27 Jan 2015

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)

21 Jan 2015

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.

20 Jan 2015

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)

5 Dec 2014

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?

16 Oct 2014

Illiquid Bond Markets? Brace Yourself!

Recently there are more and more reports about a perceived lack of liquidity in secondary bond markets.

For example Fund Traders dig deep for bonds (WSJ, Paywall)

Most Commentators blame the tide of regulation that has forced market makers to drastically reduce their bond inventories.

This may be a valid point but one should not forget that some other aspects could be more relevant.
The bond trading business has expanded enormously during the past 20-25 years. Until 2007/08 volumes and staff levels increased to what in retrospect can only be described as unsustainable levels. Some retrenchment was inevitable, with or without added regulation. This naturally has an effect on the volumes that the dealer community can handle.

Technology may play an incremental role but many more complicated transactions still have to be done over the telephone, albeit with the aid of messaging or email services. Full automation is still a distant prospect, especially when there are tens of thousands of different bond issues outstanding. 'Do you want to kill the goose that lays the golden eggs?' asked the head trader of the erstwhile Credit Suisse White Weld in the late 1970s in a note to a colleague who wanted to introduce technology into the bond trading business. In my opinion he still would not need to worry too much.

The level of interest rates has - and will - have to play an important part in the lack of liquidity. The big bull market in bonds has played itself out, rising markets create turnover. At best markets from now will move sideways - creating less and less profitable trading opportunities. At worst they will enter bear territory and declining bond prices traditionally mean lower profits and lower volumes. Only the best traders will be able to prosper in a climate of fear and pessimism.

The explosion in the amount of outstanding bond values and the corresponding expansion of the buy-side (who would ever have thought that a fund manager less than 30 years old would control billions in assets?) make it virtually certain that there will not be enough liquidity to allow a smooth exit through a (very) narrow door when markets turn. Is any trading venue going to be able to take the other side when the likes of Pimco or BlackRock want to implement a drastic shift in their investment strategy?

So the old saying holds: Markets will fluctuate, this will create opportunities for those who are a step ahead of the crowd. Expect sharp moves and review your risk management process to be able to cope with extreme volatility if and when it arrives - as surely it will one day.

11 Aug 2014

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.

30 Jul 2014

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)

10 Jun 2014

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.

7 Jun 2014

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.