Secretive Banking Elite rules Trading in Derivatives?

A New York Times report highlights the lack of official supervision of trading in derivatives. In no industry would it be allowed that the dominating participants collude setting market rules without being subject to impartial outside regulation - be it from consumers or government authorities. When the market in OTC derivatives started it was a tiny cottage industry and supervision was unnecessary. Now the amounts involved are so enormous - multiples of the whole planet's GDP - that leaving the task of supervision to a few market insiders is no longer practical. One can only hope that the top officials of the financial firms concerned realize that - in the interest of society as well as their own - a new regulatory framework is urgently required. Putting the majority of the trading onto exchanges will alleviate the risks of a catastrophic market failure but this will in itself not be enough. The central clearing houses in turn will have to be made as secure as possible and only a substantial increase in margin that has to be posted by ALL market participants will ensure a safe market environment.

Goldman Sachs in controversy about CDS trade

We have for a long time called for more effective regulation of the market in credit derivatives. Therefore we are not surprised when details about Goldman's involvement in some controversial trades were disclosed by Carl Levin, chairman of the Senate permanent sub-committee on investigations.

Deutsche Bank set to leave Postbank alone after merger

We were never sure if the frugal customers of Deutsche Postbank really will make a large impact on Deutsche Bank's profitability. The headline makes us wonder even more. What is the point of buying the bank when it will be managed with such a light touch?

Extensive interpretation of race discrimination by UK courts

It is no secret that nationals from countries where their employer is domiciled often do - or at least appear to - get preferential treatment from their respective employers. This applies to banks and other financial institutions irrespective of their country of origin. This may well be considered unfair by some observers but could on the other hand be justified to some extent. How many Europeans working for a Japanese bank for example are fully conversant with the Japanese Language? And in the future we will have a tough time to find many seasoned professionals able to express themselves fluently in Mandarin, Russian or Arabic. So we noticed with quite some bewilderment that an English court can use legislation intended to fight race discrimination when sitting in judgement about an compensation claim by an English employee working for a French bank here in London. If the Gold Standard would have to be applied in every decision concerning promotion it would mean that in nearly every case the employee who loses out would have a case to sue. In addition, who determines which employee merits promotion more? Should every decision have to be submitted to a court or tribunal before it becomes effective? Politicians, the Courts and pressure groups all combine to make the UK a less efficient and less inviting place to locate a business and court cases such as this one are the worst possible advertisement for UK Plc.

Goldman to write down stake in CMC Markets

News that Goldma Sachs is to write down the value of its £140 million minority stake in CMC Markets is proof for the fact that even the most savvy acquirers sometimes succumb to hype and a good story. Over the years we have seen numerous instances when a gullible financial press has reported valuations of businesses about to be floated that were inspired more by the aspirations of the selling shareholders and their advisers rather than by thorough analysis of the underlying values of the business. Numerous academic studies have demonstrated that at best half of all acquisitions are successful and any firm contemplating strategic transactions would be well advised to consult advisers that are not driven by fees but have the interest of the client at heart.

Some simple rules for banking reform - and no need for a PhD either!

One aspect of banking reform that has been completely neglected would be the requirement to match the maturities of assets and liabilities more closely. While 100 pct will never be practical there should be tight guidelines. Bands of maturities on both sides of the balance sheet should be closely matched to about 90 per cent. Large banks, and in particular trading firms, should not be able to roll a mountain of short term debt to finance highly speculative positions and hope for the best - or the next taxpayer-funded bailout. The huge interbank market is also ripe for more regulation. There simply is no need for a fragile house of cards of interbank positions on which to build a proper lending business. A small amount of interbank lending is always required to smooth positions but every bank should mostly rely on deposits from its own customers (and matched as to liquidity). These rules are simple to monitor, no PHD or even MBA is needed, just sound people with common sense and a health work ethic (in contrast to a bonus ethic)

Regulatory costs out of control

A quick look at numbers released by Brewin Dolphin, a wealth manager in the UK, confirms our fears that regulatory costs have exploded well out of control and that the supposed beneficiary, the ordinary investor and saver, has very little to show for it. At Brewin regulatory costs have now reached 6 percent of turnover, totalling around £15 million. When put in relation to pre-tax profits of £31.4 million or assets under management/advice of £23.2 billion one can see that bureaucracy is just another tax where most of the proceeds go towards paying the running costs of the self-serving bureaucracy (4000 paper-pushers by now and rising rapidly).

FSA vetting procedures - deepening bureaucratic morass

An interesting side-effect of the FSA's vetting procedures for senior banking executives is highlighted in the Financial Times: the widely-applauded push for more female board members may be hindered as the vetting procedures tend to favor experienced males, especially those with an accounting or audit background. As it is difficult to find many senior women with that kind of background companies may struggle to fill vacancies with women candidates. In addition, candidates may be deterred from putting themselves forward and submit themselves to the FSA vetting regime. We are not really of the opinion that favoring women during a search is the right way to go - just the other day an old colleague from Goldman Sachs mentioned to me that any woman aspiring for a more senior role there must make a hard choice between domestic and professional life with any one going to pursue her career in earnest likely to have the backing of a house husband. But on a wider front one has to ask why would any experienced professional want to undergo the humiliation of being 'vetted' by paper-pushers at the FSA that have achieved less and are less capable? Any person worth his salt in Moscow, Tokyo, Hong Kong or New York is well advised to stay where he/she is and say 'thanks but no thanks' to any job offer here in London. And that is without even mentioning the weather, taxes or public transport.

No improvement in pay practices at banks - study

An study commissioned by the Council of Institutional Investors comes to the conclusion that changes to pay practices at major banks in the USA have lead to a deterioration rather than the intended improvement in incentives.

Lehman bankruptcy administration costs reach $1 billion mark

Regulators worldwide can be congratulated for contributing so generously to the fortunes of lawyers, accountants and assorted advisers who reap this windfall at the expense of savers and investors. A special thank you must be reserved for Hank Paulson was instrumental in orchestrating this signature disaster during the Credit Crunch.