Financial Reform (No) Progress Report

Politicians, regulators and industry representatives so far do not disappoint our (low) expectations. The main idea that seems to be gathering support is (surprise, surprise!) the introduction of more taxes. As usual the proceeds of the muted taxes are not going to be earmarked and will in due course be diverted to 'socially' worthy causes. 

One regulator behind each banker!

That is the ultimate destination of the effort to create regulation for a stable banking and financial system. It is the logic of central planning (and regulation is nothing else) that the rulebooks have to be more and more detailed to cover every eventuality. In order to be effective more and more decisions will have to be supervised in minute detail by an ever-rising army of regulators. Banking professionals may love this as the bureaucrat/regulator takes all responsibility for decisions from their shoulders as each and every decision would have to be approved. A useful side-effect may be the contribution this would make to the growning lack of employment opportunities in many Western countries as it would entail a doubling of employment in the financial service sector.

USA: desperate search to increase tax revenue

It is ironic that in a week when the helpless US Treasury Secretary Tim Geithner pens a letter complaining about presumed unfair treatment of US alternative investment funds in the EU the US passes a law ('Foreign Tax Compliance Act') that forces all non-US financial institutions to report their dealings with US citizens. Against the background of a dysfunctional Congress and an administration that is spending money like a drunken sailor this desperate measure should not come as a surprise. The underlying philosophy is that a citizens' money really belongs to the state and it is up to the politicians to spend it. We do not expect the authorities to give a clear 'Njet' to this effort to extend the reach of US legislation one step further into other sovereign countries but it will do nothing to make it any easier for the US to fund its deficit in the future. Already some institutions have decided not to have any financial dealings in or with the US and as the next step may well be that the USA tries to help themselves to the wealth of non-US citizens we would advise investors to sponsor fund managers that take precautions for that eventuality.

FSA hellbent on destroying London as a financial centre

The FSA - which operates as a Quango with only the slightest amount of democratic oversight and legitimacy - intends to bring the number of paper-pushers to the incredible total of 3700 by the end of 2010. If one remembers that the City of London worked perfectly smoothly for centuries and well into the 1980s without any monstrous 'oversight' by bureaucrats the scale of this misdirection of taxpayer resources becomes more evident. When Lord 'Alliswell' clarifies that he considers much of financial market activity as 'economically' not useful he indirectly admits the intellectual bankruptcy of his thinking. To enter the debate about what is or is not 'economically useful' is a debate which only leads to the quicksands of moral do-goodism where some (usually self-appointed) authority tells other people what is good for them. The good Lord owes much of his status (and income!) to his being in favour with those in power and very little to him supplying 'valuable economic services' to the citizens. The savers in this country are those that really pay for the empire building activities of those behind the ever-expanding army of bureaucrats in the FSA. That all this spending will lead to the inevitable decline of the City of London as a financial centre is probably of no concern the the authorities. They may well talk the talk in favour of the City but one should watch what they are doing!

Deutsche Bank's Ackermann - danger of PR own goal

Deutsche Bank's Josef Ackermann fully deserves his 2009 compensation which puts him top-of-the-league for a DAX Chief Executive. It is still moderate compared with pay at some of his banking peers but it does not help his position in the global discussion about banking reform as 10 million Euro is still an amount that is way beyond salary levels that the public - and regulators, politicians and the media - feel comfortable with. To escape this dilemma it would be worthwhile to review the compensation structure of senior management - should it really be paid on the same basis as may be appropriate for a car salesman?

Bawag - problems of Private Equity or Hedge Fund Control

The diffuse ownership structure of the Austrian BAWAG Bank - where an alternative fund management firm has orchestrated a buy-out consortium a few years ago - is an apt illustration of the problems created by allowing alternative asset managers to control banking institutions. Apart from the fact that the financing often is debt-heavy there is the potential risk that conflicts of interest are not controlled properly. The age-old temptation of using a banking institution to supply credit on easy terms to controlling shareholders is one of the key areas that banking regulators have to focus on. There is also a potential conflict of interest when other banks (Goldman Sachs, Lehman Brothers in this case) are shareholders in competing institutions.

Barclays objects to Lehman scrutiny

Barclays Bank is on a roll and it therefore seems strange when the firm is reported to object to further disclosures concerning its takeover of the US operations of Lehman Brothers in autumn 2008. This behaviour will only encourage critics and runs contrary to our advice that full disclosure it the best public relations strategy.

Stability Fund no magic solution for Banking System

Germany seems to move closer to implementing some sort of stability fund for the banking sector. But its promoters already admit that the state (taxpayer) will still have to provide a backstop even in a situation when a fund is in existence. We would agree as the fund would have to be of enormous size if it ever would be able to provide for any crisis. Ironically a similar (simpler?) solution would be for banks to hold more capital reserves - which would effectively be an in-house contingency fund at every institution. Suggestions that other sectors (such as insurance) should also contribute to the fund are based on the argument that they have benefited from the bailout provided by the taxpayer. Now where does this argument end?

Lehman: Masters of the Universe R.I.P.

The sense of hubris that was prevalent at Lehman Brothers before the fall is well documented in a new book The Devil’s Casino: Friendship, Betrayal and the High Stakes Games Played Inside Lehman Brothers, by Vicky Ward. It mentions that one of the top honchos in the firm, Chris Pettit, got by with a personal spending budget of $ 15 million (!!) a year. With leadership of that kind it is no surprise that the company had to hit the rocks sooner or later. The question one has to ask is what lessons - if any - has the securities industry from the credit crunch?

Repo transactions under a cloud

Reports that Lehman relied heavily on repo transactions in order to disguise problems with its balance sheet highlight the need for tighter restrictions on repo's. Like commercial paper, most repo deals are short-term in nature and therefore unsuited for the financing of longer-term assets. Funding based on repo's, commercial paper and similar instruments should be used exclusively for the financing of assets with a matching maturity profile and capital requirements should allow for a sufficient margin to provide for extreme events.