Temple Associates

Is there any 'Leadership' in the City of London?

2012-01-23T19:52:00.002Z

The 'Leadership' of the City of London (if there is something worth that name) is outmaneuvred at every stage. Not surprising as it is composed of superannuated 'worthies'. Decisive action a la De Gaulle would stop the interventionists on the Continent dead in their tracks. What would happen if anyone would want to dismantle the EU agricultural subidy gravy train over France's wishes?

Tobin Tax: Political Caste in Germany wants your blood!

2012-01-20T10:19:00.003Z

Norbert Lammert is the current President of the German Lower House (Bundestag). Today a headline tells us that he is also 'supporting' the introduction of a financial transaction tax. While some might argue in favour of such a tax it is revealing that its supporters have mainly one common denominator: they are supporters of more state spending and indirectly in support of 'robbing Peter to pay Paul' (or pay themselves or their political clients). Particularly galling is the fact that people such as Lammert - who as far as we could find out has never held a proper job in the private sector - have the temerity to put more and more onerous taxes and 'charges' onto the shoulders of the powerless citizens. In the case of Germany one also has to say that the country has a long tradition of putting (too much) faith into regulations and top-down dirigism. Despite the economic and political success after 1945 one should not forget that this was just to compensate for the disastrous policies pursued in the decades before and as a consequence the net balance is not that encouraging. The irony is that Germans worked hard in order to deliver goods on credit to all their customers in the Eurozone who now can not repay the loans. So there is a huge bill coming due and the good standing of Germany in the credit markets is to a large extent only the reverse side of the fact that many other countries are in distress. So by necessity some markets must have low interest rates as they offer a refuge - but they are not of much higher quality. Putting another tax on business will not improve things for anyone - but it will guarantee that the German financial markets will become even more a backwater.
PS: Readers who want to support a fundamental change in political systems that allow professional politicians and lobbyist to run roughshod over the interests of citizens may want to support Dirdem - Campaign for Direct Democracy here and here

Who wants to submit to the degrading 'FSA approval process'?

2012-01-14T16:46:00.000Z

News that Richard Moore, a very senior and experienced financial market executive that Lloyds TSB wants to hire as its global head of trading, 'has yet to receive FSA approval' before his appointment can be finalised illustrates the absurdity of recent regulatory 'innovations' in the UK. It reminds very much of the old boy network that 'regulates' entry to British Universities where personal interviews are nothing but a smoke screen to weed out 'undesirable' applicants or favour those who appear 'politically correct. In a rational system of regulation one should assume that an executive with more than twenty years experience in senior and responsible roles should be more than suitable to take on a role such as head of trading at Lloyds TSB. If he has done something that contravened regulations or laws that would be a reason to prevent him from taking a senior appointment. But to give unaccountable bureaucrats - often with hardly any or much less practical business experience - the final say in an inquisitorial and secretive procedure will do nothing to help London its pre-eminent role as a global financial centre.

Hire and Fire backfired!

2012-01-12T17:36:00.000Z

The disaster that is currently played out in many banks and brokerage firms stems from poor judgement and (irresponsible) people management. There was no reason to indulge in a renewed frenzy of hiring after the 2008-09 credit crunch and staff that now has to be fired was hired based on speculation that the business would follow. Unfortunately playing with people's lives carries very low penalties for those responsible higher up the hierarchies.

No more listing schools on job applications - British Deputy Prime Minister

2012-01-12T17:11:00.003Z

Given the abysmal approval rating that the British Deputy Prime Minister already receives this 'proposal' confirms that the lunatic fringe is alive and well in the ruling establishment. Logically the only way to hire people would be not to discriminate at all and just pay everybody a salary from the sheer inexhaustible money spigot the Bank of England provides. No questions asked about previous experience, pay, age, skill, 'race', political views, - that is unless you are a right-wing 'extremist'. We do not support the BNP in any way but it is noteworthy that some of their supporters have been deemed to be politically not correct enough to be allowed into certain jobs here in the UK, so this might well be the thin end of the wedge.

MF Global - famous last words

2012-01-12T13:16:00.000Z

"If there is a relevant risk, we will have a relevant measure and limits around that risk"
Thus spoke Michael Stockman, Chief Risk Officer of MF Global (Risk Magazine, April 2011)

Banks may lose Euro 1 Billion in Hungary

2012-01-07T09:04:00.001Z

A Fiat Law imposed on banks in Hungary by the 'democratic' Orban regime could cost them nearly Euro 1 billion. This is due to the setting of an artificial exchange rate on foreign currency borrowings by Hungarians (mostly to finance mortgages at cheap Euro or Swiss Franc interest rates).
We have always scratched our heads when we read about the absurdly high prices that were paid for East European banking 'assets' before the credit crunch. The financial structure was also wrong - the subsidiaries in the individual countries should have been organised on a stand-alone basis so they could be cut loose in a worst-case scenario. Local funding would mean than devaluations would not be a problem for the parent company.

MF Global Trustees fighting over customer funds

2011-12-24T15:58:00.000Z

This pathetic spat between the US and British trustees in charge of administering the MF Global bankruptcy demonstrates that even the seemingly simple procedure of segregating customer funds poses a tremendous challenge for management, auditors and regulators. If you take money from Uncle Bill, to make an example that even these 'experts' can understand, and put it into an account you open in the name of XXX favor Uncle Bill it should be obvious for anyone who the money belongs to. Otherwise it must be apparent that all parties involved pay not the blindest bit of interest to the protection of investors.

Big loss on copper trade at Barclays?

2011-12-22T17:42:00.000Z

Reports of big trading losses at major investment banks seem to indicate that the human species - especially the one responsible for oversight in trading rooms - seems to be incapable (or unwilling?) to learn from experience. Time and again highly paid professionals make mistakes that only a novice investor should be making. Two of the golden rules of investment are not to over trade and not to throw good money after bad by adding to a losing position. We would think that several factors are at work when the inevitable big losses occur: (1) it is other people's money that is lost, (2) the so-called 'trader's option' means that the risk-reward balance is skewed in favour of the trader(s) and (indirectly) management who get paid large bonuses when the bet succeeds but at worst lose their jobs and (3) the bureaucratic structure of large (investment) banks that are (over) staffed by number crunchers and risk managers but sorely lack people with common sense.

Danger of unnecessary rebranding

2011-12-22T12:42:00.001Z

We are not so sure if the decision of Unicredit to rebrand its motley collection of brands is such a good idea. It might be an idea that has its uses for the Italian market but name changes usually destroy Goodwill that has been built over many decades. Especially in the banking sector one should therefore be extremely careful - and above all not listen to the insinusations of 'underage' management consultants who have never been in the real world of business themselves. The same warning should be heeded with respect to 'image' and 'branding' consultants who will always suggest changes as they want to earn their fees that way. In Europe there is an extra dimension as names that are successful in one country/culture don't necessarily travel well. The result will usually be a synthetic name that means nothing to most clients. In the case of Unicredit there is an additional problem as it is not that clear if the collection of banks will stay together for that much longer.

UK: Regulatory Black Hole?

2011-12-19T09:48:00.001Z

The amounts hidden from balance sheet in the shadow banking system are truly frightening and can only be described as a house of cards. That hardly any regulatory capital has to be set aside for derivative positions and guarantees borders on the severely negligent. It is simply no excuse for regulators and their overseers in politics that this field of finance has grown exponentially during the past 10-15 years and has clearly overtaken the capacity of the authorities to deal properly with this relatively new phenomenon. If is accolade for London as a leading global financial centre to be seen as the epicentre of the global re-hypothecation game that played a significant role in the downfall of several major financial service firms during the past few years.

Do not play any tax games with compensation

2011-12-14T10:50:00.000Z

News that another major bank has been entangled in a tax dispute with the British tax authorities as it has been caught with a tax avoidance scheme where (favoured) staff were paid in an offshore tax haven illustrates that even prominent firms have not yet learned the lesson that their corporate governance must be beyond any reproach. Even more so when the same firms often are the custodians for large amounts of money that are entrusted to them by institutional and private investors who expect that the highest ethical business standards are observed. Very often the rank-and-file staff lower down the pecking order is not benefiting from such generous 'tax advice' (often paid by the employer for the favoured 'high earners') and this creates a situation where the cleaning staff may well pay more taxes on their meagre incomes than the staff that receives multi-million bonuses.

Corzine testimony: 'I knew nothing!'

2011-12-08T12:11:00.001Z

That is what we would call the Manuel defence - remember the funny Spanish waiter in the television comedy 'Fawlty Towers'? But as someone who worked with Jon many moons ago I am still shocked about his prepared statement today in front of the Agricultural Committee in the US Congress.

Regulator's Report on RBS - Much Adoo about Nothing

2011-12-08T11:52:00.000Z

When a (long delayed) FSA report into the collapse of Royal Bank of Scotland does not examine in detail the role played by the former CEO Fred Goodwin one can be certain that the usefulness of this 'report' must be close to zero.

EBA: Euro-Stalinism outside democratic control?

2011-12-06T09:21:00.000Z

The latest construct created by unelected bureaucrats, the European Banking Authority (EBA) is blatantly neglecting due legal and democratic process. As reported in Handelsblatt it creates its own definition of risk capital and anticipates the new Basel III regulations. In addition it uses its own assumptions about the valuation of government bonds - in contrast to the declared intentions of its political paymasters. As usual the citizens and the businesses subject to its diktats are left without any possibility to challenge the decisions of the EBA in the courts or any democratic forum.

Fair play in Bank Bailouts

2011-12-04T10:53:00.001Z

The sorry saga surrounding the Bailout of major financial institutions during the banking crisis of 2008 should teach regulators and politicians one lesson: by all means support banks in such a crisis but make sure you seize full control from shareholders in such a situation. As staff - and particular senior management - hold large stakes in the equity of these concerns that would also impose somewhat more meaningful penalties on them than the odd slap on the wrist we have seen during the past few years. And institutional shareholders maybe would finally wake up from their slumber and take their ownership roles more seriously - rather than just darting in and out of equity positions as if they would be just play a game of monopoly with their investor's money.

Do you really think nationalised banks are safer?

2011-12-03T10:02:00.000Z

Anyone infected by this thought should look at the never-ending horror story that can be written about the abuses that are rife in banks that are the playground for politicians and their party cronies. The latest story coming out of Austria speaks of a major loss at Tirol's state-owned Hypo Bank. Together with a broken banking model that as a last resort relies on the deep pockets of Joe Public and (undemocratic) political control of banks you get a poisonous coctail that leads to one 'unexpected' loss after another.

European Banks short on Dollar Funding?

2011-12-01T12:32:00.000Z

This problem is just another aspect of the disconnect between the two sides of bank's balance sheets. Like mismatched maturities the mismatch between the currencies is as serious a problem and should be addressed by banking regulators without delay. If banks want to extend loans in a certain currency they should have ensured that they have access to funding in that currency for the period of the loan. Relying on the foreign exchange and interbank funding market for the bulk of the funding is highly risky. There might be short-term adjustments to the balance sheet as deposits are received or withdrawn but the wholesale funding should only be for a small percentage of outstanding commitments.

Loan subsidies - abuse is difficult to police

2011-11-29T18:31:00.001Z

The problem with loan subsidy schemes as proposed in the UK is: Who will receive these preferential terms? Will it be based on the old school tie, or who the bank manager plays golf with? The beauty of market economies is that the old element of feudalism is replaced by criteria of efficiency. All borrowers should be treated equally if they are good for a loan, and those not making the grade go empty handed. These subsidies create a tremendous amount of moral hazard - the same can be said for all subsidised loan schemes, be they managed by 'Development Banks', the EIB, EBRD etc.

What should be the right level of Margin?

2011-11-29T18:24:00.000Z

An article in today's Financial Times bemoans the shrinking level of collateral and gives the impression that this would be something to be concerned about - rather than give an indication that the financial system is on the way to a more sensible future. Haircuts or Margins are still way below levels required if prudent standards would be applied. As I said from long before the 2007-2009 credit crisis they should allow for one-day moves in asset prices of as much as 30 percent. This would of course drastically reduce the overall volume of speculative and risk positions and therefore make it much less likely that price moves of such a magnitude would happen.

Tobin Tax - another window tax?

2011-11-28T13:53:00.000Z

One could argue that the Financial Transaction Tax (aka Tobin Tax) is nothing to get excited about, there are taxes on air tickets, house purchases for example. But there also once has a tax on the size/number of windows in some countries. All taxes on specific transactions are questionable as there is not much logic that supports them and they are easily abused in the politician's neverending quest to finance ever-more ambitious spending plans. Most of these taxes lack a proper democratic mandate and they are highly discriminatory and arbitrary.

More stress tests for banks don't make sense

2011-11-24T18:30:00.001Z

writes Thomas Brown

MF Global Bankruptcy torpedoes Futures Markets

2011-11-22T19:26:00.000Z

When Warren Buffett spoke of derivatives as 'weapons of mass destruction' not a few belittled him as old-fashioned. Now that the full horror story surrounding this case of cronyism and ineptitude unfolds not many are laughing, least of all the victims of Corzine's megalomania. Maybe it is time to bring in full personal liability to all senior managers of financial institutions?

UBS: Reduced Assets should be more than enough

2011-11-17T20:25:00.000Z

UBS will reduce the assets of the investment bank according to an investor presentation. Offering a full range of services as a broker does not require huge inventories. To the contrary, any savvy trader - from the merchant running a market stall upward - knows that the trick is to turn over the merchandise as quickly and often as possible. Having excessive inventories basically means that the dealing operation is turned into an investment business - this confuses the mission and opens the door for mismanagement. Sfr 145 billion in assets should be more than enough to run a world-class trading/broking business. If incumbent line managers cannot make it work then UBS should look for new ones.

Less Risk Control, more Common Sense and Trust

2011-11-17T10:16:00.000Z

We agree with Anthony Hilton (Evening Standard, 16 Nov 2011) when he says that "we don't need yet more millions spent on risk control (...) what we need to learn is to make proper use of the systems we already have." We would caution that today's mega banks make it very difficult to develop a cooperative management culture based on trust and knowing what your colleagues are up to. Managers at all levels are often too busy engage in petty power struggles while angling for the next promotion and pay too little attention to the challenges of running the business.

No amount of Bank Capital is ever enough in a Panic

2011-11-17T10:01:00.000Z

The European Banking Authority (EBA) will publish new information about the capital requirements of European Banks this Friday. But unless there is a drastic hike in capital ratios or - what we recommend for a long time - a move towards limited liability banking (and capital requirements on all OTC transactions) this new information will be as useless as the previous exercises in 'fessing up' by the banking system.

Derivative Risks - URGENT ACTION REQUIRED

2011-11-16T19:52:00.000Z

While we are not in the camp of those predicting a black swan event in the global market for OTC derivatives we would none-the-less urge regulators to address the real - and perceived - risks associated with the gigantic nominal amount of out standings. These dwarf the total of the World's GDP by a substantial amount and while they may be hedged or netted we all know that systems of risk management and control can (and do - see MF Global!) fail. To this effect regulators should decree strong incentives to bring as much of the derivative trading onto a trading platform that assures proper netting and clearing. In addition, capital requirements on OTC trading should be brought into line with those assessed on lending and trading in securities.

Never underestimate intelligence of Brussels bureaucrats

2011-11-12T10:52:00.000Z

When the Kommissar for Financial Affairs suggests that it should be possible to sue rating agencies for 'wrong' ratings he demonstrates the low competence of the bureaucracy that is trying to run our lives. We are often critical of rating agencies but to make it possible to sue because a rating is supposedly wrong opens a can of worms. Ratings - like any investment opinion - are by necessity subjective opinions that may be correct or wrong. There is no 'right' or 'wrong' rating opinion and therefore it should be left to the users of rating services to form their own judgement on the correctness of an individual rating opinion. Would it not be much more useful to allow citizens to sue bureaucrats for their mistakes?

How to get rid of competitors - Unhelpful Advice by JP Morgan

2011-11-09T10:17:00.001Z

It is quite amazing that research analysts at JP Morgan spend time to outline a plan for the merger of two Swiss investment banking units. In a 48 page report they suggest that UBS and Credit Suisse combine their units in a major cost-cutting exercise. While there might be some rationale behind their arguments it is highly doubtful whether the analysts considered the wider implications of their 'research'. What would be the reaction of regulators and competition authorities if, for example, BP publishes a report about the pros and cons of Exxon and Shell merging their operations? The proposal may have its logic, but it opens a can of worms for JP Morgan's public image. In essence the paper could be taken for a scheme to get rid of a competitor. But after 2008-2009 there has already been a dangerous concentration in the banking industry. Overlaps in activity within these gargantuan institutions create dangerous conflicts of interest - as the treatment of MF Global during its last hectic few hours demonstrated. When competitors run the payment and clearing process the regulators are called to act - decisively!

City workers see colleagues as overpaid

2011-11-08T08:56:00.000Z

This poll of 515 City of London workers confirms our observation that many financial organisations suffer from the effect of an upwards-only ratcheting of compensation levels. As everyone sits in the same boat - from the chief executives down - and setting pay levels means spending other people's money (shareholders in most cases) no one has a real interest to avoid paying more than is necessary to get the job done. The same effect is at work in the public sector where taxpayers are footing the bill for any pay largess. This merry situation (for those benefiting) carries on until the gravy train hits the bumpers: a downturn in business (or tax revenues) makes cuts in pay unavoidable. Responsible Managements are looking to keep compensation levels under control at all times not only because that is what any cautious business person should do in any case, it is also the right thing to do in order to avoid an irresponsible hire-and-fire culture (where those at the top usually are spared any pain and even pensioned off with golden handshakes and gold-plated pension schemes).

Thanks a billion Mr. Schaeuble!

2011-11-04T12:57:00.001Z

The political multi-talent and career politician Schaeuble and his advisers (minions?) have given another dramatic example of how toxic the mix of interfering politicians and banking can be. After having managed to convince Commerzbank to keep its holdings of Greek bonds just a few months ago, the bank now has to pick up the bill for this misjudgement as a hair-cut to these bonds is now decreed - with Germany's Schaeuble playing a prominent role in this about-turn

Nationalising the Banks? - A Warning from Germany

2011-11-03T17:06:00.001Z

From right and left we can hear occasional calls for the nationalisation of banks. This should prevent that taxpayers have to pick up losses by private banks. But a particularly glaring example of what can go wrong when politicians are allowed to play bank manager is found in the sorry fate of Germany's Westdeutsche Landesbank. Many similar examples of mismanagement by political incompetents can be found all over the world.

Lloyds Bank boss needs a break

2011-11-03T09:32:00.001Z

While we have sympathy with Antonio Horta-Osorio's health problem and wish him a speedy recovery we cannot but take the opportunity to point out that this incident may point to a management failure. While Horta-Osorio is at the center of a 'perfect banking storm' and has to battle on all fronts to steer the bank through choppy waters caused by the never ending financial crisis and the ensuing onslaught by regulators it is the mark of a good leader, and in particular the man/woman at the top of an organisation, to surround himself with strong and capable lieutenants that he can rely on. Maybe Horta-Osorio fell into the same trap as so many (chief) executives and tried to do too much himself. But no person is irreplaceable and we all know that at any moment the CEO could be knocked out of action by the proverbial bus. So an organisation should not only have a well-balanced leadership team for efficiency's sake but also for the eventuality of any succession that may be necessary for one reason or another.

Bonus season advice: less haggling, more transparency

2011-11-01T10:54:00.001Z

Transparency is urgently required with respect to 'bonus' payments. To a large extent these are allocated on an arbitrary basis, after much political haggling. Even when a bonus is based on rational and quantitative factors it cannot be free from suspicion. The amount of business a trader, salesperson or investment banker can achieve is to a large extent dependent on what markets/customers he has been allocated and how active these were during the bonus period. Bonus payments should to a large extend be based on the overall performance of a business otherwise the internal climate in most banks and other financial institutions will be dominated by constant internal backbiting - no wonder firms go so far as to prevent employees from openly discussing their compensation arrangements. Senior management in any case should only receive the company-wide bonus and as such give a good example of moral leadership. Is this expecting too much?

Russia: do not learn the wrong things from Western Bankers

2011-10-29T13:30:00.000+01:00

'Senior western financiers (...) gathered in Moscow on Friday to advise Russia on its efforts to transform Moscow into an international financial centre and steel itself against global market turmoil'. (Financial Times).
But the last thing the Russians should do is listen to the Western banking establishment. Neither factually nor morally its exponents are fit to teach the Russians how to organise a stable banking/financial system. After a near-collapse in 2008 and total uncertainty about the future - what could they lecture about in Moscow? Why not first make sure that the banks in the 'West' get fixed once and for all? The blueprints exist, alas the will is not there (at least not as long as it hurts one's pocket if reforms are wholeheartedly endorsed)

Fireproof the British Banking System

2011-10-29T13:16:00.001+01:00

'The remorseless logic of the monetary union is starting to bite' (Financial Times). The curse of the bad Deed (Goethe, Faust) haunts us - first the undemocratic introduction of the Euro, now the undemocratic decision of letting Greece off to the tune of Euro 10,000 and more per man, woman and child in that county. Mismanagement on that scale can, will and should only lead to disaster. Big challenge for Britain: how to make its financial system 'fireproof' against any fallout from Euro land. Are regulators making sure that the banking system disentangles itself from any exposure to Euro land? (esp on the asset side of the balance sheet). Other countries that are not part of the Eurozone are well advised to take action as well before it is too late. The same can be said of all companies, institutions and individual investors and savers.

Banks should rely on customer deposits

2011-10-27T16:41:00.000+01:00

As in tighter regulation of maturity mismatches, future regulation of banks should also reduce the need for the interbank merry-go-round. Banks should be incentivised to fund the predominant part of their balance sheet with customer deposits. Only very marginal amounts should be financed in the interbank market, more like smoothing out the natural flow of deposits. This way counterparty risk would be greatly reduced.

Yahoo Board looks harder for new CEO

2011-10-26T09:05:00.000+01:00

Headlines such as this one illustrate that many boards are completely negligent in one of their key tasks - making sure that there is a proper succession plan in place. That large companies find it so hard to groom candidates for the top position is testimony for poor board practice. Though one of our business lines is recruting senior professional staff we are surprised that most firms are paying much to little attention to this crucial aspect. Personnel Management is not just a support function that should be left to the personnel department that is ranked below the front line divisions in terms of clout and prestige. Instead it should be a core function in every business - and even more so in the financial service industry which basically has no tangible products and relies for its success completely on the quality of its employees.

Today's Banks are by necessity a sort of Ponzi Scheme

2011-10-25T15:38:00.000+01:00

Martin Wolf's suggestions for banking reform may all be admirable but they are basically just reshuffling the chairs on the deck of the Titanic. Banking as we know it is to some extent by necessity a ponzi scheme, to accept that longer-term loans are financed with deposits on shorter notice periods is a concept that may work in the days when investors were very loyal (or lazy). A much better solution would be limited purpose banking (as promoted by Laurence Kotlikoff) where banks become some sort of mutual fund.

Advice to the City of London: stop the bureaucratic control freaks before it is too late

2011-10-21T17:44:00.000+01:00

Reading Monsieur Barnier's latest utterings (pity he has no pregnant young wife, maybe that would put a stop to his unnecessary activities) makes one wonder what the reaction of the representatives of British interests - be it the cacophony of associations pretending to speak for the 'City' or the arms of Government (FSA, Bank of England, Treasury) will be. Pious talk will get them nowhere against the hunger of the typical continental bureaucrat (statist control freaks) for ever more power. As an Austrian who works in the City for 30+ years I am allowed to say that. Call their bluff or face certain defeat, the choice is there.

Barnier on Rating Agencies: Shoot the Messenger!

2011-10-20T08:32:00.000+01:00

If banning ratings that do not suit the political establishment is all that the career bureaucrat Barnier can come up with, it is back to the dark ages of absolutism - as the Philosopher Sloterdijk said in a recent interview our political system is basically the old authoritarian monarchical regime that has been usurped by an equally undemocratic political/party/lobby mafia. The only sensible reform of the rating system would be the elimination of all references to ratings in regulations and the prohibition of ratings that are paid for the entities being rated. None of these two obvious reforms have been brought forward yet.

Deutsche Bank's exposure to Las Vegas Casinos

2011-10-18T09:38:00.000+01:00

When a single bank lends nearly USD 1 million per room (!!) to a Las Vegas casino-cum-hotel project one has to wonder what senior management and in particular risk management was up to. It is easy to create large amount of lending volumes (and bonuses) by lending to mega projects in property but this also creates a trap if the business is not supervised closely. A similar risk is created by lending to finance takeovers and acquisitions by financial 'sponsors' as these deals are cheap in terms of manpower expended. One should not be surprised if little or no capacity is left to finance ordinary business.

Highest Income Tax Rates Worldwide - KPMG Study

2011-10-12T10:00:00.002+01:00

A handy reckoner for those interested to move to a tax-friendly climate can be found here

Dexia troubles - no surprise given waferthin capital cushion

2011-10-04T15:42:00.000+01:00

One glance at the balance sheet of the troubled lender makes it all-too-obvious what is at the heart of the banking crisis: equity capital is just not large enough to support the huge balance sheets that happy-go-lucky bank managements have piled up in the good times. At the end of 2010 total equity of Euro 8.945 billion had to support assets in the amount of 567 billion Euros! Add the fact that many bank balance sheets are financed with footloose 'hot money' and are not even closely matching maturities on the asset and liability side and you have the perfect prescription for a banking shipwreck. And all that under the 'watchful' eye of the regulators.

OTC Derivatives - a dangerous house of cards?

2011-10-03T17:57:00.000+01:00

The renewed crisis in the credit markets that has been triggered by concerns about peripheral member states of the Eurozone festers like a slow-burning bush fire. As we have warned before, the regulators and politicians have still not come up with a credible solution (we avoid the expression 'final solution' but that is what the financial markets would really need).
Case in point is the concern about the gigantic gross exposures that nestle within the financial markets - and the extreme level of risk concentration that does little to assuage concerns. No one can really predict what would happen if there is a new bout of extreme market volatility - if key variables like stock markets would move by 20 per cent of more in one day. At a time when markets get excited about wholly inadequate hikes in margin requirements for gold futures for example one has to assume that drastic moves would take the majority of market participants by surprise.
A simple remedy - no PhD's required, or expensive 'accountant.consultants' - would be the introduction of meaningful margin and capital requirements for ALL derivative contracts that are on the books of any bank, fund manager or other counter party.

CDS Death Spiral in full swing again

2011-10-01T17:18:00.001+01:00

http://ftalphaville.ft.com/blog/2011/09/30/689791/le-spleen-de-morgan-stanley/

If you learn nothing from history, you are bound to repeat the mistakes of the past - the horror story of uncontrolled short selling via an easily manipulated CDS market is creating havoc again. Basically the rising spreads are nothing else but a concerted effort to create a run on banks and countries. We warned about this repeatedly during the 2008-09 crash but regulators and politicians have not heeded the warnings, now they reap the whirlwind.

Common Sense Lessons from the UBS Loss

2011-09-21T13:58:00.001+01:00

It is always easy to be clever after the event, but a few simple facts are behind the latest mega loss reported by a bank:
- Top management is often too far removed from the workshop where the hard work, i.e. earning the money, is done. Management (also in the lower echelons) spends too much time in meetings/politics and pointless 'reviews' rather than really knowing the details of the business and the people involved.
- Management planning is unrealistic (see Deutsche Bank's recent pronouncement that the bank aims for 10 billion in profits this year) and this puts enormous pressure on staff to try to 'meet the target' at any cost
- Top executives are unwilling to listen to advice, those below the top are fearful to speak out, the 'cult of the CEO' accentuates this problem.
- Modern management theory is useless when common sense is left out of the equation.
- Constantly changing teams (due to pro-cyclical hire/fire personnel policy, but also excessive rotating of existing staff between business areas, locations) is enemy of a solid business culture built on trust, knowing what is going on.
- Star culture - mistaken belief that individuals can consistently reap extraordinary profits by honest hard work alone rather than relying on excessive risks or just luck.
- Preference to spend vast amounts of money on management consultants without any real experience in the business as often they field young graduates/mba's that just 'go by the book', peddling formulaic management philosophies.

At Temple Associates we do not just want to 'write a ticket', we take pride in having the time - as well as the experience - to help our clients finding staff they can rely on.

Maturity Mismatch - Problem not solved

2011-09-13T09:20:00.001+01:00

To rely on money market funds to finance a large part of any bank balance sheet is sheer folly - the surprising thing is that most 'experts' - be they in the academic world, in politics and regulation and in the media - have not raised their voice more forcefully against this practice. It may have been feasible in the good old days when investors were sleepy and less well informed but to finance longer-term lending with footloose money that can switch allegiance at a second's notice is not a viable strategy for a modern banking system. Unfortunately regulators all over the world seem to be unable to order banks to match maturities on both sides of the balance sheet and deviate only by a very small - and carefully monitored - margin from 100 per cent congruence.

Death Knell for Europe's Banks?

2011-09-10T12:33:00.000+01:00

Rather than trying to cut back on government spending that is clearly out of control in most European countries the unaccountable Bureaucrats/Kleptocrats that shower us with ill-conceived legislation by the truckload are proposing to introduce a tax on financial transactions that will make sure that European banks will be hopelessly outclassed by non-EU banks in the relevant transactions. No satisfied to burden banks with the tax the iron law of bureaucracy ensures that ever-more severe restrictions are necessary to achieve the bureaucrats aim. In this case the tax will not be levied on transaction in Europe but on all transactions conducted be the banks on a worldwide basis. Not that this will be crowned with much success as it seems unlikely that all major countries will follow suit in introducing this tax. Thus a migration of transaction - and the supporting infrastructure and personnel - seems to be a near-certainty. Welcome back to the Window Tax and other absurdities of times past that enlightened people considered to be a thing of the dark ages in years long gone by.

Deutsche Bank aims high, maybe too high?

2011-09-09T09:15:00.001+01:00

To declare that he aims to reach a certain number in terms of profitability is a dangerous game to play for any company chief executive. It may be useful for internal planning and consumption but to give a number in public as Deutsche Bank CEO Josef Ackermann just pronounced (Euro 10 billion pre-tax in 2011) appears a bit unrealistic as the bank never managed to get near this number even in the 'good old days' before credit crunch and Euro crisis. The stock prices of major banks certainly would need a shot-in-the-arm and not just since the twin crisis torpedoed them. Rather than manage analyst expectations managements would be well-advised to complete a root-and-branch review of their business strategies.

Cameron vs Taleb? - No Contest!

2011-09-04T14:30:00.001+01:00

The discussion about banking reform (or should it be non-reform?) reaches a comical aspect when David Cameron, PR Manager turned Politician, assumes that his approach to reforming the British banking system should take precedence over the deliberations of the experts that are members of the Independent Banking Commission. Reports indicate that the Prime Minister will brush aside a critical aspect of the recommendations made by the IBC, namely the separation of proper banking activities from investment banking (some might say gambling). While a go-alone approach to reform by the UK alone might well put UK-domiciled banks at a disadvantage versus their international peers we would think that the correct course of action would have been to intensify pressure on other countries to follow suit - at least the other EU member states might have been amenable to instigate similar conservative policies. In an article that was just published the other day, Nassim Taleb and Mark Spitznagel send a sharp criticism in the direction of the banking industry (and supine institutions that invest in them) which implies that banks need more not less regulation - in clear contrast to our PR Manager's view that seems to have been dictated to him by unaccountable lobbies. One wonders if the members of the IBC in that case would do the honorable thing - resign and openly defy the Prime Minister on the issue.

Banking Reform: Key problem no nearer to solution

2011-09-01T08:57:00.001+01:00

Thousands of pages have been written about how to reform the banking system but we are no nearer to a solution. The key problem that needs to be solved is the fact that under the existing banking regulations the taxpayer is the ultimate guarantor of (most if not all) banking deposits. As long as this deficiency is not remedied we will not have a properly regulated banking system. If an engineer has to construct a bridge it is either safe or not. The same non-compromising yardstick should be applied when discussing solutions to the problems of the banking system.

CDS trading still poses danger to financial stability

2011-08-23T20:05:00.000+01:00

During the height of the Credit Crunch we have repeatedly warned about the dangers of a self-feeding spiral that could destabilise companies and banks in particular. Nothing has been learned and the market's attack on Bankamerica seems to become a repeat performance of the chaos that was allowed to dominate the markets back then.

FATCA - the true tragedy

2011-07-15T17:39:00.002+01:00

The absurd legislation making its way through the US government machine is a sad indictment for the inability of the European 'elites' to make a clear and determined stand in defending the interests of their citizens and the financial industry in the Continent. A simple threat to retaliate tit for tat and subject the US institutions to the same treatment would have stopped the whole nonsense right in its tracks. After all, if the US is so keen to catch potential tax cheats it could impose stringent controls on its own citizens, control all movements of money in and out of the country and in the process make a laughing stock of the expression 'land of the free'.

Worst M+A Deals in Banking History

2011-06-29T19:43:00.003+01:00

Bankamerica/Countrywide Credit, Commerzbank/Dresdner Bank, Lloyds TSB/HBOS, RBS/ABN Amro....the list is long and the memories have begun to fade, but deals such as these should feature prominently in any business book or university class about 'Business Strategy' or 'M+A'. If all the high-powered executives at the helm of these institutions would have lived in the same spot one could have suspected that there was a suspicious substance in the local water supply that made them all loose their collective marbles while they were throwing away the wealth of their shareholders in an act of wanton destruction. And they cannot argue that they had not been warned. At the time the storm signs in the financial markets were clearly indicating force 12 on the Beaufort Scale. But while the damage has been done these deals should forever be a warning not to allow management - or deal-hungry investment bankers - to get into value-destructing transactions.

Regulation will atrophy banking industry

2011-06-20T10:23:00.000+01:00

The failure of governments and regulators in reforming the global banking systems in any meaningful way is illustrated by news that more examiners will be "embedded" in the banks and securities firms they regulate (Wall Street Journal). I have always warned that a financial system that relies on regulation and not on competition will lead to the creeping takeover of all business decisions by a bureaucratic (and uncontrollable) monster where 'Kommissars' will have to vet any decision made by the business managers. These in turn will become more and more risk averse.

Oppenheim / Deutsche Bank - Haste makes Waste

2011-06-17T14:15:00.000+01:00

While it may appear to be a cheap shot to criticise Deutsche Bank's takeover and rescue of Germany's venerable Sal. Oppenheim in the summer of 2009 one aspect of the transaction can definitely be described as representing poor management practice. As this report illustrates, the decision to bid for the bank was made with undue speed and it is clear that proper due diligence would not have been possible. Time may have been of the essence - it always is in rescue bids - but the bidder can only gain from any delay. If the situation the target finds himself in (Merrill Lynch, HBOS, Dresdner Bank) is really dire the value of the asset has only one way to go: Down. Managements of highly rated organisations such as Bankamerica, Deutsche Bank, Lloyds TSB or Commerzbank should really be aware of this simple fact and all managements in all acquiring companies should never feel under time pressure (real or imagined) - as Terra Firma's Guy Hands found out to his cost when bidding for EMI.

How to prepare for slowdown in investment banking

2011-06-07T11:12:00.001+01:00

Predictions of a decline of 16 percent in global investment banking revenues will pose a serious challenge for investment banks and securities dealers. Senior management is still trying to get a handle on all the regulatory changes they are hit with (and no end is in sight) and global markets in equities, commodities and bonds may be at or close to a peak. So the outlook is not rosy as declining markets usually also lead to a decline in market activity. One thing is clear: a stop-and-go management style in all likelihood will fail, hire-and-fire policies have been tried numerous times over the past 20 to 30 years and done nothing but demotivate and demoralise organisations (many of which have sadly disappeared from the industry). Managements are called to get away from 'macro-management' (lots of flip charts, off-site meetings, management consultants) and buckle down to manage the everyday aspects of their businesses, nurture staff - and above all manage the often inflated expectations regarding compensation that their employees might still garner.

UBS: dramatic appeal by Chief Executive Gruebel

2011-05-25T10:48:00.000+01:00

Oswald Gruebel's dramatic appeal to the staff of UBS's US investment banking staff demonstrates the difficulty of managing today's sprawling international banking businesses. Once an operation is - rightly or wrongly - under pressure due to difficult markets or competitive weaknesses it requires near-superhuman skills to put the ship on the right course again. Investment Banking, Securities Dealing and Investment Management are basically simple businesses when one looks at their basic constituents but as I always say: it is not brain surgery, but people - and companies - who want to succeed in these businesses need a blend of a lot of different skills and it is exactly this combination that is the challenge - especially when the 'assets' of the business walk out of the door every evening.

Good Management must show Empathy

2011-05-17T13:24:00.001+01:00

If reports are true that the UBS's chief of investment banking scolded his staff for behaving like spoiled children he may well have said the truth. But if the report is also true with respect to the reaction by staff it highlights one fact: it is not only what you say that counts, it is also important how you say it. Morale - especially in a people business like investment banking - is a fickle thing and it can easily evaporate and hole a company below the water line.

Bank Austria pays for costly Kazakh mistake

2011-05-16T17:01:00.000+01:00

We were concerned about the high price that BA paid for ATF Bank in 2007 and our worries about buying an emerging market bank were proven correct. Regulators in Almaty have asked BA to inject another Euro 198 million. The lesson should be clear: never buy such risky assets in a seller's market.

Not all firms can occupy top position

2011-05-16T13:12:00.002+01:00

When a senior executive of UBS admits that the bank may no longer aim for the top spot in the rankings of global investment banks he puts the business on a more sensible and realistic footing.
Aiming for the top may be useful to encourage ambition but it can also be destructive if carried too far. Like in sport, there can only be one winner in business and being number 2, 3 or even 10 does not automatically brand you a failure.

Mitsubishi/Morgan Stanley JV loses big on Derivative Bet

2011-04-28T16:58:00.001+01:00

One should have thought that the turmoil of the past few years has led managements in all securities units to batten down the hatches and keep to a strict regime of risk management in all trading activities. That two major participants in the global investment banking business have to book a loss of nearly 1 billion dollars on a trading strategy that went wrong beggars belief. The more things change, the more they seem to stay the same....

Size matters - but not in the way the consultants think

2011-04-06T09:14:00.000+01:00

A well-known consultant to private banks recently claimed that smaller (Swiss) Wealth Management Banks face a challenging future. The problem with this one-dimensional view is that size does not have to be a valid variable when drafting a path for the future development of any financial institution. If the small banks have no future, the middle gets squeezed and the big ones are too big, who is going to survive? The consultants have a lot of explaining to do as they can not all be right at the same time. Experience and common sense should be the guide as banks in each of these categories can prosper if they make the right decisions.

Employment Contract: Court Judgement

2011-03-08T19:10:00.000Z

An interesting document for all those interested in the intricacies and potential pitfalls of employment contracts (Source)

CDS - Why not prohibit states issuing debt?

2011-03-04T08:44:00.001Z

When a professional party politician like the MEP Markus Ferber (he is a charge on Europe's citizens since the tender age of 29!) states that prohibiting uncovered CDSs on government bonds is under serious consideration we see that one thing is certainly represented in the useless European Parliament: ignorance about financial markets! I am critical of Credit Derivatives for a number of reasons as this blog documents but prohibition by the EU and/or its member states would simply drive the business to friendlier shores. The flood of government paper in itself is a sort of uncovered short sale that can only be described as a Ponzi scheme. As the debt level inexorably rises towards a tipping point - close to or above 100 percent of GDP - the political class that is addicted to buy votes by spending other people's money becomes increasingly desperate in the search for ways to extend its spending spree a little further - at least beyond the next election.

UBS CEO raises doubts about London

2011-03-03T11:28:00.001Z

Oswald Gruebel, CEO of UBS, wants the British government to state its intentions concerning regulation and taxation that will affect the banking sector in the years to come. Gruebel states that it is very difficult to work in a constantly-changing environment and that there may be a point where it becomes preferable to de-emphasise London as a business hub. In my opinion there is a danger that the City of London may suddenly reach a critical 'tipping point' though it is not obvious if the candidates to take over a large part of the business are really an alternative. Zurich would simply not have the capacity and Frankfurt and Paris are not exactly free from regulatory overgrowth. CS may have be a special case as it has a large hub in its Swiss headquarter and the duality of two large centres pose a management problem in terms of duplication and coordination that American or Asian banks coming to Europe do not have when concentrating European activities in London.

Arbitrary Bonus Awards - potential for contentious litigation

2011-02-16T17:50:00.000Z

A recent court judgement illustrates again that arbitrary bonus awards and redundancy decisions should be avoided at all costs. Not only do they demonstrate poor judgement by the managers responsible but they also put their employers into a bad light. We have argued for a long time that it is just not good enough to make bonus or redundancy decisions on the basis of 'whose face fits in'. The secrecy surrounding bonus decisions is a contributing factor to this problem. Bringing qualitative judgements into decisions which ultimately revolve about hard numbers and money allow abusive practices to flourish. In addition, the revenue potential that an individual employee has is also dependent to a large extent on the client base he is allocated or the product he is assigned to trade (and the dealing limit he is given). It would therefore be much better if a large part of all bonus payment would be allocated on a firm-wide basis (or based on departments). In addition the much maligned percentage basis (related to profits, credits or whatever) would also put bonus decisions onto a more objective (and less contentious) basis.

Profitability of Commodities business disappoints

2011-02-16T09:54:00.000Z

The headlong rush into the commodities business may not be as profitable as banks and brokers expect. Each commodity requires special skills and it is expensive to support teams in all of these distinct market niches. But the focus of attention shifts from on product to the next and it is tricky to anticipate the next hot market. Playing catch-up is a futile game as a bank may have hired expensive teams only to see the specific sector to cool down and prevent lucrative business from paying for the new hires. There is also regulatory risk as authorities may clamp down on what some describe as a casino that is not serving the real economy as much as investors and speculators. It is quite conceivable that commodities may be declassified as eligible investments and treated more harshly by tax legislation. Business volumes could drop precipitously if that would ever be the case.

Barclays: Protium deal worries shareholders

2011-02-13T10:28:00.000Z

A look at the longer-term performance of the shares of some of the leading 'universal' banks confirms that shareholders have largely been left out of the party when it comes to sharing the wealth generated by the explosive growth of financial markets during the past two decades. So it should not be a surprise that more than one eyebrow is raised about the cosy deal that was struck between Barclays Bank and a number of its employees when $12.3 billion of toxic assets were sold to the Protium off-balance sheet vehicle in September 2009. It is not obvious why this transaction was necessary as the amount is quite insignificant compared to the Bank's total balance sheet. As is often the case when banks dispose of unwanted assets one has to ask why outside parties should get the upside. Surely the price of any such deal reflects what should be a realistic market price. Why would a bank - once it has accepted market reality - not stick to an asset that has been marked down to a new - and more attractive - price level? The only explanation we can come up with is bureaucratic inertia or intellectual lazyness thus opening an opportunity for outsiders with an eye for value

UK banking regulators: lunatics at the controls?

2011-02-12T13:59:00.000Z

When 'bank regulators are launching a new type of "stress test" that forces banks to consider unlikely but potentially disastrous scenarios like a flu pandemic or disruptions to the country's food-supply chain' (Wall Street Journal, 11 Feb 2011) one has to ask if regulatory creep has reached the lunatic stage. I wonder when banks are asked to plan for the possibililty of an asteroid impact.

Forced Ranking: UBS falls for Management Fad

2011-02-08T09:09:00.003Z

The 'forced ranking' human resource management tool introduced by CEO Oswald Gruebel at UBS has created bad blood among employees at the bank. The instrument that can at best be called controversial (and inhuman at worst) has attracted massive criticism as a quick Google Search will demonstrate. Top of the list are negative references and it can only be seen as a sign of desperation that a company that traces its roots back over more than one century finds itself compelled to reach out for such a measure in order to improve its inadequate - and at times catastrophic - performance. It is quite difficult to understand why a CEO who has always led from the front - Gruebel started out as a bond trader and was for a while the star of the nascent Eurobond market - would fall for a concept that has been abandoned by other companies. The cost-income ratio in the investment bank may well be too high at 80% but it would be better to cut the fat in one fell swoop rather than drag out the agony. Regular reviews are in any case now an over-hyped fad that waste much employee time, create bad blood and serve only to boost the sense of self-importance in the human resource departments.

Andrew Smithers on Banking Equity Ratios, Competition and Pay

2011-02-05T12:32:00.001Z

We heartily recommend Andrew Smither's latest comments on the failure of banking regulation. Smithers argues that higher capital ratios would limit public subsidy to banks and pose no threat to lending volumes - if anything, banks would lend more than under the ill-considered Basel III capital ratios that come into effect in 2018.

Raiffeisen buys 70 pct of Polbank - valuation more realistic than pre-crunch

2011-02-04T08:29:00.001Z

News that the Austrian Raiffeisen International buys a 70 pct stake in the aptly named Polbank in Poland confirms that the market for banking assets in the emerging markets is still decoupled from the market valuations in many developed markets. The price paid to the former holder of the stake, the Greek Eurobank EFG, represents around 12.7 pct of Polbanks balance sheet of Euro 5.5 billion (per Sept 2010). This is a much less aggressive valuation than those seen applied to banks in Eastern Europe a few years ago but still puts a lot of hope into the possibilities of reaping economies of scale from merging the business with Raiffeisen's existing network in Poland.

Tax burden in UK becomes problematic

2011-02-02T16:56:00.003Z

A simple calculation in the sports section of a British newspaper came to the conclusion that a football player who would move to England on a total compensation of Euro 3 million would take home only around half that amount after the deduction of all taxes. In Switzerland his take-home pay would be nearly 2.4 million. Obviously this also has clear implications for Britain's standing as a global financial centre. With discrepancies as large as this the decline in London's relative attractiveness - especially for foreign professionals - becomes evident.

Smaller players will win market share in Investment Banking

2011-02-01T12:11:00.000Z

We agree with Chris Whalen, MD of Institutional Risk Analytics, when he predicts that smaller firms will gain market share in investment banking and fill in the gaps left by the demise of several large firms during the Credit Crunch. Regulation will also to a certain extent clip the wings of the dominant firms and force them to reduce their activities in certain business segments.

Regulation runs amok

2011-01-26T08:36:00.000Z

A 'Discussion Paper' published by the Swiss regulator FINMA on the subject of regulating the marketing of financial products to private clients runs to 132 pages. It is a classic example to the regulatory overkill that threatens the financial service sector, increases costs for the end-investor and - due to its complexity - will hardly achieve its stated goal, the provision of better and cheaper financial products to the retail investor. More and more prescriptive regulation means that ultimately behind each productive worker there will have to be a 'Commissar' (Compliance Officer) and an army of lawyers and assorted busybodies. No action will be taken before they get the Okay from the compliance department. And of course, the compliance department will have to be supervised in turn and so on ad infinitum. Final destination is an economic system that is close to the Stalinism of the old Soviet Union.

Morgan Stanley may try to offload Hedge Fund stake - a warning

2011-01-21T18:47:00.001Z

Rumors about Morgan Stanley's efforts to offload its stake in the hedge fund firm Frontpoint should be seen as a warning for potential investors in hedge fund businesses. Often these firms are dependent on one or a small handful of managers. If any troublesome news hits the business the value of the firm may evaporate very quickly. Potential acquisitions in the field should only be undertaken in an extremely cautious way and structured so that it is not just a win-win proposition for the selling insiders.

Who is Steven Maijoor?

2011-01-14T08:57:00.001Z

The regulatory vampire squid that is being created by an EU officialdom that is several stages removed from any democratic control is likely to nominate a professor with only the scantiest first-hand experience in the financial markets to be the head of the European Securities and Markets Authority. Bureaucracies such as the one created to 'regulate' the financial system in the EU have as their primary aim the expansion of their own powers and the creation of jobs for those working for them. If the EU and its member governments would really have wanted to improve the functioning of the financial system they would have had ample time to design a better legal framework during the past two years. Are we on an inevitable path towards a situation where there will be more regulators and compliance officers working in finance than wealth-producing professionals? In that case, we should have a good look at the banking and insurance system as it was during the good old days of the Soviet Union in order to prepare ourselves.

Credit Suisse Compensation Plan - Incentive or Disincentive?

2011-01-11T10:04:00.002Z

While the new compensation structure that has just been announced may at first sight appear to be a step in the right direction it raises a number of questions: relying on the return on equity may be an incentive to increase leverage (and risk) in order to achieve a superior ROE. Making payouts over a number of years could lead to employees just marking time in order to cash in the awards. Depressed share prices and/or a low return on equity may punish hard-working employees that have no influence over either of these two yardsticks. At the same time top management is free to award itself levels of compensation that are high enough to shelter them from the negative fall-out from these two factors, thus creating an unhealthy 'them and us' atmosphere that is not conducive of good team-work.
One unintended effect of complicated and onerous compensation structures dreamt up by the big investment banks may well be that smaller competitors will become a more attractive employer. Younger employees in particular will not be able to spend these 'awards' to support a young and growing family when you need cash for housing, education and other pressing needs.

Open letter to members of the UK Treasury Select Committee

2011-01-11T09:46:00.002Z

With reference to today's hearing I would like to point out that compensation for Bankers cannot be seen in isolation. Pay for staff in other sectors of the financial services industry - especially in the so-called 'Private' Equity business as well as in Hedge Funds - exerts a strong influence on pay levels in (investment) banking and the securities business. In addition, the problem of spiralling compensation for (top) executives in general industry and business is far from being resolved and also influences the general atmosphere with respect to control (or lack of control) of senior executive pay.

Central Clearing: Solution or Problem?

2010-12-31T17:01:00.000Z

Pushing more business onto central clearing systems is not the ultimate solution in the search for a more stable financial system. The question remains the same: Would the system be able to deal with a (near instantaneous) change of 20 or 30 pct of asset prices? Only then could one be reasonably sure that a market panic could not topple the financial system. But that would require a substantial increase in margin rates and a corresponding reduction in the amount of leverage available to all market participants.

M+A: Success ratio lower than at Russian Roulette

2010-12-31T13:52:00.001Z

The statement may seem to be a bit extreme but anyone contemplating a Merger or Acquisition would do well to keep this warning in mind. All too often senior management falls in love with an idea or is egged on by advisers who are paid on completion only and therefore have no real stake in the ultimate success of the transaction.

Compensation gravy train: one train in the UK that you can rely on!

2010-12-30T13:53:00.000Z

A woman has been awarded half a million pounds in a series of compensation payments after accusing four public sector employers of discrimination, unfair dismissal or sexual harassment (Daily Telegraph, 11 Nov 2010). While a disproportionate amount of claims are settled in the Public sector the financial sector is also vulnerable to the frightening rise in red tape and social engineering created with little regard to the realities of private business.

Patchy hiring to follow frenzy at European banks says Reuters

2010-12-29T15:55:00.000Z

The real test of management will come when business volumes have declined so much that present staffing levels can no longer be justified. Those companies that have hired wisely and responsibly will have to do much less pruning than those that adhere to a irresponsible 'hire and fire' philosophy of human capital (mis)management.

Tulips anyone?

2010-12-29T14:01:00.000Z

That comes to mind when reading about the frenzied trading in today's story stocks such as Facebook, Twitter and Linkedin. Which bank will it be that is left holding the bag financing a speculative hot-shot when the whole bubble bursts?

Deutsche Bank: rated most exposed by Japanese Regulator

2010-12-29T11:03:00.004Z

While Deutsche Bank has performed admirably (at least on a comparative basis) during the financial Crash we kept being concerned about the slender margin of safety that is provided by the equity capital basis. DB may be less exposed to sovereign loans in the Eurozone and corporate loans may also be a lower part of its portfolio than in other institutions but that means that the bank is more exposed to financial assets and counter party credits. And the purchase of supposedly 'safe' businesses such as Deutsche Postbank and Oppenheim are by no means guaranteed to provide the high returns that management continues to aim for. News that Deutsche Bank is the lucky (?) owner of the most recent addition to the Las Vegas hotel scene does little to inspire confidence in the bank's risk management skills. Maybe the bank should pay its bonuses in the form of free hotel vouchers until the full extent of its exposure has been recouped.

UBS dress code memo

2010-12-15T09:27:00.002Z

UBS was (and is?) known for fast-tracking officers of the Swiss Army Militia through its management ranks. We are not sure that the 'new UBS' (post SBC 'Merger') adheres to the same management principles. But given the fact that banks worldwide are inundated with more or less sensible regulations it is amazing that someone in the - still vast - bureaucracy of a large bank finds the time to devise such a detailed prescriptive paper. Rulebooks such as this tome certainly would not surprise anyone if it would be given to fresh recruits in an army barrack. I wonder what it does to promote morale at the workplace?

Deutsche Boerse: another Euro 450 mio written off on ISE

2010-12-13T10:13:00.000Z

In 2007 the German Stock Exchange (Deutsche Boerse) acquired the International Stock Exchange ISE for more than Euro 2 billion. This write-off follows a provision of Euro 420 million in the last quarter of 2009. Acquisitions are minefields for the unwary and should only undertaken after careful analysis and after consulting advisers that give objective advice based on long financial and markets experience.

Secretive Banking Elite rules Trading in Derivatives?

2010-12-12T19:02:00.000Z

A New York Times report highlights the lack of official supervision of trading in derivatives. In no industry would it be allowed that the dominating participants collude setting market rules without being subject to impartial outside regulation - be it from consumers or government authorities. When the market in OTC derivatives started it was a tiny cottage industry and supervision was unnecessary. Now the amounts involved are so enormous - multiples of the whole planet's GDP - that leaving the task of supervision to a few market insiders is no longer practical. One can only hope that the top officials of the financial firms concerned realize that - in the interest of society as well as their own - a new regulatory framework is urgently required. Putting the majority of the trading onto exchanges will alleviate the risks of a catastrophic market failure but this will in itself not be enough. The central clearing houses in turn will have to be made as secure as possible and only a substantial increase in margin that has to be posted by ALL market participants will ensure a safe market environment.

Goldman Sachs in controversy about CDS trade

2010-12-12T13:25:00.001Z

We have for a long time called for more effective regulation of the market in credit derivatives. Therefore we are not surprised when details about Goldman's involvement in some controversial trades were disclosed by Carl Levin, chairman of the Senate permanent sub-committee on investigations.

Deutsche Bank set to leave Postbank alone after merger

2010-12-11T14:39:00.003Z

We were never sure if the frugal customers of Deutsche Postbank really will make a large impact on Deutsche Bank's profitability. The headline makes us wonder even more. What is the point of buying the bank when it will be managed with such a light touch?

Extensive interpretation of race discrimination by UK courts

2010-12-09T13:23:00.000Z

It is no secret that nationals from countries where their employer is domiciled often do - or at least appear to - get preferential treatment from their respective employers. This applies to banks and other financial institutions irrespective of their country of origin. This may well be considered unfair by some observers but could on the other hand be justified to some extent. How many Europeans working for a Japanese bank for example are fully conversant with the Japanese Language? And in the future we will have a tough time to find many seasoned professionals able to express themselves fluently in Mandarin, Russian or Arabic. So we noticed with quite some bewilderment that an English court can use legislation intended to fight race discrimination when sitting in judgement about an compensation claim by an English employee working for a French bank here in London. If the Gold Standard would have to be applied in every decision concerning promotion it would mean that in nearly every case the employee who loses out would have a case to sue. In addition, who determines which employee merits promotion more? Should every decision have to be submitted to a court or tribunal before it becomes effective? Politicians, the Courts and pressure groups all combine to make the UK a less efficient and less inviting place to locate a business and court cases such as this one are the worst possible advertisement for UK Plc.

Goldman to write down stake in CMC Markets

2010-12-06T09:02:00.001Z

News that Goldma Sachs is to write down the value of its £140 million minority stake in CMC Markets is proof for the fact that even the most savvy acquirers sometimes succumb to hype and a good story. Over the years we have seen numerous instances when a gullible financial press has reported valuations of businesses about to be floated that were inspired more by the aspirations of the selling shareholders and their advisers rather than by thorough analysis of the underlying values of the business. Numerous academic studies have demonstrated that at best half of all acquisitions are successful and any firm contemplating strategic transactions would be well advised to consult advisers that are not driven by fees but have the interest of the client at heart.

Some simple rules for banking reform - and no need for a PhD either!

2010-12-04T20:03:00.001Z

One aspect of banking reform that has been completely neglected would be the requirement to match the maturities of assets and liabilities more closely. While 100 pct will never be practical there should be tight guidelines. Bands of maturities on both sides of the balance sheet should be closely matched to about 90 per cent. Large banks, and in particular trading firms, should not be able to roll a mountain of short term debt to finance highly speculative positions and hope for the best - or the next taxpayer-funded bailout. The huge interbank market is also ripe for more regulation. There simply is no need for a fragile house of cards of interbank positions on which to build a proper lending business. A small amount of interbank lending is always required to smooth positions but every bank should mostly rely on deposits from its own customers (and matched as to liquidity). These rules are simple to monitor, no PHD or even MBA is needed, just sound people with common sense and a health work ethic (in contrast to a bonus ethic)

Regulatory costs out of control

2010-12-02T10:26:00.000Z

A quick look at numbers released by Brewin Dolphin, a wealth manager in the UK, confirms our fears that regulatory costs have exploded well out of control and that the supposed beneficiary, the ordinary investor and saver, has very little to show for it. At Brewin regulatory costs have now reached 6 percent of turnover, totalling around £15 million. When put in relation to pre-tax profits of £31.4 million or assets under management/advice of £23.2 billion one can see that bureaucracy is just another tax where most of the proceeds go towards paying the running costs of the self-serving bureaucracy (4000 paper-pushers by now and rising rapidly).

FSA vetting procedures - deepening bureaucratic morass

2010-12-02T10:17:00.003Z

An interesting side-effect of the FSA's vetting procedures for senior banking executives is highlighted in the Financial Times: the widely-applauded push for more female board members may be hindered as the vetting procedures tend to favor experienced males, especially those with an accounting or audit background. As it is difficult to find many senior women with that kind of background companies may struggle to fill vacancies with women candidates. In addition, candidates may be deterred from putting themselves forward and submit themselves to the FSA vetting regime. We are not really of the opinion that favoring women during a search is the right way to go - just the other day an old colleague from Goldman Sachs mentioned to me that any woman aspiring for a more senior role there must make a hard choice between domestic and professional life with any one going to pursue her career in earnest likely to have the backing of a house husband. But on a wider front one has to ask why would any experienced professional want to undergo the humiliation of being 'vetted' by paper-pushers at the FSA that have achieved less and are less capable? Any person worth his salt in Moscow, Tokyo, Hong Kong or New York is well advised to stay where he/she is and say 'thanks but no thanks' to any job offer here in London. And that is without even mentioning the weather, taxes or public transport.

No improvement in pay practices at banks - study

2010-12-01T10:05:00.000Z

An study commissioned by the Council of Institutional Investors comes to the conclusion that changes to pay practices at major banks in the USA have lead to a deterioration rather than the intended improvement in incentives.

Lehman bankruptcy administration costs reach $1 billion mark

2010-11-23T14:03:00.001Z

Regulators worldwide can be congratulated for contributing so generously to the fortunes of lawyers, accountants and assorted advisers who reap this windfall at the expense of savers and investors. A special thank you must be reserved for Hank Paulson was instrumental in orchestrating this signature disaster during the Credit Crunch.

Kafka alive and well in US Government

2010-11-22T11:17:00.002Z

The absurd consequences of the obsession with fighting symptoms rather than causes and increasing the reach of government and civil servants at all costs is demonstrated by news (Wall Street Journal, 20 Nov 2010) that major US banks are intimidated enough to refuse to conduct business with a large number of foreign embassies in the USA. In countries such as the UK opening a bank account is a major burden for consumers and achieves no demonstrable benefit in terms of fighting crime or terrorism. The costs of complying with regulations that become more complicated by the day is immense, not only in direct costs related to the governmental enforcement agencies but also in terms of additional staffing in financial service firms.