Today's Banks are by necessity a sort of Ponzi Scheme

Martin Wolf's suggestions for banking reform may all be admirable but they are basically just reshuffling the chairs on the deck of the Titanic. Banking as we know it is to some extent by necessity a ponzi scheme, to accept that longer-term loans are financed with deposits on shorter notice periods is a concept that may work in the days when investors were very loyal (or lazy). A much better solution would be limited purpose banking (as promoted by Laurence Kotlikoff) where banks become some sort of mutual fund.

Advice to the City of London: stop the bureaucratic control freaks before it is too late

Reading Monsieur Barnier's latest utterings (pity he has no pregnant young wife, maybe that would put a stop to his unnecessary activities) makes one wonder what the reaction of the representatives of British interests - be it the cacophony of associations pretending to speak for the 'City' or the arms of Government (FSA, Bank of England, Treasury) will be. Pious talk will get them nowhere against the hunger of the typical continental bureaucrat (statist control freaks) for ever more power. As an Austrian who works in the City for 30+ years I am allowed to say that. Call their bluff or face certain defeat, the choice is there.

Barnier on Rating Agencies: Shoot the Messenger!

If banning ratings that do not suit the political establishment is all that the career bureaucrat Barnier can come up with, it is back to the dark ages of absolutism - as the Philosopher Sloterdijk said in a recent interview our political system is basically the old authoritarian monarchical regime that has been usurped by an equally undemocratic political/party/lobby mafia. The only sensible reform of the rating system would be the elimination of all references to ratings in regulations and the prohibition of ratings that are paid for the entities being rated. None of these two obvious reforms have been brought forward yet.

Deutsche Bank's exposure to Las Vegas Casinos

When a single bank lends nearly USD 1 million per room (!!) to a Las Vegas casino-cum-hotel project one has to wonder what senior management and in particular risk management was up to. It is easy to create large amount of lending volumes (and bonuses) by lending to mega projects in property but this also creates a trap if the business is not supervised closely. A similar risk is created by lending to finance takeovers and acquisitions by financial 'sponsors' as these deals are cheap in terms of manpower expended. One should not be surprised if little or no capacity is left to finance ordinary business.

Highest Income Tax Rates Worldwide - KPMG Study

A handy reckoner for those interested to move to a tax-friendly climate can be found here

Dexia troubles - no surprise given waferthin capital cushion

One glance at the balance sheet of the troubled lender makes it all-too-obvious what is at the heart of the banking crisis: equity capital is just not large enough to support the huge balance sheets that happy-go-lucky bank managements have piled up in the good times. At the end of 2010 total equity of Euro 8.945 billion had to support assets in the amount of 567 billion Euros! Add the fact that many bank balance sheets are financed with footloose 'hot money' and are not even closely matching maturities on the asset and liability side and you have the perfect prescription for a banking shipwreck. And all that under the 'watchful' eye of the regulators.

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.