ECB Banking Review - Moving Deckchairs on the Titanic

More costs borne by shareholders, savers and taxpayers, more jobs for the boys - happy to be an Eurocrat in this age - and still no change to the basic rules of the banking game. Happy New Year 2014!

Mentoring and Coaching - a simple model

While some experts try to make things complicated busy market professionals need simple solutions when they reach out for independent advice about how to manage their careers. For most successful executives the most significant barrier to effective mentoring and coaching is the illusion that any outside help is superfluous. After this somewhat arrogant attitude is overcome it quickly becomes obvious even to the most self-confident person that adding another perspective can be a useful tool to overcome any personal or professional issue that arises at work.

Summers regurgitates tired old macro cliches

Guessing what the 'correct' or 'true' natural interest rate is may be a worthwhile passe temps for tenured university professors like Larry Summers but it is of little use to explain/solve the pressing economic problems of our time. Such as Unemployment or Inequality. Both have little to do with macro economic mumbo jumbo but a lot with poorly designed policies and laws.

More Women on Boards

Hector Sants may have benefited from Coaching

News that another senior finance professional - this time Hector Sants, Barclays Bank's Head of compliance - needs to take time off to avoid burn-out, highlights the pressure that staff at all levels are facing these days. This burden gets progressively stronger the more an executive moves up the ranks of the organisation. 

20-25 years ago hardly anyone in the financial markets had ever heard or seen a compliance manual, let alone a compliance officer. And the markets functioned quite well. Now the rulebooks run to thousands of pages - and are constantly 'updated' and expanded with new rules - everything is up to interpretation and everyone wants to cover his backside. No wonder that people like Sants feel the stress (ironically he helped create many of these rules!).

Another problem facing senior managers is the fact that their jobs can be quite lonely ones where they are constantly under pressure from two sides - aspiring subordinates keen to get their job or pressure from their own supervisor who wants to squeeze out a better performance from their reports.

More Swaps, more Risks

Glad to see that another swap market (Chinese Yuan) seems to be in rude health, but nearly all swaps are facilitated by a bank acting as counterparty - and are these risks not contrary to what current regulatory efforts want to achieve? If some regulators advocate a move to a leverage ratio of 10 where does that leave the gazillions of over-the-counter swaps?

Government Mis-Selling Scandal

Having been on the receiving end of many a sales call trying to convince me of the necessity of buying identity theft protection for my credit cards,I can say that the present hysteria about this issue here in the UK can only be called a modern version of the witch hunt. Given that this dark period is but a few hundred years away it is remarkable that not much has changed in human nature - certainly not in the nature of those who want to bully and nanny the citizen.
Condemning banks in blanket fashion to 'compensate' those who were supposedly mis-sold protection products goes against all notions of legal due process. Only slightly worse is the silence of the guardians of our investment monies who should scream bloody murder as the companies they invest on our behalf get fleeced by regulators. Where is the Governance army hiding when it is really needed?
Government can play a role in protecting the consumer, as can all the worthy or unworthy organisations who claim to have the consumer's interest at heart. But let them issue warnings, educate the public so that people can make decisions that are (hopefully) protecting their own interest. Nobody forced me to buy any product, suitable or unsuitable. And maybe some people might have benefitted from the protection they bought. Who speaks up for them?

CMI should know better - no point in meaningless comparisons

When the Chartered Management Institute (CMI) proclaims that women on average receive a lower bonus than men one has to wonder what purpose this Institute really serves. Without detailed forensic comparison on a job-by-job basis this discovery - if you want to call it that - is meaningless and can only be considered an effort to get a bit of publicity.

FATCA - Testimony to EU Incompetence

While no one can blame the US for perpetrating legislative overreach as long as it gets away with it the oppressive FATCA legislation would never have happened if the (unelected) bureaucrats in the EU would have taken sufficient time off dining at taxpayer's expense in the expensive restaurants offered by Brussels. A discreet threat of the imposition of a countervailing duty on the activities of US financial institutions in the EU should have put a stop on this legislation at an early stage. Would the US really have pushed the button and chosen the nuclear option of total financial war with the EU? I doubt it. Unfortunately the senior brass in the financial sector here in Europe has also missed an opportunity to push against this unnecessary regulatory burden which leads to the conclusion that only a reform of democratic structures in the EU and its member countries can lead to a better defence of civil liberties. See www.dirdem.org if you want to support me on this.

Co-op Bank: Slaughter of the Innocents?

Talk of bailing-in holders of certain bonds demonstrates that investors and depositors in European Banks are well-advised to be ultra cautious and not rely too much on reassurances uttered by regulators and their political paymasters. It beggars belief that after the chaotic 'resolution' of the debt crisis in Cyprus there is even talk of applying a hair-cut to the value of certain bonds issued by the Co-op bank. Most of those looking at losses would be retail investors, the most vulnerable and least sophisticated participants in the financial markets. Before their investments are impaired it would be appropriate to seize the full equity value of the bank - and one would hope that there is one.

Apart from this glaring injustice this episode is another sad illustration about the danger inherent in Merger transactions. The list of desasters is a long one, Bankamerica/Countrywide and Merrill Lynch, Commerzbank/Dresdner Bank, Lloyds TSB'HBOS to name the most prominent one

Hester to leave RBS by 'mutual agreement'

Replacing the CEO? No problem, George Osborne can try his hand on running a real business, and his friend/buddy Cameron can fill the role of Investor Relations/Press chief. At least they will provide good entertainment on the SS Royal Bank of Scotland (soon to be England?). And no, we take no placement fee as we want to help the taxpayer - on second thought, did Hester not have five years to groom a successor? Any properly run organisation should have at least one credible replacement for each senior executive position. After all, that should be the priority of the CEO and a functioning board.

Bureaucrats to run UK Financial Sector

The Great, the Good and the Not-so-Good are slowly taking over the running of the UK Financial Sector. After all, it the Establishment managed to run the UK Automobile Industry into the ground, why not give it a try in another sector that (still) is a leading participant in a global industry? I warned some time ago that to give regulators (and indirectly politicians who pull the strings in our cherished pseudo-democracy) unfettered control over senior appointments in Banking, Insurance and Fund Management would make it very difficult - and certainly frustrating - to manage any of these businesses. An recent illustration is provided by the fact that two candidates for the position of Chief Financial Offices at Legal & General were rejected by the Commissariat, formerly known as FSA, now split into two units, presumably to provide more jobs for second-rate pen pushers. The explanation, that candidates did not show sufficient familiarity with insurance, does not convince. Since when did a CFO of an engineering company have to show familiarity with the intricacies of machinery design? This is just another drop on the stone of bad news that will lead to a mass exodus of financial service firms once a certain pain threshold is passed.

EU Bonus Cap - Welfare for all is ultimate destination!

One may agree with this policy (EU casts wider net for Bank Bonuses, CNBC) or not - but there will be many side-effects, intended or not. Staff will migrate to other sectors, in particular private equity and hedge funds, also traditional long-only fund managers. If politicians then want to extend pay caps the next stop for professionals will be the general corporate sector. That would mean that eventually ALL business compensation will have to be controlled - by politicians with only the slightest democratic legitimacy (Has anyone anywhere had a chance to vote for these measures? Does anyone even know his 'representatives' in the national or European Parliaments?). All this and the question of migration to areas outside the control of Eurocracy is completely left open. We might as well hand all our salary to politicians and just receive vouchers for our daily need - Welfare for all is the destination!

Commerzbank defeated in Bonus Fight

All managers involved in employee compensation will be well advised to study the implications of this protracted legal case (see here and here). When senior managers of Dresdner Bank in London tried to pacify members of staff that were unsettled by news that Commerzbank was about to make a takeover bid they did not foresee the implications of the verbal promises intended to calm the nerves of their employees. They would not have expected that two trials in the British courts would have considered their statements to be a legally binding contract that even the dramatic upheavals of the financial crisis in the later part of 2008 would not have been able to extinguish.
In a similar vein, all-too-often I find that the coordination between senior management and human resource departments leaves a lot to be desired. In addition, special deals - often verbally - are agreed with staff members that lead to further confusion and mistrust among other staff members that feel that they are discriminated against. In the case of the promises made to Dresdner Bank one could also have said (even without the benefit of hindsight!) that employment prospects during the summer/early autumn of 2008 were already less than rosy and the threatened (or feared) exodus was highly unlikely.

Scariest Part of Gold Crash?

Reads a headline but the article forgets to mention what really should scare investors, market professionals and regulators: the fact that the price of a major asset can plunge by such a large amount in a few days demonstrates the inherent fragility of financial markets. During the past 30 years the unprecedented growth of  (mostly over-the-counter) derivatives - subject to 'light-touch' supervision - has created a huge house of cards of interconnections between all financial market participants that could rapidly spiral out of control. The absurd length of time required to unwind all the liabilities from the collapse of Lehman - and the number of company 'boxes' created by that firm - shows that the current regulatory scheme is not up to the job. Proper stress-testing of banks, insurance companies, securities firms, asset managers and pension schemes would have to be much tougher and assume a shift in asset prices by multiples of the underlying assumptions that are used today, something in the order of 20-25 percent.

German Managers want banking pay limited - but not their own

A poll conducted by Handelsblatt comes to the conclusion that German Managers favour limiting pay in the banking industry but not in their own companies. How hypocritical can you be? But apart from this questionable aspect limiting pay in the banking industry would mean that only second-rate people would want to pursue a career in banking. This episode demonstrates that the question of pay - especially for senior management - cannot be tackled in specific industries but must be part of a wider solution based on sound management and moral principles.

Fed sends Minutes a Day (!) early - the real questions

In the Lobby-infested cesspool that is Washington it is no surprise to find that the Fed 'accidentally' sent copies of the latest Minutes to a select list of banks, investment managers and lobbyists. While the easy excuse is that it just is a 'fat finger' error caused by some junior staffer (an unpaid intern?) I just find this explanation less than satisfactory. As anyone who has ever sent an email message to a maillist should know a message is only sent to the recipients that are included in the list. If only this select group of recipients gets the mail it should mean that there was a sort of priority list. Otherwise all those who have signed up to get the Fed minutes delivered upon release should have seen the message at the same time. In addition, there should be a forensic audit into the trading activities of all recipient firms to find out whether they profited from this information or not.

Libor - Regulators asleep on the Watch (again)?

While I have doubts that the alleged or actual manipulations of the Libor rate-setting process really did major harm to anybody it is amazing that one large market participant was allowed to play a crucial role in the fix. Another case of regulators asleep on the watch?

Salz Report on Barclays - another Figleaf for the Establishment

The lengthy - and ridiculously expensive - Salz Report has to be seen in the long English tradition of conducting expensive and lengthy enquiries when the solution to the problem would just have taken common sense and a willingness for decisive action. Both ingredients are missing. It is not clear why there would have to be an enquiry into Barclays Bank and not into any of the other major banks, investment institutions, regulators and politicians who must certainly share a large part of the blame for problems in the financial sector - and wider economy - that have evolved during the past few years. The proverbial blind man could see that executive pay in banks - but also in investment firms and major listed companies - has spiralled out of control. It leaves a sour - not to say salty - taste in one's mouth when one sees that the costs of the report are such that the 'solution' is part of the (pay) problem. How can anyone justify that a 244 page report that any junior management consultant with his head screwed on could has put together can cost £17 million! And how much of that did go to the City 'Grandee'?

No regulators slated for failure

But HBOS chiefs 'slated' for failure (Financial Times). And anyone thought that there was a proper investigation of banking problems?

Goldman Sachs Liberty Harbor - too close for comfort?

Another Cyprus Bank Robbery?

When the state loots the shareholder

State-sanctioned looting of shareholders becomes the norm in the United Kingdom. First not-so-gentle persuasion was used to force banks to compensate 'victims of mis-selling' (though how these millions were forced to buy products that they were not supposed to either want or need still is beyond me). Then all those who were at the loosing end of derivative contracts that were designed to protect them against interest rate risk were out with their begging bowls and a complicit media commentariat, lobbyists and politicians jumped on the bandwagon to punish the unloved banking sector. The latest illustration of madcap regulatory overreach is given today as the UK's FSA fines Prudential Plc 30 (in words: thirty!!!) million pounds on the spurious pretext of not having been informed in time about a possible bid for AIA. The shareholders and pensioners who are paying for this nonsense will be the ones picking up the bill that feeds the ever-rising army of paper-pushers in the regulatory Gulag that slowly strangles the financial industry in the UK - no need for the 'Troika' to aid an inept government of PR luvies.

Stalinist Incomes policy - spiteful and arbitrary

The European (Dis?) Union is on the slippery road to serfdom (Hayek) when professional agitators like Sven Giegold (read his CV carefully, you will shudder when you read it!) are given the opportunity to introduce 'laws' that arbitrarily set pay (Financial Times) for a minority of the population that he and his minions want to punish for ideological reasons. It is not possible to argue with these extremists (have a look at what 'Attac' stands for) and the only way to combat the takeover of the pseud-democratic institutions in the EU and the member states is a complete overhaul of the political system based on a radical and comprehensive form of direct democracy safeguarded by a proper bill of rights that bans discriminatory legislation. Those who do not just want to shrug their shoulders or clench their fists in their trouser pockets should contact me and take part in the democratic reform project.

UBS: Will Junk Pay motivate the troops?

I doubt it. When regulators don't regulate properly and management runs the ship aground it is not obvious why 6,500 staff should pay the penalty. Top management may be able to be paid in monopoly money as it has (hopefully) made it's pile and could happily retire even if the bonds that are being paid turn out to be worthless. But any aspiring young - or even middle-ranking - banker needs hard cash to pay to the ever-rising cost of housing, education etc. And is there ever going to be a penalty for regulators or politicians that don't do their job properly. The ECB has just announced that it will hire another 2,000 (useless) bank 'supervisors' in the near future....wish we had another Kafka to weave a novel with this subject matter.

Deutsche Bank - Vorwaerts mit Achleitner?

The write-offs published in DB's results show that despite all the market-leading positions the Bank may have in certain business segments the size of the company makes it inevitable that some major air pockets are hit in various parts of the far-flung empire. This is a problem that all banking behemoths face. Add the incentives to make more profits every quarter (and a corresponding bonus) and you have nearly guaranteed that some transactions will lead to losses. So it is problematic when an institution such as Deutsche Bank finds it necessary to put Paul Achleitner into the role of chairman of the supervisory board after he has managed to display less than excellent flair for managing the finances and investments of Allianz AG. Do I need to mention Dresdner Bank to anyone?

Derivative Trading - prone to abuse, fraud

As little - or even no - cash changes hands when transactions in derivatives (especially those conducted " Over-the-Counter") are executed they require even more oversight than transactions in securities that are cash-settled within a very short time span. Malpractice can easily be hidden from compliance and audit departments - even if these are not complicit in any misconduct or fraud. Often staff in these units are of lower status, less well paid and less well versed in the intricacies of the instruments involved. OTC derivatives are by nature traded by appointment and the correct pricing is not easy to verify - even with the best intentions of any supervisors. So it is quite easy to build in a margin for those that want to skim some money off the transactions they conduct. That the dealing community fights every proposal to bring all transactions online and onto exchanges raises doubts about the sincerity of their motives in doing so. Reports about the conditions in the dealing department of Monte dei Paschi di Siena illustrate these problems poignantly. (Reuters)

Nomura - profits still weak

The 9-month results for Nomura Holdings offer a slightly more positive picture but given the generally favourable market conditions experienced in the 3 quarters to the end of 2012 one would have to say 'could do better'. The after-tax profit margin is just a tiny fraction of total revenues - and the gap between pre- and after-tax net points to somewhat ineffective tax management.

Derivatives: Instruments of Mass Destruction?

Another day, another disclosure of a massive derivative loss. Given the astronomical amount of outstanding (OTC) derivative contracts (and even astronomers that are used to think in big numbers might have trouble relating to the relevant numbers) it is no wonder that these 'accidents' pop up on a regular basis. Low or non-existent capital requirements make these off-balance sheet exposures attractive for treasurers and CFO's. They require little or no cash up-front so give the somewhat false impression that entry to the great casino is free and profits will flow like manna from heaven. Sometimes they are sold as hedging instruments - and they might well be fit for the purpose but the iron discipline needed to stick to that narrow use is not given to all market participants. And many users are easy prey to the salespeople that are highly incentivised to peddle ever-more exotic schemes that resemble a 'heads I win, tails you lose' game. And given the fact that derivatives are ultimately a zero-sum game it is only natural that those offering these products are above all interested in making sure that they are not on the losing side of any derivative deal. Derivatives may well have a place in the arsenal of any financial market participant - but have to be supervised by experienced experts who can give an objective assessment of the risks and rewards involved.

Goldman: plays a simple game better than most

Quarterly figures just released by Goldman Sachs this morning demonstrate (again) that the firm plays - what should be a simple game - better than most competitors. No need for expensive consultants to figure that out, just common sense and experience.

JP Morgan: Review of the 'Whale' Trades

Nothing but a very thorough review of the losses made by the 'Whale' was to be expected but one still has to wonder how much good this report will do. Its recommendations certainly will keep a lot of regulators and JP Morgan staffers very busy in the future. But looking at the quite unstructured text in the 18 pages it contains hints at the main problem any financial institution faces: complexity and human frailty combined with a good mix of fear, risk and greed. Setting up ever more complex procedures and review bodies will only go so far and never be a perfect substitute for common sense and competent, honest and modest people.

UK: Hellbent on destroying its banks?

Readers know my scepticism with respect to the LIBOR witch hunt (and the PPI/payment protection insurance brouhaha that is completely blown out of proportion and turns all notions of individual responsibility on its head). But if there is any truth to it that the regulatory jobsworths (and their political puppetmasters) put pressure on Royal Bank of Scotland to get rid of two senior executives than one really has to say that the 'Coalition' here in the UK is hellbent on destroying what is left of indigenous UK banking institutions. Cameron and Osborne (and with a little bit of luck Nick Clegg as well) will find themselves cushy jobs with their Etonian or City friends and hangers-on after (as I would expect) they lose the next election. But the taxpayer and citizens of the country would have seen their (involuntary) investment in RBS go down the tubes.

Libor Trades - Simplistic Calculations

Reports about the profits that Deutsche Bank is supposed to have made (where can we finally expect to see a hard copy of dollars and cents?) are simplistic to say the least. Of course, ALL trading houses will (hopefully) have made money from 'Libor trades'. The alternative would have been to have lost money in these trades. But as even any intern serving in an investment firm knows, that does not mean that any profit has been made in an improper fashion. Have any of the critics in the media, politics and regulators even had a good look at the acres of office space trading desks occupy? do they know how many different desks and investments are linked to Libor? Then they would understand that even the efforts of a group as large as the (supposed) group of UBS staffers can hardly have shifted the actual Libor rates produced collectively by ALL the contributing banks by more than a tiny amount. And even within UBS, for example, there would have been winners and losers on any given day, just that the people responsible for Libor quotes may have gained a small advantage at their expense. But for that I still would like to see actual proof and not general displays of shock, horror etc