Fiddling at the Fire
13 September 2012
QE3 is a sign of the Fed’s policy purgatory
September 13, 2012
Dream turns to nightmare
Investment banking once delivered juicy profits. No longer
Sep 15th 2012
“THE best countercyclical indicator of the health of capital markets is when investment banks cut staff,” says a senior banker at a large American investment bank. “We always cut just before the cycle turns.” But what if the cycle doesn’t turn? An industry that once seemed to offer banks the opportunity to earn juicy returns and expand internationally is now in retreat almost everywhere.
Some of this withdrawal has been going on since the crisis—the fees paid to banks for trading in capital markets as well as for advising on takeovers and sales of shares and bonds have been falling for a few years now. But lately retreat has turned to rout. Early this month Nomura, which had made a gutsy bet on expansion when it bought the European and Asian businesses of Lehman Brothers in 2008, in effect pulled the plug on its global investment-banking business. Peers express little surprise. “Nomura was dead before it started,” says the boss of one large bank. “It was a totally ill-conceived foreign expansion.”
There are two main reasons for the sharp falls in profitability at investment banks everywhere. The first is that their clients are simply doing a lot less business with them. Income from trading bonds, currencies and commodities (an area of activity known in the industry as FICC) has fallen as slowing economies and turmoil in Europe have discouraged institutional investors from trading and companies from buying one another or issuing shares.
Equity issuance worldwide dropped by about 30% in the first seven months of this year from a year earlier; in debt markets, bond issuance has fallen by about 8%, according to analysts at Mediobanca, an Italian bank. Number-crunchers at Deutsche Bank reckon that revenue from investment banking around the world will total some $240 billion this year, down by almost a third from 2009 (see chart).
The second reason is that regulations on capital and liquidity are starting to bite. These are reducing returns earned by banks as well as forcing them to shrink their balance-sheets and cut back on trading. Many banks are also starting to position themselves for proposed rules that are not yet in force, such as America’s Volcker rule, which aims to stop banks trading for their own account, and regulations that will shove over-the-counter derivatives, which command fat margins, onto clearing-houses and exchanges.
Not everyone is gloomy: J.P. Morgan reportedly says investment banking has never been stronger. But most other banks seem to have lost their mojo. The most visible consequence of this is in headcount. London’s financial industry will have lost about 100,000 jobs by the end of this year from a peak of 354,000 in 2007, according to CEBR, an economics consultancy. New York’s financial comptroller reckons Wall Street employs almost 20,000 fewer people than before the crisis.
Slashing variable costs is only half the story, however. The industry is reshaping itself in other ways, too. First, there is the decline of stand-alone investment banks, and the concomitant resurgence of universal banks, which combine investment banking with the simpler commercial- and retail-banking sort. Diversified, deposit-taking universal banks can maintain higher credit ratings and can borrow more cheaply than specialist investment banks such as Morgan Stanley or Goldman Sachs. As credit has become scarce, moreover, universal banks have been able to demand a larger share of lucrative investment-banking business from their clients in return for offering loans.
In response, investment banks such as Goldman Sachs and Morgan Stanley are trying to expand into corporate lending, private banking and retail stockbroking. This week Morgan Stanley reached a deal to buy out Citigroup’s 49% stake in their Smith Barney retail-broking joint venture.
The second shift in the investment-banking landscape is a hollowing-out of the midsized banks as the very biggest in the industry grab a greater share of trading revenues. This is partly because the titans can afford the best trading systems, but also because a bank with a large share of trading has the liquidity that further increases its attractiveness as a trading counterparty. Analysts at Deutsche Bank reckon that the five leading banks in FICC won 40% of the market’s revenue in 2011, up from 36% in 2007. Smaller banks that once aspired to be global are expanding in markets closer to home instead.
The more open question is whether the industry’s geographical centre of gravity will also move, away from London and towards Wall Street and Asia. London’s natural advantages of time zone, law and language are not easily bettered.
But Asian and American banks have big deposit bases to call on to finance expansion; European banks generally do not. And London’s reputation has been sullied by recent regulatory failures over issues such as the rigging of LIBOR interest rates, as well as the political backlash against investment banking that arose as a result. “London hit Ctrl-Alt-Delete in terms of wanting to be a centre of global finance,” says the boss of one large universal bank. “Singapore and New York will be the new hubs of global finance and you can’t open enough coal mines to make up for that.”
09/12/2012 10:30 AM
Green Light for ESM
German High Court OKs Permanent Bailout Fund with Reservations
In a historically significant signal for the euro rescue, the German Federal Constitutional Court on Wednesday ruled there are no grounds to stop the country from ratifying the European Stability Mechanism, the permanent euro bailout fund, and the fiscal pact aimed at bringing economic governance to countries in the euro zone. The decision bolstered stock markets in Europe and around the world and also strengthened the euro. However, the justices at the Karslruhe-based court also expressed some reservations.
The court ordered that ratification can only be completed if it is ensured under international law that Germany's current maximum liability of €190 billion ($245 billion) can only be increased with the approval of the German representative in the ESM board, court President Andreas Vosskuhle said. "(No) provision of this treaty may be interpreted in a way that establishes higher payment obligations for the Federal Republic of Germany without the agreement of the German representative," the court states.
This also means that Germany's federal parliament, the Bundestag, must play the leading role in important decisions. Under a German law accompanying the ratification of the ESM treaty, the German parliament must first vote on the positions taken by the German representative in the ESM board before they can act on them. However, it is still unclear at this point whether decisions will require a vote of the full parliament or the significantly smaller budget committee.
In another significant condition, the court ruled that Germany must ensure that the treaty is implemented in a way that ensures that representatives of the Bundestag, and the Bundesrat, the upper legislative chamber that represents the federal states, are comprehensively informed of the bailout fund's activities despite the professional secrecy that ESM employees are required to adhere to.
Vosskuhle also noted that the decision on the permanent rescue fund is provisional and that full proceedings would follow.
Germany is the only euro-zone member state that has not yet ratified the treaty establishing the ESM. Without the participation of the EU's largest member state, the bailout fund has not been able to begin its work yet.
'Good for Germany, Good for Europe'
German Chancellor Angela Merkel praised the ruling. "This is a good day for Germany, a good day for Europe," she said during a special session of the German parliament. "We haven't yet overcome the crisis, but we have achieved our first steps." She said Germany had sent a "strong message to Europe and beyond." The court has cleared the way for the ESM and the fiscal pact while at the same time strengthening the rights of parliament. This, she said, would provide certainty for everyone -- not only members of the Bundestag but also taxpayers.
Foreign Minister Guido Westerwelle of the business-friendly Free Democratic Party (FDP), which is the junior coalition partner in Merkel's government, also greeted the ruling. "It was a smart decision reflecting the pro-European spirit of our constitution," he said, adding that the conditions imposed by the court had been necessary and that Germany could not be allowed to become overburdened. "The Federal Constitutional Court has affirmed the policies of the federal government and declared them to be constitutional. That's good for Germany and good for Europe."
The group Mehr Demokratie ("More Democracy"), together with 37,000 German citizens, had sued at the country's highest court to halt the ESM's ratification. The group alleged that Germany was entering into "unlimited and irreversible liability risks." Peter Gauweiler, a politician with the conservative Christian Social Union who is a prominent critic of the German government's euro rescue policies, and the Left Party had claimed that accepting the new liabilities would be irresponsible.
There are also critical voices within Merkel's conservative Christian Democratic Union party, which has largely stood behind her policies in rescuing the euro, but is also home to some of her greatest adversaries in the crisis. Wolfgang Bosbach, a notorious critic of the euro rescue, expressed skepticism about the court's ruling. Despite the conditions imposed by the court, he said, Germany still carried enormous liabilities. "I have mixed feelings about the ruling," he said. On the one hand, it has strengthened parliament's hand in Berlin. But he also warned that it only created the appearance that the upper ceiling on Germany's liability would be limited to €190 billion. He argued that if the European Central Bank purchases government bonds in an unlimited manner, as the bank has said it may do, that would also increase Germany's potential liability.
German President Free To Sign Treaty
Following Wednesday's ruling, German President Joachim Gauck is now free to sign the ESM treaty, which was already approved by Germany's parliament, the Bundestag, in June. The ESM can only go into effect with his signature.
The permanent euro bailout fund will operate in parallel with its predecessor, the European Financial Stability Facility (EFSF), for a period, completely replacing it by mid-2013. The ESM will be equipped with €700 billion in capital but will only be able to lend a maximum of €500 billion.
In accordance with its share capital in the European Central Bank (ECB), Germany is providing guarantees for 27 percent of the ESM's funds. Germany is required to provide €22 billion in cash to the fund as well as guarantees totaling close to €170 billion. But critics fear that Germany will have to provide far more cash and guarantees in the end.
Despite firm words of warning in the past, the court has never ruled against the ratification of a major EU treaty and most politicians in Berlin, including Chancellor Angela Merkel, expected that the constitutional guardian in Karlsruhe would give its blessing to the ESM.
Stock markets across Europe showed gains following the Karlsruhe ruling. Eurostoxx, an index of blue chip European companies, rose briefly by 1.2 percent -- to close to 2,580 points. Spain's leading index, Ibex, also rose for a time by over 1 percent exceeding 8,000 points. Meanwhile, Italy's FSTE rose by more than 1 percent, bringing it to a total of almost 200 points.
The euro also rose on the news to $1.2906, its highest level since mid-May.
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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- FIDDLING AT THE FIRE / PROJECT SYNDICATE
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