Change of guard at Morgan Stanley

As John Mack moves from the role of CEO to become Chairman of Morgan Stanley at lot of coverage will be given to his record at the firm after his return four years ago. I think that he has done a remarkable job given that his tenure encompassed the most challenging two years that any leader of a financial services firm has ever had to live through. The stock price of MS at one stage priced in a possible demise of the firm (the same happened to most other bank and broker shares) and was an inevitable exaggeration caused by a market panic. Structurally, however, Morgan Stanley suffers from the merger with Dean Witter ten years ago. One of the great advantages the main rival, Goldman Sachs, enjoys is the fact that the firm in all its history only ever pursued small add-on acquisitions. This organic growth solidified the company culture and created the opportunity to develop the firm's leadership without recourse to outside hires.

What is 'socially useless' banking?

Senior Bankers have recently felt compelled to contribute to the debate about so-called 'socially useless banking'. The key question would be the definition of what is or is not socially useful/useless. I think one could well leave the answer to the market. No one is compelled to buy supposedly 'useless' products, be they derivatives, hedge funds or - to generalise the problem - expensive luxury watches or cars. Common sense should be enough to settle the question. Unfortunately there are many ideologically motivated fellow travellers joining the discussion as it appears to be a good opportunity to pursue aims that have little to do with the problem (more state, more taxes etc)

London Hedge Funds stay despite tax hikes

We would not celebrate too early and condone the long-term impact of higher prospective tax rates on London's standing as a financial centre. The effects will modify behaviour only at the margin and as taxes are admittedly not the only factor that is considered when locating a business the impact will be diluted by the weights businesspeople attribute to these other factors (legal and other services, infrastructure, quality of life, availability of skilled labor). The real danger is only that once a certain tipping point is reached decline can be very rapid and irreversible.

Ossie rallies the troops at UBS

Having undergone an interview with the taciturn no-nonsense Ossie Gruebel when he was the head of Eurobond dealing at Credit Suisse White Weld in the late 1970s I always carry the highest respect for him ever since. UBS is still a brand name that will make it easy for clients to forget the missteps of the past few years as long as they get the right service. Reading the memo that Gruebel penned for his staff of 70,000 I cannot help but think that maybe the staff numbers are still a little bit on the high side.

The Fed CAN monitor systemic risks

A senior fellow at the American Enterprise Institute argues that the Fed cannot monitor systemic risk as that would be tantamount to ask a thief to police himself. Without going into the details of his argument several aspects come to mind that would negate this judgement: until now the mandate of the Fed was not strongly focused on playing the role of a regulator of the financial markets and system. Instead, price stability and economic growth were given priority if not exclusive attention. That mistakes were made in this department cannot be denied (and they are partly due to the mixed message sent by the duality of the set targets). But that does not mean that the Fed could not be more effective if it is empowered to be a more forceful regulator. We would also hope that the Fed does not only monitor risk but will have the tools to prevent them in good time.

Blueprint for Global Derivatives Market

Derivatives are in essence a bet on the price of the underlying asset. Economically they are a zero-sum game where the losing side funds the gains of the successful side. Like all bets the derivative markets serve to redistribute wealth minus the costs of running the market. As a consequence of the credit crisis reform of the derivative markets has moved to the top of the political agenda. This is not the place to discuss the role that derivatives have played in the financial crisis. But if more players are active in a market it can only be expected that moves above (and below) underlying value are exacerbated - despite the fact that derivative instruments are often claimed to help move prices back to their underlying trend. I do not agree that moving all derivative trading to exchanges is necessary to avoid bubbles and excessive risks associated with derivative positions as advocated by many commentators. For an new example see the paper just published by Deutsche Boerse. Instead, I think that higher capital requirements to support open positions will be sufficient to reduce the danger (real or imagined) attributed to derivative markets.

Seven dwarfs - interesting comment from a Reader

Your post (Seven Dwarfs in Stockholm) is interesting in that it confirms the tendency to first blame others, the system etc when being held to account for behaviour. That type of self-righteous response never convinces anybody else outside the own group. The politicians' thrust may be crude and may have negative side-effects, but it is triggered by an apparent unwillingness of bankers to appreciate how others, society at large perceives their behaviour and its crippling effects on the financial system and the economy and to take responsibility for that. Your type of response will only make politicians more determined to ensure bankers will not be able to go the same path again and you will become more convinced of the stupidity of politicians. It takes us nowhere. A meaningful step forward would be made if bankers could say they appreciate the concerns of society and are willing to come with new responsible remuneration systems that also pay justice to the inherent risks ultimately born by society. If bankers could be transparent on how they go about this, engage in a serious dialogue with society on remaining concerns, then the need for blunt politically driven regulatory measures would evaporate.

Equal pay for Women - comparing Apples and Oranges

The unelected chairman of the Equality and Human Rights Commission has decided that the current debate about compensation in the (investment) banking industry is too good an opportunity to miss. He offers his five cents of wisdom in an article headlined 'Her City bonus is a fifth the size of his' leaving the reader in no doubt what the likely conclusion of this piece of reasoned argument will be. The sub header gives the game away: it carries the subtle threat inherent in all socio-babble propagated by socialists and assorted hangers on of the nanny state: 'We'll help the City to treat women fairly - or we'll force them'. (Does Mr. Phillips now use the royal 'we'?). It is too tiresome to discuss the details of this so-called 'study' as it is perfectly clear from the outset that an extremely detailed comparison between workers at exactly the same employment situation is required if one wants to isolate the gender impact on basic and variable compensation. It is ironic that the department regularly involved with recruitment and compensation is ofther predominantly staffed by members of the fair sex. So there is already a slender bias in favour of women candidates and employees in many organisations.

Animal Spirits still alive in City

Anyone who doubted that the credit and market crisis of the past two years has put a lasting dampener on the animal spirits in the City of London will have received a great surprise when he opened today's papers. A respected analyst is reported to plan the launch of a new bank and a senior corporate banker is offering to buy loans off his previous employer at a substantial discount. The really interesting thing is that the analyst stuck to his negative view on some bank shares while theses shares experienced a stratospheric recovery and the lending officer was one of the main drivers behind the loans that are now causing major headaches for his former employer. That is chutzpah!

Seven dwarfs in Stockholm

The seven finance ministers calling for strict limits on banker's bonuses in an open-ed article today (we spotted it first in a reference to Dagens Nyheter) do their intellectual standing no favours. If their collective wisdom only leads them to express crude judgements about the size of bonuses paid in financial services it is a sign of intellectual poverty. Rather than calling bonuses 'indecent' the ministers should concentrate on the causes of high bonuses. Otherwise their posturing lacks any credibility. Of course, we would agree that bonus payments in many cases are too high but that is due to lack of regulation, distortion in the competition and similar structural deficiencies in financial markets. Name-calling alone will not do as the same argument could be applied to compensation of sports stars, media stars and footloose international business men. Just remember that a certain Mr. Mittal is always listed as 'Briton's richest man' but it is unclear how much tax he pays in the country.