28 Mar 2012

Not all publicity is good publicity

How much longer can the image of Goldman Sachs get knocks such as these? It is time that someone minded the house again.

23 Mar 2012

UBS boss hires old friend for senior role

When one reads that the recently appointed CEO of UBS hires a former colleague from his days at Merrill Lynch as Co-Head of Global Investment Banking one has to assume that the hiring old an (business) friend may give a certain amount of comfort and hope that relationships in the top management team will work smoothly. But there is always the danger that sentimental aspects cloud the judgement or that conflicts of interest impede rational decision making or sour the morale of the other team members. The big question is also why a global (?) player like UBS cannot grow its own senior managers. Once you had to be an officer in the Swiss Army to climb the management ladder at the old UBS (before it was taken over by local rival Swiss Bank Corporation) and that surely was not providing an adaequate talent pool (and led to the sorry demise of the 'old' UBS) but has the bank really drawn the right conclusion and found the right formula? The track record over the past 10 plus years speaks a clear verdict.

19 Mar 2012

Stress tests - same (sad) old story

The publication of the results of the latest stress test performed on US banks does little to inspire longterm confidence in the ability of the financial system to be protected from another (near) meltdown. We repeat our contention that only a limited purpose banking system will give near certainty that taxpayers will never again have to be called upon to bail out insolvent banks.

18 Mar 2012

Conflicts of Interest in Investment Banking

The discussion about separating banking and securities and investment banking has reached a dead end. But the inherent conflicts of interest in an investment banking world where intermediaries directly compete with their supposed customers (the word client is no longer appropriate) will always tempt service providers to treat their clients as 'muppets'. Maybe not even reverting to the rules imposed by Glass Steagall would be enough to improve the situation and the principal trading function and the customer advisory side should be separated like they were in the UK brokerage business before 'Big Bang'. This would mean that salespeople and corporate finance advisers would have more incentive to work with and for their clients. As long as this is not feasible the only protection for customers - be they individual investors or 'sophisticated' professionals working for fund managers or corporates - is to follow the old rule of  'Buyer Beware' and not to be too trusting when dealing with their sell-side counterparts. All too often they fall for sales patter, get taken in by glossy brochures and forget to check if there are better terms available in the market.

3 Mar 2012

Political pressure to prevent CDS on Greece to pay out?

The example of a minor Austrian bank demonstrates the potential fallout that can be expected if CDS sellers are required to pay out in case Greece is 'officially' (by the insider-dominated ISDA committee) declared to be in default. Kommunalkreditbank - already rescued by the Austrian government - could be required to pay out in the high hundreds of millions of Euros if it is required to pay out on the CDS contracts it has sold. One has to assume that the Austrian government - and quite a few others - are not too keen to see the ISDA committee to declare that a credit event means that CDS contracts have to be paid out. Who will be brave enough to sue the Committee? Don't expect any help from the regulators - they are in the pockets of politicians who probably snigger about the fact that the CDS market has been little less than a game like the many online games - a financial markets farmville.
"Since when is a country's defaulting on its debt not a credit event?" asks Alan Abelson (Barron's)

2 Mar 2012

CDS - a misconceived instrument is Null and Void

Says today's headline in a newspaper (City AM). To leave the decision about whether or not a CDS pays out in a 'credit event' to a group of market insiders at a private industry association such as ISDA makes a mockery of proper regulation in financial markets. Especially as the members of the relevant ISDA committee are the largest users and providers of credit default swaps who have made vast profits from this market during the past ten years. No surprise that the author states that "The decision has been criticised by some as making a mockery of credit default swaps on sovereign debt. These critics believe that their value has now been permanently undermined." We could not agree more and every user of this market has to face a negligence claim from his investors if he uses this product in the future. We always thought that the construction of the CDS contract was overly complicated and likely to lead to disagreement exactly at the point in time when they would be needed most, i.e. in a credit event. Would it not have been more sensible to design a product similar to an option? This could have been exercised at any time - credit event or not - simply based on the price performance of the underlying securities.

Charlie Munger on Derivatives in 2003

"But I confidently predict that there are big troubles to come. The system is almost insanely irresponsible. And what people think are fixes aren’t really fixes. It’s so complicated I can’t do it justice here – but you can’t believe the trillions of dollars involved. You can’t believe the complexity. You can’t believe how difficult it is to do the accounting. You can’t believe how big the incentives are to have wishful thinking about values, and wishful thinking about ability to clear."