The Bankwatch

Small but important change (imho) to your own laptop that will eliminate lots of potential problems from viruses. 

90 percent of Windows 7 flaws fixed by removing admin rights

After tabulating all the vulnerabilities published in Microsoft’s 2009 Security Bulletins, it turns out 90 percent of the vulnerabilities can be mitigated by configuring users to operate without administrator rights, according to a report by BeyondTrust. As for the published Windows 7 vulnerabilities through March 2010, 57 percent are no longer applicable after removing administrator rights. By comparison, Windows 2000 is at 53 percent, Windows XP is at 62 percent, Windows Server 2003 is at 55 percent, Windows Vista is at 54 percent, and Windows Server 2008 is at 53 percent. The two biggest exploited Microsoft applications also fare well: 100 percent of Microsoft Office flaws and 94 percent of Internet Explorer flaws (and 100 percent of IE8 flaws) no longer work

Steps to follow:

1. add new user (your super user – call it ‘admin’ or whatever you wish) with admin rights
2. go to old user in control panel/users and remove admin rights – make it a standard user
3. reboot.
4. log in as old user

Now when you try to install anything it will launch a password screen for the admin user.  (Just like linux)

There is lots of wishful thinking contained in this PEW report which is not one of their better ones imho.  The people interviewed are by PEW’s admission skewed and several silicon valley names are included.  However the views follow the predictable linear thought process, such as, we have social networks therefore tomorrow everything will be social.  Clearly there are themes and directional indicators, but there are competing themes such as organisational inertia, shareholder needs, economic crises and last but not least, human nature. 

Some extracts.

The Impact of the Internet on Institutions in the Future | PEW

Some 26% agreed with the opposite statement, which posited:

• ”By 2020, governments, businesses, non-profits and other mainstream institutions will primarily retain familiar 20^th century models for conduct of relationships with citizens and consumers online and offline.”

Once past the headline, the sense of change remains, but some doubt expressed about the 2020 date and that it might be too early for consequential change. 

While their overall assessment anticipates that humans’ use of the internet will prompt institutional change, many elaborated with written explanations that expressed significant concerns over organization’s resistance to change. They cited fears that bureaucracies of all stripes – especially government agencies – can resist outside encouragement to evolve. Some wrote that the level of change will affect different kinds of institutions at different times. The consensus among them was that businesses will transform themselves much more quickly than public and non-profit agencies.

Many selected the “change” option, but said they were not sure drastic change will occur in organizations by the 2020 time frame. They said the most significant impact of the internet on institutions will occur after that. Some noted this change will cause tension and disruption.

And this final pessimistic note from Andy Oram is one that I can see being true.

The positives and negatives of technological change do battle. Will the result be a triumph of networking or more-concentrated, centralized control?
“I’m sure the survey designers picked this question knowing that its breadth makes it hard to answer, but in consequence it’s something of a joy to explore. The widespread sharing of information and ideas will definitely change the relative power relationships of institutions and the masses, but they could move in two very different directions. In one scenario offered by many commentators, the ease of whistle-blowing and of promulgating news about institutions will combine with the ability of individuals to associate over social networking to create movements for change that hold institutions more accountable and make them more responsive to the public. In the other scenario, large institutions exploit high-speed communications and large data stores to enforce even greater centralized control, and use surveillance to crush opposition. I don’t know which way things will go. Experts continually urge governments and businesses to open up and accept public input, and those institutions resist doing so despite all the benefits. So I have to admit that in this area I tend toward pessimism.” – Andy Oram, editor and blogger, O’Reilly Media.

Thoughts?  What will organisations look like in 2050 say?  Will the enterprise be open and participative with looking more like todays Google, or todays Bank of America?

The world of payments is mysterious and confusing to most bankers, and mobile payments is orders of magnitude worse.  Glenbrook operate on a simple categorisation that helps to follow.  This is a nice review of CTIA Wirleless conference just held at Las Vegas.

Mobile Payment Themes from CTIA | PaymentsViews

1. Point of Sale (POS),
2. eCommerce,
3. Person-to-Person,
4. Bill Payment and
5. B2B

For all the talk of Canadian economic miracles, this graph is sobering and suggests a degree of risk that remains relative to other economies following a rapid increase in debt during the 80’s.  Note that higher is worse. 

The measure reflects assets to equity and high means less equity relative to the balance sheet.  According to this McKinsey study Canadian banks are third worst only behind Switzerland and Japan.

The full report is at the McKinsey site. 

The report is really about economic consequences of consumer de-leveraging and worth the read.  The Economist summarises it here.

The video and the pdf record the discussion moderated by McKinsey.  This quote summarises for me and the longstanding position of this blog that Government is wrong to speak about recovery.  While the debate is US centric, the characteristics broadly apply to US, Canada, UK, and Euro countries such as Spain. 

Brian is the General Counsel of the SEC. 

The Future of Capitalism, Credit and Leverage | McKinsey

Brian Cartwright: When you look at the leveraged nature of, let’s say, the consumer, it’s about 70 percent of the economy. So, if we’re going to have an economic recovery—and I would say the liquidity crisis is over, but the economic crisis is far from over—the consumer has got to come back.

But US households are carrying debt that’s about equal to the GDP. Put that another way, just unpack it: that means all of our households in aggregate have borrowed an entire year’s worth of the production of the entire economy. When I was growing up—that was a while ago, but still—it was about half that. And I’m not sure where the right number is, but it would seem quite plausible that we now need to do a good deal of deleveraging, which means people have to save rather than consume. That would seem to be a big negative for an economic recovery.

Relevance to Bankwatch:

The implication for banks and their competitors is that products must be re-defined to reflect a saving and de-leveraging consumer marketplace.

Whether its Greece, Portugal and the EU financial issues, or the ongoing housing saga in the US, we are clearly not yet out of the woods relative to the 2008 banking crisis.

U.S. Plans to Expand Aid to Troubled Homeowners | NYT

The Obama administration will announce on Friday a broad new initiative to help troubled homeowners, potentially refinancing several million of them into fresh government-backed mortgages with lower payments.

I would say this piece in the usually venerable FT ought to be better placed in the comment section and hardly in the market insight section.  At a minimum read This Time is Different, and stick them both in the opinion section.  Eight centuries of empirical evidence or one mans irrational opinion.

Japan’s mythical debt crisis | Peter Tasker – ft.com

Far from the next Lehman or the next Greece, the market is rating the Japanese government as the best credit on the planet. Indeed if Sidney Homer’s classic “History of Interest Rates” is any guide, Japanese government debt commands the lowest interest rate since Babylonian times.

We all get that Japan is something of an outlier in terms of economic performance and results following the burst bubble in 1990 yet still ambling along nicely today.  But to suggest that economics 101 have been foregone and that the debt levels supplemented by a population that is aging more rapidly than other countries due to the natural resistance to immigration, leave one with a conclusion that fewer tax paying young people supporting more old people plus the countries debt, will not have have some impact, is to stretch incredulity.

What the likes of this piece ignores, and yet Japanese people realise, is that Japan is essentially a managed economy.  Despite 20 years of deflation and post bubble burst, the skyline of Tokyo shows construction cranes.  Midtown was just built.  Roppongi Hills is so empty you could shoot a missile through it, yet all the spots are leased and the stores are open.  Something is keeping Japan going longer than it should, and its got something to do with inherent citizen loyalty to the country, and other underground elements, that translates into purchase of government debt.  The issue will not be personal motivation of the average Japanese.  They would win the work and motivation ethic over anyone, anywhere.  The issue will be financial ability to continue the investment as the demographic direction takes hold.  The pressure and stress on the average person there is incomprehensible to North Americans or others, and no-one will acknowledge.

There is something else going on there and I don’t pretend to understand it all, but I do understand that economic basics stand true, and that I believe Japan to be a temporal anomaly.  Twenty years is a blink in economic terms.

In January it was the brics.  In a February piece Tasker demonstrated an understanding of Japan.  So why this one off, poorly rationalised piece .

Memo to Financial Times:  please watch which categories you employ your writers and separate opinion from (your word) “insight”.

Canadian’s balance sheets are improving following increases in real estate values and stock markets.  However in 2009 Canadians also increased debt through mortgages and loans, with the average ratio of household debt to income at 146.2%.

Household net worth up 1.6%, StatsCan | Financial Post

Canadian household net worth rose from October through December as individuals benefited from a rise in real estate and stock markets.

The value of families’ assets, such as houses and savings accounts, minus their liabilities increased 1.6% to $5.86-trillion in the fourth quarter, Statistics Canada said on Monday in Ottawa. Canada’s Standard & Poor’s/TSX composite index gained 3.1% in the period.

The ratio of household debt to income rose to 146.2% in the quarter from 145% in the previous three months, due to increased debts such as mortgages and car loans, Statistics Canada said.

Here is some selected data from Statscan detailing how Canadian debt levels relative to income.  The number that stands out is the last row – All credit as a percentage of income has grown nearly 7% (129.94% to 133.23%) over the last 5 quarters.

This little nugget from Gillian Tett at the Financial Times last week brought a few thoughts into sharp focus.

Is this the lull before the storm for US mortgages?  | ft.com

For this spring, something of a paradox is hanging over the mortgage-backed securities world. At the end of this month, the US Federal Reserve is due to freeze its programme to purchase Fannie and Freddie agency MBS that it implemented in the wake of the financial crisis.

However, before anyone is tempted to crack open the champagne, they should think – once again – about that “displacement” effect. During the past two years, the full impact of the collapse of the securitisation market has been largely concealed from most investors – let alone American politicians – because of the sheer scale of government assistance on offer. In a sense, investors have been lulled into something of a false sense of security, because so much of the support has been highly complex – and thus hard to understand.

A simple question for investors.  How do you evaluate risk?  When the government stops backstopping mortgages, the entire risk onus lies on Funds and Banks.  Till now they have been operating under the assumption that the government was always there as lender of last resort.  There have been two recent outcomes of the banking crisis:

1. interest rate returns have been driven to almost zero from unlimited Government liquidity
2. risk management has had government participation as its central focus

So how does a portfolio manager assess the risk on mortgage backed securities on their merits?  This lost art has been traditionally based on assessment of economic indicators, unemployment rates, inflation rates, purchasing power, and historic assessment of ones own portfolio.

We have the interesting situation where most of those indicators have been and remain negative or at best in serious doubt.  Stock market performance is irrelevant in considering consumer debt repayment.  So how will portfolio managers assess the risk of those MBS when they come on the market following withdrawal of the Fannies.  Will they ignore them because they have to ability to assess the risk?

There has to be a better way to assess risk, that is based on the consumers’ underlying data.

Transparency:

The problem with MBS (Mortgage Backed Securities) and any other ABCP (Asset Backed Commercial Paper) lies in the design.  It is a black box of consumer debt that is only has good as the bank which bundled it.  Bank A may have had a good record of MBS, so you choose to invest.  But really you are investing in the underlying promises from Bank A such as first loss, or making good on defaults beyond x%.  All this despite the fact that these securities are off Bank A balance sheet, but that’s a whole other post.

So really the risk is assessed based on gut feel for promises from Bank A and the economy.  There is not direct assessment of what matters – the borrowers contained in the MBS.

Enter peer-to-peer lending.  A set of loans in peer-to-peer lending services are not bundled.  Rather investments are made directly in the loans with platform capabilities enabling bulk purchases based on lender criteria.  But that criteria is assessed directly on the missing element from MBS – the borrower characteristics.  Lenders can see individual and aggregate debt service ratio’s debt levels, income levels, and stability indicators such as marriage status, home ownership, time on job etc.

Internet technology allows rapid assessment of many characteristics, with real-time updates.  Further the risk assessment is ongoing and while watching the evolution of the portfolio of borrowers.  What would have made this impossibly inefficient pre internet pervasiveness is now possible.

When we speak of transparency with peer-to-peer lending, this is in complete opposition to the ultra opaqueness of the MBS referred to earlier.

Going back to the dilemma confronting portfolio managers this spring – how will they assess risk?

For the record – 2,200 pages in all its glory.

Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report

Jenner & Block is providing links to the Report of the Examiner in the Chapter 11 proceedings of Lehman Brothers Holdings Inc. The Examiner’s report is divided into nine volumes, which are reproduced below in individual Adobe Acrobat PDF files.

Included in this from the introduction that sums up banking, not just investment banking.  Investment banking just happens to be an extreme version of this.

Lehman’s financial plight, and the consequences to Lehman’s creditors and shareholders, was exacerbated by Lehman executives, whose conduct ranged from serious but non‐culpable errors of business judgment to actionable balance sheet manipulation; by the investment bank business model, which rewarded excessive risk taking and leverage; and by Government agencies, who by their own admission might better have anticipated or mitigated the outcome.

Lehman’s business model was not unique; all of the major investment banks that existed at the time followed some variation of a high‐risk, high‐leverage model that required the confidence of counterparties to sustain. Lehman maintained approximately $700 billion of assets, and corresponding liabilities, on capital of approximately $25 billion.   But the assets were predominantly long‐term, while the liabilities were largely short‐term.  Lehman funded itself through the short‐term repo markets and had to borrow tens or hundreds of billions of dollars in those markets each day from counterparties to be able to open for business.  Confidence was critical. The moment that repo counterparties were to lose confidence in Lehman and decline to roll over its daily funding, Lehman would be unable to fund itself and continue to operate