OTC Derivatives - a dangerous house of cards?

The renewed crisis in the credit markets that has been triggered by concerns about peripheral member states of the Eurozone festers like a slow-burning bush fire. As we have warned before, the regulators and politicians have still not come up with a credible solution (we avoid the expression 'final solution' but that is what the financial markets would really need).
Case in point is the concern about the gigantic gross exposures that nestle within the financial markets - and the extreme level of risk concentration that does little to assuage concerns. No one can really predict what would happen if there is a new bout of extreme market volatility - if key variables like stock markets would move by 20 per cent of more in one day. At a time when markets get excited about wholly inadequate hikes in margin requirements for gold futures for example one has to assume that drastic moves would take the majority of market participants by surprise.
A simple remedy - no PhD's required, or expensive 'accountant.consultants' - would be the introduction of meaningful margin and capital requirements for ALL derivative contracts that are on the books of any bank, fund manager or other counter party.

CDS Death Spiral in full swing again

http://ftalphaville.ft.com/blog/2011/09/30/689791/le-spleen-de-morgan-stanley/

If you learn nothing from history, you are bound to repeat the mistakes of the past - the horror story of uncontrolled short selling via an easily manipulated CDS market is creating havoc again. Basically the rising spreads are nothing else but a concerted effort to create a run on banks and countries. We warned about this repeatedly during the 2008-09 crash but regulators and politicians have not heeded the warnings, now they reap the whirlwind.

Common Sense Lessons from the UBS Loss

It is always easy to be clever after the event, but a few simple facts are behind the latest mega loss reported by a bank:
- Top management is often too far removed from the workshop where the hard work, i.e. earning the money, is done. Management (also in the lower echelons) spends too much time in meetings/politics and pointless 'reviews' rather than really knowing the details of the business and the people involved.
- Management planning is unrealistic (see Deutsche Bank's recent pronouncement that the bank aims for 10 billion in profits this year) and this puts enormous pressure on staff to try to 'meet the target' at any cost
- Top executives are unwilling to listen to advice, those below the top are fearful to speak out, the 'cult of the CEO' accentuates this problem.
- Modern management theory is useless when common sense is left out of the equation.
- Constantly changing teams (due to pro-cyclical hire/fire personnel policy, but also excessive rotating of existing staff between business areas, locations) is enemy of a solid business culture built on trust, knowing what is going on.
- Star culture - mistaken belief that individuals can consistently reap extraordinary profits by honest hard work alone rather than relying on excessive risks or just luck.
- Preference to spend vast amounts of money on management consultants without any real experience in the business as often they field young graduates/mba's that just 'go by the book', peddling formulaic management philosophies.


At Temple Associates we do not just want to 'write a ticket', we take pride in having the time - as well as the experience - to help our clients finding staff they can rely on.

Maturity Mismatch - Problem not solved

To rely on money market funds to finance a large part of any bank balance sheet is sheer folly - the surprising thing is that most 'experts' - be they in the academic world, in politics and regulation and in the media - have not raised their voice more forcefully against this practice. It may have been feasible in the good old days when investors were sleepy and less well informed but to finance longer-term lending with footloose money that can switch allegiance at a second's notice is not a viable strategy for a modern banking system. Unfortunately regulators all over the world seem to be unable to order banks to match maturities on both sides of the balance sheet and deviate only by a very small - and carefully monitored - margin from 100 per cent congruence.

Death Knell for Europe's Banks?

Rather than trying to cut back on government spending that is clearly out of control in most European countries the unaccountable Bureaucrats/Kleptocrats that shower us with ill-conceived legislation by the truckload are proposing to introduce a tax on financial transactions that will make sure that European banks will be hopelessly outclassed by non-EU banks in the relevant transactions. No satisfied to burden banks with the tax the iron law of bureaucracy ensures that ever-more severe restrictions are necessary to achieve the bureaucrats aim. In this case the tax will not be levied on transaction in Europe but on all transactions conducted be the banks on a worldwide basis. Not that this will be crowned with much success as it seems unlikely that all major countries will follow suit in introducing this tax. Thus a migration of transaction - and the supporting infrastructure and personnel - seems to be a near-certainty. Welcome back to the Window Tax and other absurdities of times past that enlightened people considered to be a thing of the dark ages in years long gone by.

Deutsche Bank aims high, maybe too high?

To declare that he aims to reach a certain number in terms of profitability is a dangerous game to play for any company chief executive. It may be useful for internal planning and consumption but to give a number in public as Deutsche Bank CEO Josef Ackermann just pronounced (Euro 10 billion pre-tax in 2011) appears a bit unrealistic as the bank never managed to get near this number even in the 'good old days' before credit crunch and Euro crisis. The stock prices of major banks certainly would need a shot-in-the-arm and not just since the twin crisis torpedoed them. Rather than manage analyst expectations managements would be well-advised to complete a root-and-branch review of their business strategies.

Cameron vs Taleb? - No Contest!

The discussion about banking reform (or should it be non-reform?) reaches a comical aspect when David Cameron, PR Manager turned Politician, assumes that his approach to reforming the British banking system should take precedence over the deliberations of the experts that are members of the Independent Banking Commission. Reports indicate that the Prime Minister will brush aside a critical aspect of the recommendations made by the IBC, namely the separation of proper banking activities from investment banking (some might say gambling). While a go-alone approach to reform by the UK alone might well put UK-domiciled banks at a disadvantage versus their international peers we would think that the correct course of action would have been to intensify pressure on other countries to follow suit - at least the other EU member states might have been amenable to instigate similar conservative policies. In an article that was just published the other day, Nassim Taleb and Mark Spitznagel send a sharp criticism in the direction of the banking industry (and supine institutions that invest in them) which implies that banks need more not less regulation - in clear contrast to our PR Manager's view that seems to have been dictated to him by unaccountable lobbies. One wonders if the members of the IBC in that case would do the honorable thing - resign and openly defy the Prime Minister on the issue.

Banking Reform: Key problem no nearer to solution

Thousands of pages have been written about how to reform the banking system but we are no nearer to a solution. The key problem that needs to be solved is the fact that under the existing banking regulations the taxpayer is the ultimate guarantor of (most if not all) banking deposits. As long as this deficiency is not remedied we will not have a properly regulated banking system. If an engineer has to construct a bridge it is either safe or not. The same non-compromising yardstick should be applied when discussing solutions to the problems of the banking system.

CDS trading still poses danger to financial stability

During the height of the Credit Crunch we have repeatedly warned about the dangers of a self-feeding spiral that could destabilise companies and banks in particular. Nothing has been learned and the market's attack on Bankamerica seems to become a repeat performance of the chaos that was allowed to dominate the markets back then.

FATCA - the true tragedy

The absurd legislation making its way through the US government machine is a sad indictment for the inability of the European 'elites' to make a clear and determined stand in defending the interests of their citizens and the financial industry in the Continent. A simple threat to retaliate tit for tat and subject the US institutions to the same treatment would have stopped the whole nonsense right in its tracks. After all, if the US is so keen to catch potential tax cheats it could impose stringent controls on its own citizens, control all movements of money in and out of the country and in the process make a laughing stock of the expression 'land of the free'.