Goldman versus Matt Taibbi - PR Battle looms

Given the history of the stormy relationship between Goldman Sachs and Matt Taibbi it will be interesting to see who wins the public relations battle during the next few months. Goldman has just launched a major PR campaign to improve its public image while Taibbi's new book 'Griftopia' about how he thinks that Wall Street really works is going to be published in November. With respect to Goldman we would advise the company to spend less money on expensive ads but devote more thought on how to avoid getting business and politics mixed up in the future.

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.

A distorted view of the banking crisis

The standard of public discourse in the United States reaches a new low when respected commentators can argue that the main culprits in the crisis that hit the US financial system were the politicians in Washington. If one wants to one can argue that EVERY citizen and institution was culpable, be they lenders, borrowers, investors, voters etc. But to pin the majority of the blame on Washington goes to far. No one ordered Dick Fuld to manage the affairs of Lehman Brothers the way he did, nor can this argument be an excuse for the egregious failure of Bear Stearns' management to see the danger signs flashing all around them - while they were happy to spend time on the golf course or playing bridge.

Should Malta and Latvia merge?

The way legislation (if you want to call it that) goes in the EU, the merger of Malta and Latvia may not be so nonsensical as it may sound at first. We got the idea from Damian Reece who writes for the Daily Telegraph. In a recent article he said that Malta and Latvia have more control over the future of the financial services industry in the United Kingdom as the British government or its citizens. Cementing this relationship would in our opinion be a sensible step to establish a new - transnational - financial powerhouse in Europe. Assuming that more and more professionals would leave the field to the EU bureaucrats and civil servants who more and more run European banks they might find easy pickings. If the two countries manage to keep their two votes in the EU institutions it should be easy to build (bribe?) a coalition that gives them free reign.

Staff could sue if discriminated by customers

If anyone has hoped that a change in government would reduce the regulatory burden in the UK the new Equality Act that comes into force on October 1 will give them a crude awakening. The Act will give workers the right to seek compensation from employers who fail to take reasonable steps to protect them from any form of discrimination by a third party. This fits in perfectly with the news that the number of claims lodged with employment tribunals in the period 2009/10 has rocketed by 56 per cent to 236,100. Lawyers must lick their fingers when they put two and two together and get ready for the next wave of discrimination claims against hapless employers. As will experts in relocation away from these green shores.

How to define Prop Trading

All market professionals know what proprietary trading positions are when they see one. But one has to doubt if regulators - or the politicians pulling their strings - are so perceptive. They also will have to write regulations that are as watertight as possible and define the term so that it fits as many conceivable real-life situations as possible. But consider this: any boring retail bank has by necessity some mismatch between the maturity of assets and liabilities. One could say that this mismatch - and even more the changes to it as market conditions/expectations evolve - constitutes proprietary trading. The lesson is that the elimination of proprietary trading will not by itself solve the problems that are inherent in a banking system that is based on the (false) premise that there will never be market panics and/or that the authorities can always contain them at no or little cost to the taxpayer.

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.

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.

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.

FSA fines Goldman Sachs $31 million

The way the FSA arrives at the amount of fines levied is shrouded in mystery. Only dictatorships like the good old USSR and the like were allowed to operate in this fashion. London as a place to do business is on a very slippery slope and it should be remembered that its pre-eminence has only been achieved over the past 20 or so years. Before that finance was a cottage industry at best. People are highly mobile, communication is much better than 20 years ago and decamping to friendlier shores should not be too difficult - especially when half the top professionals are foreigners anyway. The backoffice can safely be handled in places like India.

Masters of the Universe: Memento Mori!

The report of a senior derivatives trader jumping to his death after snorting cocaine should be a warning sign to the 'Masters of the Universe' that fill the ranks of banks and investing institutions. Given the extraordinary sums that many of them earn it is easy for them to lose touch with reality and believe in their superiority while at the same time forgetting that their good fortune is partly only  due to the confluence of several factors that contributed to the enormous increase in the profitability of the sector during the past 20 years. Just to put it in perspective: in the late 1970s the average equity stake of Goldman Sachs partner was still less than $ 1 million! But this did not hinder them to give an excellent professional service to their clients and to enjoy a social prestige on a par with the best professionals in medicine, law or any other profession.

Barnier: get out of Europe, fast!

That is the only message any financial service professional with a brain between his ears will get when he reads the interview that the EU's financial service supremo, Monsieur Barnier, has given to the Handelsblatt. In it he claims that 'bankers' have acted "irresponsibly, amorally and unethically". We would be the first to admit that not all was (is) well in the financial services industry but to have the senior EU bureaucrat uttering a wholesale condemnation of all those who are working in the industry can only be called scandalous. That such a statement comes from an apparatschik who is in fact responsible to no one except the puppet masters among the ruling political clique in Europe, and especially France (do we want to remind you of Sarkozy who reminds us more of more of Louis de Funes in his heyday?), underlines the fact that the future of the financial services industry in Europe will one day be a copy of the common agricultural policy.

Banking Reform: Tinkering leads to bureaucratic monster

Reports that the BIS wants to collect more data about risk exposures in banks confirms our argument that current efforts to reform the banking system lead to more and more intrusive micro-management (and second-guessing) of decision-making in banks. The key problem with the banking system today is that there is simply no safeguard against a bank run. The system relies on the illusion that short-term deposits can be used to finance longer-term assets. Until a solution to this problem is found no amount of financial regulation will be sufficient to make the system 100 per cent safe and able to survive a panic without reliance on government support.

Sauve qui peut!

Today's news is dominated by triumphalist announcements by the bureaucratic supremos that want to control (strangle?) the financial markets in the EU. Michael Barnier and Jean-Claude Trichet are both products of the statist mindset that is drilled into the brains of the French bureaucrat (or 'Elite' as they call tend to call themselves). But after checking again we found not the slightest shred of evidence that either of them has ever earned a single penny by providing useful services to their fellow citizens. They spent their whole lives at the expense of the taxpayer and both enjoy wielding unprecedented power in artificial bureaucracies that allow them to issue edicts without any democratic restraint. If Britain wants to preserve any chance to keep its position as a world-class financial center it has seriousely to consider to opt out of regulation that is imposed from outside. The alternative is the acceleration of the migration of qualified experts to friendlier climates like Switzerland and further away.

US sanctions akin to tolls exacted by robber barons

It is highly problematic that banks based in other countries are forced (blackmailed?) to obey the politically-inspired wishes of narrow cliques and lobbies in the 'land of the free'. Sanctions against North Korea or Sudan may well be justified in the eyes of some or even a majority but that should not give the US the right to unilaterally decide for other countries were the governments - and even less so the citizens - have had no say in the matter. How would the US react if a European country imposes sanctions/penalties on IBM or Apple because their products are sold in a country that has been put on a sanction list by that country? Due to the technicalities of the international payment system banks are by definition involved in some US business (however tenuously) when they deal in US dollars, but this fig leaf should not be accepted without forceful resistance by the governments of other countries whose banks are penalised. This type of penalty is much more like the tolls exacted by robber barons in the Middle Ages.

HSH Nordbank: Management plays power games

The infighting  between the CEO of HSH Nordbank and former senior managers could be called absurd if it would not be a symptom of a serious neglect of the real problems the bank faces. Claims and counterclaims revolve around the possibility that the CEO entrapped another board member for having disclosed a confidential management document to the press. Time and again senior management becomes too self-centered and the companies that are entrusted to their care suffer for it. Recent examples illustrate the point: Bear Stearns, Lehman, Royal Bank of Scotland all ran aground while autocratic managers were at the helm.

FACTA: Will the EU stop US power grab?

As the implementation of the Foreign Account Tax Compliance Act by the US authorities draws nearer, it will be interesting to see how the usually toothless EU bureaucrats react to this one-sided power grab. We see no reason to accept the US intention to extend the reach of their tax law beyond the US borders. If the IRS wishes to have full control over the assets of US citizens it should set up a system of rigorous border controls and monitor all transfers of asset into and out of the country. Alternatively, the US can impose withholding taxes if it so wishes but as the country is dependent on foreign investors supporting the profligate spending by government and consumers alike it would only hurt its own interests by doing so.

A Stalinist Approach to Banking

The head of Bafin, the German banking regulator, boasts that his staff will become 'permanent guests' in all major banking institutions. This confirms our long-standing theory that only ever-closer control of all aspects of banking will satisfy the politicians' urge to supervise the business and make it conform to their wishes. Every rule needs interpretation which means another rule which leads to another rule and so on. As no one wants to make a mistake each decision will have to be cleared with a supervisor. At the end there will be a stalinist system of one 'commissar' standing behind each front line banker and the banking system will be completely ossified.