The Financial Services Club's Blog

The end of the American dream

I was asked to make a presentation today about “Is the growth story still on?” at a banking conference.

Making a presentation about growth at a banking conference right now seemed like a bit of joke, but there you go.

Luckily, most of the audience were from Asia and Latin America, and therefore less affected by the American crisis unravelling on the news hour by hour. They are affected by the ‘contagion effect’ as discussed yesterday. Just less so.

After all, they had their crises in the late 1990’s, learned their lessons and reckon it’s time someone else had one as illustrated by the opening comment from the plenary: “How do Wall Street banks manage their accounts? On the left and on the right. On the left, there’s nothing right, and on the right there’s nothing left.”

It kind of reminded me of the joke from SIBOS which was one delegate says to another: “Have you seen the best prize on offer from the exhibitors this week? They’re giving away banks!”

I guess we all need a good joke right now, and I thought the vote down of the rescue plan for America's financial system was a joke last night.

Then I found out it was true!

The Bailout Bill was rejected, and left America’s rescue dream in tatters.

Was it because the Bill would not work?

Maybe, as the UK government has spent over $200 billion bailing out Bradford & Bingley and Northern Rock, just two banks. So will $700 billion cover the whole US banking system and its problems? Maybe not.

But that’s not why it failed to go through.

It failed because some Republicans allegedly blame Nancy Pelosi, the Speaker of the House, and a Democrat.

Her speech before the bill vote was viewed as far too partisan.

For example, here were her opening remarks.

“Madam speaker, when was the last time anyone ever asked you for $700 billion? It’s a staggering figure. And many questions have arisen from that request. And we have been hearing, I think, a very informed debate on all sides — of — of this issue here today. I’m proud of the debate.

“$700 billion. A staggering number. But only a part of the cost of the failed Bush economic policies to our country. Policies that were built on budget recklessness. When President Bush took office, he inherited President Clinton’s surpluses — four years in a row, budget surpluses, on a trajectory of $5.6 trillion in surplus. And with his reckless economic policies, within two years, he had turned that around.

“And now eight years later, the foundation of that fiscal irresponsibility, combined with an anything goes economic policy, has taken us to where we are today. They claim to be free market advocates, when it’s really an anything goes mentality. No regulation, no supervision, no discipline. And if you fail, you will have a golden parachute, and the taxpayer will bail you out.

“Those days are over. The party is over in that respect. Democrats believe in a free market. We know that it can create jobs, it can create wealth, it can create many good things in our economy. But in this case, in its unbridled form, as encouraged, supported, by the Republicans — some in the Republican Party, not all — it has created not jobs, not capital, it has created chaos.”

Here’s the equivalent paragraphs that were the original draft of her opening remarks:

“Madam Speaker, when was the last time someone asked you for $700 billion?

“It is a number that is staggering, but tells us only the costs of the Bush Administration’s failed economic policies—policies built on budgetary recklessness, on an anything goes mentality, with no regulation, no supervision, and no discipline in the system.

“Democrats believe in the free market, which can and does create jobs, wealth, and capital, but left to its own devices it has created chaos."

As you can see, she embellished that opening somewhat and continued to do so throughout her speech, continually referring to ‘them’ and ‘us’ in the typical style of political partisanship.

The result is that yes, I can see why some Republicans might have switched their vote and decided against it.

Just 12 votes separated a win from a loss.

228 votes to 205.

12 Republican votes made the difference even though, by doing so, she and the other politico’s have completely blown out any American credibility in financial markets ... but some would say they blew that credibility away a while ago, with the mismanagement of the markets that led to this crisis.  The 'some would say' particularly being the Democrats as made clear in Ms. Pelosi's speech yesterday.

Is this the end of the American dream?

Seems to be ... until the next vote.

Is this the end of America’s global dominance?

Absolutely.

Now I am not anti-American.  I love America and much of what it stands for.

However, as the BBC reported, the politicians were running frightened as there is an election in five weeks, and so “rejected a bill which the Treasury and the Federal Reserve had insisted was essential to the stability and viability of the American financial system - and by extension the financial system of the entire world.”

Have they killed the world’s financial system?

No. But they have seriously infected it and need to find an antidote fast.

But that's not why they have killed the American dream.

What was killed yesterday is the 'rose-tinted glasses' by which the rest of the world has judged America.

Those glasses were smudged by the Iraq War, fogged by the subprime crisis and broken by the last two weeks mess of indecision.

For example, I may be speaking out of turn here, but the first error in the dream was the decision to invade Iraq in 2003.  Afghanistan was supported as a reaction to the Taliban over 9/11, but Iraq is seen as an unjustified war.

I travel the world and know that America blew it’s goodwill with the Iraq War. From Britain to France to Germany to Australia to China to India, I cannot find one voice amongst citizens who believe this was a righteous war. They all tell me it was a mistake.

That's not to say the poor soldiers fighting on our behalf should not be supported.  We all salute them.  But the politician's made a mistake.

Even Americans admit this now. Just look at the McCain-Obama debate last Friday night, where Barack said directly that, on Iraq, McCain was “wrong”.

So, America lost a lot of kudos, goodwill and support as a result of the Iraq War, but it had not diminished America’s economic and financial dominance. The inter-linkage of all economies is to the global currency reserve of the dollar, for example, and that is still the case.

Until yesterday.

America equally has led the world in believing that financial leverage creates growth creates commerce creates GDP creates wealth creates leverage … until yesterday.

America has also led the investment markets thanks to Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley. Until now.

This is because America created a toxic recipe under the Alan Greenspan years where greed, globalisation, technology and regulation combined to shatter the American dream.  These ingredients were all placed in a melting pot and what came out was a complex soup of derivatives, which are now unravelling. Collateralised Debt Obligations (CDO), Credit Default Swaps (CDS), Structured Investment Vehicles (SIV) and their kindred have blown the American dream to pieces.

You only need to look at the charts on the BBC’s website to see the killer combination and timing that led to yesterday’s vote in the House of Representatives.  Interestingly, my American colleague at this conference described the BBC as 'far too liberal', but then we are run by Labour (the Democrats equivalent) rather than the Liberals?

The BBC do make an incisive comment however, that American voters perceive Wall Street bankers to be "greedy, incompetent fat cats who have created this crisis themselves and who are now being allowed to pick the pockets of American voters to fix it.“

That’s why the Republicans voted it down. There's an election in five weeks and they are running scared of being voted out of office.

None of this is new though.  Not the political self-interest, or these boom and bust cycles.

The causes of this crisis are not new either.

It all lies with structured finance, leverage and complex derivatives.

This is not to say that these financial weapons of self-destruction should be banned, as the growth fuelled by such products has been appropriate in the past, just unchecked.  And the difficulty is finding the right checks and balances.

For example, Long Term Capital Management (LTCM) and Michael Milken’s junk bonds were origins that showed the vulnerability of the leveraged model when it goes unchecked and unregulated.

And the 1987 film, “Wall Street” had it all in there, with the end of the film showing Gordon Gecko, the asset-stripping, junk bond trading, investment banker, tarnsihed and tainted.

During that movie, you may remember the defining moment where Michael Douglas as Gecko says: “Greed is good”.

Greed is good, as long as it is regulated and the risks are known. And just as greed is good whilst that lasts, greed is not good when it is unregulated and risks are unknown.

That was Gecko’s mistake.

That was Milken’s mistake.

That was LTCM’s mistake.

That is America’s mistake.

And no, I’m not saying something in hindsight, as I said this in 2002 after Enron and Worldcom. Today’s situation is exactly the same, just a different situation. But the underlying causes are the same.

And I have a solution.

I think there’s a way to avoid this ever happening again in the banking world.

I’m going to make that tomorrow’s blog, because today I raise my glass, hang my head and hold my hat to the end of the American dream.

The dream was damaged by war, ravaged by money and assassinated by political self-interest.

And back to Nancy Pelosi's 'them' and 'us' comments.  It's not Democrats versus Republicans right now, but possibly America versus the Rest of the World.

I think the political self-interests of all of your politicians killed the American dream yesterday.

You also pulled the rug on the little bit of credibility you might have had left.

And back to the jokes, apart from the one I've just talked about?  

Apparently, a major investment was made yesterday in Pfizer's stocks by 12 Republicans as they wanted to ensure they had a little bit of help in the next five weeks to get a stronger election.

It didn't work.

The nationalisation of banking

I wake up this morning to hear of a $16 billion bailout for Fortis, an asset stripping sale of Bradford & Bingley (B&B) to Santander with their mortgage book taken over by the government, and confirmation of  $700 billion bailout of banks in the USA and firesale of Washington Mutual (WaMu).

Add these names to Freddie Mac and Fannie Mae’s effective nationalisation, something unthinkable a few months ago, alongside Lehman Brothers, Merrill Lynch and HBOS, and it’s been a funny old month hasn’t it?

It’s not worth commenting on all of these developments, as it would take too long and it would be too darned depressing, but the question should be why did these banks need rescuing?

Several of them had adequate Tier 1 Capital coverage, B&B at 9.9%, and so it makes Basel II and the Capital Requirements Directive seem redundant doesn't it?

Equally, several of these banks had plenty of liquidity cover, and yet they still went bust.

So what went wrong?

Is this the final explosion of those ‘weapons of financial destruction’, derivatives, or is something else going on?

I think something else is going on.

It is called a fundamental loss of confidence in the banking system.

The story of WaMu illustrates this well.

WaMu is a bank that had huge respect for their innovations in the early 2000’s, especially the launch of the new Occasio branch concept.

This concept revolutionised branch banking in America and globally, on the basis of open plan schemes with accessible tellers – no windows or barriers between cashier and customer – as well as bright colours, child-friendly zones and dress-down banking.

It worked and WaMu is thought of as a friendly bank.

However, like Britain’s building societies that relied on mortgages and savings as their core business, WaMu is a thrift.

Mortgages is core business.

That’s why WaMu had $176 billion worth of mortgage related assets on their books.

For this reason, investors and savers lost confidence in WaMu.

Gradually, as market uncertainties and media coverage made anything with ‘mortgage’ written on it appear toxic, WaMu became the victim of the crisis of confidence. Its credit rating was downgraded and, gradually, the bank’s stock was reduced to junk status

With everyone thinking that the ‘subprime crisis’ means mortgage exposures, which is not far from the truth, investors leave the sinking ship first.  Then savers and depositors follow, and start taking money out of the bank because they read it has 'large mortgage exposures'.

WaMu is one of those banks.

In eight days, from 16^th to 24^th September, customers took out $16.7 billion in deposits, or 10 percent of the total deposit base of the bank. They’re frightened out there, and the media, the bloggers and the commentators were giving them the hee-bee gee-bees.

That’s why the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision, stepped in and said this bank was ‘unsound’.

As a result, it was given to Jamie Dimon for a bargain lot firesale amount of $1.9 billion.  That's good business for JPMorgan and Mr. Dimon, and follows on his $2-per-share ($236 million) purchase - rising to $10-per-share later - of Bear Stearns earlier this year.

  And yet this was a bank with $32.8 billion of assets and $8.1 billion of debts.

It was sound.

I spoke to one of the bank’s staff over the weekend and they are mad, angry, frustrated and sore. They think Jamie Dimon is the devil, buying up a bank at its weakest point for a bargain amount and feasting on their remains. They think the FDIC has given the bank to JPMorgan and not given a damn. They really are fed up with the fact that JPMorgan get all of the bank’s good business – the branches, the cards, the deposits – whilst leaving and bad business and liabilities behind.

Source: FT.com

Seems like a good deal for JPMorgan, and that's what sorts out winners and losers.

The FDIC did this because everyone is frightened out there, including the FDIC.

Anything with mortgage on it, is bad business they think.

That’s why the Treasury, Fed, ECB, Bank of England and all other authorities are going: “oh sh*t, what do we do?”

Nationalise the banking system.

And that’s what they’re doing.

Meantime, any bank with access to liquidity - Wells Fargo, JPMorgan and Bank of America - will sweep up the crumbs from the table that have the juiciest icing on the cake.

Good luck to 'em, I say. 

Bradford & Bingley's trials and tribulations

Speaking of Bradford & Bingley (B&B), I got into trouble this week.  You see, they're a bank that's heavily exposed to the mortgage market in Britain and, as mentioned in my last post, they have a £40 billion mortgage book with most of it in buy-to-let (landlords) and self-certification markets.

 

But they also have this book of business with GMAC-RFC which I called 'toxic'.  GMAC didn't like the fact that I implied they'd sold B&B a pup, so why did I call it 'toxic'?

 

Here's the original announcement of this agreement from December 2006:

 

2006-12-07 07:04:56
RNS Number:4102N
Bradford & Bingley PLC
07 December 2006

Agreement to acquire mortgage portfolios

Bradford & Bingley plc is pleased to announce that it has today signed a further agreement with GMAC-RFC that allows the Group to acquire up to £4 billion of mortgage portfolios in each of the next three years. This agreement follows the purchase of a number of similar loan portfolios from GMAC-RFC totalling £6.5 billion since September 2002.

The acquisition will be made in four tranches per annum, the size of which will be determined by Bradford & Bingley. The minimum consideration for each tranche will be £350 million up to a combined maximum total of £4 billion per annum.

The assets will be funded from the Group's existing resources.

All lending in the portfolios will be secured on residential property. In addition to reviewing the credit controls GMAC-RFC employed in originating the loan portfolios, Bradford & Bingley will further test the loan books using its own credit scoring process to confirm that they meet the Group's credit standards.

Bradford & Bingley is delighted to cement the long term future of this excellent business relationship.

As can be seen, B&B have taken £6.5 billion worth of GMAC’s mortgages, and this agreement added another £350 million of mortgage business from GMAC, as a minimum, for each quarter from Q1 2007 through Q4 2009. 

 

So far, that amounts to £8.95 billion of GMAC’s mortgage book in the UK. £2.45 billion since January 2007 and a further £1.75 billion to come.

 

£6.5 billion of mortgages and a further £4 billion to come may have seemed a good deal in December 2006, when liquidity was freely available. 

 

Today, it's killing them.

 

First, the mortgage book is heavily in default.  For example, B&B's general arrears for mortgages in 2008 have risen by 1% during the first half of the year, to 3.1%.  That's quite high ... but the GMAC mortgage book is up from 2.1% in arrears to 5.72% on average according to various news reports.

That's not good.

 

It is particularly not good when B&B are having to pay more each year for credit default swaps (CDS) to protect themselves.  For example, just since last week, the cost of CDS insurance has risen from £425,000 per £10 million to £558,000.

 

In other words, the £8.95 billion GMAC mortgage book is costing them £499.41 million in CDS cover, up £119.035 million per year in the last week ... just for the GMAC book of business.

 

And there's a further £1.75 billion to come. 

 

Whoopee-doo. No wonder this bank needs bailing out and is likely to be nationalised, just like Northern Rock, in the next week.

 

Admittedly, B&B have tried to get out of this noose around their neck, and managed to renegotiate this deal with GMAC so that they get rid of their obligations sooner rather than later … but GMAC were a little irate with me for saying their mortgage book was bad business for B&B.

 

They sent me this statement:

 

"For clarity, GMAC-RFC is one of a number of Bradford & Bingley’s acquisition partners.  GMAC-RFC is not responsible for Bradford & Bingley’s business performance.  Indeed they are working closely with Bradford & Bingley to improve the small element of the books acquired that are not performing as expected.

"As I’m sure you understand, they are not at liberty to discuss details of their contracts with third parties, but GMAC-RFC is confident in the quality of the origination practices and processes used to build portfolios for their trading partners.

"Also with regards to this week’s agreement with B&B they’ve released the following statement:  'We are pleased to have reached this agreement which provides GMAC-RFC with certainty in this market, both by providing a secure exit of the loans it has originated and in terms of the equivalent premium that would have been paid should the agreement have run the full term. This fits with our strategy going forward in the UK market.'”

As well as the statement below:

"23 September 2008

Bradford & Bingley and GMAC-RFC announce new terms for mortgage agreement

"Bradford & Bingley (the Company) and GMAC-RFC confirm today that they have successfully renegotiated the terms of their mortgage forward sale agreement.

"Under the original terms of the agreement, signed in December 2006, the Company agreed to purchase a minimum of £350m of UK mortgage assets per quarter, with £1.75bn remaining to be purchased before the end of 2009.

"Both businesses have agreed to revise the terms of this agreement to their mutual benefit whereby £500m of loans will be acquired in Q4 2008 and between £225m and £250m in Q1 2009 after which the agreement will cease. GMAC-RFC will receive in lieu, the equivalent of the premium that would have been paid should the agreement have run the full term."

 

That clears all that up then.

 

Meanwhile, I wrote an in-depth analysis of B&B's situation a couple of months ago for Mortgage Finance Gazette, and would be happy to share with anyone who's interested.

 

Who's next?

It's been a strange week, which is why I've only been intermittently blogging.  For example, a visit to the countryside proved a challenge.  There I was in a small village in Suffolk, with only one internet access point: the Library.  And the library would not accept any USB stick usage, so the post I'd written couldn't be loaded.

Mind you, it's been a good thing to take a little breather as the markets are crazy with banks in their worst case scenario in America.  After Lehman Brothers, Merrill Lynch and HBOS last week, we now live in a world where everyone keeps asking, "Who's next?"

This is wrong, and has made the banking markets weird with investors losing confidence everywhere.  For example, Bradford & Bingley (B&B) has lost most of its value this year, with over 90% reduction in their share price and a £455 million rights issue that was messed up badly during the summer.

As a result, I was interviewed by the BBC this week about B&B and said it's a good news, bad news story. 

The good news is that, with a 9.9% Tier 1 Capital ratio and £52 billion in assets, you would think they would be OK. 

However, they have £40 billion in mortgages, 85% of which are self-certification or buy-to-let.  With the forecast of UK house prices tanking to a trough that is 30% down on the peak prices of a year ago, some folks reckon 2 out of 5 mortgage borrowers with B&B will be in negative equity or default.  Not good.

Meantime, in a similar situation, Washington Mutual, WaMu, filed for bankruptcy yesterday and is acquired by Bank of America for $1.9 billion (a snip) and everyone in the States is also asking "Who's next?"

Wachovia and National City appear to be the next.  Both banks have lost huge amounts of investor confidence - with share prices down 27 percent and 26 percent yesterday (about $10 billion  of lost capital) - and George W can't even convince his own party to back a bailout plan.

I'll post a lot more on this tomorrow.

Meanwhile, I just love the transparency of the internet and our digital age, as demonstrated by YouTube's stored records. 

For example, watch George W's speech on the bailout:

and then this one from 2002:

Now, I'm not one to judge, as I've been as much a part of this as anyone, e.g. I am a homeowner and I have invested in property as an asset rather than as a home, but anyone could see there's a problem here.  For example, I posted this one last year:

Speaks for itself.

Ken Lee

It's late at night and I'm going to bed ... but just as I'm finished for the evening, someone has sent me this clip on YouTube of Bulgarian Pop Idol (?!) where a young lady has become a superstar with Mariah Carey's famous song "Ken Lee". 

Superb.

$500 million: your bill for cover payments

Further to my earlier blog about cover payments, I had a fascinating conversation with a banker who is heavily involved with the changes to cover payments regulations.

He asserted several times that the focus upon cover payments will cost some banks $500 million each. 

$500 million.  Half a billion.

I asked how that could be, as the technology changes will not cost nearly that much.

He soon made me realise that $500 million is cheap compared to what it could have been.

Read more ...

Why some banks do themselves no favours

I don't like to use this blog to whinge, moan or rant, but I found an issue during a mortgage transfer and think this letter speaks for itself:

Dear sirs

Attached is my payment for the arrangement fee of our mortgage transfer. 

In your mortgage documentation section 8, it states I have to pay the arrangement fee or it will be added to my mortgage. That is all it says. It does not say how to pay, when to pay or where to send the payment to. I would have considered that to be pretty important.

I assumed I could just pay through a telephone call with a credit card, and rang your offices to do just that only to be advised that payment would only be accepted by post or in a branch.

I wondered why it does not say this in your mortgage documentation?

I wonder why your documentation does not even state how to pay, when or where?

I wonder why you have made this so difficult?

Is it because you want most people to forget about this fee and have it added to their mortgage at your variable rates which, by the way, are quite punitive?

Yours faithfully,

Chris

Oh dear, a glass of wine and karaoke

Oh dear ... I was caught out at the Karaoke bar during SIBOS in Vienna at the closing night singing (?) Mack the Knife ... and no, this is not my mates, my film or my idea, but as it's on YouTube ...

Never again, never again.

Are Europe's plans for Banking, MiFID and the PSD irrelevant?

With SEPA, the PSD and MiFID all paling into relative insignificance as the major banking markets explode globally, there are questions about whether the European plan will succeed or is even needed now.

Therefore, I’ll be really interested to hear what Commissioner Charlie McCreevy has to say when he launches the 2008-09 season of the Financial Services Club with a keynote speech on 2nd October in London, hosted by Brian Caplen, Editor of the Banker.

Read more ...

That Was The Week That Was

Last week was probably the most dynamic and heartstoppingly frightening any of us have seen in our lifetimes in financial services.

The fact we were all in Vienna, and therefore somewhat protected from the ups and downs of Wall Street and the City, did not make it feel that much better when you return to the newspapers of the UK and America.

Over the weekend, there's been more written about the credit crunch than Shakespeare managed to produce in his entire lifetime, although most of it is nowhere near as good a quality. 

Nevertheless, between the bloggers, papers and diggs, there have been some interesting commentaries running, such as the best of the online jokes about the impact of the credit crunch, including the effect this is having on the Queen:

Read more ...

SIBOS: the end is nigh ... but only until next year

The end of SIBOS 2008 or almost. The party is to come and I think folks a finally cheering up a bit. The weather is clear and sunny, the work is done, the markets are still turbulent but more stable and we are beginning to relax. Not with complacency, but with relief.

After running around for four days trying to keep up with the breaking news and SIBOS news, it’s been a brain strain to say the least.

As one speaker said tonight, “I’m sure you are tired physically, from walking, and mentally”. That’s an understatement.

The closing session of SIBOS this year also touched a vein that I have been talking around for over two years: Web 2.0 and the way that the internet is changing our lives.

I am surprised that SWIFT have embraced this theme as much as they have this year, but everywhere we look – once you get past the credit crisis issues and the financial shockwaves it created – there’s internet and Web 2.0 dialogues taking place.

This dialogue culminates with the arrival of Don Tapscott, author of Wikinomics as our final plenary speaker. Don delivers a consummate presentation for around fifty minutes of all the tech trends and how collaboration is key. He finishes with an interesting note though.

Everyone has been asking all week about the role of regulators in creating and enabling this financial crisis. Certainly the Fed had a role in money supply in circulation that enabled the massive leveraged positions of Bear Stearns, Lehmans and Merrills, and Greenspan and company are also culpable for the unravelling of the Glass-Steagall Act that allowed US commercial banks to get into investment banking big time. This has come up several times in the past week.

So Don says that in the spirit of collaborative commerce, regulators and banks should be honest. Admit it. The risk models and regulations were a mess. They were wrong. We screwed up.

He didn’t quite say it that way, but I take poetic licence.

And the solution is a simple one.

Or it could be.

The solution would be that, in the same way we open source systems and development work these days, and in the same way that Linux, Wikipedia and more are created by the users, open source the regulatory frameworks.

Create a global portal, where everyone can collaborate on the wordings , rules, procedures, processes and structures for the future supervisory framework and regulatory and prudential organisation for the banking industry.

At least that way, it might be more robust and reliable than the untransparent, secretive and unreliable framework we have today that is broken.

I like it.

Finally, Lazaro Campos, CEO of SWIFT and Gottfried Leibbrandt, Head of SWIFT Markets, summarise this week with a variety of commentary.

From the reunification of Germany at SIBOS Berlin 1990 to the cancellation of SIBOS Singapore after 9/11 in 2001, we have rarely seen such a turbulent SIBOS.

This SIBOS will probably be remembered as “SIBOS Monday”. SIBOS Monday was when the banking system exploded globally and imploded in America.

As Lazaro said, “we are living through history”.

This week, 23 speakers had to be replaced at very short notice due to the crisis back home, and Robert Close of CLS said that, “we’ve seen the financial world change beyond recognition this week. However, the back office risk management systems are now seen as more important than ever before. We can see that there could have been a meltdown in the financial markets if those back office systems had not worked and were not robust. For example, CLS process over 5 million FX instructions valued at over $30 trillion this week alone. The fact that those systems work saved us.”

Or words to that effect.

And I agree with him. The fact we have a globally connected market that can move risk in nanoseconds globally with robust infrastructures does help. That’s why you can unravel a Lehmans overnight, or you can at least try (we are still trying).

The big questions and themes remain though:

* how can banks regain trust and confidence?

* what is the future of OTC Derivatives?

* what should be the new regulatory rules

* what is the role of new technology and current technologies in adapting?

And more.

The themes of SIBOS 2008 have been mainly the shockwaves of the credit crisis rippling through our system, the shift of economic power from America and Europe to the BRIC economies, the role of Web 2.0 and other disruptive technologies on our business models and the important of standards and interoperability.

SIBOS always comes back to standards and interoperability as that’s the reason why SWIFT exists isn’t it? As well as throwing a darn good conference and party of course.

So, as Denmark was all about SEPA and the EU, Sydney was all about the changing role of SWIFT and the widening of SWIFT to include new markets and geographies (the BRICs), Boston was all about bringing on the corporates, Vienna has been all about getting back to basics.

Sort out this mess, work collaboratively on risk models that work, focus upon resilience, reliability and robustness, and keep the business going.

Next year’s Hong Kong and I’m guessing we’ll all be wondering how the world will have changed by then. I’m not sure, but my one thought is a line used today that I heard ten years ago, and will hear ten years from now.

“In a world that needs banking, do we need banks?”

Maybe that should be the theme of SIBOS next year in Hong Kong.

If the current model of banking continues to mess itself up with bad decision making and poor risk management, then we need a different form of banking.

What that will be remains to be seen, but it will be clearer by September 2009 with SIBOS, Hong Kong.

Meanwhile, I’ve had a tough week, so I’m off to party at the Habsburg Palace with a few thousand other poor souls who have had a shaky week and will no doubt have shaking evening.

See you around.

Are hedge funds the root of all evil?

So, the morning goes on, more dialogue and more debate.

The highlight of the week so far, for me anyway, came with the session entitled: "This House believes that Hedge Funds are the root of all evil?" if nothing else, for the title.

The moderator of the session was Julian Tregoning, a Director with the Bank of New York Mellon, and a very distinguished fellow indeed.

Punchy, charismatic and humorous, Julian introduced our debate by picking on a variety of headlines from recent media, including "Hedge Fund Manager pays himself more than the Queen of England", "Hedge Fund Manager thinks of himself as the King of England" and "Hedge Fund Manager Ate My Hamster!"

All things that would frighten the most mild-mannered person.

He then introduced the panel which included:

• Gary Aguirre, Principal, The Aguirre Law Firm; Former SEC Senior Counsel
• Jack Bouroudjian, Chairman, Capital Markets Technology
• Tim Lind, Managing Director, OMGEO
• Sean Pairceir, Managing Director, Brown Brothers Harriman
• Julian Shaw, Head of Risk Management and Quantitative Risk, Permal Asset Management

The debate was meant to be under Chatham House Rules, as in it cannot be reported, but with an audience of around 1,000 SIBOS attendees, and with many press reporters and bloggers in the room, I'm sure some quotes will be attributed.

For example, Chris Skinner of the Financial Services Club said: "is there a difference between American and European atttitudes to hedge funds and leveraged risk, e.g. the US has supported this which is why the US markets are now in such deep water?"

No, I wasn't on the panel, but that was the question I asked.

The arguments for Hedge Funds being the root of all evil included the fact that they circle like vultures and short stock weaklings.  As one audience member said: "Some say it is the role of Hedge Funds to identify firms wearing the Emporer's new clothes, but Hedge Funds do not just strip them naked but humiliate and flagellate them". 

Emotive words indeed.

Apparently, Hedge Funds are not transparent, they are unregualted, they have pushed the markets and the leverage model to the limits, and their managers rake in excessive fees far beyond their worth.

But not one of the proposers seemed to say that they destablised the markets, just that they don't like them very much.

As a result, the opposers put forward more compelling arguments.  In particular, saying that Hedge Funds create more liquidity, smooth out risks, understand their portfolios and the risk in their portfolios intimately, and have been a key constituency in creating the wealth we have enjoyed for the past decade.

The killer punch was probably the comment that it was not Hedge Funds that created derivatives and subprime risk.  It was the banks.  The banks did not understand the risk models however, and the fact that the 1933 Glass-Steagall Act was removed led to banks getting into risks they had no idea they were creating.

It was the banks therefore that messed up, not the Hedge Funds, and can anyone really blame a Hedge Fund for shorting stocks of banks that have screwed up?

The vote was therefore unanimously rejected by the audience, and Hedge Funds are not the root of all evil ... just very, very, very annoying, greedy, arrogant and rich.

Then to lunch, and a chat with a few more exhibitors.  There don't seem to be many bankers around now, but you never know.  When I see one, they all seem to be collecting memorabilia of other banks that they suspect might not be around next year.

After all, a nice towel with Merrill's, Lehman's or HBOS's logo on it must be worth something mustn't it?

The bears run rampant

Bank of America, Merrill Lynch, Lehmans, AIG, HBOS, Lloyds TSB … and the week ain’t over yet. Add in a few other names: Bear Stearns, Northern Rock, Dresdner, Commerzbank, Deutsche Bank, Postbank, RBOS, Fortis, Santander, ABN AMRO … and more, and we can see a massive restructuring taking place in European and American banking.

Some of this has been driven by competitive factors but, based upon this week’s news, much of it is being driven by bargain basement bail-outs of good banking names gone wrong.

For example, the BBC published this chart today:

That shows Merrill, Lehman, Lloyds TSB, HBOS and AIG’s market cap in total is worth less than the GDP of Kazakhstan. Nice! Not that we Brits have anything against Kazakhstan, right Borat?

This backdrop to SIBOS, as mentioned, has made us all a little more sombre this week. For example, I went to a dinner and then a nightclub party last night. Although all were smiling, laughing, drinking and joking, there seemed a little bit of a restraint in all of these activities as nothing has been too exuberant so far.

It kinda reminds me of many years ago I was lucky enough to qualify for an all inclusive, 5-star trip to Hawaii as one of only a few sales people to reach their sales targets that year.

My wife and I took the 14-hour flight to Hawaii via San Francisco, and then the short hop on to Maui. The resort was the Grand Wailea Resort, an amazingly opulent beautiful resort in the lush, green islands of the Pacific.

The following morning, the CEO of our firm stood up and addressed the audience with the words: “Our firm entered Chapter 11 this morning …”

It dampened our spirits a little bit … but we still had one hell of a party.

That company was Wang.

A name that no longer exists in technology circles, but is remembered fondly by those who were around in the 1980’s. What you may not know however, is that a lot Wang is still around today. Microsoft Office was inspired by Wang Office. Microsoft’s image scanning systems are largely based around Wang’s. Getronics took over much of Wang’s engineering maintenance services business, and word processing today is still largely associated with Wang’s name.

The point is that whatever bad times we go through, we still have good times and remember our lost name’s fondly and salute their legacy.

That’s what we’ll be doing tonight at the Habsburg Palace where we have the final SIBOS party.

For veterans of SIBOS you will know that tonight’s party is a lavish affair, with thousands of people enjoying free wine, food, hospitality, dancing, entertainment and more at SWIFT’s expense.

I’m just guessing that some of the exuberance of this lavish affair will be slightly less exuberant than in previous years. Nevertheless, we will have a ball.

Meanwhile, back to the focus of today’s show, which still has some great content.

This morning, the first session I go to is all about securities infrastructures for the future. State Street, JPMorgan and Standard Chartered all talk about how fund managers’ needs for improved multi-asset, multi-product, multi-region information services is changing the business structure.

Jeff Conway of State Street probably put it best, when he described the basic infrastructure as the ‘sausage factory’. The sausage factory has to take data in and process it efficiently. That’s the hygiene factor.

Therefore, you use your investments in hardware, software, applications, resources and BPO as your sausage factory structure, and build global centres that link together and provide the underlying support. But the business focuses upon the client’s needs, and that’s the front office.

Right now, the retail and institutional clients needs, which the panel claim are merging together in terms of requirements and information support structures, are for a single window into their complete investment portfolio, cash management and risk exposures on a real-time global basis.

That is changing technology, service and product, and the infrastructure guys basically have to be flexible enough to adapt to these needs. If they cannot, if can increase risks and damage reputation, and that’s the key to why infrastructure investments now and into a planned strategic five-year cycle is always critical.

Interesting.

Meanwhile, the good news is that today is the first sunny day in Vienna, so maybe things are getting better after all.

It's business unusual

I finish the day and my feet are tired and my head is buzzing. I feel like I’ve walked about 20 miles and been awake since 2007. SIBOS days take their toll.

The breaking news about Lloyds TSB and HBOS fuels the rumour mill and gossip columns, and the stands and exhibitors are more interested in the news from home than the news here.

Or so it seems.

But this is misplaced.

SIBOS is still an important meeting point, and it is too easy to let the news from home subsume the networking and ideas generated here.

I spend most of the afternoon in the exhibit hall and talking with bankers, technologists and consultants, and I get an overwhelming sense of excitement and foreboding.

The fear and foreboding is that the upheaval in the West will stall growth, cancel budgets and divert plans. The excitement is that the upheaval in the West will lead to more regulation, more mergers and acquisitions and therefore more projects.

Speaking of projects, I finish the day chatting with a corporate treasurer, a rare find and a highly sought after animal who has disguised himself for most of the day as a geek. I think this was to avoid anyone discovering the idea that he could make a decision and has a budget.

In talking with this corporate beast, there were some interesting nuggets, the most interesting of which is that they are converting their fragmented and diverse treasury and ledger operations across to SAP.

But, rather than planning a five year implementation which is what most of his peers have done, this treasurer has spread the project out to 2020.

“2020!” I say incredulously. “But we may all be dead and gone by then!”

I’m always optimistic.

“2020!” he says emphatically. “Because whoever heard of a SAP project that took less than ten years?”

My favourite comment of the day and one I shall treasure as I go into night mode.

Night mode sounds like some sort of a vampire operation, but no. I’m just off for dinner and clubbing, as is usual in a SIBOS week.

But this is not business as usual. This is business unusual, a comment Juan Senor used in this morning’s plenary.

Business unusual, continual change, non-stop processing, real-time risks.

This week at SIBOS is all about disruption, change and innovation.

Love it or loathe it, if you’re in banking, you’re in it, so adapt, change or die.

Welcome to the lost bank

After pounding the exhibit hall for a while, and dropping into a few sessions on SEPA and regulations without learning too much, I decided to see what today’s main plenary would tell me.

Walking down towards the plenary, my mood continued to be cheered by the signage that SWIFT has laid on here this year. The signage is called “The Dialogue Zone” and, bearing in mind that SWIFT’s theme is “Advancing Critical Dialogue” (this is a community), the aim is to stimulate interactions.

All over the hallways leading to the plenary hall are posters that have “write your view here” and “add a post-it note”, although not many people have (I added one though, saying read my blog at SWIFTcommunity.net … nothing like advertising is there?).

There are also pictorial mind maps of all the key sessions. These are being drawn by an agency SWIFT have hired, and it tracks the session by picking key questions, quotes and themes and drawing them out on large flip charts with pictures and diagrams.

I like them a lot.

As you walk down the hallway, they all seem to be saying: “Financial Shockwaves”, “Economic Powershift”, “Global Financial Crisis”, “What was the role of regulators” and such like.

Yep, that really cheered me up.

The plenary session is packed, probably because this one has the title, “What keeps CEOs awake at night?”

Apart from “jet-lag” and “worrying about my daughter’s boyfriend”, there were some good comments. Rather than summarising them, I thought I’d share with you the rough dialogue onstage (please do not take the quotes as exact, as I was summarising).

The debate was moderated by Juan Senor (JS), Business presenter, formerly CNBC and International Herald Tribune. To begin with, JS asked the guys what keeps them awake at night in terms of internal or external industry concerns and received various answers including:

* How do you change your business model to replace all the costs of the write-downs over the last 18 months?

* Liquidity funding

* How to restore the trust and faith of corporates and citizens in their financial institutions?

* How to manage the impact of new uncertainties in terms of risk management, risk positions and risk exposures?

* Keeping innovation going and the internal talent pool retained and motivated?

* The capital capacity to allow for reinvestment

* Risk transparency and to ensure our risk positions are clear at all times

Tim Ryan (TR), CEO, the Securities Industry and Financial Markets Association (SIFMA): “The ingenuity in financial services has created some concerns, especially with terms like opaqueness … risk management is a nice term but if you don’t have the tools to manage and measure the risk, it’s just a nice term.”

Brian Stevenson (BS), Chief Executive, Global Transaction Services, Royal Bank of Scotland: until recently “risk was not a factor that featured in the everyday conversations around risk management”.

Hans Van der Noordaa (HVdN), Member Executive Board, ING Group: “Don’t fly on autopilot. There are so many models out there that are full of assumptions, so if the commons sense is not there, then it’s extremely dangerous.”

JS: we see the beginning of the great American unwinding and the end of the standalone investment banking model. When will it take place?

TR: “Right now, there’s headlines saying it’s cataclysmic. But no-one knows what will happen when they are in the middle of the firestorm. What we’ve been seeing is a serious challenge to any entity which relies on wholesale funding. People who have access to liquidity through deposits, a traditional bank, are advantaged. People who have to rely on others for liquidity through repos or securitisation, are challenged.

BS: “Investment banking, and before that merchant banking, has been around for over two centuries. This concept will continue.”

HVdN: “We focus now on the failures, but there are a lot of prudent banks out there. We see a lot healthy banks, growing fast and doing good jobs. The rotten ones are really spoiling the reputation for the industry, and I worry what this will do for the long-term confidence in the industry.”

TR: “Dennis Weatherstone, the former Chairman of JPMorgan, made sure that every innovation within the bank had to be taken to him and explained. If he understood it and liked it, then it went ahead. If he didn’t understand it, you got one more chance to explain it. If he still didn’t understand it, it was not implemented. We seem to have lost some of that rigorous process in recent times.”

HVdN: “Most of our focus upon innovation will be in distribution. There is room in the large and fast growing markets to innovate. My children will never visit a bank branch and if you can see new market opportunities, such as where farmers have access to mobile telephony, that’s where the focus should be.”

BS: “The innovations that went wrong are in investment banking, the rest of banking is still innovating and competing in a very robust way, and are nowhere near as impacted as investment banking.”

All in all, a good chat.

Then you leave the conference hall to find more shocking news.

Everyone’s now agog with the news that Lloyds TSB may be merging with HBOS, after the HBOS share price tanked yesterday.

I wonder what it would be called.

Lloyds of Scotland Trustees Bank or the LOST Bank for short?

Fiddling whilst Rome burns

Waking up on day three of SIBOS, I feel a little more positive than I did yesterday. 

After all, it's not raining, just cloudy, and the bus to the convention centre was a short 20 minute ride, unlike yesterday's 45 minute jam.

Last night was strange though. 

After a nice dinner, I went to a nightclub for a short while and then a final snifter back at the hotel with good friends.  During the course of the day and evening however, I could not help get this feeling of a cloud overhead.  Not a cloud in the sky, but a big, black cloud over SIBOS.

The reaon being that here we all are, trying to do good business in our transactions and payments world, whilst the banking system burns around us.

A little like the image of  the Emperor Nero playing the violin whilst Rome burnt around him, I wondered whether the bank executives here were feeling the same way.

This feeling obviously was generated by the implosion of US banking this week, but also the news of HBOS and other banks being targeted by short sellers in the equities markets. 

There may have been 8,000 people here on Monday, but that number seemed a little less yesterday as key executives fled back to their home offices to sort out the issues with their stakeholders, and the knock-on effect of this crisis. 

You also have the sight of some bank brands that have a presence here at SIBOS, but you wonder about them and their long-term viability.  No names mentioned.

And then there's  the opening plenary vignettes in the conference, which is all about the crisis with the phrase "it's payback time" ringing in our ears.

Many of the sessions themselves are about "what happened?", "how did we get here?", "what have we learnt?" and "what are we going to do?"

But I'm not a pessimist.  This market is resilient and there are many strong players out there.  For example, the Wall Street Journal ran an article yesterday pointing to the winners in this crisis, including Bank of America, Wells Fargo, Deutsche Bank and more.  That's why Wells Fargo's share price was bouncing upwards whilst many others tanked yesterday.

That's the nature of a crisis.  For some, it means death; for others, it means success.

There are banks buying cheap assets and competitors, and there will be many more.

This morning, for example, I had a chat with a colleague from an American bank who said: "we're just watching the share prices of A, B and C.  When they're cheap enough, we'll buy 'em".

So maybe that's a good reason for SIBOS to be a party this year. 

A party of rememberance for lost colleagues and friends, and a party of celebration for those who have the capital to survive and prosper.

Meantime, I'm off to join a string quartet with some guys from the securities markets.

Forensically evolving regulations

Apart from lots more networking, I attended three more sessions in this final half of the day.

One had to be Matteo Rizzi’s discussion of SWIFTcommunity.net of course. Matteo runs this community for SWIFT and was discussing progress one year on since the launch at SIBOS Boston last year. Apparently, the SWIFT site has around 125 communities running now, with the most popular being those that discuss SWIFT’s new services and products, those that talk about bank to corporate connectivity and those that allow techie geeks to share codes and thoughts with each other.

Now what would a techie geek share on a social networking site?

“Hey babe, I got this cool new wiki I’d like to plug and play with you”, or something like that I guess.

Then it was into another chat between Vocalink, First Data, Commerzbank, ANZ and the Clearing House about “do banks really need ACHs?”

As the chairman said, “I wonder if we should use the term ACHs in the plural or singular?”

Mind you, we’ve been through that debate in the SEPA area once already, and the EPC after four years realised that there would be more than one. So yes, a G-ACH (Global ACH) or PE-ACH (Pan-European ACH) is a fallacy – there will always be competition in this space.

What was more interesting was the question: are payments instruments converging? Are high and low value payments capable of being processed through the same clearing house? Could you process cards, m-payments, credits, debits, high and low value all through the same pipe?

The answer to that one has to be yes.

So why is that not happening.

I guess John Chaplin of First Data gave the best answer with the view that logically card processing firms should be the converged clearing operation, as they understand real-time payments and how to integrate clearing, authorisation, identification and verification all in real-time at the point of payment.

But the card firms cannot process each other’s card payments today, let alone stretching to other payments instruments, so they will not spread into a converged payments processing system.

Meanwhile, the current ACHs do not have the real-time competencies or capabilities, investment fund or cross-border and global ambitions, to try to compete with the card systems real-time services.

That’s why there is not a real-time payments processor today … unless you take Marion King’s point, from Vocalink, that due to the UK’s Faster Payment Program, Vocalink do now offer real-time payments processing for mobile, credit, debit and any other low-value payment you want to consider.

Nice one Marion … the challenge is now to build scale to take that regionally and then globally.

It was then on to another debate: “was the credit crisis predictable or a black swan”?

What surprised me with this one is that everyone asked me to tell them what a black swan was.

Surely, it’s obvious?

A black swan is just a white one with black feathers.

Nah, to be serious I was referring to Nassim Taleb’s book “The Black Swan” which, in light of the events of this year, says that no-one predicts that there will be a Black Swan until they see one. Then everyone rationalises that a Black Swan was obvious and clear.

20/20 hindsight is a wonderful thing.

My own view again is that the credit crisis was darned obvious, and folks were telling me about systemic risk in the markets back in 2004 – 2005. They saw the leveraged scale of operations of single stream investment banks and wondered whether they had hedged their risks effectively. They wondered whether the globally connected technologies of investment firms with highly complex derivatives products could be tracked effectively. And they wondered whether the counterparty risks involved would implode, just as Long Term Capital Management, Salamons and others had almost imploded the markets in the past.

But these naysayers were ignored or trampled upon as being doom merchants.

Times were good, profits were great and no-one wanted a whinging warbler saying, “you don’t wanna do that” over their shoulders.

Strangely enough, this is no different to any issues of boom and bust in financial markets in the past. The pro-cyclicality as it’s called.

Nothing has changed … but it will.

My own expectation is that “forensic regulation” will emerge.

Forensic regulation will pick over the bones of the carnage of this crisis and identify the key factors that contributed to such a scale of devastation, from risk models and rating agencies that failed, to corporate governance and counterparty dealings that were too opaque.

The result will not be new legislation or regulation, but evolutionary regulation.

The panel called this Basel Three, but I would rather call it Basel 2.1.

After all, in a world of Web 2.0 communities, we should be evolving regulations to plug the holes, not creating a whole new regime that means we throw out the investments made in our very recent implementations of Basel II, MiFID, the CRD and more.

Forensically evolving regulatory and supervisory structures.

That’s what we need.

Meanwhile, I think I could do with some supervisory structures for our activities this evening as I’ve seen so many examples of embarrassing late night activities at previous shows, that a little restraint will do no-one any harm.

Something that the future investment banking world should bear in mind.

Europe, PayPal and SWIFT

Running around the conference and exhibition hall madly today and it's no wonder that SIBOS already feels like a week, even though it's only been a day.  A hard day's night as they say.

After meeting a few folks, chatting and networking, I dropped into the "CSDs and Custodians - Adapt or Die" session.  This is because I'm writing a huge report on this subject right now, and watned to hear what was being said.

One of the panellists made a comment that investors invest locally and not across borders, and so the big changes of the Code of Conduct, T2S and the LinkedUp Markets project was a huge expense that would drive up costs and limit choices for domestic investors.

I didn't like that comment and so asked the question, "don't you think that this is the reason why the Commission wants to implement change, so that investors start investing in a pan-European structure easily, rather than being limited to domestic choices".

The panellist, David Penrose from Unicredit, came back with the fact that behaviours will have to change first and used Austria as the example.   Austrian investors are a small pool of liquidity, less than 20 percent of the population, and they invest in Austrian companies through the Austrian exchange.  Czech consumers invest in European stocks, he counter-acted, because their choice local equity options are limited.

Therefore, the pan-European investor is far more likely to be Czech than Austrian.

For the short-term he may be right, but the point of the changes being implemented in Europe right now is to get everything to be borderless in the Eurozone ... so before you know it, Austrians might even be investing in German companies!

The debate moved on, but the best part was Dominic Hobson's voting system. 

Dominic, the Editor of Global Custodian and someone who proved to be quite a wit, used this hi-tech voting system of a green card for yes and a red card for no.

"Is T2S good for CSDs?" he asked.  The majority of the audience said no.

"Is T2S good for Custodian Banks".  Yes (big majority).

"Is the LinkedUp Markets project just a mess of spaghetti?"  This divided the audience, with most saying it's more like lasagne, as in it is structured access rather than hard-wired access.

"Is the Code of Conduct overtaken by T2S and LinkedUp Markets, e.g. it is no longer needed?"  No.

After this healthy debate, and there was a lot more to it, I had lunch with PayPal.

Many of you know that I like PayPal, especially as I buy lots of stuff on eBay.

And everytime I talk to PayPal at SIBOS, the question comes up: "could PayPal be a SWIFT for low value payments" or "could SWIFT be a PayPal for low value payments".

I think I finally answered this question today, as PayPal is more like the telecoms model of transactions, whereas SWIFT is more like the telecoms network.

What I mean by this is that if I'm BT or AT&T, I don't care who is on my network as long as they drive up volume and minutes on the network.  Therefore, the fact that PayPal partner with many of the largest Global Transaction Services business globally is great.  For these bank partners, they drive up huge volumes of transactions on the network, and this is great business.  However, SWIFT do not do this.

SWIFT create services for and upon the network.   Therefore, SWIFT's aim is much more to make the network more functional for the operators, rather than focusing on volume on the network ... although the more volume on the network, the better it is for pricing and rebates of course.  But the pricing and rebates is a result of the users of the network offering that functionality to their clients, such as PayPal.

Makes sense to me.

Now I'm off to see some more exhibitors, and gear up for the short stretch between lunch and the cocktail hour.

Champagne anybody?

Sovereign Wealth Funds, Gucci and Prada

It's morning on the second day of SIBOS 2008, and I'm thinking it's horrible.

That's a good start to the day, but it's horrible weather.  Non-stop rain and only 10 degrees C.  In fact, it was horrible yesterday and the day before.

Actually, the whole summer has been pretty horrendous.

London has had nothing but clouds and clouds and clouds.  No Sunshine since about June.

Maybe it's the credit crisis.

And just as I left London on Sunday to come to Vienna, the clouds broke.  It was sunny.

Then we get to Vienna and it's not just cloudy.  It's raining.  A lot.

Ah well, I guess that with the news of Lehmans, Merrill and BoA, along with 8,000 bankers being here in Vienna, who would expect sunshine.

The good news is that opera was fantazerooney.  I'm not a big opera buff, but this was amazing with the lead soprano, Nina Stemme, absolutely in phenomenal form.

So much so, that I got a lump in my throat once or twice ... or maybe that was the crisps I was eating.  In fact, I couldn't work out why the guy next to me kept frowning at me.  I can only think it was due to the trainers and anorak I was wearing.

But then it was raining.

Anyways, up bright and early and back to the conference hall.

After looking up the emails, and finding some nice comments on the risk aspects of my comments yesterday and last week.  This is that the risk models in banking are broken and do not work.  In fact, Bill Rhodes, Chairman of Citibank, said yesterday that the whole leveraged model of investment banking was broken, and he should know. 

Anyways, the risk models in banking are broken, and yet we now want to place the guys responsible for this, the Risk Management leadership, on the Board.  That makes sense to me.

Ah well, c'est la vie.

Meantime, I came back into the conference plenary to hear a session about the move from West to East.  Esteemed panellists from Dubai, Singapore, India, Russia and Germany are all debating where and who will be the next dominant power.  After all, the last one, America, is economic deadmeat, according to this panel.

The dialogue was wide and varied, but my favourite comment was from Keng Yong Ong from the Singapore Ministry of Foreign Affairs.  In response to the question, "should we be afraid of Sovereign Wealth Funds (SWFs)?" he said, "No. Not at all.  SWFs are just like you and me. You go out shopping locally and you buy the things available in your local market.  After a while, you run out of nice things to buy, so then you look overseas.  And when you look overseas, you don't buy any old stuff, but the best branded goods.  That's all SWFs are doing.  Buying some nice branded businesses."

Or words to that effect. 

An aria to e-invoicing

The last bit of my day today was chairing a discussion on e-invoicing. This is a regular debating slot I host on the IBM booth each year, and it’s now in its third year. This afternoon’s debate included Charles Bryant, former Chairman of the EPC and now working on e-invoicing with the EBA, and Bo Harald who chairs the European Commission’s e-invoicing working group.

It shocks me that e-invoicing has now been on my radar since 2004 and yet it’s not much further on. With bank margins being slashed thanks to SEPA and other competitive forces, you would think the value-adding services to corporates, such as e-invoicing, would be way up there on top of the agenda.

And yet, I don’t see it.

I see a few banks doing stuff and, as Bo said, six of the EU nations mandating that e-invoices must be used but, apart from a few isolated examples, it is still small beans with 95% of EU invoices being processed on paper.

With 24 million small businesses in the EU, and the cost of invoicing being around €50 to process for an average paper invoice, this is ludicrous. But who am I to judge?

What was interesting for me is that out of this debate a new angle appeared. The audit angle.

If EU banks and corporates are serious about compliance, the fact that the electronic trail of an invoice from origination through delivery to processing will be a critical reason for change. After all, if you can track the e-invoice and its associated Purchase Orders, Delivery Documentation and Remittances, you now have a perfect e-trail for the audit and tax office. Compare that with the bits of lost and dog-eared papers that most firms produce today and you can see why, in about five years, everyone anticipates half of all invoicing will be processed electronically.

After that debate I was immediately out of the conference anyway, as I was serious. I’m off to the opera house to see Verdi’s La forza del destino with Nina Stemme, Carlos Alvarez, Marcello Giordani and Ain Anger.

Why?

Because Vienna hosts one of the best opera houses in Europe and, with parties and dinners all week, I thought I’d be a good boy tonight.

Tomorrow?

That’s another day!