Monthly Archives: December 2009

Morgan Stanley’s board of directors approved, on 25th December, Christmas Day to many of us, the formation of a standing risk committee. Bizarre. After a pretty difficult time being long some of the wrong risks in 2008 and early 2009, Stanley has been slower than most to embrace the asset price rally of the second half of 2009. In the parlance Stanley have been whip-sawed, long when they should have been short and short when they should have been long. Is a standing risk committee the solution?

With John Mack focusing on the role of chairman, Morgan Stanley co-president James Gorman steps up to the CEO role. Is the formation of the standing risk committee linked to the personnel changes in the executive suite? To get to the top of a prestigious if somewhat tarnished organisation like Morgan Stanley you have got to be good. Competent, capable, smooth and good with clients.

But what Morgan Stanley really need is someone at the top who can improve their lamentable record managing market risk. Maybe Mr Gorman knows that a career in strategy and private banking is not the best preparation for that role, hence the standing risk committee. When we find out the balance of risk-taking hawks and risk-avoiding doves on the risk committee, we will have an important clue to what kind of organisation Stanley plans to become in the years ahead.

Related reading:

SEC filing by Morgan Stanley
Latest news on banks

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.

Banquo may write occasionally over Christmas and the new year. He will resume his regular posts from Monday January 4. Happy holidays.

One banker who still seems very comfortable in London, indeed who seems to be planning to spend even more time in the City of London in the years ahead, is Jean-Claude Trichet, European Central Bank president. The very epitome of the charming, urbane central banker, Monsieur le President spoke at the Economist lecture at the Haberdashers’ Hall on Friday.

Here is the full text of Mr Trichet’s speech.

Dealing with threats to financial stability, Mr Trichet warned us that “snow on mountain slopes can be meta-stable, looking pristine and tranquil yet turning into an avalanche after only a minor disturbance”. Colourful language for a central banker best know for his banalities.  Combine that chilling illustration with his observation that “there has been a surge in provisions for loan write-offs” and  ”the crisis in securitisation and structured products are not yet behind us” and Banquo feels he has been warned…

Related reading:

Money Supply blog FT

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.

For the second time in a year Gordon Brown has demonstrated decisive leadership on an issue of import, making an unpopular, mould-breaking decision, and then had the satisfaction of seeing others follow him.

In the spring he “saved the world” by rejecting the complex US approach to bailing out the banking system in favour of straightforward and direct state-backed recapitalisation.  “I saved the world” is poignant because it is only a small exaggeration of the reality.

No wonder the UK prime minister feels righteous indignation that bankers plan to cash big bonuses riding the bailout wave that he created, and no wonder that he feels he has the moral authority to tax them.

For the second time others seem to be following Gordon’s lead. France plans a copycat measure on bank bonus tax and Goldman Sachs and the German banking industry (of about equal import in the global banking industry) appear to be planning preemptive measures.

It must be very hard being Gordon Brown.  Sometime master of the universe, a hero to his wife, but those pesky voters just don’t seem grateful.

Related reading:

Pre-Budget report 2009 FT

Investment banking industry FT

Westminster blog FT

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.

“The art of taxation consists in so plucking the goose to obtain the largest amount of feathers with the least possible amount of hissing”. So said Colbert. Judging by the amount of hissing and clucking from the broad-shouldered golden geese of the City of London yesterday we can safely conclude that Alistair Darling’s banker tax is categorically not artful. The Treasury estimates that the tax will raise £500m. With some seemingly simple expedients (delaying payments?) the tax take will be much lower, and if a couple of Goldman Sachs bankers do choose to relocate the long term revenue impact will be negative.

But the banker tax was never meant to be a revenue-raising exercise. It is a message to taxpayers outside finance; “we are making the guilty bankers pay”. This is artful politics. In fact “middle England” may be so pleased that evil bankers are being squeezed that they may not notice the £3bn national insurance bill hit the mat.

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.

The UK’s Chancellor of the Exchequor, Alistair Darling, justifies his putative plans for a windfall tax on banks with the expression “we would expect the broadest shoulders to bear the greatest burden”.

Banquo will let others get into a lather about the negative consequences of capricious, retrospective taxes. What is most striking is the language that the chancellor chose to use. Isn’t it poetic? Doesn’t it make you want to do a Stanley Baldwin, call your tax office and make a voluntary payment? But also doesn’t it strike you as faintly sexist and old manual?  Shouldn’t wealthy women, narrow shoulders and all, pay too?

Maybe the chancellor has noticed that the Carringtons are back on TV and Joan Collins has the broadest shoulders of all. Or maybe the chancellor’s vision of the City of London is of sweating, muscular bodies hewing glistening lodes of gold from a mine deep below Threadneedle Street.  Harold Wilson’s “gnomes of Zurich”, but with broad shoulders.

Related reading:

Robert Peston: A bonus super-tax BBC

UK pre-Budget report 2009 FT

Westminster blog FT

Money Supply blog FT

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.

And another thing… (on bonuses).  One of the skews in the compensation schemes at large institutions with shared bonus “pools” is that those who do well when the firm as a whole does badly are paid poorly compared to those who do well when the whole firm also does well.

Why does this matter?  Because it encourages group behaviour.  If your institution lost big being long dotcom stocks in 2000, whilst personally you had a great year being short, you would have had the satisfaction of being right whilst all around you were wrong,  but not the satisfaction of spending a big bonus cheque.

So what would you have done? Resign to set up your own hedge fund, or stay loyal and make a mental note that next time you see a bandwagon rolling you’ll jump on board? And we’re surprised at herd behaviour!

Related reading:

London fights for its future FT

Beyond the financial crisis FT

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.

A few thoughts on paying our RBS brethren.  The best thing the board can do for all the shareholders at RBS is to reduce the government’s stake as quickly as possible,  à la Bank of America.  Diverting some portion of the bonus pool to repay the government or to reduce the size of the asset protection scheme might be tokenistic, but it would be good politics, and like it or not the board needs to be political.

Second, Banquo is on the board of a company that has an outsize compensation structure. This compensation structure needs to change, we know that. But wrenching, confrontational change will destroy equity value. There has to be a period of transition.

The alternative to managed adjustment of compensation processes is the painful, rudderless search for executive leadership now increasingly experienced (for different reasons) by ITVGeneral Motors and the aforementioned Bank of America.

The government knows that if Hester and co resign then the headhunters will draw up a shortlist with names like  Chris Flowers, Archie Norman, Howard Davies and Callum McCarthy, all competent in their own way, but better the devil you know…

Related reading:

Would RBS directors really resign? FT Westminster blog

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.

Much gnashing of teeth about the threat to London as a financial centre at the Merchant Taylors’ on Tuesday night.

Forgive me if Banquo doesn’t get too alarmed. London’s status has been under threat since the Hanseatic league, and funnily enough its market share keeps on growing.

London’s preeminence is built on much more than “light touch regulation”. More regulation won’t help London, relative to New York or Geneva, but the expertise to develop and manage within that new regulatory framework exists in London.  Each new regulation will spawn a new business line.  Reg Q lead gave us Eurobonds, Basel II was the mother and father of shadow banking. The worst outcome for London and markets generally is a prolonged period of uncertainty.  If Monsieur Michel Barnier brings some French dirigisme to the overhaul of regulation London and its European hinterland should cheer.

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.

“Transparency” and “disclosure” are the watchwords of the credit crunch, and when it comes to compensation that seems to mean more reporting of what is paid to “top earners” outside the boardroom.

Some regulators have even gone so far as to suggest that well paid individuals should be named (addresses anyone?)

There are lessons to be learned here from Japan. Back in the day, the Japanese tax authorities would publish announcements in the newspapers listing the countries’ biggest personal tax payers with a “thank you” for the large amounts paid.

One of Banquo’s colleagues routinely made this list but somehow scraped in at the bottom.  He also received a letter from the tax authorities wishing him health and continued prosperity.  What impact would this approach have on western taxpayers?

Banquo knows many whose approach would be “if I’m going to be on the list I’m going to make sure I’m above her“, and if the incentive for a top place was a letter from Tim Geithner or a seat in the House of Lords, maybe we can put a dent in the budget deficit.

Banquo is still an active investor so will declare his financial interest where appropriate in any blog post.


This blog is no longer updated but it remains open as an archive.

Banquo has spent more than 20 years in investment banking and the hedge fund industry, splitting his time between London, New York and Geneva.

Why is Banquo anonymous? Because he operates at a senior level across the financial markets, advising and investing, buying and selling, hiring and firing. He's still in the game but if he has a relevant financial interest in the subject of his posts, you'll know about it. Being anonymous keeps things simple. Banquo will never betray a confidence although he is privy to many.

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