Article: US custodian banks hit by shift into cash

Excerpt: “Low interest rates have put tremendous pressure on custodian banks that manage funds for large institutions and retail brokerages, with the Federal Reserve’s commitment to near-zero rates through 2013 make it difficult to invest customer funds in safe investments that generate return.”

Article: Dismay of MF Global clients should spur change

Excerpt: “After Lehman collapsed, the UK government set up a new bankruptcy regime for brokers which was intended to ‘ensure the return of client assets as soon as practicable’. (…) Almost three months later, clients of MF Global’s London arm are still waiting for their money. (…) MF Global’s US trustee has distributed 72% of what is owed to commodities clients.”

Article: Warning on returns from MF Global UK

Excerpt: “[KPMG, MFG's administrator has warned] that customers might not get all their money back. Many clients did not realise their accounts were non-segregated until MF Global collapsed, according to Anant Shah, a fund manager at Whitepearls, a Mauritius-based family investment vehicle which claims to be trying to retrieve $35m in segregated accounts. He said the resolution in the UK was ‘disgracefully slow, given that real lives are being affected . . . it leads us as well as others to consider never opening another account with a UK broker’. Unlike counterparts around the world, such as the US and Canada, the UK has yet to return any assets to clients”

Article: KPMG defends efforts on MF Global claims

Excerpt: “The biggest issue for KPMG (…) is determining which clients have money in MF Global UK’s segregated funds. Those with non-segregated funds have been put into the unsecured creditors’ pool and (…) the issue was complicated by many customers looking to switch the status of their accounts in the final few days. (…) Under the new rules client monies are being used to pay for secured creditors.”

Book: “Lords of Finance: The Bankers Who Broke the World”

Excerpt [context: the partial collapse of the US banking system between 1931-33]: “the mounting bank failures intensified hoarding – $500 million dollars [approx. $100 bn today] in cash was pulled from banks. While most of this was stashed away in traditional hiding places – socks, desks, safes, strongboxes under the bed, deposit vaults – some found its way to very unconventional spots, including, according to congressional report, ‘holes in the ground, privies, linings of coats, horse collars, coal piles, hollow trees’. Anywhere but bank accounts.”

While some will try pushing from one side…

Article: Shake-up in US fixed income research rules (“new rules to deal with conflict of interest in fixed income research are set to be proposed by US financial industry regulators”)

Excerpt: “A recent report highlighted potential loopholes to equity rules (…). The rules did not prohibit bankers and analysts from talking outside the firm.”
→ does anyone really take it seriously that one could legislate this risk away? Sometimes an image is worth a 1,000 words, but common sense is worth 10^12 pages.

… others show for the umpteenth time that laws exist to be reinterpreted (bent? broken?) as the occasion presents itself…

Article: Basel III – the case for the defence

Excerpt: “In Europe, Paris and Berlin are again proving that they see no contradiction between railing against financiers while at the same time undermining hard-won global agreements on tighter regulation.”

… even because it is incredibly hard to comply with all the laws and regulations of all the countries (states? cities?) one operates in and still find time to actually get some work done.

Article: New rules are struggle for industry and regulators

Excerpt: “It is unclear whether a non-EU bank would have to set up a branch in the EU if it wanted to become a member of a clearing house based in the region. There is also confusion over how financial institutions operating globally would comply with Dodd-Frank, Emir, Mifid and legislation in Asia.”

In the age of multi-disciplinary events, this is one of the best. You can keep track of it live on Livestream.com, check out the event’s blog on Tumblr, its Twitter feed or Facebook page. Enjoy!

Then we found a post by the Epicurean Dealmaker that destroys the study precisely on these arguments. As he says after presenting his points, “Perhaps one day some academic will actually make the effort to understand how my industry works before they design a study to explain it”. And as he says, we also yearn for a good study into the subject.

The second article in the Financial Times tries to tack the same “double standards” theme onto Germany, given its treatment of the heavily-indebted Eurozone members. It doesn’t work nearly as well, but for argument’s sake – and its use of Goethe quotes from Faust – it’s an interesting read.

Here’s the 3-minute video:

China

The real risks to China’s financial system – FT.com – Two articles supposedly debate the IMF report, but it turns out their opinions aren’t that much divergent. We’ve read calls for opening up the system, and we remind the readers that when the incentive systems of enough players are aligned towards a given direction – in this case, growth, then whether it’s centralized or open doesn’t matter as much. One such example was the US housing boom and subsequent bust: oversimplifying a bit, one can argue that all players were aligned towards growth: home owners, mortgage originators/ packagers/ distributors, banks, investors, credit rating agencies etc. – and, on top of them all, the government and its agencies. The fact that the system was open, competitive and so on didn’t help much. In China, the incentives to grow are still strong and the Central government is yet to pull on the reins strongly enough. It’s not necessarily true that an open system would be better incentivized to slow down.

Europe

Banks face funding stress – WSJ.com – European banks need funding, most of it nowadays comes from the ECB due to higher perceived risk. So banks needing collateral accepted by the ECB enter strange swaps with funds and investment banks to get such “risk-free” assets at a discount to the, well, not-collateral-level assets they’re swapping with the other players. Is this spreading the risk or creating even more connections where there shouldn’t be many?

UniCredit bombshell shouldn’t be the last one – Bloomberg – UniCredit, one of Italy’s largest lenders, has recognized 10.7 billion euros in asset writedowns in its latest report. Even so it’s still trading at 0.29x book value, and that book value is propped up by “useless” assets such as deferred taxes (good luck turning a profit to use this asset) and goodwill (good luck trading goodwill for cash). Other european banks trade at P/B multiples that suggest their credibility is also way down. However, the author argues the problem could be global and that, if banks start getting as candid as UniCredit, things could get rather unpredictable.

USA

Fitch’s warning spooks investors – WSJ.com — AND — US Banks face contagion risk from European debt – Bloomberg – Credit rating agency Fitch has issued a report (for subscribers only) on the “serious risk” that US banks may face if the situation in Europe deteriorates much further. As in France being at risk, for instance. While again it’s a case of “not much new information”, the fact that they chose to go on record – even though they didn’t change the ratings of any of the US banks mentioned – has spooked investors (US banks down by 3-4% as we write, with the notable yet unsurprising exception of Wells Fargo – still down by 1%).

Why not break up Citigroup? – NYT’s Economix blog – Simon Johnson, former IMF chief economist, links to the Dallas FED president’s speech on “too big to fail” banks and agrees with him that such institutions should be broken down into smaller pieces. He suggests starting with Citigroup.

‘Aloha’ to a new fix-it job – WSJ.com – coincidentally, the WSJ.com has a profile of Michael O’Neill, the new Chairman of Citibank N.A. (not Citigroup, “just” the bank – i.e. 70% of Citigroup’s assets). Certainly an impressive profile, but we’re reminded of Warren Buffett’s axiom: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”

Global

Finance job losses near 200,00 as BNP, Citigroup trim employees – Bloomberg – Well, partially playing to Mr. Johnson’s wishes above, the banks are reducing their size – does involuntary reduction count?

The first one describes Chinese car manufacturer JAC Motors’ amazing success story in entering Brazil from scratch, using cheap yet “complete” cars appealing to a middle class perhaps in search of a first car. Yet this story is at risk because of a sudden and relatively targeted regulation change – a change that has other Asian factories formally protesting it with the WTO (World Trade Organization).

The second article describes HSBC’s sale of its large consumer financing operation in Brazil, Losango. While the main motivation for the sale is certainly a CEO-led restructuring that has HSBC shedding assets and laying off tens of thousands globally, it doesn’t hurt that delinquencies are on the rise.

This NYT story highlights that some financial instruments are too untested to trust completely. Apparently there’s enough leeway built into the CDS contract for this “voluntary” deal (to take a 50% haircut on Greek debt) NOT to be considered a default on the terms of the CDS, meaning people who bought “insurance” get nothing. Another thing that captures our attention is that there’s a committee that decides whether or not this is an event of default – and it would seem like a one-sided committee in favor of CDS investors. However, the big banks’ incentives are more aligned towards making the agreed debt deal come through – to save 50% and perhaps avoid a larger meltdown. Not surprisingly, this committee has already indicated that this “voluntary” swap does not constitute default…

And this Bloomberg story addresses the counterpart risk issue: in this immensely interconnected financial system, it just may be that too much risk-spreading actually increases the chances of “contagion” or “viral spread” of troubles. If that happens with a over-the-counter, not-centrally-cleared instrument such as the CDS, there could be big consequences.