MF Global Trustees fighting over customer funds

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?

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

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?

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

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!'

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

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?

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

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?

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?

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

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?

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?

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

writes Thomas Brown

MF Global Bankruptcy torpedoes Futures Markets

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

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

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

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

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

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

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

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!

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

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

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

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

'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

'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

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

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

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

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!

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

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

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

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?

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

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

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

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?

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?

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!

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

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

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

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

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 lose 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

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

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.