Investment Banking: tough to make it pay

A quick glance at the stock price history of Deutsche Bank illustrates how difficult it is to make sustainable profits out of investment banking. Since the early 1990s the share price has only made moderate gains. So news that the bank may soon ask shareholders to support a Euro 9.8 billion capital raising leads one to ask how the management will create value to justify this capital increase. In retrospect it appears that even a leading position in investment banking does not guarantee the profits that management has repeatedly promised its shareholders. We also foresee problems in making the planned acquisition of Deutsche Postbank a very profitable investment as most of its 5 million customers belong to the less-affluent parts of society or keep their account at the bank only in order to facilitate simple payment transactions.

FSA fines Goldman Sachs $31 million

The way the FSA arrives at the amount of fines levied is shrouded in mystery. Only dictatorships like the good old USSR and the like were allowed to operate in this fashion. London as a place to do business is on a very slippery slope and it should be remembered that its pre-eminence has only been achieved over the past 20 or so years. Before that finance was a cottage industry at best. People are highly mobile, communication is much better than 20 years ago and decamping to friendlier shores should not be too difficult - especially when half the top professionals are foreigners anyway. The backoffice can safely be handled in places like India.

Masters of the Universe: Memento Mori!

The report of a senior derivatives trader jumping to his death after snorting cocaine should be a warning sign to the 'Masters of the Universe' that fill the ranks of banks and investing institutions. Given the extraordinary sums that many of them earn it is easy for them to lose touch with reality and believe in their superiority while at the same time forgetting that their good fortune is partly only  due to the confluence of several factors that contributed to the enormous increase in the profitability of the sector during the past 20 years. Just to put it in perspective: in the late 1970s the average equity stake of Goldman Sachs partner was still less than $ 1 million! But this did not hinder them to give an excellent professional service to their clients and to enjoy a social prestige on a par with the best professionals in medicine, law or any other profession.

Barnier: get out of Europe, fast!

That is the only message any financial service professional with a brain between his ears will get when he reads the interview that the EU's financial service supremo, Monsieur Barnier, has given to the Handelsblatt. In it he claims that 'bankers' have acted "irresponsibly, amorally and unethically". We would be the first to admit that not all was (is) well in the financial services industry but to have the senior EU bureaucrat uttering a wholesale condemnation of all those who are working in the industry can only be called scandalous. That such a statement comes from an apparatschik who is in fact responsible to no one except the puppet masters among the ruling political clique in Europe, and especially France (do we want to remind you of Sarkozy who reminds us more of more of Louis de Funes in his heyday?), underlines the fact that the future of the financial services industry in Europe will one day be a copy of the common agricultural policy.

Banking Reform: Tinkering leads to bureaucratic monster

Reports that the BIS wants to collect more data about risk exposures in banks confirms our argument that current efforts to reform the banking system lead to more and more intrusive micro-management (and second-guessing) of decision-making in banks. The key problem with the banking system today is that there is simply no safeguard against a bank run. The system relies on the illusion that short-term deposits can be used to finance longer-term assets. Until a solution to this problem is found no amount of financial regulation will be sufficient to make the system 100 per cent safe and able to survive a panic without reliance on government support.

Sauve qui peut!

Today's news is dominated by triumphalist announcements by the bureaucratic supremos that want to control (strangle?) the financial markets in the EU. Michael Barnier and Jean-Claude Trichet are both products of the statist mindset that is drilled into the brains of the French bureaucrat (or 'Elite' as they call tend to call themselves). But after checking again we found not the slightest shred of evidence that either of them has ever earned a single penny by providing useful services to their fellow citizens. They spent their whole lives at the expense of the taxpayer and both enjoy wielding unprecedented power in artificial bureaucracies that allow them to issue edicts without any democratic restraint. If Britain wants to preserve any chance to keep its position as a world-class financial center it has seriousely to consider to opt out of regulation that is imposed from outside. The alternative is the acceleration of the migration of qualified experts to friendlier climates like Switzerland and further away.

US sanctions akin to tolls exacted by robber barons

It is highly problematic that banks based in other countries are forced (blackmailed?) to obey the politically-inspired wishes of narrow cliques and lobbies in the 'land of the free'. Sanctions against North Korea or Sudan may well be justified in the eyes of some or even a majority but that should not give the US the right to unilaterally decide for other countries were the governments - and even less so the citizens - have had no say in the matter. How would the US react if a European country imposes sanctions/penalties on IBM or Apple because their products are sold in a country that has been put on a sanction list by that country? Due to the technicalities of the international payment system banks are by definition involved in some US business (however tenuously) when they deal in US dollars, but this fig leaf should not be accepted without forceful resistance by the governments of other countries whose banks are penalised. This type of penalty is much more like the tolls exacted by robber barons in the Middle Ages.

HSH Nordbank: Management plays power games

The infighting  between the CEO of HSH Nordbank and former senior managers could be called absurd if it would not be a symptom of a serious neglect of the real problems the bank faces. Claims and counterclaims revolve around the possibility that the CEO entrapped another board member for having disclosed a confidential management document to the press. Time and again senior management becomes too self-centered and the companies that are entrusted to their care suffer for it. Recent examples illustrate the point: Bear Stearns, Lehman, Royal Bank of Scotland all ran aground while autocratic managers were at the helm.

FACTA: Will the EU stop US power grab?

As the implementation of the Foreign Account Tax Compliance Act by the US authorities draws nearer, it will be interesting to see how the usually toothless EU bureaucrats react to this one-sided power grab. We see no reason to accept the US intention to extend the reach of their tax law beyond the US borders. If the IRS wishes to have full control over the assets of US citizens it should set up a system of rigorous border controls and monitor all transfers of asset into and out of the country. Alternatively, the US can impose withholding taxes if it so wishes but as the country is dependent on foreign investors supporting the profligate spending by government and consumers alike it would only hurt its own interests by doing so.

A Stalinist Approach to Banking

The head of Bafin, the German banking regulator, boasts that his staff will become 'permanent guests' in all major banking institutions. This confirms our long-standing theory that only ever-closer control of all aspects of banking will satisfy the politicians' urge to supervise the business and make it conform to their wishes. Every rule needs interpretation which means another rule which leads to another rule and so on. As no one wants to make a mistake each decision will have to be cleared with a supervisor. At the end there will be a stalinist system of one 'commissar' standing behind each front line banker and the banking system will be completely ossified.