Banking Reform - 2009 a year of lost chances

News that the former CEO of AIG, Hank Greenberg, is trying to have the regulators and politicians look into the circumstances of the bailout of AIG in the autumn of 2008 is just one symptom that the after-effects of the 2008 banking crisis will be with us for quite some time. Most of the ongoing problems can be traced back to the fact that bail-outs were executed in an arbitrary fashion devoid of any principle and in addition there was no democratic oversight. At least the citizens of Iceland have a say in the (non)payment of the bailout money they are asked to contribute to. In the past year there has been zero progress towards creating a banking system that does not explicitly or implicitly rely on future bailouts by the taxpayers. We are not confident that 2010 will bring more progress.

Productive vs Unproductive Lending

Interesting comment by Bob Prechter about US Banks growing lending to consumers at the expense of lending to business.

Legality of Windfall taxes doubtful

We all wonder about the absurdity of some claims about discrimination, unfair treatment etc but one thing appears to be clear: the practice of putting windfall taxes on certain individuals just because they earn their living in a certain industry will no longer be meekly accepted now that deference to authority is no longer existent. We will watch with interest how the courts deal with law suits brought against discriminatory taxes on incomes earned by workers in the banking (and related?) industries. The Pre-Budget speech by Alistair Darling is certainly good news for one section of the UK population: the lawyers!

PS: Tax on bankers' bonus 'would infringe human rights' (The Times) You read it here first!

BayernLB: State-owned Banks no solution

The sorry state of Bayern LB demonstrates that public ownership of banks is no solution to the problem posed by banking supervision. While a large part of the BLB's losses are due to the sub-prime credits generated in the US a not insignificant part is due to mistakes made by management - in particular the ill-fated acquisition of Hypo-Alpe-Adria just at the beginning of the Credit Crunch in Spring 2007.

Democracy and Bank Bailouts

The lack of democratic control is an all-pervasive defect of modern societies. More and more decisions are made by technocrats and a political class that writes its own rulebook without reference to the citizens. The regulation - or its lack - of the banking system is a perfect example. Just imagine what a system would have to look like that is subject to democratic control. Every subsidy would have to be approved in a referendum. Does anyone think the ginormous amount of taxpayer money would have been approved? We all know the answer and as a consequence the banking system would have to be completely overhauled and made literally bombproof. It can be done - if the will is there. But it is not possible to guarantee every penny that is deposited with banks. There will have to be a split into super-safe banks (strictly controlled, offering low but safe custody of money balances) and a larger sector where the value of deposits can fluctuate in emergencies (similar to the value of any bond).

London: hellbent on destruction

Not enough that the town is still - despite the collapsing Pound Sterling - expensive, that public transport may not get better in a time span that is relevant for those now working and living in the City, that taxes and regulations become more and more Kafkaesque by the day, the legal system is doing its utmost to destroy the image of London as a free and liberal environment by catering to absurd claims for discrimination and harassment. The way to riches seems to lead through the (suitably named) employment 'tribunals' which can at best be described as kangaroo courts at worst as worthy successors to the trials of the inquisition.

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.