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Karina's Kolumn at the BBA

14/07/2010

BBA Contact: Karina Robinson

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Why Spain won the World Cup

15/07/2010

Regulatory overkill in the banking sector

Soberbia can best be translated as a mixture of arrogance and pride. It is one of the seven deadly sins and prevalent in Spain (and in half Spaniards like me). Yet in the World Cup final, the Spanish team won on the back of humility.

It is admittedly natural to be humble when failure stares you in the face every four years - a football-mad nation that consistently lost on the international scene, bar the 2008 European Championship - but it is rather more difficult for those who are champions in their fields.   

Peter Sutherland has managed it. The former chairman of BP, founder of the World Trade Organisation and chairman of Goldman Sachs International, believes it is old friendships that keep our feet on the ground. He counts former UN Secretary General Kofi Annan as a friend, but his two best friends are from his early schooldays. One is a shopkeeper.

He said to me recently: "My interest is in sport and friendship and I judge people on who they really are, not on their success. I constantly question how I got to where I am. Genuinely, with humility, because I know the failings that I have. which I'm not going to identify."

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One of his apparent failures (forgive me Peter) is a bulldozer-like quality.  But ally that to a sense of humour and lashings of Irish charm and it is an irresistible combination. As my BP shares continue to plummet, I rather wish he was still there.

Former UK Prime Minister Tony Blair is being touted as the replacement chairman, ticking all the right boxes in terms of US politics: still respected and seen as a supportive friend of the US.

Sadly, his Teflon-like characteristic is one that bankers don't have.

This column was originally about banking. But, rather like many of my banking friends, I am "desolate and sick", as the Ernest Dowson poem has it. Sick of the endless waves of regulatory policies coming at the banks and bankers. Sick of cobbled together and contradictory legislation. Desolate at the nationalisation of credit and the undermining of globalisation.  

None of the multitude of measures is going to stop the next banking crisis. But they are certainly harming the recovery.  In the FT last month, Ed Clark, ceo of Toronto-Dominion Bank , the second largest in Canada, encapsulated what should have been done:

"What blew up was a relatively small number of institutions in Europe and the US that were clearly under-capitalised and clearly didn't have enough liquidity. So why don't you get them to have more capital and more liquidity and stop trying to change every rule in the rule book?"

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Putting on my humble hat, which does slip off quite regularly, I would not write off all the initiatives. Or the excellent thought that has gone into transforming the regulatory landscape.  Howard Davies, former chairman of the FSA and deputy governor of the Bank of England, co-authored a book that calls for, among other things, the end of the central bank and central bank governors as we know them.

"The past model - a secretive institution little inclined to explain itself and maintaining an air of mystery, cloaked in constructive ambiguity, and led by a philosopher king - has run its course... The new model central bank will be led by an individual who is skilled in chairmanship and communication and one who has a deep understanding of the financial sector and the wider economy, on a global scale. Taciturn autocrats need no longer apply (my italics)."

The book, Banking on the Future, also calls for the appointment of governors and other senior decision makers to meet best practice elsewhere in the public sector, with "advertisement and transparent processes."  A radical thought. I look forward to seeing an ad in the FT calling for someone with "a stubborn streak and a silver tongue" and, just as importantly, a thorough understanding of financial markets - something that was lacking in a number of central banks.

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On a glorious summer evening at the Grange Opera in Hampshire, with white roses blooming on the walls of the Palladian mansion, there was another lesson in humility. Tosca gazed at the bloody cadaver of fearsome police chief Scarpia and uttered those immortal words:  "And all Rome trembled before Him!"
Rather more prosaically, I tremble at the thought of peeling my son out of his Spain kit, which has been glued to his body for far too many hours.

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A eurozone without Germany?

24/05/2010

Late one night, over a cigar and a 1958 Armagnac in the craftily hidden Garden Bar of the Lanesborough Hotel, I was told of a great investment opportunity.  The Vice Fund, a mutual fund that had outperformed its benchmarks by "an order of magnitude."  

As a rule, investment tips exchanged in bars where billionaires lurk darkly should be ignored. But the appeal of a fund that invests in industries that are automatically excluded from corporate responsibility indices, ones that appeal to self-destruction and the destruction of others (smoking and arms manufacturers), as well as addiction (gaming and alcohol), tickled my fancy. Philip Morris is its biggest holding, along with Lockheed Martin and Carlsberg, among others.

The reality did not stand up to scrutiny. Vicex had an average annualised total return over one year to March 31st of 35 per cent. Impressive. Until compared to the S&P 500, which returned 49 per cent. The numbers were no better over three or five years.

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Does the plummeting euro stand up as an investment opportunity? 

At one point this week the euro was at a four-year low against the dollar at $1.2235 amid ongoing worries as to the unity behind the single currency and Germany's unilateral move on short selling. The reality is that at these levels it provides a great boost to European exports. Ironically, Germany, the most efficient export machine in the EU, looks set to benefit.  

So much for French Finance Minister Christine Lagarde's call on the front page of the FT in mid-March for Germany to become less competitive. It was astonishing, cheeky and offensive. France, and much of the rest of what US vice president Dick Cheney called the "old" EU, have done an abysmal job of holding down wages and, to make matters worse, have failed to incorporate much-needed labour reform into economic policy.  

That is the problem - not the fact that "clearly, Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labour costs," in Minister Lagardes's words. 

She said she did not think this model of good housekeeping was "sustainable" in the long term. What is in fact unsustainable in a global economy is early retirement, expensive firing policies and above-inflation salary increases, all policies prevalent in "old" Europe.

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Of course, the politically unpalatable but effective solution would be the departure of Germany - rather than Greece or the Mediterranean countries - from the euro. It could return to the Deutsch Mark while the rest of the EU benefitted from the weak euro.  

Meanwhile, the chance of the £750 billion rescue package for the euro succeeding without a restructuring of Greek debt is unlikely. 

But it is likely that the new UK coalition government will last the five years, according to a well-informed political strategist. He notes that the painful decisions on budget cuts and increased taxes will be taken over the next couple of years, with the hope that by the end of the full term the electorate will see some benefit. That is why it is in the interests of both the Conservative and the Liberal Democrats to hold out until 2015 before calling a general election.

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At the Saxton Bampfylde Annual Chairman's dinner in mid-May, guest of honour Sir John Bond spoke about China - an investment opportunity where the unwary have suffered much - amid speculation about what the future held for the UK with a new government taking power.  

The dozen chairs were ardent on the need to reform the visa process, which allows the brightest foreign students to attend UK universities but then stops UK companies from hiring them. There was also despair at the lack of long term infrastructure planning.  

The one certainty, with a new government labouring under a debt mountain, is best encapsulated in a topical reading from the Gospels according to Luke: "And it came to pass in those days, that there went out a decree from Caesar Augustus, that all the world should be taxed. And all went to be taxed, every one into his own city." 

Surely a couple of structured finance whizz kids could come up with an investment opportunity based on tax rises, when tax receipts can already be securitised?

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Calling International Rescue

24/03/2010

Why the IMF needs to rescue the UK
Corporate governance: a Lent tale

Giving up chocolate for Lent proved impossible so I decided to do something more proactive, namely trying to be more patient. Note my realism: trying rather than being, else it would have been as impossible. I presume Prime Minister Gordon Brown is on a similar quest, following recent allegations of phones being flung amid volcanic rages.

Patience is all the more apropos, I realised, when a wise chairman told me it was one of the attributes I would need to make a success of my new career, as I cosseted prospective non-executive directors through the process of board level headhunting.

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On the subject of the current and potentially future - if the polls are to be trusted - leader, I note Brown believes aid for beleaguered Greece should come through the IMF, if the eurozone can't solve the problem.

The IMF should also come to the aid of the UK.

Virtually every intelligent person I have seen in the last months believes a sterling crisis is imminent post-election - unless there is a clear majority for either party, in which case there might be a short-lived relief rally. But this is, in any case, deemed unsustainable.

Sterling is not the euro. There is no potential saviour like Germany - however unwilling - waiting in the wings. The numbers are frightening. It is not just that the UK has a budget deficit of around 12% of GDP, even more worrying is that the forecast level of public sector debt increases faster in 2007-2014 than in any other G-20 country other than Japan.

The better than expected inflow from taxes last week was headline-grabbing. But it is a one-off that must be kept in perspective. A man on Death Row may well welcome the extra piece of chocolate cake on Sunday, but it does not change his ultimate fate.

And the actual statistic - pace the headlines - did not mean much: the drop in government revenues for 2009-2010 compared to the previous year (and with only 11 months counted) was 6.2%, instead of the forecast 7.3%. 

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The cost of issuing gilts, UK treasury bonds, will go through the roof. This is classic emerging market stuff. I spent many years talking to IMF top officials in various Asian and Latin American capitals. Getting into their diaries was usually more difficult than seeing the local Prime Ministers. Their offices oozed power.

Whatever the merits of the IMF approach, it gave those embattled governments the ideal whipping boy for the very necessary but unpopular measures to cut swollen budgets. Although the IMF changed its tune during the most recent crisis, advocating spending via unsustainable debt burdens, it has recently rediscovered its orthodox roots.

An IMF programme would be extremely helpful for whichever UK party won the election. There is, of course, a precedent.

In 1976, after six months in which the pound plunged 14% and showed no signs of stopping, a Labour government asked for a standby loan from the IMF, the first time an industrial nation had done so. It was for all of £4 billion.

Even taking into account inflation, that may seem a risible amount today. After all, the Treasury borrowed £12.4 bn in February alone. But the principle remains.  Having an external enemy on whom opprobrium can be showered will make it politically more palatable for the Tories or Labour to make the needed public expenditure cuts. It would be a bold enough move to calm markets which are preparing for a slaughter.

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The perfect riposte to the current slew of reports/codes/discussion on corporate governance comes from a friend of mine who has worked in places as diverse as Iceland, Asia and Drexel Burnham Lambert in California. "You cannot legislate for good behaviour," he said, over an overpriced Lebanese meal earlier this week.

Having being one of the speakers at a recent discussion on the subject by the Doughty Centre for Corporate Responsibility (www.doughtycentre.info), and sponsored by KPMG, I entirely agreed.

The Doughty Centre's Professor David Grayson put it well when he said that "one size does not fit all." The problem is that the reaction to the crisis has lead to an overreaction which aims to stop future crises - an impossible task.

As part of this, we have a plethora of changing rules which mean, according to entrepreneur Luke Johnson, that companies are becoming obsessed with the theory of corporate governance while moving further away from "getting business done". This was at a recent seminar put on by the Financial Times Non-Executive Directors' Club, which should more accurately be called the Wannabes, considering the dearth of non-execs in the room, bar the panellists.

Sir Christopher Hogg, currently chairing the Financial Reporting Council which has just closed its consultation on a new UK Corporate Governance code, said that non-executive board directors need "character, commitment and experience." To this, Johnson added the ability to "challenge."

Character and challenge cannot be legislated. But a plethora of rules (even if couched as "recommendations") on time commitments for non-executive directors, their independence and the like, can do a lot to negate those qualities.

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I rather worry that impatience is a family trait, as evidenced by these words uttered by my nine-year old son last week: "Mama, why can't they just stop the credit crunch? Just say 'Enough!' and it is finished."

May I just clarify, I have never thrown a phone. But I do eat chocolate cake while cherishing my clients.

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Religion, Politics and Sex

24/02/2010

Religion, politics and sex are not fit subjects of conversation for a dinner party, an old saying has it. To add sparkle to my blog - which today deals with PIGS, BRICS and taxes - I have ensured they are all alluded to in this post.

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The imagination of financial market participants is often captured by absurdly named arbitrary groupings. PIGS is one of them. Portugal, Italy, Greece and Spain are all very different countries, even in their debt levels, deficits and economic capacity.

BRICs is another misnomer. Coined in 2001 by Goldman Sachs to stand for the high-growth emerging economies of Brazil, Russia, India and China, the thesis is that by 2050 their combined economies could be larger than those of the current richest countries of the world.

Over a Klosters skiing weekend, a fellow houseguest lambasted this notion.

"Emerging markets still have a long way to go. Despite the fact of new IPOs and a strong market performance, China's market cap is only $581bn. France has got more than $1 trn! Even more striking are the US-Numbers. The US counts for 35 % of World GDP, but for 48 % of market cap of all stock markets," said Dr Christian Falschle, a former journalist and now a consultant.

"I wrote a book about Emerging Markets in 1996  when everybody was saying that the 5 Asian Tigers (Singapore, Thailand, Malaysia, Philippines and Indonesia) would combined outweigh the US in the next 25 years (2021)," he said.

"Fact 2010: the market cap of Thailand is $43.5 bn US-$, while the market cap of Google alone is more than $150 bn," he concluded.

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Religions develop differently but often start off on parallel paths.

Take this quote: "The company of women is a dangerous thing, for by it the old devil has led many from the straight path of ParadiseWe believe it to be a dangerous thing for any religious to look too much upon the face of a woman"

Which monotheistic religion does this come from?

Islam? Christianity? Judaism?

The excerpt is actually from the first set of rules to do with the founding of The Templars, the order of fighting monks who were key to the Crusades in the Middle Ages.

In 1128 Abbot Bernard de Clairvaux wrote a treatise for them. It made the point that pure motives transformed homicide, which was evil, into malecide - the killing of evil - which was good, according to Piers Paul Read's outstanding history of the most powerful military order, The Templars.

St Bernard, as he became, also wrote: "How glorious are the victors who return from battle! How blessed are the martyrs who die in battle!"

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They say that if you owe a bank a few thousand that is your problem. If you owe them a few million, that is theirs. What happens if the debts are measured in billions and trillions?

That came to mind when I read that the Chinese were trying to pressure President Obama not to meet the Dalai Lama. He did so on February 18. Zhu Weigun, a vice minister who handles China's contacts with the exiled leader, said the meeting would undermine trust between the countries and, in a deliciously disingenuous tone, added:  "how would that help the US surmount the current economic crisis?"

China sold $34.2bn of US Treasuries in December, making Japan again the biggest holder of US government debt at $768.8bn. (China had overtaken Japan in September 2008).

Meanwhile, it holds $1.205 trillion worth of U.S. long-term and short term securities, including Treasuries, as of June 2008, according to the Treasury's latest annual data on foreign portfolio holdings.

Perhaps, though, this situation is more akin to mutually assured destruction, or MAD, the reigning doctrine during the Cold War between the US and Russia, whereby the use of nuclear weapons by two opposing sides would effectively result in the destruction of both the attacker and the defender, thus ensuring no action is taken.

For the US may tremble at any statements that hint at a sell-off by the Chinese of US Treasuries, but so does China at the thought of how this would sink the value of their own reserves.

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Gordon Brown is hanging onto power in the hope of a "Falklands moment", I was told. After all, Margaret Thatcher had one - the election that looked likely to be lost was won on the back of victory over Argentina in 1982.

Although my interlocutor did not literally mean war over Las Malvinas, as the Argentines call them, I note that mid-February the Latin nation prevented a ship from loading pipes for drilling oil and gas in an area near the islands. They continue to claim the islands are "illegally occupied" by the UK.

But with the tragic death toll from Iraq and Afghanistan, foreign adventuring would be neither electorally viable nor affordable.

Still, no harm in speculating. Especially as the Kirchners, Nestor and Cristina, who run Argentina, are low in the polls and could well see some benefit in declaring war as a  distraction from their efforts to seize control of the central bank's foreign currency reserves and their general mismanagement of the economy.

One hopes they have learned from history. The ruling military government fell on the back of its surrender to the Brits in 1982.

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It is a truism that tax avoidance rises when tax rates become unjust. And the populist 50% income tax on high earners in the UK is definitely that.

Seventy of the FTSE-100 companies are considering whether to stay in London or move their main operations outside the UK, a senior executive of a Big Four accountancy firm told the FT. Even assuming 95% of them are posturing, there is nothing negligible about the jobs and tax revenue that could be lost.

I just heard of the latest - legal, I note - move recommended by some accountants and applied by a small firm. As the 50% rate does not kick in till April, pay the salary a year early and have the employee lend the cash back to the firm. Meanwhile, other firms like Hargreaves Landsdown are accelerating the firm's dividend pay-out.

It would be interesting to know how many large firms manage this as well.

Sadly, it looks unlikely the Conservative Party, assuming they make it into government, will repeal the tax in the short term.

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I used to think I could not be bought. Or that my price would be measured in billions, like US treasuries. But we all have a price - political power in the case of Gordon Brown, Paradise for others, a good week's powder skiing in mine. For those of you on the pistes this week, enjoy. My week comes next.

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Some big ideas from Joseph Stiglitz

12/02/2010

The US is the ultimate emerging market.

I remember first hearing this from Alfonso Prat-Gay, former central bank governor of Argentina - a man who had quite a bit of experience of irresponsibly high spending governments.

If the old-style IMF were in charge, it would have ordered the Obama government to cut spending radically, jack up interest rates and suffer through the ensuing recession to come out healthily on the other side. 

But the new warm and fuzzy Bretton Woods institutions (IMF/WB) won't do that.

As Nobel Prize Winner Joseph Stiglitz pointed out at a Pi Capital/Intelligence Squared (www.picapital.co.uk) event in London earlier this week, if an emerging market had tried to bamboozle a plan like the first TARP through its legislature (with no congressional oversight of the funds to be deployed and scarce details of how the money would be spent), "in the World Bank we would have cut them off."

As the former chief economist of the World Bank, Stiglitz, who is reportedly bitter at not being included in the Obama administration, said there was "zero probability" of a US default. He pointed out that American debt is a promise to pay in US dollar bills at the end of 10/20 years, but those bills can always be printed. "To bet on a US default is weird."

Inconsistently, though, he dismissed the theory that inflation would be used by governments to deal with their heavy debts. Firstly, he did not believe central bankers would allow it; secondly, "most debt is short term, so if markets have inflationary expectations they will raise interest rates in anticipation, so the cost of debt goes up."

Despite the PIGS (Portugal, Italy, Greece and Spain) not being able to print their own currencies, the bearded Stiglitz expected Europe to show solidarity and for the "craziness and irrational exuberance of financial markets" to be beaten.

He does not believe we will be coming out of this slowdown quickly. US household savings, which were 0%, are rising. Reliance on the US consumer to drag the world into growth is misplaced, while China has been trying for five years to wean itself off exports and has not managed.

His other main reason for a continued slowdown is "the realisation that countries with reserves did better than those without is leading to a propensity to save at a national level."

I, personally, have not noticed that change of behaviour by governments - nor have the markets, which are punishing large deficits.

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These are some of Stiglitz's other bugbears, some more justified than others. My comments in italics:

• The wrong entities made it into the lifeboat: 140 small US banks who made loans to SMEs were closed down while "money was poured into the global casinos." Excellent point - although perhaps both needed to be saved.

• Central bank independence is a myth: "Central bank independence of whom? In the US it was captured by those in the financial markets The New York Fed head is basically appointed by the banks." And the US then exported the efficient market thesis to other countries so similar mistakes were made all over the world Being "captured" by an ideology which can be modified or shed is surely better than being "captured" by government.

• The Alan Greenspan thesis that even if central banks had recognised an asset bubble they had no tools to deal with it is wrong. Considering that interest rates are the major input to finance, they definitely had one tool. They also have other tools like increasing down-payments on mortgages or forcing banks to set aside more liquidity. "My complaint about the central banks is not that interest rates were low but financial regulation [was not up to scratch.]" Absolutely right.
  
  
• This is far from the first time bank bail-outs have happened: the US savings and loan crisis was a bank bail-out, as was that of Latin America and Russia. "They were not bail-outs of countries but mainly of banks." Surely of both.

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For that reason, among others, Stiglitz favours a financial transactions tax, commonly known as a Tobin tax. He thinks Obama's suggested insurers' levy is too small to be effective. This is the current fashion, a charge of some sort, with British Prime Minister Gordon Brown on the front page of the FT this week asserting that a global bank tax is near.

Global agreement won't happen and it shouldn't anyway, as Mario Blejer, another former governor of the central bank of Argentina, predicted in this blog nearly ten months ago. (see entry on 25 May 2009)

We are already seeing regulatory splits between the countries that matter in international finance, while the chances of the US Congress passing anything are too remote. Not only is there increasing acrimony between Democrats and Republicans but, as Stiglitz pointed out, there are five financial services lobbyists for each Congressman.

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Blejer is better at predictions than I am. When I interviewed FSA chief executive Hector Sants in April 2009 (for full interview www.iht.com) I suggested he wouldn't be in the job by the summer because he was thoroughly identified with the old regime of light touch regulation.

Sants, however, transformed himself into The Terminator. He has only just announced his resignation.

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Inside Global Banking

28/01/2010

Rumour of the week: The UK election will be called for the end of March, not May. The government is worried that first quarter GDP figures will show the UK falling back into negative growth after the wimpish 0.1% GDP growth number for the fourth quarter of 2009. As other countries continue growing, a negative number announced a couple of weeks before the expected date of a May election will look all the more pitiful.

If this is true - and it has the ring of truth - the Labour Party is taking us for fools. The same goes for the Conservatives, with their daft pledge, plastered on billboards everywhere, that they won't touch the NHS.

There can be no sacred cows for a country facing an unsustainable debt burden.

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It would be an interesting experiment to see which party would win the election if the prerequisites were honesty and the assumption that the electorate understood the consequences of government actions.

There are inverse parallels in the dialogue between bankers and politicians.

A top banker recently pointed out that as quantitative easing comes to an end along with fiscal stimulus programmes during 2010, banks will have to take up the slack and lend more. If not, economies won't grow. He says governments are aware of this and thus the abundance of politically motivated whippings (bonus tax, Volcker plan) will come to an end soon.

This ideal world assumes a degree of common sense and intelligence among politicians - and of the ability to ignore popularity polls - that appears unrealistic. Bashing the banks is still popular with the 'man on the street'. This overpowers any politician's sensible understanding of the facts ie. that you can't tell the banks to set aside more capital and, additionally, hit them with the unexpected every month or so, yet expect them to sustain lending.

Banks have been caught off guard by the virulent hate. Again and again. If I were them, I would fire their political consultants. Or, just as likely, listen to them more.

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How bad is the Volcker plan for bank earnings? On the day it was announced, bank stocks plummeted. Morgan Stanley thinks the proposal would be another brake on US large cap bank earnings - from 3% up to 5% for each of the large US banks.

The investment bank also views the combination of US and Basel 3 proposals as terrible for European banks: "Excluding revisions or management action, we calculate banks may need EUR83bn extra capital by 2012, or have to shrink RWAs by 11% (ie EUR1.0trn). We think banks would be likely to re-price loans and reduce credit further - we already model less than 1% loan growth for European banks in 2010. We think Basel 3 and US proposals could mean - unless amended - corporates face a higher cost of credit and need to take on more liquidity risk, as the banks are asked to shed risk."

There is, though, another view. A banker who is well versed in legislation told me there was no new substance to the Volcker plan. That, in essence, it was another way of applying the G-20/Financial Stability Board conclusion that activities like proprietary trading were to be made uneconomic via capital controls.

So not only was it not a mixture of new impositions, but the complicated US legislative process could well mean it will not make it through Congress.

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"Surely a King who loves pleasure is less dangerous than one who loves glory?" Author Nancy Mitford's quote came to mind after reading Jung Chang and Jon Halliday's hatchet job on Mao Tse-tung.

In Mao, The Unknown Story, they debunk the myths about the hardships of the Long March for the leader (Mao was carried in a litter and had special doctors and food), about peasant support for the Communists as opposed to Chiang Kai-shek's Nationalists (barely any), about the Communists fighting the Japanese occupiers (they didn't), and about how they made it to power on their own (Russian help was fundamental).

Mao "was responsible for well over 70 million deaths in peace-time, more than any other twentieth century leader" they assert. The most ascribed to Stalin was 30 million.

Meanwhile, Mao's "Four Pests" campaign to eradicate rats, mosquitoes, swallows and flies saw the entire population waving sticks and broom to make a giant din and scare sparrows from landing till they fell from fatigue and were killed by the crowds, while "eager fly-collectors loitered in droves at public lavatories."

As pests once kept down by sparrows thrived, the Chinese government sent a top secret request to the Soviet embassy in Peking to have 200,000 sparrows sent from the Far East.

North Korea's Kim Il Sung was rather more sensible. On Mao's prompting he was forced to draft a "3-year plan for Punishing Sparrows" but let it gather dust.

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The move from journalism to headhunting has been seamless. My motto ("Always overdressed") has finally come into its own.

On a (slightly) more serious note, my remit at Saxton Bampfylde is to co-lead the Board Practice. I am spending a lot of time with Chairmen.

Mao, of course, had himself called Chairman.

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¡Viva España!

07/12/2009

There are two attitudes to wrongdoing: the Jimmy Carter or the Bill Clinton. One takes on the sins of the world and the other lets even his own slip off him.

Former US president Carter, when he was Governor of Georgia, gave a memorable interview to Playboy magazine where he admitted to sinning in his heart.
"I've looked on a lot of women with lust. I've committed adultery in my heart many times. This is something that God recognises I will do - and I have done it - and God forgives me for it," he said.

Former President Clinton, on the other hand, during his 1998 grand jury testimony on the Monica Lewinsky affair, used that delicious line: "It depends on what the meaning of the words 'is' is."

I suppose he felt he had no need of forgiveness as he hadn't really done anything.

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In Catholic Spain, sexual scandals never bring down a politician. Forgiveness from a (titillated) society and, the presumption goes, from God, are both automatic.

But the codswallop that is the new "sustainable economy law" does not deserve forgiveness. It contains an amalgam of recycled measures, many of which cannot be funded by a country that is now running a budget deficit of an estimated 10 per cent this year.

The opposition has now become the central bank. Bank of Spain Governor Miguel Angel Fernandez Ordonez, a political appointee who has become imbued with the technocratic excellence of the central bank, speaks out about the government's free-handed spending and calls for structural reform of services, transport, rental and, above all, the labour market.

The latter is crucial to making a dent in unemployment that may well reach 20 per cent. (The black market in Spain is still thriving, though, so that number is rather more alarmist than accurate).

Spain's recovery from this recession will not be as fast as that of 1993 due to ongoing construction sector problems. However, there are three sectors that matter: auto export, tourism and property. If the European Union continues recovering, so will Spain, and faster than expected.

Plus, as Joaquin Almunia, European Union Commissioner for Economic and Monetary Affairs, told me, "It is quite clear that Spain did a better job than most in terms of banking supervision and we are learning from its example as we are learning from the broader lessons brought about by the crisis."

Its big commercial banks and large savings banks are in good shape, to the point where Santander was an acquirer in the worst days of the crisis, as is BBVA currently it looks set to invest a further $1.1 billion in China's Citic Bank.

Meanwhile, problems in some of the smaller politicised savings banks should lead to 15 of them being merged by spring 2010, Fernandez Ordonez said in the FT. Money from a new 9 billion bank restructuring fund can be used for this purpose. But this is not a systemic risk issue.

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Countercyclical provisions and the lack of SIVs are two of the strengths of the Spanish system. Additionally, notes Jose Maria Roldan, head of Banking Regulation at the Bank of Spain, there is the existence of a permanent team of central bank inspectors implanted in the biggest financial institutions (as many as 40 in some cases) who have the right to see not just supervisory information but also management papers.

It is the implementation of rules that makes them effective, not the mere existence of them, he notes, speaking in the magnificent 1885 building that houses the central bank.

"On a global regulatory level, we are looking at changing many things. But we need to look at the success stories more and draw some lessons from them. Canada, Australia and Spain all worked well despite different regulatory systems," says Roldan, who also chairs the Standards Implementation Group, part of the Basel Committee.

"You can't be too dogmatic," he states.

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To a fascinating Pi Capital breakfast at the Lanesborough Hotel to listen to Ken Roth, head of Human Rights Watch (HRW). The night before, 500 people at the HRW (www.hrw.org) annual dinner at the Natural History Museum were humbled by testimony from two award winners. One was Mathilde Muhindo, who runs an NGO dealing with sexual violence in the Democratic Republic of Congo. The other was Bo Kyi, a former Burmese political prisoner, who runs an organisation providing whatever support it can for political prisoners in Burma.

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I am not entirely sure, gentle reader, how to pull together sexual peccadilloes, forgiveness, financial regulation and human rights. So, let me sign off right now before I tie myself into knots.

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Tid-bits for entertainment on a winter day

24/11/2009

1. According to Alexei Kudrin, Russia's finance minister, when dismissing Gordon Brown's resurrection of the Tobin tax, the UK prime minister is the man who is "known for always raising taxes."

I once interviewed Kudrin in his socks in his room at the very trendy Sanderson Hotel (www.thebanker.com). I was rather nonplussed by a shoeless finance minister, but was told this was a Russian custom when entertaining at home. He is the ultimate survivor, an exceedingly able technocrat who has navigated the perilous waters of Russian politics with unusual skill while standing up (sometimes successfully) for what he believes in.

2. If I had a penny for every person I have sat next to in the last six months who has told me he is "THIS CLOSE" to opposition leader David Cameron, I would be a billionaire. Cameron mustn't have much time for policy or speeches, as he is so busy with his weekly call on Sunday night/Sunday afternoon/Saturday afternoon/name the time, with these self-important characters.

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"Are you Catalan?" asked Joaquin Almunia, European Commissioner for Economic and Monetary Affairs, when we first met in 2006 in Istanbul and I spoke to him in Spanish. Not a good start. Insinuating that someone raised in Madrid, as I was, might be from Barcelona is as unwelcome as telling someone from Barcelona that they sound Castillian, or asking a Canadian where they come from in the US.

In 2007, on a rainy day in Berlin at a conference on fiscal policy in Europe, he made himself as unpopular with the German minister of finance, Peer Steinbruck, who was on the stage with him.

"Germany could be more ambitious in 2008," he said to Mr Steinbruck, talking about the need for members of the eurozone to take advantage of the economic recovery to cut their debt burdens so as to be prepared to deal with the medium to long-term challenge of Europe's ageing population. At  that time, in early 2007, the average nominal budget deficit for EU members had fallen to two per cent of GDP.

What a long time ago it was!

Now, a recent EU report projects an increase in EU member state debt from 61.5 per cent last year to 80 per cent of GDP in 2010 and 140 per cent in 2030, assuming a no-policy change scenario.

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I caught up with Almunia recently. His mantra has not changed - cutting debt being his main preoccupation - but the importance of so doing has increased substantially because of the enormous increase in state debt burdens and the effect this will have on borrowing costs and growth in the world economy.

Almunia and the European Commission want governments to adopt "clear and credible strategies to reduce their deficits and debts once the economic recovery firms up." But the Spaniard is clear that "the challenge to correct public finances and to increase growth potential is not particular to Europe, as can be seen from the ongoing discussions at the G20. We need to work on this together and the EU, and its members, is playing its full role."

He disagrees with the thesis that the Stability Pact, which had clear limits on government debt and debt to GDP ratios - all of which have been breached - needs to be reinvented.

"The Stability and Growth Pact was revised in 2005 and contains the necessary flexibility to allow EU countries to stimulate their economies in the short term while designing clear and credible budgetary adjustment paths that will restore the sustainability of public finances in the medium term," he says.

But a deficit below three per cent of GDP, as stated in the Maastricht Treaty, has become a long term goal - so long term that I doubt its value.

Two weeks ago, on the back of the economic situation, the EU revised the deadline for France, Ireland and Spain and proposed yet another deadline for the UK. In the case of the UK, it had already been revised earlier this year.

Almunia says: "The deadlines for the 13 countries now vary between 2012, for Belgium and Italy, which takes into account their deficit and very high existing debt levels, to the 2014/15 financial year for the UK. For most countries, 2013 was the appropriate deadline. For Ireland, we proposed 2014 on account of the fact that it has the biggest budget deficit in the EU, at -12.5 per cent in 2009, and a very big cumulated fall in output." 

He totally dismissed a theory in financial markets that it would suit many governments for inflation to take off as this would erode the debt
they have piled up.

"I think this is a bad theory and I don't see it espoused by anybody in government," was his categorical answer.

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Almunia disagrees with commentators who argue that the already evident divergence in financial regulation between the EU and the US proves that international coordination is impossible, especially now that Armageddon has been avoided.

"Whilst there may be certain differences in approach or emphasis, what is remarkable is the degree of consensus between the two sides of the Atlantic to regulate vast aspects of the financial system that were previously unchecked," he says.

Almunia is adamant that the technocratic European Systemic Risk Board will be taken seriously enough by politicians for them to agree to unpopular choices. This is despite it having no teeth.

"I believe [politicians] will [pay heed] because any warnings and recommendations will be based on thorough and carefully-assessed information provided by the member states themselves; because the warnings and recommendations will be shared with other member states and, I hope, will be published most of the time. So you will have pressure from peers and the public," he says, noting that the IMF, together with the Financial Stability Board, will be doing the same job at a wider level.

Almunia, whose term officially ended in October, although the European Commission's life has been extended, is quiet on his future plans, only saying he will stay in Brussels.

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Competition vs. profitability

16/11/2009

The pendulum always swings too far. The European Court recently ruled that crucifixes must be taken off the walls of Italian classrooms. Cardinal Tarcisio Bertone, the Vatican's secretary of state, in a reference to Hallowe'en, complained about "a Europe of the third millennium that leaves us only with pumpkins."

Italian towns and villages run by the government's party are up in arms. The mayor of Sanremo placed a two-metre crucifix in the mayoralty. The regional council of Trapani bought 72 of them. In Busto Arsizio flags are flying at half mast. The Bellini theatre of Catania has placed a huge one on the stage. Nightclubs in Valle d'Aosta are attaching them to the walls. "We will never take them down," vows the Trieste mayor.

The excessive secularism of the judgement and the ludicrous response mask a valid debate about the role of religion in education.

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There is also a valid debate about balancing competition and profitability in banking. There are no easy answers. Recent judgements by redoubtable EU Competition Commissioner Neelie Kroes highlighted the difficulties - such as how exactly Royal Bank of Scotland is meant to ensure its debt capital markets franchise remains at fifth place in league tables, one of her conditions for state aid.

Lloyds Banking Group, on the other hand, is an outright winner. I said it on the 25th of May. There may well have been an element of arm-twisting by the government in its acquisition of HBOS. But Lloyds was on the acquisition trail at that moment, it got the bank at a cheap price and now Kroes has put the icing on the cake.

At first glance the forced disposals sound like a lot. Lloyds was told to shed 600 UK branches (including all Lloyds TSB Scotland and Cheltenham & Gloucester branches), the TSB brand and Intelligent Finance, the online savings and mortgages arm. But it has four years to do so.

It has been ordered to shrink its dominant market share of current accounts and mortgages by only five percentage points (my italics). The bank currently has a 30.3 per cent market share in mortgages and 31 per cent of current accounts. So it ends up with a whopping 25 per cent in the two sectors, while new entrants will not be permitted to hold more than 15 per cent of the market, according to John Kingman, the chief executive of UK Financial Investments, which manages the government's stakes in the banks. And banking is, above all, about scale.

Once new capital is in place on the back of the rights issue later this month, group chief executive Eric Daniels and his team will be able to fully focus on restructuring the badly-managed HBOS. I'd be willing to bet on his bank.

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Cock-up and conspiracy

21/10/2009

Some people see conspiracy, others see cock-up. The best tale from the Conservative Party conference was that Gordon Browns eye problem - two injuries in the retina of his right eye, while his left has no vision - was a carefully orchestrated first move. This was to be followed by his stepping down for ill health, his substitution by a more electable party member and victory by the Labour Party in a spring general election. 

A delicious tale. As absurd as the posturing by the parties about a windfall tax on the banks. It feeds popular anger about (some unjustifiable) bonuses, but would be deeply counterproductive. Not only are two of the largest banks, Lloyds and RBS, government controlled, but all banks need to restore their balance sheets and produce profits to help move the economy out of recession.

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The same dilemma - political bluster vs reality - informs the debate on bonuses and high City pay. Politicians such as London Mayor Boris Johnson may well call bankers "cockroaches," but taxes are a crucial funding mechanism for government and "the contribution from financial sector employee earnings is far more important for tax revenues than corporation tax," as HSBC pointed out in a note to clients this week.

"We know that the City accounts for 25 per cent of total corporation tax receipts, so in the 2007-08 tax year it paid £11.6 billion. More important is financial sector pay which accounts for nine per cent of total wages and salaries in the UK," said economist Karen Ward, highlighting the fact that without even taking into account the higher rate of tax paid by many City workers, they will have paid at the very least £22.3 billion in income tax and national insurance contributions.

The message from politicians is that the wealthy are not welcome. Not only is there the 50 per cent tax rate, which the Conservatives have declined to say they will repeal once in power, but there is also the fear of what other taxes and conditions they may impose on non-doms, who are already failing to flock to the UK as they did in prior years.

"Nearly all non-doms are considering departure, down to the very practicalities, "says Andrew Rodger, executive director of Stonehage, a three-decade-old family office. The reason there has not been a major exodus so far comes down to the need for longer term tax planning and issues such as children and schools.

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Could the Madoff investment scam have happened in Europe? Antonio Borges, chairman of the Hedge Fund Standards Board, the London-based lobby group and standard setter for the industry, categorically denies it.

Borges, a former dean of INSEAD, argues that European hedge funds operate in a different environment. They are registered with regulators, while the HSFB has put in place principles and standards that involve transparency, disclosure, and the separation of the manager from the administrator. He finds that the UK's Financial Services Authority, the regulator for much of the industry, has a superior  model of financial regulation, better than that found in other countries. But he admits to being surprised to hear the FSA express doubts with respect to the social usefulness of the financial industry, a reference to FSA chairman Lord Turner's infamous words about the City.

This week, amidst insider trading charges at hedge fund Galleon Group, the US House of Representatives financial services committee is due to mark up a bill forcing hedge funds to register with the SEC. There had been attempts over the last nine years, all of which were unsuccessful due in no small measure to skilful lobbying by the Managed Funds Association, the US industry body. Borges predicts, however, that actual registration will take some time due to the convoluted and slow political process in the US.

Borges is hopeful about changes to the Alternative Investment Fund Managers Directive, a draft piece of European Union legislation that the industry is up in arms about. The Directive will take around nine months to reach its final form. Meetings and hearings are still taking place. Even assuming the Council's version is complete by December, the European Parliament's won't be until March at the earliest. Reconciling the two versions will take until the summer.

By then, the political climate will be less crisp. Borges notes that attempts to blame hedge funds for the crisis have backfired. None of the multiple studies on its origins have laid the finger of blame at the door of the hedge funds. "We hope, as the crisis fades away, people will be more lucid and the urge to find scapegoats will disappear," he says, speaking at the HFSB offices on Fleet Street, a few doors down from Goldman Sachs, where he was vice chairman for eight years.

Borges, Chairman of the European Corporate Governance Institute, is scathing about some of the latest suggestions that the tax system should reward shareholders for being longer term investors and that institutional investors should sit on company boards. Proponents argue that the financial crisis was a failure of corporate governance at shareholder level - they did not act as owners of the banks - and that institutional investors need to become more involved.

Borges insists the right to sell the shares of a non-performing company is crucial and that too much unique communication with it ties the hands of the shareholder via insider knowledge. The former central banker says pension funds can't possibly turn all their monies into activist funds.

But what he calls "specialists" (i.e. hedge funds) are what markets require. "Most people consider specialists are speculators and should be crucified. But without them, markets are erratic and inefficient,'' he concludes.

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Not entirely unlike politicians.

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C'est la guerre

13/10/2009

In early 1945 Josef Stalin and President Franklin Roosevelt were discussing the future of Europe. Stalin said that Charles de Gaulle did not appear to realise that the French contribution to the Allied war effort on the Western front was minimal and that in 1940 "they didn't fight at all."

Meanwhile, the envoys of the US president (who dismissed de Gaulle as a man with a Jeanne d'Arc complex), were told by the French president that: "The French have the impression that you no longer consider the grandeur of France as necessary for the world and for yourselves."

Substitute the word banks for the French. That is how they are misrepresented: in 2008 they were complicit in their own crises, according to crowd judgement, and now, in 2009, they do not deserve a seat at the table when their fate is being decided.

None of this would matter, except that the key to economic growth is bank lending.

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This point was made by Sir Brian Pitman, banker extraordinaire, former chief executive and chairman of Lloyds TSB, and senior advisor to Morgan Stanley, at a Pi Capital lunch.

He noted that some of the ideas put forward by regulators on liquidity and capital were not sustainable as banks would have to raise charges and this would lower the rate of growth of the economy.

Jaime Caruana, head of the Bank for International Settlements (for more on him, see blog entry dated 18th August) and one of the most influential policymakers in the current transformation of global regulation, had a very different perspective on the issue when I spoke to him in August.

"The short answer is yes, [growth will be lower on the back of higher capital requirements], at least for a while. It is a trade-off that needs to be understood: the lack of leverage sustaining growth will make growth more sustainable. But growth is more complex than just about the cost of capital. It is about innovation, productivity increases and structural reforms," he said.

It rather sounds as though Caruana disagrees with the pithy phrase used by Sir Brian at the lunch: "You should not structure an industry on the back of one episode."

Sir Brian went on to say that regulators and politicians have not realised the consequences of their actions, but they will, and this will make the backlash against the banks temporary. "If you slam banks with huge capital requirements, greatly increased holdings of liquid assets and big changes in deposit structures, there is a cost and that cost is likely to come back on the consumer," he pointed out.

The FSA is aware of these issues. It has agreed to publish a study by March 2010 on the impact higher liquidity and capital requirements have on the lending business of banks.

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Sir Brian was also not convinced by the latest FSA rules on remuneration, as he doubted there would be international agreement on them. Other commentators believe the same will apply to the FSA's new liquidity requirements, which the regulatory organisation insists it will apply before international agreement.

Sir Brian suggested there were a lot of arguments in favour of Glass-Steagall, but that the Wall Street lobby would ensure it was not brought back.

His comments came amid speculation that Lloyds Banking Group looked likely to make the largest cash call in UK corporate history so as to bypass the Government's expensive asset protection scheme, while the FT's Lex column appeared to call for current chief executive Eric Daniels to be fired.

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There is much talk of a jobless recovery. Utter tosh. Without consumers confident in their jobs, overarching, long term recovery cannot happen. There are one-off effects - some of those who held off from making purchases are now feeling more confident that the world is not coming to an end - but this is not sustainable.

Up to 25 million people in high-income countries will have lost their jobs by the end of 2010, according to the OECD. The Paris-based organisation said that 15 million jobs were lost between the end of 2007 and July 2009, while 10 million more could disappear by the end of next year within the block of the 30 rich member nations. That is equivalent to a record 10 per cent unemployment, from the current 8.5 per cent.

As Angel Gurria, the secretary-general of the OECD, said, historically jobs lag the recovery and "the deeper and faster the jobs were lost, the more it lags."

Christine Lagarde, French economics minister and potentially an EU Commissioner, recently wrote in the FT that the recession will be over "when we have cut unemployment." That will take a long time to happen.

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Whatever Stalin said, the French did what they could in 1940 and in 1945. Without the US, though, the war would not have been won. Similarly, crucial to a sustainable recovery are the consumer - and not only the US consumer - and banks that are not labouring under excessive regulation.

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Baer vs Blejer: two visions of our economic future

07/10/2009

To the BBC to talk about bankers' bonuses. The idea of clawback provisions seems the height of imbecility to me. It is all arbitrary, all to do with where we are in the economic cycle. For instance, assuming a banker had a clawback provision for the suggested three years anytime between 2001 and the first half of 2007, there would have been no consequences.

I did suggest to the interviewer that politicians should also be subject to them. She rapidly moved on, perhaps alarmed at the thought of my mentioning an incumbent prime minister or two.

If bankers and politicians, why not parents? Perhaps the Government could institute a long term bonus payment for raising a child to be a productive member of society. This would benefit the sort of families that are the worst hit from tax rises. It would be held in a special account. The government could then claw back funds if the child turned out to be an axe murderer or, even worse, did not pay our ever more astronomical taxes.

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The debate about whether we are in a V or W (or some other letter) shaped recession appears to be the only topic of conversation around. Below are two views on this topic.

Mario Blejer, IMF technocrat, former Argentine central bank governor and subsequently head of the Bank of England's Center for Central Banking Studies, now sits on the board of Argentina's largest oil company and is vice-chairman of one of its largest banks, Banco Hipotecario. He is also an advisor to a number of London-based hedge funds, including Bluecrest Capital and Brevan Howard.

Over a vodka at the Cinnamon Club in Westminster, Blejer outlined a vision of growth in Europe and the US in 2010 at three to four per cent on the back of the end of the panic, three terms of growth and continuing stimulus programmes. With mid-term elections due in the US next year, there is no chance of the government exiting its stimulus programme. He expects this to cause inflation in 2011, but of an acceptable five to six per cent, which helps erode debt.

He dismisses all talk of the US dollar losing its reserve status, noting that the next largest government bond market in the world after US treasuries (excluding Japan) is in euros. But investors differentiate between countries in the eurozone. The fact that the largest, most liquid market is in Italian bonds is a major negative. "Can you see a Malaysian investor selling US treasuries to buy Italian government bonds?!" he exclaims.

On China, he is not worried about the build-up of NPLs on the back of the government having forced the banks to over-lend to keep growth to target. He notes the state will cover the bad loans and this is not a problem considering its massive reserves. With India also in good shape, Asia will continue growing.

Blejer does not, however, think there are no consequences to the crisis. Rather, in 2011 he sees the after-effects of the debt build-up hitting the Western world's growth, which will fall to two to three per cent. Long term, growth in the developed world will be less than it has been, not least because of the increased regulatory burden on the banks, which makes developing markets a more interesting investment proposition, as they have good growth and a risk profile that has turned out to be better than developed markets.

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Michael Baer has a diametrically opposed vision, in accordance with his surname. Over a coffee - no vodkas here - at Brown's Hotel in Mayfair, the former head of private banking and member of the executive board at Julius Baer Group, who is now the chairman and founder of Baer Capital, as well as being on the Dean's Advisory Council at MIT, noted the many similarities between the Japanese era of deflation and today's economies in the US and Europe.

"Looking at Japan, interest rates were set to zero, banks were bailed out and merged, stimulus packages for both the economy and the stock market were announced and implemented at a regular interval and yet, the result was one of a long-lasting recession which eventually led to a 20-year period of deflation," he says.

Households did not respond to record low rates by consuming or buying shares, but by living off their capital. Baer points out that the two main differences between Japan and the Western world are that Japan was slow to act and that it actually had savings, while the US and Europe acted much faster, but with no savings to speak of.

"Therefore, I would argue that it is highly probable that we too could face a long recession, leading to deflation, as was the case in Japan.  Since the Western world acted faster it is probable that this environment might also last less long.  We would be lucky to see our economic environment improve after five years, rather than the 20 plus years seen in Japan," he concludes.

Baer dismisses Federal Reserve chairman Ben Bernanke's optimism, pointing out that the press and the central banks are trying to persuade consumers that tomorrow will be better so that they consume again.

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Baer is also deliciously outspoken - having thrown his private banker cap out the window - on the long term future of structured products.

"Structured products are a money-making machine for the banks and put the clients at a disadvantage.  I would assume that over time clients will be fed up by losing money on expensive and useless products which the bank has been selling them," he says. "They will eventually be out of fashion, but not yet."

Rather like clawback provisions, I hope.

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Meeting our needs on energy and food

02/10/2009

Hands up whoever sighed with envy at re-elected German Chancellor Angela Merkel's tax-cutting agenda. The only disagreement with her new coalition partner is how deep these should be. Even Frankfurt is beginning to look appealing compared to London.

Her new government also stands united on scrapping the nuclear phase-out. Nuclear energy provides around 25% of the country's needs.

Someone else who is sighing with envy is Lady Barbara Judge (ckc), chair of the UK Atomic Energy Authority. At a Pi Capital breakfast she spoke about one of the (many) challenges facing the industry, namely people. With energy security and climate change driving the need for a new generation of nuclear plants, the dearth of specialised engineers and architects is a major issue.

It is the consequence of the political backlash against nuclear energy over the last two decades.

The same problem - lack of a specific skill set - comes about because of the dearth of big privatisations in the developed world over the last twenty years. Who has the expertise to privatise the state-controlled banks throughout the developed world? Sir James Sassoon, a possible Treasury Minister under Tory opposition leader David Cameron's, discussed this point (see blog Aug. 3 - hyperlink to it).

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On the nuclear front in the UK, even assuming a political consensus, the reality is that the first new nuclear plant would not be operational until, probably, 2020.

A similar long term perspective is needed for the global food industry. Bim Hundal, chairman and partner of Lion's Head Global Partners, a London-based boutique, is seeking to raise a $50m fund to invest in agriculture in sub-Saharan Africa. The former managing director of capital markets for emerging markets at Goldman Sachs wants to combine social investing with a 15%-20% annual return on the fund. The Hewlett Foundation has already put in $15m.

The shift in the G-8's focus from food aid to farming - in July they announced a three commitment of over $12bn for agricultural development - plays into Hundal's strategy.
But he shows a healthy scepticism about what the World Bank and the NGOs might do with some of those funds.

Hundal is scathing on the romanticised NGO thesis that "wants to preserve in aspic the romance of the smallholder" by forcing him to become an entrepreneur. "Instead, make him an employee so he can send his children to school and receive a wage," he argues.  

He also comes down squarely on the side of those who believe genetically modified crops are crucial to feed the forecast rise in the world population to 8bn-10bn in 2050, from the current 6.8bn.

"It should be called scientific techniques, not genetically modified ones," he says. "In the US they all do it, but in Africa NGOs tell farmers not to use science or destroy the environment, but that they will make them well off." It hasn't happened yet.

Martin Taylor, chairman of agribusiness Syngenta, agrees. "There will be upward pressure on food prices but technology will allow us to feed the world population as it grows over the next 40 years or so.  But if the EU were in charge of world agriculture and food supplies there would be mass starvation because of its superstitious technophobia, " he said. (For his equally trenchant views on banking, see blog 22 sep - hyperlink).

The associated issue is the rise in food prices on the back of higher oil prices, poor harvests due partially to climate change and burgeoning demand from the growing middle classes of China and India. This has put food security squarely on the agenda and lead to some unviable practices, such as the South Korean attempt to buy up much of Madagascar in 1998, in some measure responsible for riots and a change of government.

The Japanese, who are the world's largest net food importer, put forward a motion in the G-8 against what is essentially the re-colonisation of Africa. But, as Hundal says, if we accept that making Africa work is a worthwhile endeavour, then it is imperative to make agriculture efficient: around 65% of the continent's GDP is dependent on the sector.

Still, Hundal is careful to disassociate himself from too much idealism: "This is not a silver bullet. I don't want to make this a political crusade. We will help make commercial investments in African agriculture with a social aspect and help businesses grow."

Once he closes the TransFarm Africa Transformation Fund - Lion's Head is already getting cold calls from businesses looking for funds - he plans to invest and open another one.

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The Bargain

23/09/2009

I come from a much-married family. I prefer not to do the maths on averages, but at a recent family wedding in Vermont, I discovered a second cousin who was on his fifth, possibly a family record. I did not ask him about his ex-wives - I doubt the comments would have been favourable.

This behaviour is not unlike that of governments. The UK Government's love affair with the City has now come to an abrupt, acrimonious end. Gordon Brown recently said: "There is no going back to the bonus structure of the past. I am personally appalled (my italics) by some of the practices that have been going on at some institutions."

Not that long ago, he was personally enthralled by the 25 per cent of corporate tax originating in financial services. This allowed him to spend, spend, spend. He put nothing away for a rainy day. It is not only the scapegoated bankers who deserve opprobrium.

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This week we will see a flurry of announcements on bank remuneration, capital requirements and the like from the G-20 summit in Pittsburgh. A lot of it has been flagged (see my IHT interview with Jaime Caruana, head of the Bank for International Settlements. How many of these measures will finally be applied is another matter - global coordination and local politics will interfere.

Martin Taylor, chairman of Swiss agribusiness firm Syngenta, was formerly chief executive of Barclays plc and an advisor to Goldman Sachs International, chairing their asset management company. We met because, as a rookie reporter, I wore a Cacharel blouse to a Courtaulds plc results meeting, not realising the company manufactured the fabric. A blond man commented on it. I smiled and moved on, deliberately. He turned out to be on the board and later became the chief executive of the demerged Courtaulds Textiles.

Here are his comments on the current situation.

1. Yoseph Yam, the outgoing head of the Hong Kong Monetary Authority, said recently that the financial system does not and should not have a life of its own, and that it exists primarily to support the economy. Do you buy this idea of a "real" economy to be supported by Wall Street, the City and the like?

MT: "Yes, of course.  Finance is a meta-activity that cannot exist in the absence of a robust underlying economy."

2. The main reason cited by governments for not imposing new rules on their domestic banks is that they would lose out to international competition. Is this just a con by the banks, which have strong lobbying powers?

MT: "Governments need to protect their taxpayers from being despoiled again.  They should pay a little attention to the bankers' moaning about this not being the right time to impose new rules, etc, but not too much attention.  The time to experiment with new rules is now."

3. The French want mandatory caps on bonuses. Are they right?

MT: "No.  We need mandatory capital hikes for banks, to be brought in over time (extra one per cent p.a. for a number of years), remuneration structures to be subjected to regulatory approval, and more active/sensible shareholders who should themselves be subject to the bonus legislation.  If excessive bonuses are the issue we should tax them, as [LSE Professor] Willem Buiter has (I think) sensibly suggested."

4. Are rising world stockmarkets a bubble or sustainable?

MT: "They are influenced by the liquidity injections of central banks.  No doubt central banks are looking keenly at them (as well as at the "real" economy) in judging the withdrawal of these injections."

5. Is the failure of governance the main reason behind the financial crisis?

MT: "Not the main reason, no, but boards have had a lousy crisis.  One has to conclude that corporate governance in its present form does not work. Six-month old babies - the perfect independent directors under present canons - would have done little worse."

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Marriage is a source of humour in all sorts of ways. I fell in love with my husband, Kirk Stephenson, because his dry, spirited wit was irresistible. He died a year ago. This poem by Sir Philip Sidney, which I read at his memorial, encapsulates love and marriage.
           
The Bargain

My true love hath my heart, and I have his,
By just exchange one for another given:
I hold his dear, and mine he cannot miss,
There never was a better bargain driven:
My true love hath my heart and I have his.

His heart in me keeps him and me in one,
My heart in him his thoughts and senses guides:
He loves my heart, for once it was his own,
I cherish his because in me it bides:
My true love hath my heart, and I have his.

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The New Powers in the Land

18/09/2009

Outspoken EU Commissioner Charlie McCreevy told the gathered chiefs of hedge funds, private equity and public companies that a new political power had arisen in Brussels. The EU Parliament is now on an equal footing with the Council of Ministers and the European Commission, he informed the Pi Capital lunch crowd.

This does not mean that all 736 MEPs need to be lobbied on measures such as the controversial draft Alternative Investment Directive - currently being modified. However, influential figures like Poul Nyrup Rasmussen, president of the European socialists' group, chairs of specialised committees and rapporteurs (those who present reports to Parliament) are of key importance.

This makes the UK Conservative Party's proposal to base a treasury minister in Brussels to protect the City (see blog 23/07 with Mark Hoban, Shadow Financial Secretary to the Treasury) - even the "socially useless" parts of it, in the immortal words of Lord Turner - all the more important.

Meanwhile, over mouth-watering chocolate truffles, spirited debate ensued about the hubris of bankers who are busy paying guaranteed multi-year bonuses with a total lack of political sensibility, let alone taking into account the concept of risk-adjusted returns.

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Why, on the back of the largest financial crisis in a generation, are the law courts not creaking under the weight of lawsuits by irate investors in products like CDOs? Products that even Goldman Sachs ceo Lloyd Blankfein admitted last week were too complex, too many and, indeed, unmanageable.

Why are bankers not traipsing off to the courts in droves to defend their (reported/alleged/supposed/purported) misrepresentation of structured investments to the uncomprehending?

The answer, according to a couple of partners in top law firms, is that any reputable law firm is under the thumb of the banks. Either informally or in contracts, these firms are barred from litigating against any bank that they have done even the most miniscule amount of work for. And, in many transactions, this work has truly been minimal. But the banks are a much larger source of business than any would-be litigators, so being blackballed is a dire threat.

This is, quite simply, a scandal.

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Spanish bank BBVA, which has not been forced to accept government funds, announced the issue of up to €1.5bn in five year, mandatory convertible bonds a couple of weeks ago. Analysts at Keefe, Bruyette & Woods, the financial services specialist firm, see this as opportunistic capital-raising after the bank's share price recovery and have a buy on the shares, which they expect to see rise 15%.

The bank bought Texas's Guaranty Bank in August. Bolting it on to BBVA Compass, its existing sun-belt operations, grows its US assets to $72bn. In the first half of 2009, 7% of operating income came from the US, compared to 37% from Spain and Portugal, 27% from Mexico and 12% from South America. KBW is not alone in forecasting further bolt-on acquisitions in the US.

About one fifth of BBVA Group's business is wholesale and a good portion of that is done out of the group's Global Clients area, the UK operations being a significant contributor. BBVA UK's head Philip Paddack, who is also managing director of Global Clients and Investment Banking for the UK and northern European markets, says that a sense of "normalcy" is returning to the corporate market, albeit with much lower activity. The bank covers all its northern European and many other international clients from London, where 98% of the bank's business is wholesale.

It is benefitting from its specialisation in infrastructure, renewable energy, power and mining, as well as its ties to Latin America. The bank is looking at leveraging this knowledge to enter associated niche areas of business, but "the key for the wholesale strategy will remain relationship driven. We will not be going into mezzanine/hybrid finance," says Paddack, pointedly. He believes that over the next couple of years infrastructure funds for asset managers will become more common.

The bank, which posted a 15% rise in 1H operating income to €6.3bn, is charging more for loans despite record low interest rates as, like most of the banks left standing, it seeks to bolster its balance sheet, cover rising non-performing loans and be more risk-aware in the current climate.

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BBVA UK, like all foreign banks, is suffering from the FSA's new liquidity demands for foreign banks (see blog 8 April). The largest US banks with major City operations have reportedly had to deposit very substantial amounts in the UK. Although foreign bankers accept the need for change, they are livid at the deadline and are strenuously lobbying the FSA and the government.

FSA bashing is de riguer these days. One banker said to me after a one hour chat, "You now know more about our business than our regulator!"

Grumblings in confidence are all very well, but we need to accept that the pendulum has swung away from the private sector towards the public sector, encompassing government, regulators and institutions like the European Parliament. Although City lawyers may not agree.

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"A valediction - sort of"

15/09/2009

After six fascinating months at the BBA, this column is expanding. It can now be located at www.insideglobalbanking.com. I hope, dear reader, that you will follow me there, while also keeping close tabs on the BBA website, which keeps you up to date on what promises to be a busy regulatory calendar over the next 12 months.

Below are three of my personal highlights from the column – dealing with greed, power and fantasies.

March 3. My son’s dog, Sasha, is a golden Norfolk terrier of unparalleled cuteness. He is also a greedy little thing, caught in flagrante on a friend’s dining table with his snout buried in the brandy butter. He has no sense of danger and has to be kept on a lead or risks being run over by a car. Some would say he sounds like a banker – smooth, voracious and foolish.

Leaving aside the good looks, which are neither here nor there, I would argue he is the perfect simile for the behaviour of many of us during the boom years. This is why I find this Government’s obsession with pillorying only the bankers maddening.

Take Prime Minister Gordon Brown. He thinks it is political suicide to admit any part in the crisis. Was he not the Chancellor, in charge of finances in the UK, for the better part of a decade?

And did he not fritter the funds during a boom when he should have been squirreling them away? Who was keeping him on a lead?

What about corporates who happily took the funds on offer and indulged in M&A adventures that bolstered their compensation? Regulators who were too busy crowing about the aptness of their model rather than looking more consistently at systemic risk? Consumers who were happy to live on credit and take out absurd mortgages?

And, not to be outdone in the mea culpas, financial columnists like me who did not ask enough questions and now preach like the converted about the benefits of thrift?

We are all Sashas.

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April 2. There is, of course, the question of who is in charge of the FSA. I put this to its CEO, Hector Sants, this morning in their Canary Wharf offices. Sants came from Credit Suisse First Boston to the FSA in 2004 as head of wholesale and institutional markets and became CEO in July 2007.

He thinks the division of responsibility with Lord Turner works well, like that of a CEO and chairman in a publicly listed company. He also does not buy the City view that he is associated with the ancien regime and is due for the chop, insisting that he is putting into practice as CEO a more intrusive regulatory rule that he had already been applying to the wholesale side of the business.

This does seem to me to be rewriting history.

But never mind, even if he is not allowed to stay to oversee the changes, he would make exactly the right sort of non-executive board director that big banks are crying out for.

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May 11. Many regulators and government ministers are becoming enthused by countercyclical/generic provisions. I fantasise about the superb cortados (the Spanish version of a macchiato) while they fantasise about banks being made to put enough aside on sunny days to deal with the rainy ones. That, according to Jose Maria Roldán, director general of banking regulation at the Bank of Spain (www.bdes.es) which has been applying these provisions, is a big if.

"A generic provision is about having a buffer. It is not a silver bullet to stop any crisis," he said. The central bank has also used other instruments, such as making off-balance sheet SIVs too expensive to be worth setting up, as well as a generally more intrusive regulatory system. Many more regulators cover the big Spanish banks than the FSA has used in its light touch regime, while the Bank of Spain implants a host of its staff in these big banks so that they get access to the corporate culture, not just the numbers, which Roldán believes is an important distinction.

A large part of the problem is how you calculate the amount of generic provisions necessary. Realistically, it can only be done by looking at former crises.

"'It is not sophisticated rocket science. For the banks, it is about what they will need to survive," said Roldán. "We looked at the last time, when GDP fell one per cent in 1993, and based our calculations mainly on that."

The one per cent fall in Spanish GDP was then the sharpest in 30 years - in fact, the central bank thought it was being excessively cautious in its estimate. Now, a fall of up to 3.5 per cent looks likely for 2009. But if, for argument’s sake, we assume the Bank of Spain had been able to forecast more accurately the black swan event the world is now facing and had told banks to provide much higher provisions, that would have made them uncompetitive globally.

Santander would not have become the seventh largest bank in the world by market capitalisation, nor BBVA the 12th largest.

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Of Wine, Women and the G-20

08/09/2009

To dinner at the Michelin-starred Ledbury with restaurant entrepreneur Nigel Platts-Martin, who is feeling rather cynical at a change in the law from October that is being marketed by the UK Government as fair wages for restaurant staff on the minimum wage. Without going into the nitty-gritty of it - everyone in the UK will be an expert on the issue as the media goes into hyper-drive - it is yet another ruse by the Government to raise taxes by stealth.

Meanwhile, local restaurants may be seeing a rise in "domestics," as they are known in the trade. A couple are having dinner, they have an argument, she leaves the restaurant. He either asks for the bill or, more sensibly, orders an extra-good bottle of wine for himself and drowns his sorrows.

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The G-20 weekend meeting of finance ministers has been covered ad nauseam. As will the Pittsburgh meeting of G-20 heads of state later this month.

I would argue that is a lot of wasted print and hot air for, as Paul Volcker, chairman of President Barack Obama's Economic Recovery Advisory Board, said in a speech to the Institute of International Finance in Beijing a few months ago: "Converting the substantial agreement in principle [on reforming the financial system] into the specifics of national legislation and administrative arrangements will be a big challenge."

In essence, a lot of what is agreed may not prove politically feasible.

That said, let me add my two cents to the discussion - for two cents is nothing in the context of the nearly $5 trillion in state support to the global financial sector.

The requirement for banks to hold more and higher-quality capital makes sense. Like motherhood and apple pie, one can't argue against it.

But how this works in practice will be interesting. The G-20 said this is not forecast to happen till "recovery is assured," a vague phrasing that will be subject to all sorts of differing interpretations (two quarters of positive GDP growth? a couple of years?). Additionally, each country comes out of recession at its own pace, so how will higher capital for banks be applied globally to take into account competition concerns? And how are banks supposed to lend more yet hold more capital?

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Parts of the rest of the G-20 communiqué pick up on the excellent measures, such as countercyclical provisioning and off-balance sheet measures, that the Bank of Spain already applied (see blog of May 11, with supervisor Jose Maria Roldán of the Bank of Spain).

But again, I would worry on how these are applied. Firstly, many regulators are not of the standard of the Bank of Spain. As one banker said to me: "You don't screw around with the Bank of Spain but the FSA might not be around tomorrow. It has lost political clout within the EU landmass as the French and Germans have taken the upper hand."

Secondly, governments, bowed under the weight of fiscal stimuli, are so intent on tax-raising opportunities they will ignore common sense. A bank chief executive suggested to me that, in their need to lift up every rock and stone to get money, they would put pressure on regulators. He imagined there would be informal conversations between the banks and the regulators along the lines of: "if you want us to go easy on stress testing this quarter, hand over a list of Jersey accounts."  Perfectly legal Jersey accounts.

Thirdly, there is the law of unintended consequences.

Like the extra bottles of superb vintage wine consumed in restaurants by chastened men.

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We are harking back to an earlier era. Nationalism is on the rise, whether it be liquidity requirements for the branches and subsidiaries of global banks, the EU Commission threatening punitive measures on foreign-currency denominated mortgages or Harden's London restaurant guide giving top billing to British restaurants and dismissing new French arrivals.

Socialism is also on the rise, whether it be Lord Turner stating that parts of the City might be larger than "socially optimal", governments taking control of large sectors of the economy and, even worse, their assumption that they can do a better job than the private sector. History gives the lie to that myth.

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The best "domestics" of all have to be those between the so-called allies in the Second World War. As detailed in Francois Kersaudy's book, "De Gaulle et Roosevelt", they were humdingers, with the US president accusing the Frenchman of being "a fanatic and a dictator", while the latter said Roosevelt was "mad" and UK Prime Minister Winston Churchill was "a gangster".

Churchill, at least, drowned his sorrows in wine and champagne. He reportedly said in 1918, "Remember gentlemen, it's not just France we are fighting for, it's Champagne!"

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Quis custodiet custodien?

01/09/2009

It was a given that Ben Bernanke would be reappointed as head of the Federal Reserve. Continuity is key in these times of central bank experimentation. But as Morgan Stanley Chairman Stephen Roach wrote in the FT a few days ago, the Federal Reserve should not be given a host of new powers, as proposed by President Obama, without greater accountability.

There is a similar problem with the Conservative plans for terminating the FSA and making the Bank of England all-powerful. Alex Hoare, chief executive of Hoare & Co, makes the point forcefully.

“The idea of a single monolithic regulator worries me: quis custodiet custodien?” he says. “At present, things may slip between the cracks, but at least we have a healthy public debate, and we can negotiate an uneasy balance between the requirements for depositor protection, economic policy, competition policy, and international politics.”

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To the City to see the man with the impossible surname. Robert Stheeman, chief executive of the UK’s Debt Management Office (www.dmo.gov.uk) is busy. He is in charge of financing the Central Government’s Net Cash Requirement, or CGNCR, an impossible acronym. It is £220.8 billion for the fiscal year to March 31, 2010. So far, £94 billion of gilts have been issued.

Classic theory would have it that all these billions being issued by so many governments will crowd out the private sector. And we are talking serious billions: the US’s Congressional Budget Office last week announced the 10 year deficit would reach $7,140 billion, $2,700 billion more than it forecast in March.

 “I don’t think [crowding out] is the issue,” says Stheeman. “There are very distinct investor bases for fixed income, credit and non-credit. The key issue is how much liquidity is in the system and how the market allocates that liquidity.”

Governments, he says, are benefiting from investor risk aversion and the “biggest challenge for all governments will be when risk appetite increases.”

The current situation – a five-year gilt yields two per cent - is “great in terms of the cost of borrowing but it is unrealistic to expect it to persist,” he says.

The market recently drove gilts down as tax receipts plummeted in July, raising the spectre of even larger debt issuance. Not suprisingly Stheeman, a former Deutsche Bank banker, would not be drawn on this. Cash requirements for the Government are published twice a year, with the next one due this autumn.

However, a major boost in risk appetite does not look likely any time soon, despite the stock market bubble – or at least it seems not, when the Bank of England recently increased quantitative easing by £50 billion to £175 billion. (In fact, three members of the Monetary Policy Committee, including Governor Mervyn King, were outvoted in their desire to inject £75 billion).

Not that those funds are being used in the way the Bank of England would like. Bank lending to companies fell by £4.1 billion in the UK in July. That is the largest monthly drop in this downturn. Banks are hoarding liquidity, some of it in the Bank of England itself, which makes the notion of negative interest rates potentially attractive for the Old Lady of Threadneedle Street.

[Editor’s note: that £4.1 billion fall in business lending is taken from the BBA’s statistics release for July 2009. It has been skewed heavily by a single short term transaction between a bank and a public sector entity which was taken out in June and repaid in July. Hence this large repayment contributed greatly to the fall in business lending in July]

However there will come a time when risk appetite will increase. Then, Stheeman’s job becomes not so much impossible as expensive. For the UK Government and for taxpayers.

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Returning to the theme of the FSA’s termination by the UK’s Conservative Party after the next election, I enjoyed a glass of water – these were the last days of summer and times are still tough - with a savvy political consultant, who lambasted the regulator for its lack of political nous.

“What the FSA got wrong was that it did not effectively engage with the Conservatives. That is how it got to the situation where it was being abolished,” he says. “It was purely a Gordon Brown creation, filled with folk who used New-Labour speak.”  (Note he already uses the past tense when speaking about the FSA).

He says there has been major opposition to the idea of the Bank of England regulating everything from insurers and asset managers: “Banks are used to dealing with the Bank of England but insurance companies and asset management companies are not.”

He believes the Conservatives were surprised by the depth of opposition to FSA elimination and that Baroness Noakes, the Conservative Treasury Spokeswoman, has been told by Shadow Chancellor George Osborne to go on a City charm offensive.

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Let me close with some wise words from Charlie Bean, deputy governor of the Bank of England who, bless him, is one of the few out there who is not intent on blaming bankers for the crisis:

”As in Agatha Christie’s Murder on the Orient Express, everyone had a hand in it.”

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A hedge fund perspective

25/08/2009

Near Brompton Cross in South Kensington, Jeeves, a drycleaner, has a big sign in the window: “Bankers still Welcome. 7 shirts will be done for the price of 5, How’s that for a bonus?”

I thoroughly approve of a deal and of the open arms to much maligned bankers. I even approve of bonuses. However, on a global scale, nationalised banks that have the effrontery to pay enormous guaranteed bonuses are abusing public trust, while those that argue they have not taken government money are conveniently ignoring that the whole macro system has been transformed in order to bail them out.

Or why else do we have quantitative easing and the slashing of interest rates and enough moral hazard to drown in?!

I am also somewhat mystified by why the FSA’s new remuneration code insists that firms should not enter into contracts with individuals which provide guaranteed bonuses for more than one year (my italics). A rule like that is made to be abused.

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To lunch at the Boxwood Café in Knightsbridge with Michael Hintze, chief executive of CQS, one of the few asset management companies running hedge funds that met investor redemptions.

As a result, “we were used as an ATM” by some investors and prime brokers, he says. Pre- the Lehman explosion to a couple of months ago, assets under management fell from $10 billion to $6.4 billion, the majority of which was due to redemptions rather than performance. Hopefully, this enlightened attitude to customer service will lead to inflows back. Hintze points out CQS is beginning to see net subscriptions.

Australian-raised Hintze, who spent three years as a captain in the army, is the founder, chief executive, senior investment officer and chairman of the CQS executive committee. Surely there is a key man problem here?

"If I got knocked over by a bus, it would go on," he says. "I don't pay people not to get advice."

He, like most of the industry, is concerned by the EU’s draft Alternative Investment Directive. “It is clear you need rules for the effective functioning of markets. What is peculiar is that it is not about market stability,” he says, pointing out that the credit crunch was not caused by hedge funds, while the shadow banking system is about issues such as structured investment vehicles (SIVs), “but those are run by banks.”  He also argues that hedge fund strategies and structures are in many ways dictated by what banks allow them to do.

He says the draft directive in its present form is more of a “UK plc problem” as it makes countries such as Switzerland more attractive to set up a fund (“I won’t go off but at the margin it will have an effect”), is arguably protectionist on the back of the passport requirements thus potentially inviting US retaliation, while its insistence that depositories must be EU credit institutions would make global trading very difficult.

If passed in its present form, the effect overall would be to limit pension fund choice and increase the cost to pensioners. Still, not all hope is lost, as there is some pretty hard lobbying going on, not least by the UK Government. Better late than never.

Hintze, who has a MSc in Acoustics, among other degrees, is not surprised by the market run over the last months, noting the huge amount of liquidity being pumped into the system by governments via fiscal stimuli. On the banks, he believes the banking system is fine.

“Would you buy banks here [in the UK?] Yes you would.”

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A few interesting statistics.

a. Chinese regulators are telling the banks to focus their loans on the real economy, as they have been helping fuel a stockmarket and property bubble. The forecast is for 40 per cent loan growth this year. This is a classic example of how government intervention – the Chinese government had pushed the banks into abandoning their new risk management systems to ensure economic growth – always has unintended consequences.

b. The UK’s five largest mortgage lenders were responsible for nearly 75 per cent of all loans in 2008 as smaller players withdrew from the market due to problems in accessing wholesale funding, according to the Council of Mortgage Lenders. Competition is waning everywhere.

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And just for fun:

A Member of Parliament to British Prime Minister Disraeli: "Sir, you will either die on the gallows or of some unspeakable disease."

"That depends, Sir," said Disraeli, "whether I embrace your policies or your mistress."

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There are more important things

19/08/2009

Staying with friends in their Provençale heaven of La Verriere brought home to me the importance of balance and quality of life, and the question of whether small firms provide this better than large ones. The house party boasted two examples of this trend, in the shape of a married couple of French investment bankers.

Pascale Alvanitakis-Guely, the former head of hedge fund banking at Lehman Brothers, earlier this year set up Audentis Partners, a firm which primarily advises institutional investors on the secondary market for hedge funds. This has become all the more important for investors who are seeking to dispose of their locked-up hedge fund assets.

In May, she announced a joint venture with Cogent Partners, a leading advisor on private equity secondary markets, thus covering a wider range of alternative assets for institutions.

Meanwhile her husband, Paul-Noel Guely, took the boutique route six years ago. The former head of software and services at Goldman Sachs, he is the founder and managing partner of Arma Partners, which provides corporate finance advice to TMT companies.

Both have taken advantage of financial crises - the end of the firm in Pascale's case, the bursting of the tech bubble in Paul-Noel's.

They are not alone. There were 282 new financial companies seeking FSA authorisation in the second quarter. Although the single largest group consisted of independent financial advisors who sell retail products, the other major group consisted of financial services boutiques specialising in fund management, private equity and corporate finance.

The two Guely's note that the attraction of moving away from the large investment bank comes from being at a certain stage in one's career - they are both in their mid-to-late 30's with young children - plus "knowing all your colleagues' names, getting paid in real money with an equity stake in the business, the satisfaction of running your own business" and, last but not least, spending the same amount of time but much more productively (i.e. politicking is kept to a minimum).

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I first met Jaime Caruana when he was Governor of the Bank of Spain, a technocrat par excellence. At the time, I wrote the following in my column in The Banker: "There is a touch of Felipe II to the work-obsessed Mr Caruana. Like one of Spain's greatest kings, there is an ascetic side to him. When in the 16th century Spain was the most powerful nation on earth with a large empire, the King insisted on living in a small room in the austere palace-cum-monastery of El Escorial, near Madrid. His workaholic ways were considered exceptional at a time when royalty was more into pomp and dissoluteness."

Now, as general manager of the Bank for International Settlements, the central banker's bank that has become rather more powerful on the back of the crisis, he is in his element. Below is what he told me about whether private equity should own banks; below that is my translation of his words. He may, just may, disagree with my translating skills.

"There is no simple answer [to whether banks should be owned by private equity firms]. Banks are different from other companies, with systemic risks and taxpayer bailouts. Shareholders have important roles in setting strategy. The more speculative, short term strategies advocated by some private equity firms may not be suitable. I would not go so far as to say private equity could not do it, but it would depend on their approach," he says.

In plain English: I find the idea utterly abhorrent.

For a full interview with him, www.iht.com

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When I first read Siegfried Sassoon's World War I poems at school, they caught my heart in a way that few poets ever have. At a time when the deaths of the young in Afghanistan are mounting, I have just chanced upon one of his most moving ones.

Sir James Sassoon, a distant relative (see blog dated 3 August 2009) of the poet's, brought to my attention the fact that the executors of Siegfried Sassoon's son George, who recently died, have agreed to sell the poet's diaries and other World War I material to Cambridge University Library for £1.25 million. A person or institution with deepish pockets would be much appreciated.

Suicide in the Trenches
(23 February 1918)

I knew a simple soldier boy
Who grinned at life in empty joy,
Slept soundly through the lonesome dark,
And whistled early with the lark.

In winter trenches, cowed and glum
With crumps and lice and lack of rum,
He put a bullet through his brain.
No one spoke of him again.

You smug-faced crowds with kindling eye
Who cheer when soldier lads march by,
Sneak home and pray you'll never know
The hell where youth and laughter go.

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Facing a regulatory overdose

03/08/2009

Morgan Stanley kindly hosted a London School of Economics Womens Alumni Network event a few weeks ago. I was the guest speaker, in charge of plugging the LSE Alumni Professional Mentoring Network, which I chair. Difficult to do so over the sound of Michael Jacksons showbiz funeral, broadcast over the AV system. It could not be turned off despite repeated requests.

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Rumour has it that French Economy and Finance Minister Christine Lagarde will be the new Internal Market and Services Commissioner on the back of a deal that saw President Nicolas Sarkozy, currently suffering from wife-induced exercise-exhaustion, drop his objections to Jose Manuel Barrosos second term as Commission President.

Wider of the mark are rumours that Baroness Vadera, Prime Minister Gordon Browns explosive adviser, might become Competition Commissioner, say EU sources. Her well-known absence of diplomatic skills make her particularly ill-suited and, as a consequence, bound to be ineffectual in the role. In any case, Barroso is more intent on keeping the French and the Germans happy, and is said to be only paying lip-service to a Brown government which he assumes will be out of office during most of his tenure.

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To Westminster, awash with slow-moving summer tourists, for a coffee with Sir James Sassoon, one of the architects of the Conservative Partys radical overhaul of the City.

He disputes the notion that its announcement of the elimination of the FSA will lead to three years of uncertainty, pointing out that this is not a fallow period, but one where there are ongoing talks with the FSA, the Treasury and the Bank of England as to how, if the Conservatives win the election, their plan will be implemented. Sir James also points out that Treasury officials will now be obliged to work up plans based on the Conservative White Paper. He argues that this is a more open and responsible approach than the lack of any consultation in 1997.

Placing the banking regulator inside the Bank of England is causing concern among foreign banks, who say the central bank lacks an international perspective on the issues and is much too UK-centric.

"We dont think the FSA or the Bank of England has got it right. Our plan gives us an opportunity to rethink the way we engage in Europe and the plan to have a Treasury minister responsible for European issues has been well received," says Sir James.

As to criticism of Tory thoughts on which body takes on responsibility for market regulation, with the Takeover Panel and the Financial Reporting Council saying they have not been consulted, Sir James says this is because the touted idea to have them merge with the markets division of the FSA is simply that, and not decided policy. "If you look at our document carefully, we say we will consult widely on this. This is an option and it is up for discussion. We will spend the autumn talking to anyone who wants to talk. London must continue to have world leading market regulation. We now have the opportunity to consider whether we can do it even better."

Sir James, bred in the SG Warburg stable, also notes the great challenge of privatising Northern Rock, Lloyds TSB and RBS when the UKs last major privatisations were in the mid-90s. "There are no teams in any bank who have worked on big privatisations, nor civil servants in Whitehall," he says.

The Conservatives, or Labour if they cling on to power, will face the challenge of balancing the desperate need for funds to counteract the huge build-up of government debt, with the need to ensure more competition enters the banking market via sell-offs of parts of the banks. Not an enviable job for whoever succeeds John Kingman, the civil servant who just announced his intention to quit as head of UKFI, the body that controls the government stakes in the bailed-out banks.

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A regulatory overdose is not the only threat facing banks. Dont forget the internet. United Airlines in the US faced a wave of bad publicity after a band member posted a song about the airlines destruction of his guitar on YouTube. It was viewed 3.7 million times.

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A rant from Chelsea

23/07/2009

I generally believe that being a career woman by day and a Chelsea housewife by night gives me the best of all possible worlds. But recently, as I walked down my deserted, cherry-tree lined street in Chelsea, and counted the number of my girlfriends ensconced for the summer in Cornwall/Provence/Umbria/Andalucia, I wondered whether I am mistaken.

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Mark Hoban, Shadow Financial Secretary to the Treasury and an accountant by training, was heading off for his summer break the day after I met him for coffee. He may well be based in Brussels if the Tory Party makes it into government. That is one of the best suggestions in their recent blueprint for overhauling City regulation.
Hoban mentioned how European Commission officials said the Brits did not engage on a sustained basis. They arrived late for meetings and left early. "I suspect the only way to build up relationships with our European peers is to be there more often," says Hoban. That is crucial as the crisis means a much more interventionist Commission will be in place after October, he notes.

These were his answers to the objections to Tory plans. My comments are in italics.

1. We will have three years of inaction due to your decision to abolish the Financial Services Authority (FSA).

"I don't think we will. We have set out our plans clearly and not to announce any plans would have created huge uncertainty. But it does require the leadership of the institution to stay focused on regulating financial services rather than where their desks are." I did not realise the FSA was staffed with extraterrestrials rather than humankind.
I think tweaking the system [as the Labour Party has suggested] would not work. He could well be right but there was no need to go that far.

2. Bank CEOs are fed up with having regulation divided up between so many bodies and your system will make it worse.

"By bringing together the FSA [minus its regulatory powers] and the Office of Fair Trading (OFT) in consumer credit, the Consumer Protection Agency will help with this problem. We also want to see more transparency and make it easier for retail consumers to switch bank accounts." An action cannot be beneficial to both banks and consumers.

3. Even with massive City job losses, the FSA is having trouble recruiting top people.

"Working for the Bank of England will be seen in the City as having kudos. The FSA is working hard at recruiting better people, but they had closed it down as a career route, partly due to salaries. The Bank of England will need to have more resources to recruit people so pay is less of an issue. Also, there will be a programme of secondment from regulated firms to the Bank, a real benefit to them as they will then know how the regulator works." Absolutely true in our super-regulated New Age.

4. There is a conflict of interest in putting regulation and monetary policy under one roof in the Bank of England.

"We deal with this by having two committees. We say it is not appropriate to have interest rate policy determined in part by asset prices. A new Financial Policy Committee will deal with asset bubbles and conventional regulation. It will be chaired by a powerful deputy governor. There will be a degree of overlap with the existing Monetary Policy Committee, chaired by Governor Mervyn King, which works well." Worth a try, although the tensions between King and, possibly, deputy governor Paul Tucker as the FPC head, will be fun to watch.

5. The oligopoly in the banking system just got worse and you have shied away from splitting up the new behemoths.

"When we return RBS and Lloyds to the private sector we need to be informed by the OFT and the Competition Commission and also ensure there are not disproportionate barriers to entry." Difficult to match the goal of getting top price for the banks yet making them hive off businesses. With capital requirements even higher and the regulatory burden even heavier, the barriers have zoomed up globally.

"We believe there should be a closer alignment between the degree of risk and the capital held. Weve said we think there is a strong case for prising apart the more risky from the less risky activities. But this has to be taken at an international level. We dont want to impair the competitiveness of British banks unilaterally."

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The rating agencies certainly havent made any mistakes. I refer to their lobbying efforts, not to their analysis of securitised products.

They are getting away with the light touch regulation remembered with nostalgia by banks, hedge funds and private equity firms. Under the Obama administrations legislation, presented to Congress a couple of days ago, they will have to register with the SEC and comply with a number of new rules.

It is, however, beyond belief that the agencies are not being forced to find a funding model other than that of the issuer paying for the rating a humongous conflict of interest. The rule that would stop them doing consultancy work for an issuer they rated does not go far enough.

Still, with that caveat, Moodys recently published an excellent piece of research on the global banking system which pointed out that despite a profitable quarter for some banks and signs that the worlds economy is stabilising, most banks are facing "significant hurdles on their path to economic recovery."

The report notes that that banks' "financial fundamentals are still on the downward slope, mainly because of the delay that exists between the end of a recession and actual charge-offs." An obvious point, banking analysts would say, but one that bears repeating amidst the euphoria that is gripping the markets.

Upgrades for the banks are unlikely, says the rating agency. Back to my rant: why, oh why, should rating agencies still have the power to determine whether a pension fund can hold a security or how much it will cost a financial institution to raise funds?

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Too much ranting overall. Some people might say I need a dose of the Chelsea housewife holiday.

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No pool toys for the banks this summer

13/07/2009

To a private view of the Jeoff Koons exhibition at the Serpentine Gallery, courtesy of Pi Capital.  His latest series features inflatable pool toys for toddlers. Except everything is not what it seems. Homage to Salvador Dali lobsters, dolphins and turtles, are not light as air but made out of aluminum and painted to resemble the real thing.

Not unlike Nellie Kroes, the formidable EU Competition Commissioner (http://blogs.ec.europa.eu/neelie-kroes/). Except it is the reverse: she appears a heavy-weight when her powers are fast waning.  In the meantime, she scared the living daylights out of Lloyds Banking Group shareholders with her statement at the end of June that it could be forced to sell its Halifax or Bank of Scotland branch networks to comply with European anti-trust rules.

However, according to informed sources, with the current Commission’s term ending in October, the French and Germans are both intent on occupying the competition space with a nominee of their own who will be more amenable to a lenient view of what needs to be sold by any industry that has received state help. That would apply for banks, car manufacturers…in fact, few are the industries that do not seem to be getting government hand-outs.

Kroes is clearly made out of metal, but her effect may be as insubstantial as a child’s pool float.

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Similarly, I am not entirely sure I understood the fuss over the UK’s Financial Services White Paper (www.hm-treasury.gov.uk/reforming_financial_markets.htm). Not  that it was flimsy as a child’s pool toy, but it rehashed a lot of the new accepted wisdom – countercyclical provisioning, tying in compensation to longer term risk, more of an emphasis on systemic risk and bringing non-bank institutions into the regulatory net. It stuck to the Tripartite System invented by the Labour Party, which is still clinging to power, and gave the FSA more power.

Unexpected change was not going to be in order under a weakened government that faces the probable loss of a general election within 12 months to a Conservative Party that has radically different ideas on the shape of the financial sector. These include the notion of handing back responsibility for systemic regulation to the Bank of England and breaking up banks that are too big to fail.

The latter is unrealistic. How exactly would the maximum size be determined – market share in current accounts? Or dominance of the SME market? Or the linkages with international banking markets and if so, how are these calculated?

Then the break-up itself would be a hugely complicated exercise. If there is an investment banking side to the business, how do you draw a clean line between it and corporate banking – back to Glass-Steagall – or don’t you? And who will buy the extra branches, business and employees at a time of shrinkage? Does the bank have the right to decide who to sell to – presumably not wanting to make a sale to a feared competitor – or the government? Or might it close down the branches with more job losses at a time of increasing unemployment?

Plus, how will bank managements have the time for this added responsibility when they are barely coping with the current recession and the expected wave of new regulation?
The practicalities of easy phrases like “too big to fail” will, I predict, stymie any break up plans. I will be talking to a number of Conservative policy-makers in the next few weeks to further understand their thinking.

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As for the mooted pre-funding of the deposit protection scheme, an expensive proposition, I doubt the legislation can be put through before a general election. It is part of an attempt to get rid of risk in the system. This is an impossible, albeit worthy, proposition.

The lunching crowd at the Institute of Economic Affairs (IEA) received a different insight into risk from the former ceo of Invensys and Blue Circle, Rick Haythornthwaite. He spoke on the back of his chairmanship of Gordon Brown’s Risk & Regulatory Advisory Council, a body whose findings are sadly bound to be ignored as the government is in full electioneering mode.  I am not entirely sure they would have listened anyway. www.berr.gov.uk/deliverypartners/list/rrac/index.html

The former BP executive and chairman of Mastercard noted that “risk aversion does not come free.” The cost is measured in the erosion of civil liberties, excess bureaucracy and a blame culture. He also stated that “we need to resurrect caveat emptor” in response to my concerns about the excessive mollycoddling of consumers of financial products.

On the other hand, perhaps one should not listen to him. Haythornthwaite’s notions of risk are skewed: he has chosen, even though apparently of sane mind, to take on the chairmanship of Network Rail. We are bound to see his face plastered all over the tabloid press sometime in the next couple of years. They will be baying for his blood on the back of delays/an accident/a strike/increased ticket prices.

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Prime Minister Putin of Russia has told bankers not to take any summer holidays. So, no pool toys for them.

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Grovels in a Car Park

06/07/2009

What do an European Union Commissioner, a handful of top City deal makers, a Mexican jewelry designer, a hedge fund ceo and the Lancaster Herald of Arms, all have in common?
A car park.

They were among 120 people at my annual summer party. In credit crunch mode, the champagne no longer flowed freely but the white wine did. Similarly, the Orangerie in Holland Park, the usual venue, is too much identified with boom times, let alone too expensive. Instead, the party took place at a friend’s antiques emporium in Fulham www.hrw-antiques.com. Except the heat made the adjacent cool car park a preferable venue, quirkily decorated with a Bentley and a few white vans.

If a mark of a good party is the alcohol consumed, it surely was. An emergency visit to the wine merchant took place mid-party to buy more wine, despite the fact that I’d over-catered for 150 guests.

Success comes down to people.

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Angela Knight, ceo of the British Bankers’ Association, is one of them. Her defense of the banking industry has been outstanding. At the BBA’s annual conference last week, she said in her speech, “Size does not determine complexity.”

It is, though, certainly a factor. And it is worrying that JP Morgan Chase’s Tier 1 capital went up 53% in the last year, making it by far the world’s largest bank. The Top 25 banks in The Banker magazine’s authoritative annual ranking now account for 40% of the total Tier 1 of the Top 1000 and 45% of assets. Tellingly, 80% of the worst profit performance list is also dominated by many of them. http://www.thebanker.com/top1000.php

Knight also said that “splitting banks does not make sense.” How she will reconcile this statement with, perchance, representing the Conservatives in the House of Lords in a treasury role after the next election will be an interesting exercise. This does assume the Tories win – not yet a fait accompli – and that Shadow Chancellor George Osborne persists with his unrealistic idea of breaking up state-controlled banks, rather than more sensibly making their capital requirements proportionate to their size, what Lord Turner of the FSA calls a “capital surcharge.”

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Paul Tucker, Deputy Governor of the Bank of England is another person to watch. City rumour has it that he will be the next governor. In his speech to the conference, one sentence stood out, despite his soporific tones.

“This is not going to be cheap for your industry,” he said, while I was distracted by his odd central parting. (For those who have noticed my hair obsession, turn to the blog on March 25, where I interviewed Standard Chartered’s ceo Peter Sands).

As she handed over a caricature of Tucker, Knight said, “We’re still grovelling.”

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Robert Gray, chairman of debt finance and advisory at HSBC, is a measured and affable man. He too, is going to be doing some grovelling. In his role as chairman of the regulatory policy committee of the International Capital Market Association (ICMA) icma-group.org he is concerned that the European authorities may take actions to rein in OTC markets which would threaten the very functioning of capital markets.

Over the counter derivatives and bond markets are shouldering part of the blame for the financial crisis due to their opaqueness. Greater transparency, says Gray, is being seen as a panacea for market difficulties but he cautions there may be pitfalls in this way of thinking.
 
Over lunch in the tranquillity of the Walbrook Club (www.walbrook-club.co.uk), an old fashioned building sandwiched between major construction projects in the City of London, where backgammon fanatics occasionally hang out, he said the particular concern is the stress that is being placed on a greater level of post-trade price transparency for bonds traded on an OTC basis. Gray argues against the same level of price transparency for bond markets as equity markets because the former are more fragmented.

The banks that trade bonds are committing capital, and if they had to disclose prices in less liquid securities shortly after having traded, other market participants could exploit the situation. Their reaction would be to withdraw capital from the corporate bond market.

"It is quite understandable that institutional investors will see greater post-trade
price transparency as making a useful contribution to meeting their valuation
requirements. But the more far-sighted investors are very aware of the
downside risks in terms of liquidity," he says.

For those who argue the US already has introduced more transparency without ill effects and that Europe should follow, he says, “In Europe we have a lot more pre-trade price transparency. There is evidence that the TRACE system has slowed down the ability of the market to execute trades. This would not show up in academic studies of its impact.” 

On derivatives, Gray sees a lot of merit in moving as much standardised derivatives trade as possible through central clearing or exchanges. But he does not buy George Soros’s suggestion that CDSs’s should be scrapped, instead noting that there is a good argument for higher provisioning against CDS risk.

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My heart sinks at the idea that banking is so starved of talent that 67-year old Sir Win Bischoff is a candidate to be appointed to the chairmanship of Lloyds Banking Group, as reports in the FT have it. The former Citigroup chairman is a very able banker, with a spending career before his involvement with the American behemoth, but surely the headhunters can come up with another name?

Once again, it is all about people.

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Are we out of recession yet?

29/06/2009

At supper a couple of weekends ago, one of the more economically-versed of the Conservative Party MPs – spare me the endless jokes about moats and duck houses – stated that all the intelligent people he knew did not buy the alarmist climate change theory, nor the idea that we were going to be coming out of this recession quickly.

The latter is backed up by top executives in US companies selling shares in their employers. Sales outstrip purchases by 22 times. According to investment research company TrimTabs, so-called insiders of the S&P 500 sold $2.6 billion of shares in June. They bought only $120 million.

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Grigori Marchenko, central bank governor of Kazakhstan and former IMF technocrat, does not believe the world is coming out of recession. This was the man who as CEO of Halyk Bank in 2008 ensured that its total foreign borrowings only ever reached 30 per cent of total borrowings, while rivals Alliance Bank soared to 74 per cent and BTA to 65 per cent.

Marchenko became governor in January and spearheaded a devaluation in early February. He part-nationalised Alliance and BTA in February and they defaulted on their debt in April. With hindsight, he says, devaluation should have been taken up as soon as the Russian rouble started falling the year before, due to the close links between the two countries. This would have helped both banks.

But he has little sympathy for investors in them who are currently involved in an exceedingly acrimonious debt restructuring. He tells them it is their own “selber schuld,” which he translates from the German, with quite a lot of glee, as “your own bloody fault.”

“They are big boys. I can definitely say, ’I told you so,’ since when I was working for competitor [Halyk Bank] I told investors not to put more money into those banks,” he says, speaking at the margins of a conference on investing in Kazakhstan.

Marchenko is hoping for a market-based solution for both banks by mid-August and to then sell the government’s stake to strategic investors.

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We are in the midst of a recession, with overwhelmingly negative GDP numbers. The High Net Worth population has shrunk below 2005 levels to 8.6 million. HNWI wealth dropped 19.5 per cent to $32.8 according to the 2009 World Wealth Report from Capgemini and Merrill Lynch. In essence, fewer billionaires and millionaires around.

Everyone I know, bar a few liars, has lost money on investments and assets. Yet expensive summer opera is sold out and Chelsea restaurants are not lowering their prices. It is very puzzling. A couple of anecdotes:

1. On Saturday, in the last summer of opera at Garsington Manor in Oxfordshire, there wasn’t a free seat in the house to listen to Beethoven’s Fidelio. This is despite the fact that it became apparent quite rapidly that there was a reason the composer stuck to symphonies and the like. His only opera lacks brilliance and nowhere does it touch one’s soul. Luckily, a monsoon-like outpouring of the heavens caused them to cancel the second half and send the bedraggled opera-goers back to their (dry) houses earlier than expected.
   
2. At the Hobart Lunch at the Institute of Economic Affairs, a bastion of free market thinking in a world where abdicating responsibility to government has become the new norm, my lunching neighbour, entrepreneur Rob Hersov, waxed enthusiastic about his latest venture.

Based on the Net Jet model of fractional ownership of jets – he sits on the European Advisory Board – the South African-born investor is now launching the same business model for yachts. Designed by renowned architect Lord Forster, they are breathtaking. (www.yachtplus.com)

His other launches include a VIP health concierge service in Europe (www.pinnaclecare.com). Surely the wrong time for this sort of discretionary, high-level spending? He doesn’t buy that, arguing that good ideas need to be executed whatever the climate, as long as there is a long term view.

“As my father tells me, it is the best sailors who win races when there is no wind!” he says.

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Unlike Kazakhstan, Turkey does not have a banking crisis, notes Suzan Sabanci Dincer, chairman of Akbank, Turkey’s largest bank by market capitalisation. See my IHT interview for the reasons.
Alas, however, some of the international investors who own 80 per cent of the 25 per cent of the bank’s tradeable stock, undoubtedly also have exposure to BTA and Alliance.

From 2002-2007 Turkish GDP rose around 7.5 per cent per year, giving the banks enough domestic business to stop them being tempted by toxic assets or foreign expansion. Recently, local consumption has started to revive, helped by tax incentives on the sales of large items like white goods and cars. But the government is limited in its capacity for economic stimulus due to its debt burden.
For this reason, an International Monetary Fund deal is crucial for international confidence. Recent cabinet changes saw Ali Babacan, a former minister of the economy, brought in as financial supremo. Bankers like Ms Sabanci Dincer believe he will tie up a deal within the next few months.

Kazakhstan does not need an IMF deal. At least for the present. “Never say never,” exclaims Marchenko. “If there is a third stage to the crisis, God forbid, if oil falls to $20 to $30 a barrel and stays there, we would need an IMF programme. But we don’t need one now with current commodity prices.”

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Doom, gloom and a teensy bit of marketing

26/06/2009

I share neither a beard nor height with Grigori Marchenko, central bank governor of Kazakhstan. But we do share a detestation of the elevation of doom-and-gloom economist Nouriel Roubini to sainthood.

Dr Doom, as he is commonly known, spends his life forecasting recession. The fact that he is finally right is like a weather forecaster permanently predicting rain. It may well do so after, say, 10 years of drought, but that does not make the forecaster prescient.

Marchenko is even more incensed by Roubini’s calling Kazakhstan the second Iceland. The excitable 48 year old says the New York based economist is like the “men who are not loved in their youth by their parents or absent girlfriends, so they are on TV all the time, always trying.”

Kazakhstan is coming out of its crisis on the back of currency depreciation, the spike in the price of oil, its main export, and an effective government stabilisation plan which draws resources from its National Oil Fund. The banks are being sorted out and will soon be available for investment – more on this in next week’s blog.

GDP this year will be between zero and one per cent not quite at the annual nine per cent plus of prior years, but “in comparison with Latvia or Ukraine, it is pretty good,” says Marchenko with a wry grin.

Interviewed at the margins of a conference in London – our last meeting had been when he was CEO of Halyk Bank in 2008 – I asked him why he had gone back to being a central bank governor, which he was in the mid-1990s. “Life is cruel, “he sighed, harking back to when he had missed out on his bonus at Deutsche Bank by taking up a government role.

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A teensy bit of marketing for my blog.

Alex Hoare, chief executive of Hoare & Co, calls me his “favourite columnist”.

Sir David Li, chairman of Bank of East Asia, says the blog: “provides a wonderful read of truly perceptive and insightful commentary and observations, all laced with humour and light-hearted comments.  That is exactly what we all need!”

John Varley, group CEO of Barclays, says, "There are blogs and blogs. There is the ‘I went to work this morning …’ variety.  And then there is Karina's.  Good content, but also stylish and eye catching detail - the colour of a tie; the raffishness of a haircut; the aroma of a cup of coffee.  Simultaneously informative and entertaining!"

I feel this is cringe-making. Not at all the way I was brought up. But if you think it sounds like Tarzan beating his breast in a display of macho bravado, click on the link above to Roubini’s blog. I am but an amateur at the game of self-aggrandisement.

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If I were a man, I would be prostrate at her feet.

Dambisa Moyo, the Harvard and Oxford-educated Zambian economist who believes aid is killing Africa’s potential, has vision and a figure of perfection.  Over breakfast at Mark’s Club in Mayfair, organised by the extremely high-powered Pi Capital investment club, she laid into the “soft bigotry of low expectations” about Africa, where open-ended aid commitments lead to corruption and local governments abdicating their responsibility for providing public goods.

She pointed out that it is much easier for an African leader to call up the World Bank and ask for a $300 million loan than to do the rounds of hedge funds and private equity funds looking for investment, which can be “quite tortuous.” A show of hands later revealed that a majority of those present at the breakfast were investing in Africa – or at least born there. Many of them were entrepreneurs who see the potential of a continent that has been done grave injustice by the Bob Geldofs and Bonos of this world.

Moyo has, of course, been called a “baby killer” by her opponents. They obviously haven’t read her book, Dead Aid.

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The US restructuring of regulatory responsibility is a damp squib. Not just no surprises, but it seems to me that Wall Street could well have written the script. Having the Fed in charge of systemic risk is not a big deal, plus they are the body most in tune with the bankers. Let us not forget that not that along ago there was talk of Glass-Steagall being brought back to life and of breaking up banks that were too big to fail.

In fact, it is the Swiss who are being revolutionary, with the central bank still talking about it, along with the Conservative Party in the UK.

I wonder about Citigroup’s Vikram Pandit as Sheila Bair, Chairman of the Federal Deposit Insurance Corporation, wants a banker more familiar with retail banking in that role. I called her the “ever more powerful” in an earlier blog.

I got that rather wrong as she wanted systemic risk powers to be vested in a council of regulators, not the competing Federal Reserve.  And, unlike economist Roubini, if she ends up being powerful ten years from now, I won’t say I told you so.

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Arrogance and sex drive are the constants

17/06/2009

From the preparations for a luxury parquet floor in a Middle East potentate’s new mansion to the London Sexual Health Programme subgroup, which is preparing for the 2012 Olympics in London. That was the wide range of conversation at an idyllic house party in Norfolk last weekend.

The problems have already started. I am not referring to the cost overrun for the Games, although a budget that soared from £2.4 billion in 2005 to the current £9.3 billion is rather worrying. (www.taxpayersalliance.com). It is the arrival of a mass of construction workers to build the Olympic facilities, with the consequent arrival of a mass of prostitutes to service them.

Next problem are the Olympic athletes, who have a strong sexual drive. The free condoms available at the Barcelona Olympics ran out on day one. After that, the arrival of the scores of visitors to watch the Games, for many of whom sex abroad “doesn’t count,” in the words of the resident medical expert at the weekend. In Greece, there was a significant increase in teenage pregnancies after the Olympics.

There are hidden costs to everything.

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According to the BBA, the Financial Services Authority has not fully taken into account the cost of implementing the new regulatory proposals suggested in the Turner report (www.fsa.gov.uk/pubs/other/turner_review.pdf).). These are currently under consideration, but in essence banks are being told to hold more capital and a higher proportion of funding in liquid form, yet at the same time to lend more.
Although a compromise will undoubtedly be found between the BBA’s position and that of the FSA, there is little doubt that there will be higher costs for the banks.
Despite this, analyst Jon Kirk at Redburn Partners (www.redburn.com), stockbrokers with whom I have done some work, is bravely upgrading Lloyds Banking Group and RBS to “buy”. He forecasts that return on equity for the two banks – as well as for Barclays - will average 16 per cent even with stable but sub-trend economic growth. 
Kirk sees around a 50 per cent upside for RBS, around 70 per cent for LBG and around 90 per cent for Barclays. Those are tempting numbers at a time when many people are living off capital rather than income.

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A Persian tale from my days as senior editor of The Banker.

At 7:40pm on a Wednesday in the spring of 2007 I left the governor of the Central Bank of the Islamic Republic of Iran as he was about to go and shout at President Mahmoud Ahmadi-Nejad.

Ebrahim Sheibany, who studied for his PhD in economics at the University of Indiana, said he had lost his temper “several times” with the president. “Sometimes there is a need for that,” said the 59 year old, a published poet who used to write about flowers and beauty.

His task, to fight for higher interest rates to combat inflation, which under the prevailing Islamic finance system are called profit rates or return rates, was stymied by “some ministers [my italics] in the cabinet who want to have lower rates,” said Sheibany. Unofficial inflation was at the time as high as 25 per cent while rates stood at 12 per cent.

A few weeks earlier, the central bank veteran had used ridicule in parliament to make his point. He said that there were only eight countries in the world where inflation was above interest rates, including such failed states as Burkina Faso.

The governor, who dressed in the standard Iranian top official uniform of shirt buttoned up to the Adam’s apple under a suit, along with facial stubble, is now the ex-governor. Despite having three more years of his term left, President Ahmadi-Nejad fired him at the end of the summer.

As reports of shootings after the disputed elections come in, I can only mourn for a country of legend and sophistication run by a populist who has squandered oil revenues and the gifts of his educated people in pursuit of his own glorification.

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With all this debate about stress tests for the banks – the Germans don’t believe in publicising the results, the Americans swear by it – it is refreshing to hear them summarily dismissed.

"Stress tests are a nonsense. You can only stress test for things you believe can happen, not Black Swans. We have learned that the impossible can happen,” says Jeremy Isaacs, the former chief executive of Lehman Brothers for Europe and Asia, now a partner at JRJ Group, an investment firm.

Names like Lehman and Bear Stearns may have disappeared, along with an Iranian central bank governor who stood up to the President, but some things never do. Like arrogance - all the major banks had very sophisticated risk management metrics yet they all had to be bailed out – and humanity’s sexual drive.

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Ostrich to fortune

11/06/2009

Good to see that analyst stock tips have almost no effect on stock prices, according to a study. My first post-university job in 1986 was as the Spanish analyst at Morgan Grenfell, an institution that was subsequently subsumed into Deutsche Bank. This was solely on the basis of my being half-Spanish and looking entirely Spanish (see photo).

I would tell my boss that Pepito in Madrid had told me to buy Telefonica shares and we must tell our clients. He would patiently explain that I needed to write a 20-page report on it. I could envisage few things as boring as going into depreciation rates in detail. Plus, the Spanish stockmarket was an insider’s market so reports were of little use.

I lasted a year and a half.

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It is always a question of time.

Conventional wisdom has inflation taking off on the back of the huge increase in government spending. The only question is when. The positive aspect of the scenario is that it eats away at the monstrously large piles of government debt. The negative is that inflation is not a domestic pet that can be kept under control.

But the worst possible scenario involves a mixture of inflation and deflation. Jeremy Isaacs, the former CEO of Lehman Brothers for Europe and Asia believes this is a possibility. It involves inflation in energy, manufactured items, food, with interest rates rising to combat this, but price stagnation or deflation in wages, real estate and financial assets.

“So you will still have massive deficits which will stop government investing in health, education,’’ he says. “It is the worst of all worlds with consequences in the social dynamics. How do you hedge against it?”

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Isaacs, a partner in JRJ Group, an investment firm, still believes in the investment banking model. He argues that the decimation of some big players – UBS, Lehman, a much-changed Merrill Lynch under Bank of America’s stewardship – leaves some clear winners. These include JP Morgan at the top of the tree, Deutsche Bank, Credit Suisse and, arguably, Barclays with its brilliant acquisition of parts of Lehman.

Isaacs, interviewed in his Mayfair office, believes there are still significant risks on the road to recovery and that a substantial drop in the value of financial assets is possible.
 
Take US commercial real estate. Over $1 trillion needs to be refinanced in 2010. Isaacs gives the example of a bank with a $2 trillion balance sheet, of which 20 per cent or $400 billion, is in illiquid and hard-to-value assets. If the bank is wrong by ten per cent in its valuation, that is equal to $40 billion, which is “more equity than most banks have.”

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But many investors are in optimistic mode and, ostrich-like, have their heads buried in the sand. I can think of no other reason for the fact that financial stocks haven’t plummeted on the back of the news that the US toxic asset clean up plan is delayed and may very well not be implemented.

Sheila Barr, the ever more powerful chair of the Federal Deposit Insurance Corporation (FDIC) said last week that banks have been able to raise capital without having to sell bad assets “which reflects renewed investor confidence in our banking system.”

It certainly does. Banks have raised about $45 million in equity in the last month or so. But investors have been wrong before. And they are wrong now. They should instead emulate the real behaviour of ostriches who, contrary to myth, do not bury their heads in the sand. Ostriches run away from predators. They reportedly reach speeds of 70 km per hour.

Investors would do well to flee some of the US banks which, without a clean up, are incapable of leading the world out of the recession. At whatever speed they can.

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To the Saxton Bamfylde summer drinks reception at the V&A Museum in London. They are headhunters with a difference, as the party proved. There was an eclectic mix of top corporate executives; a cathedral dean using very blue language; museum heads with sideburns stretching across their cheeks; and Treasury, Home Office and Foreign Office mandarins snipping at each other in an apparently friendly way.

As the centre of dominance has shifted from the private sector to the public sector, it was reassuring to note the humanity of our new rulers.

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Isaacs points to an additional hazard on the road to recovery. Although he agrees with the view that the US economy will come out of the recession sooner than other countries, he is concerned that its debt burden will take decades to solve. To fund this, the government will have to pay more to issue debt and this will weigh on the equity markets for a long time.

So perhaps equity analysts should take a break from research that has mainly proved not worth the paper it was written on, let alone the payment of a commission.

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Not without a paddle

05/06/2009

Kayaking in the Middle River canal of Fort Lauderdale in Florida over the half term holiday was not without its dangers. Signs warned of manatees, otherwise known as sea cows, which could have overturned the fragile vessel. Polite natives called out amicably from their water-front houses, whose values had plummeted 45 per cent from a peak two and a half years ago, although the rate of decline is easing. Meanwhile President Barack Obama took out a mortgage on the nation’s future, the sort of imprudent mortgage that is no longer available, with his bail-out of GM.

That is real danger.

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To the BBC a couple of days ago to opine on the House of Lords report on the UK’s tripartite regulation. It concluded that responsibility for macro-prudential supervision should be returned from the FSA to the Bank of England. This policy has a far more important advocate than an irrelevant House of Lords committee: the Conservative Party, aka our next government.

But this upheaval is not a good idea, in part because the ever more prevalent lambasting of the FSA (merited) along with the glorification (unmerited) of the Bank of England lacks credibility.

Not only had the central bank cut staff working on financial stability, but Governor Mervyn King, the born-again champion of prudence, was happy to run a loose monetary policy in the boom years and this was clearly one of the main causes of the current crisis. (Nor should we forget that another on/off advocate of prudence, Gordon Brown, now looks like exiting office abruptly).

Due to their importance, the supervision of the wholesale markets should be under the same roof as macro-prudential supervision, while the FSA has acquired expertise in this area, not least through its mistakes.

The BBC presenter wanted to know whether this policy could prevent another banking crisis. The very idea that anybody could still believe that regulation can prevent a crisis is itself a danger.

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As Obama delivered his Egyptian speech on peace in the Middle East I remembered an interview with Benjamin Netanyahu in 2004 which was published in The Banker (www.thebanker.com) Some of it is reproduced below.

In a measured voice so deep it appeared to come from his feet, the prime minister in waiting of Israel dismissed my carping about the rudeness of the immigration service at Tel Aviv's airport.

"Let me get the GDP per capita above $20,000 then the market will demand that. It is like you can now actually eat good food, in Tel Aviv in particular. Once you cross above $13,000 per capita you start getting good food. By $20,000 you will begin to get good manners," said finance minister Netanyahu in his rather dilapidated offices.

(According to the IMF, Israel’s GDP per capital rose to $31,767 in mid-2007. Netanyahu was instrumental in this, aided by the world boom).

With an American accent left over from his teenage years in the US, he said at the time: “The real handicap, contrary to what people think, has not been wars or terrorism, but primarily the rigid and bureaucratic nature of our economy which we are cutting back on now."

During his first stint as prime minister in 1996-1999 he was less successful in the economic field. He also, at the time, let the Oslo Accords die a quiet death. The hope is that, rather like the Spanish Socialist party, which had always opposed the country’s membership of NATO but in 1986 bravely reversed its stance, Netanyahu will undergo a transformation, as will the other indispensable protagonists in this tragedy that is the eternal search for peace in the Middle East.

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Having not been back to Israel since that trip, I am not aware of whether the rudeness of the immigration service has been transformed into a Floridian welcome on the back of the augmentation in GDP. Admittedly, my travelling on an expired passport could have had something to do with their attitude.  They probably thought I was dangerous, when the real explanation was incompetence.

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Such sweet sorrows

21/05/2009

It is a time for goodbyes

Bye bye Michael Martin, Speaker of the Houses of Parliament.  He failed to recognise the seriousness of the MPs expenses scandal and antagonised the public with his lack of penitence, at a time when sackcloth, ashes and self-flagellation are de rigeur among politicians.

The Sir Fred Goodwin of politics, one could call him, in memory of the ousted Royal Bank of Scotland (RBS) boss, also rather lacking in the breast-beating department.

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Bye bye Sir Victor Blank, the chairman who is being pushed out of Lloyds Banking Group following what is perceived as a disastrous takeover of HBOS by Lloyds. The lack of proper due diligence failed to reveal the full extent of the former’s ghastly balance sheet – although CEO Eric Daniels personally took the blame.

I remember being told by a top executive at Lloyds TSB within months of Sir Victor becoming chairman in May 2006 that some sort of takeover was a fait accompli. You don’t appoint a dealmaker without expecting a deal. And shareholders had been crying out for one, presumably the same institutional investors who grumbled about Goodwin’s acquisition spree at RBS but mainly went along with it.

I wonder, though, whether long-term the deal will be seen as that ruinous. There is little doubt it will cost Lloyds and the British taxpayer billions. But it leaves the institution with massive dominance in much of UK banking.

The European Commission may ask for some asset sales, but domestically, the competition authorities are somewhat limited in what they can ask for. The legal implications are far from clear. After all, the Government waved the takeover through. Additionally, whether the Labour Party or, (more likely) the Conservative Party end up in power after a general election, any administration will be intent on maximising profits from the state’s controlling stake in Lloyds Banking Group.

A one-third market share in UK current accounts and mortgages will be of stellar help in achieving better returns. Even assuming that market share is cut back, it is still much bigger than either HBOS or Lloyds TSB had on their own.

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Bye bye as well to a consensual overhaul of global financial regulation.

Over an espresso at Patisserie Paul in Chelsea, Mario Blejer dismissed the ever-growing international financial architecture as useless. The former International Monetary Fund technocrat and GLG hedge fund advisor, who at one point headed the Argentine central bank and most recently led the Centre for Central Banking Studies at the Bank of England (a training ground for central bankers from all over the world) noted that on the back of the Asian financial crisis in 1997 an “immense” system was born to deal with future crises.

This included the IMF’s Capital Markets Department and the Financial Stability Sector Assessment Programmes for over 100 countries. (It is worth noting the August 2008 one on Iceland abysmally failed to predict the demise of its economy a few months later). Plus, there was Basel II and the Financial Stability Forum.

“There was this whole infrastructure and investigation of macro-prudential indicators created. After ten years, we end up with a much worse crisis,” said Blejer. “These did not cause it but they were useless.”

Putting the sword in to the bull for the final kill, he added: “International financial surveillance and codes were a big fiasco, a dismal failure, and they distracted from the real stuff.”

Blejer’s suggestion is to leave aside calls for more intense international cooperation from the FSA’s chairman Lord Turner and others, and to focus on enforcing better national regulation.

How, in this case, to deal with regulatory arbitrage will be the big question.  

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Part of the problem is the long-standing politicisation of international financial regulation. The behind-the-scenes lobbying that goes on by governments to have any criticism dropped from IMF reports on their countries is actually upheld by a legal disclaimer in all of them that notes “the policy of publication … by the IMF allows for the deletion of market-sensitive information.”

To me, that sounds very much like an excuse for a blanket ban of negativity.

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I too will now say good-bye for today, leaving you, gentle reader, with a conclusion from the IMF’s 2003 Financial System Stability Assessment for the UK, delicious in its irony.

“The UK’s large and sophisticated financial sector features fundamentally sound and highly developed financial institutions, markets and infrastructure, supported by a financial stability policy framework that has been significantly strengthened in a number of ways in recent years, and that in many respects is at the forefront internationally.”

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Green shoots come down to earth

14/05/2009

On a sunny Sunday in the Sussex countryside, with eight-year-old boys playing cricket on a lawn and adults desultorily chatting on a terrace, it is impossible to believe in rain and snow and cold, let alone conflict and recession.

Human beings have a tendency towards optimism and group think. Nowhere is this more apparent than at the moment, where green shoots are being focused on with much more absorption than the signs of a continuing slump. In just such unconscious happiness we all gloried in the boom.

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Doom and gloom don’t fit that well with spring. I interviewed FSA boss Hector Sants in early April (for full interview www.iht.com).  It may not have been very warm but he was imbued with optimism that he was going to keep his job.

This is despite being thoroughly identified with the old regime of light touch regulation. But then he believes, contrary to popular perception, that he applied “intrusive regulation” in his three-year stint as head of wholesale markets and that the “historic operational problems at the FSA relate to the retail areas, which I was not responsible for,” as he only became CEO in July 2007.

As I have said before on this blog, a mea culpa is more welcome than a rewriting of history. But Sants should be heading back to the private sector to sit on the board of a major bank as the senior non-executive director. He is needed there rather more than at the FSA.

Plus, what could be more pleasant than gardening leave over a lovely summer?

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On the issue of blame for this crisis, the latest posting on the Institute of Economic Affair’s blog is a breath of fresh air. Entitled 'Government failure caused the financial crisis', it is based on an IEA study by 14  respected economists that dismisses the prevailing view that the financial crash of 2008 was caused by market failure that can be cured by tighter regulation.

Instead, they argue that government failure had a leading role in creating the conditions that led to the crash. This includes the monetary bubble created by central banks, the failure of regulators and central banks to apply their considerable powers better and US government policy which encouraged high-risk lending through support for Fannie Mae and Freddie Mac, both of which had explicit government targets of providing over 50 per cent of mortgage finance to poor households.

The economists point out that serious systemic problems have not arisen amongst unregulated institutions. Thus the brouhaha over hedge funds, short-selling, offshore banks, private equity or tax havens is misplaced.

Their solutions are just as interesting.

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Istanbul lacked any sign of spring last week as a cold wind blew.

But metaphorically, it didn’t sink as far down in winter as many countries in the developed world. Emerging markets are much more used to ups and downs and, as a result, their financial institutions are often more conservatively run, pace Kazakhstan and a few others. To a certain extent this is due to banking crises in the past.

Suzan Sabanci Dincer, the chairman of Turkey’s Akbank, believes the Turkish banking sector has done better partly because it went through a crisis in 2001-2 that sorted out the strong from the weak while a reformed regulator overhauled the rules.

“The discipline was harsh but today we see the fruits of it,” she said.

Additionally, growth in the economy was crucial. From 2002-2007 Turkish GDP rose 7.5 per cent per year, giving the banks enough domestic business to stop them being tempted by foreign expansion or toxic assets. It allowed them to move profits to their capital base: capital adequacy ratios at the banks are on average around 17 per cent.

Akbank, Turkey’s most profitable bank, has three extra advantages. It only relies on foreign markets for 13 per cent of its funding, of which four per cent is syndicated loans. This was crucial when international wholesale markets froze and subsequently when the cost of funding shot up. Plus the deposit base is the bank’s main source of funding, with a loan to deposit ratio of 84 per cent. And, lastly, Citigroup has a 20 per cent stake in the bank.

A strategic partnership agreement with a US bank that has been front page news for all the wrong reasons may not be an obvious advantage. Sabanci, however, points out that those close ties gave the Turkish bank an insight into how troubled the international economy and markets were, thus leading it to become much more conservative in its liquidity management in the second half of 2008.

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In Sussex last weekend I wondered what could be charged to expenses, assuming one was a Member of Parliament in this country.  A child’s cricket bat? A pork pie for a picnic? The rich, sweet baklava brought back from Istanbul as a present for an eight-year-old?

But perhaps I should be more ambitious and buy a few fully-grown trees, if not an entire forest. It could well be the only way those green shoots turn into anything substantial.

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Coffee and countercyclical provisions

11/05/2009

To Caffe Nero on the Fulham Road, corner of Gilston Road, for my morning espresso macchiato. How do they ensure loyalty? Their  proposition includes allowing dogs in, resulting in a bit of anarchy in our PC world; the friendliest staff who know your name and comment (always favourably) on your appearance; regulars ranging from set of professional photographers who have been meeting there for years, to a body builder with a chihuahua and a set of seriously yummy mummies.

Plus, this being Chelsea, unemployed investment bankers, who are just getting into the swing of their new lives.

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Unlike the neighbouring Starbucks, at Caffe Nero they don’t overwhelm you with tasteless, monstrously sized coffees.

Here are some other questions to do with size and quality.

A. A whopping $74.6 billion is needed to bolster the capital of ten of the US’s largest 19 banks, according to the stress tests. These tests involved over 150 supervisors, economists and analysts. Forgive my cynicism, but I thought we had already concluded that too many of the staff at the US regulators were not well enough qualified to regulate financial institutions, one of the many reasons for the mess we are in. Ultimately, though, the amount matters little .What matters is what the market believes. So far, it has chosen to accept the numbers. 

B. The UK Government says its banks will cost 3.5 per cent of GDP to recapitalise. The IMF estimates it will cost the UK nine per cent of GDP. In South Korea in the 1990s it cost one third of GDP. That worked. 
 
C. When is a bank too big to manage, let alone too big to fail? Emilio Botín’s right hand man, Juan Rodríguez Inciarte, says that Santander’s challenge is to manage the behemoth “as though we were small.” That means avoiding complexity in the business model and sticking to the Spanish bank’s extremely successful strategy of commercial banking based on branches, putting everything on one technological platform and keeping the cost/income ratio at 43 per cent as one of the lowest in the world. (www.santander.com)
 
D. In the first quarter this year Chinese banks made loans worth $660 billion, more than all new bank lending in 2008. The Government, which not that long ago was intent on having the big banks clean up their balance sheets, has totally reversed strategy in a bid to stimulate enough growth to keep political dissatisfaction at a minimum. There will be a price to pay.

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Many regulators and government ministers are becoming enthused by countercyclical/generic provisions. I fantasise about the superb cortados (the Spanish version of a macchiato) while they fantasise about banks being made to put enough aside on sunny days to deal with the rainy ones. That, according to Jose Maria Roldán, director general of banking regulation at the Bank of Spain (www.bdes.es) which has been applying these provisions, is a big if.

“A generic provision is about having a buffer. It is not a silver bullet to stop any crisis,” he said. The central bank has also used other instruments, such as making off-balance sheet SIVs too expensive to be worth setting up, as well as a generally more intrusive regulatory system. Many more regulators cover the big Spanish banks than the FSA has used in its light touch regime, while the Bank of Spain implants a host of its staff in these big banks so that they get access to the corporate culture, not just the numbers, which Roldán believes is an important distinction.

A large part of the problem is how you calculate the amount of generic provisions necessary. Realistically, it can only be done by looking at former crises.

“'It is not sophisticated rocket science. For the banks, it is about what they will need to survive,” said Roldán. “We looked at the last time, when GDP fell one per cent in 1993, and based our calculations mainly on that.”

The one per cent fall in Spanish GDP was then the sharpest in 30 years – in fact, the central bank thought it was being excessively cautious in its estimate. Now, a fall of up to 3.5 per cent looks likely for 2009. But if, for argument’s sake, we assume the Bank of Spain had been able to forecast more accurately the black swan event the world is now facing and had told banks to provide much higher provisions, that would have made them uncompetitive globally.

Santander would not have become the seventh largest bank in the world by market capitalisation, nor BBVA the 12th largest.

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Before I indulge in too much glorifying, the big Spanish banks do have exposure to what turned out to be dubious concoctions, rather like Starbucks coffee: Madoff and sub-prime. However, the amounts are containable. Just like Caffe Nero’s odd frappe milkshake, a dubious experiment, albeit with no mortal consequences.

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Real Madrid and Santander's strategy

01/05/2009

To Madrid to watch the Real Madrid football team train. These glorious athletes, paid in the millions, made the ball fly in unimaginable ways, rather like asset prices and credit used to.

My eight-year-old son hung around outside the dressing rooms to capture autographs and photos with his favourite players. So did a number of middle-aged men. Have they nothing better to do, I wondered, from the perspective of a woman uninterested in football. But perhaps they were unemployed bankers and former regulators – scratch that, regulators seem to have kept their jobs.

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On a more serious note, Spanish unemployment looks set to hit 20 per cent. People gasp at that statistic and at the fact that GDP is due to fall by 3.5 per cent this year.

They are wrong to do so. Spain, like Real Madrid, may not be at the top of its game but it is not doing badly. Under the leadership of former minister of the economy Pedro Solbes, so phlegmatic he was like a Swede in disguise, the country ran a budget surplus which is coming in handy to support the economy.

Additionally, the Bank of Spain is held up as an example globally due to its insistence on countercyclical provisions and the way it made off-balance-sheet vehicles like SIVs so expensive they weren’t worth it.  As a result, the country’s big banks are in a relatively good position, despite the Spanish economy’s dependence on the collapsed construction industry, responsible for around 17 per cent of GDP. If a British bank, say, had been exposed to the plunging Spanish economy like BBVA or Santander are …

Meanwhile, Jaime Caruana, the much respected former Governor of the Bank of Spain has been named manager of the Bank for International Settlements, while José Viñals, a Bank of Spain deputy governor, takes over Caruana’s latest role as head of the IMF’s focal monetary and capital markets department.

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Spaniards are not only helping shape the international policy debate but the commercial banks are posting profits. Take Santander - net profit for the first quarter down five per cent to € 2.096 billion; Tier 1 core capital 7.3 per cent; countercyclical provisions of €6.3 billion and specific provisions of € 8.9 billion. And Spain is only 28 per cent of profits.

On the other side of the equation, NPLs have soared to 2.49 per cent from 1.24 per cent, while NPL coverage fell steeply to 80 per cent compared to 134 per cent.

One more blast of statistics: Santander started 2007 with 10,852 branches and 61 million customers. After its latest acquisition of the shares it did not hold in US bank Sovereign, Santander has more than 14,130 branches and 91 million customers.

Over breakfast at the Villamagna Hotel in Madrid last week, Juan Rodríguez Inciarte, Chairman Emilio Botín’s right hand man, was absurdly insistent that acquisitions were over. “We are big enough,” he said, citing even more numbers, including the fact that Santander is now the seventh largest bank by market cap in the world.

I don’t believe him.

He said the bank needs to concentrate on integrating Bradford & Bingley and Alliance & Leicester in the UK, European consumer finance businesses, Sovereign in the US and Banco Real in Brazil. (There are rumours there have been a few NPL surprises at the Brazilian bank. Santander has not reported any).

The bank’s full takeover of Sovereign in the US is not enough to fulfil one of its strategy mantras, which is to have critical mass in cluster markets. Although it will take some time to sort out the US bank, appetising opportunities will present themselves, considering the abysmal state of the financial system there.

Germany will probably be another acquisition field. The bank has quietly built up its presence there over the last 22 years, with over 200 branches and consumer finance expertise. This would tie in with its wanting more euro deposits.

Lastly, Asia. As global head of strategy, Inciarte is responsible for that region, for the US, in fact, for the world. Where he has gone in his 24 year career in the bank, acquisitions follow. Keeping track of his travels could be a useful exercise in anticipating Santander’s next moves.

“If something irresistible comes along, Santander management will look at it,” he said. However he quickly added, “It is our duty to look at everything but we turn down most things.”

I foresee a rights issue to fund acquisitions by 2010 at the latest, following up on that of 2008, as the bank is very aware of the need to keep core Tier 1 above seven.

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In the Real Madrid grounds, a Mr Fix-It shouts down to one of the top players from the viewers’s balcony that his mother is not pleased with the garden design. Family is important. It also drags even the mightiest back down to earth.

It is the elephant in the room at Santander. Is Botín planning to hand over to his daughter Ana Patricia Botín, currently head of Banesto? That is a question Santander executives always shy away from. But it looms large.

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Tax & Treasury, Gladiators and Queen Zenobia

27/04/2009

If my husband were alive today we would be moving to Hong Kong or Singapore. The welcome mat for skills is still out in (more exciting) Asia. Or, for that matter, in Switzerland. As it is, I am in London, working with a financial industry that is hated, in a country where top rate tax payers will pay a rate over 50 per cent.

But that number, as was pointed out to me by a hedge fund CEO at a dinner party last week, does not take into account VAT, stamp duty, petrol tax and the myriad of other ways the Government gathers its funds. The annual percentage take from the six people gathered in that room was going to come to between 63 per cent and 75 per cent depending on whether moving house was part of the equation.

The CEO said he had been approached by three of his key people asking him when they were moving the firm’s headquarters to Hong Kong.

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These are rates that used to be called Scandinavian. Except that those Nordic countries – which have been cutting their tax rates over the last few years - deliver a health service worth funding, a school system of good calibre and street safety. To state the obvious, that is not the case in the UK.

Nor, for that matter, do the Scandinavians hang bankers from lampposts.

Witch-hunts are nasty. Blaming anyone involved in finance for everything (see posting below on Sasha the Dog) has gone beyond absurdity.

On top of all this, the UK Treasury’s forecasted £2.4 billion to be raised from the new top tax rate in 2010-11 is risible – its leaked internal models actually show that 69 per cent of those affected would manage to avoid paying some of it. As risible are its growth projections for the economy.

This blog forecasts – and I bet a hot dinner mine are more reliable than the Government’s – that the top tax rate of 51.5 per cent (including national insurance) will be extended to those earning over £100,000, rather than just the one per cent of adults earning over £150,000.

Let us not even mention the prospect of a hike in other taxes which may well snuff out any recovery.

London still has so much going for, but I grieve for a land of fair play, for one without a culture of simplistic blame and envy, for one where violence directed at wealth is considered unacceptable.

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Partly due to this, there was a fin de siècle feel to the fancy dress party given to launch Chêne Bleu, a wine developed over the last decade on the estate of La Verrrière in the southern Rhone region.

The bankers and hedge fund managers disguised as Cleopatras, Roman senators, gladiators and Bacchuses were not discussing the tax tsunami that was on its way. Most felt the inevitability of the pendulum swing to the left. After all, they were alreadyhaving to deal with the financial regulation tsunami that is on its way to their firms (as EU Commissioner Charlie McCreevy discussed in an interview with me earlier this month: www.iht.com).

The omens for highly-paid talent staying in London, let alone being attracted to live here, are not good. Although historical statistics don’t exist, it is clear that the life span for gladiators and the like was short. In those days, they did not have the option of moving abroad.

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I went to the party as Queen Zenobia. The third century warrior queen of Palmyra reportedly murdered her husband and then annexed the rest of Syria and conquered Egypt, rising up against Rome.

An inspirational figure who was said to walk for miles alongside her troops, she ruled for five years with the “sternness of a tyrant and the clemency of a good emperor.” Not unlike a few, now departed, bank CEOs. Although I am not sure whether clemency featured much.

The people of Palmyra consulted the oracles on their future and were told they were an accursed race “whose treacherous deeds the angry gods disdain.” (Read: anyone involved in finance).

After many battles, Roman Emperor Aurelian finally triumphed over the brave sovereign. His victory parade included captured chariots, tigers, elephants and Queen Zenobia, “adorned with gems so huge that she laboured under the weight of her ornaments.”  Head held high, she walked through the crowds in Rome, despite her feet being bound with shackles of gold and her hands with golden fetters.

I, however, in keeping with the sprit of our times, wore a cheap concoction bought in the souk of Damascus for less than a tenner. Otherwise, it might have been taxed.

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Teenage fans mob Stock Exchange chief

08/04/2009

When you are 49 year old financial executive, it is rare that 15-year old schoolgirls scream with excitement at your arrival. But that was the lucky fate of Xavier Rolet, the CEO-designate of the London Stock Exchange, when he was in Argentina earlier this year participating in the Paris-Dakhar rally.

I am not 15, nor did I scream when I first met Rolet on May 31 at a think tank weekend hosted by the Konrad Adenauer Foundation. We spoke, rather less thrillingly, about whether the “financial surprises” were over.

On September 15, 2008, Lehman Brothers Holdings filed for Chapter 11 bankruptcy, the largest in US history. Rolet, head of the American bank’s substantial holdings in France, spent the rest of the year dealing with the aftermath and is justly proud that jobs were found for nearly all the staff.

I doubt Clara Furse, the current head of the LSE (who is also not 15 years old and is due to hand over on May 20) is screaming with joy. In an interview, Rolet was cagey about what changes in strategy he planned to institute, bar mentioning significant opportunities around expanding the LSE’s range of products on a pan-European scale. He did, however, say the exchange would “review” (i.e. lower) its fees as competitors had made some changes. He also mentioned “reviewing” (i.e. lowering) costs.

His comment on the panoply of upmarket, trendy teas in the LSE meeting room (“bull market products!”) augurs some stringent cost-cutting. He lost 15 kilos during the gruelling rally and it looks like the LSE will be drastically losing – or should I say “reviewing” – costs.

On the hot topic of whether naked shorting of financial stocks, or shorting at all, should be banned, Rolet treads warily, as many of the LSE’s largest clients have espoused it. But he does point out that it can be part of “an efficient price discovery mechanism.” Arguably, if it had been applied more over the last few years, perhaps stocks would not have become so overvalued.

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To Al-Jazeera television to talk about the results of the G20 on April 3rd. My conclusion? A success bar the elephant in the room: toxic assets. If you can’t get those set aside in a transparent way  – and the current plasters being applied don’t go far enough – what hope is there for an efficient financial system to propel growth?

Rolet thinks the Korean banking crisis is more relevant to our current situation than the oft-mentioned Swedish one. He notes that when the banks went bust in the late 1990s, the government nationalised them and pushed all the toxic assets into an asset management company while recapitalising the banks. The whole operation cost one third (my italics) of their GDP. There was no shilly shallying around with insurance schemes on toxic assets or public private partnerships.

Those assets were later sold at a 10 per cent profit, which was used to help clean up the banks.

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A bit of squirming in the City – yes, some of you, gentle readers – at what is perceived at the way the Turner Review (see my blog of April 2 below) is stepping ahead of regulators in other parts of the world with initiatives that won’t work unless they are adopted internationally.

The FSA’s CEO, Hector Sants, says it is a proactive agenda which seeks to facilitate a global debate and solution, but is positively not a definitive set of proposals.

There is also concern among foreign banks in London about the FSA’s proposed power to impose tougher local liquidity requirements on branches and subsidiaries if it has any concerns about the quality of information available.

Sants said the larger foreign banks had not expressed concern about this. I have heard differently, but I note that bankers have a transformed attitude to regulators nowadays.

Although they don’t flatter them by screaming with excitement in their presence, they do quiver and shake a bit. I don’t think, however, that denotes excitement.

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Bertie Woosters beware!

02/04/2009

In this blog: Aunt Agatha, Mervyn King, Hector Sants, John Varley
I was recently compared to Aunt Agatha, a character from the PG Wodehouse series, who makes her ne’er do well nephew, Bertie Wooster, quake with fear of her disapproval (some good examples here)  I don’t quite buy the comparison, being all of five feet and two inches and rather amiable.
However this did get me musing on who has Aunt Agatha powers these days. Mervyn King, Governor of the Bank of England, has it, demonstrated by his reining in of Chancellor Gordon Brown’s spending plans via a simple sentence in a speech.
Rather amazing how King is now cast as a hero of fiscal rectitude and macroeconomic oversight. However, opposition leader David Cameron’s view that King’s eyebrows can become more powerful (as in “one twitch of the governor’s eyebrow would be enough to get our banks to behave responsibly” in the past) is as disingenuous about earlier times as it is about transferring powers to the Bank of England now from the FSA.

As for which group has lost all Aunt Agatha powers and sits on the dunghill …well, take heart, dear financiers, this too shall pass.
The temporary nature of opprobrium was brought home to me when having drinks with two top research scientists from Oxford University last weekend.  They were relieved that now no-one could be bothered to demonstrate or put bombs near their homes and research facilities. Bankers had taken over as figures of hate, not least as demonstrated by the City and Canary Wharf protests this week.
Worryingly, despite scientists having faded out of view in terms of public hate, these two were moving to Harvard University because of a lack of funding at Oxford. Nearly two thirds of British biotech companies have not been able to raise finance in 2008.

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Lord Turner, chairman of the FSA, has rapidly acquired Aunt Agatha powers. His masterful Turner Review – presumably it is now more prestigious to have a review named after you than a rose – kept all interest groups reasonably content without avoiding the thorny issues.
There is, of course, the question of who is in charge of the FSA. I put this to its CEO, Hector Sants, this morning in their Canary Wharf offices. Sants came from Credit Suisse First Boston to the FSA in 2004 as head of wholesale and institutional markets and became CEO in July 2007.
He thinks the division of responsibility with Turner works well, like that of a CEO and chairman in a publicly listed company. He also does not buy the City view that he is associated with the ancien regime and is due for the chop, insisting that he is putting into practice as CEO a more intrusive regulatory rule that he had already been applying to the wholesale side of the business.
This does seem to me to be rewriting history. But never mind, even if he is not allowed to stay to oversee the changes, he would make exactly the right sort of non-executive board director that big banks are crying out for.

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Sants was very intent on defending the rise in fees for the financial services firms that support the organisation. That presumably means he is getting quite some opposition to the request for a 36.5 per cent increase to £437.7 million in 2009/10. The rise, in fact, seems very reasonable, considering the overhaul and intensification of regulation, albeit in difficult times for the banks.

Financial services firms should just pay up quietly.

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Congratulations to John Varley, group CEO of Barclays, at escaping the clutches of Government control. As he pointed out to me in February (speaking about an earlier Government plan), when taxpayer money is committed that creates of necessity a British taxpayer agenda. Fine (sort of) for a British bank with all its activities in this country, but not fine for a bank like Barclays which, in the last few years, has produced about 50 per cent of its earnings outside the UK. Additionally, it has a higher percentage of employees and customers outside the UK.
“The UK remains a very important part of our business but the diversification we’ve undertaken over the course has been hugely important to growth and, indeed, I’d say resistance in the crisis,” said Varley.

He finished with: “We were very clear that it was not the right thing for us to do.” Pity poor RBS, which had no choice, and whose internationalisation strategy is being slashed away at.

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I would assume Varley is a PG Wodehouse fan. For those readers who aren’t, let me delight you with a quote that may not have come from Aunt Agatha but, in any case, should have: “She gave me the sort of look she would have given a leper she wasn't fond of.”

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Abba and regulation

27/03/2009

The similarities may not jump out at you. But bear with me.

For years, I was only allowed to play the CD of Abba’s greatest hits when my husband was abroad. Now, Abba lovers have come out of the closet on the back of Meryl Streep’s performance in the film Mamma Mia! My, but it turned out there are many of us! By January, it was the biggest selling DVD of all time in the UK.

Regulation, too, has come out of the closet, on the back of an abysmal performance by a number of banks, egged on by loose credit. As far back as last March 2008 I wrote a piece for The Banker on the wave of regulation heading the way of the banks. It was picked up by the FT for its Op-Ed page but sunk without a trace.

Regulation has become a hot topic. I am willing to bet that my interview with Charlie McCreevy, EU Commissioner for the Internal Market and Services, for the International Herald Tribune will get more than a few hits when it is out in the next weeks.

In the meantime, I can highlight the Irish Commissioner’s lack of enthusiasm for my suggestion that hedge funds or private equity firms set up new deposit-taking banks. Although he is working on regulation for the larger hedge funds – those that could pose systemic risks - he does not condemn the alternative sector as such.

“We must recognise that neither hedge funds nor private equity were responsible for this crisis,” he points out. An obvious point but one that some other regulators are not interested in hearing.

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McCreevy, whose term ends in October, admits that zombie banks are not much use to anyone. He is adamant that there cannot be uncertainty in the market about the toxicity in a bank’s portfolio or else well-capitalised banks, confident of the liquidity they need to grow, will not return.

“So the first thing we need to do is get the banks to identify the problem areas. They must admit to the extent of them. That means, among other things, making realistic provisions for the deterioration in asset quality that we will certainly see in the next 18 months beyond their property and securitisation portfolios – the losses for example that they will incur in their leveraged buyout portfolios, on their aerospace, leisure and hotel lending, on project finance and on credit to other areas of the ‘real economy,’” he warns.

So in McCreevy’s view, banks are not being realistic either about their “legacy assets” (surely a misnomer by US Treasury Secretary Tim Geithner as these are the most unwanted inheritance ever) or future losses. Admittedly, pricing complex assets is far from straightforward, while mark to market rules are far from fair, but many of the asset classes McCreevy is talking about are not complex.

The truth is, none of us wants to face the fact that many of the most famous banks are bankrupt. Rather like the Abba song, Does Your Mother Know, a rhetorical question if ever I’ve heard one.

Mothers always know. They just choose to keep quiet.

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The banks’ lack of acceptance of reality was borne out by a chat with my table companion at a louche Chelsea Arts Club dinner on Monday. (Sadly, in the eyes of the public these days, the loucheness would not be due to the presence of a pornographer who makes his living from the web, but to that of a senior executive from an extremely large US bank and a hedge fund manager).

Banks are refusing to sell property debt even to get it off their balance sheets, as they would have to sell it below the price at which they have it in their books, says Ben Habib, the CEO of First Property Group, which has £300 million under management and is obviously itching to do some deals. He says the banks he has been trying to deal with are under no pressure due to government injections of capital.

On the other side of the pond, Sheila Bair, chair of the Federal Deposit Insurance Corporation – now known as Geithner’s piggy bank – has hinted that banks may be forced by the regulator to dispose of loans.

It is not yet clear how that can be done. But there is little doubting that the Abba song, The Winner Takes It All, refers to the currently unassailable regulators.

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Is it time to invest in financial services stocks and bonds? A few indicators. A friend of mine who is the chief executive of a listed hedge fund just spent well over £300,000 buying a substantial stake in the company. Another friend who was the head of a sizeable asset management unit is investing in equities, including financial services. Citi’s investment management unit is looking to raise about $250 million for a fund to buy up undervalued bank bonds issued by leading banks.

I could, at this point, mention the Abba song Take a Chance on Me. But even I have had enough of them at this point.

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A banking success story

25/03/2009

I rarely notice a banker’s hair. Not even his (for top bankers are rarely women) lack of it. But it is virtually impossible not to notice the shock of white hair that covers the head of Peter Sands, group CEO of Standard Chartered. Mainly because the 46–year old’s thatch is as unruly as a child’s, not helped by his ruffling it at awkward moments during an interview about his bank.

My hands itched to take a comb to it, with a bit of the nit-deterrent spray that goes on my son’s hair every morning. (Nits are known as head lice in other bits of the world and schools have waves of them)

At a dinner I was told by some bankers to highlight a success story. Sands’s hair is not, but the bank is.It posted operating profits before tax up 13 per cent to $4.57 billion in 2008. It has not had to take government funds so far.

Meanwhile, the bank is realising every banker’s dream of deepening its share of customer wallet: revenues from its top 50 company clients rose 45 per cent in 2008. Around 72 per cent of the bank’s wholesale loan book is less than a year in maturity and it is re-pricing its loans for increased risk.

Lessons for others? Sands believes that: “you have to have a culture where bad news travels fast, where messengers don’t get shot.”

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As US Treasury Secretary Tim Geithner provides the details of the toxic clean-up and governments take on ever more responsibilities within economies, a word of warning about our new masters on the Institute of Economic Affairs website.

It comes from an economist, Ludwig von Mises, who 80 years ago showed how a supposedly “targeted” state intervention in a free economy can produce a whole spiral of follow-up interventions. Government interference produces unintended consequences, which are then, mistakenly, addressed by further government intervention.

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To the launch of the Women in the City 2009 awards at the Chicago Booth School of Business. I declare an interest – I am a judge of the awards. It highlights female success and networks in the City, all the more necessary in such times.

The position of women in the City may well suffer a mortal blow in the current recession. Many more women than men are leaving and will leave the City. As it loses its women, it will attract fewer of them in future years as role models have proved vitally important in keeping talented female employees.

It is impossible to prove that proportionately more women than men are losing their jobs in the City – employers refuse to release such sensitive data, even internally - but anecdotal evidence points that way. Take the example of the executive who mentioned that when making a number of very competent people redundant in his department he did consider whether the employee was the main breadwinner of the family.

One cannot dispute the sentiment, but the result undoubtedly is negative for women, who are often not the main breadwinners. I would expect this attitude to be more widespread and unacknowledged and its effects dire, as there are more men than women in senior positions making people redundant.

What also militates against women is their unwillingness and inability to join the classic male networks of drinks after work, golf tournaments and the like. City institutions have been aware of this and a number have helped set up women’s networks.

The value of women’s networks, especially in a downturn, has yet to be proved.

All of this adds up to the leaking out of the City of a substantial number of female role models which, allied to the City’s much discredited image, is already having a negative effect on female recruitment.

It is difficult to see what can be done. But all suggestions appreciated.

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Just for the record, I do not believe Peter Sands has nits, even though with four children he is bound to know what they are even if he doesn’t want to know. Rather like Tim Geithner and toxic assets, of which more in the next blogs.

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A call to arms?

19/03/2009

The solution to the economic and regulatory crisis is simple. Reinstate compulsory military service. In 21st century fashion, make it for men and women. As many understandably won’t want to head off to Afghanistan and Iraq, they would qualify as pacifists and do an alternative, using their skills for the good of the country. That would take care of the rising unemployment statistics that so worry a government facing elections.

As part of this, former bankers could be trotted off to the FSA for 18 months to work for the equivalent of pocket money. This would ensure a continuous stream of capable bodies to fill the spaces for the 280-plus additional staff agreed in last April’s Supervisory Enhancement Programme. It would also be cheap. And it would create long-lasting ties between the regulators and those who would return to the private sector as bankers. Bankers should also be sent to the Bank of England as part of this military service.

For communication has been one of the problems behind the financial crisis. A former Bank of England official told me that when the FSA was first set up, the fact that many of the staff in each organisation knew many in the other made it easy to lift up the phone for the sort of unceremonious chats that are critical to supervision. As time went on and the FSA grew, hiring new people, this informal exchange of information tapered off.

Additionally, Mervyn King’s unwillingness to lunch and dine with bankers, unlike his sociable predecessor Eddie George, means he is not as aware of what is going on in the City, argue his critics. Having said that, he did dine with the Worshipful Company of International Bankers on Tuesday night at the Mansion House.

Some of us wished he hadn’t. A duller speech, deliver in a duller tone, I have rarely heard. Not one laugh raised at a convivial dinner. Luckily, Alderman Roger Gifford made up for it, with a rousing cry of, “I’m proud to be a banker.” There was a big cheer.

He did follow it with a rather emotive, “But I’m a slightly humbled banker.”

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One conclusion from Mervyn King’s speech, following the presentation of the Turner Review the next day, is that there are a couple of critical divisions between the two supervisors.

In an exceedingly smooth performance when addressing the press yesterday, Lord Turner washed his hands of light touch regulation: “The philosophy we had in the past was mistaken.”

Easy for him to say, as he wasn’t around. King, on the other hand, was extremely defensive, pointing out that if the countercyclical provisions that are so praised at this moment had been in place, they would have imposed constraints on growth and the balance sheets of banks, as well as lead to a lower tax take from the City. Surely not a bad thing at all? He also seemed rather a fan of some version of Glass-Steagall.

Lord Turner is clearly not. In the report he noted it would be difficult for any one country to pursue a separation while others chose not to, particularly in the European Union, while agreement on the division would be unlikely as there are very different historic traditions in each country.  

Turner’s review was a well-crafted, balanced document, quite a bit of which had been leaked. This included the link between remuneration, capital and risk; leverage ratios; liquidity ratios and more comprehensive risk reviews, especially of high impact firms. Of interest was the crucial change that there would be steps taken to intensify supervision in the oversight of accounting judgements and unexpected support for an EU regulatory body.

Of great concern was Chapter 2, point 7: “A shift in supervisory style from focusing on systems and processes, to focusing on key business outcomes and risks and on the sustainability of business models and strategies. This shift will imply a greater willingness to vary capital and liquidity requirements or to intervene more directly if we perceive that specific business strategies are creating undue risk to the bank itself or to the wider system (my italics).”

Am I alone in thinking that sounds like carte blanche for the regulator to intervene? The FSA is giving itself permission to devise bank strategy.

One can understand the overreaction to recent events – and there may be rare times when action is justified - but we need credible safeguards in place to make sure this system is not abused. Who, after all, regulates the regulator?

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The only phrase that resonated in King’ speech, and if delivered with a bit more gusto might have received an ovation from his audience, was the recommendation that regulation should be simple and robust or supervisors will get “lost in a morass of unnecessary detail.”

The Turner Review seems to have avoided that. As the military know, manuals are of limited use in preventing wars.

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Sasha the dog and saying sorry

16/03/2009

What should an ideal head of risk at a financial services institution be like? Discussing this with a friend on the weekend – we are sad creatures - we agreed they need to thoroughly understand credit and they also need to have good political nous. But technocratic abilities tend not to be found along with people skills. The only viable option, we concluded, was to genetically engineer the new risk managers.

On a more serious note, the one certainty is that they should be on the board and count with the backing of the CEO.  Without the latter, the former is but a formality.

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To Standard Chartered to see CEO Peter Sands. I lust after so many of the museum-standard objects in their glossy headquarters. I suggested to Sands a roving tour guide in the reception area to instruct visitors on the Khmer statue from Cambodia and the Chiwara mask from Mali, a cost that he sadly did not feel could be justified in these straitened times.

Nor did he buy the idea of re-integrating the FSA and the Bank of England, a somewhat unrealistic option that is being mooted. Sands grimaced at the concept. But when even Federal Reserve boss Ben Bernanke is talking about a super-regulator rather than the even more fragmented US system of regulation, perhaps it is worth a think.

Howard Davies, director of the London School of Economics (and the first head of the FSA) also disliked the idea, pointing out that virtually nowhere in the world, bar Singapore, was there an “all singing, all dancing” regulator.

But the Conservative Party’s suggestion that the FSA should be split in two I find worrying. A lack of communication between the Bank of the England and the FSA was one of the main reasons for the banking crisis in the UK. Creating yet another separate body would surely exacerbate the problem.

Still, the most priceless comment about financial regulation has to be that of Kaoru Yosano, Japan’s Minister of Finance. In an FT article last week, he was adamant that the emphasis at the moment should be on saving “the life of the world economy. Not to comment about its beard.” A more dismissive remark I have yet to hear. In the category of “beards” I would also put tax havens and bonus payments, the two issues that peculiarly seem to be consuming a few governments who would do well to focus on the mega-crisis at hand rather than indulging in publicity stunts.

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Davies’s view of banking in the future was a sort of Glass-Steagallish one. The regulator would no longer allow banks to cover the whole spectrum of operations from retail deposits to alternative investments like private equity and hedge funds. It had proved unmanageable by the managers and uncontrollable by the regulators.

Instead, investment banking would have to be funded from wholesale deposits. M&A, private equity and hedge funds might be grouped together; retail deposits and consumer loans might be. Various combinations would be possible, but none that exposed the public to the “roulette wheel”. One outcome would be more diverse banks, including smaller localised banks. (Davies will be elaborating on this view in the next newsletter from the Worshipful Company of International Bankers).

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My son’s dog, Sasha, is a golden Norfolk terrier of unparalleled cuteness. He is also a greedy little thing, caught in flagrante on a friend’s dining table with his snout buried in the brandy butter. He has no sense of danger and has to be kept on a lead or risks being run over by a car. Some would say he sounds like a banker – smooth, voracious and foolish.

Leaving aside the good looks, which are neither here nor there, I would argue he is the perfect simile for the behaviour of many of us during the boom years. This is why I find this Government’s obsession with pillorying only the bankers maddening.

Take Prime Minister Gordon Brown. He thinks it is political suicide to admit any part in the crisis. Was he not the Chancellor, in charge of finances in the UK, for the better part of a decade? And did he not fritter the funds during a boom when he should have been squirreling them away? Who was keeping him on a lead?

What about corporates who happily took the funds on offer and indulged in M&A adventures that bolstered their compensation? Regulators who were too busy crowing about the aptness of their model rather than looking more consistently at systemic risk? Consumers who were happy to live on credit and take out absurd mortgages?

And, not to be outdone in the mea culpas, financial columnists like me who did not ask enough questions and now preach like the converted about the benefits of thrift?

We are all Sashas.

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How tightly do you hold the canary?

09/03/2009

Vikram Pandit, CEO of Citi, put this rhetorical question to his audience at a London School of Economics lecture last week entitled “A Global Financial System for the Next Generation.” He was referring to regulation.

Debonair and carefree as he appeared, trading jokes with LSE Director Howard Davies, I had the feeling he feared the canary being throttled. Odd enough to compare banks, even more so a behemoth like Citi, to a delicate yellow bird, but never mind.

But Citi is a big canary in the rifle sights of the regulators and the government. It is the systemically most important bank in the world because of its size, global reach and mix of business. It used to warble about this to the world but is keeping rather quiet about it these days.

Dividing banks into pieces was exactly what John Redwood, Member of Parliament and chairman of one of the opposition Conservative Party policy groups, suggested at the Institute of Economic Affairs, an influential free-market think tank, the day before. Especially now that some of the UK’s largest banks were in Government hands, he argued, they could be broken down into manageable units, with some sold off. This would create more competition and choice in the market, plus it would ensure that with more banks rather than fewer, there would be a diversity of judgements about risk which would lower systemic risk i.e. the lemmings would not be jumping off the cliff together.

This approach, upheld by the Conservative Party in a speech given by Shadow Chancellor George Osborne, has some merit. But it is a very complex matter to divide up a bank. Perhaps they should consult Sir Fred Goodwin, formerly of RBS, and Jean-Paul Votron, formerly of Fortis. After all, they gave it a go with ABN Amro. Plus, they are both in need of some consultancy work and the UK government should make some restitution to Goodwin for turning him into a figure of hate. Scapegoating is an ugly business.

On second thoughts, Santander’s Emilio Botín might be a better bet for break-up advice. He is still in the job, got a great deal out of ABN Amro and is a relative winner in this crisis.

Strangling the canary is exactly what Charlie McCreevy believes is going to happen.

The EU Commissioner for the Internal Market and Services told me on a recent visit to London that a tsunami of regulation was approaching the financial sector. His other metaphor? Niagara Falls. Drowning the canary, perhaps. This liberal ex-Minister of Finance in Ireland has been instrumental in holding back excessive EU interference in financial services. However, his term ends in October and the chances of another (unappreciated) knight in shining armour for the industry taking his place look slim. The zeitgeist is heading leftwards.

Like John Varley, McCreevy is dismissive of the pipe dream of a return to the simple banking of five decades ago. “Banks in the ‘50s! You had to be asked in for an appointment by a bank manager in Ireland!” he exclaimed.

Varley was just as dismissive of the vision of banks as utilities with low returns. He was contemptuous of “steam-driven banking” which would not fulfil the need for risk protection for business customers, nor the requirements of an ageing population. As he pointed out, the opprobrium being directed at securitisation ignores the fact that it has enabled millions of people around the world to own their own home. (you can see more of my Varley interview here).

Proof of the leftward shift in thinking amongst even arch-capitalists was Pandit’s exposition on the need to figure out “optimal global GDP growth” and how much credit creation that required. It took a while for me to figure out what this reminded me of.

Then, perhaps because I was back at the LSE where I got my degree in the mid-1980s, it all came back: the Soviet Union’s unsuccessful, destructive five-year industrial and agricultural plans. You start with impossible goals, turn a whole nation into liars and cheats, and then don’t produce enough to feed … the canary.

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Lessons from pirates

05/03/2009

It is scary to face 45 eight-year-olds who expect you to be entertaining for 20 minutes. However I am not sure it is as scary as facing the UK’s Treasury Select Committee. Whether or not the butterflies in my tummy as I headed to my son’s school to give a speech about pirates compared to those in John Varley’s, as the Barclays boss headed to his appointment with the Treasury Select Committee in February, is a moot point.

In any case, when I saw him a few days after his grilling, he would not admit to trepidation. Wearing one of his trademark sleeveless wool vests over a business shirt and tie in his Canary Wharf offices, Varley dismissed it as simply “part of the democratic process.”

You may well ask what relevance the little anecdote about pirates had. Or whether I am joining the simplistic, populist, self-serving attacks on bankers by politicians and the press. It is not my intention at all to make bankers the scapegoats for this whole crisis, nor to call them pirates.

But what struck me as I talked to the Year Three students at Eaton House about modern day pirates capturing vessels for ransom off the Somali coast was that they represented one of the oldest professions in the world, one which had adapted to changed circumstances.

Bankers are also one of the oldest professions in the world. Banks, in one form or another, have been around for a very long time. Those that have survived have done so because over the centuries they adapted in the face of opprobrium – see Christ and the moneychangers in the Temple in the New Testament – and regime change.

Pirates have moved on from gold bars and treasure chests full of jewels. These would entail extra risk, additional labour and increased time, in order to be converted to ready funds via a market and intermediaries.

Instead, modern day pirates capture ships like the Sirius Star, the biggest tanker ever to be hijacked, using small, fast motor launches. They have put to one side the big galleons with the skull and crossbones flag flying from the mast and have opted for flexibility. They did not try and sell the $100 million worth of oil on the ship, but held out for a payoff in ready dollars.

Piracy has become big business. At least 88 ships were attacked in the Gulf of Aden last year. Security experts estimate around $30 million of ransom was paid last year.

Banking is a much bigger business and it attracts intelligent, go-getting people, rather than desperate Somalis with no other attractive career options. But like the pirates, adapting to changed circumstances is crucial. The quandary bankers are in is that there are still many unknowns about the regulatory changes that will be imposed on the sector. Notwithstanding, the process of redesigning the banks and the profession of banking is already underway.

In my next blog, former FSA head Howard Davies, EU Commissioner Charlie McCreevy and John Varley, all of whom I have spoken to in the last four weeks, will share their thoughts on what the new banking system might look like.

As my talk drew to a close, the boys squashed up together on the library floor became intent on designing cargo ships that could withstand pirate attacks. They found it was as difficult as designing banks that can withstand crises.

My hope for this blog is that it will capture the interest of BBA members and others involved in the finance industry as much as that of 45 fresh-faced boys.

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