Heaven : No Volcker, No Vickers

Syria , the jobless and the banks

Heaven is a long mountain slope of perfect powder snow and a sky of an intense blue only found in the Austrian Alps. Amid the brightness and the swishing sound of my skis drawing perfect curves in the snow, a Norfolk terrier scampers around, capturing the prey that always eludes him, while an eleven year old boy relishes the lack of carrots and broccoli.

This exemplifies heaven for me, my son and his dog. Or I can describe heaven by quoting the Book of Revelation which says it is a cube of 12,000 furlongs and which author Terry Pratchett reveals is less than 500,000,000,000,000,000,000 cubic feet.

Numbers rarely illustrate; they often disguise. This is all the more true of statistics, as summed up in an oft-used quote attributed to British Prime Minister Benjamin Disraeli: “There are three kinds of lies: lies, damned lies and statistics.”


Thus statistics on unemployment draw a numerical veil over despair and misery. Angel Gurria, Secretary-General of the OECD, calls the jobless the “human face” of the economic and financial crisis.
Three meals over a twenty four hour period in a recent visit to Spain encapsulated the principal problem of our time:

I had lunch with the chairman of a state entity in the transport sector, who knew he was to be made redundant by the end of the week as part of the changeover upon the arrival of the new Spanish government of Prime Minister Mariano Rajoy.

That evening, I had dinner with friends. The husband, who is well over 50 years old, has not been able to find a job in the last two years. He will probably never work again.

Meanwhile, breakfast the next morning with the head of an investment bank was slightly delayed. My host, on apologising for the hold up, confessed it was because he was making a whole department redundant.

In the OECD area what is as worrying as a record unemployment rate of 17.4% for the young and 7% for adults, is the fact that this is becoming entrenched. Even in the US, the number of those unemployed for more than a year has tripled to a record of over 30%. Without the country’s labour market flexibility, these numbers would be even worse.

On a more positive note, the crisis is forcing countries to wrestle with the unions, which have been much too intent on safeguarding the rights of existing workers at the expense of the unemployed. It is driving governments to tackle rigid, job-destroying laws which set the cost of employing and firing workers at so high a level that hiring them becomes prohibitive.

A cartoon in Italy’s Corriere della Serra a few days ago took the Pope’s recent appointment of 22 new cardinals and added in the theme of our times. Pope Benedict XVI is shown naming the new cardinals while a lay bystander says to his friend ,”At least those are permanent jobs!”


We always learn the lessons of the last war and misapply them to the next. After the First World War, generals prepared for trench warfare. The Nazi Blitzkrieg proved them wrong. The debacle in Vietnam stopped the US from involving its troops in foreign wars for many years. The successful repulsion of the Iraqi conquest of Kuwait then took precedence in US minds. This was followed by the mire of Afghanistan. Success in Libya is clearly leading towards involvement in Syria. One can hear it plainly in government rhetoric, which is being subtly modified as the weeks progress and the massacres escalate.

I fear this misapplied lesson. For starters, Libya has a population of only 6.7 million compared to Syria’s 22.5 million. Unlike Libya, it has substantial minorities. And it is geopolitically infinitely more awkward than Libya, with Iraq, Israel, Jordan, Lebanon and Turkey bordering it, plus a host of more complicated issues involved. Additionally, the focus of our diminished capabilities may well need to be Iran.

Despite my disapproval of our budding involvement, an email from a Libyan friend in Tripoli tugs at the heart strings and makes one think that surely Syrians deserve the same sort of hope:

“During the conflict, Tripoli was like one huge prison; we could barely breathe, scared to speak on the telephone, scared to even listen/watch banned channels…people being arrested left, right and centre for just coming out of a mosque where there were rebel sympathisers…The only moments of joy we had were the sweet sounds of NATO bombing…yes, we were so desperate that we would celebrate every bomb dropped like a punch in Gaddafi’s gut…

Every family in Libya has had a loved on imprisoned, tortured, killed. We are still a nation deep in mourning but one that can finally breathe. After the liberation in Tripoli, it’s in a mess, people are armed everywhere, graffiti on the walls, rubbish all over the place, but somehow it’s all beautiful as we have our freedom and we have our hope. It is going to take ages to get where we want after the destruction of G’s 42 years but we will make it!”


Heaven is also a place where diatribes would not only be allowed, but be actively encouraged. Hence the following couple of paragraphs.

In a Financial Times column decrying the Volcker Rule, which aims to separate out most proprietary trading from banks, Chancellor George Osborne and Japanese Finance Minister Jun Azumi warned that it risked reducing liquidity in all sovereign bonds except for US ones. This is an incipient disaster considering government financing needs over the next few years.

They stated that “all countries need to be alert to the unintended consequences of financial reforms.” Quite. Dare I point out that the Vickers Report, an equally well-meaning piece of financial reform which is set to separate investment banking from retail banking in UK banks, will undoubtedly also have “unintended consequences?” I look forward to an FT comment from former Federal Reserve Chairman Paul Volcker and US Treasury Secretary Tim Geithner warning on this in the not too distant future.

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Obama the war president

Why stockmarkets will rise 50% in 2012

Waiting for my host in Zafferano, an Italian restaurant in Knightsbridge, I eavesdropped on my lunchtime neighbours and found myself surrounded by the themes of the moment. The husband and wife couple to my left were Germans, on a romantic weekend break in London, accompanying the gourmet menu with a bottle of Crystal champagne and undoubtedly heading to their hotel bedroom for an afternoon of nookie. They had an air of confidence, as befits the new masters of Europe.

On my right, the 35-year old Scottish redhead was working hard. He was making predictions for markets in 2012 in a desperate attempt to convince the bored investor sitting on the other side of the table to leave some of his funds with him, having clearly lost money in 2011. The air of bravura dissipated in the air, leaving the smell of his lack of confidence.


The myth that anyone can accurately predict what is going to happen in 2012 has been dispelled. The catchphrase of 2008, ‘return of capital rather than return on capital’, is back in vogue. Inflation, albeit much higher than any index reveals, is an acceptable price to pay on cash when compared to the risks of investing in other instruments.

The other myth, that money is cheap, also needs to be dispelled. Real interest rates are negative but the usual mechanisms of transmission are clogged up. Banks are being forced by markets, regulators and their (increasingly) non-performing loans to shore up capital. Not only are they not lending but when they do, they are arguably pricing risk correctly and demanding interest rates way above their apparent cost of capital, which makes the loans often unaffordable. Additionally, the private sector has been pushed out of the market by desperate sovereign states with acute financing needs. There is thus less money available and at a higher price, pace quantitative easing.


But this could turn tomorrow.

Close your eyes, dear reader, and imagine the degeneration of the Iranian situation. Another internal rebellion by the Green opposition street movement leads President Mahmoud Ahmadinejad to seek salvation via the unifying power of an external enemy. Using the excuse of the EU’s oil embargo and the US posting of an aircraft carrier in the Gulf, Iran closes the Strait of Hormuz, through which 35% of all seaborne traded oil passes. The price of oil explodes, rising 50%.

President Barack Obama declares war. The US economy takes off as it goes into war production mode. Investors and companies who have been sitting on piles of cash – estimated in the trillions – move quickly to invest it. Historians draw parallels with the end of the 1930’s depression on the back of World War II. Economic growth and inflation (which conveniently chips away at high sovereign debt levels) take off. The euro survives in its present form for no other reason than the arrival of positive growth numbers for most of the developed world and more profitable money-making opportunities; investors focus on riding the stockmarket bull.

By the end of 2012 share prices are up 50%. The fact that global equity markets lost almost $6.3 trillion in 2011 is a distant memory.

President Barack Obama is re-elected on the back of his successful waging of the war. Patriotic reasons ensure that enough Republicans shift their vote to him and the Democrats, thus changing Congressional voting patterns and breaking the Washington impasse. There is a bittersweet taste to Obama’s victory, but like all politicians, being in power erases any conscience prickings on how he got there.


Skiing blind over much of the Christmas break was a revelation. As snowstorms raged we fixed our eyes determinedly on ski guide Harry’s red bottom and followed him over the Austrian Alps. The glory of the endless powder snow, more than we had seen in decades at that time of year, was balanced by the fear of inadvertently heading over a cliff.

Courage comes in many different forms, not just physical. In Spain, new Prime Minister Mariano Rajoy vowed to move mid-week holidays, of which there are many, to the nearest Monday, thus eliminating the emblematic puentes. These create ultra-long weekends by bridging isolated working days. There are enough of them in a year to lower Spain’s productivity. His willingness to take an axe to the sacrosanct is hopefully indicative of the courage he will show in tackling labour reform. The country’s most damaging structural impediment to job creation is the elevated cost of firing workers. Explaining that to the Spanish public is not an easy task.

Meanwhile, Mervyn King, governor of the Bank of England, has reportedly been busy with road shows to convince other countries of the wisdom of the Vickers plan. He has been working especially hard on Germany, as the German adoption of the plan to separate retail/commercial and investment banking would lend credence to this counter-productive and expensive notion, which ignores the lessons of history and is set to be implemented only in the UK.

Banking crises are generally mundane, based simply on too many banks piling in together to lend money to people and institutions that cannot afford to pay them back. Examples range from the Latin American debt crisis to the more recent subprime and Greek debt crisis. The increased interconnectedness of the global banking system amplifies calamities from a domestic arena to an international one. I fail to see how Vickers’s recommendations tackle any of this.


The overturning of the old order even happened at the Loruenser Sporthotel in Zuers, Austria. Not in the form of London-style riots, nor the civil unrest seen in Cairo and Tunis. Instead, on opening the Christmas Eve menu, guests who had been going there for generations saw a Russian translation of the classic wishes for peace. There was a sharp intake of breath. The hotel’s owner, who had sworn never to let Russians into the hotel only four years ago, had broken his vow. A family of five were later spotted in the bar.

A revolution also occurred in Italian politics. Silvio Berlusconi’s babes, those glamour girls with stuffed lips who he appointed to political posts, vanished from the pages of the newspapers. Mario Monti, the new prime minister, took special pride in appointing women to his cabinet with technocratic skills and wrinkles. One is even overweight. In fact, dare I say this, she looks not unlike Angela Merkel.

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Chinese banks vs UK banks

Base instincts kept at bay

As I jostled the respectable blonde next to me in order to move forward in the EasyJet queue at Rhodes Airport, the equivalent in August of a circle of Hell in Dante’s Inferno, I could quite see myself throwing bricks at a store front in the midst of the London riots in order to walk off with some loot. It would have been the Etro store on Bond street rather than Footlocker and its Nike trainers. Still, the veneer of civilisation in all of us is barely skin deep.

Good manners are, though, a help in keeping our base instincts in check. Our Advisory Group on the drafting of the Voluntary Code of Conduct for Search Firms, aimed at placing more women on boards, part of the Davies report on gender diversity, was a case in point.

Savage competitors sat in the same room a couple of months ago and came up with a code that calls for headhunters to ensure that 30% of the candidates on longlists are women, that the search firms should provide support to first time candidates to prepare them for the process, and that they should continually help the client look at the intrinsic merits of candidates rather than simply proven career experience.

With this Code, we hope to boost the number of women on boards. Whether we will achieve the aspiration of women holding a quarter of all FTSE-100 board seats by 2015, a goal set out in Lord Davies’s report, is another matter. Currently, only 12.5% of non-executives in the FTSE-100 are women. In the US, 15.7% of Fortune 500 board seats are held by women. Like in the UK, this number has barely changed over the last few years.


The UK is set to ring-fence retail banking on the back of this week’s report from the Independent Commission on Banking. The government has said this will be implemented over a number of years – in truth, the markets and the banks themselves will ensure it is done as quickly as is reasonably possible.

In an ideal world, starting from scratch, this might be the right design for global banking systems. But the bottom line is that UK banks are being placed at a disadvantage to their foreign competitors, even if their clever lawyers manage to make some of the measures less onerous. Implementing a UK version of the US’s Glass-Steagall Act, repealed in 1999, when no other major economy is considering anything remotely similar is a shot in the foot for banks that are juggling too many balls. The US Volcker Plan, forcing banks to separate out some of their speculative activities is much more sensible, as is evidenced from the £2bn lost by a rogue trader at UBS.

Banks are not being made any safer. If “casino” banking is the problem, why raise the capital requirement to 10% of RWA on the retail side of the fence? Let alone the fact that history has many examples of simple lending leading to crises as banks follow one another like lemmings over a cliff.

Meanwhile, UK banks are trying to square the circle: bolstering balance sheets to comply with Basel III and lending to the UK economy under the Merlin deal between banks and the government, while dealing with a sovereign debt crisis in the Eurozone and turmoil in financial markets in turmoil.

There is no substitute for a thriving financial sector in the UK. The so-called rebalancing of the economy into some manufacturing/high tech utopia is impossible. The government should not be distracting bank management with yet more regulatory changes.


Chinese banks, meanwhile, operate under a different series of advantages and disadvantages.

Having read Red Capitalism, The Fragile Financial Foundation of China’s Extraordinary Rise, over the summer months, I am impressed by the Ponzi scheme that authors Carl Walter and Fraser Howie allege is being run by the Chinese government in the shape of its banks.

The evidence-heavy thesis in this outstanding book by two China experts runs thus: Chinese banks indulge in periodic lending sprees to keep the economy growing. This inevitably results in bad loans that are off-loaded into asset management companies (AMC), or bad banks, which never work out the debts – problem loan recovery rates are very low. These bad banks are funded by the People’s Bank of China (PBOC), the central bank.

The authors argue that in the name of financial stability the Communist Party has required the PBOC to underwrite all financial clean-ups: “With this option available to them, bank management need care little about loan valuations, credit and risk controls. They can simply outsource lending mistakes to the AMCs, perhaps on a so-called “commercial” basis, and the AMCs will be almost automatically funded by the PBOC.”

The book points out that state-owned enterprises (SOE), in their majority oligopolies, have come to own the government. The government’s initial policy was to create national champions that could compete on a global level, regulated by ministries and agencies. However when Premier Zhu in 1998 restructured the ministries and other entities he cut their staffing by over 50%. Their new heads were not ministers and lacked the seniority to speak directly to the chairmen and ceos of the major corporations, who were, in many cases, the former ministry heads of those left behind in the bureaus (my italics).

When transferring to those SOEs, the former ministry officials were able to retain their positions on the Party list. Today, 54 of the 100-plus central SOEs heads are on the nomenklatura list and hold ministerial rank. Meanwhile, the chairmen and ceos of the big four Chinese banks carry only the rank of vice-minister.

Thus when the chairman of PetroChina asks for a loan from the chairman of China’s largest bank, the banking head’s sole response must be: “Of course. How much and for how long?”

The authors conclude the following: “If properly managed, there is no reason why China’s use of debt cannot continue for a long time. Its growing dependence on debt to drive GDP growth implies that there will be no meaningful reform of interest rates, exchange rates or material foreign involvement in the domestic financial markets for the foreseeable future. Can China be thought of as an economic superpower, either now or in the future, with such a system?”

Perhaps one day, rather like Greece, someone will notice that the Emperor has no clothes. But in the case of China, with $3.2 trillion in foreign exchange reserves, they can afford their debt spree for another few years. If only we, in the developed markets, could indulge in such shenanigans.


My summer (re)reading included Thornton Wilder’s The Bridge of San Luis Rey. It is a jewel to be included in the most precious of libraries.

The story tells how on 20 July 1714 the finest bridge in all Peru broke and precipitated five travellers into the gulf below. Brother Juniper, a red-haired Franciscan from Northern Italy who is in Peru converting the Indians, sees the accident and resolves to prove God’s existence through investigating the lives of the five who died.

For, as Wilder writes, in the one line that summarises the conundrum of human existence: “Either we live by accident and die by accident, or we live by plan and die by plan.”

I have yet to find the answer.

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New era regulators and a passionate conversion

How tinkering may ruin bank boards

Take a look at the Financial Times, where Robinson Hambro authored an editorial on the Financial Services Authority and its excessive interference in the running of the boards of banks.

Or read the article in the text below:

The passion of the convert is a frightening thing. Be it former smokers who cast glances of derision at office staff puffing away on the pavement or, more specifically, the regulatory backlash on the back of the financial crisis, converts allow little room for a nuanced approach.

One hopes that the government will allow for a degree of flexibility in the separation of retail and investment banking as set out in the Independent Commission on Banking’s report, which is to be published in a couple of weeks. Recent leaks suggest banks will be allowed a longer time frame in which to apply this major upheaval to their business models.

Conversely, the Financial Services Authority (FSA) has shown a new-found rigidity. The UK regulator, lambasted for its ‘light touch’ regulatory approach, now boasts of its intrusive approach. There is no doubt that its earlier regime was one of the causes of the financial crisis, but it has swung so far the other way that it is causing harm.

This is especially true of its enhanced regime for significant influence functions (SIF). These are positions of responsibility within financial services institutions, namely those that can affect a firm’s risk profile, and range from chief risk officers to top traders and all board members, both executive and independent.

The FSA is rightly trying to tackle the lack of understanding shown by some executives and independent directors when dealing with the business of the financial institutions they were involved in. But its approval process has become a “nightmare” according to a top City lawyer, while existing and potential board members lambast the junior staff interviewing them and the morass of definitional bureaucracy.

Although there are some outstanding individuals at the FSA, it cannot afford to pay private sector salaries to the recruits – nor, for that matter, can the Bank of England, into which much of the regulator will be subsumed.

The FSA expects potential non-executive directors (NEDs) to know the financial institution backwards, despite not yet being on the board and therefore not privy to confidential liquidity ratios and the like. To try and ensure success, financial institutions now need to brief the candidates as thoroughly as possible, and help figure out who the independent members of the interviewing panel are, while guessing how this might affect the questioning.

The regulator deems it a success that around 10% of the candidates withdraw. The City view is that good people are being lost due to the intrusiveness of the process.

What is not being counted in that percentage are the potential non-executives who no longer want their names put forward. To be kept hanging around is unenticing to senior executives with a proven track record, while the indignity of possible rejection looms large. Not least if they are already on a board.

Why does this matter? The pool of non-executives for financial institutions is not a large one. A heavier burden of corporate governance requirements and an awareness of potential liabilities – including on the reputational front – makes the job less appealing than it used to be for outstanding directors who are prime candidates.

Overall, the recruitment process is becoming more expensive and the pool of candidates smaller, with “group think” arguably becoming even more pernicious. The risk to business increases when securing the right people for a board becomes too difficult. The best candidates are not only the (rather obvious) former partners in accountancy firms and the like – hence the current drive to diversify boards. It is questionable how the SIF process tallies with the current attempt to promote more women onto boards.

Interestingly, the intrusiveness of the SIF process also runs counter to some recent studies on board performance and share price. Most recently, a report by law firm Eversheds showed a positive correlation between share price performance and the number of independent directors on boards who had little or no direct sector-specific experience. The law firm focused on 241 of the world’s largest companies, including 50 banks.
A host of approaches are being used to improve governance and risk-taking at financial institutions in order to avoid another systemic financial crisis. There is no doubt that corporate governance at many financial institutions was proved deficient and the FSA is rightly keen to correct this. But it is key that boards have a diversity of complementary experience, recruited from as large a pool as possible.

The regulator’s SIF regime is proving counterproductive and needs adjustment. Regulation should not stifle governance, but improve it.

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The coming Euro Ministry of Finance

SIF and the Mayr: intrusive interventions

How the mighty are fallen! Not only Dominique Strauss-Kahn, the IMF head who allegedly sexually assaulted a chambermaid, or former Egyptian President Hosni Mubarak and his Tunisian counterpart Zine al-Abidine Ben Ali.

There are a host of others: one of the world’s foremost Israeli football agents, a household-name UK broadcaster, plus a number of European chairmen. Last week they were all at the infamous Mayr Clinic, whose mission it is to clean out its residents’ guts to restore them to health and energy via a quasi-liquid fasting cure. One would imagine the conversation would range from the FIFA scandal to Greek debt restructuring.

Instead, bowel movements vied with colonic irrigation, while in the dining room a guest desperately scraped away at the last vestiges of the sheep’s yoghurt and another gloated over the waiter’s mistake in handing him three rice cakes instead of two. Lady X trotted through in a towelling robe with pop socks while Lord Y failed to notice that some of his soup was finding its way onto his robe – not unusual when one is only allowed to eat soup with a teaspoon.


The talk was rather more interesting mid-May at a dinner party at my house (I dare not focus on the mouth-watering meal served, for the rules at the Mayr are strict – lights out at 9pm, no talking at meals – and one may be asked to leave for any infractions. Fantasising about chocolate cake may well count).

At the dinner, a former EU Commissioner presciently pointed out that the crisis in the euro area would lead to talk of political integration. Sure enough, earlier this week Jean-Claude Trichet, president of the European Central Bank, called for a “ministry of finance of the union”. He envisaged the ministry overseeing fiscal and competitiveness policies of the member states, enforcing regulation of the union’s integrated financial sector and, crucially, having the right to veto specific spending decisions.

At first glance, a wild card thrown onto the table by an intellectual with only four months to go in his current job. After all, there is no political will at a time when a weakened German Chancellor and French President are focused on their electoral misfortunes and on Greek crisis management. Without the two behemoths of the EU on board, a Ministry of Finance for the EU (more likely the euro area) won’t happen.

But a different scenario may be possible. It all hinges around the price Germany would exact for the inevitable Greek debt restructuring. This will probably hinge around a Brady Bond-like scheme, deepening the German commitment to the euro and the EU. Angela Merkel will need to convince her electorate that bail-outs for Greece and others will not recur and a Ministry of Finance for the Euro area with a German in the driving seat and the right to veto uncontrolled spending plans by member states could well be the price. It resembles the bargain around the creation of the euro: the European Central Bank was purposefully located in Frankfurt and drenched in Eau de Bundesbank. The Euro Ministry of Finance would go down well in Baden-Wuerttemberg, where two months ago the Chancellor’s party lost a seat it had held for 60 years.


A German executive who had just sold his firm to a large American bank sat in the Clinic reading his book with a couple of Q-tips stuck into his nostrils. The clinician came by every 5 minutes to twist them. The treatment is called nasal reflexology and is aimed at clearing the sinuses.

On your first day at the Mayr you giggle when you see such a sight. A few days later, you sit there in the same position, focusing not on the ridiculousness of your position, but rather incandescent with anger that a friend was given 8 gluten-free croutons in the vegetable soup and you only 4.

One can get used to the most intrusive experiences with the hope that they will accomplish what they say they will. This does not necessarily make them right or effective. At times, they can even be counter-effective.

Thus with the Financial Services Authority (FSA) and its enhanced regime for significant influence functions (SIF) at financial services institutions. SIF are those that can affect a firm’s risk profile. They include board members, chief risk officers and the like. The FSA is rightly trying to tackle the lack of understanding shown by some executives and independent directors when dealing with the business of the financial institutions they were involved in. This was, after all, one of the myriad reasons for the financial crisis.

But rather like the thrusting Q-tips, they have gone too far. The approval process has become a “nightmare”, according to a top City lawyer. The FSA expects potential non-executive directors to know the financial institution backwards, despite not yet being on the board and therefore not privy to the more confidential liquidity ratios and the like. Lawyers say that around 10% of the candidates have withdrawn after the first interview with the FSA. The regulator sees this as a success, a weaning out of those who are not qualified. The City view is that good people are being lost due to the intrusiveness of the process.
There are also potential NEDs who no longer want their names put forward. To be kept hanging around with the potential for humiliation is unappetising to senior executives with a proven track record.

To comply with the FSA, major firms are asked to allow the regulator to interview candidates at the short list, rather than preferred candidate, stage. To try and ensure success, the financial institution involved now needs to brief the candidates as thoroughly as possible, while the headhunter needs to help figure out who the independent members of the interviewing panel are and make some guesses as to how this might affect the questioning.

Overall, the recruitment process is becoming more expensive and the pool of candidates smaller, with “group think” arguably becoming even more pernicious. The risk to business increases when securing the right people for a board becomes too difficult.

The best candidates are not always the (rather obvious) former partners in accountancy firms and the like – hence the current drive to diversify boards. Interestingly, the intrusiveness of the SIF process also runs counter to some recent studies of board performance and share price. The Board Report by law firm Eversheds showed a positive correlation between share price performance and the number of independent directors on boards who had little or no direct sector-specific experience (my italics). The law firm focused on 241 of the world’s largest companies between January 2007 and December 2009. It included 50 banks.


There are strict rules at the Mayr. Woe to he who breaks them. Management reserves the right to ask the sinner to leave: there are consequences, and they are just, for sinful behaviour.

But not in the world of the economists, a profession that accepts no responsibility for forecasts that err widely and fails to see that mea culpas for the financial crisis must come from them, as much as from bankers, financial journalists, regulators and other protagonists.
A classic example was in the FT, where economics commentator Martin Wolf wrote about IMF candidate Christine Lagarde that she is “an extremely likeable and impressive person. But she is not the perfect candidate: her economics are limited.” His advice is for her to ensure she has a “first-rate economist” as her first deputy managing director.

The ability to accept one’s shortcomings and thus avoid pomposity is perhaps a gene that is absent in economists. To prove that my BSc (Economics) at the London School of Economics has not corrupted me, I must admit that a year ago, when the euro was at a four-year low to the dollar, I stated in this column that a Greek debt restructuring was inevitable. That looks ever more likely. I also stated, with the same assurance, that the euro would continue heading south. It stands at $1.4595. It then stood at $1.2235. You can’t win them all.


As I leave the Mayr Clinic, I am not sure I agree with Socrates: “We don’t live to eat, we eat to live.” But I do know that having made fun of its scatological emphasis, I have been unjust in not mentioning the golf, the wonderful massages, its warm staff, Lake Worth and the magical forests. I, like many of those mentioned anonymously in this column, will return for a yearly cure.

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Spanish opportunities

Regulatory tales from Switzerland and the EU

Sitting to the right of Mexican Commerce Secretary Herminio Blanco Mendoza at the World Economic Forum in Davos in 1995 was like being present at a wake where thoughts of the deceased shadowed all conversation.

The tequila crisis, based around the sudden devaluation of the Mexican peso in December 1994, meant that the usually overrun Mexican evening party consisted of only one table, with a lowly journalist in the seat of honour next to the host. Mexico was going nowhere in the eyes of an international community which shuns failure.
In this subdued atmosphere, Herminio kow-towed to the unknown Indian on my right, who owned the country´s third biggest steel producer. The firm was reportedly the largest foreign currency earner in Mexico.

A couple of years later, the Mexican party was in full swing again on the back of the country´s recovery, while Lakshmi Mittal was making his mark on the world.


Spain, dressed in grieving black for its lost credibility in financial markets, should take heart from this story. Firstly, the fundamental situation is not that bad. There is a lot more to Spain than troubled construction, tourism and some rotten savings banks or cajas which are being restructured.

Last week I munched on pimientos del padron in old Madrid and met with a law firm whose profits were up on last year´s, a technology company with 40% of its sales abroad, a listed asset management company which was set to post record profits in 2010 and a bank which earned a majority of its profits outside Spain.

On the negative side, Spain´s lack of political leadership is the major concern for Spain´s private sector. Permanently caught on the back foot, the government of Premier Zapatero has hired PR firm Brunswick and once again announced a series of measures to pacify the markets well after action should have been taken. The tardy Latin with the refrain of manana is thriving in government.

The self-fulfilling prophecy of panicked markets, rising interest rates and unsustainable debt is still a possibility. But if it doesn´t happen, buying opportunities are already bursting to the surface. The IBEX index of the largest stocks is down 20% in the year to date, while the two top banks, Santander and BBVA, both fell 20% in November.
If the worst possible scenario does take place, even more opportunities will arise.


From Spain to Switzerland. The Swiss finish, as it has become known, does not involve covering a luxury timepiece in melted cheese or chocolate. It refers to forcing the country’s systemically important banks to post higher capital requirements than the new regulatory regime, Basel III, recommends. In fact, UBS and Credit Suisse, have to post nearly double the amount – 19% of total capital by 2018 instead of 10.5% – on the back of the report by a local banking commission, in which they were represented.

But the Swiss finish is even more polished than is commonly known. Draft legislation to ensure that the new regime is implemented quickly was tacked on to the end of the report, according to someone close to the UK’s Banking Commission.

One can hear the sighs of envy from US Secretary of the Treasury Timothy Geithner and UK Chancellor George Osborne.


Meanwhile, the Bank of Spain, one of the most outstanding regulatory bodies in the world, has to implement 300 new regulations on the back of the Dodd-Frank Wall Street Reform Act. This will involve millions of pages which may well prove of little use, since implementation of the Democrat-inspired law will be lackadaisical at a time when the Republican star is in the ascendant.

The Americans, acting alone, are matched by the European Union. Operational soon, the newly-created European Banking Authority is meant to be a sheriff for the banks. It begins its life somewhat toothless as it cannot overrule national authorities. On top of that, there are two search criteria for its head which will ensure it is but "a pocket supervisor" with no true independence, according to a central banker.

Firstly, the chairman-ceo cannot be over 60 to ensure the generous retirement provisions for EU functionaries do not apply. Secondly, the London-based head will earn less than a director at the FSA as the role is at the level of a director in the EU strata, as opposed to the two higher roles, a director general or a commissioner.

The pool of candidates has thus been effectively reduced. No major regulatory figures with clout and independence will consider the job.

Perhaps it is not that important. The international regulatory agenda has become a free for all, with calls for global coordination only a distant echo from the months after Lehman exploded.

One can´t help thinking that if only the Swiss were in charge, banking regulation would be globally consistent. In fact, all it takes is a day´s skiing in Davos/Klosters to show that myth up. Incredibly enough, t-bars and other old-fashioned lifts are still in use because of disagreements between the two villages about upgrading the facilities.

Country stereotypes, be they Swiss or Spanish, are not all-encompassing.

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