Social networking site Twitter has yet another fan, this time in the form of Dawid Konotey-Ahulu, the founder of pensions adviser Redington. Konotey-Ahulu has urged the pensions industry to start using social media to share ideas. In an article called Telling It Like It Is; The New Reality, posted online today by Financial News, Konotey-Ahulu says the lack of blogs from pension fund officials and investment consultants is a 'crying shame'.
Konotey-Ahulu writes: "It strikes me that there are hundreds of participants in the pensions and insurance industry who could benefit from using social media platforms...I hear so much wisdom from that “crowd” on my travels and very little of it makes its way onto the stage."
However he admits that the Twitter interface, requiring updates to be confined to 140 characters put him off at first. It's a common complaint, but something that Konotey-Ahulu has since come to embrace as it requires 'Tweeters' to distil their complex ideas into easy-to-understand bite-size chunks. In his own words...
"There are thousands of ordinary individuals out there who, between them, sift through thousands of articles, have myriad conversations with other people, and assimilate acres of information. Then they choose the best of the lot. They pore over information, distill the very best (in their own view, admittedly) and then serve it up for you on the plate that is Twitter.
"If you happen to follow those individuals, you have access to their condensed and distilled wisdom. In other words, Twitter aggregates relevant, useful information for you on just about every topic - around the clock. The crucial difference between Twitter and Google, is that Twitter is unnervingly real time, in a very different way to a search engine. They’re calling Twitter the super fresh web."
Self-styled "Pensionsguru", Steve Bee, is similarly enthusiastic. The fact that his Twitter moniker was still available to him, despite his relatively late entry to the world of Twitter, is, he points out, instructive – it seems the pensions industry is somewhat behind the curve in embracing new forms of communication. But with the next generation of pension savers learning about personal finance through the national curriculum, and highly literate in social media, he argues, "our future legislators and civil servants will come into the workforce trained up on Twitter, too. That could bring enormous advantages with it to our future pension legislation."
The rate with which defined benefit pension schemes are being closed appears to have escalated from a drip-drip to a gushing torrent in recent weeks. It seems that firms are taking advantage of the announcements made by their peers to wheel out their own reforms. This pushes the design of defined contribution plans to the fore. If we are to avoid another pensions crisis we need to wake employees up to the fact that the responsibility for a comfortable retirement is now up to them. We need fresh ideas, and perhaps Konotey-Ahulu is right to point to social media as the best forum for sharing these.
Can you recommend any pension-focused social media sites? Let Penrose know at: lisah@penrose.co.uk
LH
Thursday, July 23, 2009
Friday, July 17, 2009
Myners Retort
Hedge funds have had a tough year so far but things could get far worse if the EU draft directive on alternative investment strategies gets underway. Most European based hedge funds houses' funds are offshore, with many domiciled in the Cayman islands. The directive does not permit these funds to be sold to EU investors, a development which would be massively detrimental to the hedge fund business model and could mean the closure of masses of hedge funds. With 72% of European hedge funds and fund of funds based in London it looks like the UK asset management industry has the most to lose if the directive is implemented.
But has the EU considered the effect this would have on the underlying investors? Perhaps not but City minister Lord Myners certainly has, as this week's press reports reveal. Myners has urged investors to protest again the directive – he says the directive would "reduce choice" by preventing investors from investing in alternative investment funds run by non-EU managers. More than 70% of hedge funds and 2% of private equity funds are managed outside the EU.
The National Association of Pension Finds and European Federation for Retirement Provision have supported Myners' concerns. Lindsay Tomlinson, the incoming chairman of the NAPF, said: "There have been few EU directives that look worrying, but one could understand what they were seeking to achieve and it was possible to focus on particular clauses and seek to make them work better for investors. This does not seem to be the case with the alternative investment fund managers directive, which if implemented as drafted, would have many consequences that in aggregate do not seem to benefit investors."
Myers has revealed that the UK is working on proposals to iron out "deficiencies " in the EU directive and has confirmed that the Treasury has established seven working groups comprising Treasury officials and industry experts, to retool the proposed rules.
What is clear is that a lot of work needs to be done in achieving a united consensus on this directive – watch this space.
NB
But has the EU considered the effect this would have on the underlying investors? Perhaps not but City minister Lord Myners certainly has, as this week's press reports reveal. Myners has urged investors to protest again the directive – he says the directive would "reduce choice" by preventing investors from investing in alternative investment funds run by non-EU managers. More than 70% of hedge funds and 2% of private equity funds are managed outside the EU.
The National Association of Pension Finds and European Federation for Retirement Provision have supported Myners' concerns. Lindsay Tomlinson, the incoming chairman of the NAPF, said: "There have been few EU directives that look worrying, but one could understand what they were seeking to achieve and it was possible to focus on particular clauses and seek to make them work better for investors. This does not seem to be the case with the alternative investment fund managers directive, which if implemented as drafted, would have many consequences that in aggregate do not seem to benefit investors."
Myers has revealed that the UK is working on proposals to iron out "deficiencies " in the EU directive and has confirmed that the Treasury has established seven working groups comprising Treasury officials and industry experts, to retool the proposed rules.
What is clear is that a lot of work needs to be done in achieving a united consensus on this directive – watch this space.
NB
Lord of the Flies… 39 steps to enlightenment…?
Commentators argue in today's papers that the situation in financial markets is the result of the lack of an effective governance framework. The current environment puts Penrose in mind of the William Golding novel, Lord of the Flies and its message that a lack of rules can lead to mayhem and disaster. This analogy leads us to Sir David Walker's report on financial sector corporate governance, released yesterday, which has prompted a savage response from the banking community.
Closer scrutiny of remuneration was always going to be a key feature of the report, but some argue that the recommendations surrounding remuneration merely pander to populist outrage about bankers and their bonuses. Commenting in today's FT, the chief executive of one investment bank said Sir David had caved into populist demands: 'What purpose does this actually serve… it is fundamentally wrong to whip up this hatred of bankers?'
Sir David states that remuneration committees should worry less about whether levels of pay are too high in absolute terms, but rather whether employees are encouraged by bonus schemes to take actions that are not aligned to the long-term interests of shareholders. On the risk monitoring front, Sir David wants bank boards to set up a committee (separate from the audit committee) chaired by a non-executive director, to ensure that boards do not run amok. However one banker in today's FT argues that this will not be effective: 'Risks should be managed by non-executives hour to hour, not by non-executives month to month,' he said. The British Bankers Association, the Association of British Insurers and the Institute of Directors welcomed the vast majority of Sir David's recommendations, although the IMA said the regulator should not get involved in deciding the best way to manage money.
Arguably the main aim of Sir David's report is to change the culture of governance rather than the rules; he summed it up as an attempt to make the board 'a less cosy, comfortable place'. Indeed if these proposals eventually come into force it has been suggested that the UK is destined to have the toughest standards in the world…
EV
Closer scrutiny of remuneration was always going to be a key feature of the report, but some argue that the recommendations surrounding remuneration merely pander to populist outrage about bankers and their bonuses. Commenting in today's FT, the chief executive of one investment bank said Sir David had caved into populist demands: 'What purpose does this actually serve… it is fundamentally wrong to whip up this hatred of bankers?'
Sir David states that remuneration committees should worry less about whether levels of pay are too high in absolute terms, but rather whether employees are encouraged by bonus schemes to take actions that are not aligned to the long-term interests of shareholders. On the risk monitoring front, Sir David wants bank boards to set up a committee (separate from the audit committee) chaired by a non-executive director, to ensure that boards do not run amok. However one banker in today's FT argues that this will not be effective: 'Risks should be managed by non-executives hour to hour, not by non-executives month to month,' he said. The British Bankers Association, the Association of British Insurers and the Institute of Directors welcomed the vast majority of Sir David's recommendations, although the IMA said the regulator should not get involved in deciding the best way to manage money.
Arguably the main aim of Sir David's report is to change the culture of governance rather than the rules; he summed it up as an attempt to make the board 'a less cosy, comfortable place'. Indeed if these proposals eventually come into force it has been suggested that the UK is destined to have the toughest standards in the world…
EV
Thursday, July 16, 2009
Parental home is where the heart is - for 40% of young adults
Yesterday's unemployment figures made grim reading, especially for young adults, one in five of whom are looking for jobs. A recent survey revealed a growing generation of "little SHIDs" ('Still at Home and In Debt'), with as many as 40% of 18-35 year olds either still living with their parents, or considering moving back home as a result of debt.
But is this surprising? With the increase in competition for graduate jobs, the pressure to keep up with mortgage and rental payments, the burden of debt repayment, coupled with a nagging feeling that they should be saving for the future, no wonder many young adults are finding themselves in this predicament.
The Government recently revealed that it is considering dropping tuition fees for students who stay at home to study, in return for waiving their rights to grants and loans. While this is presumably supposed to address the issue of increasing debt, one can't help but think that by shifting the financial responsibility to the parents of these university students, the next generation is not going to learn how to adequately plan for their future. Education is key, and both Government and the financial services industry have a responsibility to help people understand the importance of providing for the future.
ELS
But is this surprising? With the increase in competition for graduate jobs, the pressure to keep up with mortgage and rental payments, the burden of debt repayment, coupled with a nagging feeling that they should be saving for the future, no wonder many young adults are finding themselves in this predicament.
The Government recently revealed that it is considering dropping tuition fees for students who stay at home to study, in return for waiving their rights to grants and loans. While this is presumably supposed to address the issue of increasing debt, one can't help but think that by shifting the financial responsibility to the parents of these university students, the next generation is not going to learn how to adequately plan for their future. Education is key, and both Government and the financial services industry have a responsibility to help people understand the importance of providing for the future.
ELS
Super-Calpers-go-ballistic-Ratings-are-atrocious
Who rates the raters? Perhaps the state of California if Calpers has anything to do with proceedings. The largest public pension scheme in the US is suing the big three credit rating agencies for awarding AAA grades to securities that suffered enormous subprime losses. Suffice to say, given the size and power of the scheme – it manages a massive $173 billion of pensions after all – when Calpers sneezes, the world pays attention.
The suit filed against Moody's, Fitch and Standard & Poor's at the Superior Court in San Francisco, could be a watershed moment. The raters, although bloodied and their reputation in tatters, have at least managed to prevail against similar legal challenges before. However, they may meet their match squaring up against the pension giant famous for its shareholder activism.
The Calpers lawsuit alleges that "wildly inaccurate" Triple-A ratings of structured investment vehicles (SIVs) contributed to losses of over $1 billion. Nothing particularly new here, but what's interesting is their allegation that the rating agencies not only rated the SIVs, but also the securities that the vehicles purchased, to the extent that they provided guidance to the banks on what they needed to do to obtain the crucial AAA ratings. Here lies the rub, as Calpers' objection goes to the heart of the debate around the shadowy relationship between the financial engineers and those who rate their products.
Conflicts of interest is a phrase never far from the table as Calpers contends the SIV rating fees, which it says range from $300,000 to $1 million per deal, were reliant upon the successful sale of SIV securities. It doesn't take Columbo to read the subtext suggesting that there were arguably one million different reasons why the agencies would do everything in their power to ensure SIVs got top ratings. Dwight Cass of breakingviews adds an important note: "If they assisted in structuring the SIVs, that undermines the raters' assertion that their ratings constitute opinions worthy of the same First Amendment protections afforded journalists." Fitch's then-general counsel told lawmakers investigating the Enron debacle that a rating was 'the world's shortest editorial'. That pretence doesn't hold up when you're commenting on something you designed yourself."
The case highlights just how reliant investors are upon ratings agencies for their investment decisions, even highly sophisticated ones like Calpers. Worryingly, Calpers also claim that they didn't receive enough information from the SIVs or the raters to adequately understand the vehicles. Well, surely if you don't understand a product then you shouldn't really invest in it? Caveat emptor anyone? That said, Triple-A ratings are supposed to be as safe as houses – sorry, poor choice of words given subprime.
Ultimately, the entire financial services industry must take its share of the blame for the situation we find ourselves in – from asset managers, investors, and banks right through to the risk profession itself. The ratings agencies are easy scapegoats (incredibly easy, I'll give you that) and whilst concerns about their operation and conflicts of interest might be quite correct, it was not they alone that failed to spot the looming spectre of subprime. It's ironic that at a time where liquidity is in such short supply (unless you're Goldman Sachs of course), everyone has been so quick to pass the buck.
JS
The suit filed against Moody's, Fitch and Standard & Poor's at the Superior Court in San Francisco, could be a watershed moment. The raters, although bloodied and their reputation in tatters, have at least managed to prevail against similar legal challenges before. However, they may meet their match squaring up against the pension giant famous for its shareholder activism.
The Calpers lawsuit alleges that "wildly inaccurate" Triple-A ratings of structured investment vehicles (SIVs) contributed to losses of over $1 billion. Nothing particularly new here, but what's interesting is their allegation that the rating agencies not only rated the SIVs, but also the securities that the vehicles purchased, to the extent that they provided guidance to the banks on what they needed to do to obtain the crucial AAA ratings. Here lies the rub, as Calpers' objection goes to the heart of the debate around the shadowy relationship between the financial engineers and those who rate their products.
Conflicts of interest is a phrase never far from the table as Calpers contends the SIV rating fees, which it says range from $300,000 to $1 million per deal, were reliant upon the successful sale of SIV securities. It doesn't take Columbo to read the subtext suggesting that there were arguably one million different reasons why the agencies would do everything in their power to ensure SIVs got top ratings. Dwight Cass of breakingviews adds an important note: "If they assisted in structuring the SIVs, that undermines the raters' assertion that their ratings constitute opinions worthy of the same First Amendment protections afforded journalists." Fitch's then-general counsel told lawmakers investigating the Enron debacle that a rating was 'the world's shortest editorial'. That pretence doesn't hold up when you're commenting on something you designed yourself."
The case highlights just how reliant investors are upon ratings agencies for their investment decisions, even highly sophisticated ones like Calpers. Worryingly, Calpers also claim that they didn't receive enough information from the SIVs or the raters to adequately understand the vehicles. Well, surely if you don't understand a product then you shouldn't really invest in it? Caveat emptor anyone? That said, Triple-A ratings are supposed to be as safe as houses – sorry, poor choice of words given subprime.
Ultimately, the entire financial services industry must take its share of the blame for the situation we find ourselves in – from asset managers, investors, and banks right through to the risk profession itself. The ratings agencies are easy scapegoats (incredibly easy, I'll give you that) and whilst concerns about their operation and conflicts of interest might be quite correct, it was not they alone that failed to spot the looming spectre of subprime. It's ironic that at a time where liquidity is in such short supply (unless you're Goldman Sachs of course), everyone has been so quick to pass the buck.
JS
Wednesday, July 15, 2009
Eeeh. Quality.
Harriet Harman's latest initiative to outlaw discrimination against northerners is timely. Not because its' a good idea (it isn't), but because in these difficult times it brings some much-needed hilarity to national political debate.
I always assumed the Arts Council's failure to appoint me Chairman (sorry, Chairperson) was due to some kind of administrative oversight, so it tickles me to discover that it could actually all be down to the fact that I'm from Sheffield.
Equally cheering is this news, reported by the excellent Daily Mash. At last, some long overdue recognition for we downtrodden millions from north of the Trent.
Whatever else you may think of Ms Harman, you've got to admit she's doing her bit to put a smile back on the face of Britain.
AF
I always assumed the Arts Council's failure to appoint me Chairman (sorry, Chairperson) was due to some kind of administrative oversight, so it tickles me to discover that it could actually all be down to the fact that I'm from Sheffield.
Equally cheering is this news, reported by the excellent Daily Mash. At last, some long overdue recognition for we downtrodden millions from north of the Trent.
Whatever else you may think of Ms Harman, you've got to admit she's doing her bit to put a smile back on the face of Britain.
AF
Pensions: Innovate or die
Following yesterday's RSA Insurance Group deal with Goldman Sachs, it is evident that the pensions buyout market is back. Gone are the lacklustre days in which pension schemes shrank from the high costs associated with such deals: clearly there is money to be made by pensions buyout giants, such as Rothesay Life and Paternoster, and appetite from schemes as well. As Paul Trickett of Watson Wyatt said in today's FT: now that a few large funds have made the move, others are sure to follow.
As non-stop national press coverage makes clear, widening funding deficits, rising costs and increasing longevity make final salary pensions look more and more unsustainable. With an ever increasing number of DB scheme closures, it is clear that employers will do anything to get those pesky pensions liabilities off their balance sheets once and for all. Usually something has to give in such an arrangement: trustees and members are sacrificed for the greater good of the corporate giant. But in RSA's deal, trustees will maintain control of how the scheme's assets are invested. There is no disenfranchisement here: ownership and responsibility still rests with the trustees, while the corporate balance sheet is protected, at minimal costs. As Dow Jones points out, the reduction of the schemes' exposure to longevity, inflation and interest-rate risk and the high degree of security for the schemes are also key selling points of the deal.
Does this mean that the death of final salary pensions is not quite as near as we all had feared? Is there actually a wealth of options out there for pension schemes to pursue, perfectly designed and tailored to them? The Guardian brings us back to reality, reminding us that RSA has already closed its final salary scheme to new members and shifted current employees to a career average scheme. The pure DB pension scheme open to all members has one foot in the grave and is a thing of the past.
What insight does this deal leave us with, then? Surely it proves that in today's climate, pension schemes must innovate to survive at all, given the many economic, market and demographic woes it has to grapple with. RSA was smart enough to realise it needed something tailor-made to suit them—a simple buyout would not be sufficient. Many luminaries have cautioned that only the best fund managers will survive this crisis, citing Darwin's well-known thesis. Perhaps this should be extended to pension schemes as well—only those willing to innovate and re-invent themselves will endure.
CMM
As non-stop national press coverage makes clear, widening funding deficits, rising costs and increasing longevity make final salary pensions look more and more unsustainable. With an ever increasing number of DB scheme closures, it is clear that employers will do anything to get those pesky pensions liabilities off their balance sheets once and for all. Usually something has to give in such an arrangement: trustees and members are sacrificed for the greater good of the corporate giant. But in RSA's deal, trustees will maintain control of how the scheme's assets are invested. There is no disenfranchisement here: ownership and responsibility still rests with the trustees, while the corporate balance sheet is protected, at minimal costs. As Dow Jones points out, the reduction of the schemes' exposure to longevity, inflation and interest-rate risk and the high degree of security for the schemes are also key selling points of the deal.
Does this mean that the death of final salary pensions is not quite as near as we all had feared? Is there actually a wealth of options out there for pension schemes to pursue, perfectly designed and tailored to them? The Guardian brings us back to reality, reminding us that RSA has already closed its final salary scheme to new members and shifted current employees to a career average scheme. The pure DB pension scheme open to all members has one foot in the grave and is a thing of the past.
What insight does this deal leave us with, then? Surely it proves that in today's climate, pension schemes must innovate to survive at all, given the many economic, market and demographic woes it has to grapple with. RSA was smart enough to realise it needed something tailor-made to suit them—a simple buyout would not be sufficient. Many luminaries have cautioned that only the best fund managers will survive this crisis, citing Darwin's well-known thesis. Perhaps this should be extended to pension schemes as well—only those willing to innovate and re-invent themselves will endure.
CMM
Wednesday, July 8, 2009
The Ironic Chancellor
Alistair Darling sets out the Government's latest ideas on bank regulation today, so will no doubt be all over the media for the next few hours.
The Chancellor always gives the impression of being a rather reluctant media figure. The furore around his interview with the Guardian last August probably didn't help. In a wide-ranging profile by Decca Aitkenhead, Mr Darling described the economic times as the worst for 60 years, attracting a barrage of criticism. But he turned out to be pretty much on the mark.
As an editorial in the same paper a couple of days later pointed out, the full Aitkenhead interview gave an insight into "a politician of unusual integrity, dry humour, and sober intelligence". Having worked with Mr Darling when he was Secretary of State for Social Security, I can only endorse that view. And whenever I speak to colleagues from that time, we all seem to agree that we find ourselves defending the Chancellor in similar terms whenever his name crops up amidst the current crisis. He is, we generally agree, a "top bloke".
So it was interesting to read these comments in Sunday's Observer from Matthew D'Ancona – not, one would have thought, instinctively a fan.
AF
The Chancellor always gives the impression of being a rather reluctant media figure. The furore around his interview with the Guardian last August probably didn't help. In a wide-ranging profile by Decca Aitkenhead, Mr Darling described the economic times as the worst for 60 years, attracting a barrage of criticism. But he turned out to be pretty much on the mark.
As an editorial in the same paper a couple of days later pointed out, the full Aitkenhead interview gave an insight into "a politician of unusual integrity, dry humour, and sober intelligence". Having worked with Mr Darling when he was Secretary of State for Social Security, I can only endorse that view. And whenever I speak to colleagues from that time, we all seem to agree that we find ourselves defending the Chancellor in similar terms whenever his name crops up amidst the current crisis. He is, we generally agree, a "top bloke".
So it was interesting to read these comments in Sunday's Observer from Matthew D'Ancona – not, one would have thought, instinctively a fan.
AF
Neither a borrower nor lender be?
With the first day of the Ashes upon us, perhaps it's appropriate to begin with a cricketing analogy: the capital markets are like England fast-bowler Steve Harmison. No I don't mean that they're a lanky, Durham cricketer who continually fails to live up to his potential, but rather in the sense that they feed off confidence. With it, they both fly; without it, nothing functions properly. Investors, governments, corporates, regulators and all the other assortment of bodies that make up the financial market, are ultimately at the whim of something completely intangible – sentiment.
For people that spend most of their lives thinking in acronyms – NAV, LIBOR, EBITA, AUM – capital market participants can behave just like the rest of us and follow the herd rather than logic. For reasons that require no explanation, these players have generally been crestfallen, sometimes suicidal or simply lacking confidence for quite some time now. With that in mind, perhaps the rain that stopped play of late has abated, and everyone is ready to take the field again. Well, this would certainly be the impression if we look at the thorny subject of securitisation. There have been a number of editorial pieces this week suggesting that this art is showing signs of life.
How things change – just a few months ago for any banker to put his head above the parapet and proclaim the case for securitisation would have been castigated, such was the climate of hostility against the practise. Now we have both Goldman Sachs and Barclays Capital in the Financial Times discussing their new structural innovations – dubbed "insurance" and "smarter securitisation" respectively. However, it's important not to get ahead of ourselves, ultimately the markets for securitised loans are still very much frozen. That said, the "rocket scientists" who designed these complex instruments have not just been twiddling their thumbs. Financial engineering is alive.
The freeze in the securitisation markets has caused a dramatic shortage of lending power – $8,700bn of assets are currently funded by securitisation after all. Banks cannot possibly plug this gap with traditional lending, such is the regulatory pressure they're under to improve capital ratios. Some have suggested that this might be an opportune moment to bring back the bundling of loans into tradable securities. Many banks are petrified about lending, or constrained by their government owners and overseers to de-leverage their balance sheets. As George Hay of breakingviews explains: "If strong institutions can be found to take on the unwanted loans, everyone could be better off."
Despite the attempts to kick-start the securitisation markets, it doesn't look like we'll see a return of the incredibly complicated CDO squareds, CDO cubeds and the like anytime soon. These structures have been so discredited and investors so wary of them that they've become persona non grata. Even during the worst of the financial crisis, equities were always traded – unlike the highly complicated structured products which people wouldn't touch with a barge-pole. The CDO or CLO market dried up, even if they were fairly 'sound' – as market confidence dissipated, they simply became untradeable.
As the wheels of securitisation slowly start to move, regulators should (and will) keep a watchful eye on the process. Securitisation should theoretically help keep the financial system balanced by making it easier for banks to manage their balance sheets. However, in practise it became a tool for banks to hide leverage, moving the securitised loans off their balance sheets and into those infamous structured investment vehicles.
Risk and regulation are aspects of the new financial order that nobody can deny. It's become a matter of political expediency as well as economic necessity. Although not every attempt to regulate will pass through, I think we all know that financial institutions are going to face more regulation and supervision rather than less. Investors will also demand far more transparency. While it was okay to push on without question while the going was good and returns delivered, the world is just not like that anymore.
The interest of parties must be more closely aligned and this is why the European Commission is demanding that rating agencies and bankers disclose more information about deals. As the FT reports, banks may well face calls to keep 5 per cent of any securitised bonds that they arrange, so they have enough "skin in the game" to monitor credit risks properly. The direct link between borrowers and lenders must be preserved if this market is to stand any chance of real recovery. Accountability, transparency and good governance are going to be bywords going forward.
The Guardian's Elena Moya contends that Goldman Sachs's and BarCap's securitisation initiatives represent a "sign that the City is returning to pre-credit crunch levels of confidence." That may well be overstating the case, as the market is still far from out of the woods, but it's telling that a practise so criticised for triggering the financial crisis is taking a few tentative steps into the open. Perhaps the rain has stopped and the players are now looking to take guard. They'll need to play with a straight bat though.
JS
For people that spend most of their lives thinking in acronyms – NAV, LIBOR, EBITA, AUM – capital market participants can behave just like the rest of us and follow the herd rather than logic. For reasons that require no explanation, these players have generally been crestfallen, sometimes suicidal or simply lacking confidence for quite some time now. With that in mind, perhaps the rain that stopped play of late has abated, and everyone is ready to take the field again. Well, this would certainly be the impression if we look at the thorny subject of securitisation. There have been a number of editorial pieces this week suggesting that this art is showing signs of life.
How things change – just a few months ago for any banker to put his head above the parapet and proclaim the case for securitisation would have been castigated, such was the climate of hostility against the practise. Now we have both Goldman Sachs and Barclays Capital in the Financial Times discussing their new structural innovations – dubbed "insurance" and "smarter securitisation" respectively. However, it's important not to get ahead of ourselves, ultimately the markets for securitised loans are still very much frozen. That said, the "rocket scientists" who designed these complex instruments have not just been twiddling their thumbs. Financial engineering is alive.
The freeze in the securitisation markets has caused a dramatic shortage of lending power – $8,700bn of assets are currently funded by securitisation after all. Banks cannot possibly plug this gap with traditional lending, such is the regulatory pressure they're under to improve capital ratios. Some have suggested that this might be an opportune moment to bring back the bundling of loans into tradable securities. Many banks are petrified about lending, or constrained by their government owners and overseers to de-leverage their balance sheets. As George Hay of breakingviews explains: "If strong institutions can be found to take on the unwanted loans, everyone could be better off."
Despite the attempts to kick-start the securitisation markets, it doesn't look like we'll see a return of the incredibly complicated CDO squareds, CDO cubeds and the like anytime soon. These structures have been so discredited and investors so wary of them that they've become persona non grata. Even during the worst of the financial crisis, equities were always traded – unlike the highly complicated structured products which people wouldn't touch with a barge-pole. The CDO or CLO market dried up, even if they were fairly 'sound' – as market confidence dissipated, they simply became untradeable.
As the wheels of securitisation slowly start to move, regulators should (and will) keep a watchful eye on the process. Securitisation should theoretically help keep the financial system balanced by making it easier for banks to manage their balance sheets. However, in practise it became a tool for banks to hide leverage, moving the securitised loans off their balance sheets and into those infamous structured investment vehicles.
Risk and regulation are aspects of the new financial order that nobody can deny. It's become a matter of political expediency as well as economic necessity. Although not every attempt to regulate will pass through, I think we all know that financial institutions are going to face more regulation and supervision rather than less. Investors will also demand far more transparency. While it was okay to push on without question while the going was good and returns delivered, the world is just not like that anymore.
The interest of parties must be more closely aligned and this is why the European Commission is demanding that rating agencies and bankers disclose more information about deals. As the FT reports, banks may well face calls to keep 5 per cent of any securitised bonds that they arrange, so they have enough "skin in the game" to monitor credit risks properly. The direct link between borrowers and lenders must be preserved if this market is to stand any chance of real recovery. Accountability, transparency and good governance are going to be bywords going forward.
The Guardian's Elena Moya contends that Goldman Sachs's and BarCap's securitisation initiatives represent a "sign that the City is returning to pre-credit crunch levels of confidence." That may well be overstating the case, as the market is still far from out of the woods, but it's telling that a practise so criticised for triggering the financial crisis is taking a few tentative steps into the open. Perhaps the rain has stopped and the players are now looking to take guard. They'll need to play with a straight bat though.
JS
Wednesday, July 1, 2009
Crime of the century (and a half)
I have been somewhat shocked by the recent Madoff ruling on two fronts. Firstly, according to some sources the average incarceration for murder convictions in the US is around 22 years. Are we saying that Madoff's behaviour is seven times as evil? And secondly, does the US really need to pass ridiculously long sentences that don't even reflect reality (do many 71 year old men live another 150 years?......Yes quite).
By no means am I saying that Madoff doesn't deserve to be punished for his crimes. He has ruined the lives of many people who had faith in his investment strategies and who had trusted him with their life savings. But to put him in the same or worse bracket as a murderer is disproportionate to his crime.
The US courts are fond of handing out harsh sentences and Madoff's sentence is not the longest for a white collar criminal. This was awarded to Sholam_Weiss who was sentenced in Feb 2000 to 845 years in prison for his plot to defraud an insurance company costing many of its 25,000 customers their life savings. Does that not seem a little extreme? Clearly there is no chance in hell these men will get out of jail alive. It's one thing to advocate life to mean life for murder sentences, but shouldn't the same apply for financial crimes?
LL
By no means am I saying that Madoff doesn't deserve to be punished for his crimes. He has ruined the lives of many people who had faith in his investment strategies and who had trusted him with their life savings. But to put him in the same or worse bracket as a murderer is disproportionate to his crime.
The US courts are fond of handing out harsh sentences and Madoff's sentence is not the longest for a white collar criminal. This was awarded to Sholam_Weiss who was sentenced in Feb 2000 to 845 years in prison for his plot to defraud an insurance company costing many of its 25,000 customers their life savings. Does that not seem a little extreme? Clearly there is no chance in hell these men will get out of jail alive. It's one thing to advocate life to mean life for murder sentences, but shouldn't the same apply for financial crimes?
LL
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