Caps on Banker's bonuses - Devil is in the Detail

When Gordon Brown tries to garner support for a limit on banker's bonuses one is reminded that talk is cheap. But the devil is in the detail: who decides? what is the right amount of bonus? what will be the side-effects? (certainly an increase in base pay, if not in other fringe benefits)What is a bank? If payment is regulated at banks, will people and business not migrate to other areas of financial markets like brokers, investment banks and hedge funds? (not to mention the likely migration to emerging financial centres that are outside the global G2/G7/G10/G20/OECD cartel?

Welcome to the Inquisition

Trying to find the right candidate for any position is a difficult and arduous task in the best of times. The same can be said about the problems candidates face when looking for a new job. Things (nearly always) take longer than expected and we often remind both parties in the recruitment process that nothing is done until someone actually sits on a new chair. (And sometimes even that is premature as we have seen new appointees quitting after a short time). So the news that the FSA is putting extra emphasis on vetting the appointment of senior staff is going to complicate things further. What experienced professional will be happy to be subjected to a detailed and bureaucratic grilling by people he will rightly consider to be professionally inferior bureaucrats? So far we have not seen what criteria the FSA is applying during this vetting process and as it will forever be shrouded in secrecy confidence in the procedure will never be established. Firms where appointments are subject to this interference will be at a competitive disadvantage in the future, In addition, this is just another step on the paths towards the reduction of London as a financial centre.

Lessons from Dresdner Kleinwort fiasco

The news that three more former employees are suing Commerzbank for the payment of allegedly promised bonus payments should serve as a reminder of the dangers of trying to build a financial services business by putting together a collection of senior professionals. The danger of the winner's curse that threatens the success of many a corporate takeover is a real threat. Staff that is hired too expensively is a drag on profitability and may also dampen the team spirit as those employees of less favorable terms might resent being in a second tier in terms of pay and job security. Cobbling together professionals with disparate backgrounds will never be a substitute for a corporate culture that has developed organically. As a consequence while we do recommend selective hiring of senior professionals to fill gaps in an organisations managerial line-up we strongly advise clients not too neglect the systematic development of their existing staff.

Lehman - another eyewitness account

Larry McDonald has just finished and interesting book about Lehman. It just underlines that the all-purpose boards at best are an expensive form of consultant and at worst useless decoration. Would you like to have the ex-CEO of a brezel manufacturer discuss the details of your forthcoming brain surgery with your doctor? As we argue at another place we think that non-executive directors without any experience in the business a company is engaged can more cheaply and effectively be used in the form of consultants. That way it will be much more transparent if the can make a meaningful contribution to a company's progress.

Banks need to be protected from themselves

The farcial comedy surrounding the attempted takeover of Continental by Schaeffler proves that the old saying is correct: the more you owe the banks the more you can dictate to them. The banks should never have agreed to advance billions of Euros to support Schaeffler's attempt to gain control of Continental AG in the first place. Even in times or normal credit markets the leverage ratio was just too high and made no allowance for a deterioration of the economy and/or markets. Lending cannot just be done on the basis of assuming the best of all worlds. As the upside is limited in any credit exposure (to par value) lenders have to build in worst-case scenarios and err on the pessimistic side. Regulators must assure that banks are conservative in their lending practices and should limit loans to prudent ratios in relation to the equity capital available to creditors.

Bank rescues distort competition - BIS Study

The unprecedented support for the banking system has so far cost the 11 leading economies about Euro 2 billion in subsidies and/or state support/guarantees according to a new study published by the Bank for International Settlements.

Banking Pay - a better solution

Politicians and Media Pundits in several countries are currently discussing ways to control pay in the banking industry. Discriminatory laws aimed at the industry will only lead to more and more detailed interference in the market and create all sorts of counterproductive distortions (The Cuban Economic Model as final destination). A much more effective - and simpler - solution would be to focus on implementing much-needed banking reform. Controls on balance sheet risk and exposures would do much to prevent a future bank crisis and also limit the fallout if a bank fails - as has to be allowed to happen in a free enterprise system. A side-effect would be that commercial banking would become less profitable and this would automatically limit 'excessive' compensation of banking executives.

Hell-bent on destruction

The self-servicing top tax court in the UK (ominousely called 'Special Commissioners') has just issued an order to the foreign banks located in the country to hand over details of accounts held by British citizens in their foreign branches or other operations. Apart from the question whether these foreign operations are legally entitled to pass on any information we wonder what this threat (and we expect protracted legal wrangeling) will do to damage the standing of the City of London as a financial centre. The endlessly growing power of politicians over the life of citizens used to stop at the border of the respective country, now we seem to move into the era of 'Ueber' Socialism - at least in some countries. Given that taxes on individuals and companies are comparatively less attractive in the UK than in the past we expect the relative standing of the UK's financial markets to decline. The tipping point is still far away but it is getting nearer with every ill-considered move by the politicians and their appointees.

To split or not to split?

One of the many possible remedies for the banking crisis is the separation of traditional banking (lending and deposit taking) from investment banking, in particular trading for the bank's own account. While the industry naturally is against Glass-Steagall Mark II there might be a half-way solution in that the large 'universal' banks are allowed to keep their investment banking activities but only if they are held in a completely separate legal entity that has its own funding, risk management etc. In case of failure of the investment bank the traditional banking unit would effectively be ring-fenced.

Better Regulation for Banks

A sensible article by Katsunori Nagayasu, President of Bank of Tokyo-Mitsubishi UJF, encourages my view that the solution to the recurring banking problems is the application of simple and common-sense regulations. Funding should be matched with deposits as should be maturities on both sides of the balance sheet. Loan values must be conservative - no more 100% mortgages for homebuyers or property speculators. People who have to review the application of these rules don't need a PhD in advanced mathematics, they might not even need more than common sense and a solid grounding in the three R's. The question of excessive remuneration of banking executives would also take care of itself as the banking industry would have solid but more subdued earnings.