this week in 3 minutes -...
TRANSCRIPT
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 1
“Maybe it’s time to stop trying to outsmart the truth and let it have its day in the sun.” - Alfred, Bruce Wayne’s butler, Batman Rises
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 2
Sunday Interview: Sir Evelyn de Rothschild: 'To be rather abrupt, I don’t think there’s been a great change since 2008'
One of the great City veterans and scion of the financial dynasty, Sir Evelyn de Rothschild tells Andrew Cave why banking culture needs to be reformed if lenders are to regain public trust.
By Andrew Cave
10:30PM GMT 29 Dec 2012 [Grab your reader’s attention with a great quote from the document or use this space to emphasize a key point. To place this text box anywhere on the page, just drag it.]
Britain’s financial system stands at the threshold of what’s being hailed as a historic year for regulation and governance but, frankly, Sir Evelyn de Rothschild has seen it all before.
In just over three months’ time, the Financial Services Authority, blamed for failing to control the 2008 financial crisis, will be dismantled, with most of its regulatory powers transferred to two new bodies – the Prudential Regulation Authority and the Financial Conduct Authority.
veteran investment banker Sir Evelyn Rothschild is far from convinced that enough is being done to transform the financial and regulatory landscape of the City, where he has worked for more than five decades. Photo: Raul Vasquez/Bloomberg
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 3
There will also be a new Bank of England Financial Policy Committee, which will oversee all matters of financial stability.
The aim is to empower authorities to look beyond “tick-box compliance” and foster a regulatory culture of judgment, expertise and proactive supervision.
However, veteran investment banker Sir Evelyn, 81, is far from convinced that enough is being done to transform the financial and regulatory landscape of the City, where he has worked for more than five decades.
Related Articles
• The Financial Conduct Authority: what it does and who is charge
29 May 2011
• The Financial Policy Committee: what it does and who is in charge
29 May 2011
• What is the Financial Policy Committee?
24 Jun 2011
• The Financial Conduct Authority: what it does and who is charge
08 Nov 2011
• The Prudential Regulation Authority: what it does and who is in charge
08 Nov 2011
• Rothschild and Rockefeller families team up
30 May 2012
Earlier this month, he took part in a panel made up of experts organised by Tomorrow’s Company, the think tank. The debate followed a keynote speech by The Economist’s US business editor, Matthew Bishop, on the subject of “How do we make finance socially useful?”.
It’s a topic that he says continues to exercise him.
“To be rather abrupt, I don’t think there’s been a great change since 2008,” he states. “I don’t think that in certain countries in the West anything has changed very much.
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 4
“Bonuses are still being paid, people’s attitude to making money is the same. Spreading the opportunity for others hasn’t grown as fast as it should have.
“The excessive bonus culture as it is in banking now is quite a new thing. It’s only really been like this since Big Bang back in 1986.
“People started to reward people through direct money exchanges. It’s happened in every walk of life. Money has taken a big leap forward.”
Although Sir Evelyn is keen to stress that he is supportive of the technology that enabled the move to electronic trading 25 years ago and has since transformed communications and productivity, he believes it also led directly to some of the entrenched attitudes that this year’s regulatory changes are aimed at addressing.
“The change in technology in the last 40 years with the arrival of the computer and the internet has been terrifically supportive of the medical world and also supportive of the financial world,” he says.
“But it can also be misused. A lot of action was done on the basis of a quick return, without really knowing what the investment was about.”
The solution, he argues, has to involve a much greater prominence of ethical considerations and the principles needed to sustain them.
One such tenet, he says, is transparency, which has been driving many of the regulatory reforms proposed since the 2008 crisis.
However, Sir Evelyn also feels strongly that another principle is the participation of bankers in the companies they work for through ownership, rather than the City bonus culture that has developed over the past 25 years.
“There are questions of ethics,” he says. “One is transparency. Another is participation in the concerns, rather than just bonuses.
“I personally believe that people should have stock in the businesses in which they are participating, in order to feel that they are part of the company, rather than looking forward to a 12-month bonus, which could make them leave rather than remain.”
These are words designed to strike fear into City bankers readying themselves for the New Year bonus season.
Would they really tolerate having to swap much of their lucrative annual cash sums for depressed banking shares and how could such a system work?
Sir Evelyn waves his hand. “I think there should be a ratio,” he says. “If you have a decent salary and then a participation in the company, you should then get a bonus in relation to that. You can work it out.
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 5
“I think it’s a very important point but it’s then up to shareholders to take a bigger proactive part in the business.”
Sir Evelyn has played his own part in the family business empire that bears his name, since joining merchant bank NM Rothschild at the age of 26 – two years after his father, Anthony, retired through ill health.
Nineteen years later, in 1976, Sir Evelyn took over from his cousin Victor as bank chairman, having been trained in the family business in London and at Paris-based De Rothschild Frères.
In 1982, he became chairman of Rothschild Continuation Holdings, the co-ordinating company for the merchant banking group.
By 2003, when he retired as the head of NM Rothschild and it was merged with the French business under the leadership of Swiss-based Rothschild Continuation, the merchant bank’s assets had grown to £4.6bn from £400m in 1976.
Now, Sir Evelyn’s main role is as chairman of EL Rothschild, the company he founded with his third wife, Lynn Forester, in 2003 to hold ventures in India and an investment in The Economist, which he chaired from 1972 to 1989. He also served for a time as a director of The Daily Telegraph.
Sir Evelyn says an increasing personal concern is “the huge differential between the haves and the have-nots” and the growth of “impact investment” – investments aiming to generate measurable social and environmental impacts alongside financial return – to “try to help those in a difficult way”.
“Inclusive capitalism is a difficult subject and I could speak for a long time on it,” he says. “But I think it’s a reflection on where capitalism was intended [to go].
“Whether you’re talking about Karl Marx or John Maynard Keynes, capitalism today has changed and I think inclusive capitalism is about giving a broader opportunity for people to participate.”
That conversation leads back to regulation and Sir Evelyn has strong views about the kind of principles that should underpin the new operations being put in place.
“It’s not necessarily about more regulation, but about people understanding the general rules of behaviour, understanding how they put their money at risk and how developments take place in the improvement of society one way or another,” he says.
“Let’s face it, the Financial Services Authority was a failure. Why was it a failure? Mainly because people were not told off.
“If you look at the ingredients of the mistakes from the Big Bang era in England, some of it wasn’t just the supervision of the bankers. It was the accountants, the legal firms and the rating agencies.
It’s a huge subject, but how do you train people in life to behave properly?”
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 6
The answer, he argues, lies in ensuring not only that the most capable regulators are in place, but also that they are properly remunerated and have financial firepower.
“When you have supervision, you have to make sure that the supervisors are capable of adjudicating and of being good supervisors,” he says.
“One of the questions is: 'do you reward them according to the people they are supervising?’
“Every company, whether banks or anything else being supervised, should be in a system where a proportion of their profit or turnover should go into a pool.
“The argument against supervision in many cases is that we can’t afford it; we can’t afford to pay the people but if you have a pool of funds from supervision, you use that money to pay for it.”
It’s not an argument that’s likely to find favour with many of today’s bankers. But with regulatory systems under the microscope in 2013, a few lessons from the past may be in order.
https://www.bnn.ca/ottawa-introduces-watchdog-to-oversee-canadian-companies-conduct-abroad-1.970809 https://livinginabubbleblog.wordpress.com/2013/11/09/gold-leasing-by-central-banks-explained/ https://en.wikipedia.org/wiki/Inclusive_capitalism https://www.inc-cap.com/embankment-project/ https://www.standard.co.uk/business/markets/lady-and-the-banks-why-lynn-forester-is-trying-to-rehabilitate-capitalism-8156352.html
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 7
Letter to the UN PRI representatives I met with this week: January 31st, 2018 Hello Adele and Nalini,
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 8
Thank you both for taking the time to meet with my colleague and I. It was a real treat and a pleasure to meet with you yesterday. I loved every minute of it and am very excited to begin the process to completing the documents necessary to lay proof to the great work that we do here. I am sure you could both tell how very serious I am about the reporting… even if I may have become a little ‘unserious’ at a few moments. It was a fun meeting for me and I hope it was positive and memorable for the both of you. This industry can be so serious at times and I respect your efforts to remain professional, especially in light of my unorthodox approach and verbal derailments. One thing you will learn about us gold ‘people’ is that we tend to me a little more enthusiastic than the average money manager. We simply love what we do and I sense that the both of you are equally passionate about the field you are in. We will begin the documentation process early next week. In contrast to some of my more lighthearted and, dare I say silliness, what I do here at BMG Group is deadly serious. Please read on… You will both find the DVD gift’s content extremely enlightening as it outlines how central banks actually try to manage systemic risk(s) and that the inherent risk(s) in the banking system, resulting from the last crisis, were never actually resolved – they were simply deferred and will need to be dealt with at some point. The changes to the banking capital reserves, as prescribed by the Basel III framework (and now fully implemented here in Canada) will help minimize the damage in the next crisis but will not prevent the crisis itself. In fact, they are actually providing the fuel to make the next crisis more complicated than the last. Complex financial derivatives and the interconnectedness of all the SIFIs are factors poorly understood by many PMs. The average money manager has no idea how to fully measure risk anymore since the denominator (global central bank issued currencies) are constantly fluctuating against each other. Central bankers may feel they have a handle on treating the symptoms that periodically surface but they are unwilling to address the underlying disease because the medicine is politically unpalatable and usually requires a very sizable event; the last major global currency restructuring was in 1944 with a dubious and disheartening extension in 1971. Modern (post Renaissance) currency regimes don’t typically last much longer than 70 years and we are now in year 72 of the USD paradigm. As we transition into 2020, and the global currency situation starts to more properly reflect the changing internal structure at the IMF, there will be dramatic shifts in global trade flows, current account deficits/surpluses and bond issuances due to changing rates and tax revenue streams. This will impact the various government’s ability to deal with their respective debt obligations and we will see dramatic shifts in global currencies relative to one another because of this. It will usher in a change in global liquidity and, more importantly, faith in the current monetary paradigm where the USD represents a whopping 43% of all global trade settlement. A more multi-lateral framework is not just in the works – it is ready to be deployed and has been since 2015. We don’t know for sure (maybe no one does fully) what it will look like after the IMF’s 16th Review in 2020, but we are confident that the changes will be significant and investors would be wise to be aware of the energy markets and the decision made by Saudi Arabia to accept Chinese Yuan in exchange for oil. Were it not for the ‘Petrodollar’ carry trade, the US government would never have been able to run such enormous budget deficits. The world has already begun selling US Treasuries; just last year China (the
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 9
world’s largest holder of US debt) reduced its US Treasury holdings from $1.3T by $300 Billion. Central banks have been net buyers of precious metals since the last crisis and are rallying around a new global benchmark currency called the SDR which has a dedicated formula that includes a gold component. Those who are aware of these changes can best guide retail and institutional money flows to help with stabilization and resiliency in a time of flux. It continues to be my goal to educate and inform on the things mentioned above until there is no more need for someone in a role like mine. When the monetary system, capital standards and currencies more properly reflect a shift towards sound monetary policy then I will be happy to retire to a place, on a lake in Northern Ontario, to spend my days reading and fishing near my fellow Canadian, William White (the former Chief Economist at the Bank for International Settlements in Basel, Switzerland). Unfortunately, we have a few years to go before sound monetary policy and a new currency regime are fully realized. That means there is opportunity now to assist others in recognizing the risks and the opportunities that we are being presented with. I deeply admire and respect your efforts in impacting organizations to take greater care of their fellow man, our planet and its future generations who will inherit the responsibility to preserve and protect this great treasure we call home. I read once that we did not inherit this planet from our parents but are borrowing it from our children. It pleases me to know that there are people like you, Adele and Nalini, who are aligned with these values. Let me to leave you with the words of Margaret Mead that have helped me remain focussed (especially when it was hardest), “Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.” Have a wonderful evening. Warm Regards, Brandon More links… http://sonsoflibertymedia.com/panic-grips-u-s-financial-markets-dow-falls-362-points-worst-drop-year/ https://www.rt.com/business/417592-russian-banks-gold-purchases/
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 10
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 11
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 12
https://www.gold.org/research/gold-and-alternative-asset-classes-for-sovereign-wealth-funds-video http://www.cbc.ca/news/politics/anthem-bill-passes-senate-1.4513317
On Trump’s SOTU Address: Love this line from The Post fact checkers: “Trump taking credit for this is like
a rooster thinking the sun came up because he crowed.”
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 13
https://geopolitics.co/2018/02/01/global-reset-india-cracks-down-on-cryptodollar-venezuela-issuing-petro/
Reprinted from last week’s Show Notes:
Mr. White, In response to your question below related to the capital treatment of monetary gold, Canadian banks currently recognize monetary gold held in the institution’s own vaults or in trust at a 0% risk weight for risk-based capital purposes, as specified in Chapter 3 of OSFI’s Capital Adequacy Requirements Guideline. This is consistent with the treatment outlined in the Basel III reforms issued on December 7, 2017 (paragraph 96). I trust this answers your question. Regards, Catherine Catherine Girouard Acting Managing Director, Bank Capital Capital Division Office of the Superintendent of Financial Institutions Canada (613) 991-0604 [email protected] From: Brandon White [mailto:[email protected]] Sent: January-08-18 5:58 PM To: Rudin, Jeremy Subject: Basel III Implementation and Monetary Gold's RWA Dear Mr. Rudin, Thank you for taking a moment to review this letter as it was the Bank of Canada who directed my question to you. They wrote that implementation of the Basel III rule changes for capital adequacy fall under the purview of your office, likely since this is a matter for contributing to the public confidence in the Canadian financial system. The OSFI website has a wonderfully detailed explanation of its history where it concludes with the following statement: “In the banking industry, implementation of new Basel III rules aimed at increasing the stability and resilience of global banking are being phased in and will be in force by 2019; non-conforming capital instruments are to be phased out by 2023.”
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 14
http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/Pages/hst.aspx Under the Basel III rules, monetary gold (ie. physical allocated bullion and not a derivative with counterparty risk) satisfies the key determinants to be assigned a 0% Risk Weighting Assessment (RWA) and officially recognized as a Tier One asset equivalent to a AAA sovereign bond. My question to you, Mr. Rudin, is “Will Canadian financial institutions and pension funds be required to recognize the inclusion of this Basel III rule change relating to monetary gold and fully value it on their balance sheets as a Tier One 0% risk weighted asset?” I deeply respect your time and look forward to your response, at your convenience, and wish you and your Office all the best in 2018. Sincere Regards, Brandon White http://www.osfi-bsif.gc.ca/Eng/Docs/nvcc.pdf From Resolve Asset Management : http://www.investresolve.com/blog/nvcc-bonds-how-much-risk-would-you-take/
As to new financial instruments, experience establishes a firm rule . . . that financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design, one that owes its distinctive character to the aforementioned brevity of the financial memory. The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy by real assets. . . . All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment.
– John Kenneth Galbraith, A Short History of Financial Euphoria
Galbraith wrote that back in 1990, a full decade prior to the Tech Bubble and nearly two decades prior to the Housing Bubble. And yet, here we sit, fully 26 years later, dealing with this (emphasis ours):
All regulatory capital must be able to absorb losses in a failed financial institution. During the recent crisis, however, this premise was challenged as certain non-common Tier 1 and Tier 2 capital instruments did not absorb losses for a number of foreign financial institutions that would have failed in the absence of government support. To address this, on January 13, 2011, the Basel Committee on Banking Supervision (BCBS) released the Minimum requirements to ensure loss absorbency at the point of non-viability (the “NVCC requirement”). These requirements augment the BCBS’ recently published revised capital standards, Basel III: A global framework for more resilient banks and banking systems (Basel III) to ensure that investors in non-common regulatory capital instruments bear losses before taxpayers where the government determines that it is the public interest to rescue a non-viable bank.
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 15
This Advisory outlines OSFI’s expectations in respect of the issuance of non-viability contingent capital (NVCC) by DTIs.
Long-time readers can imagine the absurdity threshold required to pry us from our cozy quantitative-and-evidentiary shell into the treacherously amorphous bounds of economic commentary.
Well, we’ve reached it, and here’s why.
Banks make money by taking your deposits and loaning against them. In fact, the law allows for banks to loan out a surprising amount of capital against your deposit, up to 90-95%, keeping only a 5-10% capital cushion. If we assume that banks do this many times over (they do!), and that they’re pretty terrible at risk assessment (they are!), then it’s possible that the amount they’re required to retain may be unsuitable in the event of a confluence of non-performing loans coupled with a bank run.
So, what then? Enter non-viability contingent capital instruments (NVCCs).
If I purchase an NVCC, I ultimately own a hybrid financing security that lives in the netherworld between debt (which has higher capital structure priority in the event of liquidation) and equity (which has lower priority). In essence, when a bank becomes troubled and its Tier 1 capital requirements are breached, those NVCC’s are converted to common shares.
The operative word is theoretically. To understand why, let’s do a little thought experiment. Imagine that a bank’s equity capitalization has dramatically and consistently shrunk over the last year, say because the loan book is chock full of energy and commodity related debt. And let’s further imagine that their last three financing rounds – raising $1.2 billion in capital – have been preferred NVCCs, which are automatically converted to common equity if bank capital falls below a certain threshold. If you owned a bunch of those NVCCs and you saw the preferred stock value dropping closer and closer to the conversion threshold, what might you do?
Yes, these NVCCs offered a high coupon rate in an ostensibly ZIRP environment, but ultimately you get what you pay for. A sophisticated investor, for example, might get to the point where he says “ENOUGH IS ENOUGH,” and shorts an amount of stock equal to the convertible value of his preferred shares. In doing so, he hedges away his individual future gains and losses. However, new to the overall market ledger is his equity short. This exerts downward pressure on the common shares, which triggers a potential feedback dynamic pulling both common shares and NVCCs toward the conversion threshold like a tractor beam.
Such is the potentially perverse, unintended consequence of a security whose original intent was to act as a capital buffer!
Matt Levine sums it up nicely when he says (emphasis ours):
…Here’s the thing. If you are buying something with an 8 percent coupon in a world of zero interest rates, and you somehow think it’s a risk-free bank deposit, I don’t want to hear about it. That’s not a thing. The coupon tells you the risk. If you bought it for the 8 percent coupon, you ipso facto knew it was risky…
This Week in 3 Minutes February 26, 2018
“Batman’s Butler”
By Brandon White, Business Development Manager/Analyst
P a g e | 16
Look, we understand the motivations (and yes, the benefits!) of profit seeking. But financial engineering ought to have the dual goals of providing a meaningful return within a context full disclosure and the opportunity for risk management.
It seems that investors in this case are either under informed of the risks, or are reaching for yield as if attempting to pick up nickels in front of a steamroller. In either case, there is a critical missing link; Either the understanding of risk or it’s appreciation is conspicuously absent from the full assessment.
And we fear that – whatever that missing link is – tragedy lurks.
Be careful out there.