Paradox of Banking reform

News that some investment banks are on the way to make record profits this year and as a consequence will be able to pay very high bonuses to their staff highlights a paradox: Governments and Regulators so far have been unable to agree on any meaningful and coherent approach to banking reform but at the same time are unhappy about the results of their inaction. Businesses that are successful are encouraged to do the opposite of what they are supposed to do in a market system: to maximise their profits. The result is a muddle where firms may avoid paying out the bonuses they think their staff are due. In a roundabout way this may well benefit the affected staff in a positive way as the higher level of retained profits will lead to higher share prices in the longer term. This will allow staff to realise higher profits on their share options and shares.

Goldman Sachs - Investment Bank or Commercial Bank?

The answer to this question may be obvious but since autumn of last year Goldman Sachs has switched to being a bank. And the problem with Goldman now being a bank will really be the following: how can the firm justify the banking status when a disproportionately large amount of revenues/profits is derived from trading or advisory work? How much did Goldman really lend to business and consumers during the past 12 months it is a bank? In addition, how much longer are banks allowed to conduct non-bank business, e.g. own other businesses (even if it is via the conduit of private equity - managed directly or farmed out to other PE firms).

Implicit government guarantee for banks

Niall Ferguson refers to the the implicit government guarantee for financial institutions deemed 'too big to fail' (Daily Telegraph, 6 October 2009) in a way that seems to imply that managements managed their business recklessly because they relied on being baled out if things did not work out well. We would dispute that managements were that devious and prefer the alternative explanation that - like most market participants - a lot of factors combined to overwhelm managements. A lot of mistakes were made and warnings were ignored but were few were really able to predict the extent of the panic that finally pulled markets to the brink of the abyss. What we are now really worried about is the fact that very little progress is being made in reforming the financial system in a coherent and speedy way.

Who should work in financial services?

An article in today's Wall Street Journal is a timely reminder to repeat the career advice we often give when asked the question: 'Should I pursue a career in financial services?' The key point we always make is that you should not choose your profession based only on the expected level of compensation. During the past ten years too many people were lured into City and Banking jobs based on the reports about extremely high salaries paid to some lucky professionals. But this exceptional period may not last forever and spending your working life doing a job that you are not really passionate about is a life of misery. When I started to work with a stockbroker I did it because the stock market was already one of my hobbies during High School and I would have worked in the Securities business even if salaries were just on a level with most other skilled professions.

Lloyds TSB - Neelie does it again!

This is a full-time job - keeping up with the arbitrary rulings of an unelected bureaucrat in the twilight years of a career spent sailing through various public sector jobs! Mrs. Kroes even finds time to chair Poets of all Nations in her spare time. But on a more serious note we think that the latest threat to Lloyds TSB - while maybe justified in principle - is lacking any moral justification as long as no one (and we wait for contributions from any reader who can provide them) has given us an explicit explanation of the yardsticks that the EU Kommissars apply in their rulings. (see our earlier comment further down for more on this scandal).

Employment Tribunals as job destroyers

The avalanche of employment legislation during the past 10+ years certainly has done nothing to make London - or the UK - a more attractive location for business. Blaming the EU does not wash as most of the legislation was home grown. A particularly vexing institution for employers are the employment tribunals. They can only be described as 'shadow' courts where normal standards of due process and above all common sense do not exist. While employees often can feel unjustly treated by their superiors and colleagues - and we would have a few stories to tell as well - the growing absurdity of the claims made by some employees can only be explained by a desire to abuse the tribunals in order to make a fast buck - or million in some cases. Young people just past the mark of 30 years claim to have suffered nervous breakdowns, be tormented by nightmares and claim to be unable for any work because of bad treatment they have suffered at work. No proper proof is needed if implausible accusations picked right out of a soap opera are taken at face value by members of the tribunal who are unaccountable and hold their positions thanks to the machinations of an inscrutable government bureaucracy. And best (or worst) of all - the accusing employee has no costs to bear, file a claim and let the system take care of the rest. We can only say - foreign employer, if you come to Britain, be warned!

IIR warns on lack of global banking rules

We usually view the opinions of the Institute of International Finance with a pinch of salt as it is a think tank and/or lobby funded by the banking industry. Yesterday's appeal to the participants of the forthcoming G20 meeting in Pittsburgh served as a reminder that one year after the collapse of Lehman and more than two years into the banking and credit crisis precious little progress has been made to forge a consistent solution to prevent a similar crisis in the future. We doubt that high-profile meetings will really produce more than pious sermons and suggest that a congress should be organised with the task to iron out a lasting solution. After all, the Congress of Vienna was also not just a photo-opportunity for the assembled dignitaries and the same can be said for the Continental Congress in the 13 founding colonies in America.

BIS report: higher taxes on larger banks

A new study by the Bank for International Settlements (BIS/BIZ) suggests that large banks should be taxed at a higher level to compensate for the risk that they pose to the taxpayer. But I think that differentiating tax rates for of different size would open a can of worms - what is the right level of tax? what size is the cut-off point for different tax rates? A more simple way to restrict the trend to ever-larger banks would be to limit the (implicit or explicit) state guarantee to a certain amount. This would give an incentive to clients and depositors to spread their business around and lead to a more balanced industry.

Neelie Kroes dabbles in bonus debate

We would have been disappointed if Neelie Kroes would not have tried to get involved in the debate about banker's pay and bonuses. After all, every bureaucrat has a natural urge to increase his power whenever and where ever the opportunity exists to do so. And even better when the taxpayer pays for you and the citizen has no chance to control your action. However, when judging the competence level of Ms. Kroes' department we always have to remind ourselves of the curious fact that while the department refuses to give detailed information about the background of its staff there are the portraits of the drivers on the website. Talk about high life in Brussels! Repeated requests to disclose the yardsticks that are applied during the investigation of competition cases have been stonewalled. So we do not expect that it will be made transparent what type of bonus and pay regulations will be applied in the case of banks that receive state support.

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.