Patent for Investment Methods

News that Research Affiliates has been granted a US patent for an indexing methodology that selects and weights securities using fundamental measures of company size, such as dividends and sales should set alarm bells ringing in investor circles the world over. While the ruling only affects the United States there is the danger that US law gains ex-territorial reach or gets copied by other legislatures.
Granting a patent on an investment methodology is akin to granting a patent to the first person that has opened a self-service supermarket. It is nonsense and makes a mockery of the true purpose of patent protection for technological and medical innovations.

Windfall Profits Tax - arbitrary and discriminatory

Some Commentators are toying with the idea of imposing a windfall profits tax on British Banks. We are not trying to defend what some may consider the indefensible but a few caveats merit consideration: if British Banks are to be taxed then all banks in the UK would have to be taxed. How would it affect the foreign banks with large operations in the UK? If they are not taxed this would distort competition. Banks such as Barclays and HSBC would also have every incentive to relocate to tax-friendlier regimes. And most importantly: in this age of heightened awareness of 'human rights' - how can a special tax on a single industry be justified? if a discriminatory tax such as a windfall tax on banks is imposed it would clearly be the duty of the bank's managements to take this case to the relevant Courts - in particular the European Court of Human Rights. And if banks can be taxed at will, what about football players, entertainers, lawyers and anyone else who one day catches the attention of freely-spending politicians?

EU competition policy arbitrary

When a major bank states that the EU may force 'unforeseen' asset sales alarm bells should be ringing. We have repeatedly stated on these pages that the competition policy is highly arbitrary and undemocratic. The people in charge (usually lifelong members of the employment club exclusively staffed by lifelong politicians or members of think tanks or universities) have no democratic mandate and are only subject to minimal and ineffective outside control. There are no proper procedures in place that make regulation transparent - otherwise how could it be that there could be unforeseen asset sales? If the rules would be clear every observer could predict exactly what measures would be taken to ensure that competition exists in the banking sector. Instead there are discriminatory rulings straight out from Central Command. We hope that the managements of the banks concerned have the guts to take every available legal step to delay the effect of measures that would harm their shareholders.

Ostentatious Consumption - good or bad?

Goldman Sachs' Lloyd Blankfein has asked his employees to avoid being seen as big spenders. The jury is out whether this is just a cosmetic PR gimmick or whether Goldman itself is in some doubt about the justice of last years highly selective bank rescues funded by the public. But however that may be, today's headline that a hedge fund manager is splashing out a reported £60 million for a super yacht may not help the alternative fund management industry in its effort to convince European legislators to enact more lenient industry regulations.

Breaking up big banks? There is a middle-way

A middle way to safeguard the utility component of banking and isolate the riskier parts of the business would be to require all investment banking and securities dealing to take place in separately capitalised and regulated subsidiaries. Cross-subsidies not only pose the risk of cross-contamination with risk they also make it difficult for management to run the business as the profitability of individual business lines is not always easy to assess.

New Credit Suisse compensation structure

It remains to be seen how the growing complexity of compensation schemes such as the one published by Credit Suisse will affect the ability of the sponsoring organizations to attract, motivate and retain talent. Given my experience, the annual discussion of expected and realised bonus allocations has already taken up a lot of nervous energy among the staff when things were much simpler. The new layers of complexity open the door to more arbitrary decisions and distracting political infighting. Most employees have zero influence on decisions taken by top management (often by the CEO alone) and cannot be expected to suffer from the impact of these decisions when they turn out to have been wrong (which may be a long time after the decision has been taken and - even worse - a long time after they were awarded their very conditional compensation).

Mayor Boris still does not get it!

One nearly has to feel sorry for Goldman Sachs - though I would hazard a guess that the people there would not give a fig for our sympathy. But when even politicians such as London's mayor Boris Johnson who do not really have a say in banking regulation start taking aim at banker's bonuses we have to take a stand. Fact number one two and three in the sorry saga of the credit crunch is simply the total failure of banking supervision. And Boris and his fellow-travellers in the political class are barking up the wrong tree. All the politically-inspired interventions in the banking crisis poured oil on the fire and if anything made matters worse (apart from being arbitrary and discriminatory in their treatment of the various banks involved). And even more regrettable is the failure of the 'International Community' to agree on improved and effective rules and regulations.

EU wants automatic exchange of Tax information

The EU develops more and more into a bureaucratic and undemocratic monster. The latest news is the 'demand' for an automatic exchange of tax information about foreign bank customers between member states. The EU was originally declared to be an economic union but the main instigators behind the 'project' always intended this stated purpose to be the Trojan horse that would allow their statist fantasies to be imposed piecemeal on an unsuspecting population. Napoleon and Hitler certainly would have been well-advised to try this approach rather than go the route of military conquest.The raison d'etre of a state is that the citizens of that state enjoy full sovereignty over their affairs. Delegating powers to a foreign authority - especially one that they have no control over - is a grave violation of that principle. In the case of taxes there is no reason to inform any foreign government in any way. The whole purpose of putting money into another country is to remove it from the sticky fingers of the home government. The host country than in turn can tax the affected funds in any way it wishes. In the interest of tax harmony it should not favor foreign investors in any way and give them different terms than those offered to home country investors.The home country of the funds concerned has in turn full authority to tax the money as long as it is in the country. If it so wishes it can create an 'Iron Curtain' and prevent money from leaving the country.Just imagine what 'full information' would have meant in past periods: would the Dutch have 'informed' the corrupt French regime of Louis XIV about the investments that prudent French citizens had made in Amsterdam, or should the French government of the 1920s have informed the thuggish Communist government of the USSR?Europe prospered BECAUSE there was no uniformity of government and religion had finally given way to a civil regime after centuries of struggle. How much longer can the control freaks in Brussels be allowed to destroy the fruits of these battles?

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).