A Modest Proposal
The tea party masquerading as a colonoscopy, better known as the stress tests was meant to examine which banks were too big to fail. Those with particularly big holes to fill included Bank of America, Wells Fargo and Morgan Stanley. Those that came out smelling of roses were, as ever, Goldman and JPMorgan.
But there seems a certain illogicality to the process and the outcome. The process was designed to discover which banks were too big to fail. All the emphasis was on the failure side. I would suggest that if regulators really want to encourage competition, free markets and a total departure from the collusion that got the world into this mess, they should look at the first part of the equation, the words “too big”. Taken to its logical conclusion this would necessitate ordering the break up of JPMorgan and Goldman Sachs. Both firms’ size and connection into nearly every facet of the financial markets has grown over the past year. If ever there was a systemic risk to the system, these two firms represent it.
Don’t get me wrong, competition breeds winners and no one should be punished for their success. And in the current light, it seems unthinkable that either JPMorgan or Goldman would fail. But such thoughts were equally valid in the summer of 2007 about AIG, Lehman and perhaps Bear Sterns.
Unfortunately there are probably too many shareholders and ex-employees of Goldman in the US government for this to happen. But if one thing could be done, to really signal that it is not business as usual in the financial system, this would be it.
Sunday, May 24, 2009
An analogy
Watching an advert for the banned weight loss supplement the other evening, a similarity stuck me. The product was essentially offering an outcome that could not happen; weight loss without diet and exercise. What occurred to me was that the busted CDOs at the heart of the financial crisis offered exactly the same thing; an impossible outcome of higher returns for lower risks.
Taking the analogy one step further, I saw how finance to the economy is just like food to the body. All economies need finance to survive. But like bodies, they can have too much of it. Financial obesity is perhaps an apt way to describe what the world looked like in early 2007, with too much money sloshing around the great, fat bellies of New York and London. Now the world is in a crash diet, with money scare and everyone trying to slim down their financial weight.
Developing the analogy a stage further, there are good foods and bad foods. Would a nice sensible corporate loan be like a wholesome shepherd’s pie? Would a CDO be the equivalent of a large curry - fun to consume but you don’t really know the damage you are doing to yourself until much later? A hot tech IPO that soars 50% on its first day of trading – perhaps its equivalent would be a jumbo slurpy which gives you a great sugar rush, but you know the slump is coming.
All the bad foods are good fun, in much the same way that it is more fun to be trading equity options than it is to be doing corporate cash management. But the body and economies need a balanced diet of food and finance respectively. With everyone working for hedge funds and trading options, the economy got dangerously fat. Having slimmed down, there needs to be a balanced diet.
Watching an advert for the banned weight loss supplement the other evening, a similarity stuck me. The product was essentially offering an outcome that could not happen; weight loss without diet and exercise. What occurred to me was that the busted CDOs at the heart of the financial crisis offered exactly the same thing; an impossible outcome of higher returns for lower risks.
Taking the analogy one step further, I saw how finance to the economy is just like food to the body. All economies need finance to survive. But like bodies, they can have too much of it. Financial obesity is perhaps an apt way to describe what the world looked like in early 2007, with too much money sloshing around the great, fat bellies of New York and London. Now the world is in a crash diet, with money scare and everyone trying to slim down their financial weight.
Developing the analogy a stage further, there are good foods and bad foods. Would a nice sensible corporate loan be like a wholesome shepherd’s pie? Would a CDO be the equivalent of a large curry - fun to consume but you don’t really know the damage you are doing to yourself until much later? A hot tech IPO that soars 50% on its first day of trading – perhaps its equivalent would be a jumbo slurpy which gives you a great sugar rush, but you know the slump is coming.
All the bad foods are good fun, in much the same way that it is more fun to be trading equity options than it is to be doing corporate cash management. But the body and economies need a balanced diet of food and finance respectively. With everyone working for hedge funds and trading options, the economy got dangerously fat. Having slimmed down, there needs to be a balanced diet.
Hedge funds must face up to their PR crisis
You know you have an image problem when President Obama publicly excoriates you. Obama, who is happy to shake hands with Hugo Chavez and reach out to the mullahs in Iran, does not however stand with US hedge funds. By publicly lambasting the senior bondholders of Chrysler debt, the President shows that the victims and perpetrators of the financial crisis have become confused in government eyes. Hedge funds didn’t cause the crisis nor has any been bailed out with public money. Indeed hedge funds and their founders have almost certainly lost more money as a result of what has happened than any single other group; and certainly in greater concentrations. Nevertheless the public is at least deeply suspicious if not outright hostile to the hedge fund industry.
It is not just in the US. In Europe regulators, politicians and the public are eager to go after the hedge funds. Paul Marshall of Marshall Wace recently wrote a column in the FT over the proposed European Union directive on regulating the alternative asset management industry. It was a plaintive cry that will probably not be heard. He argues cogently that regulators are going after the wrong guys and in the wrong way, which is entirely true.
At the root of this problem is the hedge funds’ hard wired secrecy. They have made opacity part of their business plan. In good times this served them well as it cloaked them with mystique. But their lack of openness is now a real problem and one which will take a wholesale shift of attitude to repair.
Some hedge funds get it. Within New York headhunting circles, almost the only hedge fund search mandates are for marketing people who can communicate professionally not only with investors, but also with the wider group of stakeholders, including government officials, regulators and the press. Few funds have actually made the jump and hired someone who can open the kimono, although many are thinking of it.
The hedgies might want to look at the private equity industry which two years ago was facing its own PR nightmare. Widely blamed for job losses and asset stripping, private equity firms were famously called locusts by the German finance minister. In response they went on a charm offensive. Industry bodies lobbied hard and individual firms hired seasoned PR vets, used to working in the trenches of crisis response and image building. It was no surprise that one day after Steve Schwarzman was vilified for the extravagance of his 60th birthday party, Blackstone called up Goldman’s head of press relations Peter Rose and asked him to join them. Other mavens soon went in house; KKR hired Ken Mehlmann who had run the Republican Party in the US and Peter McKillop (a senior PR from JPMorgan and ex-journalist). More recently Actis in the UK hired Tashi Lasalle (recently voted one of Management Todays 30 rising stars).
As they come blinking into the sunlight of public scrutiny, hedge funds should take a leaf out of this book. The odd op-ed in the FT is not enough.
You know you have an image problem when President Obama publicly excoriates you. Obama, who is happy to shake hands with Hugo Chavez and reach out to the mullahs in Iran, does not however stand with US hedge funds. By publicly lambasting the senior bondholders of Chrysler debt, the President shows that the victims and perpetrators of the financial crisis have become confused in government eyes. Hedge funds didn’t cause the crisis nor has any been bailed out with public money. Indeed hedge funds and their founders have almost certainly lost more money as a result of what has happened than any single other group; and certainly in greater concentrations. Nevertheless the public is at least deeply suspicious if not outright hostile to the hedge fund industry.
It is not just in the US. In Europe regulators, politicians and the public are eager to go after the hedge funds. Paul Marshall of Marshall Wace recently wrote a column in the FT over the proposed European Union directive on regulating the alternative asset management industry. It was a plaintive cry that will probably not be heard. He argues cogently that regulators are going after the wrong guys and in the wrong way, which is entirely true.
At the root of this problem is the hedge funds’ hard wired secrecy. They have made opacity part of their business plan. In good times this served them well as it cloaked them with mystique. But their lack of openness is now a real problem and one which will take a wholesale shift of attitude to repair.
Some hedge funds get it. Within New York headhunting circles, almost the only hedge fund search mandates are for marketing people who can communicate professionally not only with investors, but also with the wider group of stakeholders, including government officials, regulators and the press. Few funds have actually made the jump and hired someone who can open the kimono, although many are thinking of it.
The hedgies might want to look at the private equity industry which two years ago was facing its own PR nightmare. Widely blamed for job losses and asset stripping, private equity firms were famously called locusts by the German finance minister. In response they went on a charm offensive. Industry bodies lobbied hard and individual firms hired seasoned PR vets, used to working in the trenches of crisis response and image building. It was no surprise that one day after Steve Schwarzman was vilified for the extravagance of his 60th birthday party, Blackstone called up Goldman’s head of press relations Peter Rose and asked him to join them. Other mavens soon went in house; KKR hired Ken Mehlmann who had run the Republican Party in the US and Peter McKillop (a senior PR from JPMorgan and ex-journalist). More recently Actis in the UK hired Tashi Lasalle (recently voted one of Management Todays 30 rising stars).
As they come blinking into the sunlight of public scrutiny, hedge funds should take a leaf out of this book. The odd op-ed in the FT is not enough.
Financial freedom of the East
Spring might be in the air in New York, but love definitely is not. The three words you are most likely to overhear whispered in the bars and brasseries of midtown are not “I love you” but “its all over.” Everyone involved in the financial services industry has been watching with mounting horror how politicians and pundits have worked themselves into a fury. First it was the “outrage” of AIG bonuses. Then the government broke the bankruptcy law to give unions 55% of Chrysler at the expense of the senior bond holders. Now comes the new regulatory bill going through congress, which in all likelihood will include compensation caps.
The rank hypocrisy of many of these politicians is only matched by their demagoguery. Many people still working in the financial industry just feel that it is no longer worth it. Death threats to AIG employees, 90% bonus taxes, perp walks and prison. Bleh.
But for those of us who have been around a bit, we know it’s not all over: It’s changing but it’s not over. Recent market rebounds, some flurries of hiring, risk coming back to the party. It’s slow, it’s a beginning. And although no one knows quite what the market will look like in three years, you can bet anything that it won’t look like it did in the summer of 2007.
For some this represents a huge opportunity. Asia’s financial centres – Hong Kong, Singapore and wannabe Seoul – face perhaps the chance of a lifetime. If you are the global head of investment banking sitting in a US bank in New York, working every day and knowing that whatever money you make might be retroactively taxed at 90%, there doesn’t seem to be much point in going to work. But what if you are sitting in Asia, still the global head of the business but in a separately structured subsidiary, master of your own business, sensibly taxed and able to hire and compensate your employees without any howls of faux outrage, life looks very different.
If I were high up in the government of Hong Kong or Singapore, I would be blanketing CNBC and the Wall Street Journal with ads proclaiming the financial freedom of the East. I would have my financial secretary offering tax breaks to hedge funds to relocate their business to Asia. I would probably pay for the airfare.
Never has so much investment talent been so under stress. Market friendly governments in the East should take advantage of the stupidity of their counterparts in the West and lure the heads of these businesses. 15% tax rates haven’t ever looked this good.
Spring might be in the air in New York, but love definitely is not. The three words you are most likely to overhear whispered in the bars and brasseries of midtown are not “I love you” but “its all over.” Everyone involved in the financial services industry has been watching with mounting horror how politicians and pundits have worked themselves into a fury. First it was the “outrage” of AIG bonuses. Then the government broke the bankruptcy law to give unions 55% of Chrysler at the expense of the senior bond holders. Now comes the new regulatory bill going through congress, which in all likelihood will include compensation caps.
The rank hypocrisy of many of these politicians is only matched by their demagoguery. Many people still working in the financial industry just feel that it is no longer worth it. Death threats to AIG employees, 90% bonus taxes, perp walks and prison. Bleh.
But for those of us who have been around a bit, we know it’s not all over: It’s changing but it’s not over. Recent market rebounds, some flurries of hiring, risk coming back to the party. It’s slow, it’s a beginning. And although no one knows quite what the market will look like in three years, you can bet anything that it won’t look like it did in the summer of 2007.
For some this represents a huge opportunity. Asia’s financial centres – Hong Kong, Singapore and wannabe Seoul – face perhaps the chance of a lifetime. If you are the global head of investment banking sitting in a US bank in New York, working every day and knowing that whatever money you make might be retroactively taxed at 90%, there doesn’t seem to be much point in going to work. But what if you are sitting in Asia, still the global head of the business but in a separately structured subsidiary, master of your own business, sensibly taxed and able to hire and compensate your employees without any howls of faux outrage, life looks very different.
If I were high up in the government of Hong Kong or Singapore, I would be blanketing CNBC and the Wall Street Journal with ads proclaiming the financial freedom of the East. I would have my financial secretary offering tax breaks to hedge funds to relocate their business to Asia. I would probably pay for the airfare.
Never has so much investment talent been so under stress. Market friendly governments in the East should take advantage of the stupidity of their counterparts in the West and lure the heads of these businesses. 15% tax rates haven’t ever looked this good.
Friday, May 15, 2009
Sir John Cowperthwaite
"In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralised decisions of a government, and certainly the harm is likely to be counteracted faster." Sir John Cowperthwaite, Financial secretary of Hong Kong in his first budget speech, 1961.
As the world descends into government-controlled corporate stupor, we need more enlightened thinkers with the nerves to say such things. This blog is dedicated to Sir John.
http://www.telegraph.co.uk/news/obituaries/1508696/Sir-John-Cowperthwaite.html
http://en-cowperthwaite.blogspot.com/
As the world descends into government-controlled corporate stupor, we need more enlightened thinkers with the nerves to say such things. This blog is dedicated to Sir John.
http://www.telegraph.co.uk/news/obituaries/1508696/Sir-John-Cowperthwaite.html
http://en-cowperthwaite.blogspot.com/
Subscribe to:
Posts (Atom)