Credit Suisse: Old wine in new bottles?

Sad as it is to see a proud Swiss institution (again) unable to find a local candidate to fill the vacancy at the top of the organisation I watch with interest the first pronouncements of its newly-installed CEO. But apart from the unresolved question of whether or not it is wise to combine the business of banking with asset management (there is a strong argument in favour of independent asset managers) it is quite an irony that Credit Suisse is now supposed to find salvation in asset management - after having shed quite a few parts of the business during the past few years. And do the private banking clients really want to be 'cross-sold' the goodies that the investment bankers are 'incentivised' (to put it mildly) to create for them?
Tidjane Thiam may have done a creditable job at Prudential but he was promoted in March 2009, at the very bottom of the bear market. Talking of good timing!

We are an Earnings Machine

Claims Steve Schwarzman (CNBC) - but is it very diplomatic to boast so openly about the profits Blackstone makes off its investors? Maybe a little bit of PR coaching might be appropriate - one still remembers a birthday he celebrated that was supposed to cost $ 1 million.

Celebrity Fund Managers can be an Achilles Heel

Relying on Celebrity Fund Managers can be risky even for the most prominent Fund Management House. Recent changes at Pimco are just the latest in a series of defections by high-profile managers.

Monitoring Employee behaviour - a tricky problem

Despite the rapidly rising number of compliance officers and the tide of regulatory legislation the age-old problem of supervising employee behaviour keeps posing serious challenges to top management of banks and fund management firms. Surely the solution cannot be to put one compliance officer behind each and every trader or fund manager. And who would oversee these compliance officers? and so on....
Only management and an enterprise culture that are dedicated to maintain high standards of conduct can assure that incidents such as this one at are prevented. All-too often management is too far removed from the front line business, occupied with internal politics or simply not stable enough due to constant re-organisation (aided by clueless and inexperienced 'Consultants').

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.

Merger Blues: Another day, another Write-off

Now it is Legg Mason's turn to eat humble pie and write off a major junk of its investment in Permal, the hedge fund group. No blame sticks to Permal though as no one (except maybe some advisers too keen on their fees?) held a gun to Legg Mason's head and forced them to pay over the odds. It remains to be seen if adding some heft to Permal's assets via the acquisition of Fauchier will help to right the ship. Fund of Hedge Funds are relatively new businesses, often built by one or a handful of entrepreneurs and the task of creating a lasting enterprise culture is a daunting one. The purchase is the easy thing!
Permal to acquire Fauchier Partners (Financial Times)

Man Group faces huge write-off on Acquisition

It was clear to me from the outset that the decision by Man Group to acquire the hedge fund GLG was more out of desperation (to diversity, or as Warren Buffett would say 'diworsify') than rational calculation. While the hedge fund business has been - and will remain - a good business to be in it requires more than any other business a fine judgement of people, enterprise cultures and business trends. Needless to say, the 'advisers' on both side of the deal above all will be interested to bank their not inconsiderable fees while wash their hands of any subsequent problems that may emerge post-deal.
Man Group faces heavy GLG write-off (Financial Times)

Investment Management to the Rescue?

Many banks now think that a renewed focus on asset management will allow them to replenish their depleted earnings as investment banking income continues to be under pressure from difficult trading markets and uncertain economies. (see Wunderwaffe Asset Management?) While asset management certainly is a (very) profitable business if managed correctly it is also a business that requires management skills that are not always in abundant supply in many financial service firms. This applies to banking and insurance behemoths but also to small boutiques. While the larger bureaucratic organisations can easilty be stiffled by too much politics, rigid hierarchies and the lack of focus due to a multitude of business lines the smaller firms are not immune to infighting among senior management and often are overly dependent on an autocratic founder or dominant shareholder.

Jamie Dimon: From Saint to Villain

Since news about the trading loss in JP Morgan's Chief Investment Office broke in April there has been any number of commentators who vilify Jamie Dimon, JP Morgan's CEO. But most of them forget that investment is never a sure-fire bet. One has to take losses from time to time, there is no one-way street otherwise we would all be millionaires. I would guess that there has not been a single commentator who really has seen the full history of these trades and as a consequence no one is really qualified to pass judgement. For a large institution like JPM the only thing that counts at the end of the day, quarter and year is the overall P&L. If positions were under water during any period that is a professional hazard and needs to be managed properly. But many years, decades even, of investing have taught me that the really skilled investor shines when he has to nurse a loss-making position back to profit. Those who unleashed the attack dogs in the Media and in Politics are to a large extent the same ones who fell for the cult of the imperial CEO - and thought he could walk on water.

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.

Size matters - but not in the way the consultants think

A well-known consultant to private banks recently claimed that smaller (Swiss) Wealth Management Banks face a challenging future. The problem with this one-dimensional view is that size does not have to be a valid variable when drafting a path for the future development of any financial institution. If the small banks have no future, the middle gets squeezed and the big ones are too big, who is going to survive? The consultants have a lot of explaining to do as they can not all be right at the same time. Experience and common sense should be the guide as banks in each of these categories can prosper if they make the right decisions.

Profitability of Commodities business disappoints

The headlong rush into the commodities business may not be as profitable as banks and brokers expect. Each commodity requires special skills and it is expensive to support teams in all of these distinct market niches. But the focus of attention shifts from on product to the next and it is tricky to anticipate the next hot market. Playing catch-up is a futile game as a bank may have hired expensive teams only to see the specific sector to cool down and prevent lucrative business from paying for the new hires. There is also regulatory risk as authorities may clamp down on what some describe as a casino that is not serving the real economy as much as investors and speculators. It is quite conceivable that commodities may be declassified as eligible investments and treated more harshly by tax legislation. Business volumes could drop precipitously if that would ever be the case.

JP Morgan to acquire Brazilian Hedge Fund

It is not necessarily a logical consequence that banks that now are required by regulators to scale down their proprietary activities have to compensate for this by buying into hedge funds. Hopefully they do so if they expect to make a profit out of their stakes. But apart from the hefty price tags hedge fund businesses still attract, we think that adding to in-house asset management offerings runs counter to the tendency towards using 'open architecture' in asset management - and in particular with respect to the product selection for a bank's high net-worth and other retail clients.

Lacking CDO Disclosure: Who is to blame?

It takes two to tango. The present discussion about the alleged lack of disclosure in CDO transactions directs most of the criticism towards the structuring and originating parties in the large investment banks (and their cooperators in hedge funds). While this criticism may well be valid in some - or the majority of the cases - one should not forget that no-one was forced to buy these structured products. Any attempt at regulatory reform would be simplified if the effort would primarily be directed at the buy-side. If the list of permitted transactions would be updated so that structured products are strictly controlled the supply would quickly adjust itself - both in terms of quantity and - even more importantly - in terms of quality of disclosure.

USA: desperate search to increase tax revenue

It is ironic that in a week when the helpless US Treasury Secretary Tim Geithner pens a letter complaining about presumed unfair treatment of US alternative investment funds in the EU the US passes a law ('Foreign Tax Compliance Act') that forces all non-US financial institutions to report their dealings with US citizens. Against the background of a dysfunctional Congress and an administration that is spending money like a drunken sailor this desperate measure should not come as a surprise. The underlying philosophy is that a citizens' money really belongs to the state and it is up to the politicians to spend it. We do not expect the authorities to give a clear 'Njet' to this effort to extend the reach of US legislation one step further into other sovereign countries but it will do nothing to make it any easier for the US to fund its deficit in the future. Already some institutions have decided not to have any financial dealings in or with the US and as the next step may well be that the USA tries to help themselves to the wealth of non-US citizens we would advise investors to sponsor fund managers that take precautions for that eventuality.

Ostentatious Consumption - good or bad?

Goldman Sachs' Lloyd Blankfein has asked his employees to avoid being seen as big spenders. The jury is out whether this is just a cosmetic PR gimmick or whether Goldman itself is in some doubt about the justice of last years highly selective bank rescues funded by the public. But however that may be, today's headline that a hedge fund manager is splashing out a reported £60 million for a super yacht may not help the alternative fund management industry in its effort to convince European legislators to enact more lenient industry regulations.

Madoff - could he have done it alone?

What is the similarity between the Fritzl case in Austria and the Madoff scam? In both cases it is extremely unlikely that those close to the perpetrator were ignorant of what was going on around them.

To Quant or not to Quant?

Yesterday's Financial Times carried a polemical piece by Nassim Taleb. In it he derided the use of mathematical models and called the so-called Nobel Prize for Economics an absurdity.
While we ploughed our way through a fair share of mathematics in our undergraduate economic classes and found them pretty remote from reality, we would not go so far as to completely reject the role of mathematics in the financial markets. At that time it was a sign of stellar quant ability if a bond trader or salesman could calculate the yield to maturity on a bond without use of a calculator, but time has moved on.
The recent events in the credit markets, however, have demonstrated that at PhD in Maths cannot be a substitute for good judgement and that good character should still be the basis for a successful career and business.