No Quarter Asked, Or Given?

Newedge - Blain's Morning Porridge - September 30 2011

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: [email protected]

Quarter end...ouch...although the numbers will be miserable...remember a new one begins tomorrow!!

German EFSF vote passes and market goes. So what? No real reaction except scepticism. I could fill this morning's porridge with analysis of how dangerous it is waiting till mid-October for the Slovaks to ram their vote through, or how German legislators hedged the vote: they didn't make themselves popular: recent polls show 80% of German electorate is opposed to European bailouts, so the 90% of Bundestaggers voting for the EFSF needed to sound harsh about things like no increase in its size, etc etc etc. It’s just more noise.

Merkel says Germany is not a bottomless money pit for the euro – but does that mean it is? Best news I saw yesterday was Deutsche Bank getting a two-year €1bn senior funding deal away – apparently the first senior deal for three months. But the spread, at Libor + 98 basis points, is pain indeed. So instead of more agonising about who pays what when Greece defaults, or who gets today's Barroso award for the most useless contribution to the euro debate, it's time for a good old-fashioned rant.

Everyone from the smallest child to as-yet-undiscovered tribes in the Amazon basin knows that banks are to blame for this crisis, and every banker is definitionally an evil fatherless son or daughter. Investors around the globe are quite properly spanking the be’jesus out of any financial stock. Viva la revolution! Overturn the banks and decimate bankers.

Which I would consider somewhat unfair. I like banks. I've worked for some of the best, and had the exquisite delight of being sacked by one...well...one that was less exciting. The number of truly excellent bankers I’ve met greatly exceeds the lazy undeserving self-servers I’ve seen reach the highest levels. By and large, it’s been a career where the focus is on results, hard work gets rewarded, and failure is ruthlessly purged. It’s been fun and the happy smiling face of clients as we lent them large amounts of money (and trousered our disgustingly large fees) made it all worthwhile, and fuelled global growth!  

They were happy days. Banks that could demonstrate sound CAMEL fundamentals (Capital, Assets, Management, Earnings and Liquidity) were able to raise capital and liquidity from an open and welcoming investor base. Dull, boring and predictable banks were market darlings.

Now it’s all changed. The crash of 2007/8 exposed the exuberance of the previous years - banks were castigated. The fact that successful lenders need borrowers became secondary to the politicians and regulators demanding it 'can never happen again' and putting in place rafts of new and crude legislation, rules, requirements and conditions.

But not only has another crisis now arrived that’s even larger in scale, but it's going to be more difficult to solve because banks are now perceived to be investment pariahs. Few and far, far and few are investors willing to invest in them.

I reckon banking regulation is now the real crisis. Banks were burdened by ill-considered liquidity directives to stop funding themselves, and were steered to buy now bust government bonds. Or insisting on 'slam the door shut after the horse has bolted' capital increases leaving banks perilously over capitalised (Blain's Mantra no 7: Nothing is more dangerous than an under-capitalised bank, except an over-capitalised bank. Too much capital makes banks lazy and do stupid things - like hold Greek bonds! Yep, capital is needed today – but it's only one part of the crisis.

Confidence in banks is tumbling because of uncertainty on losses, but also because smart investors realise the regulatory community have FUBAR'd the whole financial system. Some bankers I speak to now say the regulatory quagmire consuming banks is essentially unworkable! Protection against systemic risk!!! Basle 2 was quickly gamed and optimised like a massive CDO! Ah...! Arbitraging capital adequacy rules...days of wine and roses indeed.

Add in political imperatives to lend, or making them the whipping boy for every penny unwisely spent, and it's clear banks remain vulnerable. Politicians need to show someone is being punished.

But, the consequence is a loss of faith in banking systems - and that’s a massive factor in the confidence gap that is causing the global economic slowdown. The reason bank stocks are languishing isn't just the weakening market numbers they will show this quarter, the damage to their asset books of the mounting recession, or the froth blowing off asset bubbles like housing. Nope...these factors are real, but who would really want to invest in entities where government interference has made a bad situation much much worse.

Moreover, I'm not entirely sure we can blame bankers for the current crisis of confidence in the euro. That's a long-term consequence of a mass political delusion of European unity that hit politics in the 1990s. 'Incoherent monetary union' to quote a senior banker. The fact that the euro has now been exposed as essentially naked is a crisis - and a crisis that will impact banks first and then spread through the whole economy. But it’s not the banks that allowed the euro to happen.

So why blame the bankers? Politicians and their legions of faceless technocrats, Eurocrats and other hangers are guilty of making bad banks worse. It’s them we should really loathe. Anyone who secures their living 'by hand or by brain the full fruits of their industry' should be spitting blood at the featherbedded state functionaries our kids will spend their lives slaving for in order to service their gold-plated pensions. Civil Service pensions are a major reason countries will stay bust no matter how much austerity is thrown at the tax base.  

Here's a better idea. Abandon bank regulation and capital adequacy rules and let bad banks fail. Guarantee you the good ones will rally. And when everyone else is betting against a sector and it's tumbling in price is the time to step in and buy! Meanwhile...back on planet Earth. Something wrong today. London is empty. Not a soul on my train and no rugby scrum at Liverpool St. Reckon everyone skiving to enjoy the last day of summer.

Out of time and have a great weekend.