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.

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
(FT)

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

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.

Banquo

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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