The Financial Services Club's Blog

Why are we so worried about bonuses?

I got caught up in a debate about pay and remuneration in finance this week.

This is because Stephen Hester at RBS had his package hiked to £9.6 million if he delivers all of his targets – of which the main target appears to be achieving a 70 pence share price as that will make UK plc a profit of about £8 billion – whilst Citibank and others are increasing basic remuneration and lowering bonuses to keep staff.

Now I find it interesting that folks believe pay caps, bonus cuts and other changes – such as shareholders setting executive packages – is a viable, appropriate or good thing to do.

You see there are several issues here.

First, it is not the amount of pay we give to our leaders in financial services, or any other industry, it is the measures by which we reward them.

What you measure is what you get, as they say. And what you measure and reward first, is what you get first. And what you measure first and reward the most, is what you get delivered.

This is why financial services failed – because we measured and rewarded short-term profit without balance of the long-term risks being taken to get that profit.

It is equally why we will continue to get this wrong.

For example, many of us lament the fact that quarterly results and shareholder returns drives inappropriate management behaviours, and yet that is exactly how we are incentivising and focusing Mr. Hester at RBS.

This creates the issue where management almost soley focus upon delivering short-term results, with no thought for the long-term.

The idea of growing new business arenas, entering new markets, spending more on R&D, developing intellectual capital and so on and so forth, goes by the by … or bye-bye to be honest.

Who wants to invest in the future when your only measure is the next quarter’s profit and the share price?

Second, if bankers can earn double in the bank next door, why are they gonna stay in this crummy place? We all talk about the fact that bankers can’t find homes in other banks as they’re all failing right now, but that’s not true. Just look at what happened to UBS last week:

June 25 (Bloomberg) -- UBS AG sued Jefferies Group Inc., saying a “massive, premeditated raid” cost the Swiss bank at least 36 health-care investment bankers including unit chief Benjamin Lorello.

The departures, from June 17 to 21, amount to the “nearly complete lift-out” of the UBS health-care division, which ranked among the top three in the world and had $1 billion in revenue since 2005, UBS said in a June 22 petition in New York Supreme Court. UBS won a temporary court order this week barring Jefferies from recruiting employees from the group who have not already agreed to join.

Or the activities of firms such as Barclays Capital:

BarCap, which bought the Wall Street operations of the collapsed investment bank Lehman last year, is hiring in Europe and the Middle East. In the past six months it has picked up 460 people and plans to lure another 300 before the year is out. Last week it snapped up three highly regarded banks analysts from Citigroup, the biggest financial firm in the world until the credit crunch struck and left it needing to be bailed out by the US authorities. BarCap also plucked leading bankers Matthew Ponsonby from Citigroup and Mark Warham from Morgan Stanley last week to the new positions of co-head of mergers and acquisitions.

It’s a dog-eat-dog world, and if you can’t cut it then get out.

Third, the markets set their own value, just as other markets such as football do. It’s all based upon individual talent, and you have to pay to get the best talent. We didn’t hear anyone whining about Ronaldo’s £80 million move to Real Madrid or his £200,000 a week demands.

Because we can see he is worth it.

On a football field, the guy who scores the most goals deserves the highest wage. And so isn’t it true in the financial world that the guys who create the most value deserve the highest incentives and bonuses?

Finally, a healthy bank is one that is crushing unhealthy banks, as proven above. Therefore, healthy banks are only created by having healthy income from healthy investment managers who run healthy portfolios.

It’s this last point which went wrong, and it relates back to where I started.

What you measure is what you get, and what you measure and reward the most is what you get first.

Stephen Hester is being measured and rewarded on share price, and so that’s where he’ll focus. But then I immediately said that a pure share price focus is not good as it creates short-termism, and so I could challenge whether this is the right package for him.

Equally, if your investment teams can be lifted and dropped into another firm as a complete team, then you have to work out who you want to keep and why.

If UBS wanted to keep the healthcare team, then they should have recognised that:

(a) they were a healthy team, 
(b) they were being measured and rewarded based upon value creation and risk avoidance, and 
(c) they would have been rewarded based upon value creation and risk avoidance better than any package held out to them by Jefferies Group or anyone else.

And there’s the rub really.

To have a strong banking system, there has to be accountability and a tie between risk and reward.

Seems obvious now.

This means that the best banks will relate risk in the long-term to the rewards they provide in the short-term; and they will also build-in clawback terms to any bonuses paid such that if those bonuses blow-up as high profile risk and losses in the future, they get the cash back.

Meantime, the whingers who don’t like the City having big bonus bankers back in town are just jealous … I suggest they go and find a talent themselves that can pay somewhere else.

Ever tried kicking a football?

More on the arguments for and against bonuses:

City watchdog (FSA) pays £20m in bonuses (Guardian)
Tough targets set for Hester’s package (Financial Times)
Citigroup revamps pay structure (Financial Times)

Bankers deserve their bonuses (The Finanser)
Bankers deserve bonuses? You're an idiot! (The Finanser)

  

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Things worth reading: 30th June 2009

Things worth reading today include ...

Today's must read:
How the ECB’s fig leaf has completely withered away

Anatole Kaletsky in the Times provides a fascinating analysis of the ECB's policies in Europe compared to the Federal Reserve in the USA.

"Unlike the Fed and the Bank of England, which only accept AAA public bonds as collateral for their lending operations, the ECB now lends against low-rated mortgage bonds, commercial loan books and other dubious assets that the markets would treat as 'toxic' were it not for the ECB’s willingness to turn them into instant cash."

UK:

Party political battles threatening financial system, say economists (Telegraph)
Who will end this financial insanity?  (Independent)
Mandelson tells Bank of England to share powers (Independent)
Mandelson says banks may shun reform as economy starts to recover  (Times)
Lloyds upgrade lifts FTSE (Times)
Bankers still trapped in bonus backlash (Independent)

USA:

Madoff given maximum sentence - 150 years in jail  (Times)
In a Crisis, Rethinking Fiscal Federalism  (New York Times)

Asia:

China: up to the (economic) challenge? (South China Morning Post)
China's banks are an accident waiting to happen to every one of us  (Telegraph)

Quote of the Day:

"Interest rates are just like hemlines (they’re always changing — up or down) ... the sharemarket is a little bit of a tragic fashionista [you know those girls who take all the pages of the fashion mags just a little bit too seriously] ... property is the little black dress of the economy [a timeless fashion classic]."

Excerpts from a new book called "Flirting With Finance: The Modern Woman’s Guide To Financial Freedom", reviewed by Sathnam Sanghera in the Times

  

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Play on my Piano

Our esteemed but eccentric Mayor of London, Boris Johnston, recently had the bright idea of placing pianos around London to cheer up all of us credit-crunched citizens.

I first encountered one outside the Gherkin last week.

Here it is:

It's a bit of a shame about where they've placed it, as no-one seems to want to play it ... until this chap popped along:



So far, so good.

Only thing is, he belted out a few tunes but no-one wanted to sing with him:



Must be being in the City as we're all known to be miserable, sour-faced scrooges in this part of the world ...

... as confirmed by Kieron Quirke in the Evening Standard:

Around one o'clock, I rocked up at the piano placed slap bang in the middle of St Mary-le-Bow churchyard. My potential choir were bank workers grabbing lunch and looking like they had things on their minds.

No one seemed to have been drinking - that would have helped. Trepidatiously, I opened the piano and dived into Rocket Man. I started too high. I also forgot the verse - plus my singing voice isn't very nice. But by the second chorus I was in my stride. Casting an inclusive glaze around the square I issued my rallying cry: "Sing along now!" The silence was so debilitating I forgot the next chord.

I had to make it clear that this was a group activity. So I fell to asking passers-by if they wanted to sing - offering the books chained to the piano. Sasha from the Anglo Irish bank was my first volunteer - she picked Hey Jude.

This would get the onlookers singing. No one resists joining in Hey Jude. They resisted, though Sasha gave a fine performance. We even sang the na-na-na-na bit seven or eight times, so it wasn't that they didn't know the words.

They resisted Raindrops Keep Falling On My Head and Dancing Queen too. Nicola and Sayeda were among the few to join in. The problem wasn't us, it was them. In a minor huff, I moved to the piano by the Millennium Bridge. There, a Californian called Krista Johnson agreed to sing Bridge Over Troubled Water (the songbooks are themed). We belted through - switching octaves when it became clear neither of us was Art Garfunkel. It was ragged, but it was loud, and a crowd gathered. I knew what to play now.

I don't know how many people were singing Hey Jude behind me but from the noise I would guess 3,000. Joy filled the air. I had done it. I had taken on the London masses and broken down their apathy. "Awesome! Fantaschtick!" the choir cried, and stamped their boatshoes. Still, I reckon there must have been some Londoners there somewhere.

Cracking ATMs the malware way

I get a lot of email feeds and news from financial websites, but often spot real banking news in more unlikely places ... like New Scientist magazine.

On the front cover of last week's mag was a story about Gaia's evil twin.  

I thought that was going to be about the social networking world of Gaia Online, but it was actually an interesting article about how Earth really works and that Mother Earth is nothing like the Greek Goddess Gaia, who nurtures.  Instead it's more like the murderous wife of Jason of the Argonauts, Medea, who killed her own children.

Nice.

Anyways, flicking through the pages, the tech section was headlined by a story called: 

"Want to clone bank cards?  Just press print!" 

This relates the following news:

"A devious piece of criminal coding has been quietly at work in a clutch of cash machines at banks in Russia and Ukraine. It allows a gang member to walk up to an ATM, insert a "trigger" card, and use the machine's receipt printer to produce a list of all the debit card numbers used that day, including their start and expiry dates - and their PINs. Everything needed, in fact, to clone those cards and start emptying bank accounts."

Not so nice.

Apparently the shysters intall a 50kb malware on ATMs as part of a legitimate Windows program called 1sass.exe.  This program looks OK to techies and would normally go overlooked because it is part of a normal Windows system that drive most modern ATMs, except that it has no useful function on an ATM as all it is used for is to cache session data so that users don't have to re-enter passwords every time they get a new email or enter a website.

And that's the scheme in a nutshell.

Install the malware and then 1sass.exe collects all the card data and spews it out on demand.

Result: criminals walk along to any ATM, enter the magic code and get an ATM receipt with all the card numbers and PINs.

No wonder the European ATM Security Team (EAST) reckon that ATM fraud is now running at €484 million a year across Europe:

That's just ATM fraud, not card fraud.  

Here's the Spiderlabs full briefing presentation: 

Download Trustwave-Security-Alert-ATM-Malware-Analysis-Briefing

Now then, which ATM shall I try out first?

  

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Things worth reading: 29th June 2009

Things we're reading today include ...

Today's must read:

PollyTrade Lets You Trade Stocks Via Twitter (Techcrunch)

PollyTrade links "your Twitter account to your E*Trade account (more brokers will be added in the future based on user feedback), and subsequently enable you to do transactions using tweets that start with @pollytrade and include the respective ticker. For instance, if you’d want to buy 200 shares of Apple, you would tweet ‘@pollytrade buy 200 shares AAPL’ and likewise for selling e.g. 100 shares of General Electric (’@pollytrade sell 200 shares GE).  After communicating with E*Trade, which should only take a few seconds, PollyTrade tweets back your order status along with your brokerage order number. In case something went wrong - because of incorrect formatting or a refusal from your broker - you’ll receive an error message instead so you know the order didn’t go through. It’s that simple."

UK:

Northern Rock plan to split raises concern in Brussels (Financial Times)
Davies turns down top job at Lloyds (Independent)
Darling thwarts King's bid to take wider powers (Guardian)
Bank reforms considered by Conservatives (BBC)

USA:

U.S. Treasury aims for fast sale of bank warrants (Reuters)
Ben Bernanke: Federal Reserve audit would constitute “takeover” by Congress, threaten the “financial system, dollar and economy” (Ron Paul)
Sex feels the credit squeeze in Nevada (Guardian)

Hedge Funds:

It's a stretch to blame hedge funds for banks' collapse (Financial Times)
Global Hedge Fund Assets Will Reach $2.6 Trillion by 2013 (Bank of New York Mellon)

General:

Confused about the state of the banking crisis? (WBT Radio)
The big bonus is back (Times)

 

Quote of the Day:
"The glow is coming off Las Vegas as a kind of sexual Disneyland." Melissa Farley, Women's Rights Activist

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The Finanser's Week: 22nd June - 28th June 2009

Here are our key stories of the week:

• The Top 10 Investment Banks of 2009
  
• The Top Ten of Everything
• SUN, IBM, SWIFT and more create a cloud crowd
• How accountable are the rating agencies for this mess?
• How to break trust with social media
• SmartyPig makes a Big Oink!
• Amazing survey result
• Desperate hedge wives
• Michael Jackson blows Google, Twitter and Facebook apart
• Impossible is nothing

The Top 10 Investment Banks of 2009

And yet another Top 10 list is released today.  This time it's the Financial Times analysis of the leading investment banks of the world ...

The Top Ten of Everything

One of the most popular pages on the Finanser is the Top 10 Banks of 2009 list, so I thought I would add to it with the Top Ten of Everything!  This is a wee website that has things like the "Top Ten Finance Apps for your iPhone" to the "Top Ten Ways Tim Geithner Will Fire Bank CEO's" ...

SUN, IBM, SWIFT and more create a cloud crowd

I was asked twice yesterday about cloud computing. Firstly by a friend who wanted to know how it related to payments; and then by another mate in the investment world.  The latter was inspired by a new report from IBM and SIFMA that states that cloud computing is ready for prime time: "the number of respondents predicting that cloud computing would force significant business change more than doubled (from 21% in 2008 to 46% in 2009), making it the top disruptive technology, ahead of even operational risk modeling and mobile technologies."

How accountable are the rating agencies for this mess?

We all talk about how the rating agencies were, in part, responsible for creating the mess of credit and credit instruments that caused this crisis. After all, they are meant to be rating credit aren't they?  But I didn't realise exactly how bad a job these guys had done until I saw this quote ...

How to break trust with social media

I'm going to post a bunch of stuff about our recent meeting discussing how banks could use social networks and social media soon, but then saw that Karl Flinders, a guest of the Club, beat me to it.  Writing for Computer Weekly, Karl posted a nice little note entitled: "The truth about banks, Facebook and Twitter".

SmartyPig makes a Big Oink!

SmartyPig is a social saving service designed for social networks.  Now, they're going from strength-to-strength with core deposits for West Bank, SmartyPig's banking partner, rising from about $10 million in February to more than $100 million now.  Deposits should top $500 million by the end of the year.

Amazing survey result

I just completed a brief online survey about the financial crisis. The question was: "What do you believe to be the most challenging factor facing (the financial) industry over the next five years?"  Here's the current result:

• 30% ... winning back the public trust, after losing billions in people's savings
• 27% ... staying ahead in the technology curve to innovate and improve efficiency and customer experience ...

Desperate hedge wives

A year ago, I wrote: “Boy, how the markets have changed in a year. We now see investment bankers facing hard times and selling second homes or pawning their Aston Martins and Rolex watches, as their wives divorce them before poverty strikes. We see hedge fund managers faking suicide leaps of terror in order to evade jail.”  A year later, we have a follow-on with wives who are stuck with their less than now successful husbands. 

Michael Jackson blows Google, Twitter and Facebook apart

The shock death of Michael Jackson last night created a raft of news stories about how it has impacted the world of global connections via the internet.  From the crash of Google, to the explosion of Facebook and Tweets about him, to the proof that we can't even spell his name, to amazing tributes (and jokes) ... Michael Jackson is the biggest news to crash the web so far.

Impossible is nothing

Back in September 2007, Ben Saunders opened our season of Financial Services Club meetings with a presentation entitled: "Achieving the Impossible".  To inspire us once more, Ben is coming back to show us how impossible is nothing.  Find out all about his latest exploits and plans on 7th July.

And the biggest news stories of the week include:

Rift between Darling and King widens (Guardian)
Bernanke gets rough ride over BoA 'threats' (Independent)
Bank of England's Financial Stability Report
ECB lends record €442bn in first loan offer to boost credit flows (Telegraph)
Critics round on Citi pay rises (Financial Times)
OECD: World economy will grow next year - but not Britain (Guardian)
RBS topped the losses list while Chinese banks raked in profits (Guardian)

For stories by date, click on the dates below:

• 27th June 2009
  
• 26th June 2009
• 25th June 2009
• 23rd - 24th June 2009
• 22nd June 2009

  

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A year ago, I wrote: “Boy, how the markets have changed in a year. We now see investment bankers facing hard times and selling second homes or pawning their Aston Martins and Rolex watches, as their wives divorce them before poverty strikes. We see hedge fund managers faking suicide leaps of terror in order to evade jail.”  A year later, we have a follow-on with wives who are stuck with their less than now successful husbands. 

Things worth reading: 27th June 2009

Things we're reading today include ...

Companies:

LSE takes tough new approach to technology (Financial Times)
JPMorgan's investment banking gaining on Goldman (Reuters)
Citi faces retail sales ban in Japan (Financial Times)

Regions:

Spain launches $12.7bn bank fund (BBC)
Poland's euro adoption faces delay (Euractiv)
China argues to replace US dollar (BBC)
Five Banks Are Seized, Raising U.S. Failures This Year to 45 (Bloomberg)

Economies:

Fading political will has let banks off the hook (Financial Times)
Some aspects of economic and financial crisis, speech by Charlie McCreevy, European Commissioner for Internal Market and Services
Financial Rules: Why a Global Fix Is So Far Off (Business Week)
Inflation – the real threat to sustained recovery (Financial Times)

General:

One-fifth off for Buffett lunch (BBC)
Cool Currency: 12 Beautiful Bills (Woman's Day)
Outpouring of searches for the late Michael Jackson (Google Blog)

Quote of the Day:
"People who weren't near a computer yesterday turned to their mobile phones to check on breaking news. We saw one of the largest mobile search spikes we've ever seen, with 5 of the top 20 searches about the Moonwalker." Google Blog, June 26th 2009

  

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Michael Jackson blows Google, Twitter and Facebook apart

The shock death of Michael Jackson last night created a raft of news stories about how it has impacted the world of global connections via the internet.

From the crash of Google, to the explosion of Facebook and Tweets about him, to the proof that we can't even spell his name, to amazing tributes (and jokes) ... Michael Jackson is the biggest news to crash the web so far.

This has nothing to do with banking today, obviously, although I'm sure there will be stories which will talk about how his financial troubles brought on his heart attack.  For example, the BBC reports that he was known to be spending over $20 million a year more than he earned and, in 2005, was called a 'spendaholic' with a "billionaire spending habit for only a millionaire's spending budget".

Equally, the cancellation of his London extended concert range is rumoured to have cost the organisers around £300 million.

But he'll be best remembered for Thriller, Billie Jean and his other milestone songs and dances.

Rock in Peace.

If you like that btw, the inmates of the Cebu Provincial Detention and Rehabilitation Center, Cebu, Philippines, made this special 10 minute tribute to Michael:

  

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The Top 10 Banks of 2009

And yet another Top 10 list is released today.  This time it's the Financial Times analysis of the leading investment banks of the world (doubleclick image to see the list properly):

This is hot on the heels of the Banker's release of the leading banks of the world, with the most profitable banks being:

ICBC (+$21.3bn)
China Construction (+$17.5bn)
Santander (+$15.8bn)
Bank of China (+$12.6bn)
Banco Bilbao (+$9.64bn)
HSBC (+$9.31bn)
Barclays (+$8.86bn)

and the banks with the biggest losses being:

RBS (–$59.3bn)
Citigroup (–$53.1bn)
Wells Fargo (–$47.8bn)
Fortis Bank (–$28.3bn)
UBS (–$19.6bn)
HBOS (–$15.8bn)

and adds to the Forbes list from April:

Global                                                          Sales      Profits  Assets      Market
Rank     Name          Country      Sector          ($bn)       ($bn)    ($bn)   Valn ($bn)

More to come I'm sure ...

... meanwhile, the UN's Millennium Campaign report, which also came out this week, states that the amount of money found to bail out financial institutions over the past six months is 133 times greater than the amount of aid given to poor countries over the past 49 years.

Point taken.

Things worth reading: 26th June 2009

Things we're reading today include ...

UK Regulators and Policymakers at War:

King and I in 'joint effort' to produce white paper, says Darling (Guardian)
Rift between Darling and King widens (Guardian)
Financial White Paper won't end tensions at the heart of British policymaking (Telegraph)
Bank defies the Treasury again as it seeks new powers (Independent)
Alistair Darling set to boost FSA’s powers with new Banking Act (Times)

US Regulators and Policymakers at Odds:

Bernanke gets rough ride over BoA 'threats' (Independent)
Behind the Scenes, Fed Chief Advocates Bigger Role (New York Times)

Banking still in crisis:

Bank of England's Financial Stability Report
Bank says banking crisis easing (BBC)
British banks highly vulnerable to future shocks, Bank of England warns (Telegraph)
Spanish banks to get €90 billion bailout (Times)
Moody's negative on S.African banks outlook (Reuters)
Irish economy is the sickest of them all, IMF study claims (Telegraph)
Tax banks that grow too big, says FSA chief (Daily Mail)

Companies:

UBS unveils £2bn capital raising and warns of second-quarter loss (Times)
Standard Chartered 'in good shape' to beat forecasts despite downturn (Telegraph)
The banker with God on his side (Times)

General:

EMU – Weathering the perfect storm, speech by Jürgen Stark, Member of the Executive Board of the ECB
Return of the gravy train – did the crash really change the City at all? (Guardian)
One in five ID fraud victims 'not reimbursed' (Telegraph)
Google crashes as world searches for Michael Jackson death news (Metro)

Quote of the Day:
“There was a culture, there was a climate that developed where it’s as if you would say to yourself, ‘If there’s a contract, if it’s legal, if there’s a market, then I’ll do the deal, I don’t have to ask any questions, I don’t have to ask whether it’s right or suitable’. And I do think that we need to get back to that sense of what’s right and suitable and not merely, here’s something that’s a profitable transaction.”
Stephen Green, Chairman, HSBC

  

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SmartyPig makes a Big Oink!

As most of you know, I'm always on the scout for new stuff in banking and SmartyPig is one of my favourite stories.

A social saving service designed for social networks, they're a great little outfit and spoke at the Financial Services Club's American Retail Banker's forum I arranged last November.

Now, they're going from strength-to-strength with core deposits for West Bank, SmartyPig's banking partner, rising from about $10 million in February to more than $100 million now.  Deposits should top $500 million by the end of the year, according to SmartyPig's co-founder Jon Gaskell.

Then, in the latest twist, SmartyPig have a billionaire benefactor in the form of Texan B. J. 'Red' McCoombs.

Why has Mr. McCoombs come on board?

Because "the technology that they have developed, and it's already proved itself, could handle 5,000 accounts or it could handle 5 million accounts", says Mr. McCoombs.  "In essence, you can pay the customer more for the deposits because it doesn't cost you as much to process and manage them." 

He goes on to emphasise that "they have produced the technology that is driving an opportunity the likes of which we seldom see."

As I wrote back in December:

"SmartyPig takes the social lending model and applies it to savings.

"The way it works is that you setup an account and create a savings goal, such as saving for a car or a college education or to pay off a mortgage.  As you save towards your goals, you tell the world by placing the SmartyPig widget on your social network page, blog or website.  Lo and behold, all your friends and family can contribute towards your savings goals.

"This is very friendly and very family oriented.

"As a result, SmartyPig had customers in all 50 states within three months of launch in the USA are now partnering with other banks, such as ANZ, to launch a white labelled service in Australia."

SmartyPig are based in Des Moines, Iowa, USA, with just 15 employees and describe themselves as "an online savings tool that works with a bank to allow account holders to make their savings goals public."

Watch out traditionalists.  The march of social finance move up a gear.

Postnote: has anyone noticed SmartyPig's Twitter contest?  Smart!

SUN, IBM, SWIFT and more create a cloud crowd

I was asked twice yesterday about cloud computing. Firstly by a friend who wanted to know how it related to payments; and then by another mate in the investment world.

The latter was inspired by a new report from IBM and SIFMA that states that cloud computing is ready for prime time:

A survey of over 350 Wall Street Information Technology (IT) professionals has revealed a significant increase in the level of interest in new technologies and computing models, in particular cloud computing, as firms seek to overcome budgetary restrictions and skills shortages.

While there was little change from last year in the perceived impact of all other technologies, the number of respondents predicting that cloud computing would force significant business change more than doubled (from 21% in 2008 to 46% in 2009), making it the top disruptive technology, ahead of even operational risk modeling and mobile technologies, according to the survey's results.

Wall Street and Technology, June 24th 2009

What is cloud computing?

According to McKinsey, they define it as "hardware-based services offering compute, network and storage capacity where: hardware management is highly abstracted from the buyer; buyers incur infrastructure costs as variable OPEX; and infrastructure capacity is highly elastic (up or down)."

Presentation: "Clearing the Air on Cloud Computing" by Will Forest, McKinsey and Company, March 2009

Others call it Software as a Service (SaaS) - see my version of that one - or on-demand computing power.

In a nutshell, it just means you can get extra processing power as you need it, to manage the peaks and troughs of your business needs.

So, why the sudden interest in cloud computing?

Well, it's not that sudden to be honest.  It's been a long time coming in fact, and has been discussed often before.

Its time has come however, because the strains and stresses on data centres of City firms means that most are full to bursting.

In investment markets, the firms started to find that the only way to respond to users’ needs – bearing in mind that these users are the most aggressive, macho, alpha males you could possibly meet – was to just sign open cheques to IT firms to sort out their mess.

That might sound extreme, but here’s two examples.

Example 1: Conversion to Euro Processing

It was in the summer of 1998.

A large London-based City bank performs testing of their Euro processing application alongside existing cross-border currency systems on their IBM AS/400 systems.

Systems took anything up to 12 hours to process volume trades in the new multicurrency environment, and were often tied up in batch processes until 10:30 or later in the morning based upon simulated volume throughput.

Problem?

If they went live with such systems, then they were dead meat as no trading could take place until after 11:00 each day, and most spikes in trading volumes occurred in the opening half hour of trading.

Answer?

The bank gave IBM their cheque book and asked them to write in the amount they needed to sort it out … nice business.

Example 2: the Competitor’s Black Box

Move on to the summer of 2005.

A large London-based City bank is processing millions of orders per day, indications of interest, buy-side order routing and other transactions using their latest Order Management System (OMS), deployed in 2003.

It’s all going very nicely, apart from the CIO’s concern that the world is about to fall apart because he’s maxed out in his data centre, can’t deploy any more servers for disaster recovery or business continuity, is using more electricity to run his OMS than Battersea Power Station can generate in a decade, and generally feels their technology capacity is fit to burst.

Then another London-based City bank launches a great new algorithmic trading system and starts gaining liquidity from the buy-side’s order routers through automated order fulfilment.

The head of trading bangs on the CIO’s door and says: “I want one of those”, and points at the latest brochure for sexy algo systems.

The CIO says: “we’ve no space and can’t fit any more tech in here”.

Head of Trading head butts CIO and walks out with an agreement that it will get sorted.

OK, I slightly stretched the last bit, but the reality was that the CIO had to buy a new data farm location in Canary Wharf, fill it with algo tech and ended up spending more in 18 months to compete with the new technologies of the other banks than he’d spent on their total IT architecture over the decade previously.

Both of the above are true stories and illustrate the stresses and strains on City IT.

Now, there are requirements to move towards blade and grid computing, and massively parallel processing systems, as illustrated by Sun’s Blade Farms, or Modular Data Centre as they call it.

These are shipping containers that are dumped in car parks of investment banks and churn away applications in volume.  Here’s one:

and inside as you open the doors:

and walk down the corridor of whirring processors:

you open the cupboard and find blade after blade of computing power:

Result?

You can now run thousands of applications requiring gazillions of mips with unlimited capacity, and no longer have to worry about your data centre size and location.   Oh yes, it's greener too as it can run on water power and a single feed.

This takes away the issues that my two banks had above in terms of processing speeds, power and resources.

Effectively, any bank could tap into unlimited processing power. 

Now, the issue comes up: how much processing power do you need?

And this is where cloud computing comes to the fore.

You see, there’s an old comment: “why would you build a church for Easter Sunday”?

Sure, on Easter Sunday, 1000 parishioners come to the church and pray  ... but every other Sunday?

There’s just 10 of the blighters …

... and that’s on a good day.

In a similar way, why would you buy containers of processors if you aren’t going to use them?

And that’s what cloud computing answers.

For example, here's a cloud computing farm:

What these farms offer is vast processing power on an on-demand, as needed, basis.

And this is why it’s being heavily plugged by various firms such as IBM and Sun, sorry, Oracle ...

… and Amazon of all firms.

Yes, Amazon.

In a story I’ve referenced before, Amazon CEO Jeff Bezos spoke about how Animoto – a small app for making videos out of personal stuff – went from nowhere to massive in a day thanks to Facebook.

Bezos states that they wouldn’t have been able to do this without Amazon’s Cloud Computing services: “It’s completely impractical in your own data center over the course of three days to scale from 50 servers to 3,500 servers. Don’t try this at home.”

So it’s obvious that if you’re a small bank with minimal data needs except for the odd spike of requirement for an Easter Sunday, then cloud computing makes sense.

Then my mates pipe up: “ah, but cloud computing doesn’t have enough resilience and reliability to be able to manage the volumes, security and needs of FX and other high volume, low latency trading environments.”

Maybe ... maybe not.

After all, the management of these cloud computing farms is the same as internal data farms surely, and if you have Service Level Agreements and contractual arrangements that the provider signs up for, then your rear should be covered.

You may not say that’s good enough for a Goldmans, and it isn’t.

This is because market making firms see technology as their key leverage point and they don’t want to buy in processing power to compete if it detracts from their own processing capabilities.

Going back to example #2 earlier, the very fact these big boys can create these trading platforms is there to decimate the weaker firms that can’t compete.

In addition, Goldmans won’t want their data flowing externally and being open to scrutiny by all, as illustrated by a recent survey where Goldman's placed cloud computing on the bottom of their list of requirements for IT.

However, for your average firm - a firm that doesn’t need to handle and compete with the black box, algo-based, dark pool, big boys - it’s good enough.

Equally, it should be something that large scale secure operators, such as SWIFT, should consider.

SWIFT process billions of transactions per year and offer security, reliability and resilience.

SWIFT could claim this space in the same way as they responded to the challenge five years ago when asked: why do we need SWIFT when we’ve got the internet?

Answer: because the internet is running channels of gambling and pornography, and SWIFTNet offers the additional secure environment to ensure confidence.

Now the question is: why do we need SWIFT when processing, storage and bandwidth is virtually free?

Answer: because you need access to processing, storage and bandwidth that is secure, resilient and reliable, and offers you 100% confidence.

The future of cloud computing in financial services is for operators, such as SWIFT (who are on the case), to offer an Amazon-style cloud computing service for banks to process transactions on spike days, whilst banks manage their own for the rest of the time.

Oh yes, and transactions could be anything from trade executions to payments processing.

Equally, the EBA, Vocalink, Equens, First Data, SunGard, IBM and more could all crowd this space too.

A cloud crowd.

Should be interesting to see what happens.

  

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The Top Ten of Everything

One of the most popular pages on the Finanser is the Top 10 Banks of 2009 list, so I thought I would add to it with the Top Ten of Everything!

This is a wee website that has things like the Top Ten Finance Apps for your iPhone

1. Mint
2. iExpenseit
3. Save Benjis
4. iBearMoney
5. Bloomberg Money
6. PayPal
7. Check Please!
8. Bank of America
9. Chase
10. ATM Hunter

Then there's the Top Ten Ways Tim Geithner Will Fire Bank CEO's

1. Well, actually, before he does any firing, he has to talk Larry Summers, and get approval for the plan
2. Have one of his staff do the deed ... Oops!
3. Hires Rick Santelli to browbeat them, yelling and screaming, until they run out the door
4. Gets Rush Limbaugh to take them out of town with him
5. Beats them to within an inch of death with a giant bailout check
6. Rounds'em all up and ships them to Sweden
7. Label them as Toxic Assets so they will move in the upcoming auctions
8. Use them as Human Shields, when Obama goes to speak at Notre Dame
9. Put them through the Obama Team Vetting process - They'll quit after months of frustration, waiting ...and waiting ...and waiting
10. Throws'em in Debtors Prison

But my favourite has to be the Top Ten Fake Excuses For Work:

1. I had to take my cat to the dentist.
2. I dreamt that I had been fired, so I didn’t bother to get out of bed.
3. I couldn’t find the right tie, so I had to wait for the shops to open to buy one.
4. I saw that you weren’t in the office, so I went out looking for you.
5. I got all the way to the office and realised I was still in my pajamas and had to go home to change.
6. I got run over by a goat.
7. My son tried to flush our ferret down the toilet and I needed to tend to it.
8. I stopped for a muffin, the shop was robbed and the police required everyone to stay for questioning.
9. A bee flew in my car and attacked me and I had to pull over.
10. I ran over a goat.

Even more amusing is the website 11 Points (because Top 10 lists are for cowards) who list 11 unintentionally hilarious website domains.  I won't repeat them all here but how "American Scrap Metal" became "Americans Crap Metal", I'll never know.

p.s. also see the Top 10 CEO Salaries of 2008

Things worth reading: 25th June 2009

Things we're reading today include ...

UK:

Bank of England governor attacks Darling's borrowing policy (Guardian)
Bank governor Mervyn King says scale of UK deficit is 'truly extraordinary' (Telegraph)
King warns of the 'long hard slog' to clear Britain's debt (Independent)
City watchdog (FSA) pays £20m in bonuses (Guardian)

Europe:

ECB lends record €442bn in first loan offer to boost credit flows (Telegraph)

Asia:

China has more millionaires than UK for the first time (Telegraph)

America:

Critics round on Citi pay rises (Financial Times)
Banks aid (Credit) card securitisation vehicles (Financial Times)
CIA turns to Wall St for new breed of experts (Telegraph)
Bernanke Tried to 'Cover Up' BofA Threats (ABC News)
Fed accused of 'cover-up' in BofA deal (Times)

Economies:

OECD: World economy will grow next year - but not Britain (Guardian)
Britain facing biggest deficit in Western world, warns OECD (Telegraph)
US Federal Reserve says recession is 'easing' (Telegraph)
Recovery delayed as banks fail to deal with toxic assets (Guardian)

General:

Plans to crack down on online criminals with 'cybercrime' units (Times)

Quote of the Day:
The Federal Reserve "engaged in a cover-up and deliberately hid concerns and pertinent details about the merger from other federal regulatory agencies."
Darrell Issa, Senior Republican, on the Bank of America / Merrill Lynch merger

  

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How to break trust with social media

I'm going to post a bunch of stuff about our recent meeting discussing how banks could use social networks and social media soon, but then saw that Karl Flinders, a guest of the Club, beat me to it.  Writing for Computer Weekly, Karl posted a nice little note entitled: "The truth about banks, Facebook and Twitter".

Obviously listening attentively to our panel, he captured a few golden quotes and nuggets such as:

• "If you want to adopt social media you need to listen to what people are saying."
• "Businesses can facilitate customer services through social media but it is not the answer to everything."
• "Banks will have to get used to the idea that there will be some customers who will want to use the web."
• "In financial services we are still in the educational phase."
• "There will be a bonus for banks that experiment early with social media."
• "Banks can't experiment because of heavy regulations."
• "Social media is a good way of engaging with employees as well as customers."
• "I am not certain [banks] are in a position to use social media credibly."
• "A lot of it is total bollocks."

I particularly liked the last one (no names mentioned) as this is the view of many, but it is a false view as demonstrated by the Iranain elections, G20 protests and more, and their use of Twitter to share news and knowledge globally.

Without Twitter, these people would be unable to share their message and have anyone even remotely aware of what was happening on the streets, as it can be vetted by news agencies (both Iranian and British).

That is why I am interested in Twitter and social media, as it gives me raw information to make up my own mind about the truth as well as a new channel of communication.

For those who read the blog regularly, it is also why I recommend that banks focus upon Twitter, YouTube, Facebook, Flikr and other tools of this nature, as they offer a low cost with broad reach communication channel.

A channel that can reach 200 million people or more at no cost. 

These channels are there to create trust and have a conversation. 

That's why they are social.

They are not there for a hard sell of products and advertising.

Otherwise, they would be called commercial.

That's why there is so much confusion about how to use these social channels to create commerce.

The answer is: talk and listen, engage and dialogue, converse and socialise ... then, if the folks you are conversing with want to, they will click through to your commercial sites because they trust you won't stitch them up.

But don't try to achieve the latter first - the commercial sale that is, not the stitch-up!

You only get to the sale by getting people to participate in your community, your social network, your circle of trust.

And whatever you do, don't break the trust of the social network.

This is why, in the first of its' type that I've seen on Twitter, one of our UK retailers completely screwed up this week.  Here's what they did:

"Habitat sorry for Iran Tweeting" (BBC, 24th June 2009)

"Furniture store Habitat has apologised for causing offence after accusations it exploited unrest in Iran to drive online Twitter users to its products. Keywords - called hashtags - such as 'Iran' and 'Mousavi' were added to its messages so people searching for those subjects would see the firm's adverts. Users of the networking site reacted angrily and the posts were removed."

Stupid tweets.

Watch out for some Habitat store closures in the not too distant future.

Impossible is nothing

Back in September 2007, Ben Saunders opened our season of Financial Services Club meetings with a presentation entitled: "Achieving the Impossible".

Described as the next Ranulph Fiennes, Ben is a record-breaking long-distance skier with three North Pole expeditions under his belt and is known to be an inspiration for all.

Back then, our invitation said: "we're all worried about where the markets are going. Throw in American sub-prime, hedge fund crashes, stock market falls and bear markets and you're probably wondering: where's the good news?"

We thought we had some problems but, since then, the markets have been going through more turmoil than Britney Spears ... and so has Ben.  With a failed fastest to the Pole mission, you would think he would be down too.

But he's not.

To inspire us once more, Ben is coming back to show us how impossible is nothing.

Find out all about his latest exploits and plans on 7th July.

Also, find out our range of good news announcements including new Directors of the FSClub, a new Branch of the Club, a new sponsor and an exciting agenda for our opening events of the 2009-2010 season.  These include HSBC's innovations, the Government's view of the industry's future, the future for Scottish banks, why branches need retail revamps and more.

Finally, the really good news is that the food and drinks are on us at this meeting.

Yes, this one is free!

So come along and find out how to go beyond the impossible.

The meeting starts at 18:00 at Lloyd's of London, One Lime Street, London EC3M 7HA on 7th July.

If you wish to come to this event, which is free of charge, please register as a please register.

  

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How accountable are the rating agencies for this mess?

We all talk about how the rating agencies were, in part, responsible for creating the mess of credit and credit instruments that caused this crisis.

After all, they are meant to be rating credit aren't they?

But I didn't realise exactly how bad a job these guys had done until I saw this quote:

“In January 2008, there were 12 AAA-rated companies in the world.  At the same time, there were 64,000 structured finance instruments, such as CDOs, rated AAA.”
Lloyd Blankfein, Chairman and Chief Executive of Goldman Sachs
Speech to the Council of Institutional Investors, April 2009

Jeez ... now we know.

Things worth reading: 23rd - 24th June 2009

Things we're reading today include ...

Today's must-read: RBS topped the losses list while Chinese banks raked in profits (Guardian)

"The Banker's Top 1,000 annual survey reveals that RBS's pre-tax operating loss of $59.3bn (£36bn) puts it way out in front of Citigroup, which was second with losses of $53bn ... the world's most profitable bank last year was the Industrial and Commercial Bank of China, which made $21.3bn, followed by China Construction Bank. Spain's Santander was the highest-placed European bank, coming in third with profits of £15bn. The highest UK bank was sixth-placed HSBC with profits of $9.3bn, beating Barclays, which was seventh, by $448m."

UK:

Banks are forgetting lessons of crisis already, warns Turner (Independent)
Banks told: restructure or face tougher rules (Times)
Tough targets set for Hester’s package (Financial Times)

Europe:

Gordon Brown hasn't beaten off the EU financial regulators (Telegraph)
Britain chided by Brussels for ballooning government deficit (Telegraph)
ECB chief Trichet says governments have reached borrowing limit (Guardian)
World's biggest hedge funds oppose EU cap on leverage (Telegraph)

USA:

E*Trade living on borrowed time (The Deal)
Citigroup revamps pay structure (Financial Times)
Wall St pay soars in bid to halt talent exodus (Financial Times)
How internet gambling is keeping Wall Street rich (Style)
President Obama: 'No fresh stimulus needed' (Telegraph)

World:

China and US head for trade war (Guardian)
Recession has bottomed out, say business leaders (Guardian)
World Bank cautions against recovery talk (Telegraph)

Quote of the Day:
"A rich man's joke is always funny." Heywood Broon

Sorry we missed yesterday's news due to unforeseen circumstances

  

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Amazing survey result

I just completed a brief online survey about the financial crisis. 

The question was: "What do you believe to be the most challenging factor facing (the financial) industry over the next five years?" 

Here's the current result:

30% ... winning back the public trust, after losing billions in people's savings

27% ... staying ahead in the technology curve to innovate and improve efficiency and customer experience

20% ... changing the personal image of the 'financial services executive' to that of a server of the greater good rather than only self-fulfillment

14% ... working closely with the government to ensure regulations are stringent, fair and obeyed

9% ... advocating investment and financial attention to world issues (global warming, third-world country development, infrastructure, etc.)

I've no idea how many people voted, but I do know that it's more than a few hundred and many of them are senior guys in banking.

What amazed me about this result is that "winning back the public trust" will take years, probably decades.  For example, a recent paper by the economist James K. Galbraith includes this key paragraph about the recovery after the Great Depression of the 1930's:

"What did not recover, under Roosevelt, was the private banking system. Borrowing and lending—mortgages and home construction—contributed far less to the growth of output in the 1930s and ’40s than they had in the 1920s or would come to do after the war. If they had savings at all, people stayed in Treasuries, and despite huge deficits interest rates for federal debt remained near zero. The liquidity trap wasn’t overcome until the war ended. It was the war, and only the war, that restored (or, more accurately, created for the first time) the financial wealth of the American middle class."

If this is the case, then investing in gaining trust will fall on stony ground for quite a while to come.

Then the second key vote: "staying ahead in the technology curve", is also interesting.

Now I advocate that banks must be on the leading-edge of technology as it is a bits and bytes business, but I don't see many banks investing in staying ahead of the technology curve right now ... and even less investing in staying ahead of the curve by using technology to gain back customer trust.

If they were, I would be pointing out lots of examples of banks using scoial media to gain trust ... and yet, in the UK in particular, I find it hard to spot even one.  A point emphasised recently.

Now there is some good news in that First Direct launched their new media newscentre service last week, a first for British banks.

But there are not that many banks using technology to move ahead of the curve whilst gaining trust.

The only banks doing this appear to be the one's launching customer engagement platforms using social media, such as HSBC's small business community service, First Direct's social media newsroom, Caja Navarro's social lending platform, BBVA's tu cuentas, Wells Fargo, Bank of America and all those other case studies and stories I've blogged about recently.

For the banks not doing this stuff, well, they are stuffed aren't they?

Desperate hedge wives

A year ago, I wrote a line in a blog:

“Boy, how the markets have changed in a year. We now see investment bankers facing hard times and selling second homes or pawning their Aston Martins and Rolex watches, as their wives divorce them before poverty strikes. We see hedge fund managers faking suicide leaps of terror in order to evade jail”

building on earlier discussions about wives of seriously rich bankers and hedge fund managers divorcing them, before the rot set in.

A year later, we now have a follow-on with wives who are stuck with their less than now successful husbands.  This is being publicised in a new book by Tatiana Boncompagni, the author of previous hit “Gilding Lily” and millionairess wife of Hoover heir, Maximilian Hoover.

Her new book is all about hedge fund manager’s wives.

Discussed in the Times last week, Tatiana identifies seven types of New York hedge fund wife:

“The Accidental: so named because she never signed up for the life of a hedge fund wife. She thought she was marrying a lawyer or an investment banker — anyone other than the man her husband turned out to be. The most likely to look and feel out of place in a hedgie gathering.

“The Westminster: pure-bred and pedigree, like the best dog-show entrants. She has a recognisable last name and sits on all the right charity boards. Her husband brings the money; she brings the status.

“The Stephanie: includes all former models who decide to cash in their good looks and sex appeal for a home in the best part of town and a luxury lifestyle (NB: Stephanie Seymour is divorcing Peter Brant, her wealthy, polo-playing husband, and all New York is a-twitter, anticipating a messy, dirty laundry-airing divorce à la Christine Brinkley and Peter Cook, the architect).

“The Former Secretary: this one is self-explanatory. They have fantastically lazy husbands and tend to be insecure about their lowly backgrounds. Of all the wives, you don’t want to mess with this one.

“The Socialite: cares only about her social status. She is selfish, vain and stingy, so don’t be too surprised if you are stuck with the bill for lunch.

“The Workaholic: almost as obsessed with her high-powered job as her husband is with his. Her motto? What’s his is mine and what’s mine is mine. Not exactly what the feminists intended.

“The Breeder: the easiest to spot because she is usually pregnant or carrying a tot in a designer baby-carrier, or both. Those at advanced stages of breeding can be seen leading a parade of nannies and children into the Bonpoint store on Madison Avenue.

If you want to see what some of these wives look like in real life, then here’s a good photo from New York Magazine of some real American hedge fund wives:

Which is witch, I wonder?

Anyway, Tatiana goes on to point out how most of them are weepy ninnies, especially as “half the city’s 1,000 hedge funds have disappeared. Globally, 10,000 hedge fund workers lost their jobs last year, and a further 20,000 are expected to be out of work this year. An industry that was once worth about $1.9 trillion is now worth half that.”

You see, the problem is that many of these women have had unlimited excess and riches on tap, but now their husbands are failing and they have to start reining in these excesses.

"Not too long ago my husband and I were invited to the apartment of an extremely successful hedgie for dinner. Five of us were sitting around the giant coffee table, enjoying our cocktails, when one woman remarked that the hedgie’s wife, who also works in the industry, was likely to out-earn her husband that year. The silence was deafening."

She proceeds to tell tittle-tattle about another hedge fund wife, who tells her husband as he chooses wine in the restaurant: “I’m going to be a recessionista, and remind you that we’re on a budget.”

Another complains: “I didn’t get married for this. Do you know I have to take the subway now?”

They obviously should have dumped the suckers last year, but maybe now they're stuck with them or maybe they are just supportive people enjoying a love-filled marriage.

Whatever they are, Tatiana’s book is pure fiction of course, isn't it … or is it?

No.

Google “hedge fund wives” and you’ll find Tatiana’s book but also a load of articles talking about the difficulties of the industry and quite a bit of schadenfreude – pleasure from seeing the failure of others – too.

The Telegraph had a column nine months ago with the opening paragraph:

“Early one morning last week, a young man in his dressing gown was wandering around Chelsea Harbour, the exclusive enclave of penthouse apartments in south-west London, sobbing hysterically into his mobile phone. Asked by a passer-by if he was alright, the man stared at him then bawled: ‘I’ve lost everything. Every ****ing thing!’”

and comments on her book on the Times, MSN and Dealbreaker include:

“As a hedge fund manager times have been hard. i hade (sic) to cut half my personal staff at home. we also are looking at selling one of our vacation homes” Chris

“I actually do feel bad for them. It doesn't matter if you have a net worth of $5 million or $50,000 - I think its tragic to lose your financial security, your home, etc. I don't know why we feel bad for someone who loses their job at Boeing, but don't feel bad for a hedge fund manager who's lost everything. It's the same. They are all just people.” Tonya

“Feel bad for these crooks! No way and that is what they are, crooks! They helped drive this economy into the tailspin we are in. They think they're better than everyone else. They are not honest or people with integrity at all.” Tim in ABQ

“This reminds me of Gilligan's Is when Thurston Howell III's wifer libby reminisced about the great depression when Thurston changed from being a billionaire to only a millionaire.” Newtownian, Sydney, Australia

“You hear that . .. .... ? ? ? ? ? That's the sound of my heart bleeding.” Anon

“Hedge Fund Wives? Wastes of oxygen all of them. Eat the rich, and formerly rich..with lots of seasoning.” Ross, Boston, U.S.A.

and there’s worse ... and better.

Strangely enough, as I read these articles about her book, a few other headlines caught my eye, particularly:

“A billion to go hungry with food prices back on rise”, in the Independent

“The number of people going hungry is set to top one billion a day for the first time as green shoots in the world's biggest economies spell disaster for their poorer cousins.  In line with other commodities, food prices are back on the rise. Combined with the effect of the credit crunch on poorer economies, the number of people without enough to eat will go up by 11 per cent this year, according to the United Nations' Food and Agriculture Organisation (FAO).”

That puts a journey on the subway into context.

This was followed by the news:

“Why Wealthy Nations Are Stiffing Africa”, in Time Magazine

“It may be no surprise, in light of the global economic recession, that the world's richest nations have failed to deliver much of the aid they promised Africa four years ago. But campaigners are not letting the Group of Eight (G-8) industrialized countries off the hook … most of the blame for the shortfall in pledges made at the high-profile Gleneagles summit in 2005 rests on just two countries — Italy and France. Italy, which next month hosts a summit of G-8 leaders, has delivered a minuscule 3% of the amount it pledged ... France has given just 7% of its pledged amount.”

So there you have it.

Hedge fund wives may have hit hard times, but many of them do more for charitable causes than most because of their position; whilst nations ignore other nations' desperate situations, when they are in a position to sort it out and made a pledge to do so with a signed commitment.

Not sure of the link there, other than the latter has nothing to do with banking or high finance ... has it?