The Great Debate UK

from Felix Salmon:

Facebook doesn’t care where Goldman gets its funds

The NYT is reporting that Goldman Sachs only made its $450 million investment in Facebook after its in-house private equity fund, Goldman Sachs Capital Partners, passed on the deal.

Many people -- including the NYT -- have been talking a lot in recent days about the "ancillary business" that Goldman is likely to get as a result of this investment, including fees from any future IPO and wealth-management fees for looking after Mark Zuckerberg's fortune. There's no formal agreement about any such things, I'm sure, but the general understanding seems to be that if Goldman scratches Facebook's back by raising a couple of billion dollars for it now, then Facebook will scratch Goldman's back in future with various lucrative bits of investment-banking business.

Goldman, it seems, would have loved to get all those fees without having to put its own money into the deal -- and then when GSCP said no, it ponied up the requisite cash itself.

But that means something important: that from the point of view of Facebook, Goldman's client, there's really no difference between Goldman investing and GSCP investing -- whether the money was borrowed from the Federal Reserve or invested by rich clients. Goldman Sachs and GSCP are two faces of the same company and either way Goldman is likely to end up with those ancillary fees.

from Felix Salmon:

Is Ireland’s problem a Basel problem?

Does the Ireland crisis bespeak a major weakness in the Basel capital-adequacy regime? Simon Nixon thinks so: the fact that investors won't lend to Bank of Ireland, he says, "highlights a major weakness of the Basel capital rules that European banks operate under."

This is an interesting idea: Ireland's problem is a banking problem, banking problems are Basel problems, and therefore it stands to reason that Ireland's problem might be a Basel problem. But if you look more closely at Nixon's reasoning, his thesis ends up falling apart.

from Felix Salmon:

Why Wall Street won’t get shrunk

This week's New Yorker features 8,000 words from John Cassidy on how financiers extract rents from the real economy rather than adding real value. His article features not only The Epicurean Dealmaker, star of blog and Twitter, but also Paul Woolley, a former fund manager who now runs the Woolley Centre for the Study of Market Dysfunctionality, a man who knows how to give great quote:

“I realized we were acting rationally and optimally,” he said. “The clients were acting rationally and optimally. And the outcome was a complete Horlicks.” ...

from Felix Salmon:

Learning from Ireland

I love the way that the WSJ today covers the collapse of Ireland's banking system, and with it the country's fiscal leadership. There's little if any actual news here, but that's a feature, not a bug: it frees up the WSJ's writers and editors to present the big-picture narrative in as clear and compelling a manner as possible, without having to overemphasize some small factoid which they happen to be breaking.

The story reads like one of those epic lyric tragedies of old, where no one ever learns from their mistakes, and errors simply compound endlessly. First, the Irish government, convinced that the country's banks were suffering from a liquidity crisis rather than a banking crisis, decided to solve that problem in the way that only a government can -- with a blanket guarantee of substantially all of the banks' liabilities.

Savings and the alchemy of credit


– Ann Pettifor is Director of Advocacy International and a Fellow of the New Economics Foundation. The opinions expressed are her own –

The governor of the BoE argues that: “We will have to save more, even though the immediate concern is to ensure a recovery in demand.”  This is contradictory because saving will lower demand. It is also a counsel of despair. Most economists argue that savings drive capital investment, lower interest rates, and allow firms to create jobs. As Professor Victoria Chick notes, this confusion arises from our early experience of bank money. We leave school, get a job and then find a deposit in the bank.

Live webcast: Which banks give good customer service?


You can’t keep banks out of the headlines – and often for the wrong reasons. The bail-out cost too high – interest rates too low. Trust through the floor – complaints through the roof.

Yet despite this, statistics show people are more likely to change their partner than their bank. So are our expectations really that low? Are all banks the same or are some getting it right? And how could things be better, especially with technology and social media changing the way we communicate and transact?

First Direct CEO Matt Colebrook answers your questions


– Matt Colebrook is Chief Executive of online bank First Direct. The opinions expressed are his own. –mattcolbrook

In an article on 21 September, Matt Colebrook discussed the role of social media in banking, arguing that social networks are key for customer service as they enable customers to use and interact with banks whenever they want and from wherever they may be.

from Felix Salmon:

Why Ireland is bailing out foreign banks

Robert Peston has a theory for why Ireland can't bail in the sophisticated institutions which lent untold billions to the country's beleaguered banks:

Take a look at the latest figures from the central bankers' bank, the Bank for International Settlements, on just the exposure of overseas banks to Ireland (in other words, credit provided by pension funds, hedge funds and wealthy individuals would be on top of this).

Matt Colebrook on the future of banking


– Matt Colebrook is Chief Executive of online bank First Direct. The opinions expressed are his own. –

The 21st birthday of First Direct is as good a time as any to look back on changes within the financial industry and how it will continue to evolve.

from MacroScope:

Investment week: Punch drunk and hard to startle

This week’s rehashing of European banking concerns – related variously to the Basel III impact on German banks, the ongoing morass re Anglo Irish Bank or any other scare story you want to exhume -- provided the latest excuse for a global markets wobble as September kicked off. Yet, with some justified head-scratching over what really was new to the world this week as opposed to last week, price moves showed little conviction. Most losses were quickly recouped and decibel level of the commentariat, still frantically competing to warn you of the next disaster, toned down.

boxerThe world’s major sovereigns and banks have big financial problems, no doubt, and Europe more than its fair share. The rescues of the Spring did not provide a silver bullet and genuine repair will likely take a painfully-long time. But we’ve also had a lot of time to adequately discount these risks and the marketplace at large is already positioned extremely cautiously. That's why the idea of sudden, blind panic on these long-running sagas seems just a little OTT – especially against a relatively stable, if bruised, economic backdrop. The bigger issue many investors are grappling with is the growing difficulty in making money in a hyper-cautious, low-growth environment. Ask Stanley Druckenmiller. If he threw in the towel because money-making conditions are just lousy, then you can be sure others see the same. Anecdotally at least, pressurised hedge funds – who faced rising redemptions through the summer – are ultra-cautious about open positions and seem quick to cut and run on even the slightest gain, long or short. (A bit like continually shouting 'bank!' on reaching £100 pounds on The Weakest Link!) Big institutional funds, meantime, are sufficiently uncertain about the market and economic direction that many are already keen to lock down for the remainder of the year and are hugging benchmarks to preserve whatever capital they have without resorting to zero-yielding cash or barely-more-attractive TBonds. U.S. midterms in November only add the caution. In short, it will take a pretty major positive or negative surprise to truly set these markets alight and there is every chance we won’t get a decisive one for some time.  We already have historically high vol and caution – but relative steady, unspectacular conditions for all that. The smart money may simply be tempted to buy or sell any hysterical extremes. Is may even be possible that some are tempted to foster a long-absent patience gene?