18 Sept 2009

Who should work in financial services?

An article in today's Wall Street Journal is a timely reminder to repeat the career advice we often give when asked the question: 'Should I pursue a career in financial services?' The key point we always make is that you should not choose your profession based only on the expected level of compensation. During the past ten years too many people were lured into City and Banking jobs based on the reports about extremely high salaries paid to some lucky professionals. But this exceptional period may not last forever and spending your working life doing a job that you are not really passionate about is a life of misery. When I started to work with a stockbroker I did it because the stock market was already one of my hobbies during High School and I would have worked in the Securities business even if salaries were just on a level with most other skilled professions.

16 Sept 2009

Lloyds TSB - Neelie does it again!

This is a full-time job - keeping up with the arbitrary rulings of an unelected bureaucrat in the twilight years of a career spent sailing through various public sector jobs! Mrs. Kroes even finds time to chair Poets of all Nations in her spare time. But on a more serious note we think that the latest threat to Lloyds TSB - while maybe justified in principle - is lacking any moral justification as long as no one (and we wait for contributions from any reader who can provide them) has given us an explicit explanation of the yardsticks that the EU Kommissars apply in their rulings. (see our earlier comment further down for more on this scandal).

15 Sept 2009

Employment Tribunals as job destroyers

The avalanche of employment legislation during the past 10+ years certainly has done nothing to make London - or the UK - a more attractive location for business. Blaming the EU does not wash as most of the legislation was home grown. A particularly vexing institution for employers are the employment tribunals. They can only be described as 'shadow' courts where normal standards of due process and above all common sense do not exist. While employees often can feel unjustly treated by their superiors and colleagues - and we would have a few stories to tell as well - the growing absurdity of the claims made by some employees can only be explained by a desire to abuse the tribunals in order to make a fast buck - or million in some cases. Young people just past the mark of 30 years claim to have suffered nervous breakdowns, be tormented by nightmares and claim to be unable for any work because of bad treatment they have suffered at work. No proper proof is needed if implausible accusations picked right out of a soap opera are taken at face value by members of the tribunal who are unaccountable and hold their positions thanks to the machinations of an inscrutable government bureaucracy. And best (or worst) of all - the accusing employee has no costs to bear, file a claim and let the system take care of the rest. We can only say - foreign employer, if you come to Britain, be warned!

IIR warns on lack of global banking rules

We usually view the opinions of the Institute of International Finance with a pinch of salt as it is a think tank and/or lobby funded by the banking industry. Yesterday's appeal to the participants of the forthcoming G20 meeting in Pittsburgh served as a reminder that one year after the collapse of Lehman and more than two years into the banking and credit crisis precious little progress has been made to forge a consistent solution to prevent a similar crisis in the future. We doubt that high-profile meetings will really produce more than pious sermons and suggest that a congress should be organised with the task to iron out a lasting solution. After all, the Congress of Vienna was also not just a photo-opportunity for the assembled dignitaries and the same can be said for the Continental Congress in the 13 founding colonies in America.

14 Sept 2009

BIS report: higher taxes on larger banks

A new study by the Bank for International Settlements (BIS/BIZ) suggests that large banks should be taxed at a higher level to compensate for the risk that they pose to the taxpayer. But I think that differentiating tax rates for of different size would open a can of worms - what is the right level of tax? what size is the cut-off point for different tax rates? A more simple way to restrict the trend to ever-larger banks would be to limit the (implicit or explicit) state guarantee to a certain amount. This would give an incentive to clients and depositors to spread their business around and lead to a more balanced industry.

11 Sept 2009

Neelie Kroes dabbles in bonus debate

We would have been disappointed if Neelie Kroes would not have tried to get involved in the debate about banker's pay and bonuses. After all, every bureaucrat has a natural urge to increase his power whenever and where ever the opportunity exists to do so. And even better when the taxpayer pays for you and the citizen has no chance to control your action. However, when judging the competence level of Ms. Kroes' department we always have to remind ourselves of the curious fact that while the department refuses to give detailed information about the background of its staff there are the portraits of the drivers on the website. Talk about high life in Brussels! Repeated requests to disclose the yardsticks that are applied during the investigation of competition cases have been stonewalled. So we do not expect that it will be made transparent what type of bonus and pay regulations will be applied in the case of banks that receive state support.

Change of guard at Morgan Stanley

As John Mack moves from the role of CEO to become Chairman of Morgan Stanley at lot of coverage will be given to his record at the firm after his return four years ago. I think that he has done a remarkable job given that his tenure encompassed the most challenging two years that any leader of a financial services firm has ever had to live through. The stock price of MS at one stage priced in a possible demise of the firm (the same happened to most other bank and broker shares) and was an inevitable exaggeration caused by a market panic. Structurally, however, Morgan Stanley suffers from the merger with Dean Witter ten years ago. One of the great advantages the main rival, Goldman Sachs, enjoys is the fact that the firm in all its history only ever pursued small add-on acquisitions. This organic growth solidified the company culture and created the opportunity to develop the firm's leadership without recourse to outside hires.

What is 'socially useless' banking?

Senior Bankers have recently felt compelled to contribute to the debate about so-called 'socially useless banking'. The key question would be the definition of what is or is not socially useful/useless. I think one could well leave the answer to the market. No one is compelled to buy supposedly 'useless' products, be they derivatives, hedge funds or - to generalise the problem - expensive luxury watches or cars. Common sense should be enough to settle the question. Unfortunately there are many ideologically motivated fellow travellers joining the discussion as it appears to be a good opportunity to pursue aims that have little to do with the problem (more state, more taxes etc)

9 Sept 2009

London Hedge Funds stay despite tax hikes

We would not celebrate too early and condone the long-term impact of higher prospective tax rates on London's standing as a financial centre. The effects will modify behaviour only at the margin and as taxes are admittedly not the only factor that is considered when locating a business the impact will be diluted by the weights businesspeople attribute to these other factors (legal and other services, infrastructure, quality of life, availability of skilled labor). The real danger is only that once a certain tipping point is reached decline can be very rapid and irreversible.

Ossie rallies the troops at UBS

Having undergone an interview with the taciturn no-nonsense Ossie Gruebel when he was the head of Eurobond dealing at Credit Suisse White Weld in the late 1970s I always carry the highest respect for him ever since. UBS is still a brand name that will make it easy for clients to forget the missteps of the past few years as long as they get the right service. Reading the memo that Gruebel penned for his staff of 70,000 I cannot help but think that maybe the staff numbers are still a little bit on the high side.

The Fed CAN monitor systemic risks

A senior fellow at the American Enterprise Institute argues that the Fed cannot monitor systemic risk as that would be tantamount to ask a thief to police himself. Without going into the details of his argument several aspects come to mind that would negate this judgement: until now the mandate of the Fed was not strongly focused on playing the role of a regulator of the financial markets and system. Instead, price stability and economic growth were given priority if not exclusive attention. That mistakes were made in this department cannot be denied (and they are partly due to the mixed message sent by the duality of the set targets). But that does not mean that the Fed could not be more effective if it is empowered to be a more forceful regulator. We would also hope that the Fed does not only monitor risk but will have the tools to prevent them in good time.

8 Sept 2009

Blueprint for Global Derivatives Market

Derivatives are in essence a bet on the price of the underlying asset. Economically they are a zero-sum game where the losing side funds the gains of the successful side. Like all bets the derivative markets serve to redistribute wealth minus the costs of running the market. As a consequence of the credit crisis reform of the derivative markets has moved to the top of the political agenda. This is not the place to discuss the role that derivatives have played in the financial crisis. But if more players are active in a market it can only be expected that moves above (and below) underlying value are exacerbated - despite the fact that derivative instruments are often claimed to help move prices back to their underlying trend. I do not agree that moving all derivative trading to exchanges is necessary to avoid bubbles and excessive risks associated with derivative positions as advocated by many commentators. For an new example see the paper just published by Deutsche Boerse. Instead, I think that higher capital requirements to support open positions will be sufficient to reduce the danger (real or imagined) attributed to derivative markets.

7 Sept 2009

Seven dwarfs - interesting comment from a Reader

Your post (Seven Dwarfs in Stockholm) is interesting in that it confirms the tendency to first blame others, the system etc when being held to account for behaviour. That type of self-righteous response never convinces anybody else outside the own group. The politicians' thrust may be crude and may have negative side-effects, but it is triggered by an apparent unwillingness of bankers to appreciate how others, society at large perceives their behaviour and its crippling effects on the financial system and the economy and to take responsibility for that. Your type of response will only make politicians more determined to ensure bankers will not be able to go the same path again and you will become more convinced of the stupidity of politicians. It takes us nowhere. A meaningful step forward would be made if bankers could say they appreciate the concerns of society and are willing to come with new responsible remuneration systems that also pay justice to the inherent risks ultimately born by society. If bankers could be transparent on how they go about this, engage in a serious dialogue with society on remaining concerns, then the need for blunt politically driven regulatory measures would evaporate.

Equal pay for Women - comparing Apples and Oranges

The unelected chairman of the Equality and Human Rights Commission has decided that the current debate about compensation in the (investment) banking industry is too good an opportunity to miss. He offers his five cents of wisdom in an article headlined 'Her City bonus is a fifth the size of his' leaving the reader in no doubt what the likely conclusion of this piece of reasoned argument will be. The sub header gives the game away: it carries the subtle threat inherent in all socio-babble propagated by socialists and assorted hangers on of the nanny state: 'We'll help the City to treat women fairly - or we'll force them'. (Does Mr. Phillips now use the royal 'we'?). It is too tiresome to discuss the details of this so-called 'study' as it is perfectly clear from the outset that an extremely detailed comparison between workers at exactly the same employment situation is required if one wants to isolate the gender impact on basic and variable compensation. It is ironic that the department regularly involved with recruitment and compensation is ofther predominantly staffed by members of the fair sex. So there is already a slender bias in favour of women candidates and employees in many organisations.

6 Sept 2009

Animal Spirits still alive in City

Anyone who doubted that the credit and market crisis of the past two years has put a lasting dampener on the animal spirits in the City of London will have received a great surprise when he opened today's papers. A respected analyst is reported to plan the launch of a new bank and a senior corporate banker is offering to buy loans off his previous employer at a substantial discount. The really interesting thing is that the analyst stuck to his negative view on some bank shares while theses shares experienced a stratospheric recovery and the lending officer was one of the main drivers behind the loans that are now causing major headaches for his former employer. That is chutzpah!

4 Sept 2009

Seven dwarfs in Stockholm

The seven finance ministers calling for strict limits on banker's bonuses in an open-ed article today (we spotted it first in a reference to Dagens Nyheter) do their intellectual standing no favours. If their collective wisdom only leads them to express crude judgements about the size of bonuses paid in financial services it is a sign of intellectual poverty. Rather than calling bonuses 'indecent' the ministers should concentrate on the causes of high bonuses. Otherwise their posturing lacks any credibility. Of course, we would agree that bonus payments in many cases are too high but that is due to lack of regulation, distortion in the competition and similar structural deficiencies in financial markets. Name-calling alone will not do as the same argument could be applied to compensation of sports stars, media stars and footloose international business men. Just remember that a certain Mr. Mittal is always listed as 'Briton's richest man' but it is unclear how much tax he pays in the country.

3 Sept 2009

Publish all details of stress-tests!

The news that the UK Treasury may ask the FSA to conduct a detailed stress-test on Lloyds-TSB before agreeing that the bank does not participate in the asset protection scheme and launches a share issue instead should serve as a reminder that the stress tests performed so far in the US and the UK have not really helped to improve confidence in the banking sector. Of course, the fact that the authorities claimed that the recent stress tests were satisfactory did help shares of banks to rebound but this was more due to the fact that markets simply realised that the governments would stand behind the institutions deemed to big to fail and not because investors really could see behind the official smoke-screen. If all numbers would be in the open investors could really draw their own conclusions and would probably have much more confidence in the viability of the banking sector rather than rely on the say-so of the regulators. The same argument can be made with respect to the rating process that would be to a large extent supplanted by due diligence conducted by the investing public.

2 Sept 2009

Less debt, more equity

Willem Buiter argues that the financial sector in most countries is too large partly because of the implicit government guarantee the sector, and in particular depositors, enjoy. This subsidy (in conjunction with the fact that interest expenses can be deducted for tax purposes) makes debt finance and saving in the form of deposits more attractive than investment and financing conducted in the equity markets. We think that a reduction of this subsidy would have the additional benefit of putting more companies on a more stable financial footing and stimulate the growth of business in general as start-ups and smaller companies in particular would benefit from the reduced attraction of parking money in supposedly safe investments.

A poisoned chalice?

Congratulations to Lloyd Blankfein, CEO of Goldman Sachs, on being ranked Number One on Vanity Fair's Power List. But maybe this is not the most opportune time to receive such a nomination, - however well deserved it may be.

Reading list for Insomniacs

The most recent Bundesbank circular about the regulation of market risk is a hefty 34 pages long, 4 pages more than a similar circular issued 2 years earlier. While some readers who are used to study regulations issued by the FSA or the Basel Committee may consider these publications the equivalent of a short story we still challenge all market professionals subject to these detailed bureaucratic prescriptions to go through the publication with a fine tooth comb. What a paradise for lawyers and nitpickers alike! Every sentence is in effect a rubber paragraph without any specific meaning. Time and again the word 'sufficient' is (ab)used to cover up a meaningless generalisation. As economic thinkers have predicted decades ago, any effort to subject the economy to planning makes it necessary to issue ever more detailed regulations and the final destination of the journey into the paradise dreamt up by socialists from right and left can be seen on a short trip to Cuba. (It MUST be paradise for the as there are no banks worth the description to be found there!).

1 Sept 2009

Caps on Banker's bonuses - Devil is in the Detail

When Gordon Brown tries to garner support for a limit on banker's bonuses one is reminded that talk is cheap. But the devil is in the detail: who decides? what is the right amount of bonus? what will be the side-effects? (certainly an increase in base pay, if not in other fringe benefits)What is a bank? If payment is regulated at banks, will people and business not migrate to other areas of financial markets like brokers, investment banks and hedge funds? (not to mention the likely migration to emerging financial centres that are outside the global G2/G7/G10/G20/OECD cartel?

Welcome to the Inquisition

Trying to find the right candidate for any position is a difficult and arduous task in the best of times. The same can be said about the problems candidates face when looking for a new job. Things (nearly always) take longer than expected and we often remind both parties in the recruitment process that nothing is done until someone actually sits on a new chair. (And sometimes even that is premature as we have seen new appointees quitting after a short time). So the news that the FSA is putting extra emphasis on vetting the appointment of senior staff is going to complicate things further. What experienced professional will be happy to be subjected to a detailed and bureaucratic grilling by people he will rightly consider to be professionally inferior bureaucrats? So far we have not seen what criteria the FSA is applying during this vetting process and as it will forever be shrouded in secrecy confidence in the procedure will never be established. Firms where appointments are subject to this interference will be at a competitive disadvantage in the future, In addition, this is just another step on the paths towards the reduction of London as a financial centre.