The Financial Services Club's Blog

Europe's annual drinks festival moves to Boston

Europe's greatest export to promote the art of strong drinking opens next week in one of America's oldest cities, Boston. 

SIBOS, an acronym for Standing In Buckets Of Slop, was created by the Belgians as a way to promote wine and beer drinking and is normally held in the Autumn to pre-empt Germany's October Beerfest and France's Beaujolais Nouveau day. The Slop in the acronym refers to the grape crushing by peasants in barrels of fermenting wine (or the participants lying in it during this trade show), and was the Belgians method of poking fun at their German and French counterparts.

However, this year being a year in which Europe comes together to celebrate fifty years of union, the show has become almost an Olympics for drinking and the European's, especially the British, usually win the drinks final that takes place on the Thursday evening at a secret venue that only paying attendees are able to be involved in.

Moving each year between Europe, Asia and America, the show really has become the finest display of holding one's drink around the world.  Last year for example, the Show took place in Australia and had the theme "Raising Ambitions".  This referred to the raising of glasses to higher levels.

This year, the theme is "Gaining Momentum", which is quite hard to do after you've had a few, and goes with the overall by-line of "More Together" which we all share as a vision - more drink together that is.

Funnily enough, the attendance at the SIBOS show is normally represented by only the most drink-hardy industries, such as banking and technology. These hearty souls are able to really take more than the average barrel of brew and still remain standing.

The organisers of the show - a firm called SWIFT which I think stands for Some Wine Imbibed For Tea - have this year tried to extend the attraction of the show to other industries, which they have called 'corporates'.  Corporates have apparently stayed away from SIBOS historically because they prefer drinks with meals in nice restaurants, rather than late night clubbing in great warehouses full of wine and beer.  Even so, and even with Boston being the home of the Samuel Adams brewery, it appears that over 100 of these corporates are likely to come along this year, which is no small achievement.

Now, for those virgin corporate drinkers coming to the throng, a word of advice.

Many of the people at the show talk about payments.  Avoid those people, as they're generally trying to work out how to lumber you with the bill for the round of drinks.

On the other hand, if you hear people talking about  supply chain, get in there early as this normally refers to the order of who pays for which round of drinks and, if you are there are the start, it means you can position yourself at the end of the chain.  Hence, when it comes to your round, most of your chain will be so blotted that they'll have forgotten you have to pay and you will get away with drinking all night for free.

Finally, the worst people to mix with are those who talk about messages.  This is because it is a colloquial SIBOS phrase derived from the Scottish meaning of messages, as in to 'get the groceries'. In SIBOS parlance, it means that if you get stuck with the messages then you not only have to buy all the drinks that night, but you have to give everyone a large double Scotch to finish off the evening too. That can be very expensive, so keep away from that lot.

Anyway, I've been at SIBOS for several years now.  Can't remember a thing about them but luckily I kept a blog in 2006, so I can remind myself what the hell I did. 

Pass the port old boy.

FX trading breaks the three trillion dollars a day mark

In a no turn-up for the books there then announcement, the Bank for International Settlements (BIS) released figures this week that show that the world is trading over $3 trillion a day in foreign exchange (FX) instruments in 2007. These are the results of the three-yearly survey the BIS performs with the Central Banks around the globe, and this year they discovered that turnover in traditional FX instruments increased 71% to $3.2 trillion. This is a fair explosion over the $1.9 trillion of 2004 and the $1.2 trillion of 2001.  In particular, the main surge was from FX swaps, up by 82% in April 2007.

Average daily turnover in OTC derivatives (interest rate and non-traditional foreign exchange contracts) increased by 71% to $2.1 trillion in April 2007.  This compares with $1.2 trillion in 2004 and $575 billion in 2001,

Turnover of foreign exchange options and cross-currency swaps more than doubled to $0.3 trillion per day, outpacing the growth in traditional instruments, such as spot trades, forwards or plain FX swaps.

Meanwhile, less growth was recorded in the interest rate markets, where average daily turnover increased by 64% to $1.7 trillion.

All in all, there's a lot of money out there being traded around the world's markets and I can't help wondering why I'm not seeing any of it.  After all, you would think that if all that money is flowing through the world's investment circles I'd be able to pickup some loose change wouldn't you?

What's that?  It's all speculative and electronic trading.  Well, blow me down ... who would have thought (of) it?

My friends attack Gartner over MiFID

Some of you know that I've spent a while looking at MiFID.  In fact, I'm so sad that I even produced a book about it ... there you go.

So some might think I'd know a little about the subject, although not nearly as much as my friends in the MiFID Community on the buy and sell side who enjoy sharing ideas with me, even if they don't want to publicly state those ideas. 

They're all up in arms now though after the rip-roaring mirth created over the latest gaff from an analyst who hasn't spent enough time understanding the market or, conversely, just doesn't understand the market.

The firm in question is Gartner, who I have to say I respect for their Magic Quadrants and numbers for hardware sales forecasts but, when it comes to vertical market analysis, some might say they are vertically challenged.

Here's an example: Gartner says MiFID will only be a small IT update for most UK firms, a report from Friday's Computer Weekly.

"For the majority it (MiFID) is a small update to what they have in place and some can  be outsourced."

These are the words of one Peter Redshaw, research director at Gartner. 

Now, I know that Europe's largest market making firms have spent over €100 million each this year on MiFID, so that's what Gartner call a small update?

He goes on to say things like:

"In the UK, businesses are probably doing ok because the UK already has a lot of MiFID requirements as de-facto."

So that's why the European Commission, the FSA, the Treasury, and various groups from MiFID-Connect to the Joint Working Group have spent three years collaborating to produce ranges of consultation papers and new regulatory advice, with massive changes to operations, processes and systems for all buy and sell side firms affected.

"Features of MiFID that Redshaw said the UK is already prepeared for include best execution when a customer must be given the best deal available. 'Companies are already used to searching for the best price,' said Redshaw."

So that's why CESR, the FSA, AMF, BaFIN and the rest have been arguing about how to define best execution and we still don't have a clear answer.

No wonder my friends are laughing.

First comment from a leading expert I know on MiFID and one of London's leading MiFID advisors:

"Just so you are aware of the rubbish being heaped upon the unwashed at the moment … I translate this as: 'We can’t figure it out and don’t care what the industry that spends the most money on the face of the planet on technology think'."

Second comment from one of the leading thinkers around MiFID and a man who has capital markets flowing through his blood and veins:

"This is too vertical and granular for Gartner, hence if they don’t understand it, they sandbag."

I guess for an industry that is spending millions on a Directive that they didn't ask for, which has great ambiguities, stepping into the fray with an unguarded comment goes down pretty badly.

So, I'll just stick with saying that: "Best Execution has the clarity required to ensure that no firm will be confused by what it means" ...

... why are those men in the white coats coming into the office?

 

Chip and PIN five years from now

So I finally sussed out a way to make my long-term vision of sticking chips inside people for payments a reality through a medium-term transition away from my short-term loathing for Chip & PIN. 

This will be achieved as we strip things back to the basics.

For example, look at any credit card today and it's got a chip on it (unless you're in the USA where mag stripe still rules). That Chip is the EMV - Europay, Mastercard, Visa - chip and is capable of basic functionalities, including intelligence to be used with payments terminals with a PIN.

The thing is, why do you need the card bit?

I mean, you have a payments card with a chip ... why do we need the plastic holder for that chip?

Because it has a mag stripe?  Duh ... that one went out with Chip & PIN.

Because ATMs have big slots to put cards in?  Yeah ... today.

Because payments terminals have big slots to put cards in?  Yeah ... today.

So in the near, medium-term future, this will all change couldn't it?

What got me to thinking about this is that I'm totally in love with the Kingmax USB stick I carry around in my wallet.  It's tiny, flat, and is the smallest USB flash drive in the world.  It is so small that it is almost the size of a paper clip.

It is not only small but also very thin, because it's basically a USB device stripped down to the basic chip.  Throw away all the plastic bits and that's all you're left with - the chippey connections.

That's all you need isn't it?

A little like flash memory for digital cameras and mobile phones that started as those credit card sized sticks and are now the size of fingernails, with double, triple, quadruple the memory, everything is getting stripped down to basics.

Except credit and debit cards.

They're still HUGE.

So why not throw away all those plastickey bits on the cards and cut it down to the basic chip. 

Ahh ... 'cos we'd then have to throw away all of our ATMs and card terminals.

Shame.

But here's the upside.  A basic, standardised bank chip could be multi-bank, multi-application, stored value holders.

When you get to paying, it could have all your financial providers' details - not just one bank's, but all of them - and you could then just pick the icon of the card processor you want to use for that transaction.

Equally, if we standardised the chip to something like a USB or Flash Memory Drive, then we could use that chip as a direct chip insert into PC's and mobile telephones.

This leads to the Chip & PIN Vision of five years away.

Five years away, you have a pure, standardised bank chip that can be inserted into any PC, mobile, payments terminal or ATM, in the same way as a bank card.

You only have one chip, and the plastic bit has gone.

Effectively, your bank chip is just the chippey bit you currently use on your credit card.  And that chip is powerful with 10Gb, 100Gb, 1Tb (Terrabyte) storage and even some dumb intelligence built-in, so you could do almost anything with it.

It could be multi-bank and multi-function, wirelessly enabled and communicating. 

It's contactless, cashless, debit and credit payments in home or local currency - you name it.   

Most of the time, for low value transactions, it asks for no authentication but now and then it wants ID.

You then enter either a PIN, provide a biometric or other agreed verification.

Away you go.

Now, you're concerned that if the chippey bit is that small, then I'll lose it.  But no, because you can stick that chip into anything.

You might hold that chip in your wallet, mobile telephone, watch, ear-ring ... you could even stick it up your wherever if you wanted (now that could be a safe harbour).

That's the short term future of cards as they become chips.

Bring it on.

A new currency launches

The US Dollar rules the global markets, even whilst it is being bombarded during the credit crunch.  After all, nearly all countries across Latin America and the Middle East are tied to the dollar.   That is why the dollar is the reserve currency of the world.  The thing is though that China holds over $1 trillion in reserves and, like most of us, must be wondering about its long-term value.

But what's the alternative? 

The euro is still viewed as unstable, the Yen is undervalued and underutilised, and the Yuan is a good long-term bet but short-term? Everyone seems to be saying buy Gold, with Gold the only stable reserve in the world.

So it's a funny old time with all of these uncertainties for a bank to launch a brand new currency but, according to the Financial Times, that's exactly what Barclays Capital has decided to do. 

Barclays Capital is launching the EBU, or European Borrowing Unit, today. 

The EBU is a basket of long and short positions across a portfolio of 10 major currencies, and is targetted at corporate and institutional borrowers who want an alternative to low-yielding currencies such as the Yen.  So it isn't something I can rush out and use to buy a tin of baked beans down at my local Tesco.

Also, the EBU sounds a bit weird during this current credit crunch ... after all, European's Borrowing ... who's interested in that?

I guess I'm interested  because I'm speaking at the GLNet Forum tomorrow about the relationship between MiFID and FX. 

My understanding is that MiFID does affect FX ... but only when tied to another financial instrument as an integral part of the sale. Therefore, if I'm buying BMW and General Motors shares and hedge this with a Euro:Dollar forward contract as part of the deal, then best execution on that part of the deal has to be delivered also.  However, if the Euro:Dollar contract is made completely independently of the BMW/GM contract, then that's not covered.

I'm sure folks will disagree with this so it should be fun to have the debate.  And I'll be wondering and watching the EBU carefully to see how it might play into this space.

Meantime, in these days of currency consolidation, I thought we were all moving towards a single global monetary unit. Surely that's the long-term aim.  The only thing is: what will we call it?

The Glob?

Bankers are from Mercury, techies are from Uranus

What goes around comes around ...

Some things never change ... 

Same old, same old ...

Y'know you're getting old when you are tired of hearing a debate about something fundamental but just continual.

And so if men are from Mars and women are from Venus, then bankers are from Mercury and techies are from Uranus. 

Yes, it's that old nugget of the chasm between IT and the business community, a debate I first heard raging in the 1980's and, even back then, people were tired of it.  Still raging today, the reason I mention it is that I picked up two interesting discussions around the subject in the past 24 hours.

The first is from Bank Director Magazine.

This talks about the survey by Deloitte and the Corporate Board Member (30 page pdf) which discovered that of all industries, financial services executives said they were most likely (52%) to expect technology to increase in priority for their company over the next three years, compared to the average of 45% for all respondents. 

Yet I wonder how often the SOA deployment of modules for new core banking services is actually discussed in a main Board agenda? 

How often do the guys sit and actually ask about their internet banking platform and whether it's fit for mobile access? 

Do they really get to grips with the idea of the CEO doing a daily podcast update for investors and employees that can be downloaded internally and externally?

I doubt it very much.

On the converse, to switch this beat, the reason is that most of the bankers are rather mature chappies.  For example, an analysis of the industry by the Journal of Banking & Finance states that the average age of a bank CEO is 57, ranging from 40 to 69, and most Board members are over the age of fun.

The fact is few on the Board of a bank is young because this industry is a risk averse industry, run by conservative males (see earlier article about Sexism in the City).  As a result, no-one on the Board of a bank can possibly understand the techno potential of today's world. 

With Gen X and the iGen coming along fast to disrupt our thinking, this is a major gap, and is the reason why most banks don't understand or want to understand Facebook, MySpace, YouTube, Flickr, Second Life, World of Warcraft, other virtual worlds and blogging.  After all, most banks' firewalls block access to these sites.

This leads to another dimension of the business and technology divide which the Financial Times debated on Wednesday (accessible to FT subscribers). 

This aspect discusses the fact that the CIO is dead as a donut.

Congratulations guys ... just when you thought it was going OK.

The tenet of the FT article is pretty sound actually, in that it's saying that after thirty years we have moved from the Data Processing Manager to the IT Director to the Chief Information Officer. 

We have moved from paper processing to automated records to leveraged information services.

We have also moved from Governments driving technology to consumers driving technology.  After all, consumers’ adoption of new media is voracious and growing fast.  That's why the iPod went from zero sales to 100,000,000 in under five years.

The logic of this is echoed by JP Rangaswami, the former CIO of Dresdner Kleinwort Wasserstein and now CIO, Global Services for BT Group, who states that the role of CIO could disappear because all senior managers and board members will have to be knowledgeable about IT.

Mind you, I heard that same argument - all of the Board will have to know Technology - in 1991 and also in 1997.  I remember both moments clearly as the audience drew a sharp intake of breath.  Us?  Technologists?  You gotta be kiddin'!

To be honest, the point being made is that all of us need to know what technologies are capable of achieving, whether you are a middle manager, senior manager, board member or CEO.  If you don't, especially in financial services where everything is bits and bytes, then you are fundamentally failing in delivering the potential of your business.

That doesn't mean that you, as a banker, need to know how to disconnect a memory board or replace a blade (although many will); you just need to know what folks can do with IT, and many of the folks using that IT will be bankers.  They will be the new generation of bankers, who have been wired pretty much since birth, and don't see technology as alien but as innate.

That's why I agree and disagree with JP and company.

We won't have CIO's in the future.

Their role will have changed and, as a result, so will their title.

In ten years, all of us will be harnessing information and so you won't have a Chief of Information.  We will all be Chiefs of Information.

Therefore the CIO will become the MEP.  No, not Member of the European Parliament but Master of Electronic Platforms.

MEP's will deal with the splicing and dicing, plumbing and pipes, bits and bytes to ensure the bank is truly capable of achieving its electronic potential.

That's why, even in another thirty years, bankers will still be from Mercury and techies from Uranus.

Help ... just give me your account information

Hello.  Sorry for emailing you out of the blue, but my name is Ishamal Nicker, and my brother was killed in the Iraq war before he could move his money back to Lebanon.  He had $20,000,000 in a Switzerland bank account and has given me the codes but I can't move the funds due to restrictions.  Can you help?  Just send me your bank details and I'll give you 50% of the money ...

Good day sir.  Great apologies for emailing you this way but may I introduce myself to you?  My name is James Fontagu, grandson of Sir Harry Fontagu, the famous English lawyer.  Sir Harry left his money to me but I can't get it without your help.  Can I have your bank details ...

Congratulations dear FinanSer reader.  Your click onto Chris's blog is linked to the lottery of Mars and you happen to have just won $100 million!  Just give me your bank account number ...

Dear PayPal user.  Your PayPal account is suspended.  Click here to sort it out ...

Dear Dafto.  We are your bank and we hate you as you've clicked the wrong button and screwed up your account.  Click here and we might deign to love you again ...

OK.

You may know it's all about email scams and phishing, but not everyone does.

According to APACS research, 15.7 million people regularly use the internet to access their current account, credit cards and savings in Britain of which:

• 3.8% (an estimated half a million people) said they would still respond to an unsolicited email asking them to follow a link and re-enter personal security details, supposedly from their bank, unwittingly giving fraudsters access to their account (this is slightly down from 4% in 2004);
• only 1 in 10 people have anti-spam software installed and about a third have a firewall;
• a third record their password or security information by either writing it down or storing it somewhere on their computer;
• two thirds never change their password and 1 in 5 use the same password for non-banking websites as well as their online bank;
• older users are worst, with 70% of older people never changing their password (could be the memory, old boy); and
• under 24 year olds are more susceptible to scam or ‘phishing' emails that are apparently from their banks with over 12% of them clicking on the link and divulging account details and security information – three times higher than the national average.

Stupid boys (and girls)!

By now phishing as an art form should be dead and gone, but it's still rife according to the anti-phishing league, who claim around 30,000 new phishing campaigns are out there each month (55,000 in April).

One of the most common scams however is still the one I opened with - the letter asking for help to move funds.

Originating as the Nigerian 419 operation - named after the criminal code it relates to - you would think by now most folks would have sussed out that any site that asked for your account information was dodgy.  But the suckers keep coming. Mind you, if you haven't seen the 419eater trophy room, you must.  It's fandabadoozy.

Meanwhile, on the phishing front, it appears that the really sophisticated bad guys have now moved to using banking specific trojans that can do very scary things at the client end, including manipulating the data to and from online banking sites, to change what the client sees or has entered.  These trojans are causing at least half of the online banking losses and a significant amount of plastic card frauds as well, according to my sources.

In the spirit of supporting our fight against such filth, and for those who would like to chance their arm, you may therefore want to try out the latest service from the underworld. 

Yes, you guessed it, create your very own phishing website. 

It's easy, and here's how.

According to RSA Security, cybercriminals are offering a "Plug and Play" phishing kit contained in a single file which makes it possible for even the most non-geek to create a phishing website in two seconds.

Funnily enough, this was posted on the Register  in July this year, when it was actually reported by RSA Security back in January.  That's why one of the comments on the Register states:

"Wow, this just goes to show how out of the loop the so called experts are. This is far from being something new. This kit has been in use way over a year and from the reading they are refering to a kit that is outdated over 6 months. The ones used now are far more advanced in code and a lot more idiot friendly."

 

I'm off to go angling for the day.

Is life getting harder or easier for banks?

The conference I presented at last week in Barcelona focused upon future banking, and we had an audience of international bank managers from around the world.  The conference organiser gave me the opportunity to ask some questions of the audience.  You know the sort of thing, where you have those nice voting buttons arranged around the tables.

So here's the a couple of the questions I asked and the answers. 

What is the biggest challenge for a bank today?

Managing a global operation                                         26%
Creating a differentiated product and service                  15%
Motivating staff                                                              9%
Satisfying corporate customer’s demands                        6%
Regulatory changes such as SEPA and MiFID                 6%
Dealing with technology                                                 3%       

With 35% saying all of these are challenges.

I then asked whether banking was more or less difficult ten years ago (pre-internet and mobile), five years ago (post-internet and mobile) and whether the guys thought it would be more or less difficult in five years time. 

Here's their views:

Is banking                           than 1997    than 2002    in 2012

A Lot More Difficult                    37%            18%          18% 

A Little Bit More Difficult              25%           49%           46% 

About the same                         15%           25%            23%

A Little Bit Easier                        5%              5%            5% 

A Lot Easier                              18%              5%             5%

In other words, banking was a lot more difficult ten years ago, and is continuing to be difficult.  Interesting that most of the guys think it was just as difficult five years ago as it will be in five years time.

Does it ever get easier and what would you have said?

21st Century Boy versus 20th Century Banks

I spent a day in Barcelona last week … put your hands up for Barcelona, a lovely city. For those in the know they’ll get this and, for those who aren't in the know, I’m speaking in a foreign language.  That's the point though as, these days, a lot of stuff is a foreign language, including the fact that I’m in Barcelona for a day. 

hola, soy Chris de Londres, Inglaterra. No hablo  español. Sabes hablar inglés por favor por lo tanto. 

No, not the fact that I can speak rubbish Spanish, but the fact that I'm in Barcelona for a day. I left home early in the morning and arrived in Barcelona by 10:00. Over lunch I delivered a keynote presentation and then walked around sightseeing the wonderful Gaudi architecture for a few hours, before settling down for an early evening meal in the port.  Then back to the airport and home by midnight. 

This may not sound like a big deal but, in my parent’s day, going to the nearest town for the day was a big deal, let alone somewhere half a continent away.

 

No wonder banks are thinking about their legacy infrastructures hampering them against new competitors, in the same way as traditional airlines have had to re-engineer to keep up with new competition.

Secondly, on new competition for the airlines, the cost of getting to Barcelona was less than the cost of a taxi to Gatwick airport.  It cost me £70 (about $140 or €100) to fly to Barcelona and that was return, not even each way.  My taxi cost me that much each way. 

No wonder banks are thinking about supply chains when you can move goods at a lower cost across continents and around the world than it costs to move goods around cities and countries.

 

Third, I get to the airport and decide to have a coffee.  The customer in front of me, who is about 20 years old, is buying a bottle of coke and she gives the Spanish guy her MasterCard.  He says: “no money?” and she shakes her head.  So he takes her MasterCard and processes a transaction for under €2 without flinching.

No wonder banks are thinking about new forms of payments when many think that paying electronically should be as easy as waving a card or texting a phone.

 

Finally, I get my coffee and can’t find a table so I go to the only part of the airport that's uninhabited: the telephone kiosks of Telefonica.  It's the old world memory of an era from the last century when fixed line telephones meant something.  These days, these telephones are gathering dust as everyone sits around the airport using new communications of blackberry, mobile and wireless computing.

The telecom firms do not make money out of these old phone boxes and they sit there, gathering dust and costing more to service than the cost of getting rid of them.  But getting rid of them would be admitting the end of the landline telephone and this would be admitting defeat to the new world order of the mobile carriers.

Any similarities with banks that continue to use branches for transactions, employ low-cost staff to process cheques, manage offices using teller stations based upon 1990's technologies and networks that operate at 56 kbps or less, is purely coincidental. 

 

How the world is changing.

 

Microsoft Ships BizTalk Update with SWIFT Support

I'm confused. Microsoft is shipping a new version of BizTalk Server 2006 late in 2007? How retro.

Microsoft did not change any features in the shipping release since the last beta, says Steve Martin, the company's director of connected systems product management. "We hardened some of the functionality. The last major version of the product was feature complete," Martin said. Redmond Developer">Redmond Developer</a> reported it.

Greenspan Blasts Bush and Republicans

The WSJ got hold of a copy of Greenspan’s new book, due out Monday. Sounds a little mixed. The Ayn Rand devotee who played a partisan game in supporting skewed tax cuts by Bush, criticizes the Republicans for losing their one-time small government focus. One interesting point from being close to presidents – it seems that no normal person would run for the job – the most normal was Gerald Ford, who got into the White House through Nixon’s resignation.

It does sound more interesting than the usual political memoir. Hope it’s better than Alistair Campbell’s.

Brilliant Hed: Customer Service in Best Interest for Banks – WSJ

Whew. Knew there was some reason I pay good money for my Journal subscription. Or subscriptions. When I called to complain about getting two copies a day they took action. Today I got three.

 

Anyway, some secret shoppers from Sandler O’Neill & Partners came up with exciting finds, like a BoA sales rep making disparaging comments about JP Morgan Chase. Ok, is that news? First

Manhattan

reported on its secret shopping at BAI a couple of years ago – it found sales reps disparaging the bank they worked for and suggesting the customer go to the competition! Now that’s a little more interesting.

 

First

Manhattan

also found that few sales folks could explain all the different checking accounts a bank offered.

 

The Sandler O’Neill survey is about as exciting as the headline.

Speed Without Disruption - HPC On Wall Street Monday

High Performance Computing on Wall Street has been running for a couple of years now, but interest seems at an all-time high this year. Today I have talked to IBM, Cisco and, on a related matter, Platform Computing. One common theme, which I will elaborate on Monday since some of this is embargoed, is that companies want improved performance without ripping out their exiting infrastructures, and vendors are responding with solutions that can be dropped into the existing environment. (How the IT people who actually make this stuff work must hate that sort of casual terminology -- sort of like describing 500 pound bombs as surgical air strikes).

Pete Harris of the A-Team Group organized the content bit of the show, and has a good interview at GridToday.

Pete: It’s certainly been a hot year for this subject, and so I’m very pleased with what we’ve been able to do. I think the area that’s become very hot this year is the area of “low latency,” and quite a lot of the conference is about that. It’s about different aspects of that, whether it be multi-core processing helping to achieve [low latency], or software engineering in terms of software stacks helping to achieve [low latency], or high-performance networking like InfiniBand helping to achieve [low latency.]

Gt: Are there any sessions or panels that you’re looking forward to seeing, or that you think will be particularly interesting?

HARRIS: There are a couple of them, actually. There is one on hardware acceleration (“Focus on: Hardware Acceleration, FPGA Technologies, Low Latency Ticker Plants Implementing Hardware Accelerated Applications For Market Data and Financial Computations”), which is [an] emerging [area]. We actually ran the hardware acceleration panel last year, and it was a pretty new area then, and we were surprised to see it was totally packed, so we moved it to a big room this year and got lots of participants. We’ve got Intel and AMD on the same panel, which is going to be interesting, and we’ve got someone from UBS [Invesment Bank], so I think that one’s going to be a blast.

Also, IBM is actually giving a wide-ranging presentation about what it’s doing. One of the things it is doing is something called “System S,” which is a very scalable supercomputer, which they’re looking at for stream-processing applications, processing many messages per second. IBM’s research people are researching it; it’s not something you can buy right now. That’s kind of interesting.

Come back next week for more details.

Microsoft Legacy Modernization Program

The Mainframe Migration Alliance (MMA) and the Midrange Alliance Program (MAP) will host a meeting on legacy modernization at the Fira Palace Hotel in Barcelona from 1:00 – 4:00 pm on 9 October.

The meeting will provide an opportunity to learn more about Microsoft’s plans regarding legacy modernization and offer an opportunity for attendees to suggest how the alliances should focus their efforts for the coming year.

If you’d like to attend please email mickey.pierce@microsoft.com

The Less so Bleedin' Obvious - CDO's Created Crisis

After yesterday's blog about the state of the markets and the concluding line: "When you see a way of making money with no risks, you see the fool’s gold", I guess the obvious question is: Why didn’t the banks see the fool's gold? 

After all, these are institutions that go back over five centuries, with departments that deal with market risk, credit risk, operational risk and have Advanced Risk Measurement Systems. 

Forget the idea of systemic risk as, after all, these highly advanced, highly automated institutions would never get involved in such folly surely (apart from the odd algorithmic explosion).

Some of our community came up with comments though, with Andrew Reynolds saying: “Was it bank policy to write the loans and hope to profit from the capital appreciation on foreclosure or were the incentives for the brokers such that they did not care about the credit quality?”

So here's my take on it.  The current crisis is mainly related to the latter and, to a great extent, the spread of and widespread usage of CDO’s which hid the risks.  That's why the banks didn't see the fool's gold.

Now I warn you, before you read any further, that this is a long piece.  It's not funny and it's a bit academic, and so you may want to click onto the next news item ... but if you're really wondering why our banks are in such a state, read on.

CDO’s – Collateralized Debt Obligations – allowed banks to take on higher risk lending strategies because they could get rid of the risk to other banks and corporates.  A paper was written in depth on this area by Joseph Mason, an associate finance professor at Drexel University's business school, and Joshua Rosner, a managing director at research firm Graham Fisher & Co.  The paper, titled “How Resilient Are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?” (37 page pdf), came out in February and has some interesting stats on this market showing that the growth of CDOs has been explosive.  In 1995, there were hardly any rising to more than $500 billion by 2006 of which 40% were backed by residential mortgage and almost three quarters of those were in subprime.

CDO’s allowed the banks to lay off more risk to others, and were created specifically as a complex credit derivative to allow greater lending liquidity.  As a result, banks could lend excessively and relax their credit risk control measures to a large extent by laying off the risks to other banks and corporates through CDO’s. 

The fact that these risks were minimised through collateral, a house, that was worth more than the loans meant there was no problem ... apart from a housing price boom that didn't exist and was fuelled by such lending practices.

This is fool’s folly and now we’re seeing the consequences.

And we have seen it all before.

What?

Sure.

I mean, it rings bells with me going back to America’s thrift crisis of 1989.  Funnily enough, here’s a 118 page report from 2003 looking exactly at the systemic risks in the US mortgage markets and how to avoid this (fat lot of good that did).

But there’s also solutions from those who did learn their lessons and, for me, this crisis has most similarity with the Lloyd’s of London insurance losses in the 1980’s.   That crisis almost meant the closure of a marketplace that had existed since the 17th century ... ring any bells with where I started?

What was that crisis all about?

Exactly the same as today’s issue ... just with different nuances.

The Lloyd’s crisis began because they took on more and more risk during the early 1980’s and thought they had it covered. 

The Lloyd’s underwriting syndicates took on the risks because they could lay-off the risk to external organisations, who reinsure and cover the exposure.  Eventually, at the top of the tree, you had an excess of loss syndicate who covered the greatest exposures if there were ever disasters.

The thing is there were rarely any disasters of the magnitude that affected those excess of loss firms.  As a result, those excess of loss firms were the most profitable Lloyd's syndicates because they never had to pay out any claims.

Therefore the names joined those excess of loss syndicates and the Lloyd's desks took on more and more risk.

Then it all went wrong and Lloyd’s almost went bust.

What happened?

This is quite complicated but relates to our markets today very strongly.

The way Lloyd’s excess of loss worked was that you might have an oil rig or property development worth $1 billion.   That’s a huge risk policy so the firm would go to Lloyd’s to get the cover as Lloyd’s specialised in it.

The client would go to an underwriter, and ask to get $1 billion of cover and the underwriter would happily take this on because they could lay-off the risk.,

They would lay-off $900 million of that risk to reinsurance firms outside the Lloyd’s markets, so it was no problem.  The trouble was that the reinsurer laid off their risk to another Lloyd’s syndicate, and so $750 million of the risk came back into Lloyd’s.

Therefore, the total risk to Lloyd’s was $850 million: $100 million with the first syndicate and $750 with the second.  Lloyd's troubles started there, as we shall see later, as they thought they just had $100 million of exposure.

The cycle would probably go round once more, with $600 million of the $750 million of the second syndicate being reinsured outside Lloyd’s.  Then the reinsurer comes back into Lloyd’s and places $400 million with an excess of loss firm.

This excess of loss firm was happy to take that last $400 million because they never had to pay.  Bear in mind, it would have to be a total disaster to pay out the $1 billion and, even if there was a disaster, the first $600 million of risk was covered by the others.

That’s why excess of loss firms were always profitable.

But then the disasters hit.  Asbestosis and pollution claims, combined with natural disasters like Hurricane Betsy and Piper Alpha, meant that Lloyd's total risk exposure was impacted.

You suddenly had reinsurance firms paying out $350 million, and Lloyd’s paying out $650 million of which $400 was with the final desk, the excess of loss desk.

Lloyd’s never knew that would happen because every time the risk was reinsured outside the Lloyd’s markets, they thought they had got rid of it.  So what they thought they had exposed themselves to was $100 million here, $150 million there and $400 million at the end of the game on another deal that was unlikely to ever be paid.

Suddenly, they realised they were up for $650 million for a single incident! 

The excess of loss firms also banked on rarely having to pay a claim and, if they did, it would be once in a blue moon.  After all, total disasters rarely happen.

Then several total disasters all happened at once, and so the $650 million exposure was not just for one or two risks, but for several that over-lapped and were inter-related.  In other words, Lloyd's exposures due to these disasters meant that one market was covering virtually the whole world's risks. That's an awful lot for a small market, and almost meant the market collapsed. 

But Lloyd’s got through it.

A few syndicates collapsed. Others learnt their lessons and now have systems that look at risk across the whole market, rather than on an exposure by exposure basis.

Banks will do the same ... eventually.

So going back to where I started: why didn’t banks see the fool’s gold?

It was because, as with the total risk on a single policy at Lloyd's, the fool’s gold was hidden. 

CDO's combined with other Credit Default Swap Derivatives and exotic derivatives, meant that, like Lloyd’s in the 1980’s, the risk got moved out and then back in.  It got moved out of the bank through their investment desk’s derivatives operations and moved back into the bank by allowing them to take on huge mortgage debt risk.

Problem for tomorrow will be: how will the banks ever get to the stage of seeing the total risk across all of the markets and all of their operations?

Mmmm ... maybe think about that one next week.

     

Department of the Bleedin' Obvious - Lending Created Crisis

Some totally obvious comments are coming out in the media today.

Take the UK’s new Chancellor of the Exchequer (the old one got promoted to Prime Minister) Alistair Darling who is headlined today as saying that banks “need to know who they're lending to, how much they're lending and what the risk is. Now, that's elementary banking, one might think, but there are times when going back to good old-fashioned banking may not be a bad idea.”

This headline is actually Mr. Darling ripping off an interview with Henrik Paulson a couple of weeks ago. Henry, Hank to his friends … as I said, Henry is US Treasury Secretary and was interviewed by CNBC a couple of weeks ago about the meltdown in subprime. 

A critical part of his commentary goes as follows:

“If a market turbulence is precipitated by economic weakness or by the credit quality of the corporate sector, it's one thing, but we have, again, strong economies, we have a healthy corporate sector, we have a healthy financial sector, major financial institutions, so the problems we're experiencing right now are coming from bad lending practices.“

Mr. Paulson is an ex-banker from Goldman Sachs and he met Countrywide, JPMorgan and Citi yesterday. After the meeting he came out and pretty much repeated the same mantra, but this time laying it firmly at the feet of his compatriots.

Interesting. 

Maybe it’s me or maybe I’m just getting old, but isn’t this all stating stuff from the Department of the Bleedin’ Obvious (DBO).

DBO states: “Previous financial crises have been caused by bad lending practices, such as the 1997 Asian Financial meltdown, and should not be repeated.”

DBO states: “Offer someone a mortgage at five times salary and they will be stretching themselves to pay it back.”

DBO states: “Interest rates can go up as well as down.”

DBO states: “A market that makes lots of money won’t last forever.”

DBO states: “Give a guy something he cannot afford and he’s unlikely to pay it back no matter how hard he tries.”

I could go on, but instead recommend that you read the one book that tells you what’s going on: “Extraordinary Popular Delusions & the Madness of Crowds” by Charles Mackay.

If you haven’t heard of it, the Amazon summary states:

“Why do otherwise intelligent individuals form seething masses of idiocy when they engage in collective action? Why do financially sensible people jump lemming-like into hare-brained speculative frenzies--only to jump broker-like out of windows when their fantasies dissolve? We may think that the Great Crash of 1929, junk bonds of the '80s, and over-valued high-tech stocks of the '90s are peculiarly 20th century aberrations, but Mackay's classic-shows that the madness and confusion of crowds knows no limits, and has no temporal bounds.”

In other words, people can be greedy and stupid.

Published in 1841, it shows why DBO applies as much today as it did 1,000 years ago. 

When you see a way of making money with no risks, you see the fool’s gold.

 

 

 

The Sun Newspaper launches a prepaid MasterCard

The headline that caught my attention this morning is the launch of a Prepaid MasterCard by the Sun. For those who are unfamiliar with the UK newspaper, it is the most widely circulated with over three million copies distributed to almost eight million readers, most of whom are interested in headlines such as “Freddie Starr ate my hamster” and the scantily clad females that adorn it’s colourful pages.

The prepaid card deal is that you buy the card for £6.49, and get £5 back when you top-up the first time with £10 or more.  It also has a line that you can use it wherever you see the MasterCard sign, “that’s over £25million locations” … I think they left the £ in by accident as they can see the £ signs illuminated by offering this to their unbanked and mass audience.

In fact, this is quite a bold and innovative move as I’ve been saying for a while now that prepaid is a major untapped market opportunity which will be worth over €80 billion by 2010, and the Sun is the first major non-bank I’ve seen targeting this opportunity.  So good for them.

Meanwhile, my last blog on this area finished with the line “that prepaid cards appeal mainly to young, single guys who want to download without giving away their bank details.  Now what would I want to download anonymously as a young, testosterone-charged male?”

I think the editor of the Sun must have read this as their audience fits this profile perfectly.

HSBC's Knight in Rusty Armour

During the weekend, there were lots of reports on the attack by Eric Knight on HSBC's governance and strategy. 

Eric Knight, who is CEO of Knight Vinke Asset Management, is airing his concerns in public, he claims, as a result of the FSA’s Market Watch (six page pdf) of May 2007 which focused upon shareholder activism and states:

“There is also obvious potential for abuse were a participant deliberately to set out to generate a false rumour or expectation of some future corporate action knowing that it, or others associated with it, may be able to take advantage of a short term movement in the price of the target's securities. Generally we expect market participants to take reasonable care to ensure that any announcement or informal comment does not give rise to false or in the circumstances deceptive signals about their intentions.”

As a result, Mr. Knight announced on September 6 that:

“Knight Vinke Asset Management wishes to inform the market that it intends to engage in a constructive dialogue with the Board and other institutional shareholders of HSBC Holdings plc over the future direction and governance of the Group.  In this context, Knight Vinke wrote to the Executive Chairman on 25th May, met with the Group Finance Director on 12th June in New York, and wrote to the full Board on 4th September requesting that it undertake a fundamental review of the Group’s strategy in consultation with shareholders.”

What’s Mr. Knight’s problem?

It’s a mixture of both the corporate governance and strategy of the firm.

On the governance side, the Daily Telegraph gets to the heart of the debate by stating that "the slumbering board wasn't guilty of napping but full-blown narcolepsy". This article talks about the sense of too many cronies being inside HSBC's boardroom, with a third of their non-execs having been there so long that they can no longer be viewed as being independent.  Another part of the governance issue is that HSBC does not have any American directors on the board, although you would have thought that the head of US operations would have known something was up wouldn’t you?

On the strategy side, he seems to think that HSBC should give up on America, sell their French operations and focus on Asia.  In other words, the acquisitions of Household International and CCF were both wrong and should be dismantled.

Not sure that HSBC's management would agree with that view though, especially as Household was an acquisition managed by Stephen Green when he was Chief Executive.

Nevertheless, Knight Vinke claims may have some substance. 

For example, HSBC tend to move CEO's up to Executive Chairman when they manage successions and Mr. Knight thinks that is wrong.  In the Sunday Times, for example, he is quoted as calling for Stephen Green to move to a non-Executive role and to elect a new Executive Chairman from outside the Group, something that would be unprecedented.  Indio of London commented on this article, and amused me by saying:

"Green needs to go ... Perhaps they could use that nice Mr Goodwin when he gets fired as a result of buying ABN."

There are also other mud-slingers, such as Threadneedle's retiring Head of Equities, Michael Taylor, who was quoted as saying late last year that HSBC Executive Chairman Stephen Green is "asleep on the job is how I would describe it. He's just not up for it.''

These comments were made last December when HSBC's exposure to the US mortgage markets through their acquired subsidiary, Household International, became clear. 

Household International was purchased in 2003 for $15.5 billion - under the Chair of Sir John Bond, one should note - and provisions for losses for subprime exposure of over $8 billion were made in December 2006, rising to over $10.5 billion by February 2007.

So, in some ways, this makes Green and CEO Michael Geoghegan easy fodder for critique ... just as most others have been since the subprime debacle has hit. 

And maybe that’s why Knight Vinke has invested £200 million in HSBC to gain a one percent stake, as this is their normal strategy: gain a small share in a large company and then send out long research notes to all of the other activists, board members and analysts.  And this has worked in some quarters, e.g. they managed to get Royal Dutch Shell to restructure three years ago.  Interesting that, as on this occasion, this was in cahoots with CalPERS, the California activist pension fund.

These factors, alongside the recent humbling of HSBC by an activist group of student customers; the homophobia that is alleged to exist; and the amazing spin doctors at Knight Vinke who claim that Stephen Green actually rang Eric Knight and agreed with his criticisms, may make you think that Stephen Green is on the ropes.

But you would be wrong.

First, HSBC is pretty focused on a clear strategy of Asia expansion.  Just last week, this was evidenced by two announcements.  The first was the announcement that the bank is focusing heavily on building a strong retail presence in Japan.  The second that HSBC has taken a 51% controlling stake in Korea Exchange Bank for $6.3 billion.

Second, HSBC is one of the more innovative banks.  This was shown by two stories on Finextra, again just in the last week, that HSBC investigates 'out of band' authentication for Web users and HSBC cash machines to alert customers who go into the red.

That’s why I’ve written about HSBC as being pretty strong on two previous occasions (see HSBC’s view from the top and HSBC’s numbers). 

That’s why Ken Murray, Chairman of Blue Planet fund managers was quoted in the Observer over the weekend as saying “'HSBC has been fantastically successful: I could find 100 banks ahead of it which I could grumble about.' So says Ken Murray, chairman of Blue Planet fund managers

And that’s why Stephen Green was quoted in the Financial Times as saying: “We have a clear strategy.  It is focused on investing and developing our powerful emerging markets franchises. We will continue to do that.  That was part of a strategy that had been carefully thought through from the beginning of the year.”

Finally, a few folks reckon that Mr. Knight must have been asleep on the job too, as the accusations of board cronyism broke in January 2007. 

Where was he then?

Banking is a man's world

This is not a new news story, but it is a news story.  Banking is a man's world.   

Sounds a bit sexist doesn't it, but many of us would say that there is still active discrimination in some business sectors on the grounds of age, sex, ethnicity, religion and physical attributes.  Maybe it's human nature, which is why governments spend fortunes to introduce laws to stop bullying ... sorry ... discrimination of this nature.

What's the relevance of this to banks?

Well, banks seem to be the most culpable of sex discrimination.

I mean, almost every day there appears to be a news story about some group suing some bank over some lewd act.  Here's a few illustrations:

• Working mother sues BNP Paribas for sex discrimination, April 2007
• HBOS £11m sex discrimination and bullying claims withdrawn, December 2006
• Dresdner sued for $1.4bn in sex discrimination case, January 2006
• Female banker's £1m sex discrimination case costs against Merrill Lynch, April 2005

And there's many more.  In fact, when you put "bank sex discrimination" as a search term into google, you get over 2.1 million hits. 

The subject has become so common as a headline-hugger that the BBC, on the back of a huge sexual discrimination claim worth more than $1bn, make TV dramas about the situation to entertain, absorb and even shock us.

And there is always the other side of the equation as, when you find payouts of over £15 million, maybe it's worth suing the bank over sex discrimination.

So where's the news story?

Well, it's the news this morning that HSBC have been accused  of homophobia in the treatment of one of their staff, Peter Lewis, who was openly gay.

Maybe we will now find many more such cases of this ilk coming to light and the sexist and homphobic attitudes of Life on Mars style TV will be seen as what it is: out-of-date. 

Or maybe not as banks, especially the dealing room, are still known for aggression and such aggression may continue to keep women and other groups out of the trading room.   

I guess that's why you may start finding many bank head offices and dealing rooms moving out into the countryside, where men are men and sheep are frightened.  After all, sheep don't have lawyers.

Sexism in the City

This is not a new news story, but it is a news story.  Banking is a man's world.  

Sounds a bit sexist doesn't it, but many of us would say that there is still active discrimination in some business sectors on the grounds of age, sex, ethnicity, religion and physical attributes.  Maybe it's human nature, which is why governments spend fortunes to introduce laws to stop bullying ... sorry ... discrimination of this nature.

What's the relevance of this to banks?

Well, banks seem to be the most culpable of sex discrimination.  Almost every day there appears to be a news story about some group suing some bank over some sexist act.  Here's a few illustrations:

• Working mother sues BNP Paribas for sex discrimination, April 2007
• HBOS £11m sex discrimination and bullying claims withdrawn, December 2006
• Dresdner sued for $1.4bn in sex discrimination case, January 2006
• Female banker's £1m sex discrimination case costs against Merrill Lynch, April 2005

And there's many more.  In fact, when you put "bank sex discrimination" as a search term into google, you get over 2.1 million hits. 

The subject has become so common as a headline-hugger that the BBC, on the back of a huge sexual discrimination claim worth more than $1bn, make TV dramas about the situation to entertain, absorb and even shock us.

And there is always the other side of the equation as, when you find payouts of over £15 million, maybe it's worth suing the bank over sex discrimination. 

So where's the news story?

Well, it's the news this morning that HSBC have been accused of homophobia in the treatment of one of their staff, Peter Lewis, who was openly gay.

Maybe we will now find many more such cases of this ilk coming to light, and bank's sexist and homphobic attitudes from an era more suited to Life on Mars will be seen as what it is: out-of-date. 

Or maybe not as banks, especially the dealing room, are still known for aggression and such aggression may continue to keep women and other groups out of the trading room.  

I guess that's why you may start finding many bank head offices and dealing rooms moving out into the countryside, where men are men and sheep are frightened.  After all, sheep don't have lawyers.