18 Apr 2016

Europe is over-banked says UBS Chairman Weber

I could not agree more. With the arrival of Peer-to-Peer Lending, Robo-Advisers, Internet Banking and more stringent (suffocating?) Regulation the writing is on the wall. Could one suspect that the time of excessively generous compensation will also soon come to an end? And maybe the first to feel the impact of a new and more sober climate in banking could be Axel Weber, the UBS chairman, himself. It is difficult to see why the new banking model can support a salary of Sfr 6,000,000 for what is in essence a supervisory role. Banks in the USA get by without a separate Chairman in most cases and the role is much more modestly remunerated in the UK.

11 Apr 2016

Why Europe's Banks don't have enough Capital

Interesting contribution from the Head of Research at BIS. But when the incompetents in Politics and Regulation have the UK banks pay £45 Bio in penalties for (mostly ficticious) 'mis-selling' one can only say it is a miracle that the banks are left standing and the sleepy shareholders (basically the fiduciaries managing the investment management industry) are not up in arms. 
If you want to bleed your banking system dry there is no better way, similar to Fx and Libor Fixing. 
The principles of forensic and detailed proof are brushed aside in order to score political points.

2 Mar 2016

Scared about Brexit?

A lot of my recent conversations with clients and business friends inevitably end up with a more or less detailed discussion of the upcoming Brexit vote here in the UK.
As an 'Immigrant', albeit one from Central Europe and living in the UK for all my working life I can look at the issue from both the 'In' and 'Out' camp.
But whatever the outcome of the vote, nothing much will change for at least two years. Any departure from the EU will have to be negotiated over a lengthy period, and the implementation of any agreement could take up to ten years.

More important seems to me to be the question what the UK will really achieve by leaving the Union. No more excuses about interference from 'Brussels'. A look at a few topical problems that need an answer makes one sceptical:

Did the billions of compensation gifted to 'victims of PPI mis-selling' improve the standing of British Banks and the City of London as a financial centre?

Why is the discussion about an additional runway at Heathrow, or a completely new airport, dragging on for more than 40 years? (Remember Maplin in the Mid-70s?)

Why are doctors paid (bribed) to avoid making too many referrals to specialists? and no radical measures are taken to train more doctors?

Business is difficult enough so let's not be distracted by endless Brexit Talk.

Politicians and Regulators do their very 'best' to destroy - or at least impede - a smooth functioning of the economy, debts are piled upon debts and the poor saver is left with puny interest - if any - on his savings!
This is the challenge the Financial Service Industry is tasked to accept.

14 Jan 2016

Another painful lesson from a disastrous Acquisition

News that Unicredit finally has extricated itself from its exposure in the Ukraine serves as a reminder that 'Strategic Transactions' (Acquisitions, Disposals and Mergers) need the utmost attention and best Advice. We are proud to document that we voiced serious doubts when similar acquisitions were conducted some years back (a close look at the 'Mergers and Deals' Blog entries offers a salutary lesson in Merger Hybris).
The usual suspects among the coterie of advisers (Investment Bankers, Lawyers and Accountants) may all be worth their money but they are not always on your side as they tend to have a financial incentive to make sure that a deal goes through, whatever the rationale behind it.

8 Dec 2015

ABP to introduce 'Climate Budgets'

Does it really make sense to introduce 'Carbon Budgets' as a constraint on the mandates for Asset Managers? First of all, the calculation of carbon usage for all investment options is expensive and it is also more than likely to be imprecise or liable to be gamed. And why not a Carbon budget for fixed income investments (even more complicated and expensive, how much Carbon usage to you allocate to a bond?), and before we forget, I hope there will be Carbon budget for 'Private' Equity and Hedge Funds? And last not least, don't forget the HFT firms. And what about Bank lending?
Nevermind that there is a simple solution at hand (Tax Carbon if you are hell-bent on limiting its use). Why not act according to the principle, what is good for the Consultants MUST be good for the Consumer (here in the shape of hapless end investors in Mutual and Pension Funds, Private Banks and Insurance Companies).
And while we are on the subject of Climate Hysteria, has any political or business 'leder' ever received a democratic mandate for imposing ever-more 'green' taxes, costs and regulations on the citizen/consumer/investor anywhere in the world?

19 Nov 2015

Illiquid Bond Markets? Brace Yourself!

Not much has to be added to my post from October 2014. Maybe the move to automated bond trading has accelerated a bit, but I would not expect that to be of any help when markets become stressed. But the issue is not off the table, and given the voices of prominent market pundits it is obvious that no one really knows what will happen if a major bear market in bonds arrives. But investors should remember that bonds are a conservative investment, or at least they should be. That means investing with a view to hold to maturity, so there is no real need for liquidity.

From October 2014:

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.

18 Nov 2015

Hard to believe: Competition Inquiry into Fund Management

Bureaucrats are hard-pressed to find enough to occupy the enormous number of people working at the UK's regulatory body, the FCA. The irony is that the roughly 4000 employees themselves put a large burden on the industry and by extension on the British (and international) savers who ultimately pay for the costs of this neo-totalitarian construct.
Sloppy supervision led to the so-called abuses in the financial sector (Forex, Libor, 'mis-selling' of payment protection) and even more sloppy prosecution led to the imposition of arbitrary fines that bear no relation to the 'crimes' committed. In any proper court of justice there has to be concrete proof that harm was done but these enquiries are nothing else than vindictive persecution of an unpopular and quite often hated minority.
And the bureaucrats take their time. The final report is not expected to be published before early 2017 (who wants to open a book on that?).
There may be problems in the UK asset management industry but only a fool (and a regulator with time and money on his hands) would say that there is not enough competition. Any distortions are more likely to be the outcome of ill-considered tinkering by politicians (and I am sure Chancellor Osborne is busily working on some more schemes that will aggravate an already non-sensical legal and tax framework).
FCA launches competition study of UK asset management industry (IPE)

15 Oct 2015

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

15 Sep 2015

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.

29 Aug 2015

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.