Forget being globally competitive

In Canada over the past fifteen years there has been a constant drumbeat, from every point of the compass, for our banks to make large foreign acquisitions to become, so called, globally competitive.
What is globally competitive anyways?
Does that mean like Citigroup, Deutsche Bank or UBS?
If so, forget it. If there’s a pothole, these big global banks will find it. There are probably more than 12,000 banks in the world.
Why do you have to be in the top five or ten? It’s all egos run amok.
What’s wrong with being the twenty-fifth, or the fiftieth, largest bank in the world and growing your business organically by offering good service. Shares of the biggest banks in the world have been the worst performers as long as anyone can remember.
I have learned that the financial business is a marathon and not a hundred yard dash –
- slow, steady and dull often wins the race –
in many cases because your fast moving hot shot competition blows up. Bear in mind every time a competitor blows up and goes out of business, the survivors win.
In my view Canadian banks are plenty big enough to compete where they want to compete.

Take away the punch bowl

In just the last ten years we have had two explosive bubbles which have been extraordinarily destructive. The telecom and internet bubble which burst in 2000 and the U.S. housing bubble which burst in 2007. In my view, the record clearly shows that the Federal Reserve should have moved to choke off these euphoric, speculative manias.
They could have done this by aggressively raising interest rates at an earlier date, increasing stock margin requirements and perhaps by also increasing bank capital requirements.
It didn’t happen.
Once again it was the age of deregulation. Let the market take care of itself. It’s been said that one of the primary jobs of a central bank is “to take the punchbowl away just when the party is getting started” which, in retrospect, looks like sound policy.
In short, should central banks target, and rein in, overheated and speculative industry and market bubbles even if it causes a slowdown or a recession – the answer is yes.

Innovation and financial engineering

FINANCIAL ENGINEERING AND INNOVATION - the headlines would scream. If your bank was not working at these, you were no where.
This has been a big problem area – actually disastrous.
Toxic complex structured products developed and aggressively marketed around the world by U.S. dealers and banks were the multi-trillion dollar time bomb that finally blew up the system.
In the five years or so up to 2006, big U.S. banks and dealers were bringing new and complex highly leveraged structures to market a mile a minute.
There were CDOs, CLOs and CMOs and a dozen other acronyms.
Many of these structures were leveraged more than ten times with exotic derivatives. For hundreds of billions of these structured products there is now only a market at distress prices – if there is a market at all.
The financial industry should get out of complex structured products.
If a security has more than two bells and one whistle, just say no. Think $32 billion of frozen Canadian non-bank asset backed commercial paper. It took a small army of top lawyers and top accountants a year to figure it out and, even now, no one knows what it’s worth.
It’s an amazing story that this could happen.

What's happening to our money?

If you haven’t had a chance to see the Stewart versus Cramer Video yet, here’s the link: Link
http://www.thedailyshow.com/video/index.jhtml?videoId=221516&title=jim-cramer-unedited-interview

This video raises many questions and whether you like Jim Cramer or not, at least he had the guts to come on the show and get publicly humiliated for his “mistakes”. My personal problem with the investment community though is still the fact that there are pervasive conflicts on interest throughout the industry. And despite or perhaps because of regulatory oversight any recommendation must always be taken with a grain of salt. Nobody can predict the future and yet many institutions are paid to do so. Personally I feel the bigger blunders are with the ratings agencies who are after all still getting paid by the companies and institutions they are supposed to rate, including those sub-prime CDO’s and CMO’s. Compare that with the simple conflict of interest rule for brokers. No broker can accept gifts of over $100.
It is also clear that the news media and reporters are not free of conflicts of interest. To that extent we must question why reporters (disguised as comedians) could not or did not expose these conflicts of interest, the false predictions, the questionable role of CNBC and other organizations earlier. When things are good, everyone including John Stewart’s 401K enjoyed the (false) benefits of a booming economy. Yet, a rational person should have questioned how on earth someone’s home could double in value every 5 years … and continue to do so indefinitely?

Too big to manage

Forget about too big to fail, how about too big to manage.
There are six banks in the world with assets in excess of $2 trillion each and perhaps another twelve with assets of between one and two trillion.
Banking has become incredibly complex.
If a bank has a trillion dollar balance sheet, operating in perhaps thirty countries, with trading desks, loans and proprietary trading books all over the world, it becomes immensely challenging.
In the financial business, risk grows exponentially with the size and complexity of your balance sheet and I think many of these banks just became too big to manage and they lost control.
That’s what the record shows.
I learned long ago not to expand your business beyond your ability to closely and tightly manage. I think a strong case can be made to break up these big global banks into smaller, more focused and more manageable institutions. I think it’s going to happen.
In fact, it has already started.