UK government support for City lacklustre

It is amazing that lightweight EU member Ireland can force renegotiation of EU laws while the Prime Minister of a large member state and the state with the most important financial markets of the EU appears to be powerless to protect the national interest during the negotiations for yet more centralistic and statist control advocated by the EU Commissars and assorted hangers-on.

Better Credit Research one of the lessons of the Credit Crunch

The Credit Crunch that we experienced during the past 2 years has produced – apart from financial pain the world over – an unprecedented amount of hot air. We are talking about the countless statements by politicians and self-appointed pundits in the media and academia who have proposed various measures of reform.
Rather than waiting on the outcome of the ‘Global Dialogue’ we suggest investors rely on common sense and focus on improving their own protection against the recurrence of a similar disaster.
Credit Research should be high on the priority list of every Chief Investment Officer or Senior Investment Professional.
We are not surprised to see strong demand for seasoned credit analysts and expect this to continue. Fortunately the convulsions in the financial markets have also resulted in a number of good quality analysts becoming available through no fault of their own.
Should you be looking to upgrade or expand your credit research effort we would be happy to discuss this with you or someone in your organisation.

Wrong time to raise levels of base salaries

Several Investment Banks have decided (or are investigating) to increase basic pay of employees in compensation for (expected) lower bonus payouts in the future. We think that this rush to boost the fixed costs of the business may be pre-mature. A recent report predicted that global investment banking revenues will drop by about a quarter this year. Revenues from the Securities Business may also not hold up after a quite profitable period at the beginning of 2009 and revenues from Asset Management will remain under pressure. Then there is the political aspect as the industry has just been saved from itself at great expense to the taxpayer. Even the well-run companies can only thank governments as without the bailout they would have been gone down together with the weak banks in the financial tsunami of 2008. So it may appear that already well-paid professionals get compensated for the loss of bonuses that may not be there (or might be much reduced) at the end of 2009.

Tax, Regulation and Financial Centres

A cursory comparison of personal income tax rates would cause us to cry out: 'Go East young Man!' for the tax rates in Hong Kong and Singapore are certainly mouth-watering. Young professionals in particular have not yet put down strong roots and can afford to be venture-some, - and the really big hitters have the financial means to make it painless to relocate to friendlier tax regimes. Add to this headlines such as this one: 'FSA threatens City with higher fines' and the case for the long-term decline of the City and Europe as a Financial Centre becomes stronger.

100 percent mortgages - AGAIN!!

Do some Bank Managers never learn their lesson? One of the banks that was in the middle of the sub-prime crisis has reportedly started to offer 100 per cent mortgages again. The offer by HBOS - which is now part of Lloyds-TSB - may only be available to existing customers who have reached the end of their deal and find their equity wiped out. So HBOS may not have much choice but it still leaves a sour taste in the mouth.

Less Credit and more Equity is the way forward

Contrary to many commentators we do not think that the solution to the present economic crisis lies in restoring lending to unsustainable levels. If anything, business will have to de-leverage and the source of finance will have to be equity capital. In this context it would be useful to device a mechanism that prevents 'Private' Equity Capital from financing 'pass-the-parcel' transactions. Venture Capital should again be what it was originally designed for: a source of risk capital for new and growing enterprises.

Russian oligarchs and Western homeowners

BarCap's Rudloff calls for end to debt 'war' in Russia (FT, 21 April 2009). Many homeowners facing foreclosure would like to get veteran investment banker Hans-Joerg Rudloff on their side as well. Today he urges borrowers and creditors in Russia 'to forget about trying to enforce claims through legal action and focus on the effective restructuring of debts and assets'. We do not think that oligarchs merit a more charitable attitude than homeowners and if anything would have thought that the current crisis gives an opportunity to redistribute assets to more disserving owners.

Bank of England Governor in a swipe at the FSA

I think this short quote from Mervyn King's speech to bankers speaks for itself: 'A system in which it is easier for a large bank to expand and then destroy its balance sheet than for an individual to open a bank account has lost focus'

Danger of trying to buy market share

A short press article ('As Merrill Lynch sputtered, it made a big bet on Brazil', Wall St Journal, 10 March 2009) reminded us of the danger of trying to buy market share in any business by throwing money at top people working for the competition.
Not only is it far from certain that the executives lured away will flourish in a different business culture at the new employer. If their recruitment can only be effected at high - or even exorbitant - compensation levels it may also be an indicator that the business one tries to enter has already reached a peak and may no longer offer the growth prospects one is looking for.
Selective hiring of top individuals at top compensation levels may be worthwhile in isolated cases. However, employers should take great care before committing themselves to a large financial outlay and conduct extra due diligence rather than getting carried away or 'falling in love' with prospective candidates.

Banking Secrecy - Enemy Number One or convenient scapegoat?

During the recent past politicians and lobbies of all persuasions seen to have found a new 'Enemy Number One' - Banking Secrecy and linked to this Tax Havens large and small.
Politicians and their paid servants, the regulators, have failed miserably to prepare for the current global financial crisis. For example, the Bank of International Settlements has spent roughly 10 years to produce a report of nearly 1000 (!) pages but this Basel II framework did nothing to prevent the debacle that has afflicted major banks around the world.
So it appears to be nothing more than a desperate search for scapegoats when politicians attack banking secrecy and tax havens. They are not the cause of the current crisis!
Not so long ago there was a time when anyone could walk into a Bank in Austria and open a bank account without presenting any form of documentation. No one asked what their name or address was. You paid in your money and you received a bearer passbook that was the only document you needed to claim back your money. In his teenage years the author even opened a number of passbooks on the same day. That way he pocketed a small amount of money that the banks put into new passbooks as a reward for opening the account.
Was crime any higher as a consequence of lax banking regulation? Was corruption rampant? Not at all. Since the (US inspired) crusade against banking secrecy gathered speed both crime and corruption have - if anything - increased. The world certainly does not seem to be a safer place.
Ironically, much crime and corruption can be traced back to ill-conceived legislation: the war on drugs, arbitrary taxes (tobacco, alcohol), questionable regulations and subsidies (agriculture, trade tariffs, soon to be exceeded by fraudulent carbon trading), limits on prostitution. All these laws and regulations may be well-intentioned but they provide a fertile field for criminal activity and usually are counterproductive as well as costly to the taxpayer and citizen (who most of the time get no say on respective laws).
If countries want to close down tax loopholes they can avail themselves of a solution that is easy to administer and leaves the precious privacy of all citizens untouched: Legislators can decide to impose taxes at source. If politicians are really only interested in reducing the amount of tax that in unpaid this solution should be suffice. Anything more intrusive indicates that the authorities are really interested in invading the private sphere of the individual and increase the control that the state already has over the citizen's lives.

Danger of trying to buy market share

A short press article ('As Merrill Lynch sputtered, it made a big bet on Brazil', Wall St Journal, 10 March 2009) reminded us of the danger of trying to buy market share in any business by throwing money at top people working for the competition. Not only is it far from certain that the executives lured away will flourish in a different business culture at the new employer. If their recruitment can only be effected at high - or even exorbitant - compensation levels it may also be an indicator that the business one tries to enter has already reached a peak and may no longer offer the growth prospects one is looking for.Selective hiring of top individuals at top compensation levels may be worthwhile in isolated cases. However, employers should take great care before committing themselves to a large financial outlay and conduct extra due diligence rather than getting carried away or 'falling in love' with prospective candidates.

Lloyds-TSB: Failure to heed the warning signs

Management has stubbornly refused to call off the acquisition of HBOS. The warning was on the wall in CAPITAL LETTERS and for all to see. We understand that leading a large organisation is a lonely job but that does not mean that executives have to be pig-headed to the extent that they doom their companies as Fred Goodwin had nearly managed to do. The defacto demise of RBS as a free-standing business should have been warning enough and no one can claim that the extent of the decline in financial markets and the world's economies could not have been foreseen last autumn. For an excellent analysis of this debacle read 'Brown cannot shirk the blame for Lloyds' (The Times, 9 Mar 2008). It is difficult to see how the Chief Executive and Chairman can remain in their posts.

Shall we 'modify' away Wilbur Ross' wealth?

Shall we 'modify' away Wilbur Ross' wealth?
During the past few weeks the chorus of experts in politics, academia and business has become noisier by the day. Everyone tries to peddle his own personal solution to the credit crisis. What is being lost more and more is any sense of personal responsibility and accountability. Each and Everyone seems to be entitled to be bailed out by 'society' or the 'community' (especially the 'international community').
Today the American 'Billionaire' investor Wilbur Ross contributed his 5-cents worth of wisdom on CNBC by suggesting that it should be made possible to 'modify' the terms of all residential mortgages in the USA. Effectively he is suggesting that either the taxpayer or - more likely - the mortgage creditors gift a cheque to the homeowner (more likely only those that the rulers consider worthy of public largesse).
One has to wonder what Mr. Ross would think if the legislators and other experts would hatch the idea that his wealth could be used to compensate the losers in the credit crunch? This idea may sound outlandish at first but there is no material difference to the idea of taking away agreed interest payments from those who lent through mortgages in good faith.

Madoff - could he have done it alone?

What is the similarity between the Fritzl case in Austria and the Madoff scam? In both cases it is extremely unlikely that those close to the perpetrator were ignorant of what was going on around them.

More on Mark-to-Market

See also: Former FDIC Chairman William Isaac on some historical perspective on mark-to-market accounting: Market Value Accounting Crippling Economy (American Spectator, 12 Nov 2008)

Regulators too close to Lobbies

Reading that Jay Levine, the former head of Royal Bank of Scotland's US Capital Markets Business, has made substantial donations to Chris Dodd, the head of the US Senate Banking Committee, makes one wonder who is more at fault. Accepting money from someone who you are supposed to police must be as questionable as channelling money into the coffers of your regulators. (Sunday Times, 8 Feb 2009)

Failure of Accounting Reform

An interesting article supports our view about the problems associated with Mark-to-Market: Jesus Huerta de Soto: Financial Crisis, The Failure of Accounting Reform (Mises Blog)

Death Spiral in the Banking System out of Control?

After having watched the Banking System all our adult life (and some more) we are the first to admit that managements have committed serious errors of judgement. This just reinforces our view that hiring the right people is the most important job for all those working in positions of responsibility in any bank of other financial service business.
But this particular banking crisis is characterised by certain features that have a tendency to push institutions further down the path to ultimate destruction. For instance, hardly anyone seems to focus on what proportion of the loan books are actually delinquent. Instead, there is constant talk of 'toxic assets' most of which turn out to be mortgages that just happen to be under water to different degrees. Nothing new to that. That has happened before and will happen again.
Instead, the markets, commentators and the authorities are completely enthralled by what can only be described as a 'death spiral' of weakening economic data and falling asset prices which drive 'market prices' down. The main culprit is the 'mark-to-market' rule that has been designed to keep accountants, auditors and theoreticians in academia happy. Never mind that these 'prices' are created in thin markets and pushed around by speculation. They are accepted as gospel truth even though it is a well-established fact that all markets overshoot - on the way up and on the way down.
As a result prices for so-called 'toxic' assets are divorced from reality where assets may be somewhat impaired but are still in the major part serviced by debtors. The difference between these two levels of valuation is the difference between a banking system that is in trouble but able to work its way out of a hole and a banking system destined to hit the buffers sooner or later.
In addition, respected analysts such as Meredith Whitney (CNBC, 14 Jan 2009) paint a horror picture where banks are supposed to look at economic data such as employment or home price trends and mark down their books according to some spurious economic forecast. That assumes that economic forecasting is an accurate science - a heroic assumption if there ever was one!
The latest fashion among commentators is the reference to the 'Swedish Model' of bank rescue. As no one seems to realise what is driving the death spiral they jump to the conclusion that all bad assets should be written off against shareholder equity. Given the logic of 'mark-to-market' that would mean that ever-declining 'market prices' would set the benchmark for these write-offs. Naturally, the authorities - who must share a major part of the blame (banking was always heavily regulated and the authorities were if anything supposed to prevent bank runs) have to step in and nationalise the institutions.
Ironically this outcome would not even mean that lending can resume as usual. In our impatient age politicians, the media, academics and the world of business seem to have forgotten that credit cycles are a major - maybe the major - force behind economic cycles. After an extended period of excess credit creation it is inevitable that a period of credit contraction will follow. Banks have to rebuild balance sheets and the same applies to business and consumers.

Incompetent Regulators

'Catastrophic interaction of governmental and managerial incompetence that led to the collapse of Fannie Mae and Lehman Brothers' (Anatole Kaletsky, The Times, 12 Jan 2009)