Goldman: Internal Probe on 'Muppets' draws a Blank

We are not surprised (Financial Times). Who would commit the word to email or voice mail, let alone a printed document? That person really would deserve to be fired - not for the word but for sheer stupidity. But the problem is this: Investment Banking and Securities Dealing are full of products where the interests of the firm and the customer (we avoid the word client on purpose) are directly opposed. But this is the case in almost all businesses. The vendor wants a high price, the customer a low price. A healthy amount of competition therefore is necessary to make sure that customers get the best service. However, this also requires customers that are intelligent and diligent enough to make sure that their interests are served, i.e. do not get taken in by fancy brochures, the image portrayed by the salesman or invitations to ball games and fancy restaurants. One should always be on one's guard when confronted by sales patter but at the same time no firm will be able to survive if it does not control the urge to take advantage of its customers. This requires more than a nicely formulated 'code of conduct'. It requires constant effort from the top of the organisation down through the ranks. It certainly does not help things if top managers of financial firms pay themselves a king's ransom that is disproportionately large in comparison to the pay that those lower down the hierarchy get paid.

CEO sets the tone for any business

We agree with this statement (Who's the Best on Wall Street: Risk Management Report Card - CNBC) but want to add that the development and empowering of a team of senior managers (and good succession planning for all these positions) is as important in fostering a strong culture in any business, large or small.

UBS hit by loss on Facebook IPO

This headline says it all. The hottest (or most hyped, depending on your point of view) new issue deal of the year, maybe decade, and one of the investment banks involved in the deal has to declare a $356 million loss related to the transaction. As I am never tired to repeat: Investment Banking is a simple business - if you do not make it complicated!

Not all publicity is good publicity

How much longer can the image of Goldman Sachs get knocks such as these? It is time that someone minded the house again.

UBS boss hires old friend for senior role

When one reads that the recently appointed CEO of UBS hires a former colleague from his days at Merrill Lynch as Co-Head of Global Investment Banking one has to assume that the hiring old an (business) friend may give a certain amount of comfort and hope that relationships in the top management team will work smoothly. But there is always the danger that sentimental aspects cloud the judgement or that conflicts of interest impede rational decision making or sour the morale of the other team members. The big question is also why a global (?) player like UBS cannot grow its own senior managers. Once you had to be an officer in the Swiss Army to climb the management ladder at the old UBS (before it was taken over by local rival Swiss Bank Corporation) and that surely was not providing an adaequate talent pool (and led to the sorry demise of the 'old' UBS) but has the bank really drawn the right conclusion and found the right formula? The track record over the past 10 plus years speaks a clear verdict.

Toxic Mix - Politics and Consultants

Royal Bank of Scotland (RBS) had enough problems at its hands before a young and inexperienced politician and a consulting firm made its life near-impossible. Running a bank after a near-death experience due to overreach by its previous CEO and board (some members inexplicably still have not been purged) is a tough assignment. When a chancellor with hardly any real business experience outside the charmed circle of lobbies and professional party politics tries to micro-manage a business the task becomes impossible - especially when nimble competitors do not face similar constraints. And giving a consulting firm carte blanche to meddle in this situation cannot help much to safeguard the ailing ship RBS. Staff of the consulting firms often are quite young and have no practical business experience worth mentioning. Even senior consultants often have moved up the consulting ranks and have similar deficiencies with respect to real business life. If anything, they might be busy trying to jump ship to a position on 'the other side of the fence'. Quite a number of senior positions in Financial Institutions are held by former Consultants and we are polite enough to describe their track record as 'mixed' at best.

Goldman Spin Master to retire

Goldman's public image suffered a few scratches during the past few years. So when we spotted that the firm's PR supremo was leaving after 12 years with the firm we were reminded of the time when (investment) banks and many other businesses got by without spin masters, and a happy time it was. After all, all that really counts is how well you work for your clients (or should one only say customers these days?). They pay the bills and word of mouth does the rest. Which CFO would really allocate a piece of business according to the size of a corporate image ad in the latest edition of Euromoney (or the FT). Good PR means to answer the hard questions in a straightforward way, and most importantly, do business the honest way. If that is not evident to the outside world than the best PR campaign is only wasted money.

Barclays does not 'fall short'

As some in the Media and Analyst community may want you to believe. I am the first to be sceptical when banks make grandiose announcements about the goals they try to achieve. But succeeding in investment banking is a game where those who last the course will win out in the end. Nervous prodding by analysts and media should not divert management's attention too much. The way the competitive landscape has unfolded over the past few years should allow Barclays to slowly but steadily up the rankings. Profitability is under pressure at all banks and no one can be sure what the new banking world will look like in a few years. On a more mundane scale, even the refurbished branches of the bank look great when compared to the competition here in the UK.

How to avoid employment tribunals - better people management

It may well be too easy in the UK to launch an appeal to an employment tribunal but it usually takes two to tango and without passing judgement about an ongoing case I want to argue that cases such as this one underline the need for careful staff assessments before and after hiring a person. All-too-often personnel decisions are based on academic achievement or (especially in finance) the numbers in terms of P&L. The qualitative aspects of management are easily neglected in a pressured enviroment and personality clashes can quickly escalate out of control.

UBS - curious selection of new board members

What is the 'politically correct' composition of a company board? We are not sure that board members are more than an in-house management consultancy. They certainly are far removed from the real owners of the company and even the fiduciaries in the asset management world have little say in the affairs of a board. But news that UBS has appointed two women to its board - one an academic economist and the other one a lawyer - raises some questions. Given the appalling track record of economists (you all know the many jokes about economists, as for example: An economist is a trained professional paid to guess wrong about the economy) one can not be too hopeful about these latest appointments. Don't forget the lawyers though: Q: Why won't sharks attack lawyers? A: Professional courtesy. Maybe selection by eye colour would be more effective. There may be a good cause for more women on company boards but we doubt that giving in those who expect miracles from this will be proven to be right in the long run. Whether or not a bank run by economists (Axel Weber, the incoming Chairman of UBS is another one) only time will tell.

Credit Traders accused of manipulating valuations

During the court case in which former senior credit traders of Credit Suisse are accused of manipulating the valuations of their trading books the revealing statement by one of them caught my eye: When a data-entry employee asked one of the accused “What sort of P&L do you need today?”  the trader responded that all books should end the day ‘up’ by $35 million” and the prosecution claimed that later one of the traders “artificially increased the prices of several ABN1 positions” to meet the trader's profit target. (Bloomberg BusinessWeek). This confirms our suspicion that the controls in many investment firms are woefully inadequate.

Dual CEO'S - if anything a formula to be promoted

The recent troubles at Blackberry manufacturer Research in Motion seem to suggest that dual leadership can be damaging for an organisation (FT). But Rome had two consuls during its rise to dominance, and they were limited in their power to a tenure of one year. Goldman Sachs in the late 1970s and early 1980s had co-chiefs - and that was when the firm laid the foundation to its rise to dominance. The challenge for boards and shareholders is to make sure there is a deep bench of talent - a thing that is sorely missing in many companies, why else would a company ever look for an external candidate for any of its top positions?

What is the future for banking pay?

Asks Gillian Tett (FT). When even the shares of Goldman Sachs, the company that is supposed to be the Gold Standard for banks, are at best marking time since the IPO in the late 1990s it becomes obvious that something is wrong not only with the compensation structure in the (investment) banking industry but with the whole business model (and the managements that are responsible for this state of affairs)

Why is Adoboli alone facing the music?

Seeing Kweko Adoboli as the lonely accused in the Courtroom creates a certain amount of sympathy for the young man. It is easy for senior UBS staff to pin all blame for the billion dollar disaster on one person. This makes it easy to escape blame for a  management culture that allowed a completely insufficient risk control to exist. Senior managers were busy enough chasing profits at any price with a firm eye on the next bonus payment they expected to receive. But Risk Management should mean that fail-safe procedures are in place - if necessary in triplicate - that make it impossible for any single person to play the markets the way Adoboli is accused of having done. Senior managers have been fired (with or without a 'golden handshake' as farewell present?) but should there not be other people facing justice in the courtroom? Oswald Gruebel may have wished for a more glorious end to his career, but he will certainly not feel any pain in his pocket.

Hire and Fire backfired!

The disaster that is currently played out in many banks and brokerage firms stems from poor judgement and (irresponsible) people management. There was no reason to indulge in a renewed frenzy of hiring after the 2008-09 credit crunch and staff that now has to be fired was hired based on speculation that the business would follow. Unfortunately playing with people's lives carries very low penalties for those responsible higher up the hierarchies.

MF Global - famous last words

"If there is a relevant risk, we will have a relevant measure and limits around that risk"
Thus spoke Michael Stockman, Chief Risk Officer of MF Global (Risk Magazine, April 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.

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.