29 Nov 2011

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.

28 Nov 2011

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.

22 Nov 2011

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?

17 Nov 2011

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.

16 Nov 2011


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.

12 Nov 2011

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?

9 Nov 2011

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!

8 Nov 2011

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).

4 Nov 2011

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

3 Nov 2011

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.

1 Nov 2011

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?