The Bankwatch

This highlights the significance of one key aspect of Basel 3.  The key part is that:

Global accord targets credit bubbles | ft.com

The agreement, struck last month, says that if a country decides its economy is overheated – based on the ratio of credit to gross domestic product – it can require banks within its borders to hold extra capital against potential losses.

Thus if your central bank decides the economy is being overheated and too much debt is being doled out, then the collective wrath of your own central bank and the others in the world will befall you.

“They’ve crossed a Rubicon,” said Barbara Matthews, a US-based regulatory consultant. “Up until now the Basel committee has been about ex-ante co-operation and making banks safe. They are now talking about reciprocity, and they are implementing a tool kit that blurs the line between regulation and economic policy.”

The agreement surprised many regulatory lawyers and observers who had expected fights to break out over how to combat bubbles and resistance to the cross-border provisions.

The deal is also remarkable for the trust implied by the reciprocal arrangements. If the UK imposes a surcharge, the US is honour-bound to do the same on the UK businesses of its own banks.

Its actually not a bad plan provided everyone sticks to the plan.  The Bank of Canada made interesting comments today about excessive debt that Canadians have incurred especially over the last 3 years. 

The question becomes:  when is debt too much and when should additional action be taken.  Canada has no overheating issue, but it has significant loan loss potential issues.  It is clear the Bank of Canada is aligning its ducks to be ready to take action against the Canadian banks and require additional capital if required, and thus invoke Basel 3.

An interesting post at Celent that is probably directional rather than predictive but the direction is clear.  Branches rule.  The better news is that at least internet banking is clearly 2nd.  The less good news is that mobile is not even on the radar yet.

The problem I have with this kind of research is that priority is not defined.  Two priorities that matter are costs and importance.  I am betting that most bankers think in terms of costs when allocating priorities.  If thats the case then this picture might be quite positive compared to 5 – 7 years ago when internet banking was hardly on the radar.  Bear in mind while you continue to operate branches there is a significant cost just to maintain the network.

Read through for Bob Meara comments on the Celent blog.

For the economists.  OECD report on generally positive growth indicators everywhere.  There is a graph for most countries below and if unclear, here is a

of the graphs.

The key is getting above 100 and staying there.  100 = steady state, no growth or drops.  Note the large drop in 2008.

_____________________________________________________________

OECD composite leading indicators show new growth momentum

OECD composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, point to an increasing pace of economic expansion in November 2010.

The CLIs for China, the United States, France and Japan show clear signs of accelerating economic activity, while the one for Russia points strongly to steady expansion.

The German CLI is unchanged from the previous month at a rate above 100 and should therefore be interpreted as a sign of a continued, stable pace of expansion. Signs of stabilization in the pace of economic expansion are also present in the CLIs for Canada, Italy, the United Kingdom and India.

In Brazil, the CLI continues to point to a slowdown in economic activity.

Regained growth momentum in the OECD area	Regained growth momentum in China
Regained growth momentum in the United States	Stable pace of expansion in the Euro area

The above graphs show for each country the outlook for economic activity based on the CLIs. CLIs attempt to indicate turning points in economic activity approximately six months in advance. Shaded areas represent observed downswings (measured from peak to trough) in the de-trended industrial production (the reference series for economic activity).

Regained growth momentum in Japan	Regained growth momentum in France
Stable pace of expansion in Germany	Stable pace of expansion in Italy
Stable pace of expansion in the United Kingdom	Slowdown in Brazil
Stable pace of expansion in Canada	Stable pace of expansion in India
Expansion in Russia
	Note: The horizontal line 100 shows the long-term trend in industrial production (the reference series). Expansion denotes a CLI increasing above 100; downturn a CLI decreasing but still above 100; slowdown a CLI decreasing below 100; recovery a CLI increasing but below 100.

Table 1: Composite Leading Indicators

* China, India, Indonesia, Japan and Korea.

** Growth cycle phases of the CLI are defined as follows: expansion (increase above 100), downturn (decrease above 100), slowdown (decrease below 100), recovery (increase below 100). CLI data for 29 OECD member countries and 6 OECD non-member economies available at: http://stats.oecd.org/wbos/default.aspx?datasetcode=MEI_CLI

Table 2: Historical Performance of CLI and Recent Cyclical Turning Points in the Reference Series

* China, India, Indonesia, Japan and Korea

Detailed and country specific assessment of sovereign debt from Wm Buiter of Citi (ex Financial Times).  Its on this page entitled “The Debt of Nations” under citigroup publications or direct here.

Its 84 pages but easy to locate your country.  In any event all advanced economy countries are in trouble to some extent with particular extra points to US, Japan, Ireland and Greece.  He notes that US is relatively worse than Greece.  Higher interest rates anyone?

If you want a condensed version Tyler at ZeroHedge has here at ZeroHedge.

Nomi Prins worked at Bear Sterns, then Goldman Sachs until 2002.  Her background was CDO (Collateralised Debt Obligations) which later (after she left) became tarnished with sub prime mortgages and were at the centre of the banking crisis.  Goldman Sachs were fined $550 million by the SEC for insider trading regarding CDO.

Nomi compares the FaceBook deal to CDO.  Her central point is that Goldman Sachs have better information than their customers and are in effect ‘making the market’ in FaceBook.  By making the market they provide several opportunities to make large fees and will make those fees no matter which way the market goes.  Meantime the investors are forced into an illiquid position until 2013, except for Goldman Sachs who can exit any time.  Also check out the fees.  Investors are down 10% from the outset – your $2 million is worth $1.8 million on day 1.  Its a great deal for Goldman Sachs.

Goldman’s Shady Facebook Deal | Daily Beast

If you’re one of those investors, here’s the deal in a nutshell: You get to buy shares, forking over 5 percent of any possible gains, on top of a 4 percent placement fee and a 0.5 percent expense reserve fee (so you’re down 10 percent before the game starts) in a private company that doesn’t have to disclose any pertinent financial information to you or any regulator for 15 months. For the privilege, Goldman gets its eight-digit windfall.

Forget their fees for a moment, though. Recall that what killed the CDO market, aside from the crappy deals, crappy collateral and overall shadiness: lack of liquidity. Investors stopped buying CDO pieces, and trading desks stopped making markets in them. Game over. That’s why this deal, albeit in something with more potential than a basket of subprime assets, is worse than a CDO: Investor illiquidity begins on day one. The rich Goldman clients who must pony up a minimum $2 million investment aren’t allowed out until 2013. No exceptions. Ditto Facebook employees (although they were allowed to cash out about $100 million last year). But Goldman is. Whenever it wants "without notice to the fund or investors in the fund."

She goes on to compare the FaceBook arrangement to CDO in more detail.

CDOs were private, unregulated, overvalued, disclosure-lite, fee-intensive deals. The Facebook deal is private, unregulated, overvalued, disclosure-lite, and fee intensive. CDOs sold like mad— until they didn’t. That can happen here. At the end of the holding period, there may be no bid for Facebook shares anywhere near the price paid. Plus, by that time all the enthusiastic global users of Facebook may have dropped it for thenextgreatfad.com taking the advertiser money along with them.

Finally the ultimate telling message.  As a raw investment, Goldmans own fund declined to participate.  This further promotes Nomi’s point the Goldman Sachs are doing this deal to extract large fees from their accredited investor (rich customers, who are the only ones that can participate) customers while they (Goldman) build a market for FaceBook shares.  This is all in complete contrast to the Google IPO which promoted fairness and equal opportunity and it did that by bypassing Wall Street.  Gordon Gekko is alive and well.

The Facebook deal sucks so badly that one of Goldman Sachs’ own funds didn’t want a single share of it. Richard Friedman, who runs the money for past and present Goldman partners, among others, said, thanks, but no thanks. That should tell everyone something.

Relevance to Bankwatch:

Its not that I mind people becoming rich.  The larger issue here is that opaque deals with extreme fee structures benefit investment banks, but do little for the larger economy.   They create false value that contributes to bubbles and that always end in crashes like we just saw in 2008.  And after the crash the ones holding the money are the same ones who got the up front fees and bonuses.  This is the opposite of creation of sustainable and manageable value that benefits the broader economy and people at large.  It also means FaceBook as a corporation will be entirely focussed on working to Goldman Sachs pace and not to the benefit of the company’s long term success.

In the latest on the ‘chain of title’ issue reported in October, the latest Supreme Court decision in Massachusetts upholds the decision that Wells and US Bank had lost their right of claim against mortgages they owned.

US foreclosure ruling to reverberate | ft.com

The Massachusetts Supreme Judicial Court upheld a lower court ruling that Wells Fargo and US Bancorp did not have the right to claim the homes because they could not prove they owned the mortgages at the time of foreclosure

This goes back to one of the many flaws in wholesale product design (bank to bank) that led up to the credit crisis.  The parsing out of mortgages into small pieces, and rebundling into Asset Backed Commercial Paper (ABCP) was so complex that along the way the chain of ownership was lost.  The eventual owner of ABCP might be bank in France and the borrower was a homeowner in Arkansas.  The unbundling and rebundling process was so convoluted and poorly thought through that the chain of ownership was lost. 

This goes to the very core of what was wrong with the pre crisis financial system.  The securitisation markets were a nice theory. 

This is a game changer if the US Commerce Department can pull it off.  (ht James Van Dyke at Javelin)

Internet Identity System Said Readied by Obama Administration | Bloomberg

For example, once the system is in place, Google would be able to join a trusted framework that has adopted the rules and guidelines established by the Commerce Department. From that point, someone who logged into a Google e-mail account would be able to conduct other business including banking or shopping with other members of the group without having to provide additional information or verification.

This means that users of participating systems (Verizon Communications Inc., Google Inc., PayPal Inc., Symantec Corp. and AT&T Inc.) would log in once, and have access to all the systems.This provides ease of use and within a trusted environment with one password to remember.  If we expand that to online banking and other ecommerce providers, then we may have something.

The system is called National Strategy for Trusted Identities in Cyberspace (NSTIC).

Now that we know this much, I thought I would research a bit.  The original information came from the White House blog last June.  That post had a link that is now dead.  The cached version of what the link pointed to last December is here.  http://webcache.googleusercontent.com/search?q=cache:http://www.nstic.ideascale.com/

ideascale.com?  No disrespect but with mention of Homeland Security, and a national economic game changer – from an unknown (to me) web 2.0 company?  A link from the White House web site to a link that does not work?  This has politics and ‘bill of goods’ written all over it.  I get the concepts of OpenID and OpenAuth.  The descriptions of the benefits sound like implementation of those protocols amongst others.  I get the concept of a centralised and trusted sponsor of those protocols. 

The point of a centralised system of identification has two basic needs:

1. users must trust the centralised system provider
2. the centralised system must trust the identity of the users before they let them in

Point 1. is much easier to accomplish that point 2.  A centralised system of identity verification is literally the keys to the kingdom so these points are essential.  They are not impossible to implement but are hard.

I am always suspicious of government involvement in something they probably do not understand (at the senior level) and if political motivation is involved.  If government is involved then political motivation is always there.  If they can pull this of then I am impressed.  We shall see.

BMO has surprised a few with introduction of a very cool tool called BMO Moneylogic, that is tightly integrated into online banking.  The functionality is quite similar to Wesabe with expense sorting and categorisation.  There are nice graphs and a very pleasant and easy to use interface.

This is great to see and is probably the best offerring of its kind amongst Canadian banks to my knowledge.  Well done BMO. 

I also see that there is a new iphone app which is new.   The app is called retirement positioning.  What really piqued my interest though was this comment.

BMO Bank of Montreal Mobile Banking coming soon! Features to include: Account Balance Update, Account History, Transfers and more.

Google is reported to be building an NFC wallet that will be incorporated into Android software.  (ht Dave Birch)

Google Building an NFC Mobile Wallet; U.S. Banks Are Interested | NFC Times

Google is building a mobile wallet nicknamed "Cream," which it plans to integrate with Android NFC phones that consumers could tap to pay in stores, sources told NFC Times. Among banks showing strong interest is U.S.-based Citigroup

I had read elsewhere earlier that Apple plan to include NFC capability into the iphone too.

Much has been written in the last few days about the FaceBook IPO, er private funding.  Umair makes a solid point here and notes that FaceBook is doing exactly what is wrong for sustainable value.  No doubt many will make commissions, including Goldman but is this approach appropriate for sustainable share value.

He goes on to note that by aligning themselves with the worst of Wall St approaches, something Google chose to not do, FaceBook has less chance for creating sustainable real and consistent value for investors.

A Tale of Two IPOs | Bubblegeneration

Companies that have philosophies are resilient–they’re able to weather the fiercest of storms, because they focus on enduring value, not transient gains. What Facebook’s Goldman deal might tell the astute observe of strategy is this. Facebook has no philosophy, no set of guiding principles that focus it on enduring value. Instead, it is focused–as it has been focused–on building an extractive ecosystem rife with subprime economics and tail risk, not creating value that matters, lasts, and grows.

Sidenote:  it is also interesting that the broker side of Goldman Sachs chose to not participate indicating that the valuation is too high.  The bankers know better

Goldman Sachs Capital Partners — a $20.3 billion group that manages and invests mostly for pensions and sovereign wealth funds — was offered the opportunity to invest $450 million in Facebook, according to people familiar with the matter. Goldman Sachs allegedly allows its Capital Partners unit to get the "first look" on many investment opportunities.

But unit head Richard A. Friedman decided to pass on the Facebook shares, saying the company was a mismatch with his investment criteria, according to the New York Times.