Dubai debt settlement leaves sour taste

With members states of the UAE sitting on reserves and investments worth hundreds of billions it is - to say the least- astounding that there is not enough money to pay off the contractors and creditors in one fell swoop. Do the 'authorities' think that this will increase their credibility (or do they need the money for urgent purchases of new race horses?). On a more serious note this is just another nail in the coffin of the internationalisation of bank lending. Closer to home the idea that lending to governments - at home or abroad - is a safe bet is being tested to the limit. It may well be a good idea to leave lending to governments to private and institutional investors. Why should it require the insertion of a bank balance sheet to fund government spending? This just increases balance sheet risk rather than remove it from the banking system. If governments become bankrupt the value of the outstanding bonds will decline in value and allow an orderly resolution of the situation via a reorganisation of debt.

Banks are still allowed to play in Private Equity?

The lack of banking reform becomes evident in the fact that Goldman Sachs is still able to play the private equity game with its own money.

Abacus CDO Deal: Moral Equivalency

It is surprising how many commentators see nothing wrong with the Paulson/Goldman Sachs Abacus CDO deal. We admit to disagree. In our business that kind of behavior would mean that we try to place a candidate we know is to be dodgy or helping to sell a business that suffers from substantial deficiencies. Thanks to our loyal clients we are in the fortunate position not to be that desperate to make a buck!

Neo-Feudalism will kill London Financial Centre

News that the FSA has reputedly blocked the appointment of John Hyman by Nomura will send a chill through the UK's financial centre. As we predicted a short while ago, any self-respecting banking professional will think twice about moving to or staying in the City of London where he is subjected to an inquisition by faceless and unaccountable bureaucrats who in all likelihood are less qualified than the people they are supposed to vet. Box-ticking and political correctness will be at a premium and who knows - the old-boy network, titles and knowing the right people will also help applicants. The right kind of leadership is essential to the success of any organisation and this vetting system will insure that over time the quality of leadership in the City will be on a downward trajectory. Hong Kong, Singapore and New York will love this!

Financial Non-Reform in the US

Should one laugh or cry? The solons have given birth to a mouse, some will love it, but who will have the last laugh?

SEC: non-report on 1000 point drop in Dow Jones

After a weekend of heavy-duty gardening your correspondent is back to the real world. This comment on the SEC's effort to bring light into the precipitous 1000 Dow point decline on May 6 caught our eye: "If the SEC were charged with writing a report on the causes of the New Orleans flood, it would provide a hundred pages telling us how many cubic meters of water there were, how many molecules of oxygen and hydrogen the water contained, and plenty of assurances that water is usually good for the health, but it would forget to mention hurricane Katrina and the broken levy." (Mark Mitchell on www.deepcapture.com). We could not have described the lame response of the 'regulators' much more accurately. Thank God the 'accident' happened in the USA as a similar incident in London would have led to the creation of a 'Royal Commission of Inquiry' at the cost of millions of pounds in lawyer's fees.

Client or Counterparty?

The controversy about Goldman Sachs' sale of the Abacus CDO raises an interesting question: are counterparties of securities firms entitled to be protected beyond the requirements of the securities laws? In our opinion, the relationship between a trader (or any business) and a customer is by nature antagonistic: one wants the highest possible price while the other wants the lowest possible one. As noted by Adam Smith, the best safeguard is an open and competitive market. This allows the 'invisible hand' to produce an outcome where both parties to the contract pursue their own (egoistic) interests and the best outcome for both of them (and society) is produced at the same time.Unfortunately, too many customers of securities firms are lulled into complacency by PR, fancy 'research', 'seminars' and other freebies and forget to do their own homework. This applies not only to retail investors but paradoxically also to 'sophisticated' investors. Already the term 'client' is designed to make the customer's eyes glaze over and induce them to think that a friendly uncle is going to sell them the latest inventions of the quant wizards on the derivative desk. But the dictionary tells us that a client is 'One that depends on the protection of another'. In reality the term should really only be applied to clients of doctors or lawyers. Fee-based financial advisors in private banks and traditional money management firms can also claim to be on the investor's side.
To ask for full disclosure from a securities dealer would be like asking a Bond Street jeweler to disclose the production cost of the latest Rolex watch and 'advise' the customer on the merits of the purchase.

Goldman PR counterattack: Risking Overkill?

Goldman Sachs' PR machine is rolling and every television and radio station is running interviews with chief executive Lloyd Blankfein. It is OK to try to bring one's message to the public but when media appearances are so well orchestrated you risk overkill and create even more suspicions about the veracity of the message you try to convey.

Derivative Clearinghouse no magic Bullet?

Harvard's Mark Roe makes a valid point when he doubts the benefits of relying on central clearing as a tool for the reduction in counter party and systemic risk in the financial markets. We argue that stress tests have to be designed so that even dramatic price changes like those experienced in the 1987 stock market crash of in the recent credit crunch pose no risk to the system. This may well mean that paltry levels of margin are on the way out. 20 percent and more may become the 'new normal'

Hedge Fund Wolves destroyed Bear Stearns?

The controversy about the role hedge funds have played - and may continue to play - in the credit and economic crisis that has erupted in 2007 can only be settled by an open and forensic analysis of all transactions entered by hedge funds during the period. All other discussions are based on guesswork, innuendo or comments from enemies or supporters of the industry with an axe to grind.