Monthly Archives: January 2010

Coverage of the appearance of three UK bank chief executives before the Treasury Select Committee on Tuesday has focused once again on bonuses. But this focus has once again obscured other equally important issues aired on TUesday. Eric Daniels of Lloyds did his own version of Alastair Campbell’s “I stand by every word”, telling the committee that he thought due diligence around the disasterous takeover of HBOS had been “thorough”.  Asked why the size of support for HBOS from the Bank of England was not disclosed to shareholders when they were asked to vote on the deal, Mr Daniels told the incredulous committee “It was not felt to be necessary”. And then to general consternation he repeated that due diligence and disclosure were “thorough”. Take a look at the testimony on the Parliament website.

Also intriguing was Mr Daniels affirmation that Lloyds had worked  to avoid participation in the Government’s Asset Protection Scheme partly because it feared that accessing more government support would precipitate more onerous directives from the European Union’s competition directorate.

It was fascinating to observe the contrast between the styles of the three protagonists. Stephen Hester of RBS arguably batting on the stickiest wicket was assured, open and businesslike. Shame that one or two throw away self-deprecating remarks “my parents think I get paid too much” have been taken out of context.  What he had to say about the underlying business of RBS was also encouraging, as was Gary Hoffman’s account of the situation at Northern Rock. But Mr Daniels’ style, in turn defensive, stiffly formal, superficially polite then acidly hostile only served to antagonise the committee.

Related links:
MPs grill bank executives on bonus policies

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

What is going on at ISDA, the International Swap and Derivatives Association, guardian of the best interests of the derivative markets for a generation?

ISDA has a proud but little celebrated role building the plumbing of the derivatives markets, designing and negotiating the templates which frame all of the trillions of derivatives which have been at the heart of the financial crisis.  But ISDA has not had a good crisis. Thrust into the spotlight to defend the role of OTC derivatives in the financial crisis, ISDA’s technical experts have found it hard to get traction with legislators looking for quick and easy answers.

A tactical decision not to  bend with the wind of regulatory change has left ISDA defending some positions long abandoned by other derivative believers. Consequently ISDA’s wise and well-informed voice has been much less influential in shaping the post crisis settlement than many of its supporters had hoped.

It is against this background that chairman Eraj Shirvani has asked long time staffer Bob Pickel to make room in the executive suite for a new CEO, industry veteran Conrad Voldstad. The industry needs a strong ISDA, and ISDA needs a stronger management team.

Connie certainly brings vision, determination and experience. This is good news. ISDA knows it needs to reach out beyond its traditional supporters amongst the major derivative dealers to embrace the more nuanced interests of the buy side of the derivative industry. it has made some progress in this respect in recent years. If it is not to be seen as another voice of JP Morgan and Goldman Sachs, Connie will need to continue Bob Pickel’s outreach programme. Crustacea beware.

Related links:

Trading Room FT

How derivatives can survive regulatory change and thrive FT

ISDA queries doubts cast on CDSs FT

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

After failing to worry sufficiently in the bubble years, bankers are trying to make up for lost time. We have to find something to worry about. Faced with a global economy in much better shape that any of us expected this time last year, and market conditions conducive to positive returns (steep yield curves, cheap money) the best we can do for a worry is government deficits.

You can’t read the FT without getting sweaty palms about the immense deficits in the US and the UK.  Is this the biggest worry we have? I think we have to do better than that. Investors positively demanded government bonds in 2009, driving rates down to record lows. Of course it makes sense for governments to issue bonds, and lots of them.

If Bill Gross’ appetite for gilts is satiated and Chinese state agencies have had enough treasuries, then they will sell their bonds and buy something else. That is not a bad thing. If their flows into the equity markets, corporate investment and bank recapitalisation will be stimulated, this is a good thing. If Chinese money is repatriated, the renminbi will tend to appreciate, and that is a good thing.

Some bond vigilantes see themselves as fighting back, “yanking the chain” of government officials who have been giving bankers a hard time lately, using dire warnings of funding crises as a way of encouraging officials to speed their exit strategies, not only from support mechanisms but from holding equity stakes in banks themselves.

Banquo is paid to worry, but my worry isn’t government deficits, it is why so many investors can’t think of anything better to invest in than another government deficit.

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

A broader point following on from last week’s blog about Morgan Stanley’s new risk committee. Not only does Morgan Stanley need more risk-takers, as we enter 2010 the whole world needs more risk-takers.

As we start the year many investors still have their money parked in the safest, lowest yielding assets they can find: cash and government bonds. This is understandable given the uncertainties of last year.

But, as traders ponder the year ahead, consider how your incentives and the incentives of those around you has changed. If you work in a bank, you simply may not be able to take more risk. Many banks are still in balance sheet repair mode, or like Morgan Stanley are strengthening their risk policing functions. That doesn’t necessarily mean less risk, but it certainly means lots more questions if you do want to take more risk. And if you take the risk and succeed? Your expected bonus payout is lower and your tax rate is likely to be heading higher.  And is anyone pleased or happy that you succeeded. No. You are a parasite, you just got lucky in the casino, you have done nothing socially useful.

My point here isn’t to garner sympathy for risk takers, nor am I feeling depressed about the year ahead (quite the contrary). My point is that the current climate is not conducive to risk-taking and that is a problem. The world needs more risk-takers.

Related reading:

FT Money 2010 predictions

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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