Time for a Friday rant. Headlines on investment banking in Europe in recent days have not made pleasant reading. Many familiar market names are braced for cuts as management look to scale back expenditure in the face of crashing revenues and soaring capital and regulatory costs.
Some of the supposedly stronger investment banks are delivering close to zero returns on equity. Some are repatriating out of London, others are cutting their dealing screens.
If you rely on your banks for liquidity, don’t worry, there is still time to call us.
In retrospect, the end of the investment banking era became inevitable post-Lehman; markets are evolving towards new paradigms – Mint is one of them. But, the uncertainty of a changing market environment adds to the underlying fears and threats, particularly of chronic illiquidity.
To those of us of a certain age, it’s all terribly sad and familiar. The businesses that made banks billions a few years ago, like derivatives and FICC (fixed-income, currencies and commodities), are now loss leaders. And the rule is: you are only as good as your last trade, so close them down and bin the staff.
Some banks are pinning their hopes on automated trade platforms, but as the collapse of Bondcube a few weeks ago demonstrated they have to work, and if they work, the market does not need 40-plus competing systems. And who is brave enough to entrust trades to an auto-execute in a fast market? What are the unforeseen risks? In time a few leading auto-ex systems will emerge – we’re very confident of Mint’s Volume-Match product. I’m not an expert in it, but I know a team who are!
But…it would be a mistake to think the current liquidity crisis is solely due to regulation and capital constraints. It’s far more complex. The banks themselves are only one part of the gathering storm.
One neglected factor is expertise. The loss of talent at the banks will prove a critical handicap. Many clients tell us they are worried at the lack of white hair on bank dealing or sales desks. Instead newly minted MBAs man the phones. A very senior fund manager told me: “Bill, none of these guys has ever traded bear markets – they think they can, but they are not going to get the chance to learn when it happens.”
One of the great delights working for Mint is the range and variety of experience my colleagues bring to the table. We are not fixed costs. We are paid commissions – earning shares of the profits we generate. As a result, we’ve acquired the collective wit and wisdom of thousands of years of trading expertise on our desks. Smart traders don’t retire, they follow the money.
Which brings me to my second concern: not only do the banks no longer function terribly well, but many of the basic building blocks underpinning modern financial markets are questionable.
In Europe we have a particularly profound problem with the banks. Hands up anyone who truly believes European banks are fixed? I thought not…
In the US, the authorities enforced a post-crisis recapitalisation. Banks were force-fed capital and forced to meet stringent rules and planning scenarios. Tough love, and at the time there was much wailing and gnashing of teeth. But, it worked. The money has been repaid. US banks have emerged stronger and able to renew their business.
The European approach was very different. Essentially it kept the banks afloat by addressing their asset problem – the European sovereign debt market. Anyone who thought the ECB (European Central Bank)’s brilliant TLTROs (targeted longer-term refinancing operations) were a brilliant idea to support banks by ensuring easy access to cash missed the point. It gave money to banks to save the crashing European government bond markets.
LTROs and the promise to do whatever it takes were a brilliant financial coup. They simultaneously reinforced confidence in the euro, rescued government bond markets, and avoided the ignominy of banks defaulting because of sovereign exposure. In the three years following Draghi’s “do anything” moment, we’ve seen the mother of all bond market rallies in the most unlikely European sovereign credits.
Unfortunately, the end result is a moribund market utterly dependent on the ECB. The ECB now sits at the centre of a massive mutual co-dependency scheme with the banks. I hesitate to call it a Ponzi scheme, because it didn’t start off with bad intentions. But the ECB is the only buyer, and banks lack the energy to do anything but place overnight money with it despite negative rates. To tinker with the ECB’s appetite for govies, covered bonds or anything else would rock the European boat into immediate capsize. European money markets effectively no longer exist, and without money markets as the core, the rest of the market structure teeters on foundations of sand.
The cumulative effects of QE (quantitative easing) distortion in the US and UK markets have been massively significant – impacting all asset markets from stocks to properties. I am beginning to suspect the cumulative effect of “do-anything”, TLTROs and QE and the rest in the eurozone will prove far more insidious.
The European banking system and Central Bank are now hopelessly tied in a Gordian Knot of potentially cataclysmic proportions. That’s perhaps the real reason no one can contemplate any kind of unwind. If the ECB was to suddenly stop? What then…. Rates to back up to 5, 10 or 20% in a heart-beat? Be concerned.. be very concerned..
Time for a Friday rant. Headlines on investment banking in Europe in recent days have not made pleasant reading. Many familiar market names are braced for cuts as management look to scale back expenditure in the face of crashing revenues and soaring capital and regulatory costs.
To save the village, we had to destroy it…
Mint – Blain’s Morning Porridge
Time for a Friday rant. Headlines on investment banking in Europe in recent days have not made pleasant reading. Many familiar market names are braced for cuts as management look to scale back expenditure in the face of crashing revenues and soaring capital and regulatory costs.
If you rely on your banks for liquidity, don’t worry, there is still time to call us.
In retrospect, the end of the investment banking era became inevitable post-Lehman; markets are evolving towards new paradigms – Mint is one of them. But, the uncertainty of a changing market environment adds to the underlying fears and threats, particularly of chronic illiquidity.
To those of us of a certain age, it’s all terribly sad and familiar. The businesses that made banks billions a few years ago, like derivatives and FICC (fixed-income, currencies and commodities), are now loss leaders. And the rule is: you are only as good as your last trade, so close them down and bin the staff.
Some banks are pinning their hopes on automated trade platforms, but as the collapse of Bondcube a few weeks ago demonstrated they have to work, and if they work, the market does not need 40-plus competing systems. And who is brave enough to entrust trades to an auto-execute in a fast market? What are the unforeseen risks? In time a few leading auto-ex systems will emerge – we’re very confident of Mint’s Volume-Match product. I’m not an expert in it, but I know a team who are!
But…it would be a mistake to think the current liquidity crisis is solely due to regulation and capital constraints. It’s far more complex. The banks themselves are only one part of the gathering storm.
One neglected factor is expertise. The loss of talent at the banks will prove a critical handicap. Many clients tell us they are worried at the lack of white hair on bank dealing or sales desks. Instead newly minted MBAs man the phones. A very senior fund manager told me: “Bill, none of these guys has ever traded bear markets – they think they can, but they are not going to get the chance to learn when it happens.”
One of the great delights working for Mint is the range and variety of experience my colleagues bring to the table. We are not fixed costs. We are paid commissions – earning shares of the profits we generate. As a result, we’ve acquired the collective wit and wisdom of thousands of years of trading expertise on our desks. Smart traders don’t retire, they follow the money.
Which brings me to my second concern: not only do the banks no longer function terribly well, but many of the basic building blocks underpinning modern financial markets are questionable.
In Europe we have a particularly profound problem with the banks. Hands up anyone who truly believes European banks are fixed? I thought not…
In the US, the authorities enforced a post-crisis recapitalisation. Banks were force-fed capital and forced to meet stringent rules and planning scenarios. Tough love, and at the time there was much wailing and gnashing of teeth. But, it worked. The money has been repaid. US banks have emerged stronger and able to renew their business.
The European approach was very different. Essentially it kept the banks afloat by addressing their asset problem – the European sovereign debt market. Anyone who thought the ECB (European Central Bank)’s brilliant TLTROs (targeted longer-term refinancing operations) were a brilliant idea to support banks by ensuring easy access to cash missed the point. It gave money to banks to save the crashing European government bond markets.
LTROs and the promise to do whatever it takes were a brilliant financial coup. They simultaneously reinforced confidence in the euro, rescued government bond markets, and avoided the ignominy of banks defaulting because of sovereign exposure. In the three years following Draghi’s “do anything” moment, we’ve seen the mother of all bond market rallies in the most unlikely European sovereign credits.
Unfortunately, the end result is a moribund market utterly dependent on the ECB. The ECB now sits at the centre of a massive mutual co-dependency scheme with the banks. I hesitate to call it a Ponzi scheme, because it didn’t start off with bad intentions. But the ECB is the only buyer, and banks lack the energy to do anything but place overnight money with it despite negative rates. To tinker with the ECB’s appetite for govies, covered bonds or anything else would rock the European boat into immediate capsize. European money markets effectively no longer exist, and without money markets as the core, the rest of the market structure teeters on foundations of sand.
The cumulative effects of QE (quantitative easing) distortion in the US and UK markets have been massively significant – impacting all asset markets from stocks to properties. I am beginning to suspect the cumulative effect of “do-anything”, TLTROs and QE and the rest in the eurozone will prove far more insidious.
The European banking system and Central Bank are now hopelessly tied in a Gordian Knot of potentially cataclysmic proportions. That’s perhaps the real reason no one can contemplate any kind of unwind. If the ECB was to suddenly stop? What then…. Rates to back up to 5, 10 or 20% in a heart-beat? Be concerned.. be very concerned..
Bill Blain
44 207 786 3877
44 7770 881033
[email protected]
[email protected]
Posted at 08:54 AM in News & Comment | Permalink