The Bankwatch

This is a terrific piece from McKinsey that summarises many of the things we read about in the context of changes at play in the world.  I firmly believe we are in the midst of a latter day industrial revolution but it needs a better definition than that, and this kind of piece breaks it down into understandable chunks that capture various aspects of things we are reading about.

We all speak of globalisation and these five forces nicely capture the implications and results.  For example something I have been reading a lot about is the concept of ‘market state’ and that is one of the five.  A result of market state thinking is the UK budget last week which recognises States cannot afford the level of government the old order requested.

Banks need to learn to adapt to this new order.  The changes are real and have consequential implications for people and affordability of purchases and asset values.

Global forces: An introduction | McKinsey

For much of the past year, a team at McKinsey has revisited and retested our assumptions about the key global trends that will define the coming era. We have identified five forces, or crucibles, where the stresses and tensions will be greatest and thus offer the richest opportunities for companies to innovate and change:

• The great rebalancing. The coming decade will be the first in 200 years when emerging-market countries contribute more growth than the developed ones. This growth will not only create a wave of new middle-class consumers but also drive profound innovations in product design, market infrastructure, and value chains.
• The productivity imperative. Developed-world economies will need to generate pronounced gains in productivity to power continued economic growth. The most dramatic innovations in the Western world are likely to be those that accelerate economic productivity.
• The global grid. The global economy is growing ever more connected. Complex flows of capital, goods, information, and people are creating an interlinked network that spans geographies, social groups, and economies in ways that permit large-scale interactions at any moment. This expanding grid is seeding new business models and accelerating the pace of innovation. It also makes destabilizing cycles of volatility more likely.
• Pricing the planet. A collision is shaping up among the rising demand for resources, constrained supplies, and changing social attitudes toward environmental protection. The next decade will see an increased focus on resource productivity, the emergence of substantial clean-tech industries, and regulatory initiatives.
• The market state. The often contradictory demands of driving economic growth and providing the necessary safety nets to maintain social stability have put governments under extraordinary pressure. Globalization applies additional heat: how will distinctly national entities govern in an increasingly globalized world?

Global Forces website

Nice overview from Economist on 2009 bank results.  So much for too big to fail.

I saw this and had to check myself.  Turns out 5 of my Linkedin connections are connected to connections of Anna Chapman.  She is one of the 10 Russian Spies charged in US this week.  One is Robert Scoble, but then Robert is probably connected to everyone.  It also shows the inherent weakness in the ‘connected to connections’ model.  Connections even once removed capture a lot of people.

Check it out.  Her profile is in the link below and she only has 147 connections so they were picked with some thought presumably and given her mandate to seek intelligence and information.

EDIT – 9th July, 2010

Follow up.  Her Linkedin profile has been erased.

From Roubini to Russia with love | FT

Her Linkedin profile has her listed as a VP at KIT Fortis Investments, “Head of IPO at Navigator hedge Fund,” and “Slave at Barclays Bank” in London (hopefully not literally). Barclays has already told the Daily Mail it has no record of Chapman working in its investment division in 2004 and 2005.

In what is the largest shock for me for a long time, Wesabe has shut down. I have long sung the praises of Wesabe and saw great potential for future expansion and delivery of innovative and useful services for people that no-one bank can ever offer. It appears they have run out of funding which I presume is because VC’s are not willing to support a competitor to Mint/ Intuit. This is shortsighted in my view but there we have the harsh reality of business.

Online Finance Startup Wesabe Heads To The Deadpool | Techcrunch

The startup’s homepage now consists of a letter to Wesabe users instructing them to download their account information by July 31, at which point nearly all of the service’s features will be taken offline and data deleted. 

And from the Wesabe home page:

In recent months Wesabe has been operating on a shoestring budget, with support from some of the developers and operations people who made up our core team. While the site has remained online and we continue to hear from people who find it helpful, we have not been able to provide the support people need to use it for something so central as financial management. I’ve felt especially terrible that some members have a good initial experience but then hit a problem, often after investing many hours, and aren’t able to get help with it. That’s obviously a bad experience, and not what we want to offer. Also, because Wesabe stores such highly sensitive data, continuing to operate the service with shoestring operations and security staff is not acceptable, and we do not want to continue accepting new accounts if we cannot guarantee the security level we believe our service requires.

This is a fascinating summary and review of various factors that drive investment behaviour, and surprisingly few of which have anything to do with rational investment return. 

Homo economicus – or more like Homer Simpson? Deutsche Bank Research

Many of the issues listed here may seem obvious. But in an environment like economics and finance, precisely because it is perceived as being so highly rational, the influence of psychological factors and sentiment is frequently underestimated. Of course, heeding these points – arguably not always such an easy matter in practice – will not automatically guarantee the success of an investment. But it could certainly help avoid mistakes here and there. As with  Homer Simpson, who acknowledges the effect of psychology on his behaviour when he realises that he is confused, the situations we have described may contribute to a clearer awareness of the impact that psychological factors have on our decision making.

This is a bit of a surprise with all directions pointing to increased capital requirements.

33% of banks have gone to the market to raise capital or will go to market to raise capital | Grant Thornton

CHICAGO, June 24, 2010 – According to Grant Thornton LLP’s 17th Bank Executive Survey, conducted in conjunction with Bank Director magazine, one-third (33%) of bankers said that their bank was very likely to go the market to raise capital in the next 12 months (22%) or has already successfully gone to the market to raise capital (11%).

For economic wonks here is a lengthy and broad interview this morning with Larry Summers.

He paints a positive picture that America has turned the corner, is producing jobs, and progressing well. 

On the question of stimulus versus consolidation, he makes the point that a country with growth has a greater chance of being in control of its own destiny.  He notes that non growth countries find it very hard to maintain a positive financial picture (alluding to Japan).

He talks specifically about the origins of G20 and how he and Paul Martin were the originals in setting that up.

Worth the listen.

Gillian Tett at FT highlights the seismic shift that has taken place in the securitization market.  This may appear obscure but it directly impacts product design and bank product design.

Collapsed debt market poses dilemma for G20 | Financial Times

So far, few non-bankers have really noticed this collapse, largely because governments have stepped into the breach, papering over the gaping hole. In the US, for example, the Federal Reserve has bought $1,250bn of mortgage-backed securities. In Europe, the Bank of England and ECB have gobbled up mortgage-backed bonds, and other securitised assets, via repo deals. Before 2007, eurozone banks sold more than 95 per cent of their securitised products to private sector investors; now it is under 5 per cent – with the rest going mostly to the ECB.

Relevance to Bankwatch:

Pre crisis, Banks were able to package up mortgage loans into batches and sell them off.  This securitisation brought in new liquidity that allowed banks to make more money on the same dollar by making additional loans.  The pre crisis rules allowed the securitised mortgages to be kept off balance sheet, so the loans from the new liquidity had nominal requirement to increase capital. 

This drive a certain marketing and product design strategy based on maximum volume at any cost.  Broker fees were enormous but banks happily paid to drive more volume in this capital cost free environment.

Fast forward to Gillian’s comments above, and we see the markets have probably factored in the G20 regulation that will require securitized loans to be included in balance sheet calculations and therefore capital requirements as required by Basle.

The new environment is less transactional volume driven and more quality driven. Customers must really be happy and happy enough to purchase more products and services that produce revenue.  They must also be sufficiently satisfied to advocate their bank to friends and relatives.  This suggests a very different model for banks and that’s why the securitisation market matters.

To wind up, a smart and interesting speaker on a panel moderated by Chrystia Freeland.  Dr. Inge Kaul Member, Committee of Experts, Leading Group on Innovative Financing for Development; Professor, Hertie School of Governance, Berlin, Germany

Notes on her talk.

State failures have made it very easy for markets to fail.  She speaks about public goods and how everyone wants everything, but no-one wants to pay.  Free-riding, and this applies to countries as well.  This helps us to understand why G20 talks but accomplishes little.

Leaders should set agenda – we need a Gxx for each global challenge, eg climate change.  Ministerial level G’s for each global issue.

It is not acceptable to through garbage over the neighbours fence.  Pollution is no different.

We need urgently a new global public finance theory.  Tax, movement of money, stimulus, consolidation.  There is no understood common framework to understand how to make those decisions.

Free-riding hurts money for public development.

Turns out the shaking felt at this conference at 1:45pm EST was a 5.5 earthquake centred in Quebec.  Some of my leftie colleagues are already blaming Stephen Harper and of course George Bush even though the latter is not at this G20.