Category Archives: Politics

EU/Eurozone – Start Again or Plod On? – Model Outline

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The EU/Eurozone – Start Again or Plod On?

A Model Outline

Following on from my Intro blog yesterday what is the future for Europe – do we need a new European model, or can we fix the existing model? To date the politicians have held the cards, but is it now time for the people to speak. Even the countries of the former Soviet Union now have had enough time and understanding to know what is possible, and what they would like to see as a sustainable future. Do we revise the current model, or just as with the EEC and the ERM, we put it down to experience and start again with the benefit of hindsight? I am looking for input so I would like to start with a provocative statement or two as I would like to encourage discussion and comment on the future of Europe for our children and grandchildren.

I hope that this will be an evolving blog where interested parties feel that they can contribute to the debate with comments, and be heard. Non-Europeans are welcome to participate as all input is valuable input. The resulting model for Europe should not be insular, and it is important both in relations and trade that the outside world sees a friend and partner with whom it can engage politically, and conduct business.

For the purpose of this discussion can I propose that we call our new model the United States of Europe. I have an utter dislike of any name using the word ‘Federal’ (sounds like a police state), and any reference to the word ‘Republic’ automatically removes any debate about a monarchy, and I am far from convinced that many people in Europe feel that a republic is the only option. Furthermore I would suggest that the United States of Europe is fully inclusive of all countries in Europe, as with the United States of America.

So let us start with the provocation.

  • I believe that it is a fact that the EU has no democratic legitimacy. Has any member state to date asked the people to vote on whether or not their country should become a member? This should not be confused with referendums for treaty ratifications.
  • For over 2 years now the politicians have attempted to solve the financial problems within the Eurozone. I would suggest that if you put some of the best banking minds into a room for 4 – 6 weeks, devoid of politics, vested interests, and with open minds, workable solutions to the financial problems of the Eurozone can be achieved. The pills may not be sweet, but they would be equitable and sustainable in the long-term. For example Germany was by far the economic winner with the introduction of the Euro – now it must deal with the appropriate reciprocity.
  • We must start with the tenet that a democracy consists of a framework of a Government freely elected ‘by the people, for the people’ with oversight from an independent judiciary built on merit, not election. This Government needs to build a social and legal framework based on the rule of law, respect for human rights, free speech, respect for International law, and equality for all. In return the electorate need to respect the law, and take responsibility for their role in society.
  • A secure, self-sufficient, free market economy consists of a sustainable supply of raw materials and energy, a relatively cheap labour force, innovative skills (excellent education), technology transfer skills, manufacturing, marketing, with stable and effective financing (banking).
  • The existing EU/Eurozone is built on political, over economic, sensibilities, fractured by pandemic compromise, with political and national interests as serious constraints to sustainability.

A cursory comparison of the above with the structure of the current EU/Eurozone will reveal that the current structure shows that it:

  • fails to satisfy democratic legitimacy;
  • is incapable of resolving the existing financial problems, and responds too slowly in any event;
  • does not meet the recognised basic parameters of a democracy;
  • does not meet the requirements a self-sufficient free market economy; and
  • is constrained by the vested self-interest of the political leaders of the member states.

Rather than start by debating ‘Start Again or Plod On’ I would suggest that we start with a blank sheet of paper and identify what the people see as a credible European integration by building a model of an equitable and sustainable United States of Europe. Having developed and agreed such a model we can then compare it to what we have today to determine if we can adapt what we have to what we need, or whether we adopt our new model and move into it, leaving any unnecessary baggage behind in the old model. The other option, which is certainly on the table, is to completely abandon European integration.

Please forget ‘what is’ today in your thinking as details such as what side of the road we drive on in different countries is irrelevant to the future of our children and grandchildren. At the risk of alienation the green lobby can we also ignore what could be in energy terms and just look at the resource base that already exist. Too many people in Europe are currently below the bread line, distressed, and hungry. This problem must be addressed as a priority over any new initiatives. Indeed one of my drivers for this exercise is to divert wasted money in the existing EU into growth generation to create jobs for the millions currently without income. Dignity and self-respect derive from self-sufficiency, not charity. Also let your mind have free rein when considering all of the components of a self-sufficient free market economy. I would suggest that there are countries that could be invited to the party to strengthen self-sufficiency.

The classic method of solving complex multifaceted problems is to:

  • Understand the problem, and subdivide into logical components for analysis
  • Analyse each component part – Create an ideal solution
  • Adapt the ideal solution as little as is needed to make it work

When considering the way forward could we concentrate on what we need in our model to create a sustainable, prosperous, and equitable future for all, rather than what we want. Many people want a Ferrari car, but they do not need it to live their life in peace and prosperity.

I would like to propose 2 templates to guide us through the process. The first is the creation of the United States of America in terms of some of the hard decisions and compromises that had to be made to ensure inclusion of everyone. As the creation of the USA had the benefit of no historic baggage to deal with I want to use Switzerland as a second template being a country which functions in 4 languages, has a 700 year history, not currently fully compliant as a democracy, and has an unconventional government structure. If anyone would like to propose any other template I am open to suggestions.

In order to make the process manageable I propose to load a series of blogs over time, each one addressing a separate pillar of democracy, e.g. structure of government, judiciary & legal system, taxation, etc and throw in other considerations such as common language, nationality, republic versus monarchy etc. to complete the whole picture.

This is a serious attempt to find answers to the problems that politicians seem unable to resolve. Having spent some 30 years addressing complex problems using lateral and progressive thinking I can attest to the methodology which, on first sight appears too simplistic, impossible and/or unrealistic – but they said this about Keynes at Bretton Woods – until they sat and really thought about his ideas. We still benefit from his thinking today. The fall of the Berlin Wall was an unthinkable piece of lateral thinking after too many years of political bluster. I believe that the collective thinking of people from all walks of life seriously interested in the future of Europe can contribute to solutions to the problems that face Europe. If you have friends or contacts that you feel would find this process of interest then get them involved as well. Think the unthinkable, and enjoy the process.

I will attempt, in no particular order, to start the first discussion blog in the next few days. If you click on the ‘Follow’ tag you will receive an email as each blog is posted.

Thank you for reading my blog, and I hope that you feel it worth the effort.

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EU/Eurozone – Start Again or Plod On? – Intro

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EU/Eurozone – Start Again or Plod On?

Introduction

The Eurozone is still in crisis. Greece, Spain, Portugal, etc. all need yet more money, but who is prepared to make these funds available to these seemingly bottomless pits? A recent Top Gear program featuring a race through Spain with so-called budget-priced supercars revealed disturbing images of whole new towns developed to completion, even with the signs of intended occupants above shop windows, but without any signs of life or occupation. One of these urbanisations was on the outskirts of Madrid but was so empty that they could have a 5 km street race. A brand new international airport used for just one year and then abandoned. For once Top Gear actually provided a documentary about the situation in Spain more hard hitting than any visual newsreel that I have seen. The image of budget supercars in the £120,000 – £200,000 price range against this devastating backdrop made the experience surreal.

Do we need another Marshall Plan for the Eurozone, but on what basis – there has been no devastating war or natural disaster. So what went wrong with the EU/Eurozone? Can it be fixed, and if so who is prepared to finance it.

Is it broke beyond repair? If so we can’t just abandon it – there is significant collateral damage in the form of ordinary people living in fear of what their future holds. Unemployment is at unprecedented levels in post-war Europe, and we have a whole generation of young people with no apparent future.

I was fortunate enough some years ago to have Henry Kissinger sitting next to me on a flight to New York. I will always remember one comment he made during that flight. We were discussing the difference in attitude between Americans and Brits. He stated that the people in the USA provided far more economic value during their working life than Brits. His criticism of the Brits was that they gained years of valuable experience in the workplace but, at 60 – 65 years old, they were retired off and sent to the scrap heap. He said that in the USA the workforce retired only when they were no longer capable of valuable function, or they chose to retire. On valuable function, this included mentoring the younger generation to impart their valuable experience and wisdom. He said that Companies in the USA retain the older generation to mentor younger people and thus make the younger generation more valuable faster than conventional training.

This reverberates more today than it did then. In the UK we have the crazy situation of valuable resources and experience wasted only because they are over 50 years of age, and a younger generation out of work because education failed them and thus considered of little value to businesses already watching every penny of cost. Many businesses have a dumbed-down performance because their bright young things just do not have the knowledge and experience to keep standards high – another wasted cost? I accept that there is also a celebrity attitude problem amongst a percentage of the younger generation, but there is also a greater percentage that seriously do want the opportunity to perform. We have started to increase the retirement age, but it will be interesting to see if business will capture the older people and use them wisely, or just find other ways to remove them from the workplace. Why do we need a retirement age at all other than to identify when a State pension will be available. If one thinks lateral on this point the employer could offer a reduced salary to an older person receiving a State pension, rather than retire them off, and thus employ the younger person to be mentored at a nominal cost after applying the reduction in salary of the mentor. Two employment issues resolved in one simple move of increasing valuable contribution.

We also have a Government quietly encouraging businesses to prefer younger people over older people in spite of ageism legislation – for good political reason, albeit short-sighted. Businesses need talented people that can add value. Young people need knowledge and experience to be valuable. Older people have this knowledge and experience in spades. When do we bring the 2 together?

Now look at retirement ages in other Eurozone countries, especially those in trouble. Some of these countries scrap valuable resources years before they do in the UK. How much economic value is wasted in the EU with these crazy policies and attitudes – and at what cost?

How many of the towns in Spain would have been built if they had harnessed the knowledge and experience of the older people rather than promote younger people too quickly and thus making poor decisions. I am sure that this is reflected throughout Europe. Picture a young, bright, but inexperienced loan officer coming face-to-face with a known and wirily developer looking for large debt to equity ratios for his next (speculative) development – the loan officer being overawed. Then superimpose an older, very experienced loan officer into the same situation. I suggest we see the difference between ‘yes’, and ‘maybe’ – if you increase your equity input and show me some credit-worthy presales.

So what is wrong in the Eurozone? Just blaming the banking crisis is convenient for politicians, but otherwise short-sighted. Could it be that the formation of the Eurozone revealed historic cracks in economic policy that otherwise had been quietly hidden by politicians hoping that it would not be revealed on their watch. How many politicians in the Eurozone watched in envy as Margaret Thatcher broke the stranglehold power of the UK trade unions wishing they could do the same in their country. I sense that had Angela Merkel been in power at the same time as Thatcher then the German unions would have suffered a similar fate.

What I want to do over the following weeks, with the help of the blogging community, is to develop a serious framework that could work in Europe, and then examine whether or not the existing EU/Eurozone can be adapted to this new framework, or should the existing model be scrapped, as were the EEC and ERM before, and the whole of Europe move into a structure built more on economic and business-driven sensibility rather than the existing political mishmash.

I will post the outline of this process tomorrow.

Bank Trader Bonuses – should they be paid if the bank makes a loss?

Bank Trader Bonuses – should they be paid if the bank makes a loss?

I have been cornered at a number of dinner parties and other discussions in recent years to be grilled on the controversial and sometimes hostile subject about whether or not the traders, and indeed deal originators, within investment banks should be paid substantial bonuses if the bank itself makes a loss. Having signed-off on such bonuses in the past I know what it feels like when you see the size of the number, sometimes staggeringly large, staring at you on the page, (but then most would gulp at our daily turnover of around US$ 3 billion) so I have tried to rationalise the argument ‘for’ or ‘against’.

In the early days of such traders, (latter part of the 1970’s and first half of the 1980’s), it was commonplace that the bank provided the desk, the capital, the prestige name of the bank, and the support operations. Traders were only paid a nominal salary to live on but would be entitled to a flat-rate bonus calculated at up to 10% of the net profits they generated for the bank. These traders were never considered part of the ‘family’ within the bank, and were remote to the culture of the bank. They were commonly referred to as ‘intrapreneurs’. This was a reasonable strategy for the bank in that they did not have the exposure of substantial salaries to people who might not perform, and the modest salary incentivised the trader to make profits. Many types of companies today adopt this attitude, and it is certainly a better business model than the soccer players I refer to below.

A significantly exaggerated example of this, and well recorded in books such as ‘Liars Poker’ by Michael Lewis, was the trading environment of the then Solomon Brothers investment house which was a ruthless production line of traders who performed to required levels of profit, or were discarded and replaced at will.

An analogy could be a comparison with soccer players who have a limited period of productivity (typically 5 – 10 years) who are paid substantial remuneration whilst valuable, but are readily discarded once their star no longer shines. Headhunters in banking play the role of the soccer player’s personal manager in both initiating transfer of traders between banks, and negotiating any settlement required to be paid to the former bank to overcome notice periods, garden leave, poaching costs, etc. Traders do not have a career as such, they have a window of opportunity to make large amounts of money before they burn out, and their general philosophy revolves around this short-term opportunism.

To add to this unitary approach it should also be stressed that there are a number of separate product areas within an investment bank, and they have separate profit centres which become the accumulated profit or loss of the bank. In general there is no interlinking of these profit centres within the bank, nor interdependency on performance. Therefore I suggest that a trader who performs well is entitled to their bonus, irrespective of its size, as it only reflects the quality of the person as a realised income contributor. I must emphasise that the profit against which the bonus is calculated should be fully realised without any future exposure. Accrued profits, e.g. on transactions that still have future potential exposure, is a contentious subject, and needs to be agreed on a transaction-by-transaction basis. If a trader makes losses not only do they not receive a bonus, but usually they lose their trading seat – and possibly their future as a trader.

At a simple level would you expect a car salesperson to forego the commissions due on their sales if the car manufacturer makes a loss? Scale this up to a salesperson who sells a $40 million commercial airliner on which I am led to understand they can earn a commission up to 7% of sales value. And both of these sales people will probably have a far longer career than a trader.

At the end of the day the primary difference between other corporates and investment banks is the scale of the commissions/bonuses. To put this into context an investment bank can easily turnover as much in a few days as a major corporate turns over in a year.

Please note that this blog relates to business income generators, not the fat-cats who sit at the top and mostly still receive bonuses when the bank makes a loss – this is a completely different story.

Investment Banks – do the media yet understand them?

Investment Banks – do the media yet understand them?

I read a somewhat cynical comment in the FT on 15th July that I cannot get out of my mind. It related to an Analysis article about Goldman Sachs and boldly states ‘they’re [Goldman Sachs] playing by the rules but they are very good at navigating as close to the regulatory wind as possible’. What do the journalists expect them to do?

Investment bankers have taken some serious knocks over the past few years. I am not saying that some of them did not deserve the widespread denunciation of their activities, but the media (reporters, journalists, their so-called experts, etc.) understood so little about investment banks that they delivered a grave injustice to all other investment bankers, by generally creating a feeding frenzy amongst the public, and a convenient escape route for politicians who had much to do with the economic demise of the UK economy. Can anyone remember a Labour government since WWII that did not leave us economically paralysed, and even in the hands of the IMF? I have been a banker long enough to remember serious bailouts of Governments – even when the general public had little or no knowledge of the economic dangers. And let’s not forget the then economic woes of the Eurozone struggling with the outcomes of political over economic sensibilities in an altruistic attempt to create a federal Europe.

One glowing example of this lack of understanding of investment banks was the reporting by Robert Peston during 2007/08, and whom we labelled ‘the Pest’ or with his partner-in-crime, Vince Cable MP, the ‘Ministry of Mis-information’. There is a saying in the English language about someone with a little knowledge, and Peston was certainly going to use his little knowledge to make his name no matter how incompetent the reporting. Indeed it became apparent after a while that the banks had found a way to feed him with what they wanted him to report, even if yet again the information was not credible – he would not know, and thus challenge his reporting credibility amongst those who do understand. The damage caused throughout the population by such uninformed reporting, both socially and economically, must be colossal. Knowing exactly what had happened within the investment banks, I found his reporting frustratingly depressing.

So what are investment banks and why do we need them? During the mid-1980’s they evolved out of the former Merchant Banks which provided the liquidity for global trade, and structured debt solutions for major projects throughout the world. However, capital movement around the world was somewhat limited thus frustrating economic growth through lack of available capital. Deregulation of the capital markets of the world in the mid-1980’s enabled rich sources of new capital, but it required very special and creative structured finance skills to satisfy the investment terms of these new investors with the financing needs of projects. For example we saw the global expansion of international securities, the design of structured securities products aimed at providing finance more aligned with the specific needs of a project, and the attraction of major global institutions and private investors to purchase such securities thus providing liquidity to the system that banks alone could not provide. It was instilled into me in those early days that our role was to match financing need with capital availability providing the expertise to both optimally structure the risk in the funding requirement, and to demonstrate our integrity to investors that would lead to the trust to provide the funding. Investment banks do not lend money (their income essentially comes from origination fees and trading profits), but they make it possible for investors to provide capital to funding requirements, (thus the Capital Markets) and facilitate the liquidity of capital investment to optimise the flows of investment capital.

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. 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 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.

For some years this new market worked very well especially in the arena of infrastructure and global business development which was a necessary part of global economic development. New products emerged such as asset-backed securitisation making it possible to provide ever increasing funds to satisfy mortgage demand, credit card finance, lease finance, etc. However, just as the Manhattan Project produced a new science of nuclear fission which could significantly benefit the world in the development of electronics, energy production, medical treatments, etc., in the wrong hands such innovation would have devastating results. If we can accept that history has many examples of great inventiveness being used with moral integrity to the greater good of many, and by the few intent only upon greed, avarice and power, then we can draw upon these flaws in human nature to describe the culture that emerged within investment banks over some 15 years.

For investment bankers pushing the boundaries is a way of life, to find ever more innovative ways to ensure the maximum availability of capital to service the ever growing capital demands of the world. Indeed Goldman Sachs is the most aggressive of the major investment banks, and their creativity is legend. Thus you could conclude that the missing ingredient was moral integrity. But where were the financial regulators in the early 1990’s when the few were screaming into the abyss that control of risk was being sacrificed in the name of profit – and the stakeholders in the banks poured praise onto the generators of these great profits. I find it somewhat disingenuous that financial regulators, who should have been proactive in maintaining moral integrity throughout those 15 years or so, are now reaping the rewards of large fines from the banks whilst normal households are struggling to make ends meet, partly as a result of their failure. And thus my concern at the comment in the FT.

Last year I was asked by a group of senior bankers and economists to produce a report describing the evolution of the problems within the investment banks, and suggestions of how their credibility (moral integrity) can be restored as there is no doubt that they are fundamental to maintaining global capital liquidity. Whereas this report was distributed around major banks it was considered too long for publishing. If there is enough interest in knowing what really happened then I will find a way to make it available electronically. As this is likely to cost me money there may be a nominal charge which I guess will be processed by the likes of PayPal (who will also charge me). However, the feedback from the intended audience, and a business school who studied a copy, suggest that this paper is required reading for those interested about the failure of investment banks from the inside.

Egypt – a legitimate coup to restore democracy?

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Egypt – a legitimate coup to restore democracy?

There has been much over the weekend about the problems in Egypt, and whether deposing Mohammed Morsi was a ‘coup’. It might be useful to step away from conventional thinking and consider this problem as a possible crude template for the future. Over many years in banking I have met a number of political leaders who gained power on a specific mandate, and once in power abandoned the mandate and pursued a completely different unpopular, oppressive, suppressive, etc agenda. If we consider Egypt and look at the basis of the revolution against Mubarak the fundamental cry of the people was for a secular democracy. This cry was echoed throughout the election process which Morsi won with just a little over 50% of the popular vote. It can be argued therefore that whoever became President the new constitution must follow the lines of a secular democracy. What Morsi then produced was a constitution for an Islamist state which was rejected by the secular ministers involved who felt so strongly that this was an abuse of the mandate of the people that they refused to participate. Morsi then seized even more power to enforce his will, again against the mandate of his office. This abuse of office ultimately led to his removal from office by the army.

Democracy would suggest that such removal should be via the ballot box. But how many times in the past has the remaining term of office for such a political leader given them the space to radically change enough of the state to impose much distress and oppression to the people. Is this a flaw in our current understanding of democracy? How many times in the past would it have been in the interests of the people to have a political despot removed from office? Do we need to look at this situation and use it as basis for global discussion on a means to safeguard democracy from abuse?

A possible solution would be an International body, such as the UN, that had the power of oversight on the actions of political leaders, and have the right of intervention in the event that it was agreed that a political leader was in direct violation of the mandate of the people via the ballot box. Clearly such a body could not be other political leaders – the UN Security Council clearly demonstrates that this would not work. But we also have the International Criminal Court in The Hague which, today, only deals with after the event issues, i.e. long after many people have suffered. What about another council within the UN that comprises the heads of the judiciary from countries where there is clear independence of the judiciary from the executive – a pillar of democracy. Call it the Judicial Council of the UN. This council would have oversight of the behaviour of leaders throughout the World to ensure that clear mandates are observed and that constitutions comply with accepted basic human rights. The head of the judiciary of any state would have access to this council in the event that it was deemed that a new leader was attempting to violate either their mandate or the constitution. Such council would need the authority to suspend a government until reparations, or ultimately depose the leader. In this case what happened in Egypt would be deemed a ‘coup to restore democracy’ and thus a more accurate description, and legitimate response in the eyes of the World. I commend this view to the wider audience for comment.