The Bankwatch

The numbers speak for themselves.  Apple is on fire right now.  The 4S and no 5 was such a poor decision

Apple is now $70Bn larger than Exxon in market cap.

The Next Web details a Forrester report on smartphones and tablets that quantifies what we are all seeing;  mobile is the future of computing.  There are some interesting takeaways after the graphic.

Relevance to Bankwatch:

1. Blackberry:  “Business users will factor heavily into these numbers, with some 350M employees using smartphones.” – this translates into very bad news for Research in Motion.  While that might be a statement of the obvious, RIM surely have just fallen off a cliff and don’t know it.
2. Security:  Banks really need to develop a strategy beyond having an app.  More and more I find myself using my bank iphone app over the web version, but I still use both.  But that is only the beginning.  Something about mobile increases my expectation of the mobile app.  I want it to follow me around, know where I am and more importantly know where I am not.  There can be strong security and spending support associated with mobile. 
3. Notifications:  smartphone notifications become a standard part of ones day, but no bank notifications yet. Think balance, transactions, auto deposits/debits, offers.
4. Bookkeeping:  many apps today allow collection of financial data (think Evernote) by parsing pictures of receipts and statements into searchable documents just from taking a picture.  This ship has probably sailed but is no bank considering such a service?  What could possibly lock in customer loyalty more than storage of all a customers financial data.

Whomever was responsible for the killing of the Iranian nuclear scientists, the result is that the Iranians hold the Israelis responsible and the triple attempts on Israeli diplomats today represent a significant and dangerous escalation.

There does not portend well for middle east stability, and may well translate into oil production disruption at some point.

Israel vows to strike back at Iran over twin attacks on diplomats

The wife of an Israeli Defence Ministry attaché was seriously hurt when a hitman on a motorbike attached a magnetic bomb to her car as her driver was taking her to pick up her children from school, Indian police said. Despite being wounded, Tal Yehoshua Koren, 42, managed to call the Embassy and tell staff “the vehicle exploded”. She and the driver were taken to hospital, where she was said to be in a critical but stable condition.

The second attempt, in Tbilisi, the capital of Georgia, was foiled when an embassy employee noticed a suspicious device taped to the underside of his car and called police. They found a grenade that was then defused.

Israeli officials said the Jewish state would strike back. “We know exactly who is responsible for the attack and who planned it, and we’re not going to take it lying down,” said Avigdor Lieberman, the Foreign Minister.

The situation in Europe just received another jolt with Moodys placing UK and France on downgrade alert.  This is a first for the UK but no surprise. 

It is some sign though that medium term interest rates are not sustainable at current levels.  The situation has a long way to play out.

Moody’s shifts outlook for UK and France

Moody’s put the UK, France and Austria on negative outlook late on Monday night, raising the prospect that the three countries would lose their triple A ratings due to exposure to the eurozone debt crisis.

Moody’s places UK credit rating on ‘negative outlook’

Moody’s, one of the agencies that assess the strength of the country’s public finances, said it was changing the UK’s outlook to ‘negative’ from ‘stable’.

That means there is a heightened risk that Moody’s could cut Britain’s credit rating from ‘AAA’, the highest level possible, if the public finances and economy deteriorate further in the coming months.

We are all watching the situation in Greece.  At what cost will the country remain in the Eurozone?

Athens ablaze as MPs vote to save the euro | The Times

Rioters set Athens ablaze last night as Greek MPs approved a harsh new austerity package aimed at keeping their country in the euro.

Tens of thousands of demonstrators besieged Parliament while MPs neared the historic vote, which opens the way for a €130 billion bailout by the EU and the IMF.

Anarchists in crash helmets and black balaclavas smashed marble balustrades and threw rocks and petrol bombs at police. Riot officers responded with teargas and stun grenades as peaceful protesters fled.

It would be possible to create an alternative 2nd tier Euro; one that Greece and others could adopt.  This Euro2 would seek its own trading range.  That range would obviously be significantly lower and would result in instant inflation based on the level of imports over exports for the country.  This new currency, and for the sake of argument, lets call it the Drachma, would be instantly worthless and people would be carrying wheelbarrows of drachmas to purchase a loaf of bread.

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The big failure of Sarkozy/ Merkel is to see beyond the immediacy of a proper fiscal plan for Greece and the need for something that will actually work.  Greece is turning anarchic.  When Greece borrowed all that money over the last few years, no-one in Europe told them to get their fiscal house in order.  Germans were quite happy to go to Greece for holidays and the laid back, half time work ethic was, while obvious, not a problem then.

Then 2008 happened and everyone woke up.

This is an incredibly precipitous moment as we watch the situation in Greece.  It will affect us all and it will have a knock on effect.  The scary part is that if Greece adopts (tonight) and implements (still to come over the next few weeks) the measures that will mean that Greece has literally only just kicked the proverbial can down the road.  Much of the money from the Greek proposed IMF bailout is going toward loan repayments.  How much will the implementation from the Greek government address the deficits and correct the issue is an open question still.

The impact on the European banks is still an open ended overdraft despite the negotiated hair cuts.  But the parallel question is what will happen to European society as we look at the impacts tonight.  We have seen similar anarchic situations in London, Paris, and Brussels.  Do we really understand what is happening here.

What’s up with Australian banks technology?  There have been persistent problems across many Aussie banks over the last couple of years.

NAB services knocked out | finextra

Australian banks, with their old, creaking core systems, have suffered numerous technical glitches over the last two years, with NAB, CBA and WestPac customers all inconvenienced on several occasions.

I have been giving some serious thought to which ebook provider I should settle on.  I have been a loyal Amazon user for 10 years buying regular books and recently some ebooks for the last 3/4 years. 

Fast forward to a newer decision that I will give up paper books and shift to ebook only.  That decision led to which tablet and ipad is the winner there. 

That led to looking at ibooks, and I must say it stacks up very well against Amazon.  Then looking deeper I found this;

Apple’s struggle to defeat Amazon set to be exposed by European ebook inquiry

They are to lift the lid on a power struggle between the publishing industry and Amazon that could determine the shape of the book trade for years to come.

You may have noticed the price of Kindle books recently has risen to almost double the original $9.99.  This is because Apple, who have tremendous purchasing power have offerred the publishers an out against Amazon, by allowing the publishers to pass off pricing authority to their agents (Apple, Amazon).  This is interesting and the opposite of what happened with music where Apple attacked the publishers.

I have no axe to grind here.  I just want quality books and music.  I also know that too much power on one side or the other is probably not good for content creators, or purchasers. 

So even if prices are increasing that sounds positive for authors and a level playing field of competition between Apple and Amazon is a good thing for book consumers.

Bottom line, I am leaning towards ibooks for my ipad reading.

This from the World Economic Forum as it opens tomorrow.  Major systemic financial failure remains at the top in terms of impact, but less likely than water or food shortages.  Click the pic for the full pdf.

This piece from Douglas J. Elliott, Fellow, Economic Studies, Initiative on Business and Public Policy at Brookings does an excellent job at highlighting what it is that investment bankers just do not get about life in the real (banking) world.

The Volcker Rule and its Impact on the U.S. Economy

First off I like the Glass Steagall/ Volker Rule approach to banking.  I believe it provides clarity and lucidity to people and allows them to frame their lending and investment approaches within their own personal context.  It also allows governments to quantify their contingent liability associated with deposit guarantees through vehicles such as FDIC and CDIC.   It further allows them to allocate money outside the ‘basic banking’ construct for additional return if they wish.

L ets look at Elliott’s arguments.  (He rightly notes that the opinions are his and his alone, not those of Brookings).

He begins with a macro point:

My core problem with the Volcker Rule is that it seems to me to be trying to eliminate excessive investment risk at our core financial institutions without measuring either the level of investment risk or the capacity of the institutions to handle the risk, which would tell us whether the risk was excessive. Instead, the rule focuses on the intent of the investment rather than its risk characteristics.

To this I say he is absolutely correct and actually makes my point for me.  Why should a Granny or a 28 year older saver need to consider “capacity of the institutions to handle the risk” when they make their monthly deposit to their savings account?  The Elliott argument to this point follows his general thread here that he looks at banking as securities/ risk oriented industry.  I say go back to Bedford Falls, New York if you want to see what banking really is.  Investment bankers have never seen this and that is not their fault.  Basic banking is taking peoples money/ savings and carefully lending it, but maintaining adequate capital to handle downside.

Lets move on to his four arguments:

Argument 1:  The globally-agreed Basel rules on bank capital take a more intelligent approach, by explicitly measuring both investment risk and the adequacy of capital to absorb those risks.

Yes of course.  But that does not make it right.  Nor is it backed by any evidence that regulators or risk managers have any competence in evaluating risk.  A 10% chance of something going south means little when it goes south and 100% is lost.  The issue with back to basics banking is to isolate undue risk from basic local and understandable risk.  More on this to come.

Argument 2:  Many supporters of the rule seem to be particularly concerned about investments made by banks which are funded with depositor money and on which the shareholders collect any gain.

At the core of this argument is the reality that ‘basic bankers’ are willing to live with low returns and do not wish to be concerned with risk/ reward calculations.  This concept is foreign to investment bankers.

Argument 3:  There is no reason to believe that regulators will be better at this than bankers, even recognizing the mistakes made by bankers in the run-up to the financial crisis.

I accept this point.  There is an arbitrariness involved in the implementation of the Volker rule.  But this argument is not enough to not pursue it.

Argument 4:  As a public policy matter, we want banks, even small ones, to hold substantial portfolios of safe and highly liquid securities so that they can meet sudden demands for cash …  A large portion of the investment losses at commercial banks in the crisis were on their holdings of securities purchased for liquidity purposes. They bought mortgage-backed and asset-backed securities that were rated “AAA” and which were quite liquid until the financial crisis struck and rendered them illiquid.

The best for last.  I cannot believe that the argument to hold MBS is held up as an argument against Volker.  Good grief.  Those toxic bonds and the promotion of them is precisely what caused the 2008 debacle.  Surely the writer cannot be making the argument that because some new fangled bond is liquid right now, that it is appropriate?  Surely not?  

Relevance to Bankwatch:

How far have we drifted from the traditional concept with the unfortunate title of ‘widows and orphans’ (look it up Mr Investment Banker).  If it seems unknown it is probably risky.  Implementation of Volker is being totally confused with modern concepts such as ‘weighted average risk’, beta, and a bunch of other investment jargon.  A good test for inclusion/ exclusion for Volker would be just that … jargon based /no jargon required. 

Lets bring some common sense back to financial services.  There is a need for utility banking whereby people have low expectations on return and high expectations on safety.  This is not a difficult concept.

Separate the high risk/ potential high return into a separate organization outside of Volker and let people who wish to play there do so.  Its very simple.  The volume of argument from the Elliotts and the Diamonds makes me wonder if they are afraid the savers will restrict their money to the utility bank and cut off cheap investment capital.

This is a seminal article and one that western companies and governments should study.  The general assumption is that manufacturing work is outsourced overseas due to lower wages.  Not so.

How the U.S. Lost Out on iPhone Work | NY Times

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

This story developed following a question last year from President Obama to Steve Jobs.  The backstory is that Apple has 40,000 employees in the US and up to 700,000 people worldwide engaged in making Apple products.  This in contrast to the US Auto sector, or GE, that each had at one time several hundred thousand US workers.

Obama to Jobs:

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products.

It begs the question.  Why does someone not try to build a manufacturing facility in the US that goes head to head with the Foxconns of the East?  To say it cannot be done is too easy an answer.