Figuring our Goldman

While working at GS quite a few years ago I used to joke and say that we were ahead of the competition for a simple reason: we were the one-eyed man among blind men. Nothing has changed and it is amazing that all the smart people in the competing firms and the media have not yet figured out the simple ingredients in Goldman’s recipe for success - after 25+ years!

UK probes structured-finance products

'The U.K. is probing sales of structured products amid concern that bankers may have knowingly sold complex assets based on flawed valuations' (Wall Street Journal, 3 Aug 2009).
This shows why regulators often remind us of the Keystone Cops. They should be aware that anything you sell is 'worth' less than what you sell it for, for example - how much is a Rolex 'worth' (adding up the raw materials etc). So this inquiry is posturing more than sound analysis. Buyer beware is still the best deterrent and the effort to protect all consumers, investors etc is just relieving those doing the buying of their responsiblity to conduct due diligence

Stolen Goods and Northern Rock

When a City Commentator states that the tripartite system of regulation in the UK 'undoubtedly contributed to the collapse of Northern Rock' (Daily Telegraph, 31 July 2009)one has to wonder why a 'powerful' committee of MPs wants to grant more powers to a failed regulator such as the FSA. All bureaucracies have an inbuilt incentive to increase their powers. Some people just want to boss around other people while other people want to enjoy harvesting the fruit of labor performed by others. Politicians and regulators combine these bad character traits in a toxic mix that pervades all their actions. As Richard Fletcher suggests in his comment 'allowing the FSA free rein to expand...could also endanger London's position as one of the leading financial capitals in the world'.

Fantasy World of Eurocrats

We challenge anyone to get a clear answer from Neelie Kroes with respect to the rules that are applied when she and her lightweight team decree what Banks and Governments are expected to do in order to conform to their whimsical ideas of a competitive banking market. Anyone can see that her department employs two drivers for the occasional excursion into Euroland. This is a nice human touch as it shows that all staff are equal but the sad thing is that most of the other staff look like fresh out from university and utterly unqualified to decide the fate of Europe's banks (and economies). In what fantasy world do these Eurocrats live when they think that major banks can shrink dramatically while the economies are still on the tipping point to a prolonged recession? Try to get a curriculum vitae for all the staff listed on Kroes' website if you can. We did not have much luck doing just that.

UK government support for City lacklustre

It is amazing that lightweight EU member Ireland can force renegotiation of EU laws while the Prime Minister of a large member state and the state with the most important financial markets of the EU appears to be powerless to protect the national interest during the negotiations for yet more centralistic and statist control advocated by the EU Commissars and assorted hangers-on.

Better Credit Research one of the lessons of the Credit Crunch

The Credit Crunch that we experienced during the past 2 years has produced – apart from financial pain the world over – an unprecedented amount of hot air. We are talking about the countless statements by politicians and self-appointed pundits in the media and academia who have proposed various measures of reform.
Rather than waiting on the outcome of the ‘Global Dialogue’ we suggest investors rely on common sense and focus on improving their own protection against the recurrence of a similar disaster.
Credit Research should be high on the priority list of every Chief Investment Officer or Senior Investment Professional.
We are not surprised to see strong demand for seasoned credit analysts and expect this to continue. Fortunately the convulsions in the financial markets have also resulted in a number of good quality analysts becoming available through no fault of their own.
Should you be looking to upgrade or expand your credit research effort we would be happy to discuss this with you or someone in your organisation.

Wrong time to raise levels of base salaries

Several Investment Banks have decided (or are investigating) to increase basic pay of employees in compensation for (expected) lower bonus payouts in the future. We think that this rush to boost the fixed costs of the business may be pre-mature. A recent report predicted that global investment banking revenues will drop by about a quarter this year. Revenues from the Securities Business may also not hold up after a quite profitable period at the beginning of 2009 and revenues from Asset Management will remain under pressure. Then there is the political aspect as the industry has just been saved from itself at great expense to the taxpayer. Even the well-run companies can only thank governments as without the bailout they would have been gone down together with the weak banks in the financial tsunami of 2008. So it may appear that already well-paid professionals get compensated for the loss of bonuses that may not be there (or might be much reduced) at the end of 2009.

Tax, Regulation and Financial Centres

A cursory comparison of personal income tax rates would cause us to cry out: 'Go East young Man!' for the tax rates in Hong Kong and Singapore are certainly mouth-watering. Young professionals in particular have not yet put down strong roots and can afford to be venture-some, - and the really big hitters have the financial means to make it painless to relocate to friendlier tax regimes. Add to this headlines such as this one: 'FSA threatens City with higher fines' and the case for the long-term decline of the City and Europe as a Financial Centre becomes stronger.

100 percent mortgages - AGAIN!!

Do some Bank Managers never learn their lesson? One of the banks that was in the middle of the sub-prime crisis has reportedly started to offer 100 per cent mortgages again. The offer by HBOS - which is now part of Lloyds-TSB - may only be available to existing customers who have reached the end of their deal and find their equity wiped out. So HBOS may not have much choice but it still leaves a sour taste in the mouth.

Less Credit and more Equity is the way forward

Contrary to many commentators we do not think that the solution to the present economic crisis lies in restoring lending to unsustainable levels. If anything, business will have to de-leverage and the source of finance will have to be equity capital. In this context it would be useful to device a mechanism that prevents 'Private' Equity Capital from financing 'pass-the-parcel' transactions. Venture Capital should again be what it was originally designed for: a source of risk capital for new and growing enterprises.