The Financial Services Club's Blog

Please go away, the internet is broken

I rang my bank call centre today and, as usual, it was diverted to their Indian call centre.  Unusually, I then got this message: "We apologise for disruption to our service, but we cannot receive your call at the moment.  Please try again later".

I wondered what had happened and, being in Asia, they knew the deal. 

Apparently a ship was unsure whereabouts they were off the coast of Egypt.  As they couldn't work out where they were, they dropped anchor to hang around for a while.  Unfortunately, as they dropped anchor, they didn't realise they were next to two key underwater internet cables owned by Verizon. 

As they lolled about in the Egyptian waters, their anchor dragged under these cables and severed one cable whilst ripping out the other, causing significant damage.

Result? 

South Asia and the Middle East are disconnected from the internet.

Whoops.

Apparently, 70% of Egypt's  internet access was impacted, leaving Cairo with no access for the whole day.  When asked about the impact on the banking system Tarek Amer, Egypt’s ­deputy central bank governor, is reported to have said: “We are disappointed [with] the service and will consider alternatives for the banking system if this happens again.” 

I'm sure you will Tarek, as it's a bit difficult to communicate without the internet these days, isn't it?  SWIFTNet?  Nope.  Internet banking?  Nope. Finextra?  Nope.  Not forgetting all the other things we do online these days :) 

What could be worse?!

Ah well, at least you won't have to put up with my tut every day.

Meanwhile, India's bandwidth was also cut by over half, causing their offshore call centre services a big issue.  It will take a fortnight or so to mend, and I expect that two weeks of unpaid leave will leave India's major workforce steaming a bit for leaving them in the ship.

The lesson is obviously: "to contact your banker, don't be an anchor".

SEPA today, SAPA tomorrow

Interesting to be in Asia at the moment, which is where I flew out to in case you were wondering yesterday.  I'm here at a major payments conference and was sorry to miss the minor "hurrah" as SEPA went live on Monday. 

Whoopee-doo!  Did you see the celebrations and fireworks?  Nope?  Neither did I. 

In fact, to mark such an important event most of Europe's payments elite, such as Gerard Hartsink who is the Chairman of the European Payments Council (the EPC are the designers of SEPA), appear to be over here with me at this conference.  Maybe we all knew something that others didn't, like Monday would be a bit of a non-event.

Anyway, Gerard did take some delight in pointing out to me that the European Commission have just released an in-depth research report on the benefits of SEPA.  The report is produced by Cap Gemini, and shows that SEPA might create "net benefits to payment markets" of €123 billion in six years.  The study (pdf) was  published at the weekend on the bit of the European Commission's website dedicated to the announcement. 

SEPA delivers about €20 billion a year in benefits to euro payments.  Yowser.

Mind you, this contrasts somewhat with other studies, such as some of the contributions I read in my new book on SEPA.  With contributions from a wide range of folks ... from the MEP who drafted the PSD, to the EC, EPC and EBA folks, to the JPM's, Citi's and Nordea's, and on to the corporates through TWIST and the EACT, and on to the IBM's, Sterling Commerce's, Eiger's and Vocalink's, concluding with the SEPA consultancy, UTSIT, Price Waterhouse Coopers and more ... the book provides a 360 degree review of SEPA and it's implications for the future.

So, what the hell are folks like me and Gerard, with our close involvement with SEPA, doing in Singapore in this momentous week?

Well, partly because Asia, like the GCC in the Middle East, may follow our example.

There has already been some discussion here about an ACU - an Asian Currency Unit.  The idea is that the ACU would emulate the ECU in Europe, as the precursor to a regional currency.  This implies that the Singapore Dollar, Malaysian Ringgit, Thai Baht and others would become the Aseo, or whatever the currency is called longer term.

The challenge however is to think of the size of Asia. 

With China and India being so predominant, and Japan's heritage and historical prowess, through to Indonesia's mass and Philippines populous, it is hard to see how Asia could ever create a SAPA, a Single Aseo Payments Area.  In particular, I cannot see how governments could work together across such a diverse region.  Mind you, we said the same about Europe, and look what has happened there.

All it takes is a few key countries to kick off the process and maybe we could see Southern Asia starting this process.  For example, Thailand, Singapore, Malaysia, Philippines and a few others could get together and create an economic union and a common currency unit. 

This is the thing we have been debating over the past couple of days, as well as the other thing Asia is seeking to do which is to create a Regional Settlement Infrastructure.  The aim is to have a regional SSP, like TARGET2 for Securities Asia, and some authorities are trying to play a key role in delivering such services, especially the Hong Kong Monetary Authority.

The thing is though that gaining momentum in the GCC and Asia is hard, and both regions appear to be delaying or even rejecting economic and monetary unions of the type Europe has just installed.  It intrigued me that it is actually the banks who seem keener to have this than the governments for example, and some banks are starting to lobby to get regulations drafted to enable this.  They cannot just develop it themselves without the political backing you see, as the legal recognition of cross-border products wouldn't exist.

However, if they did form an Asian Union, what would they call this currency if not the Aseo?

Pardon?

Oh ... I am told they would call it the US dollar.

Not sure that's a good choice as we created SEPA to make euro the intelligent alternative. Personally, I would hedge both ways and invest in the Yuan.  Seems like the only currency with some growth potential right now.

Meanwhile, as discussed before, the real vision is to create a single global currency ...

... and, one day, pigs might fly.

Banks are just like airlines

I often hear the cry that "all banks are the same".  It is true that many banks appear to have little differentiation.  They are all as good or bad as each other, they all appear to compete on rates and rate churn, and they all have little service or product delineation.  As soon as one bank brings out a new variation of an old product, it's copied.  The only real difference therefore is the culture of the bank, as you cannot copy a culture.  But even then, most banks have the same attitude of little empowerment.

So it got me to thinking about what other industry suffers from the same issues and how do they compete and differentiate?  An easy answer appears to be the airline industry … or maybe this just came to mind because I'm flying out of the country and am stuck at the airport.

As I drove to the airport, there were lots of signs for this bank and that bank, and they all seemed the same.  "6x interest", "Sale: 5.9% over three years", "6.9% for the life of your loan" and so on.  There were also lots of signs for airlines, with smiling and attractive hostesses photographed in nice, comfortable business class sections, welcoming and beckoning. 

Again, they all seemed the same.

So, some would say that airlines are just like banks: they are all the same.  They are completely commoditised and just compete on price.

Certainly, from the airlines view, if you go to Travelsupermarket, Expedia or similar travel websites, you could think that way.  These sites come up with all the options, and then you take the cheapest.  I want the direct, premium, non-flexible flight from A to B and “ta-da”, they come back with 50 or more options.  You then take the cheapest or the one at the time that suits you.

In a similar way, Moneysupermarket, Confused and others do the same.  I want a long-term, non-flexible mortgage for X, and “ta-da” … get lost, they say, you are one of those subprime scum we don’t deal with.  Sorry, that’s my brother.  “Ta-da” they say, and they all come back with the options and conditions.  You take the one that suits you and off you go, assuming you fulfil all the lending criteria.

Yet, they all compete on price and are commoditised?

Not really.

For example, I prefer to fly Singapore Airlines rather than British Airways.  Why?  Because the service is better, in my view.  It is subtle but little nuances, such as bending down to speak with the passenger at eye level, make the difference.  That's cultural and you can't copy a culture.

Then there's things like the product.  For example, I prefer to fly Emirates than British Airways.  This is because Emirates offer 500 entertainment channels on demand from every seat, whilst BA only offer a few.  So, if the two fares are on offer, I will take the Emirates fare.

Meanwhile, when flying to the USA, I prefer BA over United.  This is because the seats are the same-ish, but the crew are more attentive and the inflight entertainment is better. 

So yes, the airlines are different and you can tell the difference … but maybe only if you are a frequent flyer.  And this is also true in banking, with the banks being highly differentiated for the frequent bank user.

If I want really good service at eye level, then maybe I want my private Swiss bank.

If I want  good service with lots of choices, maybe I want my corporate bank.

If I want a basic deposit account that is efficient, I get my general bank.

So banks are like airlines and, like airlines, they are trusted as long as they don't crash!  Seriously though, you get what you pay for.

The fact that most customers cannot see the difference in pricing for the bank that has the comfy flat beds versus the 500 entertainment channels versus the dedicated first and business class cabins versus the cheap no-frills, is the bank’s fault for not making this clear.

This is where banks do have a lot of work to do, as it is rarely clear how they are differentiated from an external and general view.  It is only when you are the frequent bank user that you really find out how they are different.

Therefore, expect banks to start working hard at showing you how they are different in the future, and expect to see more banks showing their true colours and class.

A little like  Lynx airlines and Carlsberg bank ... if you like completely sexist marketing dross that is.

A French Letter

Over the weekend, I received this strange letter in French.  Now my French is not very good, so I have done my best to translate it, but I apologise if it does not read very well.  Even though I am sure it is rubbish, I am reprinting it here, as you never know.

Mon cher amis

As you know, I have good manners, but my blood does boileth over.  I am very mad that I have been accused by many of the things I have not done and I cannot just take this blame. 

I mean that I do not appreciate our chairman’s statements that I acted alone.  This is so wrong.  How can he say I was alone when I had help?  My boss and the head of equities division often asked me about my activities and I told them.  “Look”, I said.  “This is my brilliant trading strategy.  I bet on the market going up all the time”.  I just forgot to tell them that, like other banks, I do not bother to hedge this bet.  After all, it is a trade for the future and, as we all know, the market goes up in the future.

So, in the spirit of Émile Zola – as I was raised with good education and manners – j’accuse back.   After all, I cannot take all this twittering gossip without some retort mes amis.

You see, my real entente cordiale was to actually make the bank billions, not lose them billions.  By creating these accounts for my clients, I could trade on the stock market index going up.  Of course, the CAC and DAX would go up.  So I was very surprised when they went down. 

Now, I know that most of my colleagues talk about hedge and arbitrage – where they lay off their risk with options for if the market goes down instead of up – but I did not need those.  They cost a lot of money and are a waste of time.   

It is like insurance for your house. You only need it if your house is demolished by a meteorite or if Monsieur Pascal, who drinks too much vino and smokes 60 Gitanes a day, sets fire to your house.  And how likely is that?

Oui, je sais that he burnt his own house down, but it was not our house, was it?  So it is very unlikely, just as it is unlikely that the CAC would go down.  So I thought the same would be true in the bank.

So I was quite upset when the head of Delta One asked me what I was doing on my contracts with Carefour and Reenault.   I admitted on those two I made a mistake.  They should have been Carrefour and Renault … so my spelling is tres mal.  I am a mathematics wizard though, not some language student.  Hence, the poor translation of my words here.

But they could trust me as my desk was working well.  It had a lot of customers, what with AXE Group, the great insurance conglomerate, being my major fund investor.  Yes, I know some said it should be AXA, but I already explained that one.

Then they tell me about this margin call.

What is this margin call and how come they blame me?  I mean I know my numbers started to look bad, but what is so wrong with a margin call? Oui, oui, this only happens when a bank has a position that cannot be covered, but this cannot be the case with the beautiful Societe Generale can it, as this is one of France’s largest banks with whom I am in love.

I mean, when they gave me this computer to try out, I know they were only seeing how good or bad I was.  And the computer game was a wizard one, called Delta One.  It is a bit like Halo but more fun, with lots of numbers, and I had a character called Plain Vanilla, who lived in the future.

Ah, Plain Vanilla – or PV as I called her – was so good.  Normally she targeted the positive, which is why she bet on things going up.  After all, she would not like anything going down on her.

So I played the game and lost?  C’est ca.  Le jeux sans frontiers est finit.

I mean I thought it was only numbers on the computer.  No-one ever told me this was real money being played in the real world.

I thought it was like the Second Life, non?   I never thought that what happened to the banks there would happen in real life ... apart from le Northern Rock, eh?   So how come they never told me it was not like Linden Dollars … it all looked the same to me.   That is why I say it is the fault of the management, and particularly the head of equities and the head of IT.  They should have told me this was for real!

Mon dieu, toute la monde est mon enemies.

I am so sorry mes amis for your having to learn how I played this game and lost.  This game that I thought was just a computer game.

The good news though is that I have a fan club on Facebook now.  Look, there is a group there that wants to get me the Nobel Prize in Economics. And with my popularity, I will find a new job.  After all, I had many banks looking to hire me in both Paris and London before the bâtards found me out.  Even then, it is very annoying that these English pig dogs have given out my CV to the media, so it is now published and everyone can see my private details. 

I am especiallement annoyed about this, as I did not want people to know that I did Judo.  I mean I am thinking that my cellmate, Obelisk, may now try to beat me up in this bastille dungeon where they are keeping me.  Mind you, he may not, as he seems to have quite nice hair and his fingernails are very well-kept.

And what about these other English cochon, the Daily Mash, who take the Michel.  I mean, they say my error was caused by the “unbearable levels of stress brought on by a punishing 30 hour week”. They should know that, unlike mes amis dans l’office, I always travailled for at least 37 hours a week.   And I would never blame this on my hours as I enjoyed them, playing this Delta One game with my character, Plain Vanilla.  Mind you, at least they admit that people knew I was a workaholic.

I am getting very angry with these merdes though.  I mean who controls the internet?  They even allowed someone to set up a website called "Rogue French Banker".  Zut alors, it should not be allowed!

Ah well, I have to be calm and you may be interested in the fact that I saw on Bloomberg that Societe Generale have a position available for a trader on the Delta One desk.  You may want to apply?

Now I am off to the library where they have a great new game for me to play called L’economie francais.   Not sure how it works, but let President Sarkozy know that I shall be his saviour.

Meanwhile, if you want to know my latest news, you can find it at Wikio,

Je t’embrasse très fort ...

Personally, I think it came from some French joker, but you never know. 

Want to see tomorrow's technologies today?

TED is a conference that takes place once a year in the USA and is like a Davos for business.  If you don't know what TED is, then check it out here. The show is also where many of the future technologies are revealed, and videotaped, as can be seen on the websit.  TED also talks about a lot of BIG IDEAS TO CHANGE THE WORLD.  Visiting the TED website provides you with a mine of possibilities for future ideas.

The Show is attended on an invitation only basis, and this year takes place in Monterey, California, from 27th February to 1st March. Keynotes include Al Gore, Craig Venter, Amy Tan, Karen Armstrong, Yves Behar, Robert Ballard, Bob Geldof, Walter Isaacson, Isaac Mizrahi, Ben Zander and 40 more of the world's most insightful and inspiring speakers.

Tickets are like gold dust and you can never buy one ... until now.

TED are listing an eBay offer for 1 ticket.  All proceeds go to the Open Architecture Network, an "online, open source community dedicated to improving living conditions through innovative and sustainable design ... the goal of the network is to allow designers to work together in a whole new way, a way that enables 5 billion potential clients to access their skills and expertise. The network has a simple mission: to generate not one idea but the hundreds of thousands of design ideas needed to improve living conditions for all."

Bidding started at $10,000 and currently there are 30 bids valuing the ticket at $32,100.  Strewth, £16,000 for a trade show ticket?

Mind you, they are offering a one-to-one lunch with Meg Ryan as part of the package.  That's worth it on its own as she might do that scene from "When Harry met Sally" ... or could it be the Parky interview?  You never know. 

Other treats include a first-day cocktail with TED super-connector Sunny Bates and a coffee with the founder of ebay Pierre Omidyar.  I wouldn't mind asking him why is the other Meg (Whitman) leaving then.

Have a nice time.

eBay becomes an Exchange? Not likely

There are various forecasts of the future that may be right or wrong.  For example, this one's a goodie.  Called EPIC 2014, and nicknamed Googlezon, it forecasts that by 2014 the current media and news organisations are dead and gone, and Google and Amazon merge. 

It was made in 2005, around the same time as Sean Park - formally of Dresdner - created Amazonbay.  This video predicted the future of trading being run by eBay in 2015, after they takeover NYSE Euronext.  You can read about it here and download the Amazonbay video here, if you haven't seen it already.

To be honest, I thought that this video might not be far from the truth, as we often debate and discuss the idea of eBay moving into the banking world by offering trading operations.  We even have an eBay for trading called Bidroute, described as "an eBay for programme trading" by co-founder Barry Marshall.

Therefore, the news this week that eBay's CEO of the last decade, Meg Whitman, is retiring sparked my interest again in the idea that eBay could move into banking.

I caught the announcement when looking at PayPal's Q4 results:

"PayPal posted another stellar quarter with $563 million in revenue, an increase of 35% year-over-year. Net total payment volume (TPV) for the quarter was $14.04 billion, an increase of 35% year-over-year."

Admittedly, PayPal are a bank ... but I'm talking about eBay as an exchange here, as in trading and dealing, rather than payments or retail banking.

So, the announcement of Meg's departure sees one of the giants of the internet world retiring as such, although it appears to be more disappointing for her track record, as the initial coverage in the USA is pretty negative. 

For example, the well respected technology commentator Erick Schonfield of Techcrunch, reckons that John Donahue will take over the helm and states that:

"During most of Whitman’s tenure, eBay seemed unstoppable. But the network effects that made it so powerful in the Web 1.0 era began to dissipate as destination sites began to lose some of their appeal. Now that people want to bring the Web to them—to their blog or MySpace or Facebook page—eBay needs to adapt to the new realities."

eBay not a Web 2.0 firm?  Well, I never. 

I suppose the fact that you cannot build community sharing and socialising in eBay makes this true, but at least you have participation which is a critical element.

Schonfield goes on to state that Meg has wiped out half of eBay's share value in the last two years.  Oh dear.

This is followed by William Holstein of BNET asking if her "departure from eBay at the age of 51 signal a management  failure on her part?"  He builds on the most insightful column on her tenure from Mylene Mangalindan of the Wall Street Journal, who states:

"Ms. Whitman's retirement would come at a critical point for eBay. The company's auction business, which allows individuals to buy and sell items online to the highest bidder or at a fixed price, accounts for more than two-thirds of eBay's nearly $6 billion in annual revenue but has experienced slowing growth rates for the past few years. Any efforts to reverse the slowdown could involve drastic changes that may be more palatable under a new CEO."

With most people saying that the core auction business is in trouble.

So, an eBay in banking?  An eBay / NYSE Euronext merger?

I don't think so.

Rather than Amazonbay therefore, it's more likely an eBacebook, as you need social networking auctions in the new generation internet. 

Equally, I can't see eBay themselves moving into trading as eBay protects you from potential losses of up to £500 through PayPal ... I'm not sure eBay or PayPal would want to cover £5 billion of losses, although a few French managers may well be looking towards AXA and other French insurance firms to do just that this week.

SocGen trader loses 5 billion in fictional trading

Read the announcement from Societe Generale here (six page pdf).

The rogue trader lost €4.9 billion through a series of fictional transactions. 

Societe Generale aren't naming him, but apparently the trader dealt in plain vanilla European stock market index futures and concealed his losses through in-depth knowledge of the bank's control systems, which he had gained from his earlier role processing trades at the bank.  Doesn't it just go to show that a little knowledge of technology can go a long way!

The bank only found out last weekend and are now in the process of getting rid of the little tinker.   

Add on another €2 billion the bank is writing off due to the credit crunch, and you would think with a sudden €7 billion hit that the bank would be in real trouble ...

... but they still claim to have made an €800 million profit (€5.22 billion a year earlier), so it's all OK then.

This is something that I made comment upon three years ago, and the issue is the same today: a trader who is now in front office with access to middle or back office processes.  That creates operational risk and virtually every occurance of rogue trading has been for the same reason.

The only saving grace this time is that, talking to one of my English friends involved in the financial markets in Brussels tonight, she tells me that every time they want to pull her down a peg or two in Brussels, they say "le Northern Rock, eh?" and smirk. Apparently, she is now going to retort "et le Societe Generale?" ... thank the lord for politics and Europe.

Meanwhile, elsewhere in the City, the head of enforcement at the FSA, Margaret Cole, is apparently bringing a prosecution against Christopher McQuoid, 39, and James William Melbourne, 74.  These two alleged tricksters are to be accused of insider dealings related to the £103 million (€150 million) offer by Motorola for TTP Communications in June 2006.

It's meant to be a big deal to show how strict the FSA is becoming over insider trading ... instead it's a little show with no star names involved.

Bet Margaret wishes she was in Paris right now.

 

Global, Blogal, Social, Glocial

In this worldwide web of global wonders, I'm getting fairly cheesed off with the number of social networks I'm now getting involved with. From Facebook to LinkedIn to Plaxo to Bebo, they're all starting to mindmeld into one.  Add in Habbo Hotel, Second Life, Entropia and all the other virtual worlds, and you almost lose the will to live trying to keep up with them all. 

No wonder Ben Elton has just produced a comic book, Blind Faith, based upon the idea that those who don't join in social media are jailed.  Here's the synopsis, courtesy of Amazon:

"As Trafford Sewell struggles to work through the usual crowds of commuters, he is confronted by the intimidating figure of his Parish Confessor. Why has Trafford not been streaming his every moment of sexual intimacy onto the community website like everybody else? Does he think he's different or special in some way? Better than his fellow man and woman? Does he have something to hide?

"Imagine a world where everyone knows everything about everybody. Where what a person 'feels' and 'truly believes' is protected under the law, while what is rational, even provable is condemned as heresy. A world where to question ignorance and intolerance is to commit a Crime against Faith.

"Ben Elton's dark, savagely comic novel imagines a post-apocalyptic society where religious intolerance combines with a confessional sex obsessed, self-centric culture to create a world where nakedness is modesty, ignorance is wisdom and privacy is a dangerous perversion. It offers a chilling vision of what's to come? Or something rather closer to what we call reality?"

I must admit, in a similar fashion, I've started adding some frivolous banter to my Facebook and twitters lately, such as "Chris is up", "Chris is down", "Chris is square", "Chris is round", and even "Chris is masticating" (read very carefully).

Oh, it's all such social fun with my global crowd of friends and strangers.  However, there can only be enough room for just so many of these sites, so where does it stop? 

I mean I was recommended to sign-up with another one the other day, Badoo.  This one's a UK-based service. 

As I registered answering questions such as "Are you tall, short or about right?", "Are you fat, thin or just so?", "Are you available, taken or inbetween", and "Are you straight, gay or all ways?",  I rapidly realised that it's just a website for getting dates.  Mind you, with a choice of over 12 million people to date, it has become the fastest growing website of 2007.  Furthermore, it looks like it'll grow even faster this year as a Russian VC pumped in $30 million and Russia's market for such services is tipped to be huge.

Meanwhile, in Financial Services, we've also seen an explosion of social financial services.  Most of these are not from banks but from new entrants, with all of it starting with Zopa, who's former CEO James Alexander is speaking at the Financial Services Club on 4th February, through Prosper, the Lending Club, Boober, Smava and more.  There are even social trading and investment sites, such as Social Picks, a social network to get tips on investing.

Everyone wants to get in on this bandwagon. 

On the other hand, there's also some admirable services such as this one, Kiva. Kiva organises the redistrubition of wealth by promoting microfinance in emerging economies through social lending from developed economies. They even have an endorsement from Mr. Bill Clinton himself. 

Good for them.

Some banks have jumped in there too, with Join2Grow from Fortis and the Small Business Online Community from Bank of America, both targeted at the start-up businesses and small firms.  And now there's more and more of these business networking sites cropping up.  For example, I just got nudged into one today from BT called Bigger Thinking. It's got lots of nice videos and things about where the world is heading with technology, as well as challenging ideas such as Friedman's notion that the world is flat.

Maybe what we really need is a bank to set up therefore a small business dating agency for getting loans to fund big ideas?

As can be seen, the trouble is that the bandwagon rapidly gets full and overflowing with too many, and so we will see some falling off over time, both in this social finance and wider social networking world. 

The real question therefore has to be: which websites are the winners?

The other issue is that, with so many of these websites out there, you can get stuck in them for the day.  Between socialising in virtual online business worlds and blogging about them, there's no time left in the day to do anything worthwhile!

So I'm giving up all of these social networks to live in the real world.

Is this the real world ... or is this just fantasy?

Citi ... bank ... rupt?

There have been rumours this week of Citi being bankrupt in Banknet360 and Yahoo's message boards (see earlier blogs on Yahoo message boards and Citi)

"Citi filing for Chapter 11 in the next few days" ... oh no! what a headline. 

However, according to Here is the City, these rumours are originating out of Asia and based upon traders trying to depress the stock.  Here is the Citi call this "financial terrorism" and it is unsurprising in current climate that such rumours can grip the market interest.

Meanwhile, I've always got an eye out for talent in the banks I visit ... now that's an ambiguous statement if ever I heard one ... and, in order to avoid the situation where Citi cannot replace their CEO in a timely fashion, I was gratified to see that they have created a new role.

CTO.

Chief Talent Officer.

The lucky chappie with this title is Paul McKinnon, formerly senior vice president for human resources at Dell. 

So, he's learnt all he knows by eyeing up the talent in the computer room, ay?  Moving out of circuit board city, he'll probably be amazed at the wonders of trading room desks, payments professionals and retail branch operations ... so much more glamorous isn't it?

London versus New York, Hedge Funds and PE

Interesting stats and facts coming out of the hedge fund and private equity worlds this week.

First, Hedge Fund Research (HFR) released their year end report of inflows and outflows to the hedge fund markets in 2007.  The headline is that The hedge fund industry attracted a record $194.5 billion in new investor capital in 2007, bringing total assets under management to $1.87 trillion.  This is a 54% rise year-on-year, representing a $68 billion increase in new funds over 2006. 

It would have been even higher if the fourth quarter had not disappointed.  That's not surprising considering the credit crunch but - at just over $30 billion for the quarter compared to over $50 billion a quarter previously - demonstrates the tough market conditions that are prevailng through January.

The critical facts and stats in the detail include:

• equity hedge strategies are the #1 strategy in terms of assets ($507 billion), with relative value arbitrage strategies taking second spot ($273 billion) from event-driven strategies ($244 billion);
• the latter categories are attracting the majority of new funds with relative value arbitrage taking in almost $45.9 billion in new funds in 2007, the largest asset strategy for new funds;
• $798.6 billion is invested in funds  of funds globally, with total assets up nearly 22% over 2006;
• most funds have a European focus, although 10% is going into Asia; and
• equity Non-Hedge, Market Timing, and Fixed Income:Convertible Bonds, all saw outflows for the fourth quarter.

All in all, it is clear that hedge funds are attracting and managing much of the liquidity and capital flow, and hence these are the major market players of the 21st century.  And the good news for some is that it's all based in London.

Mind you, there is another market that is thriving out there as well.  The Private Equity market of course.

According to Private Equity International magazine, the top 50 firms have raised over $550 billion in equity capital since 2002, with each firm managing around $11 billion on average.  Top PE firms include the Carlyle Group, Kohlberg Kravis Roberts, Goldman Sachs, Blackstone and TPG.  We then find that, according to Preqin’s 2008 Global Private Equity  Review, 1 in every 6 private equity (PE) professionals are based in New York. That's about 13,200 big swingers, compared to only 7,100 in London.  In fact, 45,000 of the 76,700 PE professionals are US-based, or almost 60%. 

A few other stats of interest included:

• a third of the world's total are venture capitalists, whilst a quarter are buy-out firms; and
• firms managing under $250 million in assets employ nine people on average compared to those managing more than $10 billion who average 179.

So I'm avoiding too much economic commentary but, considering these two groups leverage their assets by investing 10 times their weight, we are looking at firms which influence over $20 trillion in assets.  No wonder the NYSE and FTSE are up and down like yo-yo's.

Meanwhile, that old nugget of London versus New York rears it's head over the parapets.  I guess, $1.87 trillion in assets versus $550 billion means that London wins?

HSBC: no longer an investment bank?

HSBC sent out a press release yesterday announcing that they are re-naming the "Corporate, Investment Banking and Markets Division".  It will now be called "Global Banking and Markets".  Global Banking and Markets comprises five main businesses: Global Banking, Global Markets, Global Asset Management, Global Research and Principal Investments.

The press release quotes CEO, Global Banking and Markets Stuart Gulliver, as saying: "We launched our emerging markets-led and financing-focused wholesale banking strategy in the fourth quarter of 2006 and completed implementation over the course of 2007. Changing our name to Global Banking and Markets does not signal a change in strategy. Rather, our new name marks the end of the implementation of the change to our strategy, which has been well-received by clients, staff and shareholders. When we introduced our new strategy more than a year ago we promised to be clearer about who we are and what we do. Our new name is straightforward and direct and aligns with how the business is managed."

Very good.

However, it has raised lots of questions.

For example, the bank has gone through some considerable change at the top of the Division, and this reorganisation follows a similar major reorganisation only two years ago, which also meant considerable change at the top back then.  Strikes me a bit of the Petronius Arbiters (see end note).

For example,the five businesses: Global Banking, Global Markets, Global Asset Management, Global Research and Principal Investments.  Note that not one of them is called "investment banking". 

Are HSBC giving up any ambition to be an investment bank? 

After all, they are following in the footsteps of Royal Bank of Scotland, who also call their investment banking operations "Global Banking and Markets".  The fact that both banks no longer refer to investment banking means that some of us ask whether it is more indicative of their weakness in the investment banking markets, rather than their strength.  Certainly this is the view of Eric Knight, the activist shareholder who has claimed that this division has underperformed for the last few years.

Finally, does it mean that HSBC no longer offer M&A, structured investment vehicles and all that good investment banking stuff?  Hmmm, they've certainly tried to be big in this arena, but with what success?

The result is that most commentators are reporting that HSBC is no longer an investment bank and, with this renaming, it would appear that HSBC is strategically admitting it is no longer an investment bank ...

... but then a lot of folks think they've never really been an investment bank anyway.  They're a global bank, and so it kinda makes sense to call the division "Global Banking and Markets" doesn't it?

Meanwhile, it did intrigue me that the "Global Markets" homepage on the HSBCnet website is nicknamed "Treasury", http://www.hsbcnet.com/hsbc/treasury, whilst the "Global Banking" homepage is "Investment", http://www.hsbcnet.com/hsbc/investment, with investment banking a subsid of this group. 

Maybe not that much has changed. 

 

 

Petronius Arbiter was a Roman satirist, who is attributed with a wonderful quotation, supposedly written in 210 B.C.:

"We trained hard . . . but it seemed that every time we were beginning to form up into teams we would be reorganized. I was to learn later in life that we tend to meet any new situation by reorganizing; and a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency, and demoralization."

Some say however that, as this quote only started appearing in the 1970's, maybe it wasn't an orginal one after all.

Please remove brain before working at this bank

Little Britain, the UK comedy show, made a character that you may think is extreme.  Her name is Carol, and she works for a fictional bank, Midwest.  The way the sketch works is that each time a customer comes into the bank, she rattles away on the keyboard and then delivers the punchline: "Computer says no". 

"Can I have a loan?" 

"Computer says no."

"I'd like to open an account here please." 

"Computer says no."

"Do you offer any bonuses for loyal customers?" 

"Computer says no."

If you are unfamiliar with Carol, then checkout her endearing little mannerisms:

So what's the point?

Well, as with all comedy sketches, there is an element of truth to Carol. Some British banks are a little bit black and white.  They run on the basis that employees should not be allowed to make decisions.  Instead, everything should be run on a strict process basis.  Staff should not be empowered.  The computers should run everything.

They might as well put a sign up saying, "This bank's policy is that all staff must remove their brains before starting to work here".

Now this may be fine if you're dealing with some spotty youth in job training but seasoned professionals, surely not?  If you are dealing with a banker by background, with years of experience, surely they should be trusted with decision making.  After all, not everything in life or banking is clear-cut.  There will always  be some grey. 

Apparently not.  I met my business banker last week, and he's been with the bank for 27 years.  He's a seasoned banker, man and boy.

I wasn't after anything in particular, except to just say 'hi'.  And we chatted.  I did mention that I receive and have to make many payments in euro's and dollars, and how awkward it is that I cannot do this online.

"Yes, and we charge you a hefty fee for conversions of currencies too", he piped in, in his cheery way. He was trying to be helpful and nice. "I'll see what I can do", he pipes up, "but often I can do nothing because the computer says no."

What? 

But you've been with the bank 27 years. 

What do you mean: "the computer says no"?

"Well, ten years ago I had much more leeway to accommodate my customer's needs than I do today," he says. 

"Today, everything is run by the computer.  It's because everything is focused upon sales.  That's why the bank has brought in people from Marks & Spencer and Thomas Cook, who have no idea about banking but they know loads about sales and retailing. 

"However, because they don't know about banking practices, they are carefully controlled by computer processes in what they can and cannot authorise, say and do.  This means that for people like me, who have been with the bank 27 years, I now have to work with the same procedures and processes as a young executive from TopShop.  I used to be able to make judgement calls ... not today."   

Now, being a nation of whingers, he was using my counselling ear to air his frustrations and, to be honest, I enjoyed hearing it.  What it tells me is that some banks no longer need humans to deliver service - just procedures and computers.

The only downside is that it means everything becomes disciplined, ordered and rigid.  There is no leeway, no grey, no humanity or relationship.  You just end up with fit in or get lost.

It reminded me of an HSBC bank manager, who wanted my mortgage business.  I said fine, and in the process I'd like to switch my main account from HSBC to First Direct, an HSBC subsidiary.  Great, he said.

I was then rejected by First Direct, because I didn't fit their risk profile.  This was for two reasons.  First, I was changing address.  Strange that, as I was in the process of moving house and taking out a massive mortgage with the bank to fund it.  Secondly, I was rejected because I had just changed jobs. Funny that, as the new job was the reason I was moving.

Even with my HSBC manager asking First Direct, part of the same bank group, personally to relent as it may mean he'd lose this mortgage account, they could not.  The computer says no.  They couldn't change their risk procedures, just to accommodate a piece of mortgage business elsewhere in the bank.

So, automatons as bank staff who sell and retail but have no empowerment, turns out to be fine for those customers who don't want flexibility and those employees who don't want to think.

"Please remove brain before work."

IBM's global reality

In an interesting article in the NYTimes, IBM's optimistic and upbeat assessment for a 15%+ rise in profits in 2008 is questioned.  Answer: IBM's not reliant on the depressed American economy but is making shedloads in the BRIC economies and from banks.  Here's the bit that piqued my interest in particular:

"The questions from Wall Street analysts in the conference call had a common theme. Why are you so comfortable about the 2008 outlook? Now, that might just be professional churlishness, since so many of them have been so wrong recently about IBM Wall Street had understandably thought, for example, that IBM’s sales to financial services companies — the technology giant’s largest single customer category — would suffer in the fourth quarter, given the way banks have been battered by the mortgage credit crunch. But Mr. Loughridge said that revenue from financial services customers rose 11 percent in the fourth quarter, to $8 billion. The United States, he noted, accounts for only 25 percent of IBM’s financial services business."

So stuff you, you Wall Street stockbashers ... we're no longer American.  We're global.

Why mobile banking doesn't work ... yet

I was looking at mobile finance this week, as we had a meeting to discuss this at the Financial Services Club last night.  In the meeting, Samee Zafur of Edgar, Dunn and Company outlined results of research he has led into mobile finance.  The research was conducted amongst nearly 500 payments professionals, and was a repeat of a survey conducted the year before.   

The results provided some interesting views:

• a large majority of payments professionals are optimistic about the future of  mobile payments;
• 29% of 2007 respondents believe mobile will take off within 2-5 years – nearly double the percentage of respondents from the last survey in 2006;
• payment professionals are optimistic about mobile banking, but with less optimism than for mobile payments (71% vs. 83%, respectively);
• of those who believe mobile banking will reach critical mass, one third believe it will happen within the next 5 years;
• respondents from Asia are most optimistic about fast adoption of mobile payments and mobile banking, while respondents from the Americas and EMEA are a bit more cautious in their views; and
• technology providers are the most optimistic.

What intrigues me is that I've spent my life in IT and yet I'm pessimistic about mobile.  I'm not pessimistic about mobile payments using contactless chips, as that's darned convenient, but I am pessimistic about mobile banking.

Why?

Because customers don't want it. 

For example, the Japanese have had mobile payments for years, thanks to the endeavours of NTT DoCoMo.  Then, in 2004, DoCoMo introduced the FeliCa phone with a built-in chip from Sony for contactless payments.  By summer 2007, over 21.5 million FeliCa phones had been sold in Japan, all with the extended EDY (Euro, Dolllar, Yen) payments functionality in the form of a fully functional mobile wallet called "Osaifu Keitai".  Osaifu Keitai - "Osaifu" is Japanese for "Wallet", and "Keitai" for "Mobile" - and was launched in April 2006. 

So I was surprised to find this intriguing research the other day, from a website called "What Japan Thinks".  "What Japan Thinks" found that, by the summer of 2007, 4 out of 5 Japanese knew what Osaifu Keitai is.  Not that surprising as over 21 million phones have it.  But what was surprising is that only 1 in 7 people are using it! 

Mmmmm.

Last year, I reported a similar reaction in the USA, and the mobile carriers tariffs and costs structures don't help there.  According to US research, under 1 in 10 Americans want mobile finance.

Meantime, I have also found surveys that indicate Europeans feel the same way, such as this study from TNS in November which states that 65% of consumers want online access and only 5% would use mobile as their preferred channel.

All of this is against a backdrop of analysts such as TowerGroup and IDC, who think we should be using mobile big time by now ... but we aren't.

Why?

Psychology.

It is this pyschology of a mobile device being insecure. 

For example, the osaifu keitai is not taking off because only 7% of Japanese consumers believe the wallet is secure.

For example, I recently started to use the Monilink service, which HSBC and Royal Bank of Scotland have adopted.  Barclays and other banks have similar services.   So mobile banking is here and now.  However, I didn't even know this was available today until I stumbled across the Monilink website.  The bank has never advertised the fact that this is available, or sent an email or letter about it. 

So I downloaded Monilink and started using the service.  Great, I can now check balances and pay bills on the hoof ... but I started to think "what if I lose my mobile?  What if someone sees my password or account number?  Why am I trying to do this here?  Wait until you get home."

To be honest, the bank reassures me that all of the above is not a problem as it's all PIN and password protected.  In some ways, it's more secure than online banking as you have multi-layered security over and above the usual online access.  And the banks all offer guarantees that mobile banking is as safe as online banking and so on and so forth. 

But the take-up is not that great because the customer doesn't feel it's as safe as online banking. This is because they are using their mobile in full public view in the open air.  al fresco banking may be a better description than mobile banking.

It's this open air aspect that creates the customer insecurity.  A bit like entering PINs in public, it's that feeling of shoulder surfers and ease of loss.  After all, online banking is something you probably do on your own in private ... along with a few other things I could mention. You don't want people seeing your online details.  And that's the problem with mobile banking.

Until banks and mobile carriers allay these concerns, and create confidence in mobile banking, all of the investments being made in these services will result in an additional channel that's good for the fun of it, but generates few real results.

Bankers are overpaid, greedy pigs

After my doom and gloom week, I thought this was a good title for a blog entry although this is not me talking ... rather it seems to be a campaign with a certain associate editor and chief economics commentator at the Financial Times named Martin Wolf.

The campaign began a while ago, with a column entitled "Why banking remains an accident waiting to happen" in November last year.  Martin's column begins:

"Why does banking generate such turmoil, with the crisis over securitised lending the latest example? Why is the industry so profitable? Why are the people it employs so well paid? The answer to these three questions is the same: banking takes high risks. But the public sector subsidises this risk-taking. It does so because banks provide a utility. What the banks give in return, however, is gung-ho speculation."

In other words, bankers take high risks, but suffer no consequences as they are underwritten by governments.  Certainly, with the example of Northern Rock in the UK, some may say this is true.   

Then Martin picks up on another FT columnist from a week ago.  The article was by Raghuram Rajan, a professor of finance at the Graduate School of Business at the University of Chicago and former chief economist at the International Monetary Fund. Raghuram writes an insightful piece entitled "Bankers’ pay is deeply flawed", with an opening line that gives away it's point: "Morgan Stanley announced a $9.4bn  charge-off in the fourth quarter and at the same time increased  its bonus pool by 18 per cent."

Finally, we get another column by Mr. Wolf on Tuesday entitled "Regulators should intervene in bankers’ pay", and this one's a real doozy.  A few choice snippets include:

"The world has witnessed well over 100 significant banking crises over the past three decades ... no industry has a comparable talent for privatising gains and socialising losses ... they know that as long as they make the same mistakes together – as “sound bankers” do – the official sector must ride to the rescue. Bankers are able to take the economy and so the voting public hostage. Governments have no choice but to respond."

This is followed by: "That is so for three fundamental reasons: first, these are virtually the only businesses able to devastate entire economies; second, in no other industry is uncertainty so pervasive; and, finally, in no other industry is it as hard for outsiders to judge the quality of decision-making, at least in the short run. This industry is, in consequence, exceptional in the extent of both regulation and subsidisation. Yet this combination can hardly be deemed a success. The present crisis in the world’s most sophisticated financial system demonstrates that."

Followed by lots of other good stuff.

So Mr. Wolf is on a personal tirade to expose the fact that bankers are overpaid, greedy pigs who feed at the trough of society and are never held accountable as, when their excesses are untangled, all the other farm animals have to pay. 

It starts to sound like something out of an Orwellian Animal Farm, with the farmers being Bush, Bernanke, Brown, Barosso and all the other politico's.  The governators of the world have to tax the workers to fund these capitalist pig-dogs.

Oh, I'm sorry.  Am I getting a bit too worked up here.  Am I in danger of biting the hand what feeds me?

Bear in mind, it is not my voice here, but that of the Financial Times: the journo of the bankers and for whom I sometimes provide input.

My own view is that some bankers are overpaid ... I mean even David Beckham might balk at the idea of being paid $160 million for being the man who led his team to relegation and lost the championship, and yet Merrill Lynch's Stan O'Neal had no such qualms.  But this is only in certain parts of the market. So yes, in some areas, they are not compensated on the risks they are personally taking, but on the risks they are taking with other people's money.  And many banks and bankers do blindly follow each other around the markets because they cannot bother to think for themselves.

Sure, this is true.  After all, a seasoned investment banker told me years ago that bankers are lemmings, rather than pigs.  They follow each other in packs and fall off cliffs, only to turn and hope they can avoid the drop at the last minute.  Some do and some don't, and right now there are a number of banks tettering on that cliff-drop.   

The bottom-line here is not that bankers are feeding at the trough of society as overpaid capitalist pig-dogs, but that they have made a fundamental error of judgement.  And the fact that they do this again, and again, and again (1985, 1987, 1998, 2000, 2007 ...) with increasing frequency is going to put them in the public eye and open to this sort of questioning.

The fact that we have another day of reckoning just means that the media is enjoying every single moment, because most of these journo's earn less than one-hundreth of the remuneration that these masters of the universe enjoy.

Me?  I'm going down the pub.

Something fishy about Discover's credit cards

Most people think the marketing of financial stuff is as dull as dishwater.  Maybe that's why the Goldfish are cleaning the waters to allow the fish to swim freely ... what am I talking about?

Goldfish. 

Goldfish is a credit card that's been available in the UK since 1996. Originally launched by British Gas, a non-bank, and backed by HFC, it's been marketed heavily in the past and became the second most recognised credit card brand in the UK by 2003.

Then it languished as credit card competition heated up and the gas firm's interest cooled down.  This was in part because the gas industry was deregulated and British Gas became Centrica.  As a result, their interest and capabilities to diversify into finance reverted and they sold the Goldfish portfolio to Lloyds TSB in 2003.  It was then sold again to Morgan Stanley in 2006.  Morgan Stanley paid £1 billion for it, netting Lloyds TSB a tidy £175 million, and it increased the Morgan Stanley UK credit card business by 50% in the process.  Finally, Morgan Stanley spun-off their cards division, Discover, last year and they are now the owners of Goldfish.

So, in order to make a killing in the hot UK credit card markets, Discover have used a major chunk of their annual marketing budget to create a campaign with Grey London to revive the card's fortunes.

Grey London and Stink Digital worked together to create a brilliant viral website, http://www.meandmygoldfish.com/.  The website uses celebrity endorsements from folks like Ranulph Fiennes, the explorer; Anthony Horowitz, the author; Meera Syal, the writer and actress; Rik Mayall, the nutter and b'stard; and others.

It looks great.

Called "Me and My Goldfish", it's also an interesting way to rebuild a brand.  The site tells you stories, delivers videos, entertains and is engaging.

As well as being online, it's also backed by an extensive advertising campaign, with posters across most London Underground stations for example.

As a result, it's winning the admiration of marketing communities, who like it's irreverence and different look.

Nevertheless, with the doom and gloom around the credit markets, is it the best timing?  After all, in December, Discover washed away $422 million of goodwill on Goldfish!

Equally, even with a great viral campaign, when I clicked on the "Visit goldfish.com" link, it didn't work as the website was down or the link was not the right link.  It's not good to have your marketing website running and your business website out of action, as I'm now entertained but you lost your chance to get my business Mr. Fishy.

Finally, it also does not mean you can keep things looking that good when you have stinking reviews from customers available online and comparasites everywhere that don't rate you.

For all the viral marketing investments in the world, the beauty of the social internet strikes again and Discover may have just thrown some millions out with the bathwater.

Swimming with sharks might have been a better bet.

Everything should be free ...

My last blog referred to the Wall Street Journal, and I suddenly realised that I could get this stuff for free ... what's happening?  It used to cost me an arm and a leg for a view of the WSJ?

Ahhh ... they've made bits of it free. Must be because so many bloggers out there aren't charging an arm and a leg, so they had to open up to compete.

Now, who's next?  The Financial Times?  The Economist?  The Banker?

Actually a lot of their stuff is free too.

In fact, everything should be free ...

... or that's what Chris Anderson, editor of Wired magazine and author of the Long Tail, thinks.  It's also the title of his new book.  Have a look at what he's thinking on this video.

I wonder if his book will be free?

   

Give me some attention will you?

Absolutely nothing to do with banking but, with all this doom and gloom around, I just thought this plea for help was so funny that it was worth sharing.  It's apparently a true email exchange between a witty but sarcastic member of the public and the Scottish Lothian & Borders Police force.

Subject: Your automated telephone answering service 

Dear Sir/madam

Having spent the past twenty minutes waiting for someone at Leith police station to pick up a telephone I have decided to abandon the idea and try e-mailing you instead. 

Perhaps you would be so kind as to pass this message on to your colleagues in Leith by means of smoke signal, carrier pigeon or ouji board. As I'm writing this e-mail there are eleven failed medical experiments (I think you call them youths) in West Cromwell Street which is just off Commercial Street in Leith.

Six of them seem happy enough to play a game which involves kicking a football against an iron gate with the force of a meteorite.

This causes an earth shattering CLANG! which rings throughout the entire building. This game is now in it's third week and as I am unsure how the scoring system works, I have no idea if it will end any time soon. The remaining five idiots are happily rummaging through several bags of rubbish and items of furniture that someone has so thoughtfully dumped beside the wheelie bins. One of them has found a saw and is setting about a discarded chair like a beaver on speed. I fear that it's only a matter of time before they turn their limited attention to the bottle of calor gas that is lying on it's side between the two bins.

If they could be relied on to only blow their own arms and legs off then I would happily leave them to it. I would even go so far as to lend them the matches. Unfortunately they are far more likely to blow up half the street with them and I've just finished decorating the kitchen.

What I suggest is this, after replying to this e-mail with worthless assurances that the matter is being looked into and will be dealt with, why not leave it until the one night of the year (probably bath night) when there are no mutants around then drive up the street in a panda car before doing a three point turn and disappearing again. This will of course serve no other purpose than to remind us what policemen actually look like.

I trust that when I take a claw hammer to the skull of one of these throwbacks you'll do me the same courtesy of giving me a four month head start before coming to arrest me.

I remain sir, your obedient servant

Here's the police response:

Dear Mr. X,            

I have read your e-mail and understand your frustration at the problems caused by youth playing in the area and the problems you have encountered in trying to contact the police. As the Community Beat Officer for your street I would like to extend an offer of discussing the matter fully with you.

Should you wish to discuss the matter, please provide contact details (address / telephone number) and when may be suitable.

Regards

PC Plod, Community Beat Officer

 

Mr. X responded:

Dear PC Plod

First of all I would like to thank you for the speedy response to my original e-mail. 16 hours and 38 minutes must be a personal record for Leith Police station and rest assured that I will forward these details to Norris McWhirter for inclusion in his next book (the Guiness Book of Records).

Secondly I was delighted to hear that our street has it's own community beat officer.  May I be the first to congratulate you on your covert skills. In the five or so years I have lived in West Cromwell Street, I have never seen you.

Do you hide up a tree or have you gone deep undercover and infiltrated the gang itself?  Are you the one with the acne and the moustache on his forehead or the one with a chin like a wash hand basin? It's surely only a matter of time before you are headhunted by MI5.

Whilst I realise that there may be far more serious crimes taking place in Leith such as smoking in a public place or being Muslim without due care and attention, is it too much to ask for a policeman to explain (using words of no more than two syllables at a time) to these scourge that they might want to play their strange football game elsewhere. The pitch behind the Citadel or the one at DKs are both within spitting distance, as is the bottom of the Albert Dock.

Should you wish to discuss these matters further you should feel free to contact me on 01234-567890.  If after 25 minutes I have still failed to answer, I'll buy you a large one in the Compass Bar.

Regards

Mr. X

    

 

Mind you, if you really want to understand Britain's youth, you can do no worse than checking out the 12 days of Chavmas on YouTube.

 

Credit Cards doom and gloom

So I blog about credit cards not being the major issue yesterday and then realise that it is unsecured debt worth billions.  Just in the USA, credit card debt nears $1 trillion.  Therefore, just to show that it cannot be discounted after all, the Wall Street Journal runs a report yesterday that shows AMEX and Capital One struggling with their high-end consumer delinquencies. 

Apparently, Citigroup and JP Morgan Chase are reporting fourth-quarter results this week and "are expected to set aside hundreds of millions of dollars to cover mounting losses on credit cards and other consumer loans ... 

"'This isn't an AMEX issue, it's an industry issue. We have started to see a spillover from the mortgage market and the weaker economy into credit cards', said Christopher Brendler, an analyst at Stifel Nicolaus in Baltimore."

Mind you, this is just picking up on an earlier article in SmartMoney.com which states:

"With home equity dried up, consumers are piling up credit-card debt at a rapidly increasing pace. As of the third quarter of 2007 (the latest for which data is available), credit-card balances increased by 7% on an annualized basis, according to statistics compiled by market research firm TowerGroup. Compared to the average annual increases of 2% over the previous six years ...

"In the third quarter of 2007, delinquency rates — the ratio of the dollar amount of loans 30 days or more past due to the amount of total loans outstanding — at the country's 100 largest banks crept up to 4.47%, from 4.24% for the same period in 2006, according to Federal Reserve statistics. During the real-estate boom years (2004 to early 2006), when homeowners easily refinanced mortgages or took home equity loans to pay off mounting credit-card debt, delinquency rates rarely surpassed 4%. Charge-offs, or debt that has been removed from the banks' books and declared a loss, are also on the rise, at 4% at the end of the third quarter, compared with 3.84% a year earlier."

I then see a CNBC headline that says "Citigroup's Layoffs Could Reach 24,000 This Year" after they post a near $10 billion loss.  That's good news as it's smaller than the $15 billion+ forecast by some ... oh, wait a minute, that's a $10 billion loss for one quarter! 

Next, there's an article from The Deal stating that the US is entering the worst banking era since 1989:

"In a climate that harks back to those bad, old days, the U.S. commercial banking system, led again by star-crossed Citi, again finds itself at the center of a debt crisis caused by real estate and leveraged lending. Once again the largest banks are suffering through steep share-price declines, hoarding cash, pitching foreigners to invest and considering dividend and job cuts. A credit crunch spurred by banking ills threatens to shove the economy into recession. Meanwhile, industry participants, regulators and legislators are wringing their hands over the future, wondering where the bottom lies.

"After almost 20 years of banking deregulation, consolidation, diversification  and globalization, has so little changed?"

Just to cap it all off, I then get the Sovereign Society's news that we're going the same way as the USA:

"Could the British pound become the 'dollar of 2008?' In other words, will currency investors batter the pound as much as they killed the dollar last year ... Look at the fundamentals:

• In the fourth quarter, U.K. house prices fell 0.8% - the first time this has      happened since 2000.
• Retail sales rose only 0.3% in December, smack in the middle of the holiday season. That's the slowest pace in 21 months.
• Core prices in the U.K. are at the lowest level in 13 months - wiping away the Bank of England's need to fight inflation.
• The savings ratio among Britons has dropped below zero for the first time since the late 1980s and household debt service makes up a whopping 14% of incomes."

Oh dear ...

... and it's still raining in London but it's now very windy as well. There's a storm coming.

Credit Default Swaps doom and gloom

Wolfgang Munchau writes in the Financial Times today that the issues we faced in subprime in 2007 are just a mere drop in the ocean, and that this is more than just a subprime crisis:

“If this had been a mere subprime crisis, it would now be over. But it is not, and nor will it be over soon. The reason is that several other pockets of the credit market are also vulnerable. Credit cards are one such segment, similar in size to the subprime market. Another is credit default swaps, relatively modern financial instruments that allow bondholders to insure against default.”

Let’s take the credit card area first.  According to The Guardian, “America's card debt is around $900bn compared with a relatively modest £56bn in Britain.”  However, the UK actually has similar levels of exposure per capita.  As I blogged about Peter Farley, Managing Director of Financial Insights Europe, last year when he presented at the Financial Services Club and said “we have reached a position where personal debt in the UK has risen to a total of £1,291 billion at the end of 2006, more than 10% higher than a year earlier and nearly triple the level it stood at 10 years ago.”

So, we should be worried about the personal credit market collapsing although the real concern, according to Mr. Munchau, is the total risk exposure in Credit Default Swap (CDS) derivatives.   

A year ago, I stated a little around this issue in discussing the quest for alpha and noting that “hedge funds account for 32% of credit-default swap sellers and 28% of buyers, up from 15% and 16% in2004".  But the real base of this concern goes back to trading strategies, which I discussed back in April 2006.  That discussion was focused upon trading strategies and algo systems and, since then, we’ve seen several market movements to create additional market risk. 

Back then, I stated that Credit Default Swap (CDS) derivatives were a $12 trillion market.  Today, Mr. Munchau estimates that the CDS derivatives market is worth about $45 trillion.  This isn’t far off, as hedge funds have exacerbated this market as mentioned and CDS derivatives were up 107% in the first nine months of 2007 according to Tim Keaney, Co-CEO, BNY Mellon Asset Servicing.

So, what’s the problem with CDS? 

Well, the way these systems work is like an insurance policy for a bank’s credit risk.  For example, the bank takes a basket of loans that mix $1 billion to Panama, $5 billion to Mexico and $2.5 billion to Columbia, and then offers the option on these loans defaulting as a credit derivative.  The investor only has to pay on the derivative if the borrower defaults.  Meanwhile, if the loans are paid off, then the investor has made a packet of cash from the premiums the banks pays to offset their credit risk.  That is why, in simplistic terms, credit derivative are an insurance policy for a bank’s loan book and is one of the major reasons contributing to the acceleration in lending over the past decade.

This is fine in times of a boom, as there are virtually no insolvencies.  However, during a recessionary period, insolvencies rise and KAAABOOOOOMMMMMMM ...

... bang goes CDS derivatives and we have a major market explosion.

Now we all recognise that there is market and credit risks in the financial world, but we manage them.  What Mr. Muchau's column raises in my mind is the question of whether there is a systemic risk in the markets?

Have all of our debt-based tools and instruments created a systemic market risk which could bring down the financial markets worldwide?

Certainly, our debt instruments are untested.  That is why Warren Buffett calls derivatives "weapons of financial destruction".  Certainly, subprime has been a problem and, if CDS derivatives explode too, then we do have a major issue.

Mr. Munchau's contention is that these instruments have not been tested during a major recession and, if the USA enters a recession, then the markets could implode.

Let's have a think about this then.

America has enoyed a boom period for the past half century, much of it fuelled by manufacturing and technological innovations.  As a result, the dollar has been the world’s globally trusted currency and America has used this strength to leverage debt.  However, this has changed as, in more recent times, some of the American economy has been fuelled by consumer demand and government borrowing, based upon a strong dollar and driven by debt.

This is all fine in periods of boom where America has strength but, with the dollar weak, inflation on the horizon and a recession looming, Mr. Munchau’s contention is that we should be worried.  Especially if this recession is a deep and long one – of the sort not seen since the mid-1970’s – as this would test the financial markets like they’ve never been tested before.  After all, thirty years ago we did not have the multitrillion exposures created by debt-based derivatives and credit-based products.  As a result, the fact these products will be tested for the first time in 2008 should be cause for concern.

Mr. Munchau also cites a report produced last week by Bill Gross of Pimco, which roughly calculates loss exposures in CDS derivatives to be around $250 billion.  Add that to the $400 billion plus in subprime losses, along with a tasty little credit card crisis, and you can see why he’s worried.

However, one thing he fails to mention is the strength of Sovereign Wealth Funds (SWF) in China, India and the Middle East and elsewhere.  Therefore, maybe we are actually seeing a balance shift in capital ownership, which is why I predicted a US bank will be majority owned by a foreigner last week.

In addition, you always have two sides of the coin, a little like Alan Greenspan’s  gloomy view of the world versus Steve Forbes.

Anyway, I’m sitting here on a Monday morning in a rainy London that has dark grey clouds and no sunshine, so maybe that’s the reason why Mr. Munchau wrote such a dark and gloomy report.

Are the doomsayers being far too pessimistic?

We shall see.