Scandalous bonuses and enormous dividends: where is the moral?

An article of The Guardian really caught my attention yesterday afternoon. Sir Mervyn King, the governor of Bank of England, was asking Britain’s banks to restrain bonuses and dividends to build up their financial strength. This statement was fairly logic but it really triggered something in me. The world’s economy is facing one of its worst crisis and yet, the very same people responsible for the crisis are giving themselves huge bonuses and dividends. I can’t stop myself of wondering where is the moral in all of this???

Am I crazy for thinking that an industry that is behaving so badly should not be rewarded??? Is it normal to expect an increase in bonuses (The eFinancialCareers survey said that of the 89% of the finance professionals it questioned who were expecting bonuses, nearly half were anticipating bonuses higher than last year) when the banking system is barely surviving?? I understand the pay-for-performance culture and I get that it is very much ingrained in the financial psyche but where is the limit?

This issue was first brought into public light in 2008 when, despite colossal losses, banks distributed enormous bonuses. Staff at six main banks including Goldman Sachs and Citigroup received $33 billion despite being the beneficiaries of a $700bn bail-out from the US government. Even more incredible, at one point in 2008 the Morgan Stanley $10.7bn pay pot for the year was greater than the entire stock market value of the business. In effect, staff, on receiving their remuneration, could club together and buy the bank.

In 2012 the bonuses should be “cut off” but no one knows by how much… Analysts expect bonuses to still be over $100,000 per employees. Doesn’t look like  Wall Street is taking seriously political threats.

Now I get that rewarding employees and retaining the best bankers are very important, I understand that sometimes some bonuses are justified but, in general, this is repulsing and utterly amoral.

The image of the financial industry is at its lowest and people are starting to mobilize to change things (e.g.: Occupy Wall Street). I believe governments should really start acting and put a stop to this insanity. If they don’t I believe that the people will. And it won’t be pretty.

Sources:

http://www.guardian.co.uk/business/2011/dec/01/mervyn-king-warns-uk-banks

The slow agony of France’s AAA

France’s rating has been in jeopardy for months because of the growing debt crisis. The country is exposed to a sustained rise of its debt yields and to a weakening economic growth. These issues are coupled with worries about a high fiscal deficit and banks’ exposure to other troubled European sovereign debt (especially Greece and Italy).

Large rating agencies have been warning the government for weeks now and the downgrade seems inevitable. However things are slow to happen. Dozens of articles about a potential downgrade are published everyday and yet nothing is happening since the S&P’s “error” (“accidental” downgrade of France on the 10th of Nov) . I am wondering why? Why have small agencies taken actions (Egan-Jones cut France’s rating to a single A yesterday) when larger ones are still warning?

A lower rating would mean a few things for France:

• A probable increase in various interest rates (including but not limited to mortgages)
• Tougher access conditions to credit
• Threat on credit ratings of large companies

This would make an impact on Frenchs’ daily lives and clearly the decision to lower the grade is a big one but I feel that there is something behind all of that.

France is, with Germany, the base of the European Union and a downgrade of France might mean a downgrade of the EU in general. The economic zone is trouble and if even the most powerful countries are getting “sucked in” one can wonder what will happen next?

So is this the reason for this slow agony or have the credit agencies finally started to understand that they have a major impact on the world’s economy?

Sources:

http://blogs.lesechos.fr/market-makers/le-aaa-de-la-france-debat-depasse-a7721.html

http://www.businessweek.com/ap/financialnews/D9RBAPH80.htm

Facebook’s 10 billion IPO

It was announced yesterday that Facebook was targeting a time frame of April 2012 to June 2012 for its IPO (initial public offering). The offering could be one of the largest ever -$10 billion- which would value the company at around $100 billion. In comparison Google raised $1.67 billion in 2004.

This IPO has been “hotly anticipated” and is viewed as a defining moment for the latest IT bubble. However, some of the other social networking companies have been struggling for the past weeks (Linkedin -36% and Groupon -42%) and people are starting to wonder what would happen to this giant.

The media and especially the web is going crazy over this news and there are over 2,820 hits for the past 24 hours in google news. All the big journals such as WSJ, Fortune, Les Echos, FT, etc… have published at least two of three articles commenting the news.

A Facebook offering of $10 billion would be the largest IPO by any technology or Internet company.

Sources:

http://www.usatoday.com/money/industries/technology/story/2011-11-29/Facebook-IPO/51463962/1

http://techland.time.com/2011/11/29/techfast-facebook-ipo-rims-iphoneandroid-play-t-mobile-att-deal/

Durban Climate Summit: “parole, parole, parole”

Representatives of 190 countries are meeting in Durban to discuss climate changes and try to negotiate a “new deal”. It’s the 17th Climate Conference and it is crucial for the future of the planet but no one is going. Obama, Sarkozy, Merkel, Cameron and the rest are more concerned with their problems at home. Why care about things that will likely cause problems in 50 years when the debt crisis is spreading like wildfire?

In the past century temperature have risen 1.4 degrees and if it keeps going this way the the climate change will accelerate, the melting of the ice will increase and many area on the globe will be flooded. The Kyoto protocol, elaborated in 1997, set binding targets for 37 industrialized countries and the European community for reducing greenhouse gas (GHG) emissions. It expires next year and world leaders failed to extend it.

Global Natural Symptoms of the Climate Change

If the Durban Conference fails it will be impossible to limit the increase in temperature by just 2 degrees and poor countries under the threat of rising water will most likely feel abandoned. Furthermore, climate is not just about “drizzle or wind” it’s about agriculture, access to water, tourism, which are all very social or economical matters. In today’s world everything is linked and “a chain is only as strong as its weakest links”. A failure to support poorest countries will become a big issue later. And later does not mean in 200 years it means in the next decades.

This does not seem to be clear for developed/rich countries, especially the United-States and China. For years now they have failed to come up with a clear answer and they keep on pushing any kind of commitment away. This Conference is likely to be exactly what the Cancun and the Copenhagen Conference were: jokes. It’s always a lots of words and no commitment. As Dalida said, “parole, parole, parole”…..

Sources:

http://www.lesechos.fr/entreprises-secteurs/energie-environnement/actu/0201763493888-rechauffement-de-la-planete-l-avenir-du-protocole-de-kyoto-se-joue-a-durban-254807.php

http://www.usatoday.com/tech/science/environment/story/2011-11-24/un-durban-climate-change-meeting/51387226/1

Upside-down World

It has been clear for a few months that the world is disturbed but I have just heard the craziest news!!

Apparently the Greek government has decided to organize a referendum for its citizens on wether it should accept or not the EU rescue plan. This move has already had an impact on the different stock exchanges (FTSE 100 badly shaken). Papandreou, the Prime Minister, is probably looking to unite the people of Greece but this move is insane.

We will look at the consequences for the EU and on a larger scale for the world’s economy but let’s stop a minute to look at the decision itself. You don’t decide to call for a referendum in just a few days, you have to really think about it which means that he must have been “plotting” this decision even during the talk on the rescue package. Maybe this has been done to get more money from the EU but it puts the entire system in jeopardy.

There are two options now: the Greek either agree or disagree with the rescue package. In both cases there will be severe consequences. If the Greek don’t accept the rescue package they will need to leave the Euro zone spreading yet another financial crisis as the banks across Europe will become insolvent. In the meantime, the help that has been given to Greece for the past year is now suspended and puts the country at risk for immediate bankruptcy.

I believe it is safe to say that Greece is holding a gun to the head of the EU. Considering that 60% of Greek are not happy with the austerity plan we have to prepare for chaos and they have to prepare to become the world’s economy “most wanted”.

Sources

http://www.lesechos.fr/economie-politique/monde/actu/0201723818822-la-perspective-d-un-referendum-en-grece-plonge-la-zone-euro-dans-l-incertitude-242396.php

http://www.bloomberg.com/news/2011-11-02/referendum-will-confirm-greece-in-euro-papandreou.html

Credit Rating Agencies: life under scrutiny

Credit rating agencies are suppose to assign ratings for issuers of certain types of financial products such as bonds. The main agencies are Moody’s, Standard & Poor’s and Fitch; they control over 50% of the market.

These agencies have been created over a century ago but the official NRSRO (nationally-recognized statistical ratings organizations) was developed only in the 1970s. This is the result of greater regulation and oversight of the credit rating industry by the SEC.

In principle this is a great idea but it has been twisted and is now being questioned. Credit rating agencies have been subject to many criticisms, some of which are not new. These criticisms (for example agencies do not downgrade companies promptly enough) use to come from the financial industry but things have changed with the sub-prime crisis. It is believed (for me personally it is a fact) that these agencies have not done their job properly and gave AAA grades to CDOs  that should have been considered as “junk”. Banks’ capital requirements depend on the rating of their structured assets and therefore the bad ratings led to catastrophe. Some banks did not hold enough capital and had to be rescued/bailed out by governments.

Since then credit rating agencies are under scrutiny by governments but also by the public. Movies such as “The Inside Job” have been made, articles have been written and reporters keep on talking about them. All of this has shed the light on these companies and how they work. It has triggered a big reaction from these agencies. For the past couple of months there has not been a day without at least one headline on some agency downgrade. Every morning you open the newspaper and see headlines such as “S&P again downgrades Spain’s credit rating” or “S&P downgrades debt rating of U.S. for the first time” or “Moody’s downgrades French banks”. It has become part of the daily routine. Before 2008 we did not hear about this much and now it has become normal. I believe that this is happening as a reaction to all the criticism. They are being extra zealous. That is good but they are creating chain reactions that jeopardize the stability of a fragile economy. By trying to re-establish their reputation they are hurting more. They have not done the job for a long time and now that they are waking up they are “shooting on an ambulance” as we say in French. I compare it to Northern Rock. As soon as people heard the bank was in trouble they went to collect their money and that created an even bigger problem. When agencies downgrade a country that is already suffering it puts extra-pressure on it.

We have seen an evolution in the way agencies rate financial products but I believe that actions need to be taken in order to better regulate their work. Any reform of the financial system need to take into account this “grey area”.

Sources

http://www.washingtonpost.com/business/economy/sec-report-questions-ratings-agencies-practices/2011/09/30/gIQA7knSAL_story.html

http://www.ft.com/cms/s/0/e7be74d4-d2f1-11e0-9aae-00144feab49a.html

Dexia or the failure of stress-test

In July the European Bank Authority declared that Dexia didn’t need to raise additional capital. Basically meaning that the bank was in good shape. A summer later both French and Belgium government are finding themselves in a somewhat embarrassing situation. In order to prevent a catastrophe they had to guarantee its financing and deposits. The fate of the bank is now in the hands of governments and board members.

The big question is how come a bank that was suppose to be safe 3 months ago is now on the verge of collapsing? And why did the stress test didn’t reveal anything?

Stress test are made to evaluate bank’s finances under different scenarios. If institutions are not capitalized enough they have a few months to try to raise necessary funds. The idea was to give more confidence in the banking system. The first stress test for european banks happened shortly after the 2008 crisis and since then two have been organized.

The idea is very good but practically speaking it really isn’t working. The reason why this potentially great idea is failing is because the tests are being rigged. When you try to pinpoint the outfall of different financial situation how can you honestly leave out the haircuts of on sovereign bond of Greece, Spain, Italy and Portugal (16% really?)? How can you also leave out the uncontrolled defaults of some of these countries??? If stress test were to work they would need to be carried on in the right conditions and not try to fool the reality of the crisis. It is easy to look at a health check up and say that someone’s healthy if you don’t look at cholesterol level or heart condition…

Dexia is the perfect example. They passed the test with flying colors and they were never asked about their real and significant exposure to Greek debt (£2.9 billion) or about their “toxic assets” that amount to €100 billion. Now that the possibility of Greek default is becoming more and more real banks are faced with the reality of their positions.

The same already happened with Irish Banks in 2010 and is likely to happen again if the real facts are not included in other scenarios. I guess european authorities are not familiar with the saying “fool me once shame on you, fool me twice shame on me”.

Sources

http://www.smh.com.au/business/dexias-troubles-highlight-stresstest-failings-20111007-1ldwz.html

http://www.lesechos.fr/entreprises-secteurs/finance-marches/actu/0201684117534-dexia-un-accord-en-vue-230603.php

Will we ever learn?

I read this evening that the FED was going to invest massively to boost the US Economy and it made me think about what it meant for the United States. I mean, if we look at US history, there has only been one big interventionist period: the new deal. So are we back there? Have we failed once again?

For a country like the US to intervene like that on the markets it must mean that the economy is falling apart and I personally think that we should all take a good look in the mirror to see the causes of this failure.

In his inaugural speech in 1933 Roosevelt talked about the reasons that led to the 1929 Krach and the Great Depression. If we take a look at his words we can only understand that mankind has not learned from its mistakes and that we are all responsible for the “new” crisis.

Let’s have a look at two speeches pronounced 70 years apart:

 “Primarily this is because the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence

[…]

Faced by failure of credit they have proposed only the lending of more money.

[…]

The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.

[…]

The joy and moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits.

[…]

There must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing.

[…]

These dark days will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men.”

Roosevelt (1933)

“Restoring a willingness to take responsibility – even when it is hard – is at the heart of what we must do. Here on Wall Street, you have a responsibility.”

[…]

This economic crisis began as a financial crisis, when banks and financial institutions took huge, reckless risks in pursuit of quick profits and massive bonuses.

[…]

These are rules that allowed firms to act contrary to the interests of customers; to conceal their exposure to debt through complex financial dealings; to benefit from taxpayer-insured deposits while making speculative investments; and to take on risks so vast that they posed threats to the entire system.

[…]

Hear my words: We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.

[…]

The American people have paid a very high price. We simply cannot return to business as usual. That’s why we’re going to ensure that Wall Street pays back the American people for the bailout. That’s why we’re going to rein in the excess and abuse that nearly brought down our financial system. That’s why we’re going to pass these reforms into law.”

Obama (2009)

It appears to me that each and every one of us should understand that we live on a planet with 7 other billion people and that we need to be more responsible individually. When the systems fail we, as people, fail.

Sources:

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7046668/Barack-Obamas-speech-on-banking-reform-in-full.html

http://www.lesechos.fr/entreprises-secteurs/finance-marches/actu/0201652228077-la-fed-use-des-grands-moyens-pour-relancer-l-economie-americaine-222595.php