Showing posts with label Investment Banking. Show all posts
Showing posts with label Investment Banking. Show all posts

31 Jul 2012

UBS hit by loss on Facebook IPO

This headline says it all. The hottest (or most hyped, depending on your point of view) new issue deal of the year, maybe decade, and one of the investment banks involved in the deal has to declare a $356 million loss related to the transaction. As I am never tired to repeat: Investment Banking is a simple business - if you do not make it complicated!

2 Mar 2012

CDS - a misconceived instrument is Null and Void

Says today's headline in a newspaper (City AM). To leave the decision about whether or not a CDS pays out in a 'credit event' to a group of market insiders at a private industry association such as ISDA makes a mockery of proper regulation in financial markets. Especially as the members of the relevant ISDA committee are the largest users and providers of credit default swaps who have made vast profits from this market during the past ten years. No surprise that the author states that "The decision has been criticised by some as making a mockery of credit default swaps on sovereign debt. These critics believe that their value has now been permanently undermined." We could not agree more and every user of this market has to face a negligence claim from his investors if he uses this product in the future. We always thought that the construction of the CDS contract was overly complicated and likely to lead to disagreement exactly at the point in time when they would be needed most, i.e. in a credit event. Would it not have been more sensible to design a product similar to an option? This could have been exercised at any time - credit event or not - simply based on the price performance of the underlying securities.

9 Feb 2012

Barclays does not 'fall short'

As some in the Media and Analyst community may want you to believe. I am the first to be sceptical when banks make grandiose announcements about the goals they try to achieve. But succeeding in investment banking is a game where those who last the course will win out in the end. Nervous prodding by analysts and media should not divert management's attention too much. The way the competitive landscape has unfolded over the past few years should allow Barclays to slowly but steadily up the rankings. Profitability is under pressure at all banks and no one can be sure what the new banking world will look like in a few years. On a more mundane scale, even the refurbished branches of the bank look great when compared to the competition here in the UK.

2 Feb 2012

Credit Traders accused of manipulating valuations

During the court case in which former senior credit traders of Credit Suisse are accused of manipulating the valuations of their trading books the revealing statement by one of them caught my eye: When a data-entry employee asked one of the accused “What sort of P&L do you need today?”  the trader responded that all books should end the day ‘up’ by $35 million” and the prosecution claimed that later one of the traders “artificially increased the prices of several ABN1 positions” to meet the trader's profit target. (Bloomberg BusinessWeek). This confirms our suspicion that the controls in many investment firms are woefully inadequate.

22 Dec 2011

Big loss on copper trade at Barclays?

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.

16 Feb 2011

Profitability of Commodities business disappoints

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.

1 Feb 2011

Smaller players will win market share in Investment Banking

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.

31 Oct 2010

UBS wants to take more risks says CEO Gruebel

Oswald Gruebel, himself a trader by background, says that UBS wants to take more risk in order to increase profits from Investment Banking. It remains to be seen how that strategy blends with the regulatory desire to reduce proprietary trading in banking. But risk in investment banking does not only mean positions (punts) taken by traders in bonds, equities, forex and commodities. It can also mean higher risk by lending (for higher margins) in commercial and investment banking. As such it is often disguised (even from the bank's management) and potentially more dangerous for that reason. But all banking is to some extent depending on taking (intelligent) risk and the change in strategy therefore is not necessarily an imprudent one. Execution and attention to detail - as always - is the key. On the other hand one would think that a truly global franchise such as UBS should make enough money from client-related business alone so that excessive risk taking is no longer required for the achievement of a satisfactory return on capital.

29 Sept 2010

More pessimism about outlook for investment banking

Andy Kessler is always interesting to read. In his latest piece in the Wall Street Journal he makes a pessimistic prognosis for the investment banking industry. He thinks that current - and prospective - levels of business activity cannot support the present number of traders, salespeople and deal makers. While we think there is a chance that emerging markets and markets in Eastern Europe and Asia will to a certain extent help to reduce this pressure on the industry it will at best help to keep levels of employment and activity at similar levels to what they are now.

13 Sept 2010

Investment Banking Jobs in Danger?

When the prominent banking analyst Meredith Whitney predicts substantial job cuts in the investment banking industry it pays to listen. After all, in 2007 she had correctly predicted that banks would be under severe pressure when she highlighted that Citigroup was under capitalized. As we at Temple Associates work as business as well as recruitment consultants for financial services firms we look at this chilling news from two angles. Naturally we were pleased with the brisk demand for staff that we have seen during the past 6 - 12 months. As business advisers, however,  we were always sceptical about firms that hired staff 'by the dozen' and tried to expand at breakneck speed. Many of the worst perpetrators are no longer with us as their businesses lacked the cohesive culture that would have allowed them to navigate the dry patches that any investment banking business invariably goes through from time to time. More often than not the salaries that were handed out in order to entice experienced professionals to join were higher than necessary and burdened the business with excessive fixed costs.

12 Sept 2010

No one helps Bank analyst Bove in hour of need

We are not able to confirm details in today's New York Times article about the lack of support for Dick Bove. BankAtlantic, a Florida bank, sued him, accusing him of defamation after he wrote a report about the banking industry in July 2008, just as the financial crisis was starting to boil over. The bank contended that the report falsely suggested that the institution was in trouble.
But if his claim that several associations that represent stock analysts or the securities industry declined his requests to help him pay his legal bills it leaves a sour taste in the mouth - to say the least. What use are the Securities Industry and Financial Markets Association, the New York Society of Security Analysts and the CFA Institute if they decline to make a stand for independent investment research. To cap it all, they declined to comment when approached by the New York Times. Even worse - the investment bank Ladenburg Thalmann, his then employer, chose to settle its end of the case by paying BankAtlantic $350,000, without admitting to any wrongdoing, and leaving Mr. Bove to defend himself.  We are glad to report that Bove won his court case against the Bank but is still left with legal bills totalling $800,000. The stakes in a case like this are high as any successful lawsuit against an analyst would deter critical analyst comments in the future and stifle independent research.

11 Sept 2010

Investment Banking: tough to make it pay

A quick glance at the stock price history of Deutsche Bank illustrates how difficult it is to make sustainable profits out of investment banking. Since the early 1990s the share price has only made moderate gains. So news that the bank may soon ask shareholders to support a Euro 9.8 billion capital raising leads one to ask how the management will create value to justify this capital increase. In retrospect it appears that even a leading position in investment banking does not guarantee the profits that management has repeatedly promised its shareholders. We also foresee problems in making the planned acquisition of Deutsche Postbank a very profitable investment as most of its 5 million customers belong to the less-affluent parts of society or keep their account at the bank only in order to facilitate simple payment transactions.