MF Global Bankruptcy torpedoes Futures Markets

When Warren Buffett spoke of derivatives as 'weapons of mass destruction' not a few belittled him as old-fashioned. Now that the full horror story surrounding this case of cronyism and ineptitude unfolds not many are laughing, least of all the victims of Corzine's megalomania. Maybe it is time to bring in full personal liability to all senior managers of financial institutions?

UBS: Reduced Assets should be more than enough

UBS will reduce the assets of the investment bank according to an investor presentation. Offering a full range of services as a broker does not require huge inventories. To the contrary, any savvy trader - from the merchant running a market stall upward - knows that the trick is to turn over the merchandise as quickly and often as possible. Having excessive inventories basically means that the dealing operation is turned into an investment business - this confuses the mission and opens the door for mismanagement. Sfr 145 billion in assets should be more than enough to run a world-class trading/broking business. If incumbent line managers cannot make it work then UBS should look for new ones.

Less Risk Control, more Common Sense and Trust

We agree with Anthony Hilton (Evening Standard, 16 Nov 2011) when he says that "we don't need yet more millions spent on risk control (...) what we need to learn is to make proper use of the systems we already have." We would caution that today's mega banks make it very difficult to develop a cooperative management culture based on trust and knowing what your colleagues are up to. Managers at all levels are often too busy engage in petty power struggles while angling for the next promotion and pay too little attention to the challenges of running the business.

No amount of Bank Capital is ever enough in a Panic

The European Banking Authority (EBA) will publish new information about the capital requirements of European Banks this Friday. But unless there is a drastic hike in capital ratios or - what we recommend for a long time - a move towards limited liability banking (and capital requirements on all OTC transactions) this new information will be as useless as the previous exercises in 'fessing up' by the banking system.

Derivative Risks - URGENT ACTION REQUIRED

While we are not in the camp of those predicting a black swan event in the global market for OTC derivatives we would none-the-less urge regulators to address the real - and perceived - risks associated with the gigantic nominal amount of out standings. These dwarf the total of the World's GDP by a substantial amount and while they may be hedged or netted we all know that systems of risk management and control can (and do - see MF Global!) fail. To this effect regulators should decree strong incentives to bring as much of the derivative trading onto a trading platform that assures proper netting and clearing. In addition, capital requirements on OTC trading should be brought into line with those assessed on lending and trading in securities.

Never underestimate intelligence of Brussels bureaucrats

When the Kommissar for Financial Affairs suggests that it should be possible to sue rating agencies for 'wrong' ratings he demonstrates the low competence of the bureaucracy that is trying to run our lives. We are often critical of rating agencies but to make it possible to sue because a rating is supposedly wrong opens a can of worms. Ratings - like any investment opinion - are by necessity subjective opinions that may be correct or wrong. There is no 'right' or 'wrong' rating opinion and therefore it should be left to the users of rating services to form their own judgement on the correctness of an individual rating opinion. Would it not be much more useful to allow citizens to sue bureaucrats for their mistakes?

How to get rid of competitors - Unhelpful Advice by JP Morgan

It is quite amazing that research analysts at JP Morgan spend time to outline a plan for the merger of two Swiss investment banking units. In a 48 page report they suggest that UBS and Credit Suisse combine their units in a major cost-cutting exercise. While there might be some rationale behind their arguments it is highly doubtful whether the analysts considered the wider implications of their 'research'. What would be the reaction of regulators and competition authorities if, for example, BP publishes a report about the pros and cons of Exxon and Shell merging their operations? The proposal may have its logic, but it opens a can of worms for JP Morgan's public image. In essence the paper could be taken for a scheme to get rid of a competitor. But after 2008-2009 there has already been a dangerous concentration in the banking industry. Overlaps in activity within these gargantuan institutions create dangerous conflicts of interest - as the treatment of MF Global during its last hectic few hours demonstrated. When competitors run the payment and clearing process the regulators are called to act - decisively!

City workers see colleagues as overpaid

This poll of 515 City of London workers confirms our observation that many financial organisations suffer from the effect of an upwards-only ratcheting of compensation levels. As everyone sits in the same boat - from the chief executives down - and setting pay levels means spending other people's money (shareholders in most cases) no one has a real interest to avoid paying more than is necessary to get the job done. The same effect is at work in the public sector where taxpayers are footing the bill for any pay largess. This merry situation (for those benefiting) carries on until the gravy train hits the bumpers: a downturn in business (or tax revenues) makes cuts in pay unavoidable. Responsible Managements are looking to keep compensation levels under control at all times not only because that is what any cautious business person should do in any case, it is also the right thing to do in order to avoid an irresponsible hire-and-fire culture (where those at the top usually are spared any pain and even pensioned off with golden handshakes and gold-plated pension schemes).

Thanks a billion Mr. Schaeuble!

The political multi-talent and career politician Schaeuble and his advisers (minions?) have given another dramatic example of how toxic the mix of interfering politicians and banking can be. After having managed to convince Commerzbank to keep its holdings of Greek bonds just a few months ago, the bank now has to pick up the bill for this misjudgement as a hair-cut to these bonds is now decreed - with Germany's Schaeuble playing a prominent role in this about-turn

Nationalising the Banks? - A Warning from Germany

From right and left we can hear occasional calls for the nationalisation of banks. This should prevent that taxpayers have to pick up losses by private banks. But a particularly glaring example of what can go wrong when politicians are allowed to play bank manager is found in the sorry fate of Germany's Westdeutsche Landesbank. Many similar examples of mismanagement by political incompetents can be found all over the world.