FATCA - the true tragedy

The absurd legislation making its way through the US government machine is a sad indictment for the inability of the European 'elites' to make a clear and determined stand in defending the interests of their citizens and the financial industry in the Continent. A simple threat to retaliate tit for tat and subject the US institutions to the same treatment would have stopped the whole nonsense right in its tracks. After all, if the US is so keen to catch potential tax cheats it could impose stringent controls on its own citizens, control all movements of money in and out of the country and in the process make a laughing stock of the expression 'land of the free'.

Regulation will atrophy banking industry

The failure of governments and regulators in reforming the global banking systems in any meaningful way is illustrated by news that more examiners will be "embedded" in the banks and securities firms they regulate (Wall Street Journal). I have always warned that a financial system that relies on regulation and not on competition will lead to the creeping takeover of all business decisions by a bureaucratic (and uncontrollable) monster where 'Kommissars' will have to vet any decision made by the business managers. These in turn will become more and more risk averse.

Secretive Banking Elite rules Trading in Derivatives?

A New York Times report highlights the lack of official supervision of trading in derivatives. In no industry would it be allowed that the dominating participants collude setting market rules without being subject to impartial outside regulation - be it from consumers or government authorities. When the market in OTC derivatives started it was a tiny cottage industry and supervision was unnecessary. Now the amounts involved are so enormous - multiples of the whole planet's GDP - that leaving the task of supervision to a few market insiders is no longer practical. One can only hope that the top officials of the financial firms concerned realize that - in the interest of society as well as their own - a new regulatory framework is urgently required. Putting the majority of the trading onto exchanges will alleviate the risks of a catastrophic market failure but this will in itself not be enough. The central clearing houses in turn will have to be made as secure as possible and only a substantial increase in margin that has to be posted by ALL market participants will ensure a safe market environment.

Goldman Sachs in controversy about CDS trade

We have for a long time called for more effective regulation of the market in credit derivatives. Therefore we are not surprised when details about Goldman's involvement in some controversial trades were disclosed by Carl Levin, chairman of the Senate permanent sub-committee on investigations.

No improvement in pay practices at banks - study

An study commissioned by the Council of Institutional Investors comes to the conclusion that changes to pay practices at major banks in the USA have lead to a deterioration rather than the intended improvement in incentives.

Kafka alive and well in US Government

The absurd consequences of the obsession with fighting symptoms rather than causes and increasing the reach of government and civil servants at all costs is demonstrated by news (Wall Street Journal, 20 Nov 2010) that major US banks are intimidated enough to refuse to conduct business with a large number of foreign embassies in the USA. In countries such as the UK opening a bank account is a major burden for consumers and achieves no demonstrable benefit in terms of fighting crime or terrorism. The costs of complying with regulations that become more complicated by the day is immense, not only in direct costs related to the governmental enforcement agencies but also in terms of additional staffing in financial service firms.

A distorted view of the banking crisis

The standard of public discourse in the United States reaches a new low when respected commentators can argue that the main culprits in the crisis that hit the US financial system were the politicians in Washington. If one wants to one can argue that EVERY citizen and institution was culpable, be they lenders, borrowers, investors, voters etc. But to pin the majority of the blame on Washington goes to far. No one ordered Dick Fuld to manage the affairs of Lehman Brothers the way he did, nor can this argument be an excuse for the egregious failure of Bear Stearns' management to see the danger signs flashing all around them - while they were happy to spend time on the golf course or playing bridge.

No one helps Bank analyst Bove in hour of need

We are not able to confirm details in today's New York Times article about the lack of support for Dick Bove. BankAtlantic, a Florida bank, sued him, accusing him of defamation after he wrote a report about the banking industry in July 2008, just as the financial crisis was starting to boil over. The bank contended that the report falsely suggested that the institution was in trouble.
But if his claim that several associations that represent stock analysts or the securities industry declined his requests to help him pay his legal bills it leaves a sour taste in the mouth - to say the least. What use are the Securities Industry and Financial Markets Association, the New York Society of Security Analysts and the CFA Institute if they decline to make a stand for independent investment research. To cap it all, they declined to comment when approached by the New York Times. Even worse - the investment bank Ladenburg Thalmann, his then employer, chose to settle its end of the case by paying BankAtlantic $350,000, without admitting to any wrongdoing, and leaving Mr. Bove to defend himself.  We are glad to report that Bove won his court case against the Bank but is still left with legal bills totalling $800,000. The stakes in a case like this are high as any successful lawsuit against an analyst would deter critical analyst comments in the future and stifle independent research.

US sanctions akin to tolls exacted by robber barons

It is highly problematic that banks based in other countries are forced (blackmailed?) to obey the politically-inspired wishes of narrow cliques and lobbies in the 'land of the free'. Sanctions against North Korea or Sudan may well be justified in the eyes of some or even a majority but that should not give the US the right to unilaterally decide for other countries were the governments - and even less so the citizens - have had no say in the matter. How would the US react if a European country imposes sanctions/penalties on IBM or Apple because their products are sold in a country that has been put on a sanction list by that country? Due to the technicalities of the international payment system banks are by definition involved in some US business (however tenuously) when they deal in US dollars, but this fig leaf should not be accepted without forceful resistance by the governments of other countries whose banks are penalised. This type of penalty is much more like the tolls exacted by robber barons in the Middle Ages.

FACTA: Will the EU stop US power grab?

As the implementation of the Foreign Account Tax Compliance Act by the US authorities draws nearer, it will be interesting to see how the usually toothless EU bureaucrats react to this one-sided power grab. We see no reason to accept the US intention to extend the reach of their tax law beyond the US borders. If the IRS wishes to have full control over the assets of US citizens it should set up a system of rigorous border controls and monitor all transfers of asset into and out of the country. Alternatively, the US can impose withholding taxes if it so wishes but as the country is dependent on foreign investors supporting the profligate spending by government and consumers alike it would only hurt its own interests by doing so.

Verdict on Dood-Frank bank reforms

This quote (Liam Halligan, Sunday Telegraph, 25 July 2010) says it beautifully:

"Based on sound-thinking courageous judgement, the Glass-Steagall legislation was only 17 pages long. Packed with wheezes and loop-holes, Dodd-Frank runs to 2,319 pages. Enough said"

Banks are still allowed to play in Private Equity?

The lack of banking reform becomes evident in the fact that Goldman Sachs is still able to play the private equity game with its own money.

Financial Non-Reform in the US

Should one laugh or cry? The solons have given birth to a mouse, some will love it, but who will have the last laugh?

SEC: non-report on 1000 point drop in Dow Jones

After a weekend of heavy-duty gardening your correspondent is back to the real world. This comment on the SEC's effort to bring light into the precipitous 1000 Dow point decline on May 6 caught our eye: "If the SEC were charged with writing a report on the causes of the New Orleans flood, it would provide a hundred pages telling us how many cubic meters of water there were, how many molecules of oxygen and hydrogen the water contained, and plenty of assurances that water is usually good for the health, but it would forget to mention hurricane Katrina and the broken levy." (Mark Mitchell on www.deepcapture.com). We could not have described the lame response of the 'regulators' much more accurately. Thank God the 'accident' happened in the USA as a similar incident in London would have led to the creation of a 'Royal Commission of Inquiry' at the cost of millions of pounds in lawyer's fees.

Financial Reform Bills - the case for democratic reform

When financial reform bills are 1273 and 1336 pages long as in the case of bills that have been passed or debated by the US Congress one can only say that this is legislation run amok. I would not expect a single member of congress to pass a simple multiple choice exam about the content of these bills and as a consequence one has to assume that a lot of nonsense is being passed that will hardly improve the situation for investors or taxpayers in the country. What is demonstrated by this perverted legislative process is the need to reign in overbearing and/or incompetent governments and parliamentarians. Anyone interested in how to bring this change should visit www.dirdem.org

Glass Steagall is good for you!

We continue to be amazed by the hysteric reaction of bankers to the possible introduction of a separation of business lines along the regulations imposed by the defunct Glass-Steagall Act of 1932 that separated commercial and investment banking for more than sixty years in the USA. Looking at it from another perspective - and not just short term/short sighted business perspectives - was the global success and dominance of the US investment banks not partially due to this enforced separation? Would the enterprise spirit not have been severely dented by keeping the entrepreneurial spirit constrained by the bureaucratic management structures of the commercial banks? A similar argument could be made in case of the City of London where the free-wheeling spirit of the financial community goes back over centuries and is in stark contrast to the top-down models of the continental European banking industry.

Betting on my neighbours house?

Lynn Stout's point about Goldman Sachs' Abacus Mortgage Derivatives Deal (New York Times) illustrates the need for stricter derivatives regulation:

"...much of the blame for investors’ losses in the Abacus deal can be laid at the feet of an obscure statute passed by Congress in 2000, the “Commodities Futures Modernization Act.”
If we allow the unscrupulous to buy fire insurance on other people’s houses, the incidence of arson would rise sharply. In one dramatic move, that act eliminated a longstanding legal rule that deemed derivatives bets made outside regulated exchanges to be legally enforceable only if one of the parties to the bet was hedging against a pre-existing risk."

How to control Commercial Property Lending

A report by the US Congressional Oversight Panel states that more than half of all outstanding commercial property loans are larger than the value of the underlying property highlight the need to reign in the banking system's freedom with respect to lending to commercial property. The report prompted us to submit the following comment to the Committee:

One often has to wonder how individual 'developers' can amass huge fortunes when most of them never had a shovel in their hand. A quick glance at the list of Billionaires in the Forbes list confirms that property development (and speculation) is an extremely profitable business for the few. A lot of this apparent success is due to the endless inflationary spiral during the post-war years, some is due to entrepreneurial spirit - but a lot is also due to lax lending practices (sometimes aided by dubious practices, the least pernicious being free tickets to sports events and meals in lavish restaurants provided to loan officers).
Reform should put strict limits on the loan value of any commercial property. At the same time 'interest only' loans should also be put under the spotlight. If they are deemed to be too risky for private homeowners they are even more risky in the hands of professional speculators and cannot be allowed to put the banking system under undue risk.

Reshaping US Mortgage Market

It beggars belief that a country that prides itself of its superior financial markets is not able to provide mortgages on a private basis. Apart from the fact that state-subsidised institutions may have distorted markets and driven out private-sector institutions it is amazing that a chastised banking industry prefers to pursue profits in more exotic segments of the financial markets rather than catering to the real needs of ordinary people.

One regulator behind each banker!

That is the ultimate destination of the effort to create regulation for a stable banking and financial system. It is the logic of central planning (and regulation is nothing else) that the rulebooks have to be more and more detailed to cover every eventuality. In order to be effective more and more decisions will have to be supervised in minute detail by an ever-rising army of regulators. Banking professionals may love this as the bureaucrat/regulator takes all responsibility for decisions from their shoulders as each and every decision would have to be approved. A useful side-effect may be the contribution this would make to the growning lack of employment opportunities in many Western countries as it would entail a doubling of employment in the financial service sector.