The Mighty, Fallen: Tales of Two Leaky Banks

1.  Leaking Information

So then, Robert Peston.  Live by the leak, die by the leak, eh ?  His epic fail on calling the new Bank Governor is surely the final nail in the coffin of his reputation.  All those reporting scoops in the heady days of '07/08 - but not proper scoops, just his being used as a privileged conduit by a couple of highly-placed leakers.  Except now, he gets fed garbage.

Everybody has his number.  Here's how C@W can scientifically assess his decline: back in 2008, if we got a link on his BBC blog, we'd get thousands of hits.  Two years later and this had dwindled to hundreds or less.  Nowadays we don't even notice.

"As it happens, I did not think Mr Carney was in the frame because a well-placed Treasury source told me - in terms - that the unknown fifth person on the short list 'was very unlikely to get the job'". Pathetic. And wasn't he subdued yesterday, interviewing Boy Osborne?  Hope his fat Beeb package is success-based.

2.  Leaking Money

UBS - what a shower. When Kweku Adoboli was being sent down, the news channels played extracts from tapes of calls between UBS Compliance and the talented trader, with such gems as:  

Financial Controller: "So you're going to confirm exactly which counterparties are involved, and the quantum of the exposure".  

Adoboli:  "OK, will do". 

WTF ?  I fell off my chair.  There shouldn't be a trading floor on the planet that doesn't have deal-capture systems, confirmation processes and risk metrics which make these issues 100% transparent and subject to checks by staff who are independent of the traders, by the end of each trading day at very least, but near-real-time is the standard.  It should be like trying to do a transaction on the web: a required field pops up, and if the entry doesn't compute perfectly, instantly, you can't progress to the next stage at all.  (Given that Adoboli was in a 'Delta One' outfit - deals with the simplest risk profile - there aren't even any complex sums to do.)  

Phantom counterparties ?  Trade books he 'set up himself' ?  And all this 3 years after the banking crisis.  So UBS indeed deserves to get it in the neck.

Gaol.  Only language they understand - and corporate fines be damned.

OK, not you Pesto - ignominy will suffice.

ND

The Cancer at the Heart ofof the Capital Markets

Last week, Martin Wheatley at the FSA was asked to make a pretty rushed judgement on the British Bankers Association ‘s(BBA) setting of the LIBOR rate. As we all know, this is a key rate, less important than it used to be sure, but still key to setting long-term mortgages and bond prices as well as many bank loans.

With the various Global banks involved in the Libor scandal seemingly bang to rights in terms of their guilt for trying to fix LIBOR, it comes as no surprise to learn the Government will now strip the BBA of the right to set it (tactfully the BBA had thrown in the towel earlier) and this will now go to an independent body. Plus, banks will have to quote real trades and not their ‘averages’ and so they will be less able to fudge the numbers going forward. A welcome victory for the market then, with ‘real’ market forces and an independent body be put in charge. As a consequence of the Libor rate rigging scandal, the setting of the Gold rate in London and now various other commodity ‘fixes’ are also under question.

What is also clear to me throughout this whole process is just how much the FSA now distrusts the capital markets, bankers and traders en bloc. If this is to be their new default setting then I can see many more targets for investigations coming. So many in fact the that their action is more likely limited solely due to the FSA’s staffing capacity rather than by the number of potential cases.

Take for example market making in smaller shares in illiquid markets - a real bone of contention for many smaller private investors. The capacity for ‘co-petition’ (as opposed to competition) and for brokers to help each other is huge. Plus, even the FSA admit that around 25% of all trades before major RNS announcements are ‘suspicious’ – in fact they are pleased that this number is actually lower than a few years ago but still substantial and symptomatic of the ‘insider’ riven environment that is the UK markets and that many private investors are sacrificed at the altar of greed due to the information deficiency they suffer. Ask yourself this question - last week Bumi shares fell 20%on the Friday before the announcement of a probe into the company - plainly obvious those “in the know” were stepping aside. What did the company’s broker say? “Nothing suspicious in our book Guv” - despicable!

Then there are the real challenges around ETF’s and so called ‘Delta One’ trades - where synthetic structures do not really hold the underlying assets that buyers think that they do. ETF’s in fact managed to get suspended in 2008 and I personally have not touched them since given the small print they come with that ‘lightly’ informs you that there is no real relationship between the synthetic instrument and the market!

And then the bid daddy of all problems, the one that is technically holding markets back the most – IPO’s. Banks setting the wrong IPO pricing due to vested interests has tarnished the equity markets of late with again Bumi and Facebook being prime examples where billions of pounds of misvaluation occurs… With so few genuine companies willing to risk going public presently, our main indices have become full of foreign natural resources plays and not necessarily for the greater good. We only have to look once more at Bumi this week to see the dangers here of the lack of information and control that concentrated shareholder lists have…

Currently, investment and retails banks are so stuffed with regulatory issues such that they are not focused at all on lending new money – with all the above still on the ‘to do’ list of the regulators, that won’t change any time soon in my opinion.

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Does RDR prove FSA is still not first for purpose?

The future of free financial advice, outsourced to Nigeria?

What is RDR?  It is a change in the whole structure of the Independent Financial Adviser market in in the UK. After several scandals around endowment and pensions mis-selling, the regulator decided that two things needed to be done. The first was to make advisers take harder exams to become 'RDR's' so that the lever of advice offered was better. The second element though was to change how IFA's made money, now they would have to charge fees upfront rather than taking commissions - this change is a real problem for the industry.

The best comparisons I can think of are free phones and free banking. You may pay a little for your mobile, but most o the money is recouped by the provider through monthly charges. With Banking, our accounts are free, but hidden charges on overdrafts and poor interest rates help the banks make that up.

As we know from the Internet world, once something is perceived as free, any attempt to charge for it generally fails. But thee Government and its public sector advisors see commission as a bad thing per se and are happy to ban it; even the EU has not gone down this road.

Unsurprisingly, IFA's are up in arms about the regulatory changes, they way they need to record their dealings is now more process driven, so they are spending lots on new systems, plus their future business model is a tricky one making the case of investment challenging.

Personally, I have never paid anyone for financial advice, but I know plenty who do - if though the payments have to now be made upfront instead of 'hidden', will people want to pay? Maybe, maybe not, we will see. It is a huge change to a huge industry.

Clearly, people resent middlemen in general taking cuts and there is a good case to make that Financial Institutions and Banks have taken too much of a cut int he past few years, helping to create our economic disaster zone of an economy. But the principle of taking a cut is a good one, it is how the world works and provides the link between service and payment.

The FSA here is, as usual, failing to understand that its new rules will end a whole way of doing business - or perhaps it does not. How are these regulators qualified though to decide on entire industry business models, what industries have they run - plus where does it go next? No introduction fees for Funds and Investments at all - a move to people having to seek free advice with the diminution in quality that this entails?

After all, what sort of so called non-advice institutions may step in to help people in this brave new world of financial advisory services - why the main retail banks of course, the source of all the mis-selling scandals in the first place....

FSA & Bank of of England drawn into mess

It has not taken long for the LIBOR scandal to become a little more complex. Many banks were involved and even were speaking to their customers. LIBOR ceased to have much meaning in 2008/9. This was blamed on the Financial Crisis - turns out that was an inaccurate generalisation.

It seems so unlikely that so many banks could be implicated without the FSA and other authorities knowing that something was amiss - already it seems as if maybe 100 people will be directly involved. Not a small number.

So now the focus will switch quite rightly to the regulators and their role in condoning or ignoring what was going on in the LIBOR market. I doubt this is going to go well for the regulators 2008 after all was a busy year for the FSA and BOE and an quite inglorious one. Mistake compounded upon mistake from 2007 onwards.

As I wrote on Friday, it won't surprise me to find the regulators as much at fault as the Banks for this. With the markets dying in the liquidity crunch anything, even deception, that could hold together the global capital markets would be a good thing. The UK did not need Barclays joining the SOE (State Owned Enterprise) club - nor will the US have wanted more Lehmans collapses.

So the interesting piece will be the blame game and who gets caught up in the end. Mervyn King is retiring soon anyway and it won't be all that amazing if he does a Marcus Agius to try to carry some of the can.

FSA & Barclays

< Sees bandwagon, *jumps* ... >

Bit of a coincidence, after the Goodwin post below.  One might have thought, after all the FSA mea culpa in 2008, they would have jumped all over Barclays this time.  But no, they have blown them a kiss.

This is par for the course.  From my own little corner of the universe I can relate that several years ago a fairly clear-cut prima facie case of the same kind of distorted price-reporting - this time in the energy sector, and again involving a blue-chip, household name player - was brought to their attention.  They did nothing - nothing at all.

How can the Barclays case (and, we are led to believe, several more that will come to light in due course) not be one of making a false market ?  All the comments on the previous post bear repeating.  It Has To Be Prison.

Finally, late at night, I have just nearly fallen off my chair as Emily Brainless on Newsnight offers the observation: "it hasn't been proved that anyone lost money over this".  What the **** ?!  The whole point of distorting LIBOR was to make the other side lose money (and win bonus for the dealmaker concerned), on each and every occasion !  Sole purpose of the exercise: and self-evidently, it sometimes had the desired effect - read the emails you stupid woman.

ND

So, Farewell, Hector Sants

So. Farewell (again)
Hector Sants

"It was nothing to do
With me
Guv'nor"

Yes
That was your catchphrase

"Sants is Pants"
That is what
Others said

Now you will never
Be
Guv'nor


E.J.Throgmorton
(0.5%)

Sir George Matthewson sees no Monkey

Credit to the Scottish Herald for following up in the abysmal FSA investigation into the conduct of RBS executives in 2008. Sadly, they find the then Chairman in a strange mood. Firstly, he bemoans his personal losses in subscribing to the RBS rights issue. Then he says the FSA is quite right to keep its investigation secret.

A fact which helps his third point, that no one was found to be corrupt and the board was not guilty of a failure of Governance. The truth is RBS fought tooth and nail with Barclays for ABN AMRO and paid a premium that was beyond belief. Certainly, beyond what Barclays (who for all their problems at least have never put their hand out to taxpayers) would even consider paying. The board stood by and watched Sir Fred Goodwin and his ego get hold of this. It is a massive failure of Governance.

As the FSA waved it through it does not surprise me at all that subsequently they give this the green light, in secret of course. When will there be a real independent investigation of these crooks and those at the FSA who connived with them. It is not just RBS, HBOS and Northern Wreck executives and their regulators all have a case to answer, one which frankly it is not in the interest of the FSA to expose.

At the moment the collective FSA and City gentry are engaged in Monkey Business:

So, Farewell Then, Hector Sants

So Hector Sants is 'unexpectedly' stepping down after his 3-year tenure as Chief Executive of the FSA - not sticking around to see whether it has a future at all after the General Election.

The Grauniad reckons he's in the clear, sort-of:

"He joined the regulator in May 2004 as the managing director responsible for wholesale and institutional markets which allowed him to avoid direct criticism over the supervision of Northern Rock"

Wrong. As we've said before, anyone in a senior FSA post can have been expected to clock the extreme dangers inherent in NR's sui generis business model and done something about it, if only to put it on a closely-monitored watch list. The 'wholesale and institutional markets' had the Crock marked down as being in Big Trouble before ever 2007 dawned.

The pyramid of blame has one Gordon 'race-to-the-bottom' Brown squarely skewered at its pointy apex: but the senior ranks at the FSA pre-2007 are close to the top on the executive side.

ND

Politicised FSA to 'fix' bond markets for Brown.

It seems clear from recent speeches by Adair Turner, about socially useless banks and the curse of bank bonus' that we have someone of the Left in charge of the FSA. And why not, it has been Labour principle to fill the country with Quangocrat placemen to ensure the policy of the Labour party is enforced everywhere and at every level.

The news today is not unexpected, but shows in its true light both the desperation of the Government, the failure of regulation previously and the guarantee of a double dip recession.

This is all quite good for one small announcement. That the FSA will require Banks to hold only Government bonds at tier one capital, no other instruments. Let's ask a rhetorical question, would you rather have bonds invested in UK Gilts or say, Vodafone or BP in the current and future expected climate. Quite.

Instead, banks will be forced to hold UK Gilts, which gets the treasury out of its QE hole by screwing the banks returns. This may sound like a good plan for avoiding bankruptcy but is really just fixing the markets. It also shows how in the past the FSA had little graps on what was and was not tier one capital, now they are going further than necessary to make up for past laxness.

Finally, this imposition on the banks will reduce greatly their returns say by up to 200 basis points being conservative. This is £12 billion of profits not earned to help fix their balance sheets, so enforcing a slower return to the private sector for the banks. Of course to make up this loss they will increase their borrowing rates and this is how we get to a double dip recession. The banks care about trying to stay solvent, if it screws their customers then so be it - it is their duty to their shareholders (which for 2 of them in the UK, means us as taxpayers).

So the result of the change is that the cost of banking to you and I is increased, whilst the cost to the Government is lowered. That is the proposed market fix. Sounds great does it not?

Economic Generals focus on the last war

There is much discussion, see here for example, of whether the FSA or Bank of England get to oversee future financial regulation. Personally, I am getting a bit tired of it all as it is a really typical Government-style piece of bureaucratic infighting.
Worse, it is clouding over the real policy failures that have been made these last few months and also ignoring the real crisis we are seeing now in the Country.

Who cares about a macro-prudential economic panel that may or may not help to avoid another bubble in 50 years time. No sane bank or borrower is going to repeat the mistakes of the past few years having learned their lessons in such a costly manner so recently. Not that we do not need new rules, but the market has enforced them much faster than any regulation can be imposed.


So this hypothetical discussion is of little interest. It also is hiding the true debate which is what on earth we can do to both try and stop doing more quantitative easing whilst not letting the economy completely die? This may be happening in any event, in which case all the bureaucratic political warfare is real deck-chairs-on-the-Titanic-stuff: As with Generals down the ages the orders and weapons put in place for a new army are those needed to fight the last war, not the next one. The next economic period is about the controlling the collapse of the fiat money system as was and the huge inflationary pressures of a 6 billion person, resource-constrained world.

The Bank of England has run out of bullets, the FSA is concerned with minutiae and the Government is busy fighting over its future in opposition. This is not the leadership we would ideally like to see us through the crisis, it is a terrible failure of the UK political system as a whole.

FSA Report; Brown poodle spouts claptrap

The title may be a bit hard, but Lord Turner has long history with New Labour. He has issued two previous reports, both of limited effect in the long-term.

Actually there is some sense (e.g. more thorough and consistent approach to audits) in the huge report published today, but I also find some logical inconsistencies in the report.

Most of the regulations for banks after all needed to be put in place ages ago. The problems they seek to solve have been solved by the market. Assets are now marked down, some banks have failed, mortgages are not being handed out willy nilly. So much of the prescription is to fight the last war, as is usually the case with these things.

However, what is missing in the FSA Elephant in the Room. Why should the FSA regulate anything again, it has proved a failed organisation in this crisis, so too has the Bank of England in many ways. The organisations need to be merged. The BOE needs the FSA's staff and insight, the FSA needs access to the BOE boffins who can see the patterns in money markets etc.

None of this is addressed, for this would be critical of G. Brown and his lame duck Government. Brown's hedge fund friends, source of so much funding and of course Lord Myners, also get off lighlty. A nice populist attack on bonus's. This is a very political report.

One last point I wanted to make is on the silliness of over-regulation. Example A is the suggestion that mortgage lending should be strictly monitored, perhaps even with limits on the multiples that people can borrow. Why is this needed ? As an answer to the world where lending was too lax, but this world was caused by BOE interest rates being held too low, not by the banks. When rates went up and credit became tighter, banks reduced the criteria. Now we have a very tough market to get a mortgage in, with strict lending criteria.
Where is this sudden need for more regulation? The state does not need to do everything, indeed generally what it does it does badly. I hope the BOE and FSA look closely at monetary policy in the future, that is the way to stop asset bubbles. Little mention of that today.

(hat-tip for graphic to Thisislondon.co.uk)

Madoff - Could it happen in the UK?

Madoff, a name few on this side of the Atlantic will have heard of until the last few days. For those who have not read this amazing story; effectively a top wall street firm has been found out to be a Ponzi scheme. $50 billion has been lost to investors, and maybe much more as the investigation is only just starting.

Mr Madoff contributed a lot to politicians and even was an adviser to the SEC, the US regulators. Over the weekend, the victims are being announced. Many already stricken banks and hedge funds who will now face possible disaster in the coming week. Santander has said its clients have lost $3.1 billion. Bramdean, run by high profile city slicker, Nicola Horlick, has lost hundreds of millions and the share price will no doubt be pummelled further tomorrow.

The story is amazing and another sign of the height's to which Wall Street excess had been allowed to reach. Madoff's company had been on the SEC list for a check, but they had not round to it.

So could it happen in the UK? The answer is yes. There are many similarities here with Northern Rock. A business with a flawed model, totally unable to operate in a market. The staff all working hard not knowing the true crisis at the business. The Finance Director resigned and nothing was done. The auditors ticked all the boxes, the FSA looked on without taking any real action.

Yes, the FSA regulator has sacked the staff and tightened up its act now. But how much more could come out in the future? The reviews they do are on a 3 yearly basis. Hopefully nothing on the scale of Madoff will come out here, but the world has turned up some pretty strange stuff in recent months.

Those pesky short sellers...

UK bank share prices today, post the short selling ban:

Barclays off 9%
Lloyds off 13%
RBS off 17%
HBOS off 12%

Must all have been their fault, closing out those short positions....