The Financial Services Club's Blog

The Finanser's Week: 22nd February to 28th February 2010

The biggest news stories of the week include ...

• The Future of Money: It’s Flexible, Frictionless and (Almost) Free - Wired
• Banks have paid their pound of flesh, now the pillorying must stop - The Telegraph
• Barnier visits City in bid to calm anger over EU regulation plans - The Telegraph
• Bank of England chief Mervyn King calls for 'narrow banks' - The Independent
• Downing Street unleashed Hell against me over economy, says Darling - The Times
• Goldman admits helping Greece 'fiddle books' to conceal public debt - The Telegraph
• Goldman Sachs faces Fed inquiry over Greek debt - The Telegraph
• Metro Bank: 'we'll put an end to stupid rules' - The Telegraph
• RBS to pay £1.7bn in bonuses despite £3.6bn loss - The Times
• Wall Street bankers' bonuses jump 25% - The Times
• Banks at risk of going bust tops 700 - CNN

 

And our biggest stories of the week are ...

First Direct's Twitter Sex Hack Attack

HSBC's First Direct have been applauded for their early ventures into social media and are active users of Facebook, Twitter et al.  Unfortunately, they were caught out this week by a hacker who sent out a very first direct message in their name, offering their followers 'better sex'.

Why Heads of Innovation are actually Bottoms

Over the past year, most of the banks I deal with have dropped the word ‘innovation’ from their mantra.  Now the Heads of Innovation have all gone and Innovation is at the bottom of the banks ‘to-do’ lists ... in other words, the Heads have become Bottoms.  Why is innovation in banking so difficult?

Innovations and snails

According to Fast Company, only one of the Top 10 financial websites of the world comes from a traditional bank.  That bank is Itaú Unibancoe in Brazil.  Well done Itaú Unibancoe ... what happened to the rest of you?  Oh yes, banks don't innovate.  Mind you, plenty of innovation from outside banks and my favourite upstart of the year has to be BPAY in Australia.

What comes next in Mobile Banking?

Our next meeting of the Financial Services Club (England) will focus upon a debate around the question "What comes next in Mobile Banking?" with a great panel comprising:

• Tim Murdoch, Founder & CEO of iCeni Mobile and co-creator of M-PESA
• Michael Salmony, Board Member of Equens and the EPC 
• Nick Ogden – Chairman and Chief Executive of Voice Commerce Group
• Michael Davison, Senior Managing Consultant, IBM Global Business Services

 

We also wrote a series of three articles related to the credit crisis, bonuses and the regulatory and bank responses ...

Banks aren’t charities, so why do we treat them that way?

Banks aren’t charities and yet the non-stop bleating about bonuses and interest rates would make you think they should be run as though they were not-for-profits.  But banks aren't not-for-profit.  They are there to make money, not to exist for the public good.  Unfortunately during the past two years, the line between public and private has blurred, and now the media and taxpayer think they have a say in every banks' bonus scheme and interest rate setting policy.

Ending the never-ending bonus war

I’m fed up with the argument about bonuses and cannot believe it still rumbles on after a year of debate and G20 meetings. With Barclays announcing record profits last week, and therefore increased bonuses, the media latched onto this angle more than the fact that Barclays, UBS, Goldman Sachs and others demonstrates reviving markets and a recovered financial sector.  Sure, bonuses are irritating so here’s my suggestion as to how it could be resolved.

The land of a thousand voices

It seems that I’m having a long whinge and rant all week, but I’m trying not to.  What I’m really trying to do is to get some answers to this crisis of confidence in the banks and, consequently, the banking system. This is nothing to do with the credit crisis, but the response of the banks to the credit crisis, which is to trash all trust and confidence in their ethics and approach.  What the industry really needs to do is to talk with one voice, not a thousand.

 

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First Direct's Twitter Sex Hack Attack

Everywhere I go these days, I see ads for following businesses on Facebook and Twitter.  The latest was down at the local winebar where they have this ad on the counter:

 

GET DISCOUNTS IF YOU FOLLOW US ON FACEBOOK!!!!

Works for me.

Apparently, some 27% of UK SMEs use social media to connect with customers according to a survey by Virgin Media and other studies show that the fastest growing companies are those using social media to communicate.

And yet, apart from First Direct, I still can't find a blog, facebook or twitter button on any mainstream bank website in the UK.

Mind you, it may be that banks are waiting until social media's issues are resolved before they dive in.  For example, here's a direct tweet I received from First Direct this morning:

Maybe that's the reason that most banks are onthe fence about social media, as they are waiting until the hackers and underware issues are resolved before they jump into the fray.

That also makes sense to me.

UPDATE
13:00 26th February

First Direct have clarified what happened and yes, they were hacked!

 

UPDATE 2

19:00 26th February 2010

First Direct posted an apology on their website:

If you're reading this you're probably aware that at 5 am this morning first direct's Twitter account was hijacked and used to spam our followers. We'd like to apologise for the message itself (no need to repeat it) and for the way we dealt with it in the first instance.

We would like to offer you some explanation for our actions...

How did it happen?

This morning (about 00.30 am) we received a rather salacious Tweet from one of our followers (their account had been hijacked too) and whilst checking it out proceeded to read the other direct messages we'd received.  One direct message was from a trusted source it read "ha ha is this you?" and included a link which we unthinkingly clicked on. 
 
We can confirm that our Twitter password is extremely secure (a long string of randomised characters, and regularly changed), and the only reason they were able to gain access to our account was through the mistake we made.  Obviously we changed our password as soon as we realised what had happened (and we have revoked the OAuth access of the spam generator), so our account is secure again.

Why did we respond the way we did?

We tweeted quickly out of a desire to re-assure people and perhaps should have gone straight to the third of our three tweets. We should have got an apology up sooner, and we probably shouldn't have used the word "hack". Twice.
We've now put steps in place to make sure it doesn't happen again.

Have any other first direct accounts been tampered with?

Absolutely not. This was an isolated incident affecting our Twitter account only.

Final word

This is new to us and to the financial services sector as a whole. We made a mistake, fixed it as soon as possible and we're taking steps to ensure it doesn't happen again. We're very sorry, but we are only human afterall.

The land of a thousand voices

It seems that I’m having a long whinge and rant all week, but I’m trying not to.

What I’m really trying to do is to get some answers to this crisis of confidence in the banks and, consequently, the banking system. This is nothing to do with the credit crisis, but the response of the banks to the credit crisis, which is to trash all trust and confidence in their ethics and approach.

This is why there is this non-stop bleating about bonuses and interest rates. The banks justify this behaviour on the basis of all the other kids on the block are doing it so, if we didn’t, we would just get beaten up in the banking playground by the bonus bullies. This is what Stephen Hester said today:

Mr Hester warned “that employees are leaving because it was offering lower bonuses than City rivals. He also said that profits at the bank, which is 84 per cent owned by the taxpayer, would have been about £1 billion higher if it had managed to stop staff leaving. The bank said it had ‘paid the minimum necessary to retain and motivate staff who are critical to the recovery of RBS’.”

Trouble is, this doesn’t cut the mustard.

MPs warned that the public would be astonished that the bank was paying £1.3 billion in bonuses given that it today reported a £3.6 billion loss for last year.

“Vince Cable, the Liberal Democrat Treasury spokesman, said: ‘Stephen Hester is trying to justify the unjustifiable. Most bankers owe their jobs to the taxpayer. His comments will just reinforce the view of bankers in many people's minds as greedy and selfish.’

“Shadow chancellor George Osborne echoed the views of Mervyn King, the Governor of the Bank of England, by telling BBC radio: ‘I do think the level of payment in the banking sector has got completely out of kilter with the rest of society. It is totally disproportionate to what doctors are paid, people working in industry are paid, teachers are paid and the like. We need to bring down pay across the sector — not just in one bank, across the sector — and things like a bank tax, internationally agreed, might help do that.’”

Oh yes, and I love the photograph the Evening Standard  chose to run with that report.

Hmmm ... Hester, the fox killing, horse and hound man.

Nice.

Meanwhile, in the same paper, Chris Blackhurst writes about how we've blown our chances to rein in the banks:

“We somehow think that the bankers will take it upon themselves to lie down on the steps of St Paul's and seek forgiveness — and reform their ways and slash their incomes. They won't. They're human. Yes, they're pariahs, but they will carry on taking the money until they're forced to stop, until the authorities say bank licences will be relinquished if bonuses are paid.”

But none of these arguments raging in the media address the real issue here.

The real issue is not bonuses, profits, lending or interest rates.

The real issue is a lack of internal market leadership within the banking industry.

Nothing to do with regulators, politicians or press. The most significant failure has been the inability for the industry to act as a cohesive hole (sic: whole) to respond to the issues arising under their watch.

Instead we act as a fragmented group of a thousand voices.

Individual voices stand up and are counted, and some count more than others such as the Jamie Dimon’s, John Varley’s and Stephen Green’s. But nothing is co-ordinated or arranged in a way that makes sense or alleviates the public anger and distrust in the system.

Take the example of the past week of banker’s bonuses.

Initially, one bank – Barclays – set an example of waiving bonuses payments, as their leaders chose to repeat the actions of a year earlier and declined the multimillion pound pot they were entitled to. Reluctantly the rest then followed with RBS, Lloyds and now HSBC one-by-one agreeing not to award their leader’s bonus.

The result is that they were accused of being lame sheep in doing so, just following the lead of one, and it just looked limp.

It also rang of insincerity anyway, in that several of these leaders are purely deferring bonuses and have taken large swags of cash via other means (e.g. Bob Diamond’s $46 million payout on the sale of Barclays Global Investors last year) or just don’t need it as most are on million-pound plus packages. In fact, one cynic said that there would just be a top-up of their pension pots to compensate, and so no-one sees these token gestures as being anything other than that- ‘token’.

Does this justify the payouts to their investment banking teams by making such sacrifices?

No.

Does it restore faith and trust and displace the anger and mistrust?

No.

So all it’s done is served as some form of internal justification for the continuance of mega-bonus payments to investment banking staff.

The issue still lies with the press, politicians and regulators however: in this land of 1,000 voices, where no-one coordinated single voice resonates, where is the leadership to change the system?

Take the example I’ve just given.

What bankers should have done is worked together to create a co-ordinated plan across the sector pre-emptively and early on.

For example, Stephen Hester (RBS), John Varley and Bob Diamond (Barclays), Eric Daniels (Lloyds) and Michael Geoghegan (HSBC) see each other often enough in front of Treasury Select Committees to be able to co-ordinate their responses.

So why didn’t they all agree upfront to defer leader’s bonus payments, and announce this as a co-ordinated approach pre-results season?

A joint announcement of rationale and reasoning would have been far more powerful than the sheep mentality manner of following the leader.

Equally, Jamie Demon Dimon (JPMC), Vikram Pandit (Citi), Lloyd Blankfein (Goldman Sachs), Brian Moynihan (Bank of America) and John Mack (Morgan Stanley) see each other all the time in front of Federal Committees. So why didn’t these leaders co-ordinate responses to bailouts and bonuses?

You may say they did, but not from an observer’s viewpoint externally.

It looks like maverick individual actions and approaches, with no single voice to rally the industry to a resolution.

Why these ‘leaders’ cannot organise themselves is beyond the ken.

After all, if these global CEO’s of banks had created a co-ordinated and rational campaign to cap bonuses, waive their own, provide charitable donations, show how bank lending and bailouts had been atoned, then the media, public and politicians would not be baying for their blood.

The fact that: (a) there is no single voice of leadership that is co-ordinated across these banks speaking on their behalf; and (b) these leaders have allowed banks to behave without change, as they were before and as if nothing had happened, is going to lead to a showdown.

That showdown is not far away and, according got all my sources, will be far more draconian and vicious than any action that would have been taken if the industry had spoken with one voice, rather than thousand.

But then, this industry’s ability to self-regulate with transparency and integrity historically has been pretty poor so this comes as little surprise.

Meanwhile, you only have to look at the fact that our poor old Queen has been forced onto the tube these days, to realise how hard times are in Britain ...

Things worth reading: 26th February 2010

Things we're reading today include ...

Today's must read:

Mervyn King: 'We live in a fool's paradise' - The Independent

The world is living in a financial "fool's paradise", according to the Governor of the Bank of England, Mervyn King, who has called for radical reform of the financial system and the break-up of big banks, as one of the biggest, the majority state-owned RBS, announced losses of £3.6bn yesterday.

Royal Bank of Scotland

RBS reports loss of £3.6bn - The Telegraph
RBS to pay £1.7bn in bonuses despite £3.6bn loss - The Times
Now RBS creates 100 millionaires (and you're paying for it) - The Independent
MPs blast 'ridiculous' pay in RBS bonus row - The Times
RBS is losing some talented staff, but maybe it doesn't matter too much - The Telegraph
RBS faces FSA complaints inquiry - BBC
RBS sketch: Up pops Stephen Hester like some circus messiah - The Telegraph

Markets

Bank of England chief Mervyn King calls for 'narrow banks' - The Independent
Scottish financial sector 'to lose 12,000 jobs' - The Telegraph
Fears grow that Britain may still be in recession - The Independent
Iceland walks out of £2.3bn debt repayment talks - The Times

Other news

Bankers still overpaid, boss says - BBC
Goldman Sachs faces Fed inquiry over Greek debt - The Telegraph
To Hell and back for the happy couple but at least they still have each other - The Times
Not a banker in sight as the Queen takes a tour of the City of London - The Times

What comes next in Mobile Banking?

Our next meeting of the Financial Services Club (England) will focus upon a debate around the question: "What comes next in Mobile Banking?"

For the past year, the hottest space in banking has been around mobile thanks to iPhone apps, M-PESA and other developments in mobile payments and banking.  The Club has debated this area often, and now looks further out towards the next and future waves of innovations.  Are there just further evolutions of change, or is there a revolution here?
 
Leading the discussion are significant practitioners in this space:

• Tim Murdoch, Founder & CEO of iCeni Mobile and co-creator of M-PESA
• Michael Salmony, Board Member of Equens and the EPC 
• Nick Ogden – Chairman and Chief Executive of Voice Commerce Group
• Michael Davison, Senior Managing Consultant, IBM Global Business Services

Tim Murdoch, Founder & CEO of iCeni Mobile
The story of M-PESA, the revolutionary service in Africa for mobile payments is now well-known.  What is lesser known is how M-PESA was really created.  A smaller team from a firm based in Cambridge, the UK, had a vitally important role in the conceptualisation and development of the application.  The firm not only wrote the software for M-PESA, they also designed the business processes, and provided operational and technical support during the pilot and after launch.  That firm and their team was led by Tim Murdoch.  Tim has now launched a brand new venture: iCeni mobile, "a telecommunications company delivering solutions to extend mobile networks and data services into rural areas, connecting the world’s most remote and low income communities". 

Michael Salmony, Board Member of Equens and the EPC

Michael Salmony recently managed the post merger integration between previously Interpay and the German processor Transaktionsinstitutnational, achieving synergies and efficiency gains equivalent to a saving of over 400 staff, to create the pan-European payment service provider Equens. He is also a member of the European Payment Council, the decision making body of the 8000 banks in the 31 countries of Europe, as Head of Internet Payments and e-  and m- payments expert group since its inception.

Nick Ogden – Chairman and Chief Executive of Voice Commerce Group
As founder and CEO of The Voice Commerce Group, Nick is primarily responsible for the company’s overall corporate strategy and business development. A serial entrepreneur Nick has consistently been at the forefront of innovation in technology since 1985. In 2003 Nick, together with several former colleagues from WorldPay, formed the Voice Commerce Group to develop systems which allow individuals to identify themselves using a voice signature. Previously, he founded Multi Media Investments Limited, a technology research and development company that led to the development of one of the first bank-endorsed e-commerce initiatives in the form of the UK’s first electronic shopping mall, ‘BarclaySquare’. In 1997 Nick founded WorldPay, which was acquired by the Royal Bank of Scotland in 2002.  He has been recognised by a number of industry awards including the UK Ernst and Young Entrepreneur of the Year Award, the Computer World Global IT Leaders award and more recently the ID People Awards 2009.

Michael Davison, Senior Managing Consultant, IBM Global Business Services
Michael recently produced a 10,000 word study of mobile banking and payment offerings, including a review of the ways in which these new services are reconfiguring value chains in very interesting ways.  He has recently appeared on CNBC and other media in this capacity and regularly commentates on innovation in banking structures.

The meeting will be held on Thursday 11th March 2010 from 18:00 until 20:30 at The City IOD, New Broad Street House, 35 New Broad Street, London, EC2M 1NH, and will be followed by drinks, canapés and networking.

If you wish to attend please register as a member or non-member (the cost for non members is £95 plus vat and is reimbursed in the event of the attendee subsequently becoming a member.)

We look forward to seeing you.

 

Innovations and snails

According to Fast Company, only one of the Top 10 financial websites of the world comes from a traditional bank.  That bank is Itaú Unibancoe in Brazil.  Well done Itaú Unibancoe ... what happened to the rest of you?

Oh yes, banks don't innovate.  I forgot.

Mind you, plenty of innovation from outside banks and my favourite upstart of the year has to be BPAY in Australia.

What's BPAY?

It's a 12-year old newbie on the payments block that has, since its launch in November 1997, become the most popular bill payment service in Australia.

Over 170 Australian financial institutions covering around 90% of the consumer banking market, belong to the scheme.  This has resulted in 18 million bills worth AUS$11 billion being paid using BPAY every month, and more than 84% of these are paid over the internet.

That's the nature of innovations like BPAY and PayPal, they just nibble away at the fringes of banking and gradually become processors with clout before you know it.

So why are BPAY in my good books?

Because they've launched a really fun website called: the World's Biggest, Most Awesome Waste of Time.

We think mindlessly flicking through TV channels at 2am, or spending the day Facebook stalking, is a pretty average way to waste your time.  Instead, pay your bills quickly and easily online with BPAY and, with the extra time you save, you could go big with your time wasting.  In fact so big, and so awesome, that you could call it the world's biggest, most awesome, waste of time.

BPAY have illustrated this with a great video of Snail Art, and this video is why they're my favourite upstart of the year so far:

They're also running this as a competition:

We're pretty keen to find out what your idea of awesome time wasting would be, so we've decided to turn it into a competition.

First prize will be getting your idea filmed by a professional production crew.

I wonder if the Baaa-Studs will enter:

 

Hattip to Banking Review

Things worth reading: 25th February 2010

Things we're reading today include ...

Spat of the Day:

Downing Street unleashed Hell against me over economy, says Darling - The Times
Gordon Brown: I didn't unleash 'forces of Hell' on Alistair Darling - The Times

Companies

RBS set to announce £5bn losses - BBC
Green light given for RBS banker bonuses - The Independent
Big rise for HSBC boss 'blocked' - BBC
Bern to propose UBS tax settlement - Financial Times
Goldman Sachs's mistake is its failure to understand the anger towards it - The Telegraph

Economies

Barack Obama's plan to break up the banks could be watered down - The Telegraph
Fed boss wants 'fiscal exit' to cut debt - The Independent
US stocks bounce on promise of low interest rates - The Times
Hong Kong economy 'to grow 5%' - BBC
World trade suffers biggest drop since 1945 - The Times

Markets

'Worthless' bankers bonuses now worth $5bn - BBC
Show hedge funds a little love - Financial Times
Banks facing long road back to recovery - The Independent

Why Heads of Innovation are actually Bottoms

Over the past year, most of the banks I deal with have dropped the word ‘innovation’ from their mantra. It’s strange but true that the focus upon being innovative had been such a focal point during the 2000s and now it’s all over.

To illustrate the point, the Top 10 American banks used the word ‘innovation’ an average 1.2 times per annual report in 2000, rising to over six times per report by 2007.

Heads of Innovation were popping up everywhere and innovation was the key to being different, attracting customers, growing business and increasing revenues.

Now the Heads of Innovation have all gone and Innovation is at the bottom of the banks ‘to-do’ lists ... in other words, the Heads have become Bottoms.

Banks have realised that the last thing they want to be is innovative.

They want to be boring.

So innovation has disappeared over the parapets as fast as Tiger Wood’s pants.

But that’s not the end of the story.

There will still be some innovation in banks. The question will be: which ones?

Let’s roll back to the beginning.

Innovation became a focus for banks because technology was moving at such a pace, and client demands with it, that any bank which was not seen to be innovative felt they would lose business.

Hence, as is the way with banks, they all appointed a head of innovation, used the word ‘innovate’ in all of their customer marketing materials, and appeared to be innovative by doing funky things like using employees to advertise the bank and giving away pens in branches.

That’s all the token gestures of innovation.

Meanwhile, some banks were actually being innovative, but just weren’t talking about it that way.

Banks such as Goldman Sachs who were creating incredibly innovative trading systems that ensure best price for their investors, which is why they get so much investment business, whilst creating huge market volatility.

Banks like JPMorgan Chase who invented the whole concept and trading of Credit Default Swaps. By being the first mover to invent and then trade these products, JPMorgan were not only the first into profits from such instruments but the first out of the losses created by them, as were Goldman Sachs.

Very clever.

Banks such as Wells Fargo meanwhile, have made it a clear focus to engage customers using social media, and see this as a differentiation in the customer experience. Rather than having a head of innovation in this area however, they instead invest in creating platforms to engage customers in remote social interactions via blogs, virtual worlds, YouTube, Facebook and Twitter.

That’s innovation, but it is not seen as token innovation but core developments in customer engagement.

For the average bank however, innovation is not in their blood.

This is because innovation demands doing things in a different way, and banks don’t like to be different. They want to be the same.

They don’t want to break away from the crowd, but want to do things in robust, proven, low risk ways.

They don’t want to be leaders but lemmings, all running in the same direction doing the same thing in a nice, safe, undifferentiated manner.

They cannot invest in something new and different, because it has to have a clear business model, financial analytics to support the investment, clear returns on investment and absolute management buy-in and commitment.

All of the above would never happen with something that is not proven, not clear, not justified, and unable to be supported by a strong financial business case.

Hence innovation lies in a heap at the bottom of the bank’s corporate agenda.

So what are we really talking about today, when it comes to innovation in banking?

We are talking about banks that create cultures of being prudent risk avoiders, entrepreneurial innovators, excellent customer engagers, aggressive market makers or active acquisitors.

These cultures sit at opposites with each other and rarely would you find a bank that could be all in one.

For example, I wouldn’t put Wells Fargo in the bracket of prudent risk avoider as they see themselves as an excellent customer engager; Goldman Sachs are an aggressive market maker, as are JPMorgan, but they probably wouldn’t use the word prudent; Citi are now a prudent risk avoider having learned their lesson of being an active acquistor; and Lloyds TSB were always a prudent risk avoider until they became an active acquistor.

These cultures are driven from the man or woman at the helm – a fish sets its direction from the head but also begins to rot first from the head – and it is the man or woman in the driving seat that creates the innovation and risk culture of a bank, not the label ‘innovation’.

That is why you can find banks that are hybrids of this model – such as Barclays where John Varley has created a retail and commercial banking operation that is prudent whist Bob Diamond runs an aggressive market making operation in BarCap.

There are other banks that demonstrate this mix, and it is purely a reflection of the management team.

For example, HSBC is a prudent risk avoider under Chairman Stephen Green and CEO Mike Geoghegan, but is also an entrepreneurial innovator thanks to Chief Technology and Services Officer Ken Harvey.

All in all, the lesson learnt for most banks is that innovation is not a function or label, but a culture and so it is gratifying to see innovation has been removed from the mantra of the banks as a label.

Now let’s see which banks create innovative cultures over the next decade, and watch them grow.

Things worth reading: 24th February 2010

Things we're reading today include ...

Today's must read:

The Future of Money: It’s Flexible, Frictionless and (Almost) Free - Wired

A simple typo gave Michael Ivey the idea for his company. One day in the fall of 2008, Ivey’s wife, using her pink RAZR phone, sent him a note via Twitter. But instead of typing the letter d at the beginning of the tweet — which would have sent the note as a direct message, a private note just for Ivey — she hit p. It could have been an embarrassing snafu, but instead it sparked a brainstorm. That’s how you should pay people, Ivey publicly replied. Ivey’s friends quickly jumped into the conversation, enthusiastically endorsing the idea. Ivey, a computer programmer based in Alabama, began wondering if he and his wife hadn’t hit on something: What if people could transfer money over Twitter for next to nothing, simply by typing a username and a dollar amount?

 

Misra quits Chi-X Europe - Financial Times
HSBC backs down on pay deal for chief Michael Geoghegan - The Telegraph
Bank of England chief Mervyn King says recovery is fragile - The Independent
UK may intervene on bank debt, says Paul Tucker - The Telegraph
UAE banks have $15bn Dubai exposure - Financial Times
Commerzbank warns on outlook - BBC
Wall Street bankers' bonuses jump 25% - The Times
Hedge funds do not pose systemic risk, concludes FSA - The Telegraph

 

Quote of the Day:

"Usually a lack of profits is not considered a good result, but compared to the record loss the industry reported a year ago it represents a significant improvement."
FDIC Chairman Sheila Bair
Banks at risk of going bust tops 700 - CNN

Banks aren’t charities, so why do we treat them that way?

Banks aren’t charities and yet the non-stop bleating about bonuses and interest rates would make you think they should be run as though they were not-for-profits.

But banks aren't not-for-profit; they are proprietary firms with stock listings. They are there to make money, not to exist for the public good.

So what’s gone wrong?

Unfortunately during the past two years, the line between public and private has blurred, as evidenced by the Royal Bank of Scotland and Northern Rock, or by Citi and Bank of America in the USA, or HVB and Commerzbank in Germany, or UBS in Switzerland or ...

The fact that these banks were bailed out by their respective governments, albeit temporarily in most instances, has blurred the media and public’s view of what they are there for.

The media and general masses now think they own the banks or, at least, have some skin in their game. And sure enough, in the case of RBS and Lloyds, the UK taxpayer does have some skin in the game: 84% and 43% respectively.

But that doesn’t mean the taxpayer runs the bank or that they exist for the public good.

In the case of RBS and Lloyds, they actually now exist in a shadowland where they are competing with openly aggressive trading firms like Goldman Sachs and JPMorgan, whilst having to conform with the requirements of the Treasury and UKFI.

This causes this schizophrenia between being openly competitive versus being humbly contrite.

What a pain.

But look at the bottom-line: these banks are still private firms with stock listings who have to serve their shareholder first.

That’s why they are paying bonuses, restricting lending, avoiding risk and being competitive.

Or that’s their thinking.

This is why we find it so hard to determine the right approach to bonuses and remuneration.

But take this a step further and we now have the journalistic and taxpaying community believing that they should somehow determine the interest rate setting policy and fees of the bank.

For example, over the weekend, the Beeb got itself into a tiz over credit card interest rates. The question posed is why, when the Bank of England’s interest rates are at their lowest levels ever, are banks charging the highest rates ever on credit card balances?

The answer is simple. The credit card portfolio runs as its own division with its own P&L. Today, more folks are defaulting than ever before. As the risks are greater and bad debts increasing, the interest rate has to rise accordingly.

The media and public then say: but you’re paying out all these hefty bonuses, what about us? Decrease the bonuses so that you can reduce our credit interest rates.

C’mon now and be serious.

The investment bank doesn’t subsidise the card portfolio. They are separately run businesses with their own P&L and both are tasked with making a profit, so both run their book as competitively and profitably as possible.

That’s why Barclays announced an increase in overdraft fees on deposit accounts just two days after saying that BarCap’s bankers would get an average bonus and pay package of just under £200,000 each for the 23,000 staff in that division.

You see the latter achieved their annual objectives and targets, so that’s why they deserve it.

And all of this is in a competitive battlefield where anyone can walk – both staff and customers.

But it ain’t that easy.

First, Barclays are justified in their actions because they never dipped into the taxpayer’s pocket, unlike RBS and Lloyds. Therefore, are RBS and Lloyds justified in providing bonus packages in the same way as Barclays? If they are privately held, shareholder-owned competitive banks, yes; if they are semi-nationalised, taxpayer-funded state-run banks ...

In addition, the divisional components of the bank may be independently structured by their P&L but that argument doesn’t hold water when the bank would have gone under in the case of RBS, Citi and others, thanks to the failings of that very part of the bank that is now sharing the spoils amongst their staff at the customer’s and taxpayer’s expense.

It is this blurring of the lines between a nationalised business that should operate in the public’s interest versus the privatised industry that operates in the shareholders’ interest that is causing all of the media and general debate today, whether it is about bonuses, remuneration, profits, fees, interest rates or any other aspect of banking.

This half-hearted, schizophrenic shadow of an industry that doesn’t know whether it’s coming or going, and has no idea how to regulate itself or be regulated, needs a strong hand to steer it to an objective and vision for future operation.

That vision appears to be one of an independent industry, run under free market principles with shareholder focus as its central tenet.

If you don’t like it ... lump it.

Things worth reading: 23rd February 2010

Things we're reading today include ...

Today's must read:

Goldman admits helping Greece 'fiddle books' to conceal public debt - The Telegraph

Addressing the influential Treasury Select Committee, Gerald Corrigan, a Goldman Sachs managing director, accepted that the investment bank had "enabled politicians to mask borrowings" through a complex currency transaction in 2001.

 

People

Stanley Fink to step down as Tories' co-treasurer - The Times
Hite set to link with UK manager Fink - Financial Times

Companies

RBS and Lloyds to reveal losses amid storm over bonuses - The Independent
Lloyds boss to waive £2.3m bonus - BBC
St James's Place puts pressure on Lloyds to sell stake - The Telegraph
LSE reduces trading costs for large customers - Financial Times
It may be imperfect, but UKFI has a role to play - The Telegraph

Markets

Bank charges face new challenge - BBC
Spending cuts must be spelt out to save stumbling sterling - The Times
Germany manoeuvres to win control of the euro - The Times
European banks 'need €240bn a year in fund-raising' - The Telegraph
European banks face showdown over €1 trillion of debt - The Telegraph

Commentary

Sheep that went astray are back in the fold - The Times
Banks have paid their pound of flesh, now the pillorying must stop - The Telegraph

 

Ending the never-ending bonus war

Solving the bonus questions

I’m fed up with the argument about bonuses and cannot believe it still rumbles on after a year of debate and G20 meetings. With Barclays announcing record profits last week, and therefore increased bonuses, the media latched onto this angle more than the fact that Barclays, UBS, Goldman Sachs and others demonstrates reviving markets and a recovered financial sector.

Sure, bonuses are irritating ... but only because we don’t get them, the guys who do are as reliable as stockpickers as monkeys, and no-one knows how to break out of this cycle of paying millions for a job that is demanding, but no more so than many.

So here’s my suggestion as to how it could be resolved.

First, set a regulatory limit on the bonus pool and the size of an individual's bonus payment.

For exmple, limit the bonus pool allocation to no more than 33% of the bank’s full year profit after tax across all bank subsidiaries, as shareholders and capital reserves must have an equal recognition.  This means that profit should be apportioned equally - one third - to each constituency.

Then limit individual bonus payments to a cap of 0.1% of full year profits after tax.

For example, Barclays net profit was £9.39 billion in 2009, up from £4.38 billion a year earlier.

£9.39 billion profits would create a maximum bonus to any one trader of £9.39 million. That may seem a lot, but it’s been a good year and is far less than some of the current payouts. Equally, if you take Barclays profits from the year before, it would have been £4.38 million. A mere pittance compared to today’s bonus culture but, if you have a level playing field, far better than today’s excesses. And this is looking at a decent bank result.

Meanwhile, take a bank like Royal Bank of Scotland (RBS).

The rules above would be extremely punitive for them. It doesn’t necessarily outlaw any bonuses within RBS, but it does challenge the bank as to how to create a bonus pool when there is no profit.

But look at the wording. It says the bonus pool ‘cannot exceed’ a third of group profits, not that it must be a third. Therefore, for RBS, they can allocate bonuses.  In fact, they have to in order to retain talent and remain competitive.

Nevertheless, you would want to ensure that a loss-making bank allocated bonuses that were in the best interests of the bank.  As a result, the stipulation should be that the bonus plan and allocations for all banks are approved by an independent panel comprising a cross-section of the shareholders of the bank. Approval of the plan must be agreed by a majority – greater than sixty-six percent – of the panel, and the panel must comprise a minimum of ten investors including at least three retail investors.

The selection and choice of panel members must be approved by the home regulator and, whatever the panel size, a minimum of one third must be retail shareholders rather than institutional.

This should ensure a bonus pool and payout that seems agreeable to all shareholders, and therefore should also keep the regulator and media quiet.

All of the above may sound reasonable (or not), but then you have the other key question which is: how would you ensure these caps are adhered to?

After all, any government who contemplated the above would just find all of their banks moving to the Cayman Islands or Switzerland to avoid such punitive arrangements.

OK, so let’s stop that one at the same time by declaring that, for a bank to operate in certain markets – especially the G20 nations – the bank must be registered in a country that has signed up to and been recognised as implementing the G20’s taxation agreement.

This taxation agreement is based upon banks regulated under the new Tobin Tax regime (oh yes, if you didn’t think it was going to happen, it will!). From today’s FT:

For years, taxes on capital flows were seen as a barbarous relic of the 70s, on a par with Demis Roussos and Baked Alaska. No friend of free markets dared support the idea of US economist James Tobin, dreamed up to curb currency volatility after Bretton Woods collapsed. That’s changing. Since Lord Turner, chairman of the UK’s Financial Services Authority, started stirring interest in taxing financial transactions last year, politicians in Germany, France and Australia have voiced tentative approval. Now Japan, through the musings of vice-finance minister Naoki Minezaki, might just be falling in line.

So, the first thing is that the bank must be head quartered and file accounts in a recognised G20 Tobin tax location.

Second, the banks’ accounts must be filed in that country and show a detailed breakdown of profits and losses using IFRS accounting, not GAAP (ouch, that might hurt).

Third, and most crucially, the bank must declare any movement of funds or debt to a location that falls outside the G20 Tobin tax coverage, such as the Cayman Islands or Costa Rica. This is to ensure that complex debt equity swaps, such as the Barclays transaction that took place last September, are registered, regulated and monitored to ensure that this is legitimate tax avoidance and not evasion.

All of the above would ensure that banks and their individuals on major bonus deals, could not just upsticks and move to a location outside the grip of the bonus rules as, if they did, they would effectively be removing themselves from the markets where they need to trade – the G20 markets.

Anyways, it may not solve or cover all the ground required – as I’m no lawyer or accountant – but at least this would be a start.

I think what’s bugging everyone right now is that this crisis began in August 2007 – almost two and a half years ago – and blew up into a full blown meltdown almost eighteen months ago in September 2008. So here we are, years after this all began, with bailed out banks, angry taxpayers, a full blown recession and all the news is of investment markets behaviours remaining unchanged.

That’s what’s bugging everyone ... so come on G20, pull yer finger out, get some actions started, and put an end to this never-ending bonus debate.

p.s. the last discussion of this issue at September's G20 summit ended up with a split view between France and Germany, and the US and UK.

Things worth reading: 22nd February 2010

Things we're reading today include ...

Today's must read

Wall Street Takes Break for Tiger Woods Apology - Bloomberg

For a few minutes, Tiger Woods was bigger than Ben S. Bernanke.  The CHART OF THE DAY shows that a day after the Federal Reserve chairman and his colleagues raised the rate charged to banks for direct loans, investors took time out from trading to watch Woods apologize for his marital infidelity and “repeated irresponsible behavior.”

 

Bonuses

Stephen Hester lines up £1.6m RBS bonus - The Times
RBS boss defuses row by agreeing to give up £1.6m bonus - The Independent
RBS and Lloyds bosses urged to decline bonuses - The Independent

People

Barnier visits City in bid to calm anger over EU regulation plans - The Telegraph
Paulson sorry he blamed UK for Lehman failure - The Times
Lord Mandelson backs state investment bank plan - The Telegraph

Companies

Metro Bank: 'we'll put an end to stupid rules' - The Telegraph
Metro board fills five seats - The Telegraph
BoCom seeks to raise $4bn in capital - Financial Times
Northern Rock could buy RBS and Lloyds branches - The Times

Economies

Our world balances on a sea of debt - The Telegraph
So where did all the money go? - The Telegraph
Irish bank rescue plan 'lies in ruins' - Financial Times
Eurozone lines up £22bn Greek aid - The Times
Crisis? Blame the baby-boomers, not the bankers - The Times

Regulation

Tobin tax - Financial Times
Credit card rates 'unjustified' - BBC

 

Quote of the Day:

"Do you build a bank for the one in 10,000 people who are going to rob you or to give a better experience to the 9,999 who come in every day?"

Vernon Hill, founder of about to be launched Metro Bank

The Finanser's Week: 15th February to 21st February 2010

The biggest news stories of the week include ...

• Top Earners Averaged $345 Million in 2007, IRS Says - Bloomberg
• Treasury will receive £1.5bn boost from bankers' tax - The Telegraph
• Barclays reports profits up 92% to £11.6 billion - The Independent
• Barclays hits customers with huge overdraft fee increases - The Independent
• Hank Paulson scorns Barack Obama's banking reforms - The Times
• Volcker Rule looks more like hype than future law - The Telegraph
• Shock as British deficit equals that of Greece - The Independent
• Bank logins targeted by global botnet: 74,000 PCs compromised - Silicon

 

And our biggest stories of the week are ...

Only 1% of people think social media will decrease

For the past few weeks we've been analysing the inital and general results from our social media survey. Almost 450 people responded to the survey, including over 100 banks, and you can now download our preliminary results.  Headline news?  74% of respondents said their use of social media will increase organisationally - e.g. in a business context - over the next two years.  Only 1% said it would decrease!

A Single Customer View? Codswallop!

The UK Banking Bill of 2009 resulted in a new regulation from the Financial Services Authority (FSA) which rules that, from 31 December 2010, all financial firms must provide a Single Customer View (SCV) of all accountholders. The European Union has similar proposals for a similar Deposit Guarantee Scheme, as does Australia (APRA’s proposed scheme, Download DP-FCS-for-ADIs-Jan-2010) and the USA.  And yet, without action on reference data, it is unlikely that any of these regulatory changes will work.

Why latency is so important (and Goldman wins)

Working with Ancero, Bloomberg has compiled a list of the best brokers using their global trade execution prices between July 2008 and June 2009. This is an annual review, and shows Goldman Sachs as the clear winner for brokers handling over $25 billion in trades annually.

LSE's marketing gets desperate

I realise that the LSE has been challenged by the new MTFs like Chi-X, which is why it has recently acquired Turquoise, but they are now taking advertising to new extremes ...

And the best Asian City to HQ your etrading is ...

Singapore is the best city in Asia to headquarter an electronic trading business according to a two week opinion poll conducted at the AsiaEtrading.com website. The result is no surprise as Singapore has a low corporate tax rate of 18% (17% in 2010), a high standard of living, a great quality of life and wonderful weather all year-round.

Banks called to question over Cayman tax dodge

Are the Cayman Islands the bank’s main loophole?  I’ve come across questionable dealings by banks in the Cayman Islands to avoid taxation three times this week.  First BCP in Portugal, then Barclays Bank and finallly the Nationwide Building Society in the UK.  What's going on?

Arrogance, Ignorance and Greed (AIG)

Just saw the folk group Show of Hands on the Beeb singing their song Arrogance, Ignorance and Greed (AIG) about ... yes, you guessed it ... bankers!  Here are the lyrics and video.

A decade of bonuses

Great interactive graphic in today's Financial Times illustrating the trends over the last decade in investment bankers' bonuses.  To get you started, here's a quick comparison of 2000, 2005 and 2009.

Barclays bright star

Yesterday’s main story was Barclays and their results, with a stonking £11.6 billion profit for 2009.  All anticipations beforehand were that the bank would announce £10.3 to £11 billion ($16 to $17 billion) profits, so these results were fairly stupendous.  This is particularly true when you remember that, just a year ago, they almost went under thanks to the share shorters.  So what happened and how does the future look?

Numbers: First Direct UK versus eBank Japan

First Direct has: 3,200 staff; 1.16 million customer; 85%+ of customer contact is electronic ...

"Greed is good ... and now it's legal"

Remember Gordon Gecko from Wall Street?  Well ... he's back!

 

The Financial Services Club is sponsored by:

 
For details of sponsorship email us.

 

"Greed is good ... and now it's legal"

Remember Gordon Gecko from Wall Street?

Well ... he's back:

"Wall Street - Money Never Sleeps", released on April 23rd.

Money never sleeps.

Lunch is for wimps.

Bankers are always winners.

 

A decade of bonuses

Great interactive graphic in today's Financial Times illustrating the trends over the last decade in investment bankers' bonuses. 

To get you started, here's a quick comparison of 2000, 2005 and 2009 (doubleclick for larger images):

2000

 

2005

 

2009

 

Things worth reading: 19th February 2010

Things we're reading today include ...

Today's must read:

Bank logins targeted by global botnet: 74,000 PCs compromised - Silicon
A botnet designed to steal logins for banking websites, social networks and emails compromised more than 74,000 PCs across 2,500 organisations worldwide over the last 18 months, a security firm said on Wednesday.

 

Bonuses

Top Earners Averaged $345 Million in 2007, IRS Says - Bloomberg

Companies

Barclays hits customers with huge overdraft fee increases - The Independent
RBS spends $500m on US office - The Telegraph
AIG to retain $500bn of assets that almost caused it to fail - The Telegraph
JP Morgan suspends analyst after Asda ‘ruse’ - The Times
LSE finalises Turquoise deal - Financial Times

UK

Bank warns lenders that support will be withdrawn - The Independent
Record fall in bank lending to business triggers new concern over UK recovery - The Times
Taxpayers could be supporting fraudsters, Darling was warned - The Telegraph
Cost of banking in UK set to soar due to new regulations - The Telegraph
Shock as British deficit equals that of Greece - The Independent

World

Greece defends complex debt swap - BBC
Icelandic bailout exposed rift at the Treasury - The Times
US bank lending falls at fastest rate in history - The Telegraph

Technology

Top 10 most innovative financial websites - Fast Company
Mint.com Traffic Soars Under Intuit Ownership - Net Banker
Facebook To Accept PayPal for Ads and Facebook Credits - Payments News

Quote of the Day:

"21 milliseconds may seem like a tiny difference, and it probably wouldn't save you in a Wild West dual because your brain takes around 200 milliseconds to respond to what your opponent is doing, but it could mean the difference between life and death when you are trying to avoid an oncoming bus."
Dr Andrew Welchman of the University of Birmingham’s School of Psychology

Numbers: First Direct UK versus eBank Japan

First Direct has:

• 3,200 staff
• 1.16 million customers
• 85%+ of customer contact is electronic
• 44% of sales are via e-channels
• 890,000 Internet Banking customers
• 370,000 SMS message banking customers
• 2.6 million text messages are sent to customers every month
• 157,760 telephone calls are handled each week

eBank Japan has:

• 2.8 million accounts
• 195 staff
• All customer contact is electronic

 

Banks called to question over Cayman tax dodge

Cayman – the bank’s main loophole?

Three times this week, I’ve come across dodgy dealings by banks in the Caymans to avoid taxation.

The first is the Portuguese Bank BCP, or Banco Comercial Portugues SA to give it its proper name.

In a detailed report in Bloomberg Markets Magazine, they recount the story of billionaire investor Jose Berardo who blew the whistle on the bank’s management team.

The accusation is that, from 1999 to 2003, BCP loaned €590 million ($843 million) to 17 companies based in the Cayman Islands that it controlled, without accounting for the debt on its books. The Cayman firms then purchased 5 percent of the bank’s stock to boost its value, falsely it’s claimed. This all backfired when BCP’s share price dropped, as did most Portuguese stocks, between 2001 and 2002.

The share price drop meant that the Cayman firms couldn’t pay back the loans but he executives at BCP allegedly disguised the bad loans as real estate losses, all of which inflated the bank’s earnings and propped up their flagging share price. Result: five executives received €24 million in bonuses that they didn’t deserve, according to the prosecutors.

This is all being contested by the management team, who have been ousted thanks to Senhor Berardo’s actions.

The second report came up when researching this week’s news about Barclays.

In a deal last September that sounds remarkably like the issues at BCP, Barclays sold off $12.3bn (£7.5bn) of toxic assets to a Cayman Islands fund which it created with 45 of its former staff. The deal is financed largely by Barclays and involved two of its top bankers, Stephen King and Michael Keeley, leaving to set up C12 Capital Management. They also took a team of staff from Barclays Capital with them to C12, and receive a $40m annual management fee from Barclays to run it.

What does C12 do?

Well, it’s based in New York but managing a Cayman Islands fund called Protium, and it’s Protium that purchased the toxic loans from Barclays funded by Barclays.

Finally, in this week’s Private Eye, the old Cayman question came up again.

This time Private Eye notes that one of the banks I like a lot, Nationwide Building Society, were embroiled in a tax issues with Her Majesty’s Revenue & Customs (HMRC) for the last five years, and it finally came to a decision at a tax tribunal last week.

The tribunal reviewed documentation which showed that the Nationwide used an elaborate scheme through ABN AMRO to gain a tax repayment amounting to some £15 million in 2003, by channelling funds through two Cayman Island companies called Bluewater and Blauzoom.

Nationwide has been arguing that the laws HMRC are using to require the £15 million be paid back did not work and, luckily for the Nationwide, the tribunal agreed.

Laws will be changed and Caymen to that!

Mind you, there’s always Costa Rica?

Arrogance, Ignorance and Greed (AIG)

Just saw the folk group Show of Hands on the Beeb singing their song Arrogance, Ignorance and Greed (AIG) about ... yes, you guessed it ... bankers!

Here are the lyrics:

All I wanted was a home
And a roof over our heads
Somewhere we could call our own
Feel safer in our beds

There was a storm of money raining down
It only touched the ground
With a loan I took I can’t repay
And the crock of gold you found

At every trough you stopped to feed
With your Arrogance, your Ignorance and Greed.

I never was a cautious man
I spend more than I’m paid
But those with something put aside
Are the ones that you betrayed

With your bonuses and expenses
You shovelled down your throat
Now you bit the hand that fed you
Dear God I hope you choke

At every trough you stopped to feed
With your Arrogance, your Ignorance and Greed.

You're on your yacht, we’re on our knees
Through your Arrogance, your Ignorance and Greed.

Toxics bring you tact and soul
Poisoned every watering hole
Your probity, you exchanged for gold

Working man stands in line
The market sets his price
No feather bed, no golden egg
No one pays him twice

To enter thrift and caution
Your only sound advice
You know you doubt yourself and meaning
And alone at every dice

At every trough you stopped to feed
With your Arrogance, your Ignorance and Greed.

I pray one day we’ll soon be free
From your absolute indifference
Your avarice, incompetence
Your Arrogance, your Ignorance and your Greed.

There's a sublime video, filmed around the City of London, that goes with it too ...

Download available from iTunes.