Category Archives: investment Banking

BREXIT – In this week of tribute to the Bard

Shakespeare lives here

In tribute to the greatest Bard

Compose some lines, it will be hard,

But once again, we are faced

With treachery, to be embraced

EU reform was his spoken mandate

Failed; now he moves to collaborate

Heed well the falseness of his word

The fear to force you into herd.

 

Those who claim to fight our case

Have failed, but want that we remain in place

What do they have us to believe?

That they knowest best; are we naïve?

EU citizens with their feet do vote

The UK is the place they bloat

We would like to welcome those

Who satisfy our needs and goals.

 

Rule Britannia, let not you fall,

Remember all you do enjoy

May this fair land we love so well

In dignity and freedom dwell

Be remembered those who gave their future

To make this nation free to prosper

Let not your spirit be subdued

By fear of raging platitude.

 

Let’s not to foreigner’s bow

Their voices hollow, not in favour thou

They would not heed to what they say

So why would we bend to their way?

We are made of sterner stuff

With resolve and fortitude, we rebuff

We are strong; not slave to obey

So bid them well, be on your way.

 

Compare ye not with a lesser realm

Who have not our powers to overwhelm

Our omnipotence they do not share

Nor standing and heritage to declare

When we do call, our voice will be heard

They dare not our call to be spurred

They will not treat us with disdain

Lest Europe will despair again.

 

Our past doth show our stealth and pride

Thus let not our omnipotence be denied

And think of England’s pleasant land

Is not for those of foreign land

Who wish to smite our honours past

And crush our national interest

Shout it loud, Britons awake

Lest those abroad your life will take.

 

So harken all you Brits, be true

To what it is you need to do

To save this land, its history share

With those you are yet to bear

Let not your offspring be denied

The hopes and dreams for which men died

Or be defined by those abroad

Whose plan for us is truly flawed.

 

Remember to the words we sang

When faced with that beleaguered land

Vera Lynn, our spirits raised

Again we showed; our courage blazed

‘There’ll always be an England

And England shall be free

If England means as much to you

As England means to me.’

 

And in the words of the great Bard himself:

This royal throne of kings, this sceptred isle,
this earth of majesty, this seat of Mars,
this other Eden, demi-paradise,
This fortress built by Nature for herself
Against infection and the hand of war,
This happy breed of men, this little world,
This precious stone set in the silver sea,
Which serves it in the office of a wall
Or as a moat defensive to a house,
Against the envy of less happier lands,
This blessed plot, this earth, this realm, this England.

Shakespeare’s Richard II

BREXIT – What a difference a week makes

univestBREXIT – What a difference a week makes

The past week has yielded so many interesting events that I have shelved my scheduled blog to consider the potential impacts to the whole EU debate.

In no particular order let us start with the UK Budget speech given by George Osbourne last Wednesday. All sounded good with much bravado albeit two of his three fiscal rules were already in shatters. But the economy is growing so such rules are only political rhetoric. However, he used this platform to make a clear statement that the Office for Budget Responsibility (OBR) had provided evidence that UK exit from the EU would damage the UK economy in the short-term. This statement clearly aggrieved the OBR as, by tea time, they had completely refuted his representations as they only provided (conveniently selected?) views provided by third parties.

Then he expounded the view that we were all in this together as he slashed corporate taxes at the same time as slashing benefit payments (some £4 billion) to the most disadvantaged. Whereas there is no doubt that the welfare budget in the UK does need to be reined in, it cannot be achieved merely by setting arbitrary limits and crossing out figures on a spreadsheet with a complete disregard for social justice. Again, by the end of the week, these welfare cuts had diluted from hard cuts, to a discussion, to kicking into the long grass, to being scrapped with the very public resignation of the Work & Pensions Secretary, Iain Duncan Smith who gave an impassioned account of his position on the Sunday morning Andrew Marr show. Let us not forget that this happened to Osbourne in his last budget as well.

Also, during his budget speech, he confirmed that the continued refusal by the EU to relax VAT rules to allow tampons to be zero rated, the so-called tampon tax (some £500 million pa), would result in the taxes collected continuing to be distributed to various women-based charities. The following day David Cameron went to an EU Summit meeting in Brussels regarding the important refugee crisis. Apparently, during a coffee break, all 28 EU leaders agreed to relax the EU VAT rules. Clearly not planned. Has Europe realised that BREXIT is gaining support? How many more rabbits will be drawn from EU hats between now and 23rd June?

It was interesting to tour the Highlands of Scotland a few weeks before the Scottish Independence referendum to test my view that Scotland would be stronger in the Union, and thus the vote would be to stay part of the UK. Having purposely stayed in B&B and small privately owned hotels it was interesting to speak privately with the Scottish people about their thoughts. In those 8 days only one person clearly stated that they wanted independence. Much was offered by the UK Government in fear of the noise by those shouting ‘independence’. Had they copied my trip they would determine that no deals were necessary. Everyone else was keeping their thoughts to themselves because of what they were seeing in places like Glasgow where Alex Salmond’s equivalent of Hitler’s brown shirt nationalistic youth movement were intimidating those who openly wanted to remain with the UK. Come the day the silent majority, proud of their heritage within the UK, prevailed. I would therefore suggest that rabbits from the EU, at this late stage, will not work. Indeed, I think the canny Scots are likely to deal Nicola Sturgeon a blow in the EU referendum. Ouch, Nicola.

Then we have the third fiscal rule imposed upon himself regarding converting the current budget deficit into a surplus by the end of this parliament. The general view on this pronouncement is that he needs a major event, such as an exit from the EU, to provide a credible excuse for missing this target, as most surely will be the case. But not because of misguided ambition as a budget surplus should be the goal for fiscal prudence, but the target has to be reasonably achievable with a balanced approach. Ouch for political ambition.

And Peter Mandelson amused me by suggesting that if Maggie Thatcher was still in charge that she would vote to stay in. Having known her views, I’m sure that she found the surrender of so much UK sovereignty to the EU by Tony Blair in her final years as depressing, and would certainly have returned from negotiations with a credible reform deal before even thinking of such a stand to remain a member. It was also interesting that Mandelson had conveniently forgotten that he proposed we join the Euro. Beware of the so-called Prince of Darkness.

Then I read a City Comment in the London Evening Standard by a journalist with the name of Anthony Hilton. Firstly, he was abusing a quote by a long deceased industrialist, Sir Arnold Hall, “What problem do we have which is so serious that (BREXIT) could possibly provide the answer”? Then he used comparators that demonstrated his armchair approach to journalism. For example, he states that the German economy can operate very well within the EU, so why can’t the UK? If he remotely understood the difference between the German and the UK economies he would understand the answer. Whereas the UK sits with the USA economy as an outsider, or open structure, the German economy is quite the opposite as an insider, or closed structure. Ownership of German companies is protected with incestuous patrimonial linkages between German banks and companies, with preferential proxy votes and cross-shareholdings. Foreign ownership of a German company is so rare that it is major news. An example of the vast difference this closed structure reveals can be illustrated by reference to the steel dumping by China. The incestuous linkages in Germany mean that steel users (car production construction, and other major engineering companies) can be compelled to buy from German steel manufacturers rather than buying cheaper steel being dumped by China. This is protectionism. Our open system cannot compel our companies to use British steel. So when our steel companies suffer the impact of dumping we can do nothing about it because it would require Government intervention – not allowed by the EU. And will Germany fully support an anti-dumping campaign against China – not likely as China is an important market for Germany exports. We should also remember that Germany makes the trade rules within the EU to favour Germany, as with the Euro fiscal policy.

He further cites Wolfgang Schäuble, the German Finance Minister, and one of the nationalistic dinosaurs standing in the way of the much needed radical EU reform, who stated at the recent BCC conference that, after BREXIT, any trade deal with the EU would be conditional on maintaining free movement, and continuation of some form of payment into Brussels. This is typical scaremonger nonsense. Do the USA, or even Canada suffer such impositions in their trade agreements? The German Foreign Minister was far more realistic. He endorsed the view that a free trade deal would be agreed within days of BREXIT irrespective of EU political views not least because the German Government would be bombarded by their major companies and banks because of the high level of exports to the UK, not to mention that imports from Germany to the UK are significantly larger than UK exports to Germany.

I could further dismantle his arguments, but would suggest that he listens to someone like Sir Peter Hargreaves, the co-founder of the very successful Hargreaves Lansdown investment manager, who has a real-world experience and suggest that not only would the UK be better off outside of the EU, but such a stimulus would re-energise the British people to take more pride in the UK, buy British, and put the ‘Great’ back into Britain. For certain the UK has problems in productivity, poor venture investment, and lack of manufacturing. Perhaps a refusal by the EU to provide goods will stimulate the UK to make their own – a boost to employment, and needed reduction in the balance of payments – all positive. We could also relabel our much heralded sparkling wine as Champagne (as do the Americans), retain our traditions of sausages, Cornish pasties, pork pies et al without meddling interference in the British way of life from Brussels.

My final observation for today is the visit by Obama to Cuba. The opportunity to re-engage with Cuba has been staring at Europe for some years, with the doors open to engage. Whilst visiting a few years ago on an exploratory trip ‘America’ still invoked hatred with the Cuban people because of the Bay of Pigs incident. The opportunities for European businesses was considerable, as was the opportunity to substantially re-establish original European businesses in sugar, and other agri-products, as well as new off-shore oil & gas finds. The inward looking nature of the EU has surrendered this opportunity to the USA who will now move in and, no doubt, ignore repatriation of former European assets. The British understand the importance of such opportunities because of their historic trans-global, outward view of the world, in stark contrast to the introspective view of the EU.

Let us hope that the coming weeks are somewhat quieter, and less damaging.

 

 

The Foundation Stones of the BREXIT issue

The Foundation Stones of the BREXIT issue Before embarking in any detail blogs regarding the political and economic merits relating to BREXIT I would like to consider the environment leading to thi…

Source: The Foundation Stones of the BREXIT issue

German Domination of Europe – When will they learn that there is a better way

German Domination of Europe – When will they learn that there is a better way

The poignant D Day events of last Friday reminded me that this year is also the centenary since the start of the First World War, or the Great War as it is more commonly known. Although I have many good friends in Germany, and hold absolutely no prejudice against the German people of today, it occurred to me that, for 100 years, the elite of Germany have attempted to mould Europe in their own image, initially through two catastrophic world wars, and currently through self-serving political and economic influence within the European Union.

It cannot be disputed that the engine-room behind the introduction of the Euro was Germany, and in spite of the so-called stringent rules of entry into the Euro, Germany allowed such rules to be significantly relaxed to allow countries to participate where compliance with the entry rules would result in such countries otherwise unlikely to qualify for entry for years to come. It is no secret that Germany has significantly prospered under the Euro – at the expense of the other member nations. These nations now seek financial support, and the German Government have a hard time selling these bailouts to the already over-taxed German people, albeit a problem created by Germany in its self-serving quest for the domination of Europe.

Sometimes I reflect that Germany, having left Europe devastated in 1945, forgets that much of their subsequent prosperity was built on their substantial participation in the Marshall Plan (whereas the United Kingdom, as victor, did not qualify for any such support and has been required the swallow the cost of the wars, and rebuild using its own resources). As with the so-called super-model of Japanese prosperity in the 1980’s I do not subscribe to the German economic model of today, and certainly would strongly oppose this model being at the centre of the European Union. The current German economic model has a fundamental incestuous instability at its core, just like the proverbial pack of cards, and just as with Japan before its economy collapsed.

And this week the German elite are flexing their self-serving muscle again by instruction Angela Merkel to support a tame federalist like Jean-Claude Juncker as European Commission president, a move that is counter to the fundamental reforms needed by all donor nations – except Germany.

I have just noticed a news headline  ‘German chancellor Angela Merkel has cautioned David Cameron not to use threats of a UK exit from the EU in his campaign to block a federalist candidate from taking the helm of the European Commission.’

Without these reforms my view is that the UK should not threaten to leave the EU, but make it very clear to Germany through the promised referendum that the people of the UK do not see their future dominated by the German vision of Europe. Maybe then the UK will have to pick up the pieces of an imploded Europe for the third time.

The Morality of Dishonesty

univestThe Morality of Dishonesty

The following story was relayed to me in a somewhat cruder form last week. The original author is unknown to me. However it had some interesting observations and so I have edited it into a relevant form for today’s society.

A few years ago two armed thieves robbed a bank – one of them shouted: “Don’t move! The money belongs to the bank. Your lives belong to you.”  Immediately all the people in the bank laid on the floor quietly and without panic.

This is an example of how the correct wording of a sentence can make everyone change their world view.

One woman lay on the floor in a provocative manner. The older robber approached her saying, “Madam this is a robbery not a rape. Please behave accordingly.”

This is an example of how to behave professionally, and focus on the goal.

While running from the bank the younger robber (who had a University degree) said to the older robber (who barely finished basic education): “Hey, maybe we should count how much we stole.” The older man replied: “Don’t be stupid. It’s a lot of money so let’s wait for the news channels to be told how much was taken from the bank.”

This is an example of how life experience is more important than a degree.

After the robbery, the manager of the bank said to his accountant: “Let’s call the police.” The accountant replied “Wait – before we do that let’s add to the robbery the £800,000 that we took ourselves a few months ago and claim that it was stolen in the robbery.”

This is an example of taking advantage of an opportunity.

The following day it was reported in the news that the bank was robbed of £3 million.  The robbers counted the money, but they found only £1 million, so they started to grumble. “We risked our lives for £1 million, while the bank’s management stole two million pounds without blinking? Maybe it’s better to learn how to work the system, instead of being a simple robber.”

This is an example of how knowledge can be more useful than power.

Moral:  Give a person a gun, and he can rob a bank – at great personal risk. Give a person a bank, and he can rob everyone – with little personal risk.

Work Related Stress – Do Corporates understand this problem, and do they care?

univest

Work Related Stress – Do Corporates understand this problem, and do they care?

Are major corporates playing lip service to EU OSHA (The European Agency for Safety & Health at Work) guidelines on work related stress and psychosocial risks? Having recently had the opportunity to review this campaign, and the proposed methodology of incorporation into a multinational corporate environment, where the primary implementation was the proposed OSHA poster campaign, and the implied consideration was not to blame management, I have my doubts that management understand the significant impact to bottom-line resulting from a stressed workforce.

What do we mean by stress and psychosocial risks? – as defined by the European Agency for Safety and Health at Work

Psychosocial risks arise from poor work design, organisation and management, as well as a poor social context of work, and they may result in negative psychological, physical and social outcomes such as work-related stress, burnout or depression. Some examples of working conditions leading to psychosocial risks are:

  • excessive workloads;
  • conflicting demands and lack of role clarity;
  • lack of involvement in making decisions that affect the worker and lack of influence over the way the job is done;
  • poorly managed organisational change, job insecurity;
  • ineffective communication, lack of support from management or colleagues;
  • psychological and sexual harassment, third party violence.

When considering the job demands, it is important not to confuse psychosocial risks such as excessive workload with conditions where, although stimulating and sometimes challenging, there is a supportive work environment in which workers are well trained and motivated to perform to the best of their ability. A good psychosocial environment enhances good performance and personal development, as well as workers’ mental and physical well-being.

Workers experience stress when the demands of their job are greater than their capacity to cope with them. In addition to mental health problems, workers suffering from prolonged stress can go on to develop serious physical health problems such as cardiovascular disease or musculoskeletal problems.

For the organisation, the negative effects include poor overall business performance, increased absenteeism, presenteeism (workers turning up for work when sick and unable to function effectively) and increased accident and injury rates. Absences tend to be longer than those arising from other causes and work-related stress may contribute to increased rates of early retirement, particularly among white-collar workers. Estimates of the cost to businesses and society are significant and run into billions of euros at a national level.

How significant is the problem?
Stress is the second most frequently reported work-related health problem in Europe.
A European opinion poll conducted by EU-OSHA found that more than a half of all workers considered work-related stress to be common in their workplace. The most common causes of work-related stress were job reorganisation or job insecurity (reported by around 7 in 10 respondents), working long hours or excessive workload and bullying or harassment at work (around 6 in 10 respondents). The same poll showed that around 4 in 10 workers think that stress is not handled well in their workplace.

In the larger Enterprise Survey on New and Emerging Risks (ESENER) around 8 in 10 European managers expressed concern about work-related stress in their workplaces; however, less than 30% admitted having implemented procedures to deal with psychosocial risks. The survey also found that almost half of employers consider psychosocial risks more difficult to manage than ‘traditional’ or more obvious occupational safety and health risks.

Having considered these definitions, and reflected on my own experience over the years creating, changing or rescuing investment banking operations I found myself compiling my top ten reasons for stress in the workplace. In no particular order they are:

  • Managers who rule by fear and/or dictate cause stress
  • Managers who do not know how to manage people cause stress
  • Managers who fear for their own position cause stress
  • Managers promoted under the Peter Principle cause stress
  • Managers who are emotional and/or insecure in the decision process cause stress
  • Managers who promote politics or other unhealthy competition amongst their staff cause stress
  • Managers who do not have an intimate knowledge of the business cause stress
  • Inexperienced people – wrong people for the job – cause stress
  • People suffering stress in their private life are prone to suffer stress in the workplace
  • Likewise people stressed in the workplace can take it home and cause stress in their private life which then reflects back into the workplace

My generic definition of a manager in this list is a strategic or tactical role, from main Board director down to line manager.

Therefore, from my own experience over many years, both as a Director of Operations and Management Consultant, my observation is that management are by far the most significant cause of stress in the workplace. This is logical if you think about it because these are the people who define the workplace.

The workplace that I speak of is probably one of the most stressful. Investment banking operations are extremely dynamic, constantly changing to meet new market demands, every transaction dealt during a trading day must be processed that day, imperfect settlement means that on a normal day some 30% of transactions fail (significant funding and hedging cost considerations), more on a volatile trading day, and little errors can result in a high cost. A typical trading day could see some USD 3 billion of turnover with an average transaction value of some USD 4 million or equivalent in other currencies. An error of just 0.25% on such volumes could result in a daily loss of some USD 7.5 million – the cost to run such operations for 1 year. So the stakes are high, and there is no room for errors.

With this background in mind it should not be too difficult to imagine the impact of any of the stress situations that I have identified above. During my career I have experienced the stress caused by poor management ranging from excessive demand on staff both in effort and time, fear, incompetence, poor leadership, breaches of human dignity, mental cruelty, demand for favour (including sexual), and physical brutality. I have experienced the human impact caused by workplace stress, whether it be mental breakdown in the workplace requiring long-term medical treatment, broken marriages, dropout, and even a premature death resulting from a mental beating from a tyrant director. In the environments in which I have worked it would be very unusual not to experience the extremes of human behaviour as it is a dynamic people business, and attracts some of the most aggressive people, many of whom have no understanding of compassion, or consideration of the impact of their decisions on others.

Examples of managers who rule by fear and/or dictate are plentiful. These people are particularly bad if they have an emotional character, and/or are very insecure. If these people are given too much power they can raise havoc in the workplace. Whether they like you or not carries more weight than merit, and total loyalty is a pre-requisite irrespective of how bad the leadership, or poor the business decisions. Very much also depends on their mood on the day resulting in erratic business decisions. Sacrificial lambs are a feature of such people as they comply with the final phases of poor management, i.e. punishment of the innocent, and decoration of the uninvolved. A manager makes a mistake; some innocent underling becomes the sacrificial lamb and loses their job.

For those not familiar with the phases of a management doomed for failure I will recount the origin of the eight original phases, which I see have now been condensed to seven or even six. In the mid-1970’s I was with Chase Manhattan Bank engaged in a project being managed by the consulting firm Arthur Anderson (no longer with us). After the first year the progress of this project was so dysfunctional that a group of us within the bank compiled the equivalent of a university Rag Mag for Christmas 1977. We identified the phases of our dysfunctional project as Confidence, Enthusiasm, Confusion, Disillusionment, Panic, Search for the Guilty, Punishment of the Innocent, and Decoration of the Uninvolved. For those who remember we also designed the tie with the motif of a picture of an anchor with a ‘W’ underneath it as presents for the associated Arthur Anderson staff, and still widely available in the City of London. This was not my first experience of poor management, and the associated profound stresses on the staff, but it was by far my most prolonged period of continual stress as a result of chronic management.

I was later asked to restructure an investment bank where the existing debt securities operations was a shambles. Operations staff were working an average 60 – 80 hours per week, there was no integration of the various functions involved, politics and finger-pointing was rife, poor transaction processing was the norm, moral was non-existent, and systems were wholly inadequate.

Having immediately realised that the executive management was located 18 floors above the operations totally removed from what was happening, and the various departmental heads were lacking the knowledge required for the business, my first task was to make it clear to the management all the way up to chairman of the bank that there would be no interference, that no-one, including the MD and Chairman, could request anything from any of my staff without coming through me first, and that my authority extended across the trading floors. I also refused to join them, preferring to have my office within the operations area (which was later mimicked by the MD). As the former head of settlements had suffered a nervous breakdown I recruited a known entity to fulfil this role, and replaced all department heads who were either not qualified, or not capable. Within 3 months anyone still on the floor at 6pm had to write down why they were still there, and put it on my desk. This is a psychological process more for them than for me as they have to read what they have written, and thus ask themselves whether or not it is credible. I needed them to go home to their families, and return fresh the next day to meet the ever present challenges of a new trading day.

After 25 weeks we had a fully integrated professional operation with new in-house systems. Politics on the floor was actively discouraged, and my door was always open to anyone on the floor for non-business related issues. At least twice each year we had informal gatherings for all staff and their families at which other halves were actively encouraged to raise any concerns they had. For every 5 people on the floor a representative was appointed, and these people were encouraged to meet together monthly to discuss any issues affecting the working environment (necessary feedback). Their output came directly to me, was taken seriously, and corrections made when necessary. We had a hard working, but happy group of people with the only workplace stress being that caused by the normal everyday imperfections in the business sectors in which we operated.

From experience I would suggest that the maxim for a stress-free workplace is to rule by consent, and lead by example.

Before restructuring this investment bank it was losing some £2 million per month through stress related errors caused directly by poor management. Therefore corporates need to understand that the overwhelming cause of stress in the workplace is poor management. Neither poster campaigns or denial will address this problem. The impact on the bottom line can be substantial if such stress is not taken seriously.

A New Multilateralism – Realisable or Wishful Thinking?

univest

A New Multilateralism – Realisable or Wishful Thinking?

I listened to the Richard Dimbleby Lecture on Monday evening with expectation of some new thinking on the way forward. The lecture was called ‘A New Multilateralism for the 21st Century’ and was presented by Christine Lagarde, incumbent MD of the IMF. My initial reaction was that it presented some interesting ideas, but I couldn’t quite put my finger on the relevance of these ideas. So, on Tuesday, I printed off the transcript of her speech from the IMF website. Having now studied this speech in some detail I find it endorses my view that the multilateral institutions of which she leads the IMF are essentially out of touch with the real problems that we face in the 21st century.

Back in the 1970’s, during the oil boom, individuals in the Middle East were accumulating vast amounts of US Dollars in cash because Western banks did not want it. Indeed I remember Swiss banks charging up to 3% p.a. to take these deposits. I actually walked into a room in a palace and saw a pile of US Dollars, and was told that this pile amounted to USD 1 billion. In an attempt to give some visual impression of this pile I am reliably informed that a standard 40ft sea container will hold USD 1 billion in fresh print USD 100 denomination bills. This money was not participating in any economic benefit whatsoever, and there was no possibility that the owner could reasonably consume these funds in their lifetime. Yet just one mile away there were ordinary working people struggling to find the money for their next meal. It occurred to me that if these funds were deposited with SAMA, and used productively producing even a nominal return, such return could be used productively to provide food for these people without any degradation to the original money. Yet the owner had no interest in such a proposition, and was content to accumulate yet more piles to look at.

Unfortunately this sorry tale has since increased in propensity, and as we saw a few weeks ago, Oxfam calculated that the 85 richest people have the same wealth as the bottom half of the World’s population. Christine Lagarde added that the richest 1% in the USA captured 95% of all income gains since 2009, yet the number of people in the USA needing food parcels to survive is now reaching pandemic proportions. She further states that in India the net worth of the billionaire community increased 12 fold in the past 15 years, enough to eliminate the poverty of that country twice over. So why has she not rationalised this into the real threat to the World Order in the 21st century?

We have seen so many billionaires created out of emerging economies such as the former Soviet Union, China, and India, sapping vast amounts of sovereign assets. The rapid nature of such wealth creation should arouse suspicion. However the point that I make is that somehow a few own wealth beyond any reasonable expectation of spending throughout their life. Many will say that they invest much of their wealth, but this only increases their existing wealth. Having met a number of these oligarchs their primary objective is to continue to increase their wealth, usually at the expense of others.

What about if each billionaire set aside USD 1 billion for investment and applied just the income to relieving poverty.

In 2013 an investment return of 15%+ was easily achievable. This would provide in excess of USD 150 million from each billion invested. The billionaire has not lost their capital, but much could be achieved with the income stream. Of course a few of these billionaires are already philanthropic and names like Bill Gates easily come to mind, and who clearly understands that he does not need such vast wealth, so uses his business judgement to make every dollar count in his selected beneficial projects.

Having brushed along with the World Bank, the IMF, and the UN for over 30 years I would suggest that they are political institutions populated by political appointees and academics who have no idea about the real world. I have witnessed a number of World Bank projects which did no more for the recipient country than to provide work for a donor country corporate, create an inappropriate monster that, within 5 years, was derelict leaving the recipient with sovereign debt but with no value to show for it. I have also seen appropriate solutions costing a fraction of the price of the expensive inappropriate concrete alternative discarded because the amount of the appropriate solution did not warrant World Bank intervention. It is interesting that Christine Lagarde acknowledges that it was the fast response of the G20 that stopped the world descending into meltdown 5 years ago rather than the institutions such as the World Bank and IMF founded to deal with such events. I think that this is a good template to use in stating that the current multilateral institutions are not good at delivering effectively solutions.

Although I am clearly in support of the outcome of Bretton Woods, we should also remember that not enough people there were visionary enough to accept all of the ideas of Keynes, and which were subsequently quickly adopted as catastrophe loomed, e.g. removal of the gold standard. Other than those wearing rose tinted spectacles no-one would suggest that the institutions that emerged remotely fulfil their ambitious mandates. I have already mentioned the lack of effectiveness of the World Bank and the IMF, and the UN is little more than a toothless talking shop today – Bosnia being a classic failure.

Christine Legrande suggests that the multilateral outcome of Bretton Woods produced ‘unprecedented economic and financial stability …. Disease eradication, conflict diminished, child mortality reduced, life expectancy increased, and hundreds of millions lifted out of poverty’.

Do we not count Korea, Vietnam, Congo, Sudan, Yugoslavia, Israel, Egypt, Lebanon, Iraq, Afghanistan, Syria …….etc as conflicts? All consumed the lives of many thousands of people including Western soldiers, left chaos and destruction in their wake, and they are still very much in our minds today. When was the last time that the USA was conclusively successful in any serious military conflict? Therefore Europe and the USA may have seen peace and prosperity since Bretton Woods but how many thousands of American and European soldiers and civilians have died in the name of preserving this peace?

To suggest that Europe has been conflict free is also short-sighted. In the past 6 years Europe has been involved in an economic war. Not too many people killed with bullets and bombs, but many have become disenfranchised, lost everything, displaced, and descended into poverty. Is this not symptomatic of a conventional war? When the vision of a European Union was first put to the people the rhetoric promised peace and prosperity for all citizens. I accept that the banking crisis made a bad situation worse, but how many European politicians in France, Greece, Spain, Italy, Ireland and the UK breathed a sigh of relief that they could hide their failure to create a credible EU behind the banking crisis?

Let us examine the two reference dates that she used, i.e. 1914 and 1944. She suggests that prior to 1914 the birth of the modern industrial society brought about massive dislocation between protectionist nations, and inequality between the ‘haves’ and ‘have-nots’. Take away the country boundaries, essentially the impact of the digital age, and what is different today?

So where do I see the powder kegs of the 21st Century? Perhaps controversially I do not see the North-South Conflict as a major threat. An implosion within the Islamic community is more likely with primarily Sunni against Shi’a. If you think about it, most of the current conflicts involve the Islamic nations, and are driven by extreme religious division. The intervention by the West in some of these conflicts in the name of protecting the West has no logical outcome. These people have no regard for Western democratic values, or of secular tolerance.

At one end of the spectrum we have the blatant inequality of the distribution of wealth. We are experiencing 2 critical phenomena, both of which are counterproductive to a peaceful, all inclusive world. We have individuals and corporates accumulating vast wealth to the point where the resulting power exceeds that of some major nations. Albeit a few of these have taken a philanthropic stance we should note that such philanthropists are mostly from Western countries. Many of the new billionaires are from emerging or developing economies where democracy does not really mean very much, and a market society is the norm, i.e. everything has a price, even social and civic values. All we need is a charismatic megalomaniac, as depicted by the Carver character in the James Bond movie, ‘Tomorrow Never Dies’, to cause chaos and suffering for many throughout the world. Unfortunately Western civilisation has degraded over the past couple of decades towards a market society thus adding a significant sting to the ever increasing differential between the ‘haves’ and ‘have nots’. For example diminish the rights of the ‘have nots’ to education, justice, political influence, and healthcare because they have no money and you have a significant pool of would-be terrorists for our megalomaniac to exploit because they have nothing else, and nothing to lose.

Then we have corporate greed. So what can the people see? During the past 6 years the people have become very aware that their corporate executives have suppressed the salaries of the workers (the value drivers) to below inflation levels whilst increasing their own already attractive remuneration by some 40% average, and which has been allowed by investors because dividends have been maintained to these investors. So the people at the top have handsomely profited whilst real income to the workers has diminished. So much for sharing the pain. In addition these executives are immune to any accountability should they fail. Have any of the avaricious people who profited from the banking crisis been prosecuted, or had their ill-gotten gains repossessed? The banks themselves are being penalised by regulators who should have been more alert to the problems in the first place, and some of these funds do go to Government coffers. But these large fines diminish the capital of the banks, and thus inhibit their capability to finance the very enterprise we need to re-energise the employment market, i.e. they inadvertently stifle recovery, increasing disenfranchised young entrepreneurs.

At a micro scale we can look at the fate of RBS under Fred Goodwin. He was a megalomaniac trying to build the biggest bank in the world. Everyone I spoke to in the City of London at the time leading up to the acquisition of ABN Amro agreed that the terms of that deal, at twice the price that anyone else was prepared to consider, was insane. Yet no-one stepped in to stop him. How much pain, and destroyed lives has RBS caused to many thousands of people. But Fred Goodwin is made for life financially; so well in fact that sticks and stones may break his bones, but he will not lose a night’s sleep over the names that he is called.

At the other end of the spectrum we have the demographic issue. We have already seen a growing view amongst the young generation of workers that their taxes should not be funding the pensions and healthcare of the graying generation. The younger generation see that they have to pay taxes to support the pensions of an ever increasing graying population, and being told that they also have to contribute a significant proportion of their disposable income to their own pension provisions as State pensions will slowly but surely phase out by the time they retire. All of this at a time when real incomes are diminishing in real purchase power terms. Rightly the graying population state that they have paid their taxes, in the form of a special National Insurance tax specifically for the right to a State pension and healthcare, throughout their working lives and thus their State pension is rightfully theirs. The problem is that successive Governments have not ring-fenced these contributions over the years, preferring to spend it in the hope that future generations with continue to fund the requirement; a little like a Ponzi scheme. Add to this the migration of young labour where they have no historic interest in the local graying population, and expect to be able to send money home to support their own aging family, and we have potential serious discourse and unrest. Bring both of the above phenomena together and we have a powder keg just looking for a fuse.

So from where can our fuse emerge? Our fuse already exists in the form of the global internet, social networking, and twitter. Christine Lagarde is right in that the Arab Spring was fuelled by the galvanising of the people through media such as Twitter and social media. But likewise these facilities can also be used to fuel discontent and confusion. Great philosophers such as Aristotle, Kent and Hume have all commented on the importance of gossip to the masses, and our lesser quality media thrives on this obsession. So the touch paper is a disenfranchised charismatic individual or group exploiting the power of gossip through Twitter and social networks. We have seen the impact of disenfranchised ‘have nots’ in riots in many cities over recent years. It is when all of these groups can be galvanised together that we need to be concerned.

Investment Banking – The Way Forward

univestInvestment Banking – The Way Forward

Having previously looked at the history of investment banking, and where they are today, what is needed in the future to ensure the credibility of these important banks.

Even today, post the 2007/08 meltdown, we find the mavericks still essentially in control of many of the investment banks, epitomised by the most recent scandal in the UK whereby corporate bankers, probably from an orchestrated script that even they did not understand, were encouraged to sell complex SWAP instruments to small corporates with devastating effect. Bonuses taken, but leaving the banks to face humiliating fines and further damage to reputation.

If it is accepted that we have defined a major, if not predominant, flaw in investment banking culture then what practices could be instituted to change this culture to a more acceptable form of banking without losing the creative skills for formulation of new and applicable products, and the liquidity environment to make such products attractive to the widest range of investors.

The Role of Regulators

The typical cry from outraged politicians across the world (who for all intent know little or nothing about these markets) is for more regulation. This is nonsense as no amount of regulation will impact a short-term culture environment where traders will take whatever risks they need to make their bonus as they will be long gone to their retreat in Barbados before the devastating  (both reputation and financial) impact of their actions are felt by the banks. The only changes to regulation that will extract any effect would be the prosecution of reckless traders who profit from the damage they do albeit I see a legal minefield differentiating between rogue trader, and irresponsible trading with plausible deniable consent of management. The legal maxim actus non facit reum, nisi mens sit rea comes to mind. Furthermore the UK Financial Services Act would need to be amended to bring habeas corpus into effect for individual prosecution so that banks could limit their legal liability to the trader and thus impose some responsibility discipline into their actions without removal of the rights of the individual in Common Law. The Serious Fraud Office, who would have to seriously increase their skills, would need to be the prosecutor for UK based traders. Importantly any such change of this type of prosecution needs parity in each of the major financial centres to have any real deterrent value. Rendition of individuals to the USA when London is the heart of the financial World is not a reasonable solution.

Furthermore my experience of regulators is that they have little or no knowledge of the complexities of securities products, or the markets. Forensics and post-mortem after the event is a far cry from being able to evaluate the impact of new financing structures, e.g. super-senior debt, and realise the impact of such artificial concepts on the market, and thus prevent its introduction. It is also worthy of note that the independent rating agencies and monoline insurers also need to take responsibility for what they are prepared to acknowledge as worthy credit, and in the case of monoline insurers, their capacity to manage major defaults.

Regulators such as the FCA in London do not have remuneration structures at a level to attract the people skilled in such instruments. Why regulators appoint youngsters when there is a vast body of 50+ knowledge and invaluable experience who may desire a more relaxing environment than the daily frenzy within the banking environment to see out their days. It was the smart youngsters who were encouraged by the mavericks to engage in casino transactions, without knowledge of impact, thus bringing the system to its knees. If regulators are to regulate the markets against transaction types that will create havoc then they need a ‘poacher turned gamekeeper’ approach to recruitment – and reward these people properly. If this credibility existed within regulators then every new instrument proposed by investment banks should be approved for full or specific limited usage. Likewise, as a general rule, unregulated OTC markets should be seriously curtailed, if not banned, or fully regulated. Leaving a door even slightly ajar invites clever investment bankers to find a way through it.

There is no point or value in having regulators in different major financial centres who cannot exactly agree on how investment banks and products should be regulated. I believe that the decision by the SEC unilaterally allowing the US investment banks to increase their capital gearing to 40:1 was a major contributor to the financial problems through 2007/08. Not only did this encourage casino gambling by investment banks in the USA but also provided a competitive edge to US investment banks that had to be mirrored throughout the whole investment banking community to maintain a level playing field. Securities and associated derivatives are the essence of a global capital markets and, just as with Central Banks, requires one central governing body regulating capital adequacy and risk. Regulators throughout the World have to be in harmony on the essential capital and risk management of investment banks, and the products in which they can engage. This would also prevent anticompetitive meddling such as the EU Governments attempting to impose a financial transaction levy on banks throughout Europe which would clearly be more detrimental to London than anywhere else.

It might also be worth considering nomination of major financial centres in the World where every investment bank in those centres operated under identical rule sets. Indeed this idea could be expanded to contain all investment banking activities to these major financial centres and thus all investment banking would be under the same regulatory umbrella. Much of such investment banking activities occur in the recognised major financial centres today so this would not be onerous to implement.

At the beginning of the widespread use of International securities in the 1970’s every Eurobond instrument was supported by an identifiable asset, even if just a Balance Sheet. This provided a clear understanding of the risks involved with holding the Eurobond. When more complex securities such as asset-backed securitisation came into being there was still a pool of assets that could be clearly identified. With mortgage-backed securities the asset cover was usually provided by a ‘AAA’ rated monoline insurer credit wrap (without stressing the Balance Sheet of the monoline) thus the asset was the Balance Sheet of the monoline insurer backed ultimately by the underlying property assets. Today it is very difficult with many securities products to adequately identify the underlying asset in a direct way, if indeed any such asset exists. As existing securities are partially stripped and repackaged the underlying asset becomes blurred, and there is no fundamental economic benefit that can accrue from such instruments. So is it time to retreat from synthetic casino instruments of no real economic value and thus ensure that there is a clear economic reason for the issue of any securities product, including derivatives. In recent years banks have used casino instruments such as the Snowrange issues that essentially bet on stock market activity or interest rate movements to raise cheap capital. Having studied a number of these issues I am disappointed that banks need to use such nebulous mechanisms in this way when, if structured with some thought, they can provide a needed and valuable project finance collateral instrument, especially in developing economies, and which achieves the same objective for the bank, but also provides real and identifiable economic benefit. Perhaps investment banks should use their financial skills to revert to structured project finance to win back credibility. If investors are provided with a continual flow of instruments which are no more than a casino gamble then this consumes capital that could be more usefully employed in economic growth. If regulators remove casino products from investment banking then investment bankers have to apply themselves to raising capital for economic activity. This would also force mainstream banks to use depositor funds for lending purposes rather than engaging in casino gambling.

 

The Role of Compliance

It is very rare to meet a compliance officer within an investment bank with the knowledge and expertise to be accepted as a positive contributor to the business rather than the person to be avoided as a constraint to business because of the ‘if in doubt, say no’ where doubt can be interpreted as the lack of knowledge and understanding of the business.

Compliance officers are essentially the eyes and ears of the regulators. Therefore their knowledge needs to be thorough, and their role clearly defined. In my early days at Citicorp we had compliance in the form of an internal audit team the head of which reported only to the President of the bank, and with the absolute authority, without the consent of the President, to close down any operation or entity that was considered non-compliant. Internal audit consisted of a small team of inspectors that could go to any operation anywhere in the World without notice. Within each corporate entity there would be representation proportionate to the size of the entity and who reported only to the head of internal audit. They could summon the inspectors if they felt that something was wrong, and had not been corrected to their satisfaction. Believe me that this internal audit team put more fear into every aspect of the business than any compliance team I have encountered post-big bang. Bob Diamond suggested that Barclays had some 200 compliance officers yet he was still allowed to operate as he pleased. Compliance similar to the internal audit team I experienced at Citicorp but where they are paid by the bank, but ultimately report to a senior regulator, should impose much needed discipline into investment banks, especially at a senior level. However, such compliance officers need to be well trained, and worthy of the power that they wield.

One aspect of compliance which I consider unwieldly is the amount of written documentation involved in this process, much of it in a legal jargon. Is it reasonable to expect our compliance officers to be trained lawyers, or is it more important that they understand the business, the products, and the markets? The more cumbersome the role of compliance, the less likely that it will be effective. Therefore I would suggest that the whole concept of regulation be re-visited to determine the type of regulatory structure that can be reasonably and effectively implemented.

Much of who can engage in what activities can be controlled by rule tables within competent computer systems. If new products are pre-vetted by Regulators then, again, computer systems can control what transactions are admissible, and in what size, volume, etc. This was all possible in the late 1980’s and early 1990’s with the advent of AI. Technology has moved on to a more mobile capability, but the challenges presented by allowing high value transactions to be executed using such technology do require extensive risk/reward assessment where convenience is the very last consideration. I have experienced the attempts by traders to circumvent rules built into systems. For example we had a fixed income trader who wanted to step out of their allowed range of traded instruments to engage in gilt futures. A trader authorised in this product was on leave, but somehow had allowed his login details to become known to the fixed income trader who used this information to access the gilt futures markets. Unfortunately for him the computer systems knew that the gilt trader was out of office so an alert was posted to the trading floor manager, the head of settlements, the compliance officer, and the director of operations (me). Thus this potentially very expensive transgression could be swiftly dealt with.

This level of control is relatively simple when trading is contained to a trading room but, now I understand that there are traders who can use their mobile phones to trade from anywhere, and I  am also aware of trading stations at the homes of traders. This poses enormous problems for compliance. I would propose that unless every aspect of any transaction can be properly and fully recorded, including any and all voice communication, then trading should be contained to a specific trading room. Remote trading stations pose significant risks, not least from hackers. If hackers can infiltrate the most sophisticated (and budgetless) systems in the intelligence community then this is a risk too far. Furthermore remote trading opens the door to orchestrated trading, whether market manipulation or book distortion. If one analyses this problem laterally there is no excuse for remote trading out of hours as processes to overcome the global nature of trading were introduced in the 1980’s to roll active positions to a trader in the next time zone with instructions on how to react in the event of certain market conditions. If these market conditions do not arise then the position will revert untouched to the originating trader at the opening of the next business day.

Trading practices today centre around the ‘convenience’ to the trader, and the argument won on the basis of ‘profit’. A number of very expensive and publicised trader problems have occurred as a result of such practices, and I would wager from my own experience that many more have gone unreported. It is time to change the argument to one which states that if any trading practice cannot meet robust compliance requirements then such practices should not be allowed.

A Change in Culture

Although the regulatory and compliance structures outlined above would provide a more mature and robust environment for investment banking activities, the changes required to the current risk taking attitude of traders will not occur without a radical change in the way that investment banks are managed. Soccer players are a reasonable analogy to traders because their career is short-term, as is their perspective. I think it is arguably universally accepted that Sir Alex Ferguson is the most successful and respected soccer manager in the World. We know him as a strong character who can build and mould successful soccer teams using a well-honed balance of discipline and encouragement of flair with his players. The players know that Alex is the boss, and know that his words are essentially law. He instils a belonging in his players to Manchester United Football Club, the most renowned soccer club in the World, and commands loyalty and respect from his players and supporters alike. If any player thinks themselves bigger than the club, e.g. Beckham and Ronaldo, no matter how good a player, they are sold on as they have clearly forgotten from where their fortunes derive. Players such as Scholes and Giggs have been loyal to the club for the whole of their professional football career even though they were both World-class players who would be welcome at any other soccer club in the World. Players such as Cantona, who had such a bad reputation and not wanted by any club, was given an opportunity to redeem himself by Alex, and proved to be a great and loyal asset to the club for the remainder of his playing career. In a slightly different light we see that every Formula 1 driver expresses a desire to drive for Ferrari at some point in their career regardless of how Ferrari is performing. And note that these people vocally praise the support teams that make their success possible. These are success stories in an environment of high energy, high risk, short career span people who want to belong and are prepared to openly express their commitment and loyalty. How could investment banks learn and profit from a culture change that encourages long-term loyalty in a team structure that strives for success as a collective rather than individual reward.

Managing any self-respecting professional investment banker, whether deal origination/execution, support operations, or systems is a very special skill. These are not conventional people. They live on the edge of the box or totally outside of the box, and not willing to comply with boring rules of convention. This is the essential characteristic of their ability to be creative and productive in such an energetic environment where things happen in the moment with no dwell time to consider. They must have confidence and conviction supported with knowledge. If they have been through higher education, and succumbed to conventional wisdom during the process, they are unlikely to survive no matter how bright they are. Like soccer players they have individual skills and flair which needs to be positively moulded into a successful team. Teams of like-minded people create a sense of belonging and loyalty as a natural progression of working together. The management of such people needs to provide a suitable working environment which contains the necessary constraints regarding risk and excess without trying to apply any conventional management techniques that will stifle performance. Like the soccer players they are contained within the boundaries of the playing pitch, where they are encouraged to combine their individual talents to win the game within the constraints of the rules of the game. In our analogy to Alex Ferguson all team members know that the manager has a formidable knowledge of the game.

Asking a trading manager to operate with constraint is counterproductive as it is easier to ask forgiveness than seek permission. Equally you would not expect such a trading manager to determine credit or risk policy as this would invariably lean toward excess. The role of the trading manager is to maximise return on capital employed within pre-determined credit and risk boundaries and thus looks out into the market to seek opportunity. The trading manager, director, or whatever you wish to call him plays the role of the team captain in our soccer analogy ensuring that the play strategy is right, and that every player is contributing at peak performance.

Therefore a counterbalance is needed to ensure that rules and boundaries are independently derived, and then observed at all times in order to protect the Balance Sheet of the bank from inappropriate exposure, i.e. looking inwards. In conventional businesses such activities can be dealt with over days or even weeks, but in a trading environment with a turnover of some USD billions per day such attention can be minute by minute. Whereas a Credit Committee can provide overall guidelines on limits and exposure, the reality of the trading environment requires credit and risk limits such as new counterparties, trading in hybrid securities to fulfil a client requirement, etc. to be determined swiftly, and certainly within a trading day. Thus a combination of compliance, settlements, and funding act as the referee during the trading day (the game).

Likewise traders should not be allowed to determine their own strategies without reference and approval of a detached COO – the Alex Ferguson role. Traders who cannot properly articulate their proposed activities in a coherent manner should be refused the right of execution.

On the subject of behaviour it can readily be demonstrated why a trading director is generally not the right person to manage the discipline of traders – not least because the director of trading is one of them – they are the pack, and the trading director the pack leader. The trading director considers the loss of a good trader before the serious nature of his behaviour, and the behavioural impact on the other traders by forgiving unacceptable behaviour. I am aware of forgiveness of extremes of behaviour throughout the investment banking sector, but certainly not exclusively to it.

If we look at banks that have either failed (Barings, Lehmans), or banks that have suffered large losses under the heading of ‘rogue traders’ (SocGen, UBS), we will find a common denominator – the front-office was all powerful, and the back-office were considered irrelevant people with no voice. I know that this attitude to back-office exists in many investment banks today, yet a good operations support team is equally as valuable as the front-office in securing, realising and protecting revenues. If allowed to properly engage they provide valuable input to traders and are valuable eyes and ears of the COO who controls all of these activities. The COO provides the boundaries of the playing field, the rules of the game, and the moulding of all of the players into a team, including the Director of Trading whose natural self-preservation and ego will provide some initial hurdles. Having seen this in action turnover of staff diminished to an extraordinarily low level, and the ability to cross-cover in times of volatility was exceptional.

The Bonus Culture

How many investment banks still have the perverse attitude that traders should receive vast bonuses whilst the support function that at the very least minimises the cost to do business receive only a nominal percentage of salary. This attitude is so wrong in every respect and is an inherent facet of the corrupt culture within the investment banking sector where the top people take care of themselves, and spread a few crumbs for those that actually made their profits possible. A good support operation controls the downside risks thus more of the income is translated into profit.

Can we change the existing bonus culture in a way that it will be adopted throughout the investment banking sector, help to avoid reckless transactions, and encourage more term loyalty of investment bankers. I have listened to a number of options in this direction, especially from grandstanding politicians and media reporters. However none have grasped the nature of bonuses in the investment banking sector so their suggestions, whilst sounding good to their audience, will be rejected out of hand by the bankers.

When sales people of any product or service complete a transaction they are generally entitled to a commission within a short time frame as part of their remuneration package. This commission is their incentive to perform and is the general nature of the sales process throughout the World. Some transactions involve a term timeline to completion so commissions are scheduled according to the value received at various points along the timeline. Some sales involve a sole sale person, others require a team approach and thus a commission pool is created and the value of this pool distributed to each team member at periodic interval tied to the value received by the company. Such commissions are referred to as bonuses in the investment banks, but otherwise share all of the above characteristics of commissions. I have already discussed the origin of bonuses in a previous blog. So how can the bonus system be modified to help to properly reflect performance, as well as to encourage loyalty. It is worth noting that an investment bank can have a daily turnover equivalent to that of a major corporation over a whole year, so understanding scale is important.

Deferred bonus for completed transactions is neither popular nor equitable. The bank has the value of the transactions in its profits, and thus the bonuses should be paid. It is also counterproductive as it causes discontent, and a headhunter can readily negotiate a payment of such deferred bonus as an inducement for a good trader to move. Alternatively, for a term transaction, a bonus should not be paid until the bank has accrued real value less any required contingency for future risk until such time as the transaction completes, and is without further potential liability. This is an equitable approach regardless of sole trader or team, and the latter case will probably have the greatest impact on bonus culture.

My experience suggests that the more important issue to be addressed by investment bankers is whether or not it is more appropriate to engage in pool bonus structures to encourage team performance, and thus loyalty. I am in favour of pool systems for a number of important reasons. Firstly and foremost it does encourage team performance which significant reduces the possibility of rogue activities, and provides a natural cover for sickness and holidays. Other benefits include natural selection in that if any member of a team is not performing this becomes immediately apparent making the exit of the non-performer self-evident.

As for quantum, remember our soccer players, Formula 1 racing drivers, and their short career span. I have experienced many traders freeze or completely fold at their desks over the years. These people will never trade again, and probably not work again so I do not resent high bonus payments as it might well be their last. The only time I have exception is when these traders are so greedy that they always look for ways to trade outside of the acceptable range of activity, and will not even consider contribution to a pool for the people who support them, and without whom they would not make any bonus.

Summary

From my experience the counterbalance resource that represents our Alex Ferguson role is an executive COO with the following characteristics:

  • Highly experienced in all aspects of investment banking – but not from a deal origination background
  • Has control of all aspects of the operational business base including risk, exposure, compliance, settlements, funding, and systems including origination/execution staff discipline, but excluding business daily strategy within approved guidelines.
  • If there is an investment bank CEO then this COO should have equal status and equal responsibility to the Board. If there is a parent company then both the CEO and COO should have equal representation on this Board.
  • This COO should be the main contact of the investment bank with regulators such as the Bank of England.
  • This COO should not be obliged to accept market sensitive information without the opportunity to check such information with the source.

This resource will provide the counterbalance to the ‘Bob Diamond’s’ of this World and preserve a more stable environment without loss of business opportunity, and without loss of credibility. Under such a structure rogue traders would be confined to history as there would be no means of hiding such activity, and any activities outside of risk and credit lines (which can occur during a trading day) would be monitored in real time and corrected within that trading day.

There is no doubt that the ‘Bob Diamond’s’ of investment banking are valuable resources as deal makers but if the bank is to achieve stability and credibility such people need a tight rein to curb their natural tendencies to push the boundaries beyond reasonable limits of risk and exposure in the name of profit. However, giving such people executive power is tantamount to giving a nuclear warhead to a fanatic. The Peter Principle needs to be applied with rigour, regardless of the demands/charm for executive status ‘as a requirement to perform’. They can assume the title of ‘director’ for market purposes, but without executive portfolio.

I have no doubt that, assuming that such existing people can be persuaded back to their deal making tasks, there will be continual clashes of personality and will to regain their executive control as their deal making ego will see robust management as a constraint to profit generation. But I have already referred to the specialist management skills needed within an investment banking environment, and shareholders must support this position instead of listening to the charm of fool’s gold from reckless risks. Assuming that you can walk into a casino, put all your money on ‘00’ at the roulette table expecting to win, invariable ends in tears.

The outcry about bonus payments need to be put into perspective, albeit they need to be rationalised as previously described to encourage loyalty and fair distribution.

Robust management supported by a regulatory system which has professional competence and provides pro-active oversight with universally accepted rules of engagement throughout the World will provide the framework for investment banks to perform their specialist and fundamental role in global economic recovery, and its continued growth. This does not mean more regulation by grandstanding politicians (just look at the mess they are creating in the Eurozone debacle). It requires a unification of existing regulation, and then implementation with the required skills. Investment banking is a global business, and needs a uniform global platform of regulation.

One important lesson of the past 20 years is that the door was open to let the mavericks take control, and they were treated as gods. They have taken their rich bonuses and so can live in luxury whilst everyone else has to burden the cost and pain of their activities. Only after a major reorganisation of investment banking, essentially from within, can we revert back to the banker’s creed ‘My Word is My Bond’ with any sincerity.

Where are the banks today?

univestWhere are the banks today?

Having explained the history associated with where the banks are today, I would now like to examine the current situation.

Ironically the banks are essentially in the same situation as they were in 1986/87. Then they had spent enormous excesses preparing themselves for the new era of investment and corporate banking, they needed more capital to expand into new business opportunities, and remuneration packages reflected the desire to attract the most prolific profit generators. Today we have the enormous losses of the banking collapse in 2008/2009, enormous sums paid to regulators in the form of fines, large claims for damages including large legal bills, demands for more capital adequacy, and remuneration packages still need to attract profit generators.

There are essentially two ways to increase capital: a) asking investors for more investment, or b) translating profits into capital. The latter is by far the easiest with no impact on existing investment returns. The former puts pressure on profit generation to maintain a good dividend yield, which then places pressures on costs to support the remuneration required by the profit generators.

But are some of these profit generators really worth the cost? How many of these profit generators produced large profits through excessive risk or even market manipulation, have been paid their bonuses and moved on, leaving the bank with credibility problems and fines exceeding the benefit of the profit generator.

Let us look at an extreme example. Interest rate swaps are a sophisticated instrument that should only be sold to qualified professionals. Yet some profit generator convinced someone in the banks that these instruments should be sold to small corporates (SME’s) that would have difficulties even qualifying for a straight-forward interest swap under normal corporate banking rules. The structure of interest rate swaps are so complex that there should be more pages of cautionary notes attached than explanation of the mechanism of the instrument. And the banks would know that base interest rates are not going anywhere fast. So do we assume any interest rate movement is geared towards the bank’s borrowing cost? If so then manipulation of these rates by the banks must also be an issue.

Last year I designed a Documentary Credit solution for a tri-party tolling deal (a raw material supplier provides materials of a given quality to a producer of goods with a third party guarantee buyer of the finished goods thus guaranteeing payment to the raw material producer, i.e. guaranteed cash flow) over three countries. The safest mechanism was a conditional tri-party letter of credit which is only a small step removed from a conventional letter of credit. Although the banker to the third party buyer was completely satisfied with the structure they were not convinced that the financial director of the third party buyer fully understood the structure, and thus would not engage. An interest rate swap is streets ahead in complexity to such an instrument, and I would be very surprised if any of the financial directors of these SME’s remotely understood what they were being sold. Even worse I would doubt that the corporate banker selling this product knew any more about these instruments than the script provided by the investment bank. As swaps are purpose designed for a specific need on a Balance Sheet, who was looking at the SME to define their need, and to ensure their understanding of what was being offered?

I think it is clear that the banks are totally focussed on income generation from wherever it thinks it can be obtained. In too many cases the mavericks are still in control. So how can they generate these much needed profits?

Firstly, and foremost, they cut operating costs. Within investment banks this is most certainly a false economy, but it suits the mavericks. A professional operations director, properly respected by the Board, is the first line of defence to protect the bank from abuse. If we look at the problems over recent years in the likes of UBS, BarCap, SocGen, Deutschebank, JP Morgan Chase, et al, none of these problems could have occurred had a solid operations base been in situ. When I ran operations for various banks there was no possibility that a trading director could override any decisions by me on credit, risk, trading volumes, trade procedure, compliance, discipline, funding, hedging, and systems. My head of settlements, who knew more about the markets than any trader, attended the morning strategy meetings with the traders. If he said that trading could not occur in certain instruments, or specific securities issues, or ticket sizes, this was not a request but an instruction. Trading was not allowed over mobile phones. No dealer could get into the dealing room before 7:30am unless by specific authorisation, and only with a settlement clerk present. Our systems had artificial intelligence monitors on all traders, positions, risk, and credit in real time, monitored by me, head of settlements, and financial controller. Traders did not have autonomous computer systems, yet we always had the most sophisticated trading systems on the street. Our counterparties knew that if they did not confirm a trade with our settlement department during the same trading day then we had the right to void it, so dealers could not hide deals. All funding, own book hedging, and bond borrowing was undertaken by settlements on a book basis to ensure that we were properly covered at minimum cost.

Now the mavericks having taken control of, or suppressed, the operations base, what I see today horrifies me in that there is little or no real control over what many business generation platforms are doing in the name of the bank. They are treated like gods, or at least divas, and anyone who speaks out against what they are doing is destined for unemployment. The senior management have a fixation that if they do not comply with the absurd requests of these people that they will take their ‘skills’ elsewhere (and thus risk their own personal rewards). However, put a senior operations person in place in every bank, and who knows what they are about, make them more powerful than the trading director, and the mavericks have nowhere else to go. Alternatively if they are likely to leave you with a horrible mess to clean up after they depart do you want them in any event?

Having entered investment banking in the mid-1970’s with Citicorp, now CitiGroup, my first job was to find a way of providing Walter Wriston, the Global CEO, with global real-time positions of the bank in all markets. This is before the internet – indeed we created the first global corporate intranet in 1978 to achieve this requirement. With today’s technology this task is not only simple, but should be fundamental if any control is to be placed on banking activities.

What about the banks engaged in corporate business? Again horrific. Many so-called corporate bankers that I have encountered in recent years are no more than information gathers for some faceless people hidden from view in dark places. These faceless people are the arbiters of all activity with corporate clients, yet have never met any of them. Gone are the days when a corporate banker, certainly in the SME arena, can read financials better than the financial director of the company, and actively advise on how the financial position can be improved prior to bank lending. Now it is more akin to lending against security without any consideration as to the quality of the lending instrument – just the level of income that can be achieved. Surely it is in the bank’s interest to have quality people guiding their corporate clients and thus protecting their investment, not merely taking security and destroying people’s lives.

Just as an illustration of how dire the training within banks really is, I went into a large branch of Barclays bank in Holburn in London where their principal client base is likely to be corporate clients. I wanted to send a SWIFT payment in USD. I was told, by their resident corporate banker, that Barclays Bank do not send SWIFT payments. This is a sad reflection on where banking is today, and it needs to change quickly. My next blog will look at the way forward.