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Sunday, 21 October 2012

Citicorp - Vikram Pandit's ejection

When a CEO and COO both are sudenly ejected we assume a corporate power-play. In this case the failure that appeared to trigger hands-on Chairman Mike O'Neil's acceptance of Pandit's and Havens's resignations, according to the FT, is the Federal Reserve (US banking regulator) decision to "fail" Citibank's stress test results and stop its proposed share buy-back and insist the bank build up its reserve capital instead - an argument that could also be applied to non-guaranteed bonus pay-outs. Pandit's original appointment to head up Citi was opposed by the FDIC. Pandit also had a reputation for impatience and angry outbursts - not surprising in view of the travails of Citi in 2007, a bank that would have been broken up if not for the international legal and regulatory cost complications. The problems of the stress tests on the 19 top US banks are onerous on top of their dumbed-down macro-economic simplicity. Three failed last March. It is simply remarkable that Citi could not deliver sufficient intelligence to do this job well. The Fed reviewed the bank balance sheets to determine whether they could withstand a crisis that sends unemployment to 13 percent, causes stock prices to be cut in half and lowers home prices 21 percent from today's levels. Citi's failure was a shock. Analysts expected the bank to pass after it reported two years of profits and some expected the bank to increase its dividend to 10 cents a share and buy back stock. Pandit opted to buy back stock, to reward shareholders, try to boost the stock after over 80% fall and thereby annouce return to normal health. Instead the stock fell in the after-market. For banks that failed, the Fed can stop them from paying dividends or buying back stock. The Fed can also force them to raise money by selling additional stock or issuing debt. In fact regulators can force the bank to do anything it deems necessary including selling assets. Smith Barney was sold by Citi at below book value. The Fed has conducted the stress tests each year since 2009. March this year was the first time that the results were made public. The problem is really that banks on both sides of the Atlantic have never had it spelled out to them clearly and forcefully what their central banks (regulators & government) have done for them and what is expected of them. Banks are like any major private corporations extremely unwilling in any case to give in to regulator and government pressure, to be dictated to, because that sends a long term precedent. They have failed to appreciate what the regulations (Basel II etc.) demand, essentially that the banks are fully conscious of their macro-economic circumstances. This also demands having risk officers and macro-economists in the boardroom, which most bank main boardrooms fear and resist absolutely because it means granting techical experts the power to stop short-termist high risk decisions. The Credit Crunch overlay on recession (US and UK beginning in 2008) doubled the nominal (unrealised) capital losses of the major banks. The central banks and governments stepped in and effectively refinanced half of the loss in expectation that this would be recovered over a few years out of collateral and security cover of bad loans and investment losses. The banks had to recover the other half by selling assets, cutting costs and rebalancing their balance sheets. The continuing weak economies of the US and UK and later of the Euro Area when it entered its full recession after 2011, meant that assets including operating units had to be sold bekow book value (at a realised loss) and cost-cutting has been sluggish (not least to maintain bonuses and because major risk accounting and general ledger systems all need replacing). Changing the profiles of balance sheets cannot be done quickly except in derivatives exposure, which does not according to the accounting rules make a big enough difference to capital reserve requirements. The most important changes in the balance sheets require US and UK banks especially to shift loan exposures from property lending to industrial production and that means from higher to lower margins. The banks are most reluctant to do this even though it would do most to improve economic growth, especially by boosting small business lending. A macro-political problem is that banks resist mightily the idea that they should forego short term profits for longer term economic health. This is the battleground that regulators if given enough political support must focus on. It is what the banking regulations are primarily concerned with - the role of bankiing in the wider economy.

Tuesday, 31 January 2012


Tobin Tax - and the Merkozy version that David Cameron rejected to protect the City of London's premier position in world markets? He may or may not have understood issues of its practicality? Probably not, since if he believed it to be unworkable he might have said so or simply gone along with it until the idea falls over? But, of course, the spat between Cameron and Sarkozy (ongoing) is a political win-win.
No one is asking publicly, however, whether taxing wholesale financial dealing transactions is technically feasible?
Whose and what massive computing facility will be needed to track & tax, or is it to be reported only by the taxable firms and are they all known in every jurisdiction when so much trading volume is cross-border?
There are enormous technical problems facing the whole concept. It is an idea that plays well with the general public and may even put the fear up some bankers who should know better. The fact is that it will take years to create a workable tax system. What are the problems?
- all cash markets do not officially report all transactions, most of them none:
- FX (foreign exchange trading) we know only its size as a rough guess from a periodic survey every few years covering only a few weeks in one month (a survey coordinated by the bank of International Settlements - BIS)
- Bonds markets turnover are only reported by what is transacted in exchanges (to be found glob ally in FIBV data), but that is a very small %, less than 5% of the total
- Money markets trading has no officially collected reported data and few people know how to even estimate what it might be - a few $trillions for sure
- We know a lot more about derivatives trading volumes because these go through exchanges, mostly, but not all; many are between banks and their clients only
- ditto commodities, which is almost all through exchanges
- there are issues about black box trading, dark pools, all the various alternative trading system engines
- every deal type has various transaction types - most complex to calculate principle amounts?
- we don't have a definite taxonomy, a set of inviolate standards to define all deals by type. Many are easily redefined, reclassifiable, which can be an interesting game if there are vraiable tax rates depending on deal type!
- should authorities tax both ends of a deal and everyone in the middle the same?
- what happens when deals are struck between jurisdictions with different tax rates?
- clearing houses only report netted data so gross data has to be estimated roughly
- internal crossing networks within large banks, institutions & universal groups is a major unknown that will tax banks and others how to measure for tax pruposes.
- It follows therefore that deals would have to be all reported gross and principal amounts, buy & sell & intermediary amounts, and maybe the tax is exerted on spreads as representing the true principal being traded in some cases. The standards are not well-defined for this.
- Would we have zero tax for internal intra-group deals? But, that would be considered a massive competitive advantage grossly unfair to medium and small financial firms.
- Also, how are multi-legged deals to be taxed? A first deal gets broken apart and re-used in further deals including all that goes via inter-dealer brokers? This is more akin to accounting and risk adjustment transactions to support an original deal. Would a tax on dealing result in higher risk-taking because all the secondary and teriary transactions for risk mitigation are taxed?
- How is market-making dealing to be tax classed when it is merely to stir the market and keep prices liquid & known?
- Shouldn't there be a tax difference between what is a customer deal and what is own-book trade or merely swapping (whether bed & breakfasting or not) between wholesale professionals.
- Will banks load all the cost of any tax onto customers?
- Then too, the publicly stated 0.01% or 1 basis point tax is ridiculous because it cannot apply to all markets since some operate on much smaller spreads & margins than the % tax imagined (according to news reports). Tobin suggested 0.5% (half a basis point) and others suggest 0.01% to 0.1%. All of these can swamp margins in one market or another.
- In FX 0.0005% can be a typical spread. Would FX (and other markets) volumes fall to such a level that liquidity and price discovery suffer to the extent that tax on taxable profits fall more than the amount raised in a transaction tax?
- Lastly, politicians and their public imagine that gross turnover in the markets is real money. Most traders have no idea either what is real in the sense of actual cash transacted as opposed to credit and derivative security or unsecured 'trade credit' in finance. The actual sums committed to the secondary markets are churned hundreds of times in a year. The apparent equivalent of the whole of world GDP is traded every week for 40 weeks a year! Of course, that is not really what is happening - it is 85% merely churning and moving prices.
Tobin years ago said his tax was unfeasible. He revived it again later. Some experts have proposed a two tuer tax to account foir the vast bulk of trading described as "noise", when really it is somewhat more than that! Others obsequious to the idea claim that modern technology makes exerting the tax, just like "stamp duty" to be eminently feasible, even easy. They must be either errant fools or paid consultants?
If a financial tax like some kind of fixed or variable stamp duty was to be made in some way realistic it should probably tax wholesale market balance sheets like a witholding tax rather than try to tax every line item of deal volume. Stamp duty tax on stock exchange equities trading is the easiest because there the spreads are largest. There is also little evidence supporting capital flight because of variations in stock exchange taxes. These are ultimately paid by customers of course!
The Merkel-Sarkozy-Tobin Tax supporting politicians and advisors imagine that several hundred $billions could be raised for good global causes. worth more than most countries' GDP or over half a per cent of world GDP. But who pays in the end?