Mike Cagney is one of those Silicon Valley entrepreneurs for whom humility is a foreign language.
Since raising around $1bn at a $3.8bn valuation for his online lending shop, SoFi — which stands for Social Finance — he has called his peers unambitious dorks for working with Wall Street and told America’s biggest banks to watch their backs, I’m coming for you.
All with one key message: SoFi is not a bank. It’s “happily not a bank”. In fact, it’s “better than a bank!”. Or even better still, it’s a way to “un-bank millennials”. One could say, SoFi’s ‘not a bank’ almost to the point that the word ‘bank’ itself becomes entirely meaningless. (The common view is a bank’s a platform which uses network effects to transfer risk from those can’t afford it to those who can.)
The Financial Stability Board wants banks to raise up to €1.1tn in so-called “total loss absorbing capital” (TLAC) to make the banking system less risky.
It’s their attempt to put skin back in the game for bank stakeholders and ease them off the notion that the government will always be around to rescue overly imprudent institutions.
The authors of “The end of banking”, however, see things somewhat differently. In a post last week they outlined how it’s the digital age which has rendered the limited liability corporate structure unfit for purpose and in the process made the world much more systemically risky. Read more
It is a business now, some of these organisations have complexes not quite as big as Google but it is an office facility and people come to work. Instead of coming to work out how to create things for cell phones, they go after banks because that’s where the money is.
That’s from cyber-security expert Clay Calvert, director of Cybersecurity at MetroStar Systems, who we contacted last week to get some insight on the multiple ways banking is turning into a cyber-security story.
Also, we wanted to know the degree to which everything is spiralling out of control for banks because cyber criminals are now organising themselves in the style of more materialistic criminal syndicates before them. It is, experts fear, the beginnings of a new cold war, of Spectre-style proportions. The criminals aren’t lone hackers in basements anymore. They’re highly organised networks, often working out of jurisdictions which are happy to protect them. Read more
The case study in how a business can exist outside of the embrace of traditional banking — as, in this case, traditional banking is afraid of being done for money laundering, since the product in question is still illegal on a Federal level — continues.
That’s despite the efforts of Fourth Corner Credit Union in Denver, which, per the NYT, “applied in November to the Federal Reserve for a “master account,” which would allow it to interact with other financial institutions and open its doors to some of the hundreds of state-licensed marijuana businesses in Colorado.” It didn’t go well.
Still though, the legal pot industry is forging on regardless.
From Convergex’s “Beige Book of Pot” ‘on Monday (with our emphasis):
Our most recent survey showed even more progress among our contacts’ stores, and demonstrated the natural evolution of a maturing industry. Here are our findings from the interviews we conducted last week:
Evidence of a potentially large change in India’s banking system from Credit Suisse and Neelkanth Mishra’s India markets team:
Even within bank loans, which are losing share to bonds in corporate borrowing, [public sector, or PSU, banks] are losing share to private banks, being short of capital. In this environment, by allocating just Rs80 bn for PSU bank recapitalisation in the FY16E budget (half that of the previous year, and the lowest after FY10), the government has shown willingness to let PSU banks fall in relevance, and not perpetuate moral hazard by bailing out weak banks. This is a remarkable and unexpected change in stance, given the potential advantages in micro-managing three-fourths of the bank lending space in India.
And lo did the wails of certain politicians rent the sky. Read more
That was our takeaway from reading Bill Dudley’s speech at the “Workshop on Reforming Culture and Behavior in the Financial Services Industry”.
His thesis is that skewed incentives in banks and other financial firms encourage excessive risk-taking and even outright illegal behaviour. Losses from wild bets that go badly tend to be borne by shareholders and the rest of society, while the gains are often hoarded by the mid-level individuals making the trades. There is also a timing issue, where a trader can collect a bonus today for engaging in an activity that appears profitable in the short-term but has a high likelihood of catastrophic failure in the medium term. Read more
There was no bald supervillain stroking a white cat, but other than that the City of London hosted a conspiracy theorists’ perfect scenario yesterday: a meeting organised by the Rothschilds, sponsored by the Rockefellers and with managers of $30tn, or more than a tenth of all financial assets worldwide, in the room. Even the British royal family was represented, essential for any decent conspiracy, although usually Prince Philip is preferred to the Prince of Wales.
Perhaps there were shape-shifting reptilians present, as per David Icke. But if so, they were keeping their heads down: rather than discussing how to rule the world, the focus was on “inclusive capitalism”. Read more
The Bank of England is perhaps a little late getting around to this explanation of money creation and a debunking of the money multiplier theory… but that really doesn’t mean it shouldn’t get a wide reading.
Do click through for the full thing and we’ll put some tl;dr fodder below the break:
It’s bad enough having the most expensive bank bailout around. But not getting official recognition for it? Unbearable!
Luckily for Ireland, there’s a concerted effort underway to right that wrong… (h/t Nama Wine Lake) Read more
It’s bad enough finding out that you’ve been made redundant when your pass fails to let you in to the building. But finding out that you’ve been sacked and replaced by a computer (which has more or less made your skills redundant)? That’s even worse.
So spare a thought for David Gallers, former head of CDS index trading at UBS, who was let go last week, to be replaced by snazzy new algo. Read more
Here’s a talking point: “Socially useful banking.”
As luck would have it, Lisa Pollack has been invited to chair a discussion on this very topic, featuring none other than FT Alphaville favourite, Andy Haldane. (Mr Haldane is the Bank of England’s executive director for financial stability but you knew that.) Read more
John Mann, the battler from Bassetlaw, is back with the results of his very own banking inquiry.
The Labour MP set up the alternate inquiry after expressing his displeasure at the omission of fellow committee member Andrea Leadsom and his good self from the specialist Libor inquiry because they were “too outspoken”. The words “whitewash” and “farce” also made an appearance: Read more
Here are some charts we knocked up (in our usual MS paint, so excuse the pixelation) to try and explain why the banking system’s biggest problem may lie in ‘negative carry’ — a phenomenon that would make investment-focused lending unprofitable, pushing the onus instead on predatory-profits extracted from economically destructive practices.
We begin with the following (click to expand): Read more
There are many gems in the annual report of the Bank of International Settlements that came out on Sunday. One of the most intriguing is a trail which leads to an actual estimate of the cost to society of scientists becoming hedge fund managers.
The trail starts at a section about debt sustainability across a number of countries. It notes that elevated levels of debt got us into this crisis and the situation still hasn’t improved for many countries. In fact, for some countries, the debt burden of the private sector has gotten even worse. Check out the last row of these charts on debt service ratios (looking at the red lines): Read more
It’s a commonly-held belief that the bailout of Spain’s banks won’t be sufficient to solve the country’s problems. It will increase the government’s borrowing, and may not be large enough anyway.
The real solution is
fiscal banking political some kind of union. See if you can spot one of the barriers to moving forward with that: Read more
It has come to FT Alphaville’s attention that the NYMag is admirably trying to completely prepare the latest crop of would-be bankers for their summer sojourn as interns.
For those in NYC, there is advice on where to live. For those who haven’t clocked that working at a bank involves dressing up in a suit and not having a ridiculous haircut, there’s advice on what to wear and appearance. Finally, there’s advice on what to do, and what most definitely not to do, inside and outside the work environment. Read more
Banking in Europe boomed upon the creation of the euro and the global expansion of credit in the 2000s. In the US, banks were also riding high on strong assets growth and accompanying increases in market capitalisation. Cross-border claims also climbed as banks sought to grab an even bigger share outside their domestic markets.
Things have since changed. Read more
A particularly eagle-eyed FT Alphaville reader noticed this when strolling in the heat of Miami Beach:
Time for more BIS-timates of international banking activity — this time looking at developments in the deleveraging turn among eurozone lenders in late 2011.
These stats from the Bank for International Settlements go up to the end of December. Predictably they show a massive pullback in credit throughout the banking system with Europe and the eurozone leading the way. Read more
Royal Bank of Scotland is to cut an additional 3,500 jobs as the state-controlled bank rapidly shrinks its investment banking activities in response to the worsening economic outllook and wide ranging reforms of the banking sector due to take effect before the end of the decade, the FT reports. Stephen Hester, chief executive, on Thursday outlined plans to restructure RBS’ wholesaling or investment banking operations into two divisions and withdraw from activities such as cash equity broking and merger and acquisition advisory work that were aggressively expanded by former disgraced chief executive Sir Fred Goodwin. Risk weighted assets, under Basel III regulatory definitions, will be shrunk to £150bn from £225bn under the restruring plan. The bank will continue to operate in the fixed income and debt raising markets where it has a strong position but reduce its dependence on wholesale funding markets which have frozen up in the last three years. Since taking over in 2009, Mr Hester has shrunk RBS’s balance sheet by £600bn following the disastrous acquisition of Dutch bank ABN Amro in 2008 by Sir Fred, which forced the bank to seek a government bail-out.
Andy Haldane’s latest speech is a coherent, logically argued history of modern banking that ends with four intriguing policy ideas. The Bank of England’s Executive Director, Financial Stability, is always worth reading but his Wincott Annual Memorial Lecture, delivered on Monday evening, is the best introduction to his views on banks.
The FT’s Martin Wolf includes a cogent summary of Haldane’s proposals as part of his formal response to the speech, highlights of which are available on his blog. Read more
Ireland’s stricken banking sector will require €24bn in additional capital, pushing the total cost of the government’s rescue to about €70bn (£62bn), according to the country’s latest banking “stress tests”, reports the FT. Also on Thursday, Dublin announced a radical shake-up of the industry aimed at restoring confidence in the troubled sector, which remains dependent on the European Central Bank for funding. Allied Irish Banks, which had been told to raise an additional €5.3bn, must now raise €13.3bn. Bank of Ireland must raise €5.2bn, Irish Life & Permanent €4bn and Educational Building Society €1.5bn. Essentially, says the WSJ, Ireland is on track to nationalise its banking sector, belying politicians’ claims that the tests are the final episode in the country’s banking crisis.
UBS has tried to draw a line under its upheavals during the global credit crisis, acknowledging serious errors but declining again to take legal action against former top managers, the FT reports. In a 69-page “transparency report” prompted by a Swiss parliamentary committee this year, UBS reviewed the causes of its writedowns on toxic securities and its separate bruising crisis prompted by private bankers helping rich American clients to evade tax. “What happened should not have been allowed to happen,” said Kaspar Villiger, chairman. The losses were attributed to the bank’s drive for growth in investment banking, notably by originating and distributing structured products that were based on US mortgages. The group also acknowledged that its risk controls had been based too heavily on statistical models – while ratings supplied by external agencies were seldom questioned.
Visa has told banks they must stop using the payment system of Chinese state-backed China UnionPay to process international transactions for co-branded Visa and UnionPay credit cards, as required by operating regulations, the FT reported. If banks did not comply with Visa’s request, the card company said it would start to charge penalties from August 1. China UnionPay replied: “Neither side has the right to unilaterally restrict cardholders’ options for overseas payment channels.”
China’s budding investment banks have zoomed to the top of Asia’s all-important league tables, and they’ve even begun to win business outside the mainland, according to the WSJ’s Deal Journal blog. The test now, the blog said, will be whether they can build on recent success, or whether they follow the same path as Japan’s banks – which have gained prominence but are still struggling to expand outside their home turf.
Financial services professionals in Australia might do better if they ditched their spreadsheets for hard hats, because according to Bloomberg, the real money is in mining. But as FT Alphaville points out, miners — like bankers — will find their incomes hit by a sharp tax increase. Read more
Want to ensure that your bank is well-managed? Then appoint a cynical Scotsman to its audit committee.
Such was the advice proffered, in apparent seriousness, by the UK’s City Minister Paul Myners to a commission on the future of banking. Read more
Just in case you thought the financial crisis in the US of A was concentrated on the mainland, here’s some food for thought from Dow Jones (emphasis ours):
The Federal Deposit Insurance Corp. is seeking buyers for three banks in Puerto Rico, a small island with big banking problems. Read more
PR firm Hill & Knowlton has begun to dabble in an arena usually reserved for its banking clients: modelling.
As the Gorkana PR service reported on Thursday: Read more
John Cassidy, writing in the latest edition of the New Yorker, tells the story of London’s Millennium Bridge in a long, slow-burn introduction to a longer and (by now) very familiar discussion of what went wrong in the Great Crunch.
The Millennium Bridge, of course, proved alarmingly unstable after it was opened by the Queen in June 2000. It was quickly dubbed the “wobbly bridge” after pedestrians noticed it swaying – and the structure had to be closed while the architect Sir Norman Foster and the engineering firm Arup figured out what to do. Read more