Capital Markets Union

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

Capital and Chutzpah: Why US has more than Europe

Dark Pools - who brings light into them?

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

Money Laudering: what is a 'suspicious' transaction?

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

Credit Suisse: Old wine in new bottles?

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

Buying a Hedge Fund is not so easy

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

Future of 'Universal' Banking Model in doubt

The sudden exit of another Bank CEO - now at Barclays Bank - is a stark reminder that managing a 'Universal' Bank requires near-superhuman skills, and a good portion of luck (or friends in high places as JP Morgan's Jamie Dimon or Lloyd Blankfein at Goldman Sachs would probably confirm).The business model did work quite well in a period of slow technological change, markets that were quite insulated and regulation that kept unwanted competition out.But a universal bank is basically nothing but a financial conglomerate and the conglomerate model - while offering certain advantages - is not one that has demonstrated that it is likely to be successful in the long run. Who still remembers names such as LTV or Gulf+Western? Both were high-fliers on the stock market until they hit the buffers as they become unmanageable, their mastermind retired or they hit unfavourable economic headwinds.

Anti-Money Laudering measures bark up the wrong tree

Prevention, detection and prosecution of money laundering has become big business during the past 20-30 years. And it will keep on growing and feed an ever-expanding army of regulators, compliance officers and assorted consultants. By definition the term money-laundering can be applied to nearly all business transactions and it taints everyone - even innocent parties - that is involved in commerce. For who can with 100 percent certainty say that someone he transacts with is not in some way associated with a proscribed activity? As re-iterated on this site for a few times money-laundering legislation is only a get-out for poor legislation and poor government. If the crime (and quite a few of the proscribed activities do not rank as crime in everyone's eyes) would have been prevented, detected or prosecuted, or even better, bad laws would not have been enacted, the need for anti-money laundering would vanish. High and arbitrary taxes (tobacco, alcohol, VAT), discriminatory subsidies (EU agriculture), moral crusades (drugs, prostitution) are all imposed on upright citizens and cannot be justified by any standard. It is also noteworthy that money-laundering accusations are regularly added to accusations that are not really involving any money laundering. One example would be where the someone is accused of tax fraud. Naturally there will be some financial transactions involved but to claim that money laundering was involved is not grounded in any rational sense of justice. But it suits today's political class to create a climate of all-pervasive supervision and fear among the citizens they are supposed to serve.

We are an Earnings Machine

Claims Steve Schwarzman (CNBC) - but is it very diplomatic to boast so openly about the profits Blackstone makes off its investors? Maybe a little bit of PR coaching might be appropriate - one still remembers a birthday he celebrated that was supposed to cost $ 1 million.

London the global Bitcoin Hub?

Pull another one would be my first and only reaction. I may be of the wrong generation but would still stake my reputation on the fact that this will end badly. In an age where Central Bankers are close to act like petty criminals and steal money from Savers all over the World it is unlikely that a Bitcoin will ever provide a reliable store of value. A gambling chip maybe, and we all know that people want the excitement of rolling the dice, even if statistically they are playing a losers game.
London stakes its claim as global bitcoin hub (Reuters)

The 'fun' (ugly?) face of the City

The one thing that surprises me - given the amount of ever-more sophisticated technology that is available - is the survival of the voice-based interdealer brokers. As this incident demonstrates the level of sophistication needed to fulfill the role of go-between is not all that great. So may the level of 'client entertainment' have a significant role to play? Sooner or later the penny will drop and another source of generous income for many staffers will be rationalised away, or fall foul of tightening regulation.
City traders make new recruit eat 8 quarter pounders (Mail on Sunday)

Jamie Dimon clings to outdated business model

No surprise that Dimon defends the status quo, bigger is better and the banking department store model is best (Reuters). But I wonder if he reads the trends in financial services the right way. Specialist providers may well be the way of the future, especially if they make good use of technology. Payments, Fund Management, Investment Banking Advice, Securities Trading all can easily - and cheaply - provided by standalone providers. One only has to wonder why there are still so many bank branches on the High Streets. The only - and probably the real - reason that gives JP Morgan and other super large banks an edge is the (sad) fact that customers - and unfortunately politicians and the regulatory minions - consider them too-big-too-fail. That still pushes clients their way that would otherwise consider cheaper and more nimble competitors. The growth of new product providers is therefore stunted which gives the large banks the opportunity to cling to their outdated business model.

Single Capacity to protect counterparties - notes on Goldman/LIA dispute

Not a question of being smarter, though that may well be the case. It is a question of morality - or lack thereof. When firms are feted as being the 'most powerful' investment bank this may go into the head of staff and senior management. That success is only measured by the size of the pay packet shows that morality is unlikely to be top of the priorities in the organisation. The setup of financial markets invites problematic relationships between firms and their customers (client would be an inappropriate term though it is used ad nauseam by staffers). A lawyer is smarter than the average user of legal services, but only in this narrow field of expertise. No one would need a lawyer unless he has an informational advantage, i.e. knows the law better than the client (here the term can be applied with justification). Goldman and other financial service providers WILL know more than the client, that is their job. But the (moral) imperative is not to abuse this advantage. This particular case will make its way through the courts but it appears from the outside that the Libyans were in all likelihood even more in need of being protected as a client and not just considered a counterparty in an equal exchange. A system of single-capacity, splitting market making and 'advice' would go some way in preventing similar scenarios. It would not automatically eliminate conflicts of interest, maybe a code of practice for the protection of customers would also be appropriate. Self-styled 'Business principles' devised by the firms themselves are not sufficient.
Goldman Sachs profit on disputed LIA trades back in focus (Financial Times)

QE - should you laugh or cry?

More and more desperate calls for all-out QE in the Eurozone make me laugh and cry at the same time. Laugh because it is not very likely that the hoped-for revival of the economies in the weak member states of the zone will happen. One has to look at the micro-economic aspect of the problem: why would any business invest/hire just because the rate of borrowing has declined by some small fraction? Given high tax rates - and they are going up all the time, openly or in stealth fashion (think 'fees' and 'charges' by public bodies) it should be expected that the entrepreneurial class will cut back on its work load. Why not take it easy if the larger part (60, 70pct if one adds in tax on taxed income, i.e. VAT, stamp duties etc etc) of additional income is confiscated by a parasitic caste of politicians, bureaucrats and their favoured beneficiaries? And why would I cry? Because the chances that the march into ever-higher control of our lives via the permanent avalanche of ill-thought-out legislation and higher taxation/spending is not going to be reversed anytime soon.

Does Bini Smaghi pass the competency test?

Lorenzo Bini Smaghi may have many (too many?) fine qualifications, but he is basically an academic and bureaucrat who never in his life made a loan or traded a security. So it is not clear whether he would pass the newly-introduced tests that are now de rigueur under the UK 'senior persons regime'. It may well be that he would not want to undergo this water-boarding by anonymous and unaccountable regulators - understandably so as it is nothing but a new version of a black-balling that belongs to a long-gone area. But if he is seen as competent enough to supervise one of the largest banks in Europe one wonders what all the ink and paper worth on banking regulation has really been wasted for.
Regulators must check all senior bankers (Daily Telegraph)

Being a 'Global' Bank brings extra Risks

One has to wonder if being a 'Global' Bank is really an intelligent business proposition. It requires Superman/woman to manage far-flung empires and activities that can span more disciplines than any normal human can realistically be expected to fully understand. And a particular risk factor are differences in business culture that senior management - be it located in New York, London, Frankfurt, Zurich or Tokyo - can hardly be expected to appreciate to the extent that would be required. Deutsche Bank lending money to build another hotel/casino in Las Vegas? Citigroup lending money secured by warehouse receipts in Chinese Ports? An Austrian Bank lending money to a steel business in Russia? Do these activities make sense or would concentration on a geographical area one understands and is familiar with be more profitable in the long run?

Succession planning at Santander - an example to follow

Yesterday's announcement of the death of Emilio Botin, the man behind the immense growth of Banco Santander over the past decades, highlights the need to prepare for the smooth handover of leadership. While Santander may appear to be a special case - the succession is clarified on the next day - every business should be able to replace key personnel without delay. This applies not only to CEO roles but all managerial positions in the organisation. Internal promotions should be the rule as they boost morale and team spirit and usually are cheaper and quicker to realise.

Regulators know no shame when they are after taxpayer's money

European Commission to investigate possibility of levy to fund EIOPA (IPE)The EU is particulary shameless as there is no proper supervision by any real government and the pretend-parliament is just a resting place for party hacks.

7-Yr Bonus Clawback? You must be joking!

That is what a former Wimbledon Champion would probably say to the psychopathic politicians and regulators (including reckless Bank of England officials busy stealing from Savers). How anyone can be expected to work for seven long years and not be sure that the hard-earned money will be his for good is beyond me. Anyone contemplating a career in banking in the UK should have his head examined. Meanwhile our politicians are busy cleaning up the problems they or their predecessors created, safe in the knowledge that however big the waste of money they will NEVER be asked to compensate the taxpayer.

Why UK's new bonus regime could be the world's toughest (CNBC)

Regulatory Nightmare is here and now!

I quite often said that the control freaks in charge of our lives - i.e. psychopathic politicians - will not be satisfied with extending ever-more intrusive regulation into all aspects of society. In the realm of banking and finance that would mean that - in addition of the armies of 'compliance' staff that is an expensive millstone around the necks of savers and investors - there would ultimately have to be one 'Kommissar' next to each productive employee. Ultimately the whole economic system would atrophy under this burden - the direction is clear for anyone who has seen the 'success' of the Cuban economic model.
U.S. Seeks Eyes Inside Banks' Offices (Wall Street Journal)

European Bond Markets have come full Circle

A few years ago (2005) we warned that anyone continuing to hold Italian government bonds yielding a measly 15 basis points more then German Bunds would be reckless. Now it is time to put out the warning again. While conditions may not yet be as extreme as in those days it is only prudent to consider an exit and take what is effectively a free option. Unless you believe in full political and fiscal union in the Eurozone this prepares you for the next (inevitable?) economic and financial storm.

TLTRO - a can of worms

Last week's announcement by the head of the ECB, Don Draghi, that the Eurocrats will pump up to € 400 billion into a 'targetted' long-term refinancing operation immediately makes me curious about how exactly this new bureaucratic monster is supposed to operate.
Leaving aside the question whether or not this new confetti money will do much good to the real economy in the Eurozone area there is a number of problems even a cursory look at the scheme brings to mind. So when one member of the Commentariat calls the TLTRO the "Star of the Show" (Gilles Moec, Deutsche Bank) we would warn him to be less star-struck and more dispassionate. But maybe his employer really does need this shot in the arm (or gift from heaven, maybe that is the star Moec refers to)?
So I cannot wait for the full details to be published. A few critical points that need answers: Who shall be the beneficiaries of the additional lending? Giant Buy-out funds speculating on ever-rising share prices certainly will not be among them though there is a displacement effect as banks may well use the TLTRO money to fund one group of clients and therefore have more money available to property, buy-out groups and companies seeking to finance M+A deals.
And what exactly counts as a small (and possibly mid-sized) borrower? And who is going to monitor that the TLTRO money really goes into ADDITIONAL lending to this privileged group of clients. And what if most or all of the lending is done in 'stable' economies such as Germany or Austria?
One thing is certain - programs such as these will inevitably lead to additional jobs for the boys and increase the ever-expanding number of bureaucrats working for the ECB, the local Central Banks and favored 'Consultants' charging exorbitant fees that are ultimately paid by savers and taxpayers who as usual have no say in these dirigist extravaganzas.

Bond business - down but not out

My prognosis for interest rates, esp bond rates, for the next few years gives a high probability that rates will meander around a relatively low base level. So the view that the bond trading business will be less profitable from now on is quite justified. But one has to remember that volumes during the previous 5-10 years were abnormally high. Declining and/or volatile interest rates are manna for bond traders. In addition, many innovations - some useful, some less so - in the bond market created new business opportunities. But there are no new products on the horizon, and some 'innovations' turned out to be duds. But taking all this into consideration, given the enormous volume of outstanding bonds and the large number of investors and issuers in a globalised bond market one can expect a good but down-sized bond market business from now on.

US blackmails banks - EU useless

The US 'authorities' (if you can name them as such as the country becomes more and more ruled by out-of-control lobbies and zealots) prepare another drive-by shooting aimed at a foreign bank. This time it is the turn of French BNP-Paribas. The 'crime' was that the bank supposedly conducted business with a peaceful country as that is the only way one can describe Iran. Or can anyone point to an occasion where the country has been the aggressor and not the victim (do I need to mention BP, or Mossadegh?). So it is with growing anger that one watches the spectacle of a useless Eurocracy that drowns Europe in more and more intrusive and expensive regulation but is afraid (incapable? lazy?) to put a serious warning shot in the direction of the United States demanding that the extra-territorial reach of its 'laws' be stopped immediately. Europe - or at least its citizens - have no quarrel with Iran and do no longer want to support unaccountable lobbies and the policies they have imposed on the US government.
PS: Cleptocrats in the US have just upped the ante - $10 billion, and rising? Basically it is the behavior of the typical criminal, grab what you can get away with, only this time it is the government (or the shady lobbies that push idiotic and counterproductive foreign policies on a hapless majority).

QE ineffectual and criminal

Barclays: how not to manage a business

Announcing that the number of jobs in the investment banking unit will be cut by 25 per cent over the next three years is as bad a decision as can be. Firstly it sends a clear signal to anyone who can get a job elsewhere to do so as soon as feasible. The remaining staff will be spending most of their time second-guessing where and when the next cuts will be made. Even worse, the instinct for survival will make it essential that each and every one tries to protect his employment by trying to put the knife into his or her colleagues' back. Above all it is not even clear why a down-sized and provincial version of Barclays - not dissimilar to a building society or - shock horror! - the Co-op bank, will be more successful in the long run. Is there something JP Morgan or Bankamerica know that Jenkins and the regulatory/political cabal here in the UK don't know? But never mind, Shipping, Car Manufacturing, Textiles, Steel Making etc were successfully destroyed by the Powers-that-be, so it matters little if British Banking is blow-torched as well. Makes it so much easier for other financial centres - in the EU and further away - to eat the City's lunch.

London - what would be effect of 'Brexit'?

When senior banking figures warn that London's position as preeminent financial centre would be at risk from any British exit from the EU must be taken seriously. But at the same time one should not overlook the other side of the argument. Language and legal traditions aside the first question that comes to mind is the following: where would all the banks that are supposed to leave move to? A battle royal would ensue between the obvious candidates, Frankfurt and Paris. But some banks might also consider Amsterdam or Brussels, and the main European banks might find it unnecessary to maintain a major location outside their home country. If it ever comes to the question of 'Brexit' the main deciding factor might well be what the regulatory and tax regimes look like in the UK and the various possible alternatives inside the EU.

Absurd Asset Quality Review

Every bank is bust if all depositors want their money back at the same time - unless a thorough reform (which we support) has mandated a strict maturity match (Disregarded by the Solons in Brussels, Frankfurt etc). It is also always possible to find a scenario that results in a bank failing a stress test - how about a Mega Earthquake in Yellowstone? an escalation of the Ukraine conflict or a nuclear exchange somewhere else? So to employ 25 Deloitte staffers to check more than half (which half?) of all loans at Austria's Raiffeisen Landesbank Oberoesterreich (12/13 Balance Sheet € 40 Bio) seems to be an expensive waste of money. The depositors/borrowers/equity owners have to pay the hefty fee of € 4.5 Mio for this extravaganza. It remains to be seen how 'expert' the Deloitte people are. Can we assume that they are banking experts? or just box tickers? Will these commissars really be able to properly assess each and every borrower? Are they just recent school leavers and Deloitte charges full whack for their (questionable) services? Was there a proper tender process when the contract was given to Deloitte? As the team will stay at RLB for a full five (!) months each of the 25 will be charged to the bank at a fee of approx. € 40,000 per month (!!). Talking of overpaid bankers! Now multiply all these shenanigans by a massive number - the same game is being played all over Europe, without a single citizen having had a chance to have a say - and you can see what massive amount of wealth destruction is being conducted at the behest of unelected politicians and their minions in the regulatory and central banking institutions. And the taxpayer is still not off the hook when the next disaster hits the financial industry!

Celebrity Fund Managers can be an Achilles Heel

Relying on Celebrity Fund Managers can be risky even for the most prominent Fund Management House. Recent changes at Pimco are just the latest in a series of defections by high-profile managers.

Banking Stress Tests of limited value

Every bank can be shown to fail under certain assumptions. For example a 50 percent drop in property and/or share prices, a steep increase in interest rates etc. So you can always design stress tests that result in a positive or negative result, depending on the scenario you choose.

Succession Planning often neglected

A new study released by Stanford Business School highlights the cavalier attitude that many organisations take when planning for the eventual replacement of their executives. While we are happy to assist any client in his search for alternatives we think that the first stop in any well-managed company should be their own pool of seasoned and well-trained managers.

Monitoring Employee behaviour - a tricky problem

Despite the rapidly rising number of compliance officers and the tide of regulatory legislation the age-old problem of supervising employee behaviour keeps posing serious challenges to top management of banks and fund management firms. Surely the solution cannot be to put one compliance officer behind each and every trader or fund manager. And who would oversee these compliance officers? and so on....
Only management and an enterprise culture that are dedicated to maintain high standards of conduct can assure that incidents such as this one at are prevented. All-too often management is too far removed from the front line business, occupied with internal politics or simply not stable enough due to constant re-organisation (aided by clueless and inexperienced 'Consultants').

Superbanks - too large to fail, and too large to manage?

Bank managements often argue that losses in far-away subsidiaries could not easily have been foreseen by top management. Such may be the case when Citigroup tries to explain loan losses that may have occurred in its business in Mexico. But is this really a valid excuse? A loss of $ 400 million is quite substantial, even when measured against the bank's total assets of approximately $1.9 trillion. The loss/exposure admittedly is only 0.2 percent of total assets but seen in a different way this would mean that the bank has about 4500 loans (if they would all be the same size). Any organisation should be able to set up a management structure that can cope with this number of transactions. The management pyramid would only about three layers if each senior loan officer is in charge of about 50 loans. Impossible in this age of instant communication? Not in my opinion, one would not even need (expensive) MBA's or PhD's, just honest hardworking employees with a good pinch of common sense.

J.P. Morgan to pay $2 billion over Madoff case

Not sure if one should cry or laugh when reading headlines such as this one. How did the parties to this shameful deal arrive at the number? Did it get picked out of thin air? Is there any real proof of culpability? Since when is it a crime to conduct one's business prudently? If the regulators did not spot the Madoff fraud have they received any punishment? And why is JP Morgan management agreeing to this 'settlement' (which leaves the question where the money goes, is it just used to plug the hole in the government's budget?)

P.S.: it is gratifying to read that a 'portion' of the $2 billion penalty will be earmarked for victims of the Madoff fraud. How generous, and the state appropriates the majority of the loot for itself. Why don't the regulators make a contribution to the victims as well? I guess the only reason why regulators do not throw the book at specific JP Morgan executives is that they want to avoid questions over why they are spared jail after such a major cock-up as the failure to detect the Madoff fraud in good time.

Nothing can surprise me with respect to the ever-increasing reach that the 'authorities' give the interpretation of the ill-fated and useless money laundering laws. Soon the £5 loan that a schoolchild receives from a granny will have to be reported as 'suspicious' by anyone who has knowledge of it, for who but the 'regulators' can (with hindsight) determine what is suspicious or not? Already anyone trying to open a bank account (or even access a long-forgotten one) is basically treated as a potential criminal these days. And all this wasteful effort is expended in order to undo the results of bad laws imposed by an undemocratic process.