January 12, 2012 § Leave a Comment
The following is reprinted from Dealbreaker. Click HERE for the original piece.
Nikita Khrushchev, the former First Secretary of the Soviet Union, once remarked, “Berlin is the testicle of the West. When I want the West to scream, I squeeze on Berlin.” Given the EU’s current predicament, I find this statement prescient. But the people of Berlin could not care less about that predicament. In fact, most Berliners find Greece a bore and Portugal simply a destination for fast, easy women. So why am I so captivated by Chancellor Angela Merkel’s painful pandering and yet also sympathetic with Germany’s plight?
Germany has served as the antithesis to the rest of the EU’s character these last four years in fiscal policies, labor markets, free trade, and general stability. In my mind, Germany is basically being gangbanged by the rest of the EU, while paying handsomely for a reach-around. Yet it’s hard not to acknowledge that the nation’s surging economy has been made completely dependent on the needs and desires of other European nations to purchase exports while keeping said goods and services cheap and affordable. In fact, next to China, Germany is the largest international exporter. With that in mind, perhaps it’s understandable that many people I’ve spoken with don’t appreciate Merkel’s international importance. Many Berliners appear dumbfounded after learning that she can be found on page one of the NYT and WSJ almost weekly. As one gentleman here remarked, “She must make your newsstands much less desirable.”
Most Berliners don’t like Merkel, but can’t really say why. All the attacks I’ve heard are of the ad hominem variety, referring directly to her looks. Pulling from a cigarette, one Berliner told me, “Her fucking haircut is embarrassing for this city,” before collapsing on the bar in laughter.
Although the Germans tend to act indifferent towards their country’s newfound responsibility in keeping the EU from collapse, they admit that politics have completely ground to a halt these past few years. But to Germans, failure is not an option. No “bailout” is too big. There is no chance of Germany breaking away from the EU or printing its own currency. Basically, this is a blip in the EU’s (hopefully) long history. As a bar patron expressed, “Keep the tobacco rolling and the pilsner flowing. These … these are the things that keep Germany functioning.”
As Klaus Wowereit, the mayor of Berlin, stated this past year, “We want for Berlin to become richer while staying sexy.” One can’t help but agree.
November 24, 2011 § Leave a Comment
FT Alphaville penned an interesting article this morning regarding the state of investment banks and how medium to bulge brackets are reacting to increased public pressure on compensation, living within unchartered regulatory environments, and reacting with haste to immediate shifts in market activities.
According to the post, the following trends are noted.
I) a shift in compensation structures will result in reduced headcounts as opposed to reduced bonus pools;
II) commercial MBS markets are still reeling, and banks are having a difficult time securitizing this debt with a lack of demand and erratic regulatory initiatives;
III) commodities markets have been negatively affected in Q3 by EU sovereign debt woes and increased risks associated with pricing mechanisms. We should expect many redundancies within the commodity groups over the next two quarters;
IV) many hedge funds are seeking one or two prime brokers to limit complicated exposures to numerous entities.
Let’s work backwards. Regarding point IV, FT Alphaville properly notes that hedge funds are actually returning to the pre-Lehman bankruptcy days, when many funds operated with just one or two full-service prime brokerage firms. Either hedge funds want to cut back on their internal accounting work by taking a few cooks out of the kitchen, or they’re highly confident that specific prime brokerages are healthy enough to weather another panic in the financial markets. For this exercise, I choose the former.
With regards to point III, I believe that this is another short-term “correction” that will end up biting many i-banks in the ass over the next year. Whether we like it or not, commodities will be playing a rather large role through these next few years as the States and EU players begin crawling from monetary calamities and increased fear/lust/paranoia associated with the manufacturing and agricultural sectors. This is simply inevitable in my opinion.
On point II…well, there isn’t much to be said. The real estate markets, both commercial and residential, will continue to have a tough time through the foreseeable future. Home prices are still dipping by 2-5% YOY, and, although numerous corporations are repeatedly posting record profits, geographical market growth will continue to be hindered by high unemployment rates and tired municipal bond markets. In addition, and taking into account the three aforementioned problems that will continue to perplex corporate growth strategies, many CMB securities are difficult and risky to price right now simply due to regulatory/economic uncertainties. I have a feeling that the CMBS markets are going to continue to face slow growth through the first few months of 2013 (post election).
Finally, point I. Well, this is a huge problem, and one that I only see getting worse in the coming years (particularly for seasoned i-bank folk). With the great bonus backlash of 2009, compensation structures were tremendously altered. Performance-based bonuses were hindered, the incentive program was altered, and most banks significantly increased salaries. With a smaller bonus pool to report to shareholders and the public, much backlash was averted…right? Right? Anyone? However, with smaller profit margins and a rather large decrease in revenues, these shortcomings cannot be corrected by simply cutting back on bonuses. Instead, budgetary cutbacks will be made, heads will be cut, and blood will wash through the streets with all necessary corrections. Simply put, many folks will be deemed far too expensive to retain, teams will be stripped, and the pricing mechanism put in place for recruiting talent will be significantly altered for the next few years. In short, this is actually a difficult moment if you’re a supposed “big swinging dick” that’s been pigeon-holed into a tight sector these past few years.
However, looking over the list presented above, many of these problems could’ve likely been averted had the banks not made staffing/industry decisions with such haste. In turn, they’ll soon be making similar decisions in haste going forward for short-term gains with long-term losses. These losses will be seen with hedge funds placing all their eggs in one basket using a single or double prime brokerage, cutbacks in commodity focused groups prior to further volatility in pricing and competitiveness, and a progressively difficult compensation structure, thus limiting the ability to recruit and retain great swathes of talent.
In short, I feel that the financial services industry is doing itself a tremendous disfavor by reacting in haste to short-term challenges. I suppose we’ll see whether I’m right or wrong over the next two quarters.
The State Of Investment Banking [FT Alphaville]
November 8, 2011 § Leave a Comment
So it begins.
Fed Governor Daniel Tarullo gave a speech on Friday to the American Bar Association where he discussed international efforts on bank regulation. He reviewed the steps that have yet to be taken to complete the reforms of capital and liquidity standards and he discussed priorities for the financial regulation of cross-border firms. He also discussed Basel implementation, where he emphasized that the U.S. will not be implementing fully, because of its dependence on credit ratings.
Fed Governor Tarullo: U.S. Not Implementing All Basel Reforms [ABA Dodd-Frank Tracker]
November 4, 2011 § Leave a Comment
Jon Corzine, Policy Enthusiast.
(Head to the 61 minute mark for comedy gold.)
November 3, 2011 § Leave a Comment
The New York Federal Reserve issued a report dated September 2011 in regards to credit default swaps (CDS). The writing is interesting, particularly given the amount of coverage that CDS have received of late, along with the anger expressed towards a lack of regulation in these markets.
After a cursory glance, the report notes the low volume of executed trades when compared with other instruments/securities. Additionally, hedging these derivatives is usually done in piece-meal, rather than alongside traditional securities.
In short, the report doesn’t provide a terrible amount of incendiary language and will thus likely be buried outside of institutional reading grounds. Go figure.
Yet! The report spends a great deal of time and energy discussing price discovery and the need for transparency when facing catastrophic conditions akin to September 2008. And why not, particularly when, in the past, they’ve dastardly linked CDS-based correlations with causations? Everyone needs to pad their points now and again.
Without further adieu, here’s the link. It’s a long read, but well worth it.
h/t _CB01 via Twitter
November 1, 2011 § Leave a Comment
We all know what happened this morning. A little shop run by Mr. Corzine took the dirt nap. I’m personally surprised that a “meeting of the minds” didn’t take place, much like the LTCM bailout. However, these stories generally take time to digest, and many potential liaisons will likely be aired and questioned as to why the noble and diligent folks within the SEC weren’t alerted to the movement of funds. Or maybe not.
Regardless, there comes a time when a story is presented with absolute brilliance. It needs no further clarification, footnotes, or edits (at least for the time being). Well, that time is now.
As a caveat, I agree with everything presented in the following article, with the exception of the author’s sense that this will “[freeze] the money markets.” Lest we forget that we’re heading into an election year. If anything (given the information presented by ZH via NYT), further regulatory measures will be imposed, folks will go to jail, and Corzine will forever be marked as fraudulent.
With that being said, enjoy. And get ready for Barney Frank to piece together another useless piece of legislation.
October 27, 2011 § Leave a Comment
Still, despite the uncertainties that remained, European leaders hailed the package as a milestone in their efforts to tackle the crisis. “I believe this is a global, ambitious and credible response to the crisis,” Mr Sarkozy said.
In other news, short Merkel.*
*Full disclosure: I’ll be travelling to Berlin at the end of the year. I do not endorse riots, but I certainly hope the currency spread is minimized to my benefit.