Random Thoughts on The City, Wall St & Capitalism

MERRILL LYNCH:Cannot Recommend A Purchase

2008-10-10T16:13:00.006Z

Well I did warn you.Just because BofA was taking this heap over the ride isn't finished.Unless you're a sovereign wealth fund, that is, easily duped with money to burn,you had ample opportunity over the last year to bail.Happy Days!

SHIT happens in America.

2008-09-24T19:13:00.001Z

Euphemisms and acronyms.Wall St. and The City seems to be full of them.Years ago Morgan Stanley used have a product called 'OPALS'.Short for Optimized Asset Linked Securities.I can't remember if it was any good.Sure it was popular with clients.I'm assuming in reality it was a crummy product.After all excellent products aren't exactly at the top of an investment bank's list of must haves when you're trying to rip off,l mean ''service'' clients.

The new Resolution Trust Style bailout entity is described as 'TARP'.Troubled Asset Relief Programme.Surely it should be called Securitized Holdings Intervention Trust or 'SHIT'.Because if the Hank and Ben show get away with it the US will be in real 'SHIT'.

RB

Dollar Bail Out

2008-09-22T19:24:00.003Z

I don't mean The Bailout,you know Resolution Trust 2,or Toxic Bank.Whatever you want to call it.The proposition itself is not new but why does Hank want his proposal/decisions to be outside the scope of judicial review? I was long dollar/Sterling up to 1.75.But given the extra dollars that will need to be injected,and the resulting increase in budget deficit both the US economy and the dollar are just plain doomed.Short dollars.I mean bail out.

RB

MERRILL LYNCH:DEATHWATCH

2008-09-16T19:07:00.002Z

I wept when l heard the news.With laughter.If you didn't see this one coming you must be a real believer in the Blundering Herd.

I'm mulling over yesterday's events.I'm a bit annoyed.I was sure Merrill was going to Chapter 11.It was much worse run than anyone could dream of.I hadn't anticipated anyone could be stupid enough to take it over.But then Bank Of America came along.What's B of A trying to hide that it's buying up Merrill at a massive premium to it's Friday close price.I'm hoping after proper due diligence B of A will see the light and let it fail.It's an awful excuse for an Investment Bank.Oh yes,thumbs up to Thain.Good one.

RB

Regulators,Fools,Merrill:Mid Year Update

2008-08-02T23:17:00.003Z

I haven't written anything for a while.There was nothing to write about.All that's happened in the last six months is that an investment bank went under,oil & gold reached new peaks,liquidity has dried up,market confidence is low,getting lower.Any fool could have predicted that,unless of course you run The Fed or The Bank of England.In which case,you're beyond help.None of these events were unpredictable.No black swans here.

I've been taking it easy since March.Watching the credit crunch unfold.It's been a source of much amusement.I like it when companies go under,especially financials.It's Darwinian,it's necessary,destructive capitalism at it's best.It's exhilirating.There are just too many people working in financial 'services' companies.They're fat from the bumper harvests of previous years,I don't have a clue what most of these people do.Do you? Now the slaughter house beckons.Bring on the savage cuts,let the blood run,the downturn spiral.

All the FSA managed to do was fine Woolworths for inaccurate accounting,while Rome burns.Good work.Go back to sleep.The regulators in the US have been busy too,banning naked short selling (just go synthetic short-it's less risky & probably cheaper these days).They've also been busy ''nationalising'' failing US regional banks.In the home of unbridled markets,very odd.Friedman would turn in his grave.

So Merrill has written down approximately 45 billion dollars to date,and another record quarter of losses.Another round of capital raising.The nice chaps at Temasek are lapping up more stock.It's a bargain $22.50.As if they hadn't lost enough on their initial stake (see earlier blog).The best thing about modern Sovereign Wealth Funds is that they have deep pockets and will believe anything you tell them.That's where investment banks come in and fleece them,l mean allow them to invest in their businesses that are ideally positioned for growth in the future.

Bizzarely the market marked up it's shares after it's latest balance sheet re-structuring exercise.It sold about 31 billion dollar's worth of 'risky' CDOs to Lone star for around 22 cents in the dollar compared to face value.An epiphany in this particular episode of Merrill 's history? A watershed.Now it's all clean and fine and shiny and disease free right? Wrong.Look at the deal again, Merrill lent Lone Star most of the money to finance the deal.Ok nothing wrong with that,but the net effect of the deal is that Merrill has capped any potential upside from it's CDO portfolio,and has taken all the downside risk.If the instruments continue to drop in value,it's all pretty much worthless.They could end up LOSING on the deal.So though it looks good on paper for now,this particular method of balance sheet clean up is actually very stupid in this envirionment.I have no idea who advised them on this deal.Looks like they advised themselves.

One analyst has pointed out that Merrill is losing 52 million dollars a day.I'm surprised it's as low as that.Worse is to come.Can't wait.

RB

Rating Rating Agencies

2008-02-25T23:20:00.000Z

The US stock market rallied today.Mostly on the back of Ambac retaining it's triple A rating,and MBIA being taken off the downgrade sick list.Ambac's trying to raise 3$ billion to bolster it's capital base.

Phew,panic over then,things can return to normal.No more write downs,and the credit market will return to normality very soon.

Nah just kidding.Here's the problem.Ratings agencies earn their revenues from the bond issuers.They get a fee to provide the the rating from the issuer.This is called conflict of interest.Let me illustrate you how this might be a problem.Remember Enron? Weeks before it went bankrupt these very same ratings agencies were assigning them healthy credit ratings.

I suspect they will have to downgrade the monolines,it's just a matter of when.

Sovereign Investment Funds,oil & Stagflation :SELL US STOCKS

2008-02-20T23:36:00.002Z

Oh dear.The Fed lowers growth forecasts,predicts increased unemployment,and oil also jumps to 101$ on supply concerns.It's the 70s all over again,and this time not just disco.Stagflation writ large.What should the Fed do? Here's the problem.It doesn't know and even if it did it's too late.

Question:who really controls the US economy now? Answer the US consumer,unfortunately he's broke at the moment.Who then if not the US consumer? It's the Sovereign Investment Funds of the Middle East silly.They've bought into the financial infrastructure of the US via Wall Street.Now OPEC will start cutting oil output.They are also probably behind the hedge funds which are taking positions in the oil market now.As the price of crude goes up,this will inject enormous inflation into the US economy and become a huge drag on growth.If you thought a recession risk was 50:50,it's probably wise to reconsider.

In a serious downturn who do you think will be buying up America's prized assets on the cheap?You guessed it.Sovereign Investment Funds.The real change after this recession will be the fact generations of American workers yet to be born will be in effective bondage to the wealth funds of the developing world.

The US in it's hunger to consume now has mortgaged away it's future.It's just another overleveraged bet that went wrong.Dump US stocks.

FGIC-in great!Monoline doing the splits? Seeing double.

2008-02-17T21:51:00.003Z

The big news isn't the Northern Rock nationalisation.I predicted that a while back in an earlier blog.The really big news is on the other side of the pond.You'll miss it if you blink.

Last Friday FGIC,one of the large bond insurers put forward proposals to split itself in two.Monoline to Duoline it were.It proposes to house the low risk municipal bond insurance piece in one entity,leaving the now worthless credit-default swaps insurance trash in the other.A perfectly good idea actually.

The municipal bond insurance piece then will have a higher credit rating,presumably triple A.Why does this matter.Well think about it,the the remaing piece (the writer of the risky stuff)then can be downgraded or even file for insolvency or chapter 11.

If this bifurcation process into two companies occurs and AMBAC,MBIA and others follow suit,it will result in the end game for some investment banks.The instruments they have have insured will have to be written down on the investment banks' balance sheets to zero.The G7 ministers agreed that about 400$bn of writedowns will result from sub-prime.Yet we are only half way there,if that.Maybe once monolines split,then we can see who's been fiddling their balance sheet reporting.Naughty Bankers.

Of course l believe,and sincerely hope Merrill will be on this shit list.

RB

King-dom Come (Back Again)

2008-01-30T21:04:00.000Z

We expect very little of our public servants.So we get what we deserve.The re-appointment of Mr King is not good news.

Merrill Lynch:Ahmass Fakahany get's f..resigns.

2008-01-28T19:44:00.000Z

Ahmass Fakahany Resigns (According to CNBC)

I did tell you this would happen.My earlier blog of 29 Nov 2007 entitled,Merrill Lynch:You don't have to be in-thain to work here,but it helps,explains why.Wonder what the severance will be for the worst risk manager in the world.My guess around 20$ million cash & stock.Sounds about right for tanking a FORTUNE 500 bank.See below.Is Greg next?

RB

Societe Generale:'Rogue Trader'?

2008-01-24T23:20:00.000Z

I hate the term 'rogue trader'.There's no such thing.Just poor controls.I don't know the details,they're not important.The young man at SG has just racked up losses of $7 billion.I hate the term losses,lets call them negative profits.

So you make a little, lose a little.I feel rather sorry for the trader.He hasn't really done anything wrong in real terms has he? It's all fake electronic money anyway.

Think about this,assume his vanilla directional market bet had gone the 'right' way.That is to say it was up 7$ billion in profit.Do you think he would even have made the news.When the 'rogue trader' makes money for the bank he is called a star trader aka financial wiz.

It's just bad luck, they should leave the young man alone and make him head up a risk management team.

RB

Market Volatility : Let the bad times roll.

2008-01-22T20:39:00.000Z

Well the recent recent volatility will be nothing compared to what will happen if the monolines go under.Imagine the whole of the developed world selling most of the bonds they own and most of the world's banks balance sheets severely distressed.The near dooms day scenario is a bit like every bank with write offs like Merrill without the sovereign wealth funds to help them out.Nasty huh?

The Fed's emergency rate cut today was laughable.What on earth will lowering interest rates do in a world where trust has broken down.Banks aren't lending to each other,not because of lack of liquidity/cost,but lack of trust.Guess what, money can't buy trust.A novel concept.

Sadly Mr Bernanke's only trying to fix the mess his predecessor,Mr Greenspan made.50 years from now Greenspan will be remembered for one thing only.As the Central Banker who precipitated the conditions for the worst asset inflation bubble for a century for no apparent reason.He has now joined a hedge fund,Paulson & Co, specialising in essentially selling sub-prime short.It's the opposite of a virtuous circle.A vicious cycle.

Assuming deteriorating US corporate earnings,high unemployment,poor consumer confidence and impaired bank balance sheets,then the conditions for a deep recession in financial markets are already here.

In the end the the Fed has only another 350 basis points worth of ammunition.What 'medicine' will it use after that? After that all recovery is based on hope.
Exciting times really.The financial services industry needs a severe downturn to get rid of all the idiots in the investment banks.If you don't know who they are.You're probably it.Here's hoping markets continue to deteriorate quickly.Why do l care,I'm long cash.

RB

Monolines reaching the end of the line?

2008-01-17T22:00:00.000Z

Monoline Insurers : Key to future write down numbers

At the moment bond insurers are having their credit ratings downgraded.This is of course having a knock on effect on the value of all the debt on Wall Street's balance sheet.

If you think the write downs by Citi and Merrill are bad now, don't be fooled.If MBIA,AMBAC or another one of these insurers goes bust,then everything they've ever insured is instantly worthless.Monoline insurers are used by investment banks to protect against default for their toxic debt tranches/packages.If the insurer fails,depending on the bank's exposure, the bank loses even more.It's lose lose all round.Cool or what.

One of my predictions for 2008 (See Jan 4 2008 blog below) was that a major US monoline insurer would go bust.AMBAC's credit rating was downgraded today,as a result it lost nearly half it's value at one point. If it/similar went under then the likelihood of a major Wall street house being tipped into Chapter 11 would be pretty much guaranteed in my opinion.Not to mention substantial mark downs in the stock price of the surviving ones.

This could be the next major development in the sub prime story,and has enormous entertainment potential.Can't wait.

Keep an eye on them.

RB

Banking career advice for the young (and young at heart!)

2008-01-15T12:53:00.000Z

.A number of readers have privately e-mailed me as to what l think the true position is at Merrill Lynch.I am sad to say l cannot proffer career advice.Each person's position is unique.I think of my readers like snowflakes.No two are the same.Everyone is special.What l can say if you're unsure about what to do in any firm,especially a bank/similar,here are some generic questions you should ask your self.

A short guide to career due diligence, most of you already know this;but the late 20-something new meat has yet to be tenderised.This for them,l hope l'm giving something back to the young folks :

1.Do you believe top-down communication has been transparent and honest? I of course mean corporate 'honesty'.So not fraudulent counts as 'honest' in this context.

2.Do you believe any of the assurances provided to you by your manager/senior management .If it's something along the lines of,''we value our top performers'',''there will always be roles for exceptional people in our ( INSERT NAME OF COMPANY)'',"if you're giving better than your best/110% there's nothing to fear","We value people",''our core values are that we we treat our human capital professionally''.You should probably be packing up your stuff slowly and knocking out your hard drive before I.T. shuts off access.

3.Note though the sooner you leave,the better first mover advantage you will have over later leavers.Get into the market before the crowd.You're more likely to find employment else where,if you want to work again,especially for more junior/middle management roles.

4.On the flip side, if you stay what is the probability of a decent redundancy pay out?.Redundancy In your company this may be called ''voluntary or involuntary separation'' ,''right-sizing'',''role elimination'' or even ''redundancy".

5.If you do decide ''to stay'' and sit it out,consider what information you have on your operating environment about malfeasance or misfeasance.Any memos,emails,records of meetings? Get proof.Evidence is key,ideally these days of regulatory breaches.They're the juiciest. This will always be useful in severance 'negotiations' with HR later.

6.The restricted stock problem.If you were compensated in restricted stock mostly,you could try and get new co. to buy you out in real cash (unlikely but always worth trying it on.It's just a monetisation trade really) or ask for straight stock for stock swap on same terms.Failing that remember restricted stock is not real.The numbers might look big to you now,but the value depends on performance of the share price.How do you know if your current employer will even be in business a year from now?You can't eat stock,go down to Starbucks and try to pay for coffee in restricted stock.They will laugh you out of town.It's essentially an illusory not so golden handcuffs for middle managers.You won't really lose anything by letting it go if you really want to leave.

In the age of the adversarial consumer society,employees only owe a duty of care to one person.Themselves.

Good luck you crazy young things!

RB

Merrill Lynch 4th Quarter write down hits 15$ billion:Abandon Ship

2008-01-12T17:03:00.000Z

As you will see from Bloomberg,Marketwatch,and the International Herald Tribune,Merrill is now expected to report a 4th quarter write down of 15$ billion.Apparently far in excess of analysts expectations.Where these analysts get their numbers from l have no idea.None of them seem to be able to build accurate valuation models for Merrill.The problem is many of them are innumerate snake oil salesman,unable to count nothing more than the loose change in their own pockets.I said last year in a previous blog (see below 30 Dec 2007) I expected a 4th quarter write down of 15$ billion.So it is.

After the news was announced,the shares went up to around 54$.This is called a suckers rally.My own valuation model estimates of Q1 & Q2 2008 losses for ML show that there is at least another 9$ billion which will be written off by mid year on top of the 23$ billion to date.My valuation model is extremely robust since and has been coded by of the finest brain in the city,me.It's been bang on to date.

Although Mr Thain is hiring all his ex-Goldman buddies to strengthen senior management,no matter how great the management is,at the current rate of write downs,the company will simply run out of capital.My current calculations suggest it's only the cash from Sovereign Investment Funds et al that is allowing Merrill to meet it's current wage bills.Some of the SIFs will undoubtedly make money out of their positions in US investment banks and brokerages.Increasingly this looks unlikely at Merrill.Temasek would do well to dump it's stake while it's up.

The bonuses were announced last Thursday,if you're a smart employee you could do worse than to abandon ship once it's been paid into bank account.No one would blame you.It's called survival.

RB

2008 Financial predictions

2008-01-04T17:48:00.000Z

2008 Forecasts

Like most ill informed pundits,my 10 Forecasts for 2008.A lot of it wishful thinking.

1. Oil reaches $125 (mostly on supply disruption concerns).

2.Gold breaks $1100 per troy ounce.

3.Dollar hits 2.40/£.

4.US interest rates hit 2.5%

5.At least one major Wall Street firm is taken over/Goes to the Wall.

6.Northern Rock is officially nationalised.

7.Dow falls below 10,000.

8.Bank of England independence officially retracted.

9.$ hits further record lows vs €

10.Major US monoline insurer goes bust.

RB

Going to the Wall (Street):Merrill Lynch

2007-12-30T14:41:00.000Z

I'm pretty excited about 2008.Observing Carnage in the financial sector is a very entertaining way to pass time.As Yogi Berra used to say,you can observe a lot by watching.

As you're aware l have taken a keen interest in Merrill's slow decline over the past months.I'm hoping things will only get worse for them.In the last downturn in 2001-3 there was a feeling that Stan cut into muscle ,not just trimming fat.In the ensuing months l would like to see it de-boned and made into a stew.The employees should start getting used to smell of Napalm in the morning.I think the major write downs and consequent lay offs around the corner.

It's true just before Christmas Temasek,the Singaporean state investor, bought a stake in Merrill.They injected $4.4 billion into the company.The share price reacted by going down.Why,well Temasek paid around $48 for their stake,a 13% discount to the market price.Not a confidence builder is it.Just because a share is cheap doesn't mean it's good value.Value and price are different metrics.

I read today that John Thain is desperately trying to get further cash injections,as a financial engineer he probably has some notion of true exposure.Scared, he should be.He's basically running a giant black hole of a balance sheet masquerading as an investment bank.

I can't wait for the 4th Quarter results.I've pencilled in writedowns around $12-15 billion.Bear in mind these will not be the full and final write downs.It's the amount they can quantify in that reporting period.

In the end l'm hoping for one of two outcomes in 2008.Chapter 11 filing,which would actually crack me up with laughter.It couldn't happen to a nicer investment bank,or an ignominious opportunistic bid from a cash rich bidder.Like Wal-Mart,or Krispy Kreme.Hey Everyone's diversifying these days.

Happy new year to all.A special message the Merrill Readers.Hope you go under.

RB

Nelson's column:Merrill Lynch new CFO announced

2007-11-30T18:31:00.000Z

I think I might be psychic.It's a big responsibility.It's the only 'skill' l have. After my piece yesterday,what should happen today-as if by magic.Oh Lordy!,Marketwatch reports that Mr Thain is hiring his CFO from NYSE,Nelson Chai,at Merrill.Looks like Jeff Edwards will get the heave ho or a 'lateral' move.No that's categorically NOT a demotion.You know that.He will probably be moved on to a similarly ''challenging" role.Let's all thank him first for doing an excellent job under very difficult circumstances.Right.

If I wasn't so short sighted my effigy-dart process would have revealed this yesterday.Damn.As l said he's the first of many that will be encouraged to look for other opportunities.Cool.Merry Christmas.

RB

Merrill Lynch:You don't have to be in-thain to work here,but it helps!

2007-11-29T23:21:00.000Z

John Thain is starting at Merrill from Dec 1.Once a new CEO starts,especially with a specific mandate to turn around a company,the legacy senior management should be afraid.

He will be firing some of the current senior managers,partly to draw a line in the sand to mark the beginning of his reign.Also to make room for Mr Thain to hire his own people.

I've been taking bets with my friends as to who we might think would get chopped.It's fun but hard.Our opinion is that all the Merrill's current senior management is pretty so so.It could be anyone.Being smart,even-handed,sensitive and logical people we devised an almost fool proof way of predicting the first two out of the door.
We bought small effigies (about 7 inches tall) to represent each current senior manager,stood them on a table.Stepped back ten paces and then threw darts at them.

I had two hits.Well l'm short sighted.The first 'hit' was Ahmass Fakahany.Creepy.Well it was under his watch as risk manager that the balance sheet got loaded up with rubbish,and credit exposure went out of control.So if my voodoo dart throwing process is any good,he'll be shown the door.

The second 'hit' was Greg Fleming.I was slightly bemused.He is co-president with Mr Fakahany.What is lady luck trying to tell me.I have no idea.Yet still l believe the effigy-dart method to be very reliable .I think he will get chopped by Mr Thain because he's always grinning.In every picture l see of him,a Peter-Panesque grinning Mr Fleming stares out into the abyss.It's not good to exhibit so much good humour in such solemn times.Too much jollity on the shop floor is not appropriate.I trust my process,so l think he'll be gone too.

Of course the big redundancy program for everyone else will also be announced once Mr Thain gets on board and settled.Very excited,can't wait.Hope it's before Christmas.

RB

Merrill Lynch:SELL

2007-11-27T08:40:00.000Z

Yesterday Greg Fleming,Merrill's co-president told his minions,that he has "tremendous confidence" in the company's long term prospects.I worry about his mental health.

When senior staff talking like this it means one of two things.Firstly he is about to leave the company and needs to prop up the equity to cash in as he goes.Or secondly he has no clue what's really wrong with Merrill.The senior management should look in the mirror,they are the problem.

Famous last words like this also mean they are tempting fate.Watch how the shares prices tanks in the coming weeks.

RB

Gieve & Hawks and why recessions are good.

2007-11-24T19:31:00.000Z

Sir John Gieve is normally naturally Hawkish.As a Deputy Governor of The Bank of England his judgement is usually better than Mr King.As the real possibility of a recession appears on the horizon (well l never!), coupled with serious liquidity and credit quality issues even he's changed his mind. He is deputy Governor responsible for financial stability.So voting for a cut in the current environment for him makes sense.His boss has made financial markets unstable and to some extent he has to fix it.Of course it's an absurd suggestion when you keep in mind pricing pressure and real world inflation.

Rates need to rise in the short term to stem inflation.They also need to rise because both the UK (and the US) need a recession.Central Bankers and economists seem to have forgotten that they are a necessary part of the economic cycle.They allow the bloodletting needed to ease asset price bubbles,namely housing.Trying to avoid a recession is like trying to cheat death.It will get you in the end.It's just a matter of time.

Recessions of the non-depression era variety are excellent for businesses in the long term.Badly run companies fold.Increased unemployment means wage push inflation slows.After all if you're afraid of losing your job,you're not going to whine about no pay rises for a few years.

Recessions are secretly even more welcome in banks.Especially by senior managers.You can legitimately get rid of all the underlings you disliked.More importantly you can 'encourage' all the bright young things to leave.In an industry where endurance and cunning are more important than intelligence smart people have to be shaken out.For three reasons,firstly if you're a senior manager they could become a potential threat to you in future.Get rid of the competition,and you're safe for another five years.Secondly you need smart people to do jobs that can be of benefit to you in future.You need to know that if ever you need a dentist,doctor,architect etc that that person will be brighter than you are.Otherwise what's the point in having all that money.Thirdly recessions are good in the here and now.First class cabins become a lot less full,hotel suites less expensive,nice restaurants are quieter.Second,third,and fourth homes get cheaper.The Maybach waiting list shortens,its not all bad.Even if you get laid off in a downturn,you'll get paid off as well.So you can sit it out.

Sir Gieve is wrong we need emergency rate rises,all the way up to 10% at least.

All in all recessions are desirable if you're long cash and not overleveraged.I can't wait for it.I'm already planning my holiday schedule and a list of new property purchases as prices collapse.What about you?

RB

The bountiful rewards of destructive capitalism:Adam Applegarth,a modern executive's hero

2007-11-20T23:19:00.000Z

Adam Applegarth:Who's the fool?

I'm bored of the whole Northern Saga.Why shouldn't the tax payers pick up the bill.Apparently it's costing each tax payer in the UK £900 per head.

The public should regard this cost as a kind of idiot tax for employing morons in high public office,for example Darling.Public sector posts,including regulators and the Bank of England will normally attract the poorest quality job applicants.It's just a given.All things being equal,why would you become a civil servant and not a hedge fund manager? These left over no-hopers man the regulators and other 'supervisory' bodies.If you spend long enough in 'public service' you can get knighted and a nice pension.It's actually not a bad life at the top of these organisations.No accountability and endless financing underwritten by the populous.

I saw Adam Applegarth being quizzed by the treasury select committee.He's got a lovely soft voice, and a ye olde bank manager's manner.In another life he would have made a nice vicar or provincial GP.Trust me l'm a Doctor.Dr Strangelove.

Here's why the man is a genius.He worked out long before everyone else that globalisation meant that when he was 21 and looking for a job,he could make his fortune by staying in a nice backward part of the country.Namely Northumberland.A strange hybrid county,neither England nor Scotland,but generally encompassing the worst aspects of both.In this eternally drab landscape,he takes a provincial building society,floats it,re-engineers the business model.

He effectively ran an intermediary operation for packaged mortgage debt remotely from Newcastle for some of the more aggressive US investment banks,including Lehman.Unlike his counterparts running trading desks in the London based investment banks,Mr Applegarth ran one product,mortgages.Nothing fancy,exotic or complex.He got to come into work about 9ish,leave by 5.He is by his own admission a sports fanatic,so he followed his favourite football team.He was also captain of Sunderland cricket club.All in all he has and had a very good quality of life and held down nice undemanding day job.

He became CEO of the Rock in 2001,aged 39.His base compensation in 2007 was 760K.Lets add pension rights,bonus,and equity etc.Make the assumption that he made approximately 1.5 million per year since 2001.Lets do some rough and ready calculations then,ignore time value of money etc:

2001-2007 = 1.5 x 6= 9 million total comp

1983- 2001 =assume 8 million total comp

By my very rough numbers,I think he has taken about about 17 million pounds over his 24 years at Northern Rock.He wasn't particularly well paid as a FTSE 100 CEO,still he wasn't starving either.He has had an excellent quality of life up north.I'm told a million half a year is a lot of money in Gosforth.Now at 45 can now retire very happily.

He has therefore been quietly collecting little and often over 24 years,and now the game's up.I doubt if he's particularly bothered.It was just a job.

If you're middle aged investment banker in London reading this at 2 am at your desk.Rubbing your eyes,wondering whether your total comp might even reach half a million pounds.Think about the genius of Applegarth's approach.He's collected 17 million pounds , been and gone.He didn't have to compete in the urban rat race,work late,have to engage in bitchy office politics or learn about anything more complex than a mortgage.Who's the fool ?

RB

No Thain, no gain:The asymmetry of risk / reward in the boardroom

2007-11-16T23:31:00.000Z

No Thain, no gain:The asymmetry of risk / reward

Here's a strange thing.John Thain is taking the top job at Merrill.He must be bored indeed.

For his troubles, if he can turn the house around,his incentive bonus will be in the region of 100 million dollars.Stan took 160 million dollars for his part in Merrill's current downfall.Does that make any sense to you?

The compensation culture in investment banking and financial markets has turned the concept of performance based pay on it's head.If l destroy a company l can now expect to get paid more than if l run a company properly.It's completely counter-intuitive to the real world.It's how the mad hatter would structure a bonus culture.I love it.

RB

A King's Ransom

2007-11-16T22:32:00.000Z

He is apparently a brilliant economist.For me he is also the least able central banker in the developed world.

The governor has announced that there are likely be a number of rate cuts in 2008.Apparently this will be achieved despite the fact that oil prices are hovering around an all time high with no sign of weakness in the near term and metal prices and agricultural commodity prices are also increasing.All this indicates a 2008 environment of higher inflation and stagnant economic growth.Stagflation even.

The Bank of England's mandate is to be vigilant on inflation.Lowering rates in future won't achieve this.I have no idea what Mr King is talking about.I'm wondering whether he does either.

His performance this year doesn't fill me with confidence.

Let's look at the list of his recent achievements in 2007.Keeping inflation under control.Failed,had to write letter to chancellor.Oops.

Not pumping liquidity into capital markets when appropriate. Unlike the Fed and ECB,he didn't bother.This may have stopped the first run on a bank for 140 years.

Northern Rock,the farcical shenanigans and volte face on 'moral hazard' that led to systemic loss of confidence in UK banks & regulators.

Radio 4 interview,''I'm not to blame really,it's just l was ''bullied'' by Darling et al.

On balance I'm not sure a second term for the governor is appropriate.Given his recent musings,something tells me things are about to get worse on his next watch.In the land of the blind the one eyed man is king.

RB

Bear Necessities, Cayne it!:A salutary lesson in workplace presenteeism

2007-11-04T13:49:00.000Z

"Puritanism: The haunting fear that someone, somewhere, may be happy"

The Wall Street Journal is a pretty run of the mill paper.Editorials tend to be good.The quality of the rest of the journalism is quotidian the rest of the time.So there I was reading this weekend's European edition.There's an article on page 12 & 13 on the great and the good-how the top dogs spent the summer of 2007, but mainly focusing on James Cayne's behaviour.

The writer, Kate Kelly reproves Mr Cayne's behaviour,apparently "James Cayne hit golf links,bridge tournaments amid summer turmoil",and shock horror "In the critical month of July,he spent 10 of the 21 work-days out of the office,either at ..(a).. Bridge event or golfing".

Worse still the cardinal sin of a puritan and largely stupid work ethic,"In summer weeks,he typically left the office on Thursday afternoon and spent Friday at his New Jersey golf club"..and -oh my god-"out of touch".Burn him.It does sound like he's definitely in league with the Devil.

God forbid the poor man should have outside interests and put his leisure time ahead of 'work' interests.The writer goes on the compare and contrast this with Lloyd Blankfein who "cancelled plans to spend to spend the last two weeks of August at his Beach house,missing a chance to spend time with his sons before they headed to college.Through the summer's market gyrations,Mr Blankfein frequently visited Goldman mortgage desks."Yes his family must be really pleased with him.I think we are all supposed to admire Mr Blankfein.Instead he ends up sounding like a work obsessed,boring,lonely,control freak,micro manager,with literally no life outside work.A similarly Stakhanovite picture is painted of other wall street managers,like Chuck Prince of Citigroup.

Lets put it another way,I bet Stan O'Neal and his cronies were in the office all summer long.All he managed to do was get fired and tank the company.Later today the Citi Board will be sacking Mr Prince. NICE.

Iceberg theory,losses :Merrill Lynch going private?

2007-11-03T15:27:00.000Z

Oh Dear.Another day another billion dollar writedown.When does it stop.I did warn you about Merrill's off balance sheet exposure in the last blog.Now this week it's been investigated by the SEC for off balance sheet loss manipulation.Bad Luck.Another 10$ billion could be written down.This should not come as a surprised to anyone except the Board of Directors at Merrill.Oh well you snooze,you lose.Their PR spokesperson denies this.Last year's financial statements are fiction,why anyone would believe the PR department l have no idea. So what next?

In the coming months,once the dubious quality of the accounting becomes apparent there will be further writedowns.So far the approximate numbers are 8$ billion+ another 10$ billion to come. I expect true exposure in reality is in the region of 50$ billion. So expect at least another 32$ billion in writedowns.

This is how I got to the 50$ billion as the 'real' writedown.Assume all management are at worst economical with the truth and at best have no idea what's going on;especially in investment banks and particularly if they think it will prop up the share price.Now use iceberg theory. The initial number is only 10% of the true figure, the other 9/10 ths are below the surface.Initial writedown estimates were approximately 5$ billion.Multiply by 10=50$ billion. Current Market Cap at Friday's close (59.71$) was 49$ billion. Take the 10 yet to be written down plus the other 32 , that should leave a market cap of around 7$ billion dollars if it survives as an on-going concern/independent entity.It's not rocket science is it?

So my made up target price of 15$ still stands.It's a better valuation than the rubbish the analysts are peddling. I'll be a net buyer at this price.The brand equity is roughly worth about 6$ a share ( 50 cents for each letter in the name, there are 12 letters),add $9 for on-going operations.

So what does the future hold for Merrill's various stakeholders?

Employees

If you're an employee wait for the mass severance package offer like the one in 2001/2. The party is just beginning,so if you're planning on staying in the firm,hold on real tight.The storm hasn't even arrived yet. If you are higher up at ML and have been comped in restricted stock,stock options and similar equity related incentives,you really should have got out at the end of last year and known better.Now don't you feel like a fool.Oh Well a fool and his money were lucky to get together in the first place.

Stockholders

Stockholders will probably start to litigate quite soon for misrepresentation etc quite soon,and breach of fiduciary duty by the Directors. So the firm should expect a host of class actions, coming to a Merrill Office near you very soon.

Auditors

If you're an audit partner at Deloitte LLP, New York.Expect litigation for a job done badly.Did you check your PI insurance like I told you to in the last blog?

The Firm

As the firm's creditworthiness begins to deteriorate, in fact it's already happening look at the credit default swap prices of it's bonds,financing will get a lot more expensive. The ratings agencies will start downgrading it's debt.Who knows in a peculiar twist of fate, they could become sub-investment grade.They themselves could become sub-prime.They could then buy their own debts, re-package them as CDOs and shove them off balance sheet into a SIV-lite. Maybe flog it to Citigroup.That's the financial engineering equivalent of eating your own vomit.How cool would that be.

There is one avenue which looks increasingly likely, it could be taken private. It will soon become a classic distressed asset play.So it goes private.De-leverages, gets rid of all non- core business.Keeps brokerage,M&A, underwriting.Reduces proprietary trading, reallocates capital. It's an easy way out.Sounds crazy.Well think about this.Of the current board of twelve.Three of them are ex-private equity boys and girls.Charles Rossotti ( advisor to The Carlyle Group), Ann N.Reese ( Clayton,Dubilier & Rice) and wait for it, the current acting Chairman, Alberto Cribiore ( Clayton, Dubilier & Rice and Brera Capital).If you're telling me that this hasn't crossed their minds, I'd be surprised.

Personally I'm still hoping it will still go under.That's my preferred outcome.This is called destructive capitalism.

RB

Uneasy lies the head that wears a crown: E. Stanley O' Neal,Merr-ILL?

2007-10-28T13:40:00.000Z

To forecast a $5.5 billion write off is careless, to then revise it up a couple of weeks later by another $2.4 billion is just plain fishy.I hate to say I told you so but in my previous blog I intimated that all was not well at Merrill Lynch.No one really knows the real state of it's balance sheet,least of all the CFO or Stan, and I certainly wouldn't trust the Auditors.Oh dear.Funny thing is if you look in the 2006 Annual Report from page 51 onwards there is all sorts of drivel about the firm's Risk Management policies, the ROC, the role of the Executive Committee.Yada yada yada.Either this was all bullshit ( the smell is somewhat familiar) or just delusional lies.Either way the only losers are the shareholders.Still the drama that has ensued livened up a traditionally very uneventful fourth Quarter.

Stan is one of my heroes though. After succeeding Komansky to the ML throne in 2002, he proceeded to fire everyone he disliked, anyone who disagreed with him or who could be potential rival. This is called the Caligula School of Management. When you’re left with just yes men and Board members who have no interest in upsetting you and just pocketing their own compensation, is it any wonder no one has bothered telling you that you maybe taking on a little excessive risk. So really Stan has only himself to blame for his current predicament.

If I had to describe Stan here are the adjectives I would use: Calm,Ruthless, logical, Manipulative, Charming, Intelligent, Aloof. These qualities are not unique to him. They are also exhibited to some degree or another on the rest Board of Merrill and lots of other Wall Street Firms. Just one problem though, those of you who are familiar with abnormal psychology may also notice that these characteristics are all listed in the current Statistical Manual of Mental Disorders (DSM-IV-TR Fourth Edition 1994) as the classic signs of a sociopath.

With losses and write downs probably continuing well into the next quarter and beyond, and no potential floor on the downside given the opacity of on and off balance sheet exposure Merrill could well get taken over. Current valuations are still too high for it to be an attractive proposition for a predator. Someone might fancy it's retail arm which always chugs along making good cash flow. I would place current book value around $10 -15. How I got to this valuation.I'm not telling you -it's a secret, just like the way they calculated the latest write down. I think the formula is : Back of Envelope+Pen+whatever sounds about right.Analysts are livid after last week's conference call.This is very disingenuous on their part.Unless they were all asleep for the last two years, if you actually looked at the company's business mix and probed around a bit, the losses aren't a surprise.

Any more write downs and it may be the first of the major investment banks to go to the wall. Personally I wouldn't mind seeing it go under, I flogged all my holdings at $78 early last year why do I care. Just for entertainment value it would be nice to see a bit of blood on the street.A shake out is always good.I liked the 80s,I'm hoping this could be the Drexel Burnham of the new millennium.

How can the Board save ML? Well they could divest ML's interest in Blackrock. As noted in a blog at the time of the acquisition this was a very silly deal for Merrill.Still they know best right.

No doubt about it though, Stan is in a tricky position. Now after an apparent unauthorised overture to Wachovia late last week, the Board have turned against him. They are biting the hand that feeds them. Like most sociopaths they have no empathy or remorse.

So Stan must be thinking how he can save himself.Well he could replace the Chief Risk Officer with horse or maybe just quit.

RB

Whither Blog?

2007-10-08T17:08:00.001Z

One of the few things money can't buy is good weather.Well that's not strictly true. I have written nothing since February because of the inclement conditions in the UK this year. I also lost all interest in finance - again. Bad weather plus boring subject matter=no blog entries. I have also scrapped the cityboy consults service. Good idea, but I genuinely can't be bothered. I've spent as much time as I practicably could on holiday this year, including a most enjoyable month at Sandy Lane, my current favourite hotel outside Europe. The ever declining dollar makes it almost a bargain.

Now holidays are over, for a change I'm in a good mood. The fourth quarter is here already, but what did l miss in the last eight months. Looking back, only a couple of things nothing of real note. In an earlier entry I mentioned Jade Goody as a possible candidate for Governor of the Bank of England. I take it all back, policy should be decided using text voting - similar to pop idol or stars in their eyes. This has the double benefit of raising revenue for our new Darling and allowing Joe public to become much more engaged with setting things like interest rate policy. If you think rates should be cut by 25 basis points text CUT to 0870 123 456 or alternatively call the MPC to register your vote. Members will be there to take your call once a month. A small percentage of all call profits will go towards a charitable foundation, so current and future members can be taught basic practical economic theory and have access to learning facilities which allow them to think independently and maybe one day be released back into the financial community to sit on the board of a bank as a non-executive director or similar. All calls cost £1+ standard network charge.You get the idea.

The buffoons at the Bank of England have only themselves to blame for the current liquidity problems and consequent public mistrust of their handling of the Northern Rock Affair. Some commentators have suggested with the benefit of hindsight bias that oh yes it was a terrible business model anyway, they knew all along it would implode, it was a mismanaged company. Truth is the business model was a product of it's age and due to abnormal credit conditions it collapsed. Lending long and borrowing short makes perfect economic sense if short borrowing is cheap and plentiful.Back to the abnormal credit environment. I wonder how that happened? Well amid the buffoonery at the MPC quarter on quarter for a long time they forgot to act independently and kept leaving rates on hold, even while real inflation was creeping up. I'm not talking about the fudged rate from the even more incompetent ONS which all the government statisticians seem to have left.

The problem with the MPC of course is that they are all academic types-so the real world of rising oil, and agricultural commodities and house prices doesn't really impinge on their thinking. How do you manage a real economy on theoretical data. You can't- one has to be realistic and consider the real economy. King should have resigned when he had to write that letter to the then Chancellor. Even after mismanaging the economy so long through cowardly lack of decisiveness he is still in a job. So that's where my tax money goes to keeping these public sector geniuses in jobs they can't do and their final salary pensions. No thanks.

Lest you think l am picking on Mr King, Bernanke and the Fed are worse. A small taste of liquidity problems -and off he goes propping up the US economy, injecting liquidity (I think that's a euphemism for just printing more dollars), panic cutting rates by 50 basis points. All too late. The problem again is that he is an academic economist, rather like Mr King. Mr Bernanke used to teach at Princeton. He taught the cream of America. Rich and thick.

Was Northern Rock mismanaged. Answer:No. The businesses model was so simple and of the moment.You couldn't mismanage it.The quality of it's loan book seems extremely good still and default rates lower than market peers.No real impairment discounts need to be applied but prospective buyers want it cheap.The quality of non-executive directors also seems very high.Nicola Pease is not a fool, her husband is Crispin Odey and she can also claim consanguinity with John Varley of Barclays. Barclays, alas, was another victim of the credit crunch,what with funding all those off balance sheet conduits.It don't come cheap.In the end,it sounds like a strange proposition but the banks have been the biggest victims of poor central bankers in the UK and US.They will be the ones suffering job losses this Christmas.It doesn't lead to Dickensian poverty for the bankers,but the ghost of bonuses past will loom ever present.If you want to see what a great central banker looks like,try Jean-Claude Trichet.

The fourth quarter also means the results season is upon on us.The sub prime fallout started with it's first casualty Bear Stearns.For a one trick fixed income house gone mad on financial steroids,Bear stock had performed extremely well,then collapsed.It will come back-so hopes Joe Lewis who took a big position in the stock post collapse.If it works he will be even richer than he is now.I am reminded of a similar play on Citigroup by Prince Al Waleed bin Talal in the early 90s.It could work.Lehman's numbers were respectable.

So what went wrong at Merrill? 50 cents per share loss,that's no good.What happened to Stan's famous cost discipline / control environment? Well he got greedy see,sadly Mr Fakahany though he talks a good game on analysts conferences got lax.The real value add member of senior management in challenging operating environments for investment banks is the CFO.Ahmass alas was not there valuing the add.The last time Merrill made a loss on this scale was after the tech boom/bust.They subsequently went on to shed about 25% of their workforce globally.Merrill is the yo-yo dieter of the Investment Banking world.The payroll is once again bulging through four years of gluttonous hiring. Stan will start the blood letting soon.Expect CVs from ex-Merrill employees at a headhunter near you,very soon.He is a kind soul,so the axe should fall in November and take you right through Christmas.

Goldman deserves a paragraph to itself in this blog.Of course you are all aware US accounting standards allow more than a handsome degree of leeway in the method of attributing and calculating write-downs on illiquid and obscure instruments.Especially notional mark to market for complex products where due to lets say,a temporary market abnormalities and price dislocations you can't actually mark to market.It's a tricky area.I call it fudging.It's all legal though.I'm sure the auditors for the major investment banks know what I'm talking about.Been tempted to qualify any of the accounts of some of the investment banking clients,just a teeny weeny bit? Are you sure,you can tell me.I won't tell anyone.If you're a Big 3 audit partner please be sure to keep your professional indemnity insurance up to date won't you.I won't even charge you for that advice.I'm nice me.Where were we,Goldman.Everybody gets fucked,but Goldman is up 67% on the quarter.Whether it's due to great risk management or miraculous financial legerdemain,I have no idea,but most of seems down to David Viniar.As CFOs go in these awful organisations you can but admire his decision making skills.After all he has final say in allocation of capital risk.I have no idea what Lloyd Blankfein does (though he does have a striking resemblance to Jeff Bezos of Amazon.Are they the one and the same.I have never seen them together, so suspicions were aroused).Mr Viniar is my favourite CFO by a long way,for obvious reasons.

My other favourite CFO is Jonathan Asquith of Schroders for entirely different reasons. It's ok Jonathan your parting is on the correct side of your head, it's just on a photograph it comes out as the reverse.Bless.They broke the mould with that one.
RB

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NEW SERVICE : Audience Participation Request, Cityboy Consults

2007-02-16T11:45:00.000Z

In a radically changing world, sometimes we as businesses need help. Often that help is not to hand within the organisation. Going outside usually costs. That's where I come in. I now invite readers to email me, with their business problems across a variety of issues both micro and macro. This could range from financial, strategic, tactical, personnel issues you are experiencing either as employee, manager, C officer or other. No issue is too big or small. City boy will then provide a unique absolutely free service to help you resolve those issues.

Process

1 Email Cityboy88888@googlemail.com- with your problem

2.On a weekly basis Cityboy will then pick the most appropriate issue to reply to

3. The problem and possible resolutions will then be published in the blog in a Q&A format so others may learn from Cityboy's wisdom

4.No names will be published to protect the innocent and the incompetent

5.I can't promise to reply to all queries - some might be just to boring to warrant a reply

6.I can not guarantee the effectiveness of any advice given and nothing I write should be relied upon ever

Off you go.

RB

Big Brother, Inflation & The MPC :Goody for Governor

2007-02-13T14:58:00.000Z

There hasn't been much to report this year. Most of January I was glued to Big Brother. Cheap television is indeed addictive. I'm on Miss Goody's side. She has taken a beating for her apparent ignorance and lack of finesse. Yet I believe on the judgement of money alone she is an extremely successful person. Worth £8 million.That's pretty good really considering she hasn't been ripping people off,unlike investment 'professionals' in the financial services industry,to make a fast buck.I am not surprised she reacted so unpleasantly to Miss Shetty's clean living holier than thou patrician hauteur.

The only other thing to happen of any note was the interest rate rise by the MPC that took city economists by 'shock'. Only one in fifty city economists predicted the rate rise.That was Simon Ward of New Star. This really is a poor show.The other 49 must be congratulating themselves that the city reward system is in no way linked to performance, otherwise they would be in trouble wouldn't they. The real shock came this month when the MPC again left interest rates alone. I'm now quite convinced there is no point having the MPC at all. I don't really believe that they are independent or competent. Their collective decision making priority seems to be to prop up the housing market. Reading between the lines they seem to live in fear of making a decision that could mean they could be blamed for bursting the housing bubble. Any prophylactic measures are always put off. Rates should really be up to 6% or above by my reckoning. Money supply is out of control, credit is easy, witness the increasingly ambitious size and scale of private equity deals on the table currently.Mervyn King & the MPC seems to think inflation is on it's way down mainly because of lower energy prices.Hmm not really convinced. Other indicators, for example gold futures are telling a different story.They are at a 7 month high today. On almost every measure of prudence the MPC have failed to curb inflation. There is some doubt as to whether they actually know what's going on at all. All in all it's really not good. One way we could save the tax payer money is by getting rid of them, and replacing them with a celebrity who would toss a coin every month. Heads up, tails down. It's quick, short and transparent. No Delphic announcements like labour mobility from the former Soviet block is making things very difficult to predict. Well guess what the Fed has had the same problem in the US from Mexican immigration for years, they seem to be able to factor it into their decision making process quite easily. Truth is the MPC seem to be not up to it. In the long run they are just storing up more trouble for the future by trying to protect their own reputations now. I believe we should have Miss Goody as Governor. She would probably be cheaper per month than shelling out for the MPC pay and pensions from the public purse. She would not bring pre-conceived economic ideas to the table, she says what she thinks so transparency would not be a problem. A Governor of the Bank of England for the people by the people.

RB

Bonus Envy: Is it worth it?

2006-12-20T13:57:00.000Z

Infamy, infamy – they've all got it in for me!"

Kenneth Williams - Carry On Cleo

This is how the Goldman employees must be feeling at the moment.Suprisingly for a firm that's so slick, they haven't handled their bonus season PR very well. The public backlash has been quite a bit more vocal this year.Even more surprising because recently their head of PR - Lucas Van Praag was made a Partner Managing Director only a couple of months ago.Ooops!

The media backlash about bonus envy happens every year.That's understandable from journalists, they tend be poorly paid hacks who have chosen a career of gossip mongering.Nobody put a gun to their head and told them to write for a newspaper.What must really irk financial journalists is when they interview 'rainmakers' and dealmakers, and realise that those being interviewed are no smarter or harder working than they, but for an accident of fate they could easily be picking up a few million dollars.

Then come the unwholesome moanings of career politicans, about the unfairness and inequity of it all.The whole protestant work ethic, fair days pay for a fair days work nonsense is peddled out. Everyone suddenly turns into a socialist in the face of what is regarded as unwarranted largesse.The truth is that if everyone was paid a fair wage for a fair days work, then capitalism wouldn't work.Its a zero sum game.There would be no one to exploit and therefore no margin to mark up. We would all be poor.

Contrary to popular thinking,bonuses do not need to be defended.There is nothing to defend.The general rule is the closer you work with money the more you get paid.It's not fair, but neither is being struck by lightning. So why all the envy.

Reasons not to engage in bonus envy

Everybody conveniently forgets to mention that people pay tax. So if your bonus is 50 million Dollars, 40% of that will go in tax. Wouldn't you rather one person paid 20 million dollars in tax, than you paying more tax dollars.

30 million dollars net, isn't what it used to be. In the real scheme of mega-wealth it's actually not material, no pun intended. Do you like to collect paintings?, well £15 million pounds might buy you two thirds of a recently sold Van Gogh (L'Arlesienne, Madame Ginoux ) which sold earlier this year for £22 million. It would buy you about a quarter of a second hand Gulfstream G550, for sale at 52 million dollars. See http://www.controller.com/listings/forsale/detail.asp?OHID=1110645&guid=34594EBFA2EB458D9BA0E347E55665B8tp://www.controller.com/listings/forsale/detail.asp?OHID=1110645.

So you can't even afford to fly like a minor pop celebrity.

Compared to the wealthy of the gilded age, and adjusted for inflation, this is very little money. It might buy enough imported marble from Italy to build a small toilet at one of the old Vanderbilt homes, here maybe http://tickets.newportmansions.org/mansion.aspx?id=1000.

We all lose sight of the fact however much you are paid, these people are still just employees and office workers. In the abnormal parallel world that is office life , everyone is someone's bitch. Even the CEO is the shareholders' bitch. They are all still in bondage to the dreary world of office life. They might get a bonus but they are not free to do as they please. Management Ego and insecurity demand that even superstars do the bidding of those in charge.

No one ever questions the sums paid to film stars. When Tom Cruise demands 20 million dollars a film and a percentage of the gross proceeds , it never makes the news, yet banking is just the publicity shy cousin of the movies. The compensation and work system is almost identical. So why does anyone care that much.
In the current issue of the Harvard Business Review there is an essay on 'Extreme Workers', white collar workers who choose to work 70 plus hours a week. Many of these are in banking. Any employee that was working 70 hours a week in an office job which is neither interesting, nor difficult needs treatment. I would begin to wonder what they are doing all day, are they dyslexic, or slow or inefficient. They will tell you it's the buzz of the deal, instant results, being recognised as the 'best', the stimulus of working with smart colleagues. All of this of course is just rubbish. Denial is not just a river in Egypt. Office work by it's very nature can never be 'interesting' except to dullest individual. It's the same power point to the same clients, with the same spreadsheet, with the same dull colleagues, only the dates and logos change. If you spend enough time brainwashing yourself you can justify most things. It's delusional, in the clinical sense. Smart people don't tend to work in offices for other people for 70 hours a week. A typical mid-size investment banking project should not take more than 10 hours a week.Most people in banks seem to hang around the other 60 hours to look good, or perhaps they have no friends. Smart people don't tend to work financial services, Smart arsed people do though.

If time is money, then the big bonus receivers have traded in their time ( including what spare time they may have had) for money. Imagine how dull they are as people. All their social lives, friends, acquaintances, conversation will be work related. This doesn't produce fully formed individuals, just good workers. The time/money equation is never reversible. That is to say the more time you forego may give you more money but no amount of money will be able to purchase more time. If we consider Chuck Palahniuk's theory that "on a long enough timeline the survival rate for everyone drops to zero"then it makes no sense to choose excess money over time, for a normal person. In the end we should pity these people rather than envy them.
RB

Chronicle of a death Foretold: Dollar woes

2006-11-29T10:07:00.000Z

"I didn't warn him because I thought it was drunkards' talk,"
------------------------------------------------------------------------------------------------

Hank Paulson must be wetting himself laughing. First he gets to defer the tax on all his shareholding in Goldman, now the dollar is finally on the road to collapse which should , if it falls long enough and far enough, give the US economy a helping hand. Finally he has intimated that Sarbanes-Oxley in its current guise is not a great way to do business, so he'll just copy the UK regulator. Good work, why not model yourself on the FSA, they 're pretty effective. I think this is called adopting best practice or plagiarism or stupidity.

I have discussed the inevitable dollar decline last year in a previous blog, rather than repeat myself and bore everyone - go and look at the piece called Currency Movements Dollar/Sterling:No way but down in the November 2005 archives. Nothing has changed, except the people in charge of the US economy are more inexperienced and incompetent than the lot before.

Anyway Hank and Ben are off to China soon to persuade the Chinese that the renmimbi needs to appreciate- all this while China is slowing trying to diversify out of dollar reserves. All very fishy.Why is Ben Bernanke going with Hank anyway? What does he have to add?Financial Markets are notoriously irrational.They react very negatively to bearded people. See if you can think of any serious banker in the world with a beard ( except Joseph Perella). Unlikely. Maybe it's somekind of comedy double act, maybe they're making a film in the Ealing tradition.Carry on Central Banking.

Practical Implications of dollar depreciation

Cheaper holidays in US denominated regions. These places are now verging on the reasonable value. http://www.jumbybayresort.com. www.sandylane.com
Lower bonuses when converted to sterling, unless you've already elected a rate for conversion

RB

New Crimes in Financial services: Keeping the FSA/compliance Bozos in Jobs.

2006-11-24T10:55:00.000Z

Look at the front of the FT today. One of the headlines is 'Trader fined for passing 'outsider' information'. The article is at http://www.ft.com/cms/s/6a6012d8-7b2e-11db-bf9b-0000779e2340.html. The facts seem to be that an equity salesman passed on publicly available information dressing it up in sales patter, and passing it off as though it were inside information, in a rather amateurish fashion. So the nice boys in the CSFB compliance department reported him to the FSA. See and all the business lines always complain that the compliance department does nothing. They are a dynamic hot bed of regulatory activity. So the FSA now fines the poor man £20,000.In the absence of being able to catch anyone actually committing real 'insider trading', it seems now it's ok to get people for 'outsider trading'. So literally following the FSA's logic, outside is inside, therefore up is down, losses are profits, so market abuse must be compliance. So why do we need compliance functions or the FSA?

RB

Goldman Sucks? A lesson of greed and ambition.

2006-10-27T12:22:00.000Z

I've never liked Goldman, it always seemed a desperately "worky" place, and really somewhat up itself to boot. This sounds like sour grapes, and it probably is. Let me explain many moons ago,pre-IPO, they turned me down for a job. Of course one is bound to take this stuff personally( think about it, I missed out on free windfall shares), in my case I think it turned to hate.For other people this can have a very positive effect.Look at Lloyd Blankfein http://money.cnn.com/2006/01/23/magazines/fortune/stars_blankfein_fortune_060206/index.htm he runs the place now.The new partners have been announced-there are 400 now, yes they will make a lot of money over the coming years, but spare a thought for the non-partners.That is the majority of the working population in the firm.Last time I looked total headcount was approx 25,600. The other 25,200 don't do that badly, but the majority of it's employees are junior people. VP and below, to be honest for a firm that makes so much cash I was always surprised at how very average the compensation was for most of the worker bees.I wonder if they feel just a wee bit exploited whilst senior management live it up.This attitude is attributed to the fact that there is some kind of special employer brand equity at Goldman that the employee can cash in on later.That's true in the case of Hank Paulson who skipped over to the white house to take over from John Snow as treasury secretary.Although Mr Paulson cannot be described by any stretch of the imagination as a 'brainbox', he is a clever operator.One of the conditions of getting that government job is that he can defer tax on his shareholding in the firm, which I believe is valued around $500 million dollars.Who needs a tax break more than he, there would be an awful lot of tax to pay on that.He's not completely dumb, but then again being the US treasury secretary is not exactly the world's most demanding job. Devalue the dollar without pissing off the rest of the world. It's like PR without the skill.Remember previous incumbents in that office have been known to say things like,"the dollar is our currency, but your problem". Not exactly the words from the mouth of a rocket scientist , nor phrased with the delicacy of language of one holding high office.So the bar is set pretty low as you can see.

In the end I realised I didn't actually want to work there, I just wanted to be on their payroll.I committed the cardinal sin in this industry.Never confuse greed and ambition.

RB

Make Poverty History: City Inflation, the incredible rise of the Million Dollar Pauper Executives

2006-10-23T14:14:00.000Z

Million Dollar Problem : The £500,000 a year breadline

"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Last week's supplement with the FT was a special 'bonus' issue of 'How to spend it' magazine. Unfortunately even if you're on a fair whack most of the items are plain ridiculous. Most middle ranking executives in financial services just aren't paid well enough to afford this stuff. On paper they seem to earn a lot of money, but the problem is if you're paid less than £500,000 a year total comp ( approx 1 million USD) in London, and you have a family, you are officially getting by, if not poor and most months you're in overdraft. I'm always a bit amazed to see political and media whining about city pay, especially with the bonus season coming up soon for most banks.

The saying goes a fool and his money are lucky enough to get together in the first place, that's certainly true with me.Most people I bump into these days in London seem to be comping around a million US Dollars/500,000 pounds. Unfortunately you're only as rich as you feel and the majority of these people don't seem to feel very wealthy at all. So what's the problem? The real problem is the rising cost of living for these middle earners. Once upon a time the FT used to produce an annual survey for middle class professionals in London. I haven't seen it for a while, probably because they've just given up. The numbers literally don't add up. So I've done my own analysis. You can use this to try and get yourself a pay rise.

The cost of living in London and environs is now seemingly out of control. £500,000/approx 1 million USD is the basic subsistence total compensation for anyone with 2 children, wife/partner for living a middle class lifestyle-and not a showy one at that, merely comfortable at best. This seems like an absurd proposition, indeed it is, but it's also true. Once upon a time this kind of salary would fall into the category of compensation for super-professionals, partners in Magic Circle Law Firms, Tax Partners in Big 3 accountancy firms, Senior managers in private equity houses, averagely performing minor league hedge fund managers.The problem is wage inflation. These chaps are now routinely taking over a million / 2 million USD. This is driving middle class inflation up.

Consider our middle ranking banking/exec

Income -£500,000 ( let's say 250 base, 250 bonus)
Tax @ 42% ( blended rate including NIC etc) -£210,000
Total annual net income take home £290,000

This equates a monthly post tax income of £24,167 per month.

Here's the breakdown

Background

1x Family House Putney/Chiswick. Purchase price approx 1 million GBP , Deposit £250,000. Mortgage £750,000. Repayment over 25 years @ 5.5%. Add insurance ( e.g Income protection for a proportion of the monthly repayment, etc and some overpayment ). Using the following www.bbc.co.uk/homes/property/mortgagecalculator.shtml.

Household and related -monthly outgoings £16,370

Monthly Mortgage repayment costs :£7,000
Car ( 1xAudi 80-2nd hand , 1x4by4 family car) x 2 leased/monthly repayment : £1000
Petrol :£200
Insurances household and Cars :£400
Life,travel & other insurances x 2 adults : £400 -(no medical insurance taxable but provided by employer)
Food :£1200
Eating out 4xmonth : £800
Cleaner : £200
Gardner :£200
Nanny( shared) :£1200
School Fees ( children aged 5&7) associated expenses £1200
Birthdays, Christmas & associated events :£1000
Gym membership 2x adults :£150
Utilities, phone, heating, electricity, water : £500
Council tax for Putney Band H : £120
Clothing 2xadults, 2xchildren :£ 800
Subtotal £ 16,370

Holidays & leisure ( family) monthly approx £5000
Comprised of the following

Holidays 2 X long weekends Europe
- Venice (total cost £2500)
- Nice ( total cost £2000)
1xlong weekend Cotswolds ( Barnsley House ) -(total cost £1500)
1x European Holiday ( Forte Village Resort Sardinia) 2 weeks-( total cost £15000)
1XCarribean Holiday, include flights ( 2 rooms Sandy Lane 2 weeks) -( total cost £40,0000)
Total p.a 61000/12 = £5083.0

Other & general £3797
Travel Underground, train & Cabs (2x Adults):£400
Coffees, newspapers, minor expenses day to day: £397
Membership Work share participation Scheme :£1000
( though deducted from gross salary net effect)
Credit card bills, unsecured borrowing :£2000
( part payment of principal, some interest)
Subtotal £3797
---------------------------------------------------------------
Total post tax income monthly : £24,167
Total monthly outgoings : £ 25,167

Net monthly overdraft: £1000 per month. RESULT=MISERY.
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Before everyone starts whining about the detail, the above figures are all approximations, but according to the Ivan Boesky research institute they should provide a true and reasonably fair picture of lifestyle patterns randomly drawn from senior executives. Now do you see why everyone feels so poor. My suggestion is to use this piece as a pro-forma, print it off and try and get a pay rise.

MPC: Lack of interest.

2006-10-06T13:10:00.000Z

Why do we have the MPC? As tax payers we contribute a lot of cash to keep the treasury in the style it has become accustomed to, but do we get value for money? We let the MPC do what it wants as long as it makes a measured judgement. We fly members in from the US once a month ( Blanchflower) because presumably there aren't enough talented academic economists in the UK to fill a place up at the MPC. The Bank of England is supposed to be independent, in part I would think this also required some courageous and independent decision making which it seems unable to perform. The decision to keep interests on hold yesterday was clearly wrong. Inflation is increasing, personal debt including unsecured lending is over a trillion, house prices in real terms are still going up, commodity prices are volatile to say the least. The reluctance of the MPC to increase rates sooner rather than later is odd. After all whether they put rates up now or in November it doesn't matter for all practical purposes. The MPC seem to dither an awful lot, which is amazing given the unambiguous nature of the data suggesting rates must rise. Instead the vacillation is somewhat inexplicable. Compare this to Jean Claude Trichet's decision yesterday at the ECB. He doesn't mess around. The delay in raising rates means that when the landing happens, it's unlikely to be soft.Mervyn King better start drafting his letter to the Chancellor soon. Can someone please post him a pad and pen.

RB

Bernanke's Beard, Greenspan's spam: Fed Up? Short the US economy.

2006-09-27T10:58:00.000Z

It is a truth universally acknowledged that a slowing economy, possessed of rising inflation, must be in want of higher interest rates. The Fed has been delaying the inevitable for the last ten years. Conventional wisdom says Greenspan did a great job as a central banker, avoiding US economic meltdown and ensuring a soft landing after the dot com bust. I'm not so convinced, by cutting interest rates all that happened was that another liquidity bubble was created, mostly in the housing market and private equity. This has led to the current predicament of 'loose credit' and an increased current account deficit. Is that really symptomatic of a healthy economy. This has created Bernanke's bind, to raise or not to raise. Once you look through the obsfuscatory language and reliance on dodgy labour and consumer data, the only thing that becomes apparent is that the Fed should raise rates. Whether it does is another question. That commodity prices have fallen recently, especially oil, doesn't necessarily mean they will stay like this in the medium term. The inflation risk in the US economy is hugely underestimated, partly because it's hard to get a clear picture of economic health without M3 figures, which inexplicably the Fed has stopped reporting. Why is that? Is the US just printing money so much money that it would make a mockery of the fiat money system that underpins it's economic dominance. The answer is probably yes. If foreign investors start buying alternative asset classes or abandon the dollar as a reserve currency, then the dollar devaluation is only just beginning. It maybe that petrodollars in the middle east and Russia may end up as petro gold. In which case it's a good time to bail out of US equities and treasuries.

RB

See also
http://www.washingtonpost.com/wp-dyn/content/article/2006/04/26/AR2006042602529_pf.html

No Way! Could this be true? CFO reveals all.

2006-09-27T08:44:00.000Z

From FT.Com
Fastow accuses Enron bankers
By Ben White in New York and Sheila McNulty in Houston
Published: September 26 2006 18:41 Last updated: September 26 2006 21:48

Andrew Fastow, the former chief financial officer of Enron, has accused 10 leading investment banks of helping the now-bankrupt energy group falsify its books in return for big advisory fees.

The accusations came in a 24-page legal declaration filed by Mr Fastow in support of a class action lawsuit against the banks brought on behalf of Enron’s shareholders.

The declaration from Mr Fastow, who was sentenced on Tuesday to six years in prison for his role in Enron’s collapse, could put new pressure on banks that have not yet settled in the class-action case.
In his statement, Mr Fastow said he viewed Enron’s bankers as well-paid “problem-solvers” who knowingly helped Enron created financial structures that made the energy trading company seem more profitable than it really was.
Mr Fastow singled out Merrill Lynch, Credit Suisse, RBS and Barclays as especially involved with creating what he described as deceptive structures.
Attorneys for Enron shareholders, led by Lerach Coughlin, have already won $8bn in settlements from a group of banks including Citigroup, Bank of America and JP Morgan Chase.
A federal judge has previously dismissed Deutsche Bank and Barclays from the class action suit. But William Lerach, the lead attorney in the case, plans to ask that the two banks be reinstated in light of the declaration.
G. Paul Howes, an attorney for the Enron plaintiffs, spoke on Mr Fastow’s behalf at the sentencing hearing in Houston on Thursday, asking for leniency to reflect his co-operation with the shareholders’ suit.
Legal experts noted that Mr Fastow’s statements were tainted by his desire for leniency and his admission of falsifying financial statements.
However, experts also said that Mr Fastow was well positioned to describe Enron’s dealings. Mr Fastow was deeply involved in creating the off-balance-sheet partnerships that helped cloak Enron’s mounting debt.
“He is in the best position to know exactly what was said or not said and what kinds of winks and nods were going on,” said Henry Hu, professor of law and business at the University of Texas.
Mr Hu added that Mr Fastow’s co-operation with the shareholders’ suit would increase pressure on the remaining banks to settle.
Mr Lerach defended Mr Fastow’s credibility: “Everything Fastow will say is documented by the damning and incredible e-mails these bankers wrote to each other when these schemes were going on,” Mr Lerach said.
Mr Fastow, 44, broke down repeatedly when addressing the federal court, saying: “I wish I could undo what I did at Enron, but I can’t.”
Copyright The Financial Times Limited 2006

Practical advice for the C-Suite, Maximising your bonus:4th Quarter Strategy

2006-09-21T16:13:00.000Z

The Harvard Business Review always refers to the C-Suite managers. The C doesn't stand for what you think it does.There is no need to be like that, the C- suite managers are people too, they have feelings as well. The C of course stands for Chief. CEO ( Chief Entertainment Officer), CFO ( Chief Fraud/Fudge Officer - the numbers looked right to me - I had no idea they were wrong! - please not so hard with the hand cuffs - I'm a professional you know), the CAO ( Chief administrative Officer- mostly involves signing for stationery and other stuff).

Today for one day only I am offering free advice, nothing new just practical hints really, on how to max out your compensation for year end.

The 4th Quarter is approaching fast. Most banks, asset managers and other finance houses have reported extremely good numbers for revenue and net profit over the first 2 quarters. Goldman announced record results, even the basket case that was Morgan Stanley announced record results.But as a senior member of the firm how do you make sure you are personally enriched beyond measure for the work of the minions? These are exceptionally profitable times, you should profit exceptionally. But did you notice something about Goldman's compensation ratio, it's falling ( down to 45.2%), and Morgan Stanley's Value at risk figure is down ( from 63$ million to 52$ million). This is not a good omen for employees ( not C-suite managers, they are more in the nature of sinecures and would not count as workers, so you can sigh a breath of relief). This surely means that the revenue and profit outlook in the 4th Quarter is not as robust as earlier quarters. Why keep comp costs down when profits are booming, why take less risk on the trading book unless you think the risk/reward profile is deteriorating.

Now the way it stands at the moment most companies have record profits. The problem as a C-suite manager is how do you avoid sharing it. Think of it like this. The profits are a big cake ( maybe carrot and banana), why divide them among 10 people if you can divide it between 5. You get a bigger part of the cake see.

The only way to do this is to get rid of the other 5 cake eaters, and as a C-suite guy you need to do this fast and certainly before year end. The best and most reliable method of leaving more for yourself is by sacking all the employees. If this was practical I would heartily recommend this, but the next best thing is to start re-structuring, managing people out and offering redundancy. This is the only way you will be able to report exceptional or in-line year end profits and drive the value of your own compensation package up when the shares peak in response to the great results you will deliver in the 4th Quarter, even though trading conditions were very challenging. Hell your paper might become so highly rated you could even take over a competitor and sack everyone in that firm too.Happy days!.

Basic Principles

Get the employees off the payroll fast, do it now so you can take a one-off exceptional for severance costs in Q4 if you have to pay any.No company wants to pay out free money. It's just wrong.Remember you will not have to pay severance in the following circumstances:

1. Encourage Natural Attrition : People who were going to leave anyway can be encouraged to leave by poor performance reviews or my preferred method, 'reverse head-hunting'. Retain headhunters to call the people you need to get rid of and send them on to another firm. This plays to the current employees vanity and self-esteem.Voila you don't have to pay a bonus or redundancy. I suggest a tiered fee structure agreement , not per employee. E.g. if the headhunter can get rid of between 1-50 , pay them X dollars, 50-100 Y dollars. This really depends on the size of your company. Recruitment companies always love to do deals which guarantee certainty of cashflow and earnings visibility.They work primarily on commission remember.

2. The Set-Up:Try to set-up more senior employees up so you can accuse them of gross negligence or misconduct. This usually invalidates the employment contract. This is best done through scrutinising expense claims and implying inappropriate claims ( it doesn't have to be true) ,which is tantamount to accusing them of theft. Or there are other alternatives -get them involved in a harassment claim. Because these employees tend to be older and longer serving this is the best method.They will probably agree to leave quietly and with a small pay-off in return for a good reference so they can find work again to pay the 2nd mortgage and the school fees.Do consider the legal position, the company maybe exposed to an unfair dismissal claim ( the upside for the firm is that in the UK this is capped at around 59K so it's cheaper than paying out a 300K bonus). If you are going to go down this road to get rid of the middle managers- it's best to pick ones that have been with the firm less than a year. The law as it stands only gives you locus standi to bring an unfair dismissal claim if you have more than a year's service. For futher details consult HR & legal.

3.Encourage people to take sabbaticals: Talk to the high-fliers,they generally cost more and have high compensation expectations. Explain how you value all their hard work, why not take a sabbatical as a thanks for all the contribution they have made in making the firm no.1/the best etc. Guarantee them their job back in 6 months. Then while they are away contemplating the meaning of life in The Gambia, at year end give them nothing, piss them off so they don't come back. If they have any self respect they will quit thereby saving you a lot of cash in unpaid severance.If the market goes down the pan next year you can always replace them with someone cheaper and more desperate. It's a short term outlook business, the high fliers should know that. Market conditions are constantly changing.

4.Decimation: If I was honest this is one of my personal favourites. Get a list of all the employees by division, get some interns on work placements ( should be free), ask them to highlight every tenth name, and then make the unfortunate fellow redundant. This always appeals to my sense of capriciousness, it's simple too.The the only draw back is sometimes you end up losing employees who are quite attractive, good to play golf/Bridge/table football with or ones who had a good store of jokes. Sadly sacrifices have to be made. Everyone is replacable.

Other ways of shaving Costs

Close any restaurant facilities - not because this will save much money but it will make life inconvenient for the workers, if they have half a brain they will realise you simply do not care about their comfort. Since you send the MBA out to get all your coffee why do you care?

Get rid of gym memberships, dry cleaning,concierge services, business class flights, biscuits, flowers, newspapers. Ask people to bring their own pens, stop the the printing of new business cards,freeze all training ( except legally required stuff e.g Health and safety)these are all small strategies that could throw a lot of people who were thinking of leaving into accelerating their departure. You need to make them feel unloved. It's not a hippy commune. It's a business.

Pensions- immediately reduce any matching payments into defined contribution schemes. Send out a complicated but dull memo explaining what is happening, but on the same day as announcing other things like some voluntary redundancies. No one will read it. As a C-suite member if you are in any self respecting company you should be Ok.You're on final salary remember.

Announce cancellation of the Christmas party NOW. This always upsets people. Tell them the company values work place diversity and as a result has decided to not elevate any one religous festival ahead of others.

Conclusion

My advice seems counter-intuitive in these boom times ,but if as a C-suite member you want to profit from this great bull market, you need to starting putting the wheels in motion to get the morons off the payroll. Don't be too harsh though,have a heart, it's only money.

U S extraterritoriality: Balls to Sarbox!!!

2006-09-19T14:24:00.000Z

In the good old days before the UK became a remote US state, it used to be that Parliament was sovereign, and was the ultimate law maker. Increasingly this role in the international finance scene is being performed by the US legislature. Although we are not US citizens in the fully fledged sense ( cheap petrol, trips to Vegas, dunkin' doughnuts) financial services personnel are increasingly subject to US law. This is called extraterritoriality. Let me explain. Imagine the US passes a law that says it is a criminal offence to fart in the US. That's fine if you live in the US, you commit the offence of farting in the US. Now imagine that the same law is extended to make farting by persons working in US listed companies or companies with US ties abroad. So if you fart in the UK and do not comply with US flatulence laws you maybe committing an offence for which you will could be extradited or prosecuted in the US, even though you farted in London UK, not New London Connecticut. Strange isn't it. The truly smart readers will have realised by now that if you substitute the example of Sarbox for farting the whole thing becomes much clearer. The issue of extraterritoriality is more important now than ever, for example what happens if Nasdaq does eventually take over the LSE. Will UK companies have to comply with US listing and regulatory and compliance requirements. The answer seemed to come from Ed Balls, the economic secretary to the the Treasury ( UK that is). The proposed legislation effectively ring fences the LSE from the effects of US compliance should it be taken over. This seems very sensible, given that one of the main and presumably
unintended effects of Sarbox has been to put off companies listing in the US, instead companies have listed on non-US exchanges like AIM. The response from Harvey Pitt a former Head of the SEC was he couldn't understand why Balls has gone down this road,

he told the Financial Times: "What we need now is not unilateral turf-protecting activity but really collaborative discussions between regulators to figure out what the right solutions are to protect investors."

The fact he doesn't get it is the problem.Is he a bit thick ? Exporting legislation in a seemingly benign manner is the most insidious form of extraterritoriality, we need world class solutions but Sarbox heavy handedness was never the answer, nor is it business friendly, it's true we do need to protect investors, but lets just recap. Sarbanes- Oxley came as response to a number of firms involved in misdemeanours on an epic scale. Here are some of them - Enron, Worldcom, Global Crossing, HealthSouth, Tyco and the banks involved were Citibank, JP Morgan,Merrill Lynch and others. Last time I looked they were all US firms. So why Sarbox needs to be exported is anyone's guess. It came about in response to the poor corporate governance in America, not the rest of the world. It is a was a poor piece of legislation to begin with. The thing Mr Pitt doesn't get is corruption is part of the capitalist process, it's at the heart of the US corporate framework. Firms are still fiddling stock options accounting, faking inventory, re-stating financial statements. No accounting information coming out of any large corporate will ever be reliable. We can't trust the auditors or the advisors either. They themselves have either colluded in cooking the books ( Andersen's) or are being investigated for their own lack of ethical conduct in regard to things like tax avoidance scams ( KPMG , E&Y ).The Lawyers were at it too. So what do you do? I have no idea but more corporate governance and tighter internal controls are not the answer. If all the information is wrong and faked to begin with, having tighter internal controls is like auditing the contents of your dustbin. Now you know exactly what the rubbish is made up of, but it's still rubbish.

Diversity matters? The Minority Report.

2006-09-18T12:37:00.000Z

My summer sojourn is now over. Back to work then, in a manner of speaking. My first post is regarding a matter that seems to be close to everyone's hearts. Been on any Diversity training lately? I have. It's pretty nonsensical and another little timewaster. There seems to be an a priori assumption that Diversity is good and indeed desirable in financial services companies, especially banks. The FT has recently reported that minorities are under represented in banks and financial services companies and UK boardrooms. So lets examine the logic of diversity from a financial perspective, lets apply investment principles. Since I constantly hear that people are an 'investment', or they are our biggest 'investment'. Where better than to start with actuarial methods, Pegler's Principles of Investment seems like a good tool.

1. Maximising Returns: Does having a diverse work force maximise returns, do you actually make more money as a business. Diversity training costs, recruitment processes that conform to affirmative action procedures cost, seeking a more effective way of recruiting minorities costs. Does having a adequate measure of minorities in your company mean you will get more business, maybe so in the cases of public bodies seeking goods and services who will give preference to companies which meet diversity targets. Is that necessarily good for the customer or the supplier. If I have two widget makers to choose from and one of them makes excellent widgets but does not have a diverse workforce whereas the second makes a competent product which will last half as long, but has met their diversity targets, should I use the latter supplier. Is that good economic sense for my business? In the end you will be keeping an uncompetitive and inefficient company afloat, which means poor allocation of capital in the economy as a whole. On the other hand minorities may work harder, but if you are already comfortable with the margins your business makes - do you want to go to all the hassle of trying to actively meet diversity targets? I am at a loss to find any non-anecdotal evidence that diversity maximises business returns.

2. Diversification reduces risk: How?, the more minorities in the workforce means more potential for misunderstanding and general cultural conflict. If my religious belief makes me frown on the making of profit from usury, then perhaps I shouldn't be in a company that arranges loans to companies. There is more risk of litigation due to cultural sensitivities, there is more likely a non-alignment of interest in business as a whole. You may end up with distinct sub-cultures within the business that is not helpful when it comes to achieving shared objectives.(Profit).

3.Take account of future trends: It may be that your business seeks to position itself as a provider of choice for new markets, and new ethnic and demographic groups. For example many banks are expanding their private wealth management offering in Asia to cater to the newly rich. It may therefore make sense to employ people with the same demographic in that region to face customers, but this is a response to a business need. This is not diversity as an end in itself.

4.Orienting Investment towards economically and socially desirable ends: This may be the reason why companies are driving towards diversity( aside from the legal aspects such as anti-discrimination legislation). That said, this cannot be the overriding business principle it is merely one of the four principles set out by Pegler.

In the end the case for corporate diversity as an end in itself is extremely flimsy. Unlike other types of businesses, banks should be considered a sui generis type of business.The overriding investment principle for these businesses is to make as much money as possible, without taking into account moral or ethical considerations, as a shareholder , as long as the activity is not illegal why do I care whether my business meets diversity guidelines or not. Businesses are legal persons, there is no moral imperative. The issue of diversity is sadly linked to the myth of merit. In banks almost every person is fungible with any one else, from the CEO down to the contract cleaner.Try firing either and see if your business blows up. I doubt it. Merit is a meretricious concept. Who wants to employ people based on merit, especially in finance, there is just no need.The idea itself is absurd, especially in banks, 95% or more of the roles do not need any 'real' skills. If you have basic literacy and numeracy skills you should be OK to perform any role in any bank.They are unskilled jobs essentially with a professional veneer. You may be an analyst, you may have CFA, but the point is it's totally unnecessary, especially if you are an analyst at HSBC, your work has already been deemed worthless.

Banks are extremely dry places to work, it would be better if people were hired on their ability to amuse , attractiveness and general ability to make good small talk. These are the skills that get people through the working day. Diversity and merit should have no special place in the recruitment process. I am not sure it is even desirable. I personally like myself best and like to go around with people who are mostly like me, why would I want to change that.

RB

Bored in May, Go away

2006-04-24T11:58:00.000Z

Finance is a dreary business at the best of times. Now that May is around the corner, the days are getting longer it is time I signed off for the summer. I shall therefore be not writing anything till early Autumn, perhaps early October-depends on the weather really.Frankly I can't be bothered writing anything in summer. It's too much like real work, which is of course to be detested. There are much better things to do in summer. The world has gone mad, gold is over 600$/troy ounce,Oil is 75$, Goldman is embracing ethics. It's horrible. Thanks for taking the time to read the blog. See you later in the year.Have a good summer.

RB

Insider Trading FSA, SFA

2006-03-24T11:01:00.000Z

I was deliberating whether to bother even commenting on the FSA's latest 'findings'. Often if you write about something the thing itself is given more credibility merely by the act of commenting on it. I concluded that in the end, there is no chance of giving the FSA any more credibility than it deserves, since it doesn't really have any in the first place. That sounds cruel I know, but I'm sentimental. I still long for the days of the old Securities & Investment Board. They were obviously amateurish, hated telling people off and had no glossy brochures or websites to try and convince you they were serious.

Not so the FSA.Last week the FSA have noticed that insider trading is 'rife' in the city of London. My what a revelation! but not exactly man bites dog is it.If you're an insider dealer, I suspect you can still sleep safelyat night. They are hardly the SEC and there are no Eliot Spitzer types in there. As with all regulators it's a difficult balancing act trying to regulate a market and yet not to overburden it with bureaucracy.Light touch, risk based regulation is the way the FSA wants to go , which seems sensible.This was probably the only useful thing to come out the ineffectual tenure of Howard Davies as the FSA's Chairman. Spookily another ex-Mckinsey alumnus.He thankfully moved on.The thing with insider trading is that although its apparently relatively common, it's very hard to prove. It needs a lot of investigation and man power. The convictions are rare and usually the fines are for very small sums. It may be better to take a more practical approach and abolish the offence altogether for something wider, and less onerous to prove. Maybe just bring it under the heading of market abuse. I don't know it just seems logical and a better use of resources. The second point is the standard defence of all white collar criminals, it's a 'victimless' offence. Yes there are all sorts of arguments that show the consequential 'victims' of the insider trading 'crime', but in one sense it's true.It's about perception rather than reality. The man on the street couldn't care less about who's screwing who in the stock market.He has to continue to get on with his dreary job, pay the mortgage, get the kids to school on time etc.Insider trading is the least of his concerns. In a sense his remoteness from the environment and nature of the 'crime' makes it unlikely whether he gives two hoots about the FSA's research and what they do.

Closer to the public's heart are things like effect on investors of the endowment mis-selling scandals, or the split capital debacle.Does anyone know if these two problems were ever resolved? No one can even be bothered finding out it's been dragging on so long. A bit of compensation here, a letter there.Perhaps the FSA should concentrate on the more mundane stuff and really show the investing public that it can protect the interests of the common man, before taking on the big stuff like insider trading.Compare the FSA's approach handling small investor claims of impropriety to its Amercian counter-part, the SEC, class actions, big payouts.US investors have been compensated for loss of faith and money, even if they haven't had their confidence restored.

Even though it's rife ,I don't think the stock market is going to be being derailed in the short term by insider trading, nor do I see any innovative solutions coming out of the regulator. Maybe that's why it lacks credibility.

RB

Oxbridge Blues : In Praise of Plagiarism

2006-03-14T09:22:00.000Z

One of the headlines in today's Telegraph is that 'Plagiarism is rife at Oxford', according to the senior proctor who is also the chief disciplinary officer. It's brave of him to admit it, an anonymous student writes in another column that this is due to increased access to the internet.I'm presuming if plagiarism is rife at Oxford , the same is true of its evil twin, Cambridge. Presumably students there have internet access too. Plagiarism is as old as the hills and was there long before the internet. To be fair it's probably rife at most universities in the UK. If it's rife at the top of the educational hierarchy imagine what its like at the nasty second tier ersatz oxbridge-type universities that the English middle class are so fond of. My limited knowledge of what goes on in less exalted institutions suggests that cheating is certainly not discouraged as long as it's not blatant . Ho hum. What does all this have to do with capitalism or the City. Well three things.

Firstly under the market driven model of higher education, universities are just another provider of a consumable. That being the educational experience, the proof of which is the degree/diploma, whatever. They don't seem to have woken up to the idea that their products and brands are no differrent from cola or shampoo. Because they are selling 'ideas' ,the providers seem to confuse these with a higher purpose or ideal. Poor quality though UK degrees are sadly they are the only viable option in order to get the most menial of jobs now.Educational inflation is rife as well as plagiarism. Most people attending universities just want a job at the end,for in the age of the economic man there is no greater hope. If there are tools to make the acquiring of the product quicker and with more ease, does it not make sense to take those routes. If you could find a way to finance your mortgage at a cheaper provider today would you not take it.

Secondly at the posh end of the university market institutions like Oxbridge are there to supply tomorrows lawyers, accountants, venture capitalists etc. Plagiarism in once sense is the essence of these professions, it's an essential skill. For example consider the concept of stare decisis in English common law which students of law need to master, or when a drug has come to patent expiry how a generic provider comes on the scene, or even the recent case of patent infringement for Research In Motion provider of the ubiquitous BlackBerry. From personal experience I see Law and accountancy firms selling the same old structured product , going from bank to bank telling you that you are first one to have access to this 'unique' revenue enhancing scheme. Oh really. Pass the snake oil. Or ever involved an external advisor on structuring a delicate transaction only to find later some 'unscrupulous' (inevitably oxbridge educated) partner(s) at the firm are now 'flogging' your scheme to competitors , hardly changed except for the logo, as all their own idea. So you see in the vast majority of cases , a talent for plagiarism pays both in saving time and making money. God bless the market.

Thirdly consider also the usefulness of plagiarism in the world of work, when the time comes to take credit for a colleague's idea or the work of a junior. You need to be familiar with their work as if it was your own to pass it off successfully. Don't you. What about the great management fads from process re-engineering to Six Sigma. Last time I looked everyone was copying everyone else.This is called adopting 'best practice' in the business world, not plagiarism. This creates work and employment for a great many dull but hard working types. Work places tend to use the rhetoric of the new or the innovative but ideally want to stay stable by expecting the same core values of people. We need more plagiarists - fewer thinkers in the work place.Thinkers just cause trouble with their ideas and discontent in their colleagues. Could this process be streamlined? - yes - but why bother if even after screwing the customers everyone makes enough.

Finally, the high brow English universities tend to be skewed towards humanities. This is a very easy short cut to a degree.In the modern world arts degrees are basically a time wasting exercise, they are good to man nor beast. As most arts graduates know strictly speaking they should not be awarded degrees at all for subjects such as law or history or English literature. They should receive a certificate of attendance, if that.They are just exercises in recall and memory,rather like memorising a telephone directory and expecting to receive a degree for it. Except telephone numbers can be useful if you need them. Why not let these people pay for their 'degrees' and plagiarise. More revenue for the university and greater product sales. Pile'em high, sell 'em cheap. After all even after so-called tuition fees are taken into account. University education in the UK is basically very cheap to free compared with their other developed world counterparts. Namely the IV league. When is the last time you received something free or cheap and thought it was worthwhile or even valued it? If it's free I say buy one get another free( see below).Why does it matter if tomorrow's auditor or civil servant doesn't have an understanding of the three unities of Aristotle's Poetics. Or your boss doesn't quote Shakespeare to you as he's laying you off -

Well Bob I'm going to have to let you go, you're in a cross roads in your life, that reminds me of Measure for Measure, you know" Thou hast nor youth nor age, But, as it were, an after-dinner's sleep, Dreaming on both; for all thy blessed youth Becomes as aged, " Here's your redundancy cheque.

or the Doctor who brings the bad news, yes the tests show it's terminal , but look on the bright side you're going to die anyway,hah that reminds me of the old line from Epicurus, "It is possible to provide security against other ills, but as far as death is concerned, we men live in a city without walls". Take these twice a day. Here's my bill.

At this point dear reader you maybe thinking - what an awful piece. This kind of economic analysis is so reductive, the writer is a horrible philistine. But consider this. Although Professor Grafen has bravely denounced plagiarism, we must also examine his reasons. I'm only guessing, mind. I presume he disapproves of the fact that by plagiarising the average undergraduate at Oxford is only letting himself down. I suspect he finds it offensive and deceptive that any student should gain a degree without the requisite academic rigour and that it misrepresents the student's ability somehow, because it is in a sense unearned and worse still, shock horror, unmerited indeed unmeritocratic to obtain a qualification in this fashion. These are very noble and laudable objections.Ideals worthy of Chaucer's Clerk of Oxenford. Unfortunately prof, here's the problem. I'm sure dear reader you already know this, but if you are the holder of an BA degree from Oxbridge after a couple of years , the matriculation rules allow you to "convert" this to an MA for a nominal fee. This too is unearned, unmeritocratic and would fool the average man in the street and dumbos like me that holders of an MA would actually have sat for an exam or done some work.But guess what? no work required. I kid you not.It's for nothing, free, without strings.Hey who wouldn't want one. Guess what outside the narrow world of academia most people including recruiters don't realise it's a , dare I say it, a 'cheat' degree. Does Professor Grafen not consider this a problem?I know it's been going on at least 400 years, but a piss take is a piss take right? Does it have a place in the 21st Century? How do you justify it?

Oh dear prof. Cat's out of the bag now!!.You've opened a can of worms. See it's best not to bemoan modern ways unless you've already sorted out the problems of the ancien regime. So nobody cares and nobody is worse off due to plagiarism certainly for first and second degrees, These kids pay the tuition fees, and expect a product in return.Give it to them.

P.S
send me a degree in the post and I'll take the blog down.No questions, just an MA. Nothing fancy. Nah on second thoughts make it a DPhil, and top me up with a BCL. Go on , you know you want to.

RB

Stock Tip Update: Barclays

2006-03-13T18:58:00.000Z

This is an ocassional up date of the stock tip that I made in November last year regarding Barclays.(See the archived piece on 24 Nov called:Barclays - Is the Barc[ap] worse than its bite? Why be long Barclays?). I tipped it at 604p. Today it's approx 668p. Time to dump it or close any derivative positions. I really don't like the bad debt provisions or BarclayCard for that matter. As with all financial tips, I will add the usual disclaimers. Don't listen to me, I'm not trained as a financial analyst, bad with numbers and my stock recommendations are usually based on flimsy logic. Welcome to capital markets.

RB

Mckinsey & Outsourcing, What a McSurprise!

2006-03-10T16:32:00.000Z

I don't go to Canary Wharf very often. It's a dirty place in a kind of antiseptic way. All futuristic city no soul. A kind of Bladerunner landscape with out the Philip K. Dick twist. Recently I went there to have lunch with a friend of mine. I got there early. If you're ever there early and have nothing to do, and don't fancy hanging round in a Starbucks, why not grab a hot drink and use the reception area of 25 Cabot Square, otherwise known as Morgan Stanley. It's central , it's free and the chairs are comfy, quite a nice place for a power snooze too. Even better though there is a nice selection of newspapers and magazines for perusal as you await your lunch appointment. The once mighty wall street powerhouse reduced by Mr Purcell (before you laugh-yes, ex-Mckinsey) into a bit of a joke is quite a good place to hang out. The staff restaurant and executive dining rooms were some of the earliest in Canary Wharf and at a push could rival Deutsche. Perhaps not Winchester House but not bad.

So where was I , yes if you want to see the extent of Mckinsey's influence on the outsourcing market I would urge you to read the current piece in Business Week Magazine ( March 6 2006) issue, called 'Spreading the Gospel'. In this rather eulogistic piece by Business Week you will be treated to a two page spread on how Mckinsey pioneered the outsourcing concept and then how their star alumni had the bright ideas of leaving the consultancy to set up outsource providers. It's all very neat, but you do begin to wonder who the winner is from the back office outsourcing model. Well let's see. It's not the average employee ( you get fired) , it's not the customer ( your service level normal stays the same , or gets worse in most cases), it's not the shareholders necessarily ( does the company that increases margin and profit pay out more in dividends or make more buybacks in the short to medium term. Perhaps we need to see some consultancy research on this? There you go boys, try doing a piece on that . That's something for the weekend).Guess who the real winners are in the short term?. Yes that's right - the ex-consultants who suggested the outsourcing now providing the outsourcing. It's perfect. You couldn't invent it. Be careful who your company listens to. It could cost you your job.

Mckinsey McJokers. Hire Consultants, Pay for Drivel

2006-03-08T11:18:00.000Z

In real life double standards tend not to be a very attractive or a valuable personal characteristic. In the world of commerce they can be useful in running a business. In Management consultancy it seems to be the major product offering. Today's FT reports that a partner in the New York Office , in fact one of its " top corporate finance partners", has concluded in a research paper that the "provision of guidance on earnings with research that shows the quarterly ritual fails to reduce share price volatility but encourages short-termist management". REALLY, I did not know that. Oh wait it a minute, yes I did because it's obvious unless you're a fool.Here's a recent example, witness Wall Street's reaction to Google and it's share price when it refused to provide traditional earning guidance. You don't need a research paper to tell you which way the wind blows. If these are the types of valuable conclusions the egg heads at Mckinsey are 'finding' you ought to think twice about paying for their services.By all accounts they seem to be very academic people, but really not very practical or business savvy. They completely lack what the ancient Greeks used to call Metis http://www.shkaminski.com/Classes/Readings/metis.htm). It's a wonder they try and sell this as 'research' and an embarrassment that they actually put their name to it.I'm actually embarrassed reading it.

Now for the good bit, this is actually a very timely article given that the Enron trial is going on at the moment. Companies have always known that the quarterly earnings guidance dance causes stock price volatility, the best example of this was Enron. The current trial recently revealed that Ken Lay and Jeff Skilling are alleged to have raised quarterly earnings expectations from 32 cents to 34 cents in July 2000 in order to keep the analysts happy. Now here's coincidence number one, it's now universally agreed that Mckinsey was the chief architect in Enron's transformation from old world industrial pipe company into the new economy asset-lite energy investment bank cum dot com boom darling.Here's another fact Jeff Skilling is an ex- Mckinsey alumnus. I'm getting goose pimples, no really. Mckinsey prides itself on it's alumni contacts, in fact ex-alumni littered round the boardrooms of the Fortune 500 are a major source of it's revenue.Proud ex-Mckinsey-ites will tell you that the all important Mckinsey contact book is one of it's greatest assets. It's the ultimate contact book. So rather than waste his time researching this stuff from scratch, Tim Koller could have just called up Jeff Skilling and got the real deal from the horse's mouth. After all there is no point re-inventing the wheel.Work smarter not harder boys. You'll get there. Eventually.

Merrill Peril: Stan I'm Your biggest fan or Sell MER

2006-02-21T09:42:00.001Z

Is it just me, or does the Blackrock deal look unnecessary and over priced and a strategic mistake. Only time will tell. Why would anyone want to pay 37 times earnings for a minority stake in a Brand unknown to retail customers.For now I'm selling Merrill, at 75$ it looks fully valued. Hey but who Knows how things will turn out. Rather than a traditional blog posting, I have dedicated the following to Stan O' Neal and the EVPS at Merrill.

( With thanks to Marshall Mathers)

Dear Stan, I meant to write you sooner, but I've just been busy.
You said your return on equity is reached now, how far along to a stock split are we?
Look, I'm really worried about the Blackrock deal.And here's an autograph for Komansky : I wrote it on your latest report on strategy,

I'm sorry I didn't see you on CNBC, I must have missed you.
Don't think I did that shit intentionally, just to diss you.
And what's this shit you said about earnings dilutive,
You like to have your cake and eat it too?
I say that shit just clownin' dawg,c'mon, how fucked up is you?
You got some business issues, Stan, I think you need some counselin'
To help your assets from bouncin'
off wall street when the maket's down some.

And what's this shit about Blackrock and us meant to be together?
That type of shit'll make me not want us to meet each other.
I really think you and your consultants need each other.
Or maybe you just need to pay them better.
I hope you get to read this letter.
I just hope it reaches you in time.
Before you hurt the business model,
I think that you'd be doin' just fine If you'd relax a little.
I'm glad that I inspire you, but StanWhy do you follow value enhancing fads?
Try to understand that I'm your biggest fan.
I just don't want you to do some crazy shit.
I seen this one shit on the news a couple weeks ago that made me sick.
Some dude was drunk at Morgan Stanley and drove a deal with Blackrock
and had his lawyer ask for majority stock,
and they was offerin' much less money,And in the end they called it off and Fink found another
didn't say what the new found deal was,
but it did say who it was,
to Come to think about it...it was an asset swap...and his name was...it was you.
DAMN!

UK Fund Managers, clowns to the left jokers to the right.

2006-01-19T12:05:00.000Z

Are you arrogant, basically talentless, a average to poor investor, like to be taken to lunch a lot by brokers, want to be paid a couple of hundred grand a year for underperforming the benchmark index of your choice. Then why not become a fund manager in the UK . It's sleepy, it's long only, it's easy money.You don't even need to try and hedge currency risk if you can't be bothered or don't understand it.No need for fancy derivatives either, oh yes UCITS III let's you use them. But it's all such such a bore. If you started actually trying to make money for investors when would you have time to play golf, or go out, you'd actually have to do some work.

It's common knowledge most fund active managers in the UK underperform their chosen benchmark by whatever time period you choose. There are some exceptions but they are few and include the likes of Anthony Bolton, John Train , Nils Taube, Hugh Young and others. Even a full list of the out performers wouldn't go to a page of A4. There a thousands of funds and a complete lack of talent.It's scary if you do the numbers.

So how has it got like this?

Well all this is down to two things, firstly UK retail investors are basically financially illiterate (unlike their US counter-parts), secondly institutional money, typically pension funds have trustees who are extremely conservative and who know even less about finance than the retail investor, so they rely on those notoriously influential players the investment consultants. Guess who the Fund Managers need to court?

So why does this matter anyway you may say. Even if you have no direct holdings of OEICS/ICVCs or unit trusts. It should matter to anybody who is in a defined contribution (DC) scheme. Otherwise Known as money purchase.The underperforming fund managers are basically robbing you. Sure the bank you work for is also robbing it's clients, the wheel of capitalism is never ending in its parasitic circularity. Its a dog eat dog eat dog world. So what can you do ? Not much actually - which is strange given that people should be worried how their pensions are performing since they are likely to live longer. You could try to negotiate with the trustees to change their provider or asset allocation, but they are unlikely to take you seriously. That's why they have investment consultants stupid. And you know consultants always add value. You can't really do anything about the trustees.Trustees can be as incompetent as they like, when is the last time you heard of a pension fund or endowment fund trustees get fired for breach of fiduciary duty? Well never.

It's peculiar that the FSA doesn't intervene, but that's like the blind leading the blind off the top of a cliff. Anyway in the upside down world of self-regulation , ever wondered who regulates the regulator?

So what can you do as a retail investor and as a member of a DC pension Scheme?

Retail Investors - The Solution

I have two suggestions

Firstly if you want an alternative buy an Exchange Traded fund or look into Investment Trusts with good managers.

Secondly if you still want to invest in an OEIC or unit trust , try this D.I.Y Method which is guaranteed to out perform most UK fund managers whilst giving you peace of mind plus you will earn free money.The D.I.Y recipe. Be your own fund manager

1. Find an old EMPTY card board box, an old cereal packet will do.

2. Decide what you want to invest, let's say £10000. Now take out £525 put the remaining £9475 in the box , close it and put it under your bed.

3.Give the money a random name like ' Global High Potential really good Fund' .Choose a benchmark such as headline inflation minus 4% or maybe 6%. The £525 we shall call this the 'initial charge' . This is the cost of initially entering the fund, normally it would go the fund manager. But in this case you can spend this, buy yourself something nice. Just like the fund manager you have'earned' this for your investment expertise.

4. At the end of the year count your money again - you should be overjoyed - you have just outperformed your benchmark . The value of your investment will only have gone down by the rate of inflation, not -4% as well. Congratulations.Easy wasn't it!. Bear in mind most active fund managers are UNABLE to achieve this.

5.At the beginning of the next year take out 1.25% of the 9475. That's another£118.43 you have 'earned', this is called the annual management fee. Repeat step 5 till you run out of money- when you get to the end, although you will have no money left- because the charges have eaten up all the capital at least you spent it yourself.

Now do you think it's hard? So you see as legitimate scams go, active fund management is the best one going in most cases.

The DC Pension Problem

We've established that you are being legally robbed everyday, but if your'e wondering what you can do if you're a member of a money purchase pensions cheme. Well there is nothing you can really do, think of it like this your retirement plans are in the hands of an unholy trinity, docile trustees, the rather opaque world of investment consultancy and incompetent fund managers, and you're stuck in the middle.

Inverted Yield Curves & the end of the World :City Economists, Profits of Doom?

2006-01-18T13:46:00.000Z

The Oracle ( no not Larry Ellison's) at Delphi ( no not the auto parts maker) ,The Cumean Sibyl, Tiresias the blind prophet. These are all examples of people from the ancient world with the power to tell us the future. Gifted by one God or another with the power of prophesy, often cryptic, reading the future through the entrails of sacrificed animals. The enlightenment came and went and of course we are all far more sophisticated now.These were just universal myths.Who believes that stuff.Today we have have predictive texts ( right most of the time) consult your mobile phone, weather forecasters - there are whole channels devoted to this on cable, switch on your TV ( mostly right) and of course the professional city economist. Every firm has at least one, most firms a few. Have you consulted yours?

In the age of the economic man the predictions of economists matter more than you would think,their pronouncements will eventually affect your take home pay(through tax policy), mortgage and debt servicing,( interest rates and inflation) , holidays & shopping( currency movements/ trade deficits/surpluses). They are powerful people but like the soothsayers of the ancient world very few are reliable and worse we give them that position of power over us. We think they know something we don't, we ask for guidance. This is a form of wish fulfillment by individuals and capital markets. No one can know the future, ever.Economics, the dull science for dull people is decidedly dangerous in the wrong hands. Most economists seem to be mild mannered geeks but they can cause havoc in capital markets. What's the one in your company like? Right prediction...oh but just the wrong time frame. Oh dear that's the same as being wrong isn't it? Dollar bears, interest rates hawks. Whatever.

What set me thinking about all this? Around the end of last December there was a yield curve event. The US 10 year treasury was paying less than the 2 year note.This yield curve inversion according to most economists presages a recession.Most economists will tell you that this is a sure sign of doom. Hmmmmmm.Taken in isolation this fact means nothing. It's up there with stock market cycles and the length of skirt hem lines. Yet because it comes from the mouth of well heeled professional economists we tend to believe this stuff. They must know right? No one knows the future. Like most of the finance industry these people are generally ill informed about the real world, maybe not about macro-events but ask them the price of a litre of milk , or how much a loaf bread costs, they have no idea. By all accounts The Pythias were deemed to be very worldly and their knowledge covered history, mathematics, philosophy, religion, politics. Sadly our modern economists know only about one thing, ..err economics.They are theorists and as such their spurious but some times well intentioned advice can cause us a great of distress and and lose us money. That's not to say they are all bad, most professional ones seem to be though. So don't believe the hype, if soothsayers can bankrupt Croesus they can certainly take you down.

Beware geeks bearing gifts of economic forecasts.

RB

Risk Management Re-visited: Deutsche CDO trades...What's the big deal?

2006-01-12T11:19:00.000Z

Ahh, another year another scandal, plus ça change. It's déjà vu all over again. Deutsche has always been one of my favourite banks, for a number of reasons.Firstly the staff canteen at Winchester House always used to do excellent food at very reasonable prices, the grub in the meeting rooms wasn't too shoddy either. I also have a soft spot for their art collection , especially Bacon's Study for a Portrait of Pope Innocent X lithograph. It was outside one of the meeting rooms on the 8th floor if anyone's interested. So what's not to like?

Of late though, Deutsche seems to be a very accident prone institution. Not forgetting the Peter Young affair back in the mid-1990s, then the recent poor press and eventual disposal of the asset management arm to Aberdeen , loss of major clients, Josef Ackermann's criminal trial in Germany for the bonuses paid to executives in the Mannesmann takeover, and recently the 270 million dollar settlement for securities fraud in the US . Now the latest scandal with the young trader involving CDOs Mr Ashul Rustagi. He has apparently overstated his trading book by £30 million. Big Deal?, no literally what is the big deal ? Compared to the size and value of Deutsche's assets or even its industry leading trading book in these types of derivatives it's not even on the radar. It's simply not material.So what are the real issues? It's all about risk management in the widest sense.

The truth is that Risk Managers are mostly ineffectual at actually managing risk and compliance functions generally do no more than rubber stamp decisions that the business has already made . They are there to be 'seen' and not heard. Essentially they keep regulators happy, ultimately the business pays their salary, so they are unlikely ever to say no. When is the last time you met a risk or compliance guy with any balls. I haven't yet. For further reading see my earlier piece on Risk management dated 11 Nov 2005.
Secondly this kind of discrepancy is more common than most banks would have people believe, do you think it couldn't happen at Merrill , Goldman , Citi, or Morgan Stanley? Think again before pointing the finger at Deutsche.Just like the lottery, it could happen to you.The truth is that long after the likes of Barings the real quality of risk and controls in the investment banking world are not much better than 10 years ago. What you have is much better reporting of that risk and operational errors, etc. Yes there are more compliance and risk managers than ever-but more is not necessarily better.Yes you have much better quantification of risk through fancy Value at Risk models, but at the end of the day this is not much use. The reason for this is not, as the financial press would have you believe, because these are complex, exotic financial instruments. Derivatives are simple instruments, whether you re-package bonds with differing yields/maturities in a special purpose vehicle (CDOS) and flog it to punters or not. Financial journalists only insult their readership when they continue the mystique surrounding these products. Partly I suspect because they are too lazy to try and understand the products themselves. If you can count to ten using your fingers , you can become a pretty successful derivatives trader. If you can count to twenty without taking off your socks, there is really no reason why you shouldn't make M.D. immediately at some major bank.Think about it if they are so complex and difficult why is a 26 year old graduate trading them? So what's the real reason. It's simple, you can identify all sorts of financial,political,security and market risk,but there is no way to predict the undpredictable nature of people's behaviour.It's a behaviourial risk inherent in all organisations where there are people. You can't assess anyone's mental state through risk models, audit trails and sign offs. That's another reason why they call it a people business.

As the year goes on I look forward to more of these little scandals.

Executive Decisions: A utility theory of bonus allocation.

2005-12-08T16:50:00.000Z

It's December, people are singing carols at train stations and shopping malls, letters to Santa are being written. Yes it's that time of year again - financial year end and bonus time, either this month or in the following months. A time of much heartache, emotional distress and intrigue. That's just the senior management side of things, imagine how the worker bees feel. The process in most firms is a mystery.Who gets what when and HOW much. Are they worth it? what I did I do wrong ? etc.The speculation of winners and losers in winning at the loser's game provides good fun well into the new year for all involved. The bonus, VICP, performance-related compensation, whatever you want to call it, is in most cases a purely discretionary gesture. There is no entitlement or obligation to pay anything. Why do so many people forget that?.

Here are some basic rules for a general theory of bonus pool allocation for senior managers :

If you can possibly get away with it, under no circumstances pay anything out at all. There are only two situations where you will need to pay a bonus. Firstly if the employee can point to a direct contribution to P&L. Yes that's how much I made, that' s my cut. Secondly in the case of contractually guaranteed bonuses. ONLY if it's in writing. Oral contract, not worth the paper it's not written on. This approach should ensure there is much more left for the management pool. Remember it always looks good to hand some back.

Never reward top peformers adequately. This will only set a precedent for the following year, where the bar will be set higher, it has the additional dis-incentive of making them take their foot off the accelerator for the rest of the year. Remember the old adage from the organisational motivation courses. Money does not motivate in the long term.So why bother. If we are agreed that 99.99% of all jobs can be done adequately 99.99% of the time by 99.9% of any random selection of people, then it follows managed turnover is a good thing. The next set of hires should be cheaper and younger, therefore more gullible and energetic than the chumps in the current jobs.So save by not giving good bonuses and then save again by hiring cheaper replacements.It's a virtuous circle.

Always give the best part of the bonus pool to your friends, and or good looking employees. We all want to see our friends happy rather than complete strangers it's only human nature. Good looking people of both genders are a joy to have round and are generally less bothersome than the ugly harder workers. Ugly employess have to work harder because they are not good looking, ergo whether they receive a bonus or not they will continue to work hard. If they don't they should be managed out for poor performance. They can be replaced by cheaper and younger ugly people of which there is an excess supply. That's the nature of the labour market. In case any mangers feel uncomfortable doing this ,bear in mind there is no country in the world with legislation that regulates this area.That is to say it's not illegal to employ people on the basis of their attractiveness. The recent case of phamaceutical sales reps being recruited from college cheerleaders should give you some comfort.( see the article at the end of this blog- below)

Always reward the bottom 20% of performers by at least 40% more than you would a top performer.There are two reasons for this firstly this will make them unexpectedly happy for a while, which should last well into Q1 next year, but better still when you fire them they are less likely to be difficult and will ensure smooth handover of their work.Why would you take this counter-inuitive approach? Well these workers provide the pool you will have to sacrifice in Q1 and maybe mid-year to reduce headcount to meet the unrealistic budget targets that will be set by your own managers if revenues become volatile or other costs go up. If neither of these happens you can manage them out anyway in Q3 leaving you with an even larger bonus pool for the year ahead. Like I said it's a win win situation.

Follow these simple guidelines outlined above and be merry.Don't worry about the long term. Manage for the short term, manage for the stock price, but above all be kind to youself.It's tough at the top.

Excerpt from International Herald Tribune 28/11/2005 follows:

As an ambitious college student, Cassie Napier had all the right moves - flips, tumbles, an ever-flashing America's-sweetheart smile - to prepare for her job after graduation. She became a drug saleswoman.
Napier, 26, was a star cheerleader on the national-champion University of Kentucky squad, which has been a springboard for many careers in pharmaceutical sales. She now plies doctors' offices selling the antacid Prevacid for TAP Pharmaceutical Products.
Napier says the skills she honed performing for thousands of fans helped land her job. "I would think, essentially, that cheerleaders make good salespeople," she said.
Anyone who has seen the parade of sales representatives going through doctors' waiting rooms in the United States has probably noticed that they are frequently female and invariably good-looking. Less recognized is the fact that a good many are recruited from the cheerleading ranks.
Known for their toned bodies, small skirts and persuasive enthusiasm, cheerleaders have many qualities that the drug industry looks for in its sales force. Some keep their pompoms active, like Onya, a sculpted former college cheerleader who on Sundays works the sidelines for the football team Washington Redskins and who asked that her last name be withheld, citing team policy. But on weekdays, she urges gynecologists to prescribe a treatment for vaginal yeast infection.

UK MBA: Oxymoron or Caveat Emptor

2005-12-06T13:56:00.000Z

Wise Fool. Butt head. Idiot Savant. These are all examples of oxymorons. Though Europeans constantly bemoan all things American, the US has given the world a great many good things, Krispy Kreme, Google, cheap designer clothing ( yes- I know its all made in Mauritus or Indonesia or Thailand.Where else would Ralph Lauren, J Crew and Timberland produce this stuff. That's globalisation), and of course the best business schools, or should I say the best business school brands in the world.

A brand is the spiritual sign post of the consumer society. Without them we are all doomed. Just ask the experts. http://www.interbrand.com/who.asp.

Yesterday I opened the FT and the business education ( oxymoron?) supplement fell out. How dreary. It's usually consigned to the bin- but it did set me thinking.

Question : Why do so many talented UK executives insist on taking MBA courses in the UK. Its always been quite a mystery. Aside from the lucky few who are on employer sponsored courses or scholarships, in which case its perfectly understandable. A little time out of the office with a raised gold letterring airport novel and a cigarette under the guise of 'executive development' is always a welcome relief to the mindless boredom of corporate life.

What about the others- why on earth would you spend your own money for a qualification in the UK which in the long term seems to take you nowhere. Albeit the UK MBA graduate will certainly get there quicker.

The approximate cost of an MBA at LBS, including cost of living is around 30,000 GBP/52000U$ for one year full time.Not forgetting the loss of a year's salary and other non- financial opportunity cost. Lets look at what the FT has to tell us http://rankings.ft.com/rankings/mba/rankings.html. If we look at the LBS graduate salary today adjusted for purchasing power parity in U$ it's around 130K U$. Yes - I know the salary today figure doesn't count towards the ranking, but its the universally accepted measure of short term post graduation 'success'. This is about a 147% increase in pre-MBA salary. The real issue isn't this, but what happens in the long term to these graduates. Since the majority of MBA s eventually go into lucrative fields such as consulting or banking, being highly ambitious and full of energy one would assume they would eventually end up at the top of these companies. Why else would you do it? Because case-studies are cool, and courses in business ethics are all really interesting?

Here's a quick test for those hoping to 'invest' in an MBA from a UK business school -Can you name five CEOs, CFOs, CIOs, or even CAOs of multi-nationals or Fortune 500 companies from any UK MBA School? Hard isn't it. That doesn't mean there aren't any, I'm sure there are a few, but then even a blind squirrel finds a nut once in a while. Now do the same test with HBS - George Bush, Jeffrey Skilling, Meg Whitman,Jeffrey Immelt, Jamie Dimon. Its not an accident. Its all in the brand.UK business schools have very little brand value comapred to their US counterparts. Yet people insist on doing them , partly I suspect for logistical reasons. It's local, it's only for one year, bear in mind once you have one the damage is done, you can't undo it.

In the long run UK MBA schools seem poor value indeed.

RB

Outsourcing & Investment Banks: People are our greatest asset.Who's next?

2005-12-05T18:33:00.000Z

Mckinsey has a lot to answer for, especially its trade rag - The McKinsey Quarterly. Read any good articles on outsourcing lately. No. It looks like the chaps at JP have. JPM Chase or what ever its called these days.JM Walmart-Chase-Duane Reade has decided to hire 4,500 new graduates in India over the next couple of years. The ultimate goal is that by 2007 30% of its back office work should be located off-shore.Apart from the management consultants who dream up off-shoring, near-shoring and whatever next euphemism for 'job exporting' who wins from this in the short term.The shareholders-not really.The employees-Nope.The Senior management-Yep. How did you guess?. Why is it necessary?Well It's an easy way to increase your margin-all other things being equal it's the logical corrollary of reducing your cost base. Financial companies by their very nature are constantly in search of the better margins,less cost,more economies, scalable business models etc. The accepted wisdom used to be that only basic back office functions could be reliably outsourced,reconciliations,data input. So this never worried white collar employees. Guess what, that's changing. As good employees you all have to be model change agents. Just have a look at some of the outsourcing work in the pipeline at Wipro, Infosys or Tata. The projects are large,complex and sophisticated. It's the turn of the white collar so called Knowledge workers to be outrsourced and things don't look pretty. Where better to start than the finance industry. The retail banks have been doing it for years,just look at HSBC or Lloyds. After the technology melt-down a few years ago the investment banks finally learned some basic principles of financial discipline.Like their real world counterparts in manufacturing,healthcare and autos they began to treat concepts such as recturn on equity,pre-tax margin,compensation/revenue ratios as serious metrics against which to measure their businesses by.These lessons won't be forgotten in a hurry. Who remembers John Mack's arrival at CSFB and the re-negotiation of guaranteed bonuses,or the invite from Merrill HR globally inviting its employees to consider "voluntary separation". The question back and middle office employees at the investment banks should be asking themselves is - who's next. My money is on Goldman.
If you're a Goldman employee think back many moons ago back to 2003,remember Henry Paulson's little gaff.

I don't want to sound heartless," but then proceeded perhaps to do just that.
"I'm going to tell you the facts," he said. "In almost every one of our businesses, there are 15% to 20% of the people who add 80% of the value in terms of their efforts and experience. .......
I think you can cut a fair amount and not cut into the muscle, and be well-positioned for a recovery."

That was in Feb 2003. Bear in mind it's people business, as long as the people are cheap and in another jurisdiction. If you're in Goldman back/middle office remember your its greatest asset.

RB

See full article at Goldman's CEO Apologizes To Staff for Layoff Remarks

Stock Loan traders: Just idiots with phones?

2005-11-25T13:22:00.000Z

In my long and varied career in the city, the most consistently annoying, stupid, vain, idiotic and moronic people I have met have been the so- called stock loan 'traders'. number of reasons. The term stock loan in some institutions has been subsumed under the heading of Equity Finance or some other technical sounding appellation- to make the whole thing sound much more smart.
Why are these people so objectionable?
Firstly stock loan traders aren't 'traders' at all. This is the misnomer that is the root cause of the problem. They are merely glorified order fillers. No different from serving coffee or fries or doughnuts. Consider the following
I would like a big mac please for 2.99
I would like to borrow 1 share of Vodaphone at 1.20 please.
Spot the difference. No. Well the main difference is that the people serving in fast food joints tend to be politer, brighter and of course you guessed it much more numerate. The number of times the fee/rebate/tax rate is incorrect on stockloan trades, even when the front end systems have fool proof buttons need to be seen to be believed. The question for managers of these morons should be is not how much money are my stock loan traders making me - but how much are they costing me - amongst other things in
Failed trades
Unnecessary over-borrows
Lost tax credit and planning opportunities
Opportunity costs of depot mis-management

As over-paid simple jobs go - it doesn't get any easier. Yet this seems to encourage them to ape the behaviour of their thinking counter-parts, such as structurers or even cash/equity traders. The most objectionable people in this arena tend be the 'Heads' of Stock loan as they they proudly call themselves.Normally ex-UK settlements clerks who found new homes after CREST was introduced so there was nothing for them to do. I look forward to the day when the whole of the stock loan trading is totally automated and we can get rid of these people.

Risk Managers: Money for nothing. Just passing the buck?

2005-11-25T13:19:00.000Z

After Enron, Worldcom, Global Crossing , Parmalat, Refco . The list will probably go on forever and the introduction of the wholly ineffective and inappropriate Sarbanes-Oxley bureaucracy , a new breed of no-jobs have appeared in the financial services scene. Every company seems to have one or two or a whole department. But does anyone actually know what they do? Flow charts and reports mainly. That go straight to the operating committee then of course filed and never to be seen again. If you have a robust new business approvals process, a vaguely competent legal department, good business development managers , competent internal auditors reasonable operational controls you don't need career risk managers. Most of them seem to be ex-accountants or lawyers. These people have had years of training in avoiding risk completely, not identifying it or controlling it. But perhaps the reason they really exist is so banks have ready made scape goats when things go wrong. In which case you should hire more of them just in case things get rocky.
RB

Scared of Avian Flu?.........don't be so Chicken: Why bird flu could be good for pay & pensions.

2005-11-25T13:10:00.000Z

The panic over bird flu has lost its entertainment value. The only people now amused by it are the makers of Tamiflu, namely Roche and the other generic providers. The effect on Roche's share price over recent months is not to be sneezed at,( http://www.roche.com/home/investors/inv_share/inv_share_fin.htm). Is there fowl play afoot? Not really, as every good stockbroker knows getting investors to panic can be very profitable. In the age of the health obsessed it gets ever easier. The odd thing about bird flu, unlike normal flu, is that it tends to affect people in the 20-40 age range, not the young and the old. Estimations of potential fatalities are always increasing. The last time the WHO said it would be likely to be 40 million. The deaths toll to date are about 70 people. In addition the vaccine itself has apparently killed about 11 people. So the disease is approximately 7 times deadlier than the cure. The odds aren't that bad so I think I'll stick with lemsip and hope for the best. Lets assume it did hit the country. If it wipes out a goodly proportion of 20-40 year olds, this means that the people remaining in that age group would instantly command higher salaries given the labour supply pool will be depleted. There is a historical precedent for this, the Black Death. Secondly older workers will be welcomed back into the work force. Best of all, companies having to report pension deficits under IFRS and FRS 17 will instantly see these liabilities go down, any CFO with half a bird brain will write this back to P&L..Voila the stock market rises.So all the survivors with pensions in DC schemes see their retirement funds go up.Its a virtuous circle. All in all as good capitalists we should kiss chickens and welcome bird flu.You know it makes sense.

RB

Earn lots - Do Nothing , become a central banker!

2005-11-24T15:31:00.000Z

Without a doubt Jean-Claude Trichet and the council at the ECB are my current heroes. Why? Well easy. While the MPC and our own central bankers have been picking their noses , and having endless cups of tea , umming and aahing - Should the rate go up or down or both? What way is up or down does anyone know, and while the Fed aggressively raised rates when it needed to last year, the ECB have sat and ignored the whole thing.No rate rises for the last five years 2% seems about right for the eurozone.-yep ok lets go fishing. If we calculate this a decisions per salary of the central bankers, then it looks like the ECB and JCT win hands down. Last year JCT got paid about 600,000 USD , whereas I understand that poor old Greenspan only makes approx 180,000USD a year. So that's 3 million dollars per decision at the ECB. Now that's magic! These figures come from a recent FT survey of central bankers pay.

Barclays - Is the Barc[ap] worse than its bite? Why be long Barclays?

2005-11-24T15:00:00.000Z

There seems to be a school of thought that says UK banking stocks are really ex-growth, you only have to read some of the research notes that come out on Lloyds TSB to understand that. Yes the building societies that de-mutalised in the 1990s are offering current accounts up to 10% interest a year, just look at Alliance & Leicester and the Halifax. UK consumers are the most profligate in Europe, and have high personal debt ( excluding mortgage payments), personal bankruptcies are on the rise. The one bank I like the look of is Barclays, I think it reports Q3 earnings tomorrow. Why? Simple Barclays Capital. Barcap is the only investment bank left of any standing in the UK investment banking scene. Barcap will be Barclays' growth engine and seems to contribute an inordinate amount to Barclays bottom line. In historical terms its gone from nothing in 1997 to being a pretty significant player these days. But with the odd exception of media coverage on Bob Diamond in the trade rags and the newspapers , usually focusing on his pay, there seems to be little coverage of Barcap when Barclays is mentioned in the press. That's probably because retail banks like to give the image of being staid and stable and don't want shareholders to think they are playing poker with their money.Of course that's all investment banking is - a fixed poker game where the house always wins, basically because it cheats. The US investment banks have been reporting record earnings for the last three quarters ( look at Lehman, Merrill and the ever slippery Goldman ) , even European second liners such as Societe General have reported exceptionally good numbers.So why would Barcap be any different. As a play on investment banks with a stable retail client base and income stream Barclays looks like a good short to medium term trading play. It's 604 today.

Currency Movements Dollar/Sterling:No way but down

2005-11-24T11:04:00.000Z

I have read a tremendous amount of rubbish about the direction of currency movements especially Dollar/Sterling. Most of it is the worst kind of conjecture by 'professional' forecasters at the big banks. They should Know better. The common consensus for 2003-2005, seemed to be that the dollar would weaken - maybe even reach 2$/1£ by the end of this year. The US current account deficit isunsustainable Snow/Bush and the other idiots were constantly trying to talk the dollar down as if somehow this would solve US indebtedness by itself. So what happens the Dollar rallies to a high this year - hitting 1.71 recently. When Bernanke was nominated to succeed Greenspan this seemed be a catalyst for dollar strengthening. All this proves is that currency movements, like all other markets react to sentiment not fundamentals. So what's really happening , lets consider the following:

US Consumers love consuming- they will never stop spending that's their constitutional right seemingly. Long live imports from China/India etc.
There is an unprecedentedd house price inflation boom in the US, as in the UK. Remember Tony is just Bush lite.
Most currencies in the developed world have abandoned the gold standard - so all the dollars in the world are not really worth the paper they are written on, so to speak. Our own super smart chancellor sold UK gold reserves a few years back- now gold has hit multi year highs per troy ounce. Such a move in any other job would get you fired - but instead he will probably become PM .But I digress. So really all currencies are merely confidence tricks and bad ones at that.
China has liberalised yuan/dollar to a semi-floating rate.
Japan isn't going to keep buying US debt forever , and will probably dump some dollar reserves.
Bernanke has said his policy will be to target inflation, unlike the the Bank of England at least he has a clear policy.
Commodity prices will only go up due to demand in developing economies. Oil is back down from 70$ a barrel, but copper, platinum and gold are still going up. Why?Becausee these metals have some kind of intrinsic value not linked to the vagaries of market demand/supply. In other words they are not confidence tricks.
The interest rate cycle in the US is probably at the top, consumers need cheap credit to keep spending . Cheap money and high institutional liquidity mean a rising stock market in the US .

So here's what will happen:

The dollar will weaken - the US will just keep printing more dollars till they run out of paper.
The US deficit will actually go up not down - this is a red herring - the US will never go out of business. When the economy slows down they will just start wars. Remember wars are always good for economies in the long term.
Sterling will weaken vs dollar , because UK interest rates are suspiciously high for an economy in decline ( the government growth figures are basically fabrications as certain bodies have now pointed out)

What to do..a couple of ideas

Simple buy US assets( shares, property- whatever- avoid auto companies, obviously)

Go long dollar/sterling calls

Let's go to Business School, Why not?

2005-11-23T10:46:00.000Z

Business Schools are a great way to increase your pay without actually learning anything. But best of all they can help you totally lose your moral compass - if that's what's holding you back in your career. Most measures of a business school's standing in the world really revolve around post graduation pay. I note that the newspaper rankings include drivel like 'international students, quality of teaching, etc.etc. This is merely to obfuscate the fact that 'business' itself cannot be a subject.It is of course a ridiculous idea. Peter Drucker ( recently deceased) was early to recognise this. But the business of business schools is to make money , like any other business.

BUSINESS LIFE: Business schools focus on making money, not martyrs
By Michael Skapinker
Financial Times; Jan 05, 2005

When Robert Giacalone asked his students at Temple University business school in Philadelphia for examples of morally repellent management behaviour, they struggled to come up with anything. One of his students said: "Well, I suppose you can't kill your subordinates." The class could not agree on anything else they thought was reprehensible.

On another occasion, he asked students whether they would dump carcinogens. On this the class reached consensus: they would do it, because if they did not, someone else would. Prof Giacalone asked whether they wanted to live in such a cynical world. "We already do," they replied.

Prof Giacalone recounts these experiences in the December issue of the Academy of Management's Learning & Education journal as part of an article on who was responsible for producing the leaders of Enron, WorldCom and other scandal-hit companies.

He says many people blamed the business schools. "Over and again I was asked: 'What are you teaching these students?' The implication was not subtle: business faculty were not teaching students ethics and were to blame for the wrongdoing that ravaged society's trust."

He does not believe business schools should take the rap alone. Home is where corporate crooks first imbibe their moral creed. Children's schools do little to curb base behaviour, he adds. Cheating is endemic, and teachers are reluctant to do anything. When challenged, teachers say their students are too young to know better. That is not the real reason they refuse to act, Prof Giacalone says. "It is the fear of costly legal action that quells the deterrence of dishonesty - in a litigious society, students who are too young to know better have parents old enough to call a lawyer."

Not that Prof Giacalone exempts the business schools from blame. All sections of society have to ask what they have contributed to the malaise. Many business schools have attempted to address the problem with ethics courses, which Prof Giacalone sees as the equivalent of trying to halt a plague by administering antibiotics to a few of the sick.

What is needed, he argues, is a radical change in what business schools teach. The problem with business school education is that it has no higher order ideals. It teaches that profit is the sole proof of business success, whether it is achieved by producing drugs that cure cancer or cigarettes that cause it. Business schools have nothing to say about "love, forgiveness, gratitude and hope", none of which can be reduced to money. Business schools have none of the aspirations for society as a whole that medical or engineering schools take for granted. What is needed, he says, is "a transcendent business education for the 21st century".

With this polemic, Prof Giacalone joins a growing group of business professors attacking their schools and what they stand for. The group includes some of the best-known names, including Henry Mintzberg of McGill and Jeffrey Pfeffer of Stanford.

Are they right? Prof Giacalone seems to have had worse luck with his students than other business school professors I have spoken to. Several have said students seem ever-more concerned about proper corporate behaviour; they are demanding not only ethics courses but classes in non-profit management. All the same, Prof Giacalone speaks for many of his colleagues' discomfort with their schools' ethos.

Central to the problem, it seems to me, is that business school professors have made fundamentally different career choices from their students. The professors have chosen to become educators; the students - the few non-profit managers apart - go to business school in the hope of reaching the highest echelons of business. Educators, for the most part, choose their jobs because they want to improve the life chances of the young. Business leaders aim for power, challenge, control and the opportunity to make money. Business school professors may not be badly paid, but, by choosing their careers, they have opted to earn less than their charges.

As to Prof Giacalone's call for a philosophy of business that aims for more than the maximisation of profit, I am all for it - but then I, too, have chosen a profession whose monetary rewards are lower than those enjoyed by most business school graduates.

There is nothing wrong with business schools challenging their students' overly materialistic assumptions. They will still enrol for the courses. But it is likely to have only a marginal effect on how those students behave once they graduate. Whatever they learn at business school, the world after they leave will impose its own demands.

The business school critics may not like the economic system their students enter - one that measures success purely by the generation of shareholder return - but it is the one we have. There are alternatives to the American version of capitalism - the French one, for example, but that has not achieved the US model's worldwide success and has produced its fair share of crooks too.

Business schools can and should invite trade unionists, environmentalists and anti-globalisation campaigners to address their classes. But they will probably achieve more against corruption if they remind students of the consequences of getting caught. Some schools already invite business convicts to speak. According to the New York Times last year, Walter Pavlo, who spent more than 18 months in jail, spoke at the University of California Berkeley's Haas School. But the newspaper also reported that Mr Pavlo expected to earn up to $200,000 a year from his speeches, so he may be more of an inspiration than a deterrent.

A better idea might be for each student to be handcuffed and marched through a jostling mob of his or her classmates filming the event for the evening news. The simulated perp walk? It may be a better weapon against corruption than transcendent business education. michael.skapinker@ft.com

Welcome to the Professional Class in the 21st Century!

2005-11-23T10:29:00.000Z

I read this in the New Statesman a few weeks ago. It rang a bell. Adds new meaning to the corporate treadmill.Something to ponder for now.

Those mill owners knew a thing or two
Observations
Raj Persaud
Monday 17th October 2005

Observations on work. By Raj Persaud

The Marxist view of pay strategy "down t'mill" was that bosses extracted
maximum effort from workers by keeping them desperate. Employees, in other
words, were paid just enough to keep them from starvation. It didn't make
sense to pay them so badly they couldn't get out of bed in the morning, but
equally it wasn't smart to pay more than the minimum needed to keep them
turning up at the mill gate each day ready to give their all.

A distant Victorian memory, you may think, except that an American
economist has come up with a model of modern salaried professions which
suggests that the Marxist analysis applies with renewed force in
competitive market places such as, to take one example, the City of London.
According to Alan Day Haight of Bowling Green State University, Ohio,
people in accounting, law, medicine and similar work toil on the verge of
depression or burn-out in much the same way as wage workers once lived on
the edge of starvation.

Haight points out that promotion-track workers in these professions are
motivated largely by hope of advancement to partner or vice-president, or
some other senior post. And given that they basically accept hope as a
means of payment, they are convenient targets for "surplus extraction".

In a typical office, this argument runs, senior professionals benefit from
the long hours put in by junior professionals, and because a little rivalry
makes the juniors more diligent, the partners have an incentive to hire
more than one candidate for each anticipated promotion. But how much more
than one? How much rivalry is enough, from a partner's point of view, to
extract maximum surplus effort?

The Haight answer may seem dismally familiar: there is enough rivalry only
when the junior professionals are suffering from so much promotion anxiety
that they are always on the verge of giving up or burning out.

Haight has modelled the optimum curve for the number of extra hours that
can be extracted from young professionals on the basis of their hopes of
promotion. Maximising hope, he notes, is the key art of the senior partner;
more people must believe they may be promoted than can be promoted.

He therefore concludes that "if staff burn-out did not exist, it would be
necessary to invent it". If junior staff have high morale, in other words,
you must hire more of them until promotion anxiety is sufficiently severe
to extract maximum free labour from juniors. The firm can even afford a few
psychological casualties among the staff because of the returns in
aggregate effort.

The model reminds us that although the modern owner of the means of
production might not exploit workers physically in the manner of the
Victorian mill owner, he or she may be exploiting them emotionally. And
because emotions are less visible than malnutrition or physical exhaustion,
the damage is harder to measure. In other words, the professional workers
of the world may be in chains, even if they can't see the chains to throw
them off.

Raj Persaud is Gresham Professor for Public Understanding of Psychiatry and
consultant psychiatrist at the Maudsley Hospital, London

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