Risk from Open-ended Bond Funds, BIS warning

The Cassandra of the markets is not heard, until it is too late. Maybe the BIS is overly-cautious but given the enormous growth in all types of investments the risks arising from a sudden turn in market sentiment are quite substantial. The bear markets of the Seventies could be digested in an orderly basis, apart from serious settlement problems that stemmed from the large rise in transaction volumes. But markets took the massive declines in their stride and nobody ever even thought that the financial system was at risk.

Now - as with the Covid Virus - panic is always in the air if there is the slightest risk of a substantial drop in asset prices. But while this may be overdone there is one risk that is neglected in my view: are margin levels throughout the financial system really able to cope well with a sudden sell-off of, let's say, 20-25 percent? It did happen in 1987 and fortunately that 'blip' got reversed more or less instantly. But now - when volumes are a multiple of those in 1987 - how would the system cope? The desaster that hit Credit Suisse and others when margin was insufficient earlier this year could be played out on a much much larger scale!

BIS Quarterly

Archegos just a warning of things to come

Archegos just a warning of things to come, and it will be ignored! But how many Risk managers are preparing their business for a 1987-style market 'surprise', i.e. a near-instant 25%+ move in prices? Are the clearing houses, prime brokers, margin clerks really set up for this type of 'black swan' event? Markets are much bigger then in 1987 when bond issues of 1 billion were the rare exception and the derivatives market was in its infancy. And we don't even want to think of the break-up of the Euro (my suggestion - if you hold any Euros make sure you are not left 'naked' when it happens).

Credit Suisse troubles due to wrong Leadership Development

Media Pundits and Deal Makers are keen to give free advice to Credit Suisse - sell this, spin off that - especially with reference to its Asset Management unit. But one thing should not be forgotten: there is no clear rationale against combining Retail, Investment and Private Banking and Asset Management as JP Morgan demonstrates. What is required, however, is superior management, and that means having the right people in charge. This means not only hiring potential saviours or mercenaries from outside but creating a HumanResource strategy that develops and fosters talent from the bottom up as demonstrated by GoldmanSachs. Neither the Chairman nor the previous CEO had any proper training as a banker. Head of Risk Management had no previous trading experience or appropriate qualification for the role.

Are CVA's undermining Real Estate Investment?

The widespread practice of reducing rent obligations is leading to problematic outcomes. The UK restaurant chain Leon just last December completed a CVA and today's media report that the operation is sold for an eye-watering amount, giving the founders a substantial multi-million pound pay-off. One has to assume that the sale was made much easier now that the rent bill was reduced - at the expense of the landlords one has to assume (happy to hear about details of the CVA in case you are privy to the information).