Why Europe's Banks don't have enough Capital

Interesting contribution from the Head of Research at BIS. But when the incompetents in Politics and Regulation have the UK banks pay £45 Bio in penalties for (mostly ficticious) 'mis-selling' one can only say it is a miracle that the banks are left standing and the sleepy shareholders (basically the fiduciaries managing the investment management industry) are not up in arms. 

If you want to bleed your banking system dry there is no better way, similar to Fx and Libor Fixing. 

The principles of forensic and detailed proof are brushed aside in order to score political points.

Another painful lesson from a disastrous Acquisition

News that Unicredit finally has extricated itself from its exposure in the Ukraine serves as a reminder that 'Strategic Transactions' (Acquisitions, Disposals and Mergers) need the utmost attention and best Advice. We are proud to document that we voiced serious doubts when similar acquisitions were conducted some years back (a close look at the 'Mergers and Deals' Blog entries offers a salutary lesson in Merger Hybris).
The usual suspects among the coterie of advisers (Investment Bankers, Lawyers and Accountants) may all be worth their money but they are not always on your side as they tend to have a financial incentive to make sure that a deal goes through, whatever the rationale behind it.

ABP to introduce 'Climate Budgets'

Does it really make sense to introduce 'Carbon Budgets' as a constraint on the mandates for Asset Managers? First of all, the calculation of carbon usage for all investment options is expensive and it is also more than likely to be imprecise or liable to be gamed. And why not a Carbon budget for fixed income investments (even more complicated and expensive, how much Carbon usage to you allocate to a bond?), and before we forget, I hope there will be Carbon budget for 'Private' Equity and Hedge Funds? And last not least, don't forget the HFT firms. And what about Bank lending?
Nevermind that there is a simple solution at hand (Tax Carbon if you are hell-bent on limiting its use). Why not act according to the principle, what is good for the Consultants MUST be good for the Consumer (here in the shape of hapless end investors in Mutual and Pension Funds, Private Banks and Insurance Companies).
And while we are on the subject of Climate Hysteria, has any political or business 'leder' ever received a democratic mandate for imposing ever-more 'green' taxes, costs and regulations on the citizen/consumer/investor anywhere in the world?

Illiquid Bond Markets? Brace Yourself!

Not much has to be added to my post from October 2014. Maybe the move to automated bond trading has accelerated a bit, but I would not expect that to be of any help when markets become stressed. But the issue is not off the table, and given the voices of prominent market pundits it is obvious that no one really knows what will happen if a major bear market in bonds arrives. But investors should remember that bonds are a conservative investment, or at least they should be. That means investing with a view to hold to maturity, so there is no real need for liquidity.

From October 2014:

Recently there are more and more reports about a perceived lack of liquidity in secondary bond markets.

For example Fund Traders dig deep for bonds (WSJ, Paywall)

Most Commentators blame the tide of regulation that has forced market makers to drastically reduce their bond inventories.

This may be a valid point but one should not forget that some other aspects could be more relevant.
The bond trading business has expanded enormously during the past 20-25 years. Until 2007/08 volumes and staff levels increased to what in retrospect can only be described as unsustainable levels. Some retrenchment was inevitable, with or without added regulation. This naturally has an effect on the volumes that the dealer community can handle.

Technology may play an incremental role but many more complicated transactions still have to be done over the telephone, albeit with the aid of messaging or email services. Full automation is still a distant prospect, especially when there are tens of thousands of different bond issues outstanding. 'Do you want to kill the goose that lays the golden eggs?' asked the head trader of the erstwhile Credit Suisse White Weld in the late 1970s in a note to a colleague who wanted to introduce technology into the bond trading business. In my opinion he still would not need to worry too much.

The level of interest rates has - and will - have to play an important part in the lack of liquidity. The big bull market in bonds has played itself out, rising markets create turnover. At best markets from now will move sideways - creating less and less profitable trading opportunities. At worst they will enter bear territory and declining bond prices traditionally mean lower profits and lower volumes. Only the best traders will be able to prosper in a climate of fear and pessimism.

The explosion in the amount of outstanding bond values and the corresponding expansion of the buy-side (who would ever have thought that a fund manager less than 30 years old would control billions in assets?) make it virtually certain that there will not be enough liquidity to allow a smooth exit through a (very) narrow door when markets turn. Is any trading venue going to be able to take the other side when the likes of Pimco or BlackRock want to implement a drastic shift in their investment strategy?

So the old saying holds: Markets will fluctuate, this will create opportunities for those who are a step ahead of the crowd. Expect sharp moves and review your risk management process to be able to cope with extreme volatility if and when it arrives - as surely it will one day.

Hard to believe: Competition Inquiry into Fund Management

Bureaucrats are hard-pressed to find enough to occupy the enormous number of people working at the UK's regulatory body, the FCA. The irony is that the roughly 4000 employees themselves put a large burden on the industry and by extension on the British (and international) savers who ultimately pay for the costs of this neo-totalitarian construct.
Sloppy supervision led to the so-called abuses in the financial sector (Forex, Libor, 'mis-selling' of payment protection) and even more sloppy prosecution led to the imposition of arbitrary fines that bear no relation to the 'crimes' committed. In any proper court of justice there has to be concrete proof that harm was done but these enquiries are nothing else than vindictive persecution of an unpopular and quite often hated minority.
And the bureaucrats take their time. The final report is not expected to be published before early 2017 (who wants to open a book on that?).
There may be problems in the UK asset management industry but only a fool (and a regulator with time and money on his hands) would say that there is not enough competition. Any distortions are more likely to be the outcome of ill-considered tinkering by politicians (and I am sure Chancellor Osborne is busily working on some more schemes that will aggravate an already non-sensical legal and tax framework).
FCA launches competition study of UK asset management industry (IPE)

Capital Markets Union

The muted plans for CMU will always remain half-baked without a common legal landscape. Only when buying shares in any company sited in the EU is as simple/safe/painless as buying shares in an Oregon company by an investor in Alabama will we reach this Nirvana. Pie in the Sky?

Capital and Chutzpah: Why US has more than Europe

Dark Pools - who brings light into them?

News that Credit Suisse has reached a settlement on the 'dark pool' probe may bring relief to its shareholders, management and some market professionals. But it still leaves open the question how the practice of executing orders in these pools is policed. By definition the transactions are designed to provide a certain (total?) amount of privacy and anonymity. Market impact is (hopefully in the eyes of the users) lessened. But are the prices achieved fair - especially for the ultimate owners of the assets bought or sold, the investors holding the mutual funds or pension funds that are using dark pools? Are all transactions logged and published so that the end investor can check them against a consolidated tape (price, amount and exact time?). If not then this leaves too much leeway and encourages trickery that would rival the abuses that came to light in the foreign exchange and interbank (Libor) markets.

Money Laudering: what is a 'suspicious' transaction?

Apart from finance professionals being clairvoyants it is extremely tricky to safely fulfil the regulator's insistence to report all suspicious transactions. With hindsight it is always possible for authorities to hit banks and asset managers with a big club and claim a transaction should have been reported. The only really safe procedure would be to report ALL transactions and put the burden of compliance on the shoulders of the regulators. Alternatively there should be an EXHAUSTIVE and detailed checklist giving details of any signs that should arouse suspicion. As always we want to remind readers that in our opinion poor and unnecessary legislation or sloppy work by police authorities are the real reasons for the anti-money laundering hysteria. There was no more crime before the politicians invented the need to control citizens more and more in a costly, intrusive - and ultimately ineffective - way.

Credit Suisse: Old wine in new bottles?

Sad as it is to see a proud Swiss institution (again) unable to find a local candidate to fill the vacancy at the top of the organisation I watch with interest the first pronouncements of its newly-installed CEO. But apart from the unresolved question of whether or not it is wise to combine the business of banking with asset management (there is a strong argument in favour of independent asset managers) it is quite an irony that Credit Suisse is now supposed to find salvation in asset management - after having shed quite a few parts of the business during the past few years. And do the private banking clients really want to be 'cross-sold' the goodies that the investment bankers are 'incentivised' (to put it mildly) to create for them?
Tidjane Thiam may have done a creditable job at Prudential but he was promoted in March 2009, at the very bottom of the bear market. Talking of good timing!

Buying a Hedge Fund is not so easy

Hedge fund firms are difficult to sell/buy as they depend - in general - too much on the style of a few individuals running the show. Quite often their mentality is not well suited to build a lasting institution. One of the main reasons - apart from the possibility of greater financial rewards - of starting a hedge fund was to be free of the bureaucratic constraints they experienced during their previous employment with a larger institution. So I am not surprised that Carlyle's acquisition of Vermillion asset management has hit rocky shores. (Wall street Journal, Paywall).