Greece: Banks and Hedge Funds must watch out

The present crisis in and about Greece may look like a god-sent opportunity to make money but banks and hedge funds must be careful not to take too high a profile. Speculation against the Euro and Greece may well backfire if it turbo-charges downward pressure on the Euro and Greek bonds. The days when speculation was a cottage industry and could be ignored are long a thing of the past. Speculative moves do not reflect reality but they actually CREATE reality (a thankful nod to George Soros' theory of reflexifity). So this is not a harmless crap game but the lives of millions of citizens are at stake - and they will not tolerate for ever that a few make millions on the back of ordinary working people. Recent criticism (James Rickards in last week's Financial Times and today's Neue Zuercher Zeitung) pointed the finger at Goldman Sachs. But its competitors should not gloat but may well find themselves in the firing line as well. The New York Times points out that the same investment banks that now point the finger at Greek profligacy when they issue their research reports were more than willing to lead the country deeper into the debt trap. Can you really have it both ways? Even with the help of God?

Bank Tax: Brown barking up the wrong tree

When statists sniff an opportunity to extract more tax from their subjects they usually find an excuse quite quickly. Gordon Brown certainly thinks that the solution to all of our problems is to invent a new tax. So it is no wonder that taxing banks is his solution to the global credit crunch. How that is supposed to absolve us from problems such as excessive borrowing, mismatch of maturities in balance sheets or simply bad lending is not explained to the public. In addition we have to expect the worst when it comes to disposal of the loot: will the tax money end up in some sort of reserve fund? or is it a pay-as-you-go scheme like the national 'insurance' or unemployment 'insurance' schemes that we are so familiar with?

EU Alternative Asset Management Regulation

The present plan to regulate the alternative asset management industry in the EU suffers from a number of serious deficiencies: Number one is the lack of a definition of the problem that it is supposed to solve. If there is no problem it is quite tough to design a proper regulatory regime. As far as we can see, apart from the usual rant from social engineers to the left (but also the authoritarians on the right) of the political divide there has not been a convincing proof that hedge funds or private equity funds pose a serious problem to anyone individually or to 'society' in general. So we are left with a legislative 'free-for-all' that gives underemployed and overpaid bureaucrats that represent no one but themselves (and their prejudices) carte blanche to cook up more schemes to make it difficult for ordinary citizens to make a living. As there is no clearly defined problem in the first place it is impossible to pass judgement whether or not the proposed measures are appropriate - an ideal world for the legislators as no one can call them to account or do a cost-benefit analysis of the proposed legislation. (As if anyone would to that in Brussels or any other capital). On the most basic level a major criticism has to be that it is not sensible to regulate hedge funds and private equity funds in the same law. They are similar in nature but it takes a bit of experience to understand that they are two very different animals. We rest our case as it is impossible to convince the average EU bureaucrat that he is barking up the wrong tree. Better to prepare for the wholesale decampment of the alternative investing industry to friendlier shores!

UK: is regulation 'clinically insane'?

The regulation may not be clinically insane (as per Jon Moulton) but it certainly requires a special individual to be able to find one's way through the thousand plus pages of the assorted rules and regulations passed by the FSA. One wonders how many of its staff would pass an exam that tests them about detailed knowledge of all the rules, - we would take bets that the present chairman would not be able to pass the exam. We do not even want to get into the question of democratic accountability as the British Parliament is not fit for the purpose it is designed for. There is no 'talk' (french: parler) as the stooges peopling its benches are basically told what to nod through by the government.

Capital Ratios still at pathetic levels!

There is still more talk than action in banking reform. Volcker rule, Basel III, contingent capital - all these buzzwords are worthless if nothing gets implemented at some stage. News of generous bonus pools give the impression that all is back to normal in the banking world but when we had a look at the capital ratios of some large banks we were genuinely surprised - if not shocked - about the abysmal capital ratios that some of them reveal. Balance sheet totals seem to expand and the simple ratio of pure equity is in the low single-digits, and falling!

Santander to float Bradford & Bingley?

It is just a bit over one year that the shareholders of B&B got expropriated by the British Government and saw control of the business handed over to Banco Santander shortly afterwards. So it may ruffle a few feathers among the investor community if there is talk that Banco Santander may float a stake in Bradford & Bingley or some other holdings in the UK on the public markets here. While Santander appears to be the laughing third party in this sorry affair one would hope that the effort of the previous owners of B&B to get satisfaction in the courts gets a boost from this slap in their face. After all, the situation at B&B cannot have been all that bad. Forensic accountants to the fore! And what about all that talk about 'Human Rights'?

AIG: Compensation Policy in Disarray

News that Peter Hancock is joining AIG with a compensation package worth up to $ 7.5 mio per year drives another nail through the credibility of the Obama administrations attempts to control pay in the financial sector - and in particular in the companies dependent on government support.

Apology to Wall Street

Just how strong the Anti-Wall Street feeling is can be seen from this article on - of all places - Marketwatch. Is it not time that someone listens? (or is everyone AWOL in Davos?)

Austria: Back to the Past

Austria demonstrates that political control of banking institutions by no means assures that banks are managed in a responsible fashion. Numerous banking problems during the past 30 years (Laenderbank, Bawag, Kommunalkredit, Bank Burgenland) prove this point. The most recent example of a bank that was the plaything of politicians and got into trouble while the regulators turned a blind eye is the Hypo-Alpe-Adria Group in the southern province of Carinthia. The bank had to be rescued by the Federal Government in December 2009 and to cap it all two members of the political establishment have now been appointed to the supervisory board. Plus ca change....

Michael Mayo Testimony - Financial Crisis Inquiry Commission January 2010

Nobody has the time to read everything of relevance - but occasionally we like to the highlight little gems such as Michael Mayo's testimony to the Financial Crisis Inquiry Commission.

Banking Reform - 2009 a year of lost chances

News that the former CEO of AIG, Hank Greenberg, is trying to have the regulators and politicians look into the circumstances of the bailout of AIG in the autumn of 2008 is just one symptom that the after-effects of the 2008 banking crisis will be with us for quite some time. Most of the ongoing problems can be traced back to the fact that bail-outs were executed in an arbitrary fashion devoid of any principle and in addition there was no democratic oversight. At least the citizens of Iceland have a say in the (non)payment of the bailout money they are asked to contribute to. In the past year there has been zero progress towards creating a banking system that does not explicitly or implicitly rely on future bailouts by the taxpayers. We are not confident that 2010 will bring more progress.

Productive vs Unproductive Lending

Interesting comment by Bob Prechter about US Banks growing lending to consumers at the expense of lending to business.

Legality of Windfall taxes doubtful

We all wonder about the absurdity of some claims about discrimination, unfair treatment etc but one thing appears to be clear: the practice of putting windfall taxes on certain individuals just because they earn their living in a certain industry will no longer be meekly accepted now that deference to authority is no longer existent. We will watch with interest how the courts deal with law suits brought against discriminatory taxes on incomes earned by workers in the banking (and related?) industries. The Pre-Budget speech by Alistair Darling is certainly good news for one section of the UK population: the lawyers!

PS: Tax on bankers' bonus 'would infringe human rights' (The Times) You read it here first!

BayernLB: State-owned Banks no solution

The sorry state of Bayern LB demonstrates that public ownership of banks is no solution to the problem posed by banking supervision. While a large part of the BLB's losses are due to the sub-prime credits generated in the US a not insignificant part is due to mistakes made by management - in particular the ill-fated acquisition of Hypo-Alpe-Adria just at the beginning of the Credit Crunch in Spring 2007.

Democracy and Bank Bailouts

The lack of democratic control is an all-pervasive defect of modern societies. More and more decisions are made by technocrats and a political class that writes its own rulebook without reference to the citizens. The regulation - or its lack - of the banking system is a perfect example. Just imagine what a system would have to look like that is subject to democratic control. Every subsidy would have to be approved in a referendum. Does anyone think the ginormous amount of taxpayer money would have been approved? We all know the answer and as a consequence the banking system would have to be completely overhauled and made literally bombproof. It can be done - if the will is there. But it is not possible to guarantee every penny that is deposited with banks. There will have to be a split into super-safe banks (strictly controlled, offering low but safe custody of money balances) and a larger sector where the value of deposits can fluctuate in emergencies (similar to the value of any bond).

London: hellbent on destruction

Not enough that the town is still - despite the collapsing Pound Sterling - expensive, that public transport may not get better in a time span that is relevant for those now working and living in the City, that taxes and regulations become more and more Kafkaesque by the day, the legal system is doing its utmost to destroy the image of London as a free and liberal environment by catering to absurd claims for discrimination and harassment. The way to riches seems to lead through the (suitably named) employment 'tribunals' which can at best be described as kangaroo courts at worst as worthy successors to the trials of the inquisition.

Patent for Investment Methods

News that Research Affiliates has been granted a US patent for an indexing methodology that selects and weights securities using fundamental measures of company size, such as dividends and sales should set alarm bells ringing in investor circles the world over. While the ruling only affects the United States there is the danger that US law gains ex-territorial reach or gets copied by other legislatures.
Granting a patent on an investment methodology is akin to granting a patent to the first person that has opened a self-service supermarket. It is nonsense and makes a mockery of the true purpose of patent protection for technological and medical innovations.

Windfall Profits Tax - arbitrary and discriminatory

Some Commentators are toying with the idea of imposing a windfall profits tax on British Banks. We are not trying to defend what some may consider the indefensible but a few caveats merit consideration: if British Banks are to be taxed then all banks in the UK would have to be taxed. How would it affect the foreign banks with large operations in the UK? If they are not taxed this would distort competition. Banks such as Barclays and HSBC would also have every incentive to relocate to tax-friendlier regimes. And most importantly: in this age of heightened awareness of 'human rights' - how can a special tax on a single industry be justified? if a discriminatory tax such as a windfall tax on banks is imposed it would clearly be the duty of the bank's managements to take this case to the relevant Courts - in particular the European Court of Human Rights. And if banks can be taxed at will, what about football players, entertainers, lawyers and anyone else who one day catches the attention of freely-spending politicians?

EU competition policy arbitrary

When a major bank states that the EU may force 'unforeseen' asset sales alarm bells should be ringing. We have repeatedly stated on these pages that the competition policy is highly arbitrary and undemocratic. The people in charge (usually lifelong members of the employment club exclusively staffed by lifelong politicians or members of think tanks or universities) have no democratic mandate and are only subject to minimal and ineffective outside control. There are no proper procedures in place that make regulation transparent - otherwise how could it be that there could be unforeseen asset sales? If the rules would be clear every observer could predict exactly what measures would be taken to ensure that competition exists in the banking sector. Instead there are discriminatory rulings straight out from Central Command. We hope that the managements of the banks concerned have the guts to take every available legal step to delay the effect of measures that would harm their shareholders.

Ostentatious Consumption - good or bad?

Goldman Sachs' Lloyd Blankfein has asked his employees to avoid being seen as big spenders. The jury is out whether this is just a cosmetic PR gimmick or whether Goldman itself is in some doubt about the justice of last years highly selective bank rescues funded by the public. But however that may be, today's headline that a hedge fund manager is splashing out a reported £60 million for a super yacht may not help the alternative fund management industry in its effort to convince European legislators to enact more lenient industry regulations.

Breaking up big banks? There is a middle-way

A middle way to safeguard the utility component of banking and isolate the riskier parts of the business would be to require all investment banking and securities dealing to take place in separately capitalised and regulated subsidiaries. Cross-subsidies not only pose the risk of cross-contamination with risk they also make it difficult for management to run the business as the profitability of individual business lines is not always easy to assess.

New Credit Suisse compensation structure

It remains to be seen how the growing complexity of compensation schemes such as the one published by Credit Suisse will affect the ability of the sponsoring organizations to attract, motivate and retain talent. Given my experience, the annual discussion of expected and realised bonus allocations has already taken up a lot of nervous energy among the staff when things were much simpler. The new layers of complexity open the door to more arbitrary decisions and distracting political infighting. Most employees have zero influence on decisions taken by top management (often by the CEO alone) and cannot be expected to suffer from the impact of these decisions when they turn out to have been wrong (which may be a long time after the decision has been taken and - even worse - a long time after they were awarded their very conditional compensation).

Mayor Boris still does not get it!

One nearly has to feel sorry for Goldman Sachs - though I would hazard a guess that the people there would not give a fig for our sympathy. But when even politicians such as London's mayor Boris Johnson who do not really have a say in banking regulation start taking aim at banker's bonuses we have to take a stand. Fact number one two and three in the sorry saga of the credit crunch is simply the total failure of banking supervision. And Boris and his fellow-travellers in the political class are barking up the wrong tree. All the politically-inspired interventions in the banking crisis poured oil on the fire and if anything made matters worse (apart from being arbitrary and discriminatory in their treatment of the various banks involved). And even more regrettable is the failure of the 'International Community' to agree on improved and effective rules and regulations.

EU wants automatic exchange of Tax information

The EU develops more and more into a bureaucratic and undemocratic monster. The latest news is the 'demand' for an automatic exchange of tax information about foreign bank customers between member states. The EU was originally declared to be an economic union but the main instigators behind the 'project' always intended this stated purpose to be the Trojan horse that would allow their statist fantasies to be imposed piecemeal on an unsuspecting population. Napoleon and Hitler certainly would have been well-advised to try this approach rather than go the route of military conquest.The raison d'etre of a state is that the citizens of that state enjoy full sovereignty over their affairs. Delegating powers to a foreign authority - especially one that they have no control over - is a grave violation of that principle. In the case of taxes there is no reason to inform any foreign government in any way. The whole purpose of putting money into another country is to remove it from the sticky fingers of the home government. The host country than in turn can tax the affected funds in any way it wishes. In the interest of tax harmony it should not favor foreign investors in any way and give them different terms than those offered to home country investors.The home country of the funds concerned has in turn full authority to tax the money as long as it is in the country. If it so wishes it can create an 'Iron Curtain' and prevent money from leaving the country.Just imagine what 'full information' would have meant in past periods: would the Dutch have 'informed' the corrupt French regime of Louis XIV about the investments that prudent French citizens had made in Amsterdam, or should the French government of the 1920s have informed the thuggish Communist government of the USSR?Europe prospered BECAUSE there was no uniformity of government and religion had finally given way to a civil regime after centuries of struggle. How much longer can the control freaks in Brussels be allowed to destroy the fruits of these battles?

Paradox of Banking reform

News that some investment banks are on the way to make record profits this year and as a consequence will be able to pay very high bonuses to their staff highlights a paradox: Governments and Regulators so far have been unable to agree on any meaningful and coherent approach to banking reform but at the same time are unhappy about the results of their inaction. Businesses that are successful are encouraged to do the opposite of what they are supposed to do in a market system: to maximise their profits. The result is a muddle where firms may avoid paying out the bonuses they think their staff are due. In a roundabout way this may well benefit the affected staff in a positive way as the higher level of retained profits will lead to higher share prices in the longer term. This will allow staff to realise higher profits on their share options and shares.

Goldman Sachs - Investment Bank or Commercial Bank?

The answer to this question may be obvious but since autumn of last year Goldman Sachs has switched to being a bank. And the problem with Goldman now being a bank will really be the following: how can the firm justify the banking status when a disproportionately large amount of revenues/profits is derived from trading or advisory work? How much did Goldman really lend to business and consumers during the past 12 months it is a bank? In addition, how much longer are banks allowed to conduct non-bank business, e.g. own other businesses (even if it is via the conduit of private equity - managed directly or farmed out to other PE firms).

Implicit government guarantee for banks

Niall Ferguson refers to the the implicit government guarantee for financial institutions deemed 'too big to fail' (Daily Telegraph, 6 October 2009) in a way that seems to imply that managements managed their business recklessly because they relied on being baled out if things did not work out well. We would dispute that managements were that devious and prefer the alternative explanation that - like most market participants - a lot of factors combined to overwhelm managements. A lot of mistakes were made and warnings were ignored but were few were really able to predict the extent of the panic that finally pulled markets to the brink of the abyss. What we are now really worried about is the fact that very little progress is being made in reforming the financial system in a coherent and speedy way.

Who should work in financial services?

An article in today's Wall Street Journal is a timely reminder to repeat the career advice we often give when asked the question: 'Should I pursue a career in financial services?' The key point we always make is that you should not choose your profession based only on the expected level of compensation. During the past ten years too many people were lured into City and Banking jobs based on the reports about extremely high salaries paid to some lucky professionals. But this exceptional period may not last forever and spending your working life doing a job that you are not really passionate about is a life of misery. When I started to work with a stockbroker I did it because the stock market was already one of my hobbies during High School and I would have worked in the Securities business even if salaries were just on a level with most other skilled professions.

Lloyds TSB - Neelie does it again!

This is a full-time job - keeping up with the arbitrary rulings of an unelected bureaucrat in the twilight years of a career spent sailing through various public sector jobs! Mrs. Kroes even finds time to chair Poets of all Nations in her spare time. But on a more serious note we think that the latest threat to Lloyds TSB - while maybe justified in principle - is lacking any moral justification as long as no one (and we wait for contributions from any reader who can provide them) has given us an explicit explanation of the yardsticks that the EU Kommissars apply in their rulings. (see our earlier comment further down for more on this scandal).

Employment Tribunals as job destroyers

The avalanche of employment legislation during the past 10+ years certainly has done nothing to make London - or the UK - a more attractive location for business. Blaming the EU does not wash as most of the legislation was home grown. A particularly vexing institution for employers are the employment tribunals. They can only be described as 'shadow' courts where normal standards of due process and above all common sense do not exist. While employees often can feel unjustly treated by their superiors and colleagues - and we would have a few stories to tell as well - the growing absurdity of the claims made by some employees can only be explained by a desire to abuse the tribunals in order to make a fast buck - or million in some cases. Young people just past the mark of 30 years claim to have suffered nervous breakdowns, be tormented by nightmares and claim to be unable for any work because of bad treatment they have suffered at work. No proper proof is needed if implausible accusations picked right out of a soap opera are taken at face value by members of the tribunal who are unaccountable and hold their positions thanks to the machinations of an inscrutable government bureaucracy. And best (or worst) of all - the accusing employee has no costs to bear, file a claim and let the system take care of the rest. We can only say - foreign employer, if you come to Britain, be warned!

IIR warns on lack of global banking rules

We usually view the opinions of the Institute of International Finance with a pinch of salt as it is a think tank and/or lobby funded by the banking industry. Yesterday's appeal to the participants of the forthcoming G20 meeting in Pittsburgh served as a reminder that one year after the collapse of Lehman and more than two years into the banking and credit crisis precious little progress has been made to forge a consistent solution to prevent a similar crisis in the future. We doubt that high-profile meetings will really produce more than pious sermons and suggest that a congress should be organised with the task to iron out a lasting solution. After all, the Congress of Vienna was also not just a photo-opportunity for the assembled dignitaries and the same can be said for the Continental Congress in the 13 founding colonies in America.

BIS report: higher taxes on larger banks

A new study by the Bank for International Settlements (BIS/BIZ) suggests that large banks should be taxed at a higher level to compensate for the risk that they pose to the taxpayer. But I think that differentiating tax rates for of different size would open a can of worms - what is the right level of tax? what size is the cut-off point for different tax rates? A more simple way to restrict the trend to ever-larger banks would be to limit the (implicit or explicit) state guarantee to a certain amount. This would give an incentive to clients and depositors to spread their business around and lead to a more balanced industry.

Neelie Kroes dabbles in bonus debate

We would have been disappointed if Neelie Kroes would not have tried to get involved in the debate about banker's pay and bonuses. After all, every bureaucrat has a natural urge to increase his power whenever and where ever the opportunity exists to do so. And even better when the taxpayer pays for you and the citizen has no chance to control your action. However, when judging the competence level of Ms. Kroes' department we always have to remind ourselves of the curious fact that while the department refuses to give detailed information about the background of its staff there are the portraits of the drivers on the website. Talk about high life in Brussels! Repeated requests to disclose the yardsticks that are applied during the investigation of competition cases have been stonewalled. So we do not expect that it will be made transparent what type of bonus and pay regulations will be applied in the case of banks that receive state support.

Change of guard at Morgan Stanley

As John Mack moves from the role of CEO to become Chairman of Morgan Stanley at lot of coverage will be given to his record at the firm after his return four years ago. I think that he has done a remarkable job given that his tenure encompassed the most challenging two years that any leader of a financial services firm has ever had to live through. The stock price of MS at one stage priced in a possible demise of the firm (the same happened to most other bank and broker shares) and was an inevitable exaggeration caused by a market panic. Structurally, however, Morgan Stanley suffers from the merger with Dean Witter ten years ago. One of the great advantages the main rival, Goldman Sachs, enjoys is the fact that the firm in all its history only ever pursued small add-on acquisitions. This organic growth solidified the company culture and created the opportunity to develop the firm's leadership without recourse to outside hires.

What is 'socially useless' banking?

Senior Bankers have recently felt compelled to contribute to the debate about so-called 'socially useless banking'. The key question would be the definition of what is or is not socially useful/useless. I think one could well leave the answer to the market. No one is compelled to buy supposedly 'useless' products, be they derivatives, hedge funds or - to generalise the problem - expensive luxury watches or cars. Common sense should be enough to settle the question. Unfortunately there are many ideologically motivated fellow travellers joining the discussion as it appears to be a good opportunity to pursue aims that have little to do with the problem (more state, more taxes etc)

London Hedge Funds stay despite tax hikes

We would not celebrate too early and condone the long-term impact of higher prospective tax rates on London's standing as a financial centre. The effects will modify behaviour only at the margin and as taxes are admittedly not the only factor that is considered when locating a business the impact will be diluted by the weights businesspeople attribute to these other factors (legal and other services, infrastructure, quality of life, availability of skilled labor). The real danger is only that once a certain tipping point is reached decline can be very rapid and irreversible.

Ossie rallies the troops at UBS

Having undergone an interview with the taciturn no-nonsense Ossie Gruebel when he was the head of Eurobond dealing at Credit Suisse White Weld in the late 1970s I always carry the highest respect for him ever since. UBS is still a brand name that will make it easy for clients to forget the missteps of the past few years as long as they get the right service. Reading the memo that Gruebel penned for his staff of 70,000 I cannot help but think that maybe the staff numbers are still a little bit on the high side.

The Fed CAN monitor systemic risks

A senior fellow at the American Enterprise Institute argues that the Fed cannot monitor systemic risk as that would be tantamount to ask a thief to police himself. Without going into the details of his argument several aspects come to mind that would negate this judgement: until now the mandate of the Fed was not strongly focused on playing the role of a regulator of the financial markets and system. Instead, price stability and economic growth were given priority if not exclusive attention. That mistakes were made in this department cannot be denied (and they are partly due to the mixed message sent by the duality of the set targets). But that does not mean that the Fed could not be more effective if it is empowered to be a more forceful regulator. We would also hope that the Fed does not only monitor risk but will have the tools to prevent them in good time.

Blueprint for Global Derivatives Market

Derivatives are in essence a bet on the price of the underlying asset. Economically they are a zero-sum game where the losing side funds the gains of the successful side. Like all bets the derivative markets serve to redistribute wealth minus the costs of running the market. As a consequence of the credit crisis reform of the derivative markets has moved to the top of the political agenda. This is not the place to discuss the role that derivatives have played in the financial crisis. But if more players are active in a market it can only be expected that moves above (and below) underlying value are exacerbated - despite the fact that derivative instruments are often claimed to help move prices back to their underlying trend. I do not agree that moving all derivative trading to exchanges is necessary to avoid bubbles and excessive risks associated with derivative positions as advocated by many commentators. For an new example see the paper just published by Deutsche Boerse. Instead, I think that higher capital requirements to support open positions will be sufficient to reduce the danger (real or imagined) attributed to derivative markets.

Seven dwarfs - interesting comment from a Reader

Your post (Seven Dwarfs in Stockholm) is interesting in that it confirms the tendency to first blame others, the system etc when being held to account for behaviour. That type of self-righteous response never convinces anybody else outside the own group. The politicians' thrust may be crude and may have negative side-effects, but it is triggered by an apparent unwillingness of bankers to appreciate how others, society at large perceives their behaviour and its crippling effects on the financial system and the economy and to take responsibility for that. Your type of response will only make politicians more determined to ensure bankers will not be able to go the same path again and you will become more convinced of the stupidity of politicians. It takes us nowhere. A meaningful step forward would be made if bankers could say they appreciate the concerns of society and are willing to come with new responsible remuneration systems that also pay justice to the inherent risks ultimately born by society. If bankers could be transparent on how they go about this, engage in a serious dialogue with society on remaining concerns, then the need for blunt politically driven regulatory measures would evaporate.