BHS Pension Fund Debacle

Yesterday's headline read Green 'missed five chances to save BHS pension fund.' But the article missed the possibility that Philip Green and his (well rewarded advisers) were more than happy to 'miss' these opportunities.
They were on the inside and had all the information about the state of affairs at BHS as well as the pension fund.
It could well have been the case that all the 'opportunities' available to extricate Green from BHS would have been more expensive and therefore unattractive.
The fact that the Green camp was advised of the track record of the eventual 'buyer' shows that they can not claim to have been in any way duped or surprised about the eventual outcome.
What is really astounding is the way the pension regulator and the trustees of the pension fund behaved. It can only be described as inept (the most charitable description), in the good old tradition of just trying to be nice to everybody, we are all from the same schools, go to the same clubs and attend the same (free) hospitality at sports and entertainment events....reminds me of a former Chairman of British Airways (it may have been before BEA and BOAC combined) who climbed into the cockpit during a flight and asked the captain 'What model of airplane is this?'. Enough said, British management has improved since those days, but not in the party and state dominated 'public' sector.

DIY Pensions -like DIY Brain Surgery

The idea that the average person should be wholly/predominately responsible to save for his/her retirement is laughable. It may appeal to doctrinaire free market advocates and it certainly appeals to the providers of the many 'products' that are supposed to provide for a care-free retirement.
But much better for the state to provide a sufficient pension. Longevity and investment risks are truly shared, between all citizens and all generations. Costs are very low - no pass the parcel investment games, no expensive admin (everyone gets the same pension, higher rate taxpayers give back more than those in a low tax bracket or not liable to any income tax). This is to some extent akin to the currently debated 'Guaranteed basic income', but only applied to those already retired.

Anyone who has tried to manage his own investment portfolio will understand how difficult investing is. Even so-called professionals time and again mess up, highly acclaimed 'Masters of the Universe' in the Hedge Fund industry often produce lamentable investment returns. So pushing the masses into the investment game means they are supposed to do the equivalent of Brain Surgery on themselves.

By all means encourage people to save, but this part of their retirement provision should not benefit from overly generous tax benefits (that mostly flow to those already enjoying high incomes) and also be free from all other regulatory and bureaucratic restrictions. These additional nest-eggs can help to provide a more comfortable old age than the universal state pension will be able to provide.

48% of Americans saving for retirement are pretty sure they have no idea what they are doing (Business Insider)

Report on the Economic Well-Being of U.S. Households in 2015
(Federal Reserve)

Deutsche Bank - enough own goals to win any competition

It will be interesting to see how much longer the chairman of Deutsche Bank's Supervisory Board will be able to cling to his seat. The number of own goals at DB is growing remorselessly, the person at the top of the management pyramid must certainly take a lot of the blame. Having worked at Goldman Sachs used to be a badge of quality, but that was a long time ago. Nothing but a 'Grab as much as you can' Culture has survived the IPO and Paul Achleitner's handling of affairs at Allianz Insurance was also not exactly crowned by success (Dresdner Kleinwort may ring a bell).

Commodity Trading - A Mystery

While this news item illustrates the extraordinary influence the - mostly Switzerland-based - Commodity Trading firms have in the markets the real mystery is the profitability of their business model. Given the nature of the business most transactions - if not all - are conducted with counter parties outside of Switzerland. That leads to the questions where trades are booked and taxes are paid. Do the Swiss really care, do the authorities in Geneva and Zug have the resources to police all transactions? Or are they happy with the taxes they receive, following the motto that something is better than nothing. The trading firms could leave at a drop of a hat and decamp to friendlier climes (Dubai? Cayman?) if tax officials are becoming too nosey. And how are these wondrous profits achieved? Most deals are over-the-counter, in physicals. Counter parties are often little-supervised and basically unregulated entities in places that rank very low on the transparency side. Has any of the numerous regulators that harass the financial industry ever shown interest to have a close look at the commodity trading universe? Not to forget the media that could also stop writing fawning pieces on the 'success' that the trading firms have and the fabulous wealth their senior executives enjoy.

Credit Suisse CEO without Banking Experience

Can it make any sense to appoint someone to lead a bank when the person has no specific experience in the industry? Recent moves by regulators tended to make it mandatory that senior staff has relevant qualification and experience, so what banking experience does Credit Suisse CEO Thiam have? Sad to see a once-stellar franchise being managed so abysmally! Being well-connected in the higher echelons of politics in Senegal or Ivory Coast should not be a free pass to top management.

Europe is over-banked says UBS Chairman Weber

I could not agree more. With the arrival of Peer-to-Peer Lending, Robo-Advisers, Internet Banking and more stringent (suffocating?) Regulation the writing is on the wall. Could one suspect that the time of excessively generous compensation will also soon come to an end? And maybe the first to feel the impact of a new and more sober climate in banking could be Axel Weber, the UBS chairman, himself. It is difficult to see why the new banking model can support a salary of Sfr 6,000,000 for what is in essence a supervisory role. Banks in the USA get by without a separate Chairman in most cases and the role is much more modestly remunerated in the UK.

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.