Bank Bailouts for ever?

As long as there is no radical reform of the banking system we may well have to endure bank bailouts for a very long time and this prediction by a senior economist may well come true. (CNBC)

While Rome burns the EU's Almunia plays in his little Sandbox

One could not make this up, but while the EU's house is on the edge of a major conflagration the useless Nannycrat Joaquin Almunia, in his role as the EU's competition commissioner, continues his fight to destabilise Germany's banking system by imposing untimely conditions for the 'restructuring' of Bayerische Landesbank. At a time when it should be 'all hands on deck' to get the economies going and allow banks to lend money this career politicians picks senseless fights at the ultimate expense of the citizens - who had no say in his selection for office. Careful perusal of his CV left me with the impression that he has not done a single day's work outside the sheltered realm of politics.

Jamie Dimon: From Saint to Villain

Since news about the trading loss in JP Morgan's Chief Investment Office broke in April there has been any number of commentators who vilify Jamie Dimon, JP Morgan's CEO. But most of them forget that investment is never a sure-fire bet. One has to take losses from time to time, there is no one-way street otherwise we would all be millionaires. I would guess that there has not been a single commentator who really has seen the full history of these trades and as a consequence no one is really qualified to pass judgement. For a large institution like JPM the only thing that counts at the end of the day, quarter and year is the overall P&L. If positions were under water during any period that is a professional hazard and needs to be managed properly. But many years, decades even, of investing have taught me that the really skilled investor shines when he has to nurse a loss-making position back to profit. Those who unleashed the attack dogs in the Media and in Politics are to a large extent the same ones who fell for the cult of the imperial CEO - and thought he could walk on water.

JP Morgan 'loss' - too much ado about nothing?

The reported 'loss' that JP Morgan took on its investment account may appear to be large but in the context of a portfolio size of $ 300+ billion and a total balance sheet of more than $ 2000 billion it really is small beer. Every investor or trader worth his salt will know that no investment goes up in a straight line. Daily fluctuations of one percent are the norm. That would mean that the investment book could be up or down three billion dollars on any given day. Hedging is no panacea. If you fully hedge all risk out of a portfolio you may as well stay in treasury bills as the cost of the hedge will eat up all the expected profit. I am sure that some aspects of the portfolio could probably have been handled better but loan books - even surrogate ones - are usually meant to be held to maturity so the mark-to-market loss should not have been of any consideration. That various busy-bodies (media, various officials like the department of justice or the New York Auditor) should feel competent to be backseat drivers for JP Morgan's investment department adds a twist of absurdity to the whole affair. Jamie Dimon also made a mistake to preemptively excuse himself in front of a baying media crowd rather than calmly explain the realities of the investment game.

Poor start for Monsieur Hollande

Hollande has done surprisingly poorly in the second round of the French Presidential elections. Given the unpopularity of Sarkozy (due to his somewhat abrasive and erratic behaviour) and the strong headwinds due to the fallout from the ongoing financial crisis, one would have expected nothing but a landslide victory by the socialist contender. Now he uses the first days after his vapid victory to hit out (Daily Mail) at the Financial Sector, and in particular at the City of London. We have a simple switch to suggest to this party apparatchik: Give up all the costly subsidies that your farmers receive and we might think about protecting the City of London less vigorously. The cost of the subsidies that hundreds of millions of consumers have to bear is readily quantifiable while the damage that the financial sector is causing - if there is any at all! - is mostly based on smoke and mirrors (even the backing of 'Star' economists from Harvard etal is less than convincing, they only achievement they can be proud of is to get too much shelf space by the media).

Defer bonuses for 10 years?

Andrew Haldane, an otherwise sane Bank of England official, has suggested that bonus deferral and claw-back periods should be extended to 10 years or more for (senior?) bank executives. While we have sympathy for those who think that bank regulation is not up to the task we would consider this proposal to be unworkable and counterproductive. Who in his right mind would be willing to work on that basis? 10 years is an awfully long time - just think of the young banker aged 25 who would have to wait until he is 35 to enjoy the benefits of his effort! You might as well work in a communist system. One has to suspect that the Bank of England officials - typically for the caste of government employees all over the world - simply have lost touch with reality. We have pointed out repeatedly that proper banking reform has still not really been enacted. Stalinist 'command-and-control' systems are no appropriate substitute.

Reply from M. Philippe Lamberts - MEP (Green)

while I agree with you that we have to incentivize banks to go back to their basic mission of collecting savings and using those to fund the real economy, I totally disagree with your statements on pay.

1. There is absolutely no factual or scientific evidence of a correlation between eight-figure salaries and real value creation; in this business, banking executives have basically (up until very recently, see CitiGroup case) been left to determine their own pay, getting away with whatever they dared asking for. The hypothesis of self-interest (greed if you will) driving pay schemes is I believe much more credible than one that purportedly would relate them to value creation.

2. Your statement that a 1/1 relationship between fixed and max variable pay would lead to a hike in fixed salaries remains to be proven; maybe a way for banking executives to have shareholders approve what ended up as absurdly high salary packages was precisely to have the fixed part relatively modest, so as to make size of the real total package less obvious. Those executives might have a tougher sales act to perform in front of their boards and their shareholders should they want to convert a significant part of what used to be variable into fixed pay. I definitely would like to see how they manage before I decide whether or not I agree with your statement.

3. The pay rules that are being proposed are in fact very simple : 1/1 ratio between fixed and variable; 20-fold ratio between average and maximum pay; 40-fold ratio between minimum and maximum pay. I do not believe the adjective "onerous" to reflect that simplicity and I see these ratios as more than reasonable. Administering those limits would not impose an extra administrative burden on firms; as far as I know, they do manage their payroll (with the help of effective and efficient IT systems, I would venture). It would just need them to adapt and publish their existing pay rules, which are hopefully documented. Enforcing legislation would be left to existing supervising bodies; no new ones need be created. Your mentioning of "expensive bureaucracies" gives me the opportunity of questioning whether decently equipped and paid supervising authorities would, in terms of absolute cost, come anywhere near the total impact of financial sector irresponsibility to our societies, which runs into the trillions. That said, I do not see this as an excuse not to tackle the issue of the cost-effectiveness of government as a whole and I do agree that there is still room for improvement in that area.

4. I'd also like to discuss your statement as to "the conviction that unequal incomes are somewhat suspect". On that, I would refer you to Wilkinson & Pickett's "The Spirit Level", which demonstrates a statistical correlation between many key indicators of societal wellbeing (incl. life expectancy, crime, education...) and the level of revenue equality in society. Those who claim that more inequality is beneficial to society as a whole have yet to come up with anything coming close to similar evidence proving what is, I'm afraid to say, belief rather than fact. Everything indicates on the contrary that more equal societies perform better. So I my view, what is suspect is that drive towards absurd - and self-serving - pay packages in an industry that has run amok.

5. Finally, a word on "the Chimera that any problem can be fixed by rules set down by an 'enlightened' technocrat". Beyond that statement, assuming that you agree that problems - at least non trivial ones such as the climate/resource equation or the closely interlinked private and public debt issues - need to be fixed, I do not know exactly how you would suggest to do that. As a citizen, as a democrat and as a lawmaker, I agree that trusting one's future to "enlightened technocrats" is an option that would simply lead us to disaster. I might also say that having seen how unregulated (financial) markets drive the planet and its societies towards collapse, I would not trust our future to them either. What is then left is public, open, fact-based debates leading to decisions to be made by democratically-elected people.

Now, as an author of amendments on banking industry pay, I do not see myself as an "enlightened bureaucrat". I am a politically-aware citizen, who, after a 22-year career in business, got elected and I remain accountable for my work. As you may know, I will need to face my voters in 2014 and I definitely have skin in the game, much more than any banking executive has at the moment. You will therefore understand that have little desire or interest for being lectured by such people on my societal responsibilities. It is not clear to me in what capacity you are writing to me - as a citizen or as a service provider to an industry that has a lot to account for and who stands to lose revenue if pay packages would go down. I will therefore leave the argument at that.

Pay regulation not addressing the real problem

What really drives financial market regulation is not logical thinking but a mishmash of misguided ideology as well as a reversion to good old authoritarian attitudes. The former is derived from the conviction that unequal incomes are somewhat suspect, the latter is the Chimera that any problem can be fixed by rules set down by an 'enlightened' technocrat. This leads to absurd outcomes such as the current proposal to limit any discretionary bonus payment to a maximum level equal to the amount of annual base salary. Not much thought is given to the fact that this will lead to an upward move in basic pay which in turn will mean that the financial institution that pays these higher salaries will become less, not more, stable. Making compensation more sensitive to the time horizon of risks incurred in a bank is another can of worms that regulators seem to be intent on opening. While one has to admit that remuneration policies in many banks and other financial institutions have been found wanting during the past few years this situation is not being helped by the way that politicians and regulators fall over themselves in order to help out the same institutions with public support once they reap the fruits of their profligacy. Proper financial reform - especially the introduction of limited purpose banking - would ensure that the shareholders of the banks - and not the taxpayers - would pick up the bill for any poor management decisions. The need for onerous pay regulation - and an expensive bureaucracy to monitor compliance - would be avoided.

Europe's banks face gaping capital hole says EBA

When the EBA states that many banks would have insufficient core capital under the rules that will come into force we are not surprised. As we repeatedly said, no amount of capital will ever make banks 100 percent bulletproof. One just has to make more and more pessimistic assumptions and come to the conclusion that a bank is not 'safe' enough. The only way to get the taxpayer off the hook once and for all would be the introduction of limited purpose banking as suggested by Larry Kotlikoff.

Not all publicity is good publicity

How much longer can the image of Goldman Sachs get knocks such as these? It is time that someone minded the house again.

UBS boss hires old friend for senior role

When one reads that the recently appointed CEO of UBS hires a former colleague from his days at Merrill Lynch as Co-Head of Global Investment Banking one has to assume that the hiring old an (business) friend may give a certain amount of comfort and hope that relationships in the top management team will work smoothly. But there is always the danger that sentimental aspects cloud the judgement or that conflicts of interest impede rational decision making or sour the morale of the other team members. The big question is also why a global (?) player like UBS cannot grow its own senior managers. Once you had to be an officer in the Swiss Army to climb the management ladder at the old UBS (before it was taken over by local rival Swiss Bank Corporation) and that surely was not providing an adaequate talent pool (and led to the sorry demise of the 'old' UBS) but has the bank really drawn the right conclusion and found the right formula? The track record over the past 10 plus years speaks a clear verdict.

Stress tests - same (sad) old story

The publication of the results of the latest stress test performed on US banks does little to inspire longterm confidence in the ability of the financial system to be protected from another (near) meltdown. We repeat our contention that only a limited purpose banking system will give near certainty that taxpayers will never again have to be called upon to bail out insolvent banks.

Conflicts of Interest in Investment Banking

The discussion about separating banking and securities and investment banking has reached a dead end. But the inherent conflicts of interest in an investment banking world where intermediaries directly compete with their supposed customers (the word client is no longer appropriate) will always tempt service providers to treat their clients as 'muppets'. Maybe not even reverting to the rules imposed by Glass Steagall would be enough to improve the situation and the principal trading function and the customer advisory side should be separated like they were in the UK brokerage business before 'Big Bang'. This would mean that salespeople and corporate finance advisers would have more incentive to work with and for their clients. As long as this is not feasible the only protection for customers - be they individual investors or 'sophisticated' professionals working for fund managers or corporates - is to follow the old rule of  'Buyer Beware' and not to be too trusting when dealing with their sell-side counterparts. All too often they fall for sales patter, get taken in by glossy brochures and forget to check if there are better terms available in the market.

Political pressure to prevent CDS on Greece to pay out?

The example of a minor Austrian bank demonstrates the potential fallout that can be expected if CDS sellers are required to pay out in case Greece is 'officially' (by the insider-dominated ISDA committee) declared to be in default. Kommunalkreditbank - already rescued by the Austrian government - could be required to pay out in the high hundreds of millions of Euros if it is required to pay out on the CDS contracts it has sold. One has to assume that the Austrian government - and quite a few others - are not too keen to see the ISDA committee to declare that a credit event means that CDS contracts have to be paid out. Who will be brave enough to sue the Committee? Don't expect any help from the regulators - they are in the pockets of politicians who probably snigger about the fact that the CDS market has been little less than a game like the many online games - a financial markets farmville.
"Since when is a country's defaulting on its debt not a credit event?" asks Alan Abelson (Barron's)

CDS - a misconceived instrument is Null and Void

Says today's headline in a newspaper (City AM). To leave the decision about whether or not a CDS pays out in a 'credit event' to a group of market insiders at a private industry association such as ISDA makes a mockery of proper regulation in financial markets. Especially as the members of the relevant ISDA committee are the largest users and providers of credit default swaps who have made vast profits from this market during the past ten years. No surprise that the author states that "The decision has been criticised by some as making a mockery of credit default swaps on sovereign debt. These critics believe that their value has now been permanently undermined." We could not agree more and every user of this market has to face a negligence claim from his investors if he uses this product in the future. We always thought that the construction of the CDS contract was overly complicated and likely to lead to disagreement exactly at the point in time when they would be needed most, i.e. in a credit event. Would it not have been more sensible to design a product similar to an option? This could have been exercised at any time - credit event or not - simply based on the price performance of the underlying securities.

Charlie Munger on Derivatives in 2003

"But I confidently predict that there are big troubles to come. The system is almost insanely irresponsible. And what people think are fixes aren’t really fixes. It’s so complicated I can’t do it justice here – but you can’t believe the trillions of dollars involved. You can’t believe the complexity. You can’t believe how difficult it is to do the accounting. You can’t believe how big the incentives are to have wishful thinking about values, and wishful thinking about ability to clear."

Assuming a Meteorite hits New York

all banks in the USA may see their ratings downgraded. That seems to be the logic behind the thinking that causes Tom Brown to decry the latest 'nonsense from the rating agencies'. Banking as it is conducted at present will always pose a certain amount of risk - only 'limited purpose banking' that turns banks into a sort of mutual fund would avoid any risk of failure. As a consequence, war games based on worst case scenarios may be of intellectual interest but they also undermine the credibility of rating agencies.

UBS appoints ex Bear Stearns CFO to senior role

One can only wonder, and wonder and wonder again about the Personnel Policy (if you can call it that) at UBS. Just last week someone still working there said that the people around him change constantly, there is an annual turnover rate of 70 pct. Now the firm pins its hopes on Sam Molinaro, and he is based in far away New York. Given the fate of his last employer and how long he was away from the major league - can this be any help for the once proud ship UBS? Does the bank have nobody in its ranks who could to this job?

Toxic Mix - Politics and Consultants

Royal Bank of Scotland (RBS) had enough problems at its hands before a young and inexperienced politician and a consulting firm made its life near-impossible. Running a bank after a near-death experience due to overreach by its previous CEO and board (some members inexplicably still have not been purged) is a tough assignment. When a chancellor with hardly any real business experience outside the charmed circle of lobbies and professional party politics tries to micro-manage a business the task becomes impossible - especially when nimble competitors do not face similar constraints. And giving a consulting firm carte blanche to meddle in this situation cannot help much to safeguard the ailing ship RBS. Staff of the consulting firms often are quite young and have no practical business experience worth mentioning. Even senior consultants often have moved up the consulting ranks and have similar deficiencies with respect to real business life. If anything, they might be busy trying to jump ship to a position on 'the other side of the fence'. Quite a number of senior positions in Financial Institutions are held by former Consultants and we are polite enough to describe their track record as 'mixed' at best.

Compensation under control?

Despite our recent positive comment on Barclays Bank we have to put out a critical comment about the compensation practices at the leading (only?) British Investment Bank. It is risible that compensation increases by 2 pct during 2011 when total headcount drops by 6000 over the year. It means that 'cheap' bank and support staff was 'cut' while expensive staff in 'Wealth Management' and Investment Banking was added. This may be an explanation but it should not be an excuse for lax oversight.

Goldman Spin Master to retire

Goldman's public image suffered a few scratches during the past few years. So when we spotted that the firm's PR supremo was leaving after 12 years with the firm we were reminded of the time when (investment) banks and many other businesses got by without spin masters, and a happy time it was. After all, all that really counts is how well you work for your clients (or should one only say customers these days?). They pay the bills and word of mouth does the rest. Which CFO would really allocate a piece of business according to the size of a corporate image ad in the latest edition of Euromoney (or the FT). Good PR means to answer the hard questions in a straightforward way, and most importantly, do business the honest way. If that is not evident to the outside world than the best PR campaign is only wasted money.

Barclays does not 'fall short'

As some in the Media and Analyst community may want you to believe. I am the first to be sceptical when banks make grandiose announcements about the goals they try to achieve. But succeeding in investment banking is a game where those who last the course will win out in the end. Nervous prodding by analysts and media should not divert management's attention too much. The way the competitive landscape has unfolded over the past few years should allow Barclays to slowly but steadily up the rankings. Profitability is under pressure at all banks and no one can be sure what the new banking world will look like in a few years. On a more mundane scale, even the refurbished branches of the bank look great when compared to the competition here in the UK.

Are Bankers really overpaid?

Are all bankers overpaid? This seems to be the conclusion when reading the news on a daily basis. But reports that hundreds of headteachers in London’s schools are now receiving annual pay packages of more than £100’000 indicate that generalisations are inappropriate. Heads enjoy generous holidays, there is very high job security and there is no competitive pressure. They also have managed to escape teaching duties to a large extent. One wonders how they fill their days given that personnel turnover in most school is also relatively modest. The main problem with banker's pay is the fact that senior bankers - CEO's and the top level of management - benefit to a large extent from weak corporate governance that is endemic in all public companies. But this problem should not be used to target bankers in general.

How to avoid employment tribunals - better people management

It may well be too easy in the UK to launch an appeal to an employment tribunal but it usually takes two to tango and without passing judgement about an ongoing case I want to argue that cases such as this one underline the need for careful staff assessments before and after hiring a person. All-too-often personnel decisions are based on academic achievement or (especially in finance) the numbers in terms of P&L. The qualitative aspects of management are easily neglected in a pressured enviroment and personality clashes can quickly escalate out of control.

UBS - curious selection of new board members

What is the 'politically correct' composition of a company board? We are not sure that board members are more than an in-house management consultancy. They certainly are far removed from the real owners of the company and even the fiduciaries in the asset management world have little say in the affairs of a board. But news that UBS has appointed two women to its board - one an academic economist and the other one a lawyer - raises some questions. Given the appalling track record of economists (you all know the many jokes about economists, as for example: An economist is a trained professional paid to guess wrong about the economy) one can not be too hopeful about these latest appointments. Don't forget the lawyers though: Q: Why won't sharks attack lawyers? A: Professional courtesy. Maybe selection by eye colour would be more effective. There may be a good cause for more women on company boards but we doubt that giving in those who expect miracles from this will be proven to be right in the long run. Whether or not a bank run by economists (Axel Weber, the incoming Chairman of UBS is another one) only time will tell.

Credit Traders accused of manipulating valuations

During the court case in which former senior credit traders of Credit Suisse are accused of manipulating the valuations of their trading books the revealing statement by one of them caught my eye: When a data-entry employee asked one of the accused “What sort of P&L do you need today?”  the trader responded that all books should end the day ‘up’ by $35 million” and the prosecution claimed that later one of the traders “artificially increased the prices of several ABN1 positions” to meet the trader's profit target. (Bloomberg BusinessWeek). This confirms our suspicion that the controls in many investment firms are woefully inadequate.

Dual CEO'S - if anything a formula to be promoted

The recent troubles at Blackberry manufacturer Research in Motion seem to suggest that dual leadership can be damaging for an organisation (FT). But Rome had two consuls during its rise to dominance, and they were limited in their power to a tenure of one year. Goldman Sachs in the late 1970s and early 1980s had co-chiefs - and that was when the firm laid the foundation to its rise to dominance. The challenge for boards and shareholders is to make sure there is a deep bench of talent - a thing that is sorely missing in many companies, why else would a company ever look for an external candidate for any of its top positions?

What is the future for banking pay?

Asks Gillian Tett (FT). When even the shares of Goldman Sachs, the company that is supposed to be the Gold Standard for banks, are at best marking time since the IPO in the late 1990s it becomes obvious that something is wrong not only with the compensation structure in the (investment) banking industry but with the whole business model (and the managements that are responsible for this state of affairs)

Why is Adoboli alone facing the music?

Seeing Kweko Adoboli as the lonely accused in the Courtroom creates a certain amount of sympathy for the young man. It is easy for senior UBS staff to pin all blame for the billion dollar disaster on one person. This makes it easy to escape blame for a  management culture that allowed a completely insufficient risk control to exist. Senior managers were busy enough chasing profits at any price with a firm eye on the next bonus payment they expected to receive. But Risk Management should mean that fail-safe procedures are in place - if necessary in triplicate - that make it impossible for any single person to play the markets the way Adoboli is accused of having done. Senior managers have been fired (with or without a 'golden handshake' as farewell present?) but should there not be other people facing justice in the courtroom? Oswald Gruebel may have wished for a more glorious end to his career, but he will certainly not feel any pain in his pocket.

Is there any 'Leadership' in the City of London?

The 'Leadership' of the City of London (if there is something worth that name) is outmaneuvred at every stage. Not surprising as it is composed of superannuated 'worthies'. Decisive action a la De Gaulle would stop the interventionists on the Continent dead in their tracks. What would happen if anyone would want to dismantle the EU agricultural subidy gravy train over France's wishes?

Tobin Tax: Political Caste in Germany wants your blood!

Norbert Lammert is the current President of the German Lower House (Bundestag). Today a headline tells us that he is also 'supporting' the introduction of a financial transaction tax. While some might argue in favour of such a tax it is revealing that its supporters have mainly one common denominator: they are supporters of more state spending and indirectly in support of 'robbing Peter to pay Paul' (or pay themselves or their political clients). Particularly galling is the fact that people such as Lammert - who as far as we could find out has never held a proper job in the private sector - have the temerity to put more and more onerous taxes and 'charges' onto the shoulders of the powerless citizens. In the case of Germany one also has to say that the country has a long tradition of putting (too much) faith into regulations and top-down dirigism. Despite the economic and political success after 1945 one should not forget that this was just to compensate for the disastrous policies pursued in the decades before and as a consequence the net balance is not that encouraging. The irony is that Germans worked hard in order to deliver goods on credit to all their customers in the Eurozone who now can not repay the loans. So there is a huge bill coming due and the good standing of Germany in the credit markets is to a large extent only the reverse side of the fact that many other countries are in distress. So by necessity some markets must have low interest rates as they offer a refuge - but they are not of much higher quality. Putting another tax on business will not improve things for anyone - but it will guarantee that the German financial markets will become even more a backwater.
PS: Readers who want to support a fundamental change in political systems that allow professional politicians and lobbyist to run roughshod over the interests of citizens may want to support Dirdem - Campaign for Direct Democracy here and here

Who wants to submit to the degrading 'FSA approval process'?

News that Richard Moore, a very senior and experienced financial market executive that Lloyds TSB wants to hire as its global head of trading, 'has yet to receive FSA approval' before his appointment can be finalised illustrates the absurdity of recent regulatory 'innovations' in the UK.  It reminds very much of the old boy network that 'regulates' entry to British Universities where personal interviews are nothing but a smoke screen to weed out 'undesirable' applicants or favour those who appear 'politically correct. In a rational system of regulation one should assume that an executive with more than twenty years experience in senior and responsible roles should be more than suitable to take on a role such as head of trading at Lloyds TSB. If he has done something that contravened regulations or laws that would be a reason to prevent him from taking a senior appointment. But to give unaccountable bureaucrats - often with hardly any or much less practical business experience - the final say in an inquisitorial and secretive procedure will do nothing to help London its pre-eminent role as a global financial centre.

Hire and Fire backfired!

The disaster that is currently played out in many banks and brokerage firms stems from poor judgement and (irresponsible) people management. There was no reason to indulge in a renewed frenzy of hiring after the 2008-09 credit crunch and staff that now has to be fired was hired based on speculation that the business would follow. Unfortunately playing with people's lives carries very low penalties for those responsible higher up the hierarchies.

No more listing schools on job applications - British Deputy Prime Minister

Given the abysmal approval rating that the British Deputy Prime Minister already receives this 'proposal' confirms that the lunatic fringe is alive and well in the ruling establishment. Logically the only way to hire people would be not to discriminate at all and just pay everybody a salary from the sheer inexhaustible money spigot the Bank of England provides. No questions asked about previous experience, pay, age, skill, 'race', political views, - that is unless you are a right-wing 'extremist'. We do not support the BNP in any way but it is noteworthy that some of their supporters have been deemed to be politically not correct enough to be allowed into certain jobs here in the UK, so this might well be the thin end of the wedge.

MF Global - famous last words

"If there is a relevant risk, we will have a relevant measure and limits around that risk"
Thus spoke Michael Stockman, Chief Risk Officer of MF Global (Risk Magazine, April 2011)

Banks may lose Euro 1 Billion in Hungary

A Fiat Law imposed on banks in Hungary by the 'democratic' Orban regime could cost them nearly Euro 1 billion. This is due to the setting of an artificial exchange rate on foreign currency borrowings by Hungarians (mostly to finance mortgages at cheap Euro or Swiss Franc interest rates).
We have always scratched our heads when we read about the absurdly high prices that were paid for East European banking 'assets' before the credit crunch. The financial structure was also wrong - the subsidiaries in the individual countries should have been organised on a stand-alone basis so they could be cut loose in a worst-case scenario. Local funding would mean than devaluations would not be a problem for the parent company.

MF Global Trustees fighting over customer funds

This pathetic spat between the US and British trustees in charge of administering the MF Global bankruptcy demonstrates that even the seemingly simple procedure of segregating customer funds poses a tremendous challenge for management, auditors and regulators. If you take money from Uncle Bill, to make an example that even these 'experts' can understand, and put it into an account you open in the name of XXX favor Uncle Bill it should be obvious for anyone who the money belongs to. Otherwise it must be apparent that all parties involved pay not the blindest bit of interest to the protection of investors.

Big loss on copper trade at Barclays?

Reports of big trading losses at major investment banks seem to indicate that the human species - especially the one responsible for oversight in trading rooms - seems to be incapable (or unwilling?) to learn from experience. Time and again highly paid professionals make mistakes that only a novice investor should be making. Two of the golden rules of investment are not to over trade and not to throw good money after bad by adding to a losing position. We would think that several factors are at work when the inevitable big losses occur: (1) it is other people's money that is lost, (2) the so-called 'trader's option' means that the risk-reward balance is skewed in favour of the trader(s) and (indirectly) management who get paid large bonuses when the bet succeeds but at worst lose their jobs and (3) the bureaucratic structure of large (investment) banks that are (over) staffed by number crunchers and risk managers but sorely lack people with common sense.

Danger of unnecessary rebranding

We are not so sure if the decision of Unicredit to rebrand its motley collection of brands is such a good idea. It might be an idea that has its uses for the Italian market but name changes usually destroy Goodwill that has been built over many decades. Especially in the banking sector one should therefore be extremely careful - and above all not listen to the insinusations of 'underage' management consultants who have never been in the real world of business themselves. The same warning should be heeded with respect to 'image' and 'branding' consultants who will always suggest changes as they want to earn their fees that way. In Europe there is an extra dimension as names that are successful in one country/culture don't necessarily travel well. The result will usually be a synthetic name that means nothing to most clients. In the case of Unicredit there is an additional problem as it is not that clear if the collection of banks will stay together for that much longer.

UK: Regulatory Black Hole?

The amounts hidden from balance sheet in the shadow banking system are truly frightening and can only be described as a house of cards. That hardly any regulatory capital has to be set aside for derivative positions and guarantees borders on the severely negligent. It is simply no excuse for regulators and their overseers in politics that this field of finance has grown exponentially during the past 10-15 years and has clearly overtaken the capacity of the authorities to deal properly with this relatively new phenomenon. If is accolade for London as a leading global financial centre to be seen as the epicentre of the global re-hypothecation game that played a significant role in the downfall of several major financial service firms during the past few years.

Do not play any tax games with compensation

News that another major bank has been entangled in a tax dispute with the British tax authorities as it has been caught with a tax avoidance scheme where (favoured) staff were paid in an offshore tax haven illustrates that even prominent firms have not yet learned the lesson that their corporate governance must be beyond any reproach. Even more so when the same firms often are the custodians for large amounts of money that are entrusted to them by institutional and private investors who expect that the highest ethical business standards are observed. Very often the rank-and-file staff lower down the pecking order is not benefiting from such generous 'tax advice' (often paid by the employer for the favoured 'high earners') and this creates a situation where the cleaning staff may well pay more taxes on their meagre incomes than the staff that receives multi-million bonuses.

Corzine testimony: 'I knew nothing!'

That is what we would call the Manuel defence - remember the funny Spanish waiter in the television comedy 'Fawlty Towers'? But as someone who worked with Jon many moons ago I am still shocked about his prepared statement today in front of the Agricultural Committee in the US Congress.

Regulator's Report on RBS - Much Adoo about Nothing

When a (long delayed) FSA report into the collapse of Royal Bank of Scotland does not examine in detail the role played by the former CEO Fred Goodwin one can be certain that the usefulness of this 'report' must be close to zero.

EBA: Euro-Stalinism outside democratic control?

The latest construct created by unelected bureaucrats, the European Banking Authority (EBA) is blatantly neglecting due legal and democratic process. As reported in Handelsblatt it creates its own definition of risk capital and anticipates the new Basel III regulations. In addition it uses its own assumptions about the valuation of government bonds - in contrast to the declared intentions of its political paymasters. As usual the citizens and the businesses subject to its diktats are left without any possibility to challenge the decisions of  the EBA in the courts or any democratic forum.

Fair play in Bank Bailouts

The sorry saga surrounding the Bailout of major financial institutions during the banking crisis of 2008 should teach regulators and politicians one lesson: by all means support banks in such a crisis but make sure you seize full control from shareholders in such a situation. As staff - and particular senior management - hold large stakes in the equity of these concerns that would also impose somewhat more meaningful penalties on them than the odd slap on the wrist we have seen during the past few years. And institutional shareholders maybe would finally wake up from their slumber and take their ownership roles more seriously - rather than just darting in and out of equity positions as if they would be just play a game of monopoly with their investor's money.

Do you really think nationalised banks are safer?

Anyone infected by this thought should look at the never-ending horror story that can be written about the abuses that are rife in banks that are the playground for politicians and their party cronies. The latest story coming out of Austria speaks of a major loss at Tirol's state-owned Hypo Bank. Together with a broken banking model that as a last resort relies on the deep pockets of Joe Public and (undemocratic) political control of banks you get a poisonous coctail that leads to one 'unexpected' loss after another.

European Banks short on Dollar Funding?

This problem is just another aspect of the disconnect between the two sides of bank's balance sheets. Like mismatched maturities the mismatch between the currencies is as serious a problem and should be addressed by banking regulators without delay. If banks want to extend loans in a certain currency they should have ensured that they have access to funding in that currency for the period of the loan. Relying on the foreign exchange and interbank funding market for the bulk of the funding is highly risky. There might be short-term adjustments to the balance sheet as deposits are received or withdrawn but the wholesale funding should only be for a small percentage of outstanding commitments.

Loan subsidies - abuse is difficult to police

The problem with loan subsidy schemes as proposed in the UK is: Who will receive these preferential terms? Will it be based on the old school tie, or who the bank manager plays golf with? The beauty of market economies is that the old element of feudalism is replaced by criteria of efficiency. All borrowers should be treated equally if they are good for a loan, and those not making the grade go empty handed. These subsidies create a tremendous amount of moral hazard - the same can be said for all subsidised loan schemes, be they managed by 'Development Banks', the EIB, EBRD etc.

What should be the right level of Margin?

An article in today's Financial Times bemoans the shrinking level of collateral and gives the impression that this would be something to be concerned about - rather than give an indication that the financial system is on the way to a more sensible future. Haircuts or Margins are still way below levels required if prudent standards would be applied. As I said from long before the 2007-2009 credit crisis they should allow for one-day moves in asset prices of as much as 30 percent.  This would of course drastically reduce the overall volume of speculative and risk positions and therefore make it much less likely that price moves of such a magnitude would happen.

Tobin Tax - another window tax?

One could argue that the Financial Transaction Tax (aka Tobin Tax) is nothing to get excited about, there are taxes on air tickets, house purchases for example. But there also once has a tax on the size/number of windows in some countries. All taxes on specific transactions are questionable as there is not much logic that supports them and they are easily abused in the politician's neverending quest to finance ever-more ambitious spending plans. Most of these taxes lack a proper democratic mandate and they are highly discriminatory and arbitrary.