The Financial Services Club's Blog

The Finanser's Week: 29th June - 5th July 2009

Here are our key stories of the week: 

• PSD and SEPA research
• Cracking ATMs with Malware
• Why are we so worried about bonuses? 
• Banking in 1509 ... the same, but different
• Zopa - love it or loathe it?
• Deutsche Bank accused of 'spying'
• Play on my Piano

PSD and SEPA research

In preparation for this year’s SIBOS, the Financial Services Club is launching a major PSD and SEPA survey of payments professionals vies of SEPA and the PSD.  The aim of the research survey is to provide an in-depth analysis, comparison and contrast of the country-level transpositions of the PSD and implementations of SEPA.  In order to participate in the survey, which should take you less than ten minutes, just click here. 

Cracking ATMs with Malware

ATM fraud is now running at €484 million a year across Europe, according to the European ATM Security Team (EAST).  It is no wonder that this is the case when Russian criminals can find a way to install simple malware on a Windows-based ATM so that it spits out all the PINs and Card Numbers of the ATM users.

Why are we so worried about bonuses?

I got caught up in a debate about pay and remuneration in finance this week.   This is because Stephen Hester at RBS had his package hiked to £9.6 million if he delivers all of his targets – of which the main target appears to be achieving a 70 pence share price as that will make UK plc a profit of about £8 billion – whilst Citibank and others are increasing basic remuneration and lowering bonuses to keep staff.  Now I find it interesting that folks believe pay caps, bonus cuts and other changes – such as shareholders setting executive packages – is a viable, appropriate or good thing to do.  It's not.

Banking in 1509 ... the same, but different

Half a century ago, Europe was in a state of flux and the Papal battles were rife.  Rome was ruled by the Borgias, and nothing was stable or sacred.  Then a banker appeared on the scene.  A banker who funded the Pope, Kings and Princes.  This banker became the most powerful and wealthy man in Europe ... in the world.  And, you know what?  He was just like Fred Goodwin or Richard Fuld ... with one crucial difference.

Zopa - love it or loathe it?

I’m often asked about Zopa’s business model and website Lovemoney have kindly made a video explaining what they’re all about and how they work. At the end, they ask whether you should love or loathe Zopa … you’ll have to watch the video to find out the answer to that one.

Deutsche Bank accused of 'spying'

Over the last month, Deutsche Bank has parted ways with their security chief and found themselves in deep schtook with the media and regulators.  It all began with a report in Handlesblatt on 27th May that “high-level employees of the bank were being spied upon.  This  allegedly included Hermann-Josef Lamberti, DB board member responsible for day-to-day business and the head of risk management Hugo Baenziger.”

Play on my Piano

Our esteemed but eccentric Mayor of London, Boris Johnston, recently had the bright idea of placing pianos around London to cheer up all of us credit-crunched citizens. I first encountered one outside the Gherkin last week.  It's a bit of a shame about where they've placed it, as no-one seems to want to play it.  Must be being in the City as we're all known to be miserable, sour-faced scrooges in this part of the world as demonstrated ...

And the biggest news stories of the week include:

Britain's banks are on life support, says Miles  (Independent)
Probe launched after rogue trader costs City oil broker $10m  (Guardian)
Kroes sees Lloyds and RBS asset sales (Financial Times)
How the ECB’s fig leaf has completely withered away (Times)
Madoff given maximum sentence - 150 years in jail  (Times)
China's banks are an accident waiting to happen to every one of us  (Telegraph)
China Limits Use of ‘Virtual’ Currency (New York Times)
It's a stretch to blame hedge funds for banks' collapse (Financial Times)

For stories by date, click on the dates below:

• 4th July 2009
• 3rd July 2009
• 2nd July 2009
• 1st July 2009
• 30th June 2009
• 29th June 2009

  

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Things worth reading: 4th July 2009

Things we're reading today include ...

Today's must read:
It's July 4th and America is celebrating 233 years of not being British ... to recognise this annual jamboree, along with previous discussions of the founding of America and the role of Alexander Hamilton in the creation of the First Bank of America, I thought a little history was worth quoting from the Encylopedia Britannica (another old antique that has been superseded by Wikipedia):

"The most significant result of Burgoyne’s capitulation was the entrance of France into the war. The French had secretly furnished financial and material aid since 1776. Now they prepared fleets and armies, although they did not formally declare war until June 1778."

Vive la resistance et pour toute l'armée britannique: "vous êtes une pomme de terre avec le visage d'un cochon d'inde.  Brûlez dans l'enfer."

Meanwhile, on more serious matters:

Bankers who return to excessive ways will be 'brought back to earth', warns Alistair Darling  (Telegraph)
Britain's banks are on life support, says Miles  (Independent)

And finally, Germans see the funny side of Mrs Merkel  (Independent)
EU call to boost use of OTC central clearing (Financial Times)

Drumbeat of Defaults Gets Louder (New York Times)
Today's financial and foreign-affairs disasters are closely linked, and the solutions should be too (South China Morning Post)

Billions stolen in online robbery (BBC)

"Pioneer Bank" and "Future Bank" by Bill Taylor on the Wells Fargo Blog  (Times)
Time capsule: ‘Bank of the Future’ from 1973 (Financial Brand)

 

Quote of the Day:
Remembering the Future Bank, Jo McNearney reflected: "Our opinion of it at the time was that no way would this sort of banking ever exist. Boy, were we wrong." Wells Fargo Blog

  

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Deutsche Bank accused of 'spying'

I know that some news goes under the radar but when it's major news - like the ATM malware issues mentioned earlier this week - then it is worth highlighting, and here's another one that creeped out a month ago and only just caught my eye. 

This is that Deutsche Bank has been found out to have been spying.

It began in the German paper Handlesblatt on 27th May:

“Aufsichtsratsmitglieder, Kunden und Journalisten sollen jedoch nicht ausgespäht worden sein. Im Visier standen dagegen hochrangige Mitarbeiter des Konzerns. Darunter soll sich auch der für das Tagesgeschäft verantwortliche Vorstand Hermann-Josef Lamberti befunden haben. Möglicherweise soll auch der für die Konzernsicherheit zuständige Risiko-Vorstand Hugo Bänziger betroffen sein.” 

Which I am told translates into:

“Supposedly, members of the advisory board, bank clients and journalists were not targets of the spying. On the other hand, high-level employees of the bank were being spied upon.  This allegedly included Hermann-Josef Lamberti, DB board member responsible for day-to-day business and the head of risk management Hugo Baenziger.”

Wrong, it did include more than just a few employees according to a report in the Deutsche Welle:

“The news agency Reuters says unnamed sources have confirmed reports ... that Deutsche Bank had spied not only on its employees but also on people outside the bank. The paper said the bulk of the spying allegedly took place in 2006. However it is unclear what kind of data the institution's security department had gathered.”

The initial news was followed two days later by a report that: “Deutsche Bank spied on shareholders critical of the bank’s management, the spouse of one of the company’s directors and workers’ representatives.”

Bloomberg followed up on this report on 16th June:

“ 'Deutsche Bank supplied a nine-page statement', Gerhard Mueller, a spokesman for the regional council in Darmstadt, which handles data protection issues in the state of Hesse, said today by telephone. 'We will now read, examine and evaluate the report. We can’t say how long that’ll take.'

“The Frankfurt-based company faces a probe by the country’s financial regulator, BaFin, into possible violations the company uncovered in its corporate security department. Deutsche Bank hired a law firm to carry out an independent investigation into possible violations in 'past years', the bank said May 22.

“Deutsche Bank said yesterday it was fully cooperating with authorities and will take all necessary measures once the probe is completed. Mueller, the bank and BaFin declined to disclose further information about the investigation.”

We are all now waiting to see what happens next ... keep an eye out (and check your room for bugs too!).

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Things worth reading: 3rd July 2009

Things we're reading today include ...

RBS chief tries to defuse concern over pay  (Times)
FSA to add two new divisions in 'radical' overhaul, says chief executive Hector Sants  (Telegraph)
Probe launched after rogue trader costs City oil broker $10m  (Guardian)

Open warfare between Rolling Stone and Goldman Sachs  (Times)
Goldman Sachs bankers in line for record bonuses  (Telegraph)

US bank buy-outs get tougher  (Financial Times)

Banking system like South Sea bubble, says senior Bank of England official  (Guardian)
Walker to seek boost for bank risk monitors  (Times)

ING wants Twitter users to rail against bank fees (CBC New Canada)
Worldwide, Russians Spend Most Time On Social Networks (comScore) (Techcrunch)

Quote of the Day:

Goldman Sachs has “engineered every major market manipulation since the Great Depression — and they’re about to do it again”, Matt Taibbi, Rolling Stone

  

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Banking in 1509 ... the same, but different

So here I am in Rome, Italy (not to be confused with the ‘micropolitan’ city of Rome, Georgia or Rome, NY in the USA of course).

Rome, the ancient City, the City of the Empire, the Borgias, the lust and the life of Europe, the foundation of the Modern World ... need I go on?

As Orson Welles said so famously in the Graham Greene film, the Third Man:

"In Italy, for thirty years under the Borgias, they had warfare, terror, murder, bloodshed — they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, they had brotherly love, they had five hundred years of democracy and peace, and what did that produce ... the cuckoo clock."

One should note of ocurse that the Swiss did not produce the cuckoo clock - zat was a German - but that’s the movies for you.

And no offence to the Swiss of course. After all, they did invent Rayon, Velcro and cellophane.

Anyways, that’s not the point.

The point is Rome.

I’m here for a Remittances Conference which will be the focus of a few thoughts over the next week but, to begin with, I had a chance to tour this City which gave its name to Rome’s ants, sorry, Romance.

Oh yes, la dolce vita and all that.

But not so five hundred years ago, when the Papal hold on Europe was in the balance and war and politics was rife.

Back then, a man was born in Siena in 1466.

This man became the most wealthy and powerful man in Rome, in Italy, in Europe, in the World.

His name was Agostino Chigi.

Sr. Chigi was the son of a banker and friend of the Popes.

Bearing in mind the Lombardi’s, Borgia’s, merchants and dealers in the Venice, Rome, Sienna and Florence invented modern day banking, this was the time that shaped today’s civilisations and commerce.

Anyway, Sr. Chigi and his dad helped Pope Alexander VI to strengthen his Empire with financing and, after his death, also helped his eventual successor Pope Julius II. In fact, Agostino financed Julius’s election campaign and he was rewarded by the new Pope by becoming the official banker, treasurer and notary for the Papal Empire.

Result?

Agostino went from strength to strength, at one time employing around 20,000 staff and covering a power base that reached across all of Europe.

Why am I telling you all this?

Because I like history lessons?

Because I’m in Rome?

Yes, but more to do with the fact that nothing has changed.

For example, bankers were disliked because they controlled money supply, and were wrapped up in the internecine plans of politicians and policymakers.

This has been true since time immemorial, and is still true today.

Even more notable with Agosinto however is that, in order to keep up his reputation of being the richest man in the world, he used to have lavish dinner parties for high ranking guests in his beautiful and large mansion, the Villa Farnesina (which I toured on Tuesday), overlooking the Tiber.

At the end of each meal, he ordered his servants to throw the silver cutlery and dishes used by the guests into the River Tober!

Yes, he would be thinking, I am that rich and powerful that this silver means nothing to me.

For the guests, it would have been the equivalent of throwing their annual earnings or life savings in the river.

Imagine, if you will therefore, Sir Fred Goodwin or Richard Fuld having you around for dinner and, at the end of the evening, lighting up a fire full of £50 or $100 bills.

That’s what Agostino was doing.

Your entire wealth burned or thrown into a river as you watch, just to show how rich they are.

Ah, how times haven’t changed.

Anyways, I’m now off to see the Pope’s Chapel. Apparently, you can almost feel the Hand of God in there ...

p.s. unlike Sir Fred and Richard Fuld, Agostino secretly had a deal with some monks who, in exchange for alms, spread nets beneath the surface of the water and each night returned the silverware to the him.  How wonderful ... but darnit, those notes are just burnt to cinders?.

  

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Things worth reading: 2nd July 2009

Things we're reading today include ...

Tesco linked to early sale of Northern Rock (Times)
Win Bischoff set to lead Lloyds Banking Group (Times)
Northern Rock losses grow by £1bn (Telegraph)
Citi raises card rates on millions (Financial Times)
Banks face a new social contract (Telegraph)

Bank Woes Deepening in Europe (New York Times)
Sweden rides to defence of hedge funds (Financial Times)
Chinese bloggers hail Green Dam ‘victory’ (Financial Times)
US private sector sheds 473,000 jobs (Financial Times)

A Global Approach to Financial Risk (New York Times)

Quote of the Day:

"The aim is to have sound regulation and not to kill the industry." Mats Odell, Sweden’s financial markets minister

  

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PSD and SEPA research

It’s July 1st and we are pleased to announce that, during the summer, the Financial Services Club is running an in-depth analysis and research project about the country-level plans for the transposition of the Payment Services Directive (PSD) on 1st November 2009 and the implementation of SEPA Direct Debits (SDD) on 2nd November.

The research will be released the week before SIBOS in Hong Kong in September and, as part of this, we have an online 25 question survey which all readers of the Finanser are invited to complete.

If you participate in the survey you will automatically receive a copy of the final research report in September and, for those who enter their email address, three winners will get a copy of the book: “the Future of Finance after SEPA” and one lucky person will be given an honorarium to the Financial Services Club to be able to attend any of our meetings in the future for free!

Now there’s an offer you can’t refuse.

If you would like to participate, then just complete our survey, which should take you less than ten minutes, by clicking here.

  

The Finanser is sponsored by Vocalink and Cisco:

For details of sponsorship email us.

Zopa - love it or loathe it?

I’m often asked about Zopa’s business model and website Lovemoney have kindly made a video explaining what they’re all about and how they work.

At the end, they ask whether you should love or loathe Zopa … you’ll have to watch the video to find out the answer to that one.

Although the video is a bit naff, the comments area is interesting with MissingOz saying that: “Zopa is great, I've been using it for 2 years now ... Ironically, now I know how banks feel when faced with lending.”

Oh to be a banker, and take real risks with your money.

And Max878 (what happened to the other 877 Max’s?) says: “I'm a Zopa lender. Yes, it's a strong product. However, please bear in mind that the historical returns of over 8% are simply not realistically achievable. At the moment, you are not likely to be lending to A* borrowers at much over 7.5% if that. Zopa will take 1% of that in fees (not unreasonable bearing in mind that they carry out stringent checks on potential borrowers). Many lenders, myself included, believe that default rates are edging close to 1.5% - 2% at the moment, and it's not likely to improve in the near future. And you will of course be taxed on the interest that your investment earns.”

It’s not all fun and games in the world of borrowing and investing, is it?

Mind you, my favourite comment would have to be Olipro’s, who reckons the presenter “talks in a tone that reminds me of the informational videos they show to children in school.”

So, if Jack lends Jill one dollar and wants Jill to pay it back very quickly, Jack charges Jill more to borrow that dollar than he charges Mary ... but Mary is better looking so that’s why.

Sorry, having a non-PC moment ... but then I am in Italy this week, home of Silvio Berlusconi, so I can be forgiven can’t I?

More about Rome later in the week as it’s mixing business and pleasure.

Meanwhile, if you want to know more about Zopa and other social financial services, I’m running a one-hour webinar detailing all about this, Twitter, Facebook finance and more on Monday 6th July from 17:00 GMT (12:00 EDT, 18:00 CET) for an hour.

This follows on from our other successful webinars of recent times, and you can register to attend by clicking here.

The Finanser is sponsored by Vocalink and Cisco:
 
For details of sponsorship email us.

Things worth reading: 1st July 2009

Things we're reading today include ...

Today's must read: China Limits Use of ‘Virtual’ Currency (New York Times)

"China issued regulations made public Tuesday aimed at cracking down on the use of virtual currencies amid worries that a huge underground economy was developing out of the country’s online gaming community. The rules, issued jointly by the Ministry of Commerce and the Ministry of Culture in Beijing, could deal a blow to the country’s fast-growing online gaming industry.

"Beijing said the regulations would curtail trading in virtual currencies, prevent online gambling and restrict virtual currency from being exchanged for cash or used to buy real-world goods.

"Among other things, Chinese officials have worried that online currencies could ultimately serve as an alternative to China’s official currency, the renminbi, and have an impact on the country’s financial system."

UK:

UK economy shrinks at fastest rate for 50 years (Times)
Probably the worst three months for the economy since the 1920s (Telegraph Blog)
Bank deputy calls for financial sector shake-up (Times)
SFO freezes $100m of UK assets in Sir Allen Stanford fraud investigation (Telegraph)
Lloyds axes 2,100 jobs to take tally to 7,000 (Times)

Europe:

Kroes sees Lloyds and RBS asset sales (Financial Times)
Eurozone inflation turns negative (Financial Times)
Eurozone economic confidence rebounds (Financial Times)

USA:

Congress Gets Plan for Financial Protection Agency (New York Times)
Despite Citi Losses, a Prince Stays Positive  (New York Times)

Technology:

Monitise Inks $13M Deal With Visa (Wall Street Journal)

Quote of the Day:

"It's not the people who vote that count, it's the people who count the vote." Daniel Finkelstein

  

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Why are we so worried about bonuses?

I got caught up in a debate about pay and remuneration in finance this week.

This is because Stephen Hester at RBS had his package hiked to £9.6 million if he delivers all of his targets – of which the main target appears to be achieving a 70 pence share price as that will make UK plc a profit of about £8 billion – whilst Citibank and others are increasing basic remuneration and lowering bonuses to keep staff.

Now I find it interesting that folks believe pay caps, bonus cuts and other changes – such as shareholders setting executive packages – is a viable, appropriate or good thing to do.

You see there are several issues here.

First, it is not the amount of pay we give to our leaders in financial services, or any other industry, it is the measures by which we reward them.

What you measure is what you get, as they say. And what you measure and reward first, is what you get first. And what you measure first and reward the most, is what you get delivered.

This is why financial services failed – because we measured and rewarded short-term profit without balance of the long-term risks being taken to get that profit.

It is equally why we will continue to get this wrong.

For example, many of us lament the fact that quarterly results and shareholder returns drives inappropriate management behaviours, and yet that is exactly how we are incentivising and focusing Mr. Hester at RBS.

This creates the issue where management almost soley focus upon delivering short-term results, with no thought for the long-term.

The idea of growing new business arenas, entering new markets, spending more on R&D, developing intellectual capital and so on and so forth, goes by the by … or bye-bye to be honest.

Who wants to invest in the future when your only measure is the next quarter’s profit and the share price?

Second, if bankers can earn double in the bank next door, why are they gonna stay in this crummy place? We all talk about the fact that bankers can’t find homes in other banks as they’re all failing right now, but that’s not true. Just look at what happened to UBS last week:

June 25 (Bloomberg) -- UBS AG sued Jefferies Group Inc., saying a “massive, premeditated raid” cost the Swiss bank at least 36 health-care investment bankers including unit chief Benjamin Lorello.

The departures, from June 17 to 21, amount to the “nearly complete lift-out” of the UBS health-care division, which ranked among the top three in the world and had $1 billion in revenue since 2005, UBS said in a June 22 petition in New York Supreme Court. UBS won a temporary court order this week barring Jefferies from recruiting employees from the group who have not already agreed to join.

Or the activities of firms such as Barclays Capital:

BarCap, which bought the Wall Street operations of the collapsed investment bank Lehman last year, is hiring in Europe and the Middle East. In the past six months it has picked up 460 people and plans to lure another 300 before the year is out. Last week it snapped up three highly regarded banks analysts from Citigroup, the biggest financial firm in the world until the credit crunch struck and left it needing to be bailed out by the US authorities. BarCap also plucked leading bankers Matthew Ponsonby from Citigroup and Mark Warham from Morgan Stanley last week to the new positions of co-head of mergers and acquisitions.

It’s a dog-eat-dog world, and if you can’t cut it then get out.

Third, the markets set their own value, just as other markets such as football do. It’s all based upon individual talent, and you have to pay to get the best talent. We didn’t hear anyone whining about Ronaldo’s £80 million move to Real Madrid or his £200,000 a week demands.

Because we can see he is worth it.

On a football field, the guy who scores the most goals deserves the highest wage. And so isn’t it true in the financial world that the guys who create the most value deserve the highest incentives and bonuses?

Finally, a healthy bank is one that is crushing unhealthy banks, as proven above. Therefore, healthy banks are only created by having healthy income from healthy investment managers who run healthy portfolios.

It’s this last point which went wrong, and it relates back to where I started.

What you measure is what you get, and what you measure and reward the most is what you get first.

Stephen Hester is being measured and rewarded on share price, and so that’s where he’ll focus. But then I immediately said that a pure share price focus is not good as it creates short-termism, and so I could challenge whether this is the right package for him.

Equally, if your investment teams can be lifted and dropped into another firm as a complete team, then you have to work out who you want to keep and why.

If UBS wanted to keep the healthcare team, then they should have recognised that:

(a) they were a healthy team, 
(b) they were being measured and rewarded based upon value creation and risk avoidance, and 
(c) they would have been rewarded based upon value creation and risk avoidance better than any package held out to them by Jefferies Group or anyone else.

And there’s the rub really.

To have a strong banking system, there has to be accountability and a tie between risk and reward.

Seems obvious now.

This means that the best banks will relate risk in the long-term to the rewards they provide in the short-term; and they will also build-in clawback terms to any bonuses paid such that if those bonuses blow-up as high profile risk and losses in the future, they get the cash back.

Meantime, the whingers who don’t like the City having big bonus bankers back in town are just jealous … I suggest they go and find a talent themselves that can pay somewhere else.

Ever tried kicking a football?

More on the arguments for and against bonuses:

City watchdog (FSA) pays £20m in bonuses (Guardian)
Tough targets set for Hester’s package (Financial Times)
Citigroup revamps pay structure (Financial Times)

Bankers deserve their bonuses (The Finanser)
Bankers deserve bonuses? You're an idiot! (The Finanser)

  

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