24 Dec 2011

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.

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.

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.

19 Dec 2011

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.

14 Dec 2011

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.

8 Dec 2011

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.

6 Dec 2011

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.

4 Dec 2011

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.

3 Dec 2011

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.

1 Dec 2011

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.