Roger Barton sets up new market infrastructure consultancy Monday, March 14, 2011
Good luck to Roger Barton, until recently managing director and head of regulatory policy for Europe at Tradeweb, who has left to set up a consultancy specialising in market structures and regulatory reform. The firm is called Financial Reform Consultancy.
Many companies certainly need help of this sort to help navigate through the hugely complex and rapid changes being caused by new regulations in the US and EU. Even keeping up with the huge reading list generated by regulation is an massive task in itself - making sense of it and evaluating it on a holistic basis to assess business impact is something few do well.
Derivatives Week 14th March 2011 edition is reporting that Japan's Regulators are seeking to provide clearing members with limited liability at the same time as preserving the local law which precludes a CCP from going bust.
The reported solution for who should pick up losses in the event of a default exhausting the resources of the CCP, which includes capped contributions of surviving members, is to declear trades back to their original counterparties.
This is an awful solution, widely rejected in almost all major CCPs, for several reasons.
Firstly, it removes certainty from clearing. As a consequence, counterparties will retain a contingent exposure to their original counterparty, with a consequential capital requirement.
Secondly, in most CCPs, trades are offset with each other to create net positions with the CCP. Under this model, one clearly cannot net trades since preserving the identity of the original counterparty is essential if trades are to ever be re-allocated back. As a result, whilst one may have exited a position some months/years ago, a potential exposure remains if those trades are ever unwound by the CCP to revert back to a bilateral exposure. To close such an exposure in the ordinary course of business, one may have to do offsetting trades with the original counterparty, but even that may not suffice depending upon how the CCP determination of unallocated trades works.
Whilst members cannot be exposed to an unlimited liability in order to keep a CCP afloat, and the possibility of a CCP failure sends terror into the heart of regulators, operating contingent clearing simply creates other unpalatable problems.
I sincerely hope that the groups working on this will come up with a more palatable solution, hamstrung as they are by the notion that a CCP may not go bust.
Free Sugarsync is a sweet deal for Blackberry & iPhone users Sunday, May 10, 2009
I use a few auto back-up & sync tools in parallel including Live Mesh and Drop Box, supplemented by cloud storage services like ADrive, Live, Flickr, Google docs etc which I access via the excellent Gladinet application that makes them virtual drives within windows explorer.
So when I saw SugarSync had released a free service with 2gb online storage included I wasn't overly excited as it seemed to be a poor substitute for my existing services. However, I then spotted its' trump card - a native blackberry app which allows a user to access their files from their device AND to sync changes made using Documents to Go back to the PC. Likewise, photos taken on the Blackberry device can automatically be synched. Finally you can send files held within SugarSync from your device.
Multiple devices can be linked to a User's account and their files made accessible.
Since installing SugarSync on the Blackberry, I've had no problems and have been impressed with the features above, as well as its ease of use. Moreover, it has happily co-existed with my existing desktop sync services on the same folders and files, and now provides an additional layer of comfort.
Sugarsync has similar native apps for the iPhone amongst others.
Definitely worth installing.
Anagram is a free app for the Blackberry which simplifies the creation of contacts and diary appointment from emails on your device. Similar to desktop apps like grabit, by highlighting the relevant text in an email, Anagram creates and populates the fields in a new record which you can elect to discard, edit/save.
As someone who uses a blackberry extensively, I'm familiar with the inconvenience of creating a record manually from email signatures and so immediately recognise the benefit Anagram offers.
In my tests, I found it gave mixed results, having most trouble distinguishing between titles, companies & addresses. Yet even where it did slip up, it normally grabbed the phone & email details accurately and hence had saved some time/effort.
Happy to recommend it.
Stars of adverts brainstorm for comic relief Thursday, March 12, 2009
Confess I did enjoy this first time I saw it.
Bank short-sellers deserve an apology Saturday, February 28, 2009
When UK bank shares began their torrid falls in October 2008, the baying hounds were calling for the heads of short sellers who had unjustly brought "strong and viable" banks to the brink of a collapse of confidence.
Yet as the details of the financial results emerged this week, with huge write-downs, the press coverage ironically seemed to chime with the views held by short sellers at the time - the bank balance sheets were stuffed with toxic debt. The only difference was the timing of their comprehension - short sellers realised long before and saw that it was not reflected in the over-inflated share price.
One might now justifiably argue that those who called the share price falls unwarranted were either incompetent or self-serving in attempting to maintain a bubble. As was often mentioned, market manipulation and trying to create a false market is illegal, but the guilty parties were those insisting higher prices were warranted and demanding measures to prevent price falls. Sadly, no prosecutions will occur.
This episode has re-enforced the importance of short selling. These investors put money behind the conviction that things aren't as great as some would have us believe. In doing so, they stand to lose a fortune if they are wrong, profiting only when hubris is dispelled and reality is restored. Unfortunately, it's only in the case of the Emperor's clothes that we admire the person that pricks the illusion.
Save a lifestyle Sunday, February 08, 2009
It is an inevitable parody but will still amuse many.
Google Latitude - the what, why and where next? Thursday, February 05, 2009
Image by thms.nl via FlickrMany of you will have read elsewhere, including via mainstream media about the launch of Google's Latitude offering, which introduces location based information that can be shared with nominated friends at your discretion.
It means that if you choose to expose your location, a decision over which you have constant control, then you can choose who you share that info with.
Your location can be set manually via your browser, which involves typing your location or moving a "pin" around over a google map. However, if you have Google maps on your phone then you can choose to automatically update your location using either the phone GPS or base station information, which is far easier, albeit it will continually consume data on your phone plan, not to mention gobble up your phone battery [I’d like the ability to configure how often phone updates occur for that latter reason].
You can also define how much detail those chosen contacts get since Latitude settings mean you can publish at city-level, general area or actual location.
So, using this service now means you and your chosen friends can share locations updates with each other most of the time [exceptions being when you/they turn off details].
This is not a new concept. Latitude is similar to services such as Loopt, Brightkite, Whrrl, Buddyping [now defunct it seems], RadiusIM and Buddy Beacon, most of which focus upon the intersection of "social mapping" and communication. However, all of those services don't could close to touching the might of the Google Brand and its reach.
So now comes the "why" anyone would choose to opt into this, given that it immediately throws up privacy concerns/fear in a "big brother is watching you" sense to many people.
Well, most obviously this increases the likelihood of chance meetups because you can now see which of your friends happens to be in the neighbourhood. Hence, seeing I am nearby you may choose to avoid the area or call me if you are nearby to arrange to meet, which is actually something likely to be of interest to a wide range of people for business and social reasons alike. To that point, I'd actually like to be able to group Latitude contacts into categories which would give me the option to tailor the information I share with others e.g. friends, business, which isn't possible in this first incarnation.
Of course, some parents may hope to use the service to keep track on their kids as the newspapers suggested, but given that kids can turn-off location sharing, it may prove ineffective unless they are so desperate for their friends to also see the information that their parents see it by default. Sadly I was immediately entrapped yesterday when my wife was immediately able to spot on Day One of this service that I was near a shop she wanted me to call into!
This being Google one can easily speculate on how this service could evolve i.e. where next. It's not a unique insight but there is a clear route to the three way intersection of mobile, social, and local. The last of these quite simply refer to location aware or based services. Hence, similar to the famous scene from the Tom Cruise movie, Minority Report, you could begin receive news, travel, announcements and adverts all related to your present location.
On its own, "local" probably isn't inspiring enough for large numbers of people to sign up to service which discloses one's location, since the benefits are less obvious. Hence, offering the social element first is a better "bait". Having attracted a large user base, it then becomes attractive for firms/services to participate in "local offerings" e.g. offering targeted ads and coupons to people in the vicinity of a store.
Here's a scenario that I put together with a business a couple of years ago, but have substituted Latitude's name
- A national coffee chain head office create a series of offers that are hosted by Latitude that may be used by their local shops when those stores are quiet to try to drum up business e.g. coffee half price for the next hour or "buy one and get one free". Local managers may activate these at their discretion perhaps via a text, phone, or web activation with Head Office able to possiblly control the times that offers may be used e.g. only offpeak. Head Office also agree the price that is paid to Google for distributing these "coupons" in a similar manner to Google Ad-words.
- Latitude's [future] ad service offers to either broadcast offers/coupons or be paid a higher price for redeemed coupons [assuming a mechanism to identify redemptions can be implemented easily].
- Latitude users would have the option to pre-set their profiles to indicate whether they are willing to receive offers and the types they will countenance. Likewise they may search for local offers on an ad-hoc basis e.g. bars offering deals now.
- Google Latitude broadcast the offers either as adverts or coupons to Latitude users who are in the local area, which drives custom to the stores. Google could choose to broadcast all ads or similar to Ad-words running a bidding process in given time slots which would allow them to extract the best price and ration/manage the number of offers issued so as to minimise the perception of spam.
In this scenario, all parts of the market are satisfied, namely
- consumers get alerted to cheap deals for relevant goods/services
- retailers increase traffic and revenue at slack times, whilst only incurring ad spend when relevant/appropriate, in a setting in whichcompanies can delegate authority within parameters for local stores to tune their offering based on conditions
- Google increases its' revenues by connecting the market paticipants, as a consequence of providing a social service
Timeframe for this to become reality? Well, there are no technical limitations to what I've described, albeit Google need to build the "ad-words like" infrastructure and tie this into the Latitude user data. So I think its' about Google choosing its' optimum moment to launch the "local" element once enough consumers are on-board or trend evidence of wide-spread adoption exists.
US Caps on Compensation Wednesday, February 04, 2009
Today it was reported that President Obama and the US Government was expected to impose caps on "executive" pay at organisations that accepted Government bailout funds. It was suggested that these conditions are not expected to be retrospective on those firms that have already received bailout monies [which will be a great relief to those firms!]. However the cap is on cash compensation - it is specifically proposed that any compensation over $500,000 would have to be paid in company shares which could not vest until all bailout monies had been refunded to the Government.
The reports do seem to focus on the banking sector, albeit it would seem reasonable that such provisions apply to any firm that required Government money.
Salary caps are always highly contentious with arguments usually polarising into accusations of greedy bosses versus the importance of paying the "market rate" to attract the best talent. However the debate has strongly swung in favour of caps because the recent downfall/demise of many large institutions are being directly attributed to incumbent executives who are seen to be the cause or at some fault. Consequently, there is no public support for "rewarding" failure especially with taxpayer money, especially when the compensation sums involved are colossal in contrast to average earnings. Throw in envy, plus people losing their jobs through no fault of their own but as a consequence of an economic slump accompanied by a contraction in available bank credit, and you have an populist and moral tidal wave to sweep away counter-arguments.
Defenders of unconstrained pay, myself included, will now get to prove or lose their arguments which mainly revolve around the belief that locations/industries with caps will be disadvantaged as the best talent will be drawn to locations without such caps [assuming jobs still exist there].
An example often quoted to support this contention is football, highlighting that the English Premiership regularly wins out in the battle for global talent because of the rewards on offer to players, with the consequence that the teams in the league regularly compete at the top of European/World football.
However, is it probable that the World's biggest firms will fail to lure the best talent, since landing a senior role at these firms is still a considerable "prize"? Even in football, recent failed transfer events at Manchester City showed money doesn't always work in prising away talent from a "big club". Moreover executives still need jobs and there are far fewer firms around that can offer "big" jobs or who are willing to pay "over-the-top" compensation in a recessionary environment. Hence, supply may be growing whilst demand is reversing, thereby automatically pushing down pay, especially when those hiring are increasingly sceptical about anyone claiming superhuman management powers, given the rapid fall from grace of so many former business stars.
The worst outcome of introducing the caps would be that they deters executives from seeking the very help that may be right for their companies. Whilst board members have a duty to their companies and shareholders, they are clearly conflicted given the personal ramifications for their own wealth. Of course, they could choose to move on and perhaps should in circumstances that their company needs a bailout. Yet career choices like that are rarely made dispassionately.
Depending upon how "executive" is defined e.g. main board directors only, some executives may follow Bob Diamond's example, who for years refused a seat on the main board at Barclays to avoid having to disclose his earnings, or so it is widely believed. It was undeniable that he had a major role in running a core part of the Bank despite not being a main board member, but who was in effect a shadow director. Some companies may well look at such devices to circumvent rules, especially if main board directors find themselves underpaid relative to considerable numbers of their employees, as would probably be the case in a number of banks.
Of course, if "executive" is widened to any senior manager or employee, then things could really be shaken up, especially since those firms who took money early would be free of any such constraints and thus able to poach talent with offers of higher pay from those who arrived at the trough later. And yes, that would definitely happen.
Pay aside, executives are clearly deterred by the prospect of Government oversight and intervention in running the companies if they accept bailout funds. Barclays demonstrated that the executives were much happier paying a higher price for capital instead of accepting UK Government money. Yet, increasing numbers of companies who are struggling to refinance their operations are jumping on the emotional blackmail bandwagon and demanding Government aid. Perhaps imposing caps will restore some balance by inflicting some personal pain on the wealth of the executives making the demands.
However, perhaps the most interesting thing is that the proposal stops short of capping all forms of compensation and allows executives to be paid in shares. Given that bank shares are in the doldrums, a $500,000 bonus in shares buys you considerably more shares than it did up until recently. Assuming a bailout does ensure a company's survival, then the executives forced to forgo cash may get to make even bigger sums if their shares manage to recover even some of their lost glories, which won't make for pretty news headlines e.g Lloyds is trading at 95p today from a low of 44p only a couple of weeks ago which would have double an executives money, but several fold returns are not inconceivable. Of course, you could contend that executives who nurse a company back to health are deserving of this, but against a backdrop of Government funded survival and the possibility of an economic tide lifting all companies in due course, the public may well feel aggrieved with such an outcome.
Stitching up panoramic views for free Monday, February 02, 2009
It's not uncommon to want to take a panoramic shot of scene / place / event only to believe that you're not carrying the right equipment or don't possess the right software to even try. Thankfully, the software to do the job is now freely available both as an online service and as a download, with clear guidance on how to take suitable shots.
Whilst housebound today thanks to London's heavy snowfall, I wanted to grab a panoramic shot of our snowy garden to send to my family in various locations in the UK and overseas. Having taken a sequence of overlapping shots whilst keeping the camera in roughly the same spot [height and position], I tried out two free services both of which gave excellent results.
The first was Clevr which is a downloaded application that utilises the Adobe AIR framework, which automatically installs itself if not already present. Shots are imported into the applications, re-ordered if necessary and stitched together within the application, from where the generated panorama can be both uploaded or saved as a new file. Uploaded versions may be shared or embedded in other websites with zooming and paning features as standard. It was amazingly easy to use which has encouraged me to consider taking more panoramic shots in future.
I also tried MagToo, which is an online service that not only assist with creating panoramic views, but can also create photo slide shows. Both facilities are free and are impressively integrated with a huge number of social networking and blogging sites to which results may be sent. Furthermore, there is neat Google map location tagging facility provided as standard to add "meta-location data" about your shots. The process to create a panoramic image was remarkably similar to Clevr, with automatic stitching of the photos and it was just as quick to use, with great results that could be embeded or downloaded.
I confess I found it difficult to choose a particular favourite between them but ably performing the required task easily, quickly and effectively. There are other similar packages out there, including the Microsoft Photosynth offering, but both of these apps are definitely worth bookmarking for future use.
Brilliant effort and great photo from FT Alphaville.
Image via WikipediaI'm a Brit and so obviously I am going to talk about the weather! Today, most of the South East of England is snowed in with airports closed, trains cancelled and buses not running, whilst many roads are impassible. Of course, many countries would consider this a light covering of snow and will laugh at our helplessness, but at the same time one has to remember it is increasingly rare to get heavy snow in the South of the UK - this is the heaviest snow fall for 18 years.
However, the subject of this post is not to debate the weather per se but to make a couple of observations:
- the websites of transport operators crashed under the weight of enquiries: Whilst the conditions may have prompted new peaks in hits, it demonstrates that these firms don't have any or sufficient "on-demand" technology expansion facilities in place or if they do, they may be reliant on absent staff to activate them.
- Last year JP and I were discussing the lunacy of disaster recovery thinking amongst City firms which tends to fixate on having a replica site, normally located some distance outside of London. In our view, in the event of a disaster, most staff will more inclined to return to their families and homes than travel to a DR site, assuming that transport links are even operating. Instead we both felt that it was better to spend money on allowing staff to work from anywhere i.e. remote working facilities. This approach caters for DR situations as well as having day-to-day practical uses. As demonstrated today, with many City workers unable to travel to their offices or a DR site, those without remote working facilities will be at a disadvantage to those with staff able to seamlessly work from home.
- the fragility of our infrastructure and supply chains is exposed by a snow flurry, albeit we assume that this will be a temporary aberation with several days inconvenience followed by days of "recovery" as supply chains attempt to catch up. Yet it is a superficial foretaste of other probable natural disasters e.g. a flu pandemic which would force families into isolation and expose the complete dependency we have on things like supermarket supply chains, water and power services operations and health services - their staff would be similarly isolated and unable/unwilling to perform duties that we presently take for granted.
- Many companies will also find their customers aren't transacting with them today e.g. retail outlets whose customers will be unable/disclined to venture out to shop depriving them of sales. The minority that have failed to invest in adequate online facilities will find themselves at an disadvantage.
Labels: Supply chain
Henderson to buy New Star Friday, January 30, 2009
Henderson today announced a recommended offer for New Star Asset Management, the business founded by John Duffield in 2000 and who owned just under 6% of the company, prior to its' share restructuring agreed with the banks.
New Star has rapidly fallen from the sky in recent months to the extent that it is currently majority owned by its banks who converted their debt into equity.
The deal values New Star at £115m in a cash and share deal, but includes £20m of cash in New Star balance sheet. Henderson will add £10bn of assets under management to its existing £50bn and it hopes to manage the new funds at a marginal cost to income ratio of 40% - most fund managers operate at 70%+ cost to income ratio. Some of the incremental costs will come from taking on about 150 staff, including the retail "star" fund managers.
With integration costs amounting to £31m, Henderson will have a busy year in 2009 as they are apparently also going to switch back office outsource provider, moving from BNP Paribas Securities Services to JP Morgan.
There has been considerable coffee shop discussion about what any buyer would actually be getting for their money since
- New Star's brand is tarnished and so is regarded by many to have little or no value
- There has been a huge exodus of funds as IFAs have lost confidence in the New Star business and some business that remains will clearly have waited to see what would happen before making a decision. As such more funds may leave, but this is normally factored into the price offered by the buyer.
- A buyer will normally prefer to add funds onto their own platform and so the existing New Star infrastructure is unlikely to be of considerable interest to a buyer.
- "Star" Fund Managers are a little like premiership footballers and can be tempted away by competitor cheque books. Consequently, it is normally cheaper to hire the staff you want.
I'm just waiting for the Henderson advertising campaign to see how they will position this acquisition with IFAs - "There's a New Star at Henderson" perhaps?
Legg Mason's annus horribilis Thursday, January 29, 2009
Image via WikipediaLegg Mason has experienced an awful year. In 12months
- Its' money market funds had to be significantly propped up to prevent them "breaking the buck"
- Star manager Bill Miller had a collapse in performance after 15 years of consistent out-performance, albeit many of those gains have now been wiped out
- assets under management have fallen to less than $700bn, 30% lower than a year ago
- it has just reported a $1.5bn loss for the last quarter to produce the worst results in 25 years
Unsurprisingly, its' shares has fallen by about 70% over the year.
Legg aren't alone in being battered by market conditions, but being one of the largest fund management firms makes the impact looks much larger.
You have to have some sympathy for Mark Fetting, Legg's Chief Executive. He only took over in January 2008, inheriting the reins from "Chip" Mason, who had led the firm for the previous 46 years, and who also stepped down as Chairman in December 2008 in favour of Fetting. Yet, as Napolean said, "give me lucky Generals" and Mason will be known as the successful Patriarch whilst Fetting will be the CEO who oversaw the downturn in the firm's fortunes. Indeed, if it was a movie script, you can imagine Chip being called out of retirement in 18 months time to "save the day and rescue the firm".
I've commented on Legg previously here, here, here, and here.
John Thain quits Bank of America Thursday, January 22, 2009
Image via WikipediaWell it took a week from my asking the question "Can John Thain remain at Bank of America?" and concluding it seemed unlikely to his "mutually agreed" departure today following a meeting with his boss, Ken Lewis as reported here. Shares in Bank of America fell 16% on the news.
Perhaps the "icing" on the cake was the news that John Thain's new office had been lavishly re-furbished e.g. waste bin for $1,400 and a rug for $87,000, which isn't the sort of thing that goes well with tax payers or politicians who've just bailed out your company.
Merrill's staff should have cause to be thankful to Thain. He
- found them a safe-ish harbour in the storms and thus avoided the fate that befell Lehman
- negotiated a good deal with Bank of America despite Merrill's awful prospects, as borne out by their Q4 results
- paid their bonuses in December, totalling over $4bn despite the huge losses, which was some two months earlier than usual and days ahead of Bank of America taking over
Might John Thain follow his former colleague, Hank Paulson into academia and avoid the hassle of commercial life? Paulson has just stepped down as US Treasury Secretary and can easily afford not to work again. Similarly Thain is unlikely to be pressured by the need to work again, even without any payoff he may receive from Bank of America. However, his talents are widely recognised and it is probable that a number of firms are already weighing up the possibility of engaging him in some capacity after a short break, especially in the private equity sector where he could avoid much public scrutiny.
Any payoff he does receive will be a matter of public disclosure because Bank of America is listed. So it will be interesting to see whether he extracts one final huge "pound of flesh", despite the company having only just received a huge bailout. For Bank of America any sizeable payout will be a PR disaster since it will clearly be described as a payment for failure that has been funded by the taxpayer. However, John Thain probably has a pretty watertight employment contract under which he will inevitably be entitled to some pre-determined payoff. I also doubt that Ken Lewis will press any case that Thain was dismissed for misconduct or something similar, regardless of his personal feelings, since this would embroil the Bank in far too much unwelcome press over a protracted period, as each side makes disclosures helpful to their case.
Thain could, of course, choose to forego a payoff in recognition of the climate as he evidently decided to do with his bonus. Yet having conceded over his bonus to save face for Ken Lewis, he may be less inclined to do so given the manner of his departure. Watch this space.
Meanwhile, I hear his successor could be inheriting a nice new office.
One of the 3 firms showcased at the WeB@nk event this week that was hosted by Nesta was Zopa. Nearly 4 years old, Zopa [which stands for "Zone of Possible Agreement"] describes itself as a market for money. Targeted at the retail market, the platform has executed £31m of unsecured loans to date across over 7000 loans, with £12.6m booked in 2008 for 2600 loans. Their maximum loan limit is £15k and typical loans have been for cars, weddings and medical expenses - the loan purpose has to be detailed as part of the information provider by a borrower.
In supplying offers of cash, lenders specify
- the total amount on offer up to a maximum of £25,000 beyond which a lender needs a Consumer Credit Licence
- the rate they are prepared to lend at, which can be set per borrower risk category
- the maximum amount per borrower they are willing to commit e.g. no more than £100 per borrower [Zopa sets a floor of £10 minimum per borrower]
- the loan term
- the category of risk they want to invest in [Zopa stratifies its' borrowers across 5 risk categories]
- Complete a loan application
- Make monthly repayments comprising capital and interest
- Can borrow over 36 or 60 months with the ability to repay early
- Pay a loan fee of £94.25 when taking a loan
- Can borrow between £1,000 and £15,000
- provide the marketplace platform
- pool funds provided by lenders and distribute these amongst eligible borrowers
- vet lenders and borrowers against anti-money laundering criterion
- credit score borrowers
- undertake loan administration i.e. cash distribution and collection, oversee debt recovery via a third party arrangement
Zopa were at pains to stress that many people are attracted to Zopa because it puts a human face on money which they termed "Social lending", rather than the impersonal and institutionalised banking that traditionally operates. Yet as one member of the audience put it, "they made it sound like charitable work or lending for emotional/entertainment value".
Zopa did acknowledge that the flip side to social lending is that it can turn sour/personal when bad debts arise as people feel their "trust" has been betrayed. Overall Zopa has experienced 0.2% bad debts to date, and provides its' lenders with an estimate of bad debts per risk category as shown here.
One of the major selling points of Zopa is that borrowers and lenders reportedly get better rates than from banks by interacting directly. Lenders are presently getting an average of 8% after fees compared to high street savings ates of under 2%, whilst borrowers are receiving loans at 9% compared to 15%+ from a bank from unsecured loans.
I felt quite strongly that Zopa is disingenuous in making interest rates comparisons between themselves and banks for savers. When depositing with a bank you are transferring loan default risk to them and losses are borne by the bank's shareholders. Depositors also benefit from deposit protection schemes in the event of bank default. In Zopa you retain this risk. Hence an element of the rate differential has to compensate for that. In conversation after the event, their MD admitted to me that whilst the rate differential is about 6% following the sharp fall in bank deposit rates [Zopa lenders are averaging 9% less 1% Zopa fee versus average savings rates of 2%], back in the summer it was about a 2% differential.
What astounds me about this latter figure is that it indicates that Zopa lenders are clearly not making an allowance for borrower default. Whilst average historic loss rates may be only 0.2% across all lenders, those lenders who lent to defaulting borrowers will have been lost much more. More significantly, whilst Zopa claim that their credit screening process rejects a considerable percentage of borrower applicants and keeps them clear of sub-prime loans, I suspect that the deterioration in the economy is going to push up their default rates in line with the experiences of banks on similar tranches of unsecured personal debt.
My assertion regarding default risk being overlooked by lenders was further validated when I enquired about whether Zopa would consider offering credit protection insurance and Giles advised that it had been offered but there had been minimal interest in the product. Perhaps people are being overly seduced by the touchy-feely aspect of "social lending" and become too trusting or are ignorant of the risks.
Whilst savers are undoubtedly complaining about the pitiful rates currently offered on deposits, in the current environment I suspect that many people are most concerned about return of capital than return on capital, at least temporarily.
As James Gardner of Lloyds TSB (Bankervision) put it during the panel session, the real question is whether Zopa and its' kind represent a significant threat to banking and could disrupt the current model. He contended it did not and I have to concur. Whilst I believe Zopa has considerable growth potential from its' current low base and is not liable for losses on loans, I'm not convinced about its' business because
- despite having increased it's margin from 0.5% to 1%, this feels like insufficient gross margin on which to operate and develop the business. For example, at best Zopa is generating approximately £300,000 of interest revenue each year on £31m of loans, assuming all loans transacted on the platform were open, no capital repayments had been made and 1% was applicable to all of them. On top of this, Zopa will have generated just under £200,000 of borrower loan fees in 2008. Once costs are factored in e.g. staff, premises, insurances and technology, this doesn't leave much.
- Zopa isn't a regulated business at present, but were it to scale-up I believe that regulators would probably be forced to take a closer look. As James Gardner observes, were a major bank to enter the peer-to-peer lending space it would be inevitable that regulators would seek to include it as a regulated activity. At this point, its cost of operation would increase considerably putting further pressure on its' margins.
- Zopa claims that all elligible borrower applications have been funded to date, demonstrating that their supply of funds is sufficient. However this is represents a probable and material constraint on their business. The higher rates currently on offer may induce more savers to use the service but I believe that Zopa will also need to increase the average deposit several fold from the current average of £1,300, which translates into an average of 3 savers per borrower. Whilst banks have a similar situation, they can also supplement funds from wholesale markets, leverage and shareholders. None of these options are available in Zopa's current "peer to peer" model.
- Banks have considerably more experience in loan pricing than individuals and I question whether the rates presently on offer on Zopa may represent naive pricing on the part of lenders once bad debts/risk premium is taken into account. Obviously I acknowledge that bank lending rates will be higher simply to allow for bank profit and bad debt provisions, but stripping out such elements are likely to suggest higher rates should apply.
The 150 or so people attended the Nesta run "WeB@ank" event last night on the subject of peer to peer finance models and businesses were treated to a lively and polarised panel debate involving Giles Andrews (MD, Zopa UK), James Gardner (Bankervision and LloydsTSB) and Umair Haque (Havas Media Lab).
Unfortunately Umair's contribution lacked any real relevance to the discussion and left him appearing as someone wanted to be a deep-thinking academic offering higher plane wisdom and insight, but who actually came across as someone out-of-touch with matters at hand. Of course, he may retort that I was simply not bright enough to understand his mutterings but it was evident I wasn't alone in my thinking speaking to others in the audience later.
Fortunately, James and Giles were excellent sparring partners on opposite sides of the debate. Indeed, it almost had a pantomime feel to it with the traditional banker ["the baddy"] questioning the upstart model ["the goody"] - Giles was even pulling exagerated faces to win over the audience when James was speaking.
Good contributions came from the audience, which further the discussion. Disappointingly, though Nesta's organiser decided to cut the debate short simply to fit into the closing time they had publish which sadly failed to reflect the momentum the evening had built up.
Congratulations to Nesta and Christian Alhert at Open Business for organising the event.
I intend to post separately about the presentations from three firms who were showcased, namely
- Zopa, a loans marketplace
- Kubera Money
FT Alphaville has published an excellent graphical representation of the decline in the market values of major banks that was created by JP Morgan analysts. Really brings home the answer to the question of how one gets to be CEO of a small bank - start as CEO of a large one and wait.
The dramatic falls in UK banking share prices in recent days have prompted people to immediately conclude it is directly related to the FSA's removal of the short selling ban on UK bank shares. The Chairman of the Treasury Select Committee has already contacted the FSA in this regard and prompted the Chair of the FSA to comment in a radio interview this morning that the ban could be re-introduced at any time and without warning, albeit conceding that there was no evidence that short selling was the cause.
The Short Stories blog, which monitors stock borrowing and short interest in stocks, highlights the relatively trivial levels of shorting that appears to be going on.
Clearly the timing suggests some causality between the declines and shorting but one other culprit exist - the Government recapitalisation and insurance plans revealed to the markets on Monday. That such action appears necessary has prompted increased jitters, with the consequence that existing investors appear to be dumping their stock in fear of what lies ahead. So perhaps those levelling criticism and anger should be actually focussing their comments on existing shareholders who are voting with their feet and heading for the exit.
Increasing numbers of firms are asking their employees to make a choice - take a pay cut or lose your job. Unpalatable as both options are, in the current climate with few job vacancies available as a report here highlights, it is understandable that most employees choose the former.
What's notable about this sort of offer is that they are not
- a request to defer an element of pay in an effort to conserve company cash, but which maintains your current entitlements
- a temporary reduction with a guarantee to revert to former levels when there is an upturn
Whilst not suggesting losing your job is a better options [unless you have another job to go to], if you do have any scope to discuss the terms then you may want to propose foregoing any benefits that form part of your compensation package as the first element of any cut instead e.g. car allowance or health care. These tend to be ignored for pension purposes and are often less significant in negotiations with subsequent employers.
As a minimum, you could suggest rephrasing the terms of the cut such that you will agree to "donate" a proportion of your salary to the company during these turbulent times but that your contractual salary remains unaltered. This enshrines an acknowledgement that the cut is temporary in nature. You may be unsuccessful but "don't ask, don't get."
Details have emerged that the Abu Dhabi Royal Family inserted an anti-dilution clause alongside their investment in Barclays, which would re-price the shares issued to them in the event that new capital was raised within 9 months at a lower share price. e.g. if £100m bought 100m shares at £1, then if shares were subsequently issued at 50p then they would automatically receive an additional 100m shares [£100m divided by 50p].
Such a clause is relatively common in private placings and Angel/VC rounds of fund raising. It's purpose is simply to protect the investor from subsequent investors being offered better terms, rather than being a device to deter further capital injections. However, the rapid deterioration in Barclays situation and market conditions, with corresponding slump in share price from 153p to under 70p, would prompt a significant repricing of the Abu Dhabi stake were new capital raised at such levels, with the consequence they would probably end up with a majority stake.
This now presents Barclays with a considerable problem - if they conclude that they do need more capital, new investors would face the prospect of automatically being a minority shareholder in the shadow of the Adu Dhabi control. This is likely to deter some sources of new capital and hence frustrate Barclays efforts to the extent that the only source of new funds may be the Abu Dhabi's themselves.
Whilst Abu Dhabi could sit back in the expectation that the UK Government would be obliged to bail out Barclays, I suspect that the UK Government would be forced to nationalise the bank rather than simply inject fresh capital, given that it would be political suicide to be seen to be using taxpayers money to hand control of the bank to another sovereign state.
Nationalisation would clearly be a dramatic step and materially damage relations with Abu Dhabi, given it would wipe out much, if not all, of their investment. However, the idea of nationalising a major UK bank is openly debated and advocated in some serious quarters, albeit RBS and Lloyds are most commonly the subjects of such discussion in this context.
Hence, Abu Dhabi may now find themselves having to consider the prospect of having to [unwillingly] provide more capital to prop up their ailing investment or else waive their anti-dilution rights.
Hedge Funds assets dwindle considerably Wednesday, January 21, 2009
For the industry as a whole, [albeit starting from a lower estimate than I've seen elsewhere, which may reflect that their figures do not include assets invested in fund of hedge funds] Hennessee Group has estimated that hedge fund industry assets decreased by USD782bn in 2008 to USD1.21trn, a 39% fall. They divide this up as
- USD399bn redemptions
- USD383bn drop in valuation
This is because the Madoff case has challenged the notion that the due diligence and monitoring is in any way adequate to warrant their fees. Furthermore, investors notice fees far more when performance is low or negative and will question the value added far more.
Hennessee Group Research says, fund of hedge funds were the largest single source of capital for hedge funds at 32 per cent of the total. Of direct investors in hedge funds, individuals and family offices accounted for 30 per cent, pension schemes 15 per cent, endowments and foundations 12 per cent and corporations 11 per cent.
The hit on fund of hedge funds will affect smaller and less well known funds hardest, since they tend to be weakest at marketing successfully to end investors. Whilst they may get seed money from some wealthy investors to put them in the barely viable $100m range, pushing beyond this without fund of hedge funds assistance is incredibly tough.
One firm in particular, RAB Capital, is having a bad time [not to mention investors in the company and its' funds]. Previously acclaimed, its assets under management fell 74% in 2008 to $1.9 billion at the end of December, compared to $7.2 billion a year earlier, according to Market Watch. As a result, revenues including management and performance fees fell to £51m, a drop of 59%.
Across the industry, there is also an investor backlash from hedge funds that have imposed a "gate" on investments i.e. refused to allow investors to make withdrawals, whilst still demanding their management fees on those same funds. This has been likened to being locked in a hotel room by staff and still being told you have to pay the room rate. In the good times, few investors seemed to care about their liquidity options on such investments. Now it has moved to the forefront of their mind and I anticipate more investors will demand considerably lower fees to lock their money up for long periods.
I confess to some bitterness on this matter of investor liquidity - I was involved in a venture that sought to develop a regulated secondary market for hedge funds that would enable investors to trade with each other, without necessitating redemptions from the funds. Many fund of funds firms we spoke to back in 2007 scoffed at the notion that such a mechanism was useful since "redemptions and liquidity would never be an issue" which is a genuine quote to me from the CIO at GAM. I am hoping to run into him again soon to remind him of those words.
Many hedge funds will also be quietly dying or considering exiting since the likelihood of them receiving performance fees for some years to come looks remote, given that they normally have to hit the high watermarks of past years before they qualify. Of course, management fees may tied them over, but drops in the value of assets will have also pushed these down.
If 2008 was bad for funds, my current guess is that 2009 will not be any better.
Just saw this image of the new US Presidential Limo.
from the blog 2-Speed
- 8 miles per gallon [not so eco-friendly]
- top speed of 60 miles an hour and 0-60mph in 15 seconds [no high speed getaways ala "24" TV show with this tank]
- Driver's window opens by only 3 inches so he can pay a toll!
- Laptop with Wifi [and they're worried about the President having a Blackberry]
Amazing footage of the Hudson Plane Landing Sunday, January 18, 2009
Real-time security camera video on the plane landing and the subsequent rescue efforts.
Can John Thain remain at Bank of America? Friday, January 16, 2009
Image by Getty Images via DaylifeThe credit crunch has unravelled the reputations of some of the previously most respected investment banking bosses. Previously praised for their deal-making abilities, business savvy and genius, many have been undone by the collapse of their empires e.g. Dick Fuld. Yet of all of those in the spotlight I have perhaps been most astonished by the apparent fall from grace of two former Goldman Sachs senior figures, Hank Paulson and John Thain. Regarded in awe within and outside of the firm, they were credited with steering Goldman on an prosperous course for a number of years.
Hank Paulson, as the US Treasury Secretary, appeared to have the perfect CV to design and oversee the actions of the US administration given his extensive experience on Wall Street. Yet he has been widely derided for his handling of the situation and notably the hastily arranged TARP.
Meanwhile John Thain, who was only parachuted in Merrill Lynch at the end of 2007, and who appeared to have cleverly manoeuvred his "ship" into the safe harbour of Bank of America is now being castigated for the issues being uncovered in the Merrill Lynch balance sheet that weren't declared up front. The Bank of America has now received a further $20bn capital injection from the US Government to ensure it remain adequately capitalised. Trust in Thain by his boss, Ken Lewis, was already strained following the furore over bonus claims the Merrill executives were allegedly going to request, as well as the awful Q4 performance by Merrill.
When your current boss thinks you hoodwinked him, regardless of the fact you were acting for Merrill shareholders at the time in soliciting the best price, your position is surely shaky. Having been in charge of the "ship" for a year, Lewis may also question whether Thain has demonstrated he can turn things around quickly enough at Merrill, especially given the state they have now apparently inherited.
Separately, the FT are also raising the question of whether the bonuses paid to Merrill staff in Q408 could come under scrutiny if it turns out Merrill was technically insolvent at the time the BofA deal closed. If Merrill staff weren't already panicked by fear of layoffs, the prospect of having to repay bonuses should really make their day.
Deposit protection schemes are supposed to re-assure savers that their deposits are [mostly] safe. In recent months, combined with actual interventions to demonstrate support, many national schemes have been improved to remove any risk for most depositors e.g. UK Govt protected 100% of Icesave Bank and Irish Govt guaranteed 100% of Irish bank deposits.
Yet even a 100% guarantee doesn't seem to have deterred savers from making large scale deposit withdrawals from Anglo Irish Bank if reports are to be believed. Ireland's third-largest lender, who were also offering some of the best sterling savings rates, was nationalised last night, following a dramatic decline in its' share prices as concerns mounted and ahead of an assumed "run on the bank" perhaps fuelled by comments of the Irish Opposition Leader.
This has considerable ramifications for deposit protection policy since if savers aren't assuaged by a 100% guarantee, preferring to grab their cash rather than "take any chances", what else can Governments do? I confess that I don't have a ready answer for those banks remaining in private ownership, since it appears savers will continue to have doubts unless a bank is actually Government owned, at least for now. As I wrote here, I thought the Irish scheme, would actually be sufficient to pull in savers from the UK given the "better protection" apparently offered. Evidently Irish savers didn't share my confidence.
Anglo Irish had recently hit the headlines when its' Chairman had been found to have received enormous loans from the bank which had not been declared because of window dressing transactions around the Bank's financial year end. It was also considered to be the Bank most exposed to Ireland's property market collapse and had appeared in Cazenove's most at risk league table here.
Image by adambowie via FlickrI confess that I haven't bought an Evening Standard for easily more than a year. I was never a regular buyer, mainly because my evening commute was often devoted to reading my weekly copy of the Economist. However, because of the availability of instant news online, I now feel even less need to buy a copy.
At one time on the evening commute, many people would have a copy of the Evening Standard. Now it's a rarity to see anyone with a copy, despite news that the Standard's sales were rising. In my experience, the vast majority are looking at freesheets such as the London Paper and London Lite. Likewise the street vendors of the Standard no longer have the busy crush of commuters trying to snatch a copy but appear somewhat forelorn relicts of a past era, outmuscled by pushy freesheet distributors standing on every street corner.
Whilst the paper isn't closing, annual losses of £10m demonstrate that radical surgery will be required to re-invent the offering. Given the trite content of the freesheets, one hopes that the Standard can successfully use quality as its' point of differentiation and to justify its' paid-for status. However, I wonder if the free sheets are its' only competitor or whether online material has been equally to blame.
Gladinet - joining up the clouds [storage and apps] Friday, January 09, 2009
Being a big fan of cloud application and to the extent I'm almost able to operate entirely using free online apps, I was delighted to be introduced to Gladinet, a brilliant free service that joins up cloud storage services with cloud applications.
Some of my concerns with any cloud application are a) where does my data live b) how portable is my data c) how reliable is the service provider. Gladinet helps overcome these fears by liberating data storage from cloud applications [or at least the ones it presently supports] and then enabling you to connect between them at will.
Windows only, you do need to install a small desktop application to use the service. The Gladinet software creates a virtual drive on your desktop from which you can access your online storage services as if they were local folders. You can also access the same folders from multiple PCs via the same Gladinet account.
Presently the service integrates with Microsoft SkyDrive [25gb of free storage], Amazon Simple Storage Service(S3), Google Docs and Google Picasa. You can also connect to folders on remote local computers that you have access to e.g. at home or at work. In effect it means your files can follow you.
It's easy to drop and drag files between your online and desktop folders, and the files become instantly available. You can also drop and drag files between cloud storage folders i.e. skydrive to google docs.
The "icing" comes from the ability to easily access online applications. Hence, your online or desktop files can be instantly opened within the web applications supported from Google Docs, Zoho and Think Free.
For example, you can elect to open a document stored on Skydrive in Google Docs. A temporary instance of the document is created in Google Docs but all the changes are instantly reflected by in the original source file when you save the document. Next time you open the document you could instead choose to use Think Free or Zoho to edit it, or perhaps use MS Word on your desktop. A point to note is that I found Google Docs considerably faster at opening files than Think Free.
Gladinet also lets you share your files by creating internet urls that you can send to others. If you choose to youcan protect your share with a password. You can also put a timer on the URL so it can expire at a specific time. Both features make the sharing experience more secure.
Gladinet doesn't provide any synchronisation capabilities between online and offline folders, leaving that to services such as Microsoft's Live Sync and Dropbox amongst others.
But here's a personal reason why I am enthusiased about this offering. When I installed Gladinet I simply couldn't get it to connect to the cloud storage services following the installation and got a Window error code. I dropped Gladinet an email asking for help and one of the founders, Jerry Huang, was kind enough to spend time investigation the problem with me online and despite it not being a Gladinet issue, tracked it down to a conflict with a very old Juniper Networks security application I had on my laptop, which I hadn't even been aware was still active. Thereafter things have been troublefree.
Whilst on the call, Jerry also took the time to give me some background on the company and a taste of their future plans, which were impressive.
Definitely a service to look at.