The Great Debate

from Commentaries:

‘Living wills’ easier said than done

In the wake of the widespread chaos that accompanied the bankruptcy of Lehman Brothers last September, regulators have sought to find a better way to unwind global financial giants. One approach is that the banks themselves should prepare for their own orderly demise -- a kind of "living will".

That idea has been gathering steam of late. The G20 group of finance ministers and central bankers meeting in London over the weekend agreed to require "systemic firms to develop firm-specific contingency plans."

The concept has wide appeal. The crisis has convinced politicians and regulators of all colours that even large financial institutions must be allowed to fail without imposing a huge burden on taxpayers. Many bankers see such a regime as a preferable alternative to more intrusive regulation.

However, drawing up a detailed "living will" is easier said than done.

Simon Gleeson of Clifford Chance argues that it is more important for regulators and legislators to establish a cross-border crisis-management and resolution regime than it is for individual firms to prepare for their own demise.

The mandate of the Financial Stability Board (FSB), the international body comprising finance ministries, central banks and financial regulators, was recently expanded to include contingency planning for cross-border crises. It published a series of relevant principles in April. However, as the Institute of International Finance (IIF) noted, it is "clear from the high-level nature of the principles and the aspirational language [that] there remains a lot to be done."

from Commentaries:

UBS settlement leaves Switzerland scarred

UBS, Switzerland and the United States can all claim a sort of victory from the settlement on Wednesday of their tax dispute.

UBS gets to avoid a fine that -- according to the Swiss justice minister -- would have threatened its existence. The Americans get the details of some 4,450 accounts that they say have held up to $18 billion, on which fat taxes may be payable. And the Swiss get to draw a line under a threat to their fundamental banking secrecy.

Even so, there will be many who want to keep their financial affairs private who will look for other homes for their cash.

Germany risks zombie banks

Margaret Doyle– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

Germany’s politicians seem to have rescued their bad bank. Pushing back the valuation date for toxic assets to before the Lehman collapse has made it more likely that banks will consign their dud investments to the voluntary scheme.

It had looked as if the banks might simply boycott it. However, while the government has scored a political goal, it is no closer to its aim of boosting lending to a credit-starved German economy.
The essence of the scheme is that banks will be able to transfer some 250 billion euros of toxic assets into “eine Bad Bank”. In exchange they receive government-backed paper that they can count towards regulatory capital.

Why banks should sell their fund managers

Margaret Doyle– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

Barclays’ proposed sale of BGI may be an eye-catching deal thanks to its size, but it is unlikely to be the last bank that gets out of the fund management business.

Banks have debated whether they need to control their asset management arms for years. In the United States, Citigroup and Merrill Lynch were early sellers of their divisions in 2005 and 2006.

Diamond hangs on to Barclays crown jewel

Margaret DoyleYou have to hand it to Barclays. The reported sale of BGI, its fund management arm, to BlackRock  for $13 billion is probably the best way that the bank could bolster its capital ratio.

It looks like it will end up with around $8 billion in cash and a fifth of the enlarged asset manager.

The gain on the sale would lift its equity tier 1 ratio to 6.8 percent from just over 6 percent, according to Nomura.

Barclays monoline insurance ploy pays off

Margaret Doyle– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

By Margaret Doyle

Barclays has avoided the dead hand of state shareholding and, on Thursday’s evidence, it looks as though it will escape completely.

Barclays Capital has enjoyed a storming first quarter — so good it is hard to see it being sustained — which has allowed the bank to make more big write-downs and still report a 15 percent increase in pre-tax profit.

Ukraine too far east for western banks

– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

Margaret DoyleIt’s tough on Ukraine, but European banks should pull out. It may not be the only Eastern European economy giving its western bankers a headache but that country’s political chaos and weak corporate governance outweigh the prospects of a return to growth.

Hungarians and Romanians, the bulk of whose loans are in foreign currencies, have seen their debts rise as their own currencies fall. And Sweden’s SEB and Swedbank have taken a pasting in their neighbouring Baltic states.

from The Great Debate UK:

Germany’s bad bank fudge

REUTERSpaul-taylor-- Margaret Doyle and Paul Taylor are Reuters columnists. The opinions expressed are their own --

LONDON/PARIS, April 23 (Reuters) - Germany is to set up a system of bad banks before the summer recess to hold some 250 billion euros of toxic assets. Finance Minister Peer Steinbruek has assured taxpayers that his solution -- called "eine Bad Bank" (there is no German word for the concept) -- will not weigh on the budget.

He is fooling them, if not himself. If the rescue really were such a free ride for the taxpayer, some savvy commercial investor would have stepped in. Under the proposed scheme, the taxpayer will end up carrying the risk of "Schrottpapiere" (scrap paper).

U.K. government should resist the VC trap

Margaret DoyleThe British government is considering whether to set up a mega public-private fund to invest in early-stage ventures. This would be a mistake. While British — and European — entrepreneurs have largely failed to produce huge successes like Google and eBay, bunging taxpayers’ money at the problem is not the answer.

In a policy document published on April 20, the government said it is evaluating whether to set up a public-private fund with similar objectives to the Industrial and Commercial Finance Corporation, the precursor to 3i. That was established with 10 million pounds in 1945 as Britain struggled to recover from war. Such a move has been urged on Lord Mandelson, the business secretary, by the Confederation of British Industry (CBI), the National Endowment for Science, Technology and the Arts (NESTA) and the British Venture Capital Association (BVCA). NESTA is looking for a 1 billion pounds fund; BVCA for 1 billion pounds-plus and the CBI for a round 1.5 billion pounds. The idea is for the government would lead the fund-raising by putting up an unspecified portion of the total pot.

Venture capital bigwigs speak of a calamity if the state does not step in. Britain risks “a lost generation of innovation”, says Simon Walker, the BVCA’s boss. NESTA warns that the country could lose 44 billion pounds in annual revenues unless it invests in growth businesses. Indeed, Walker believes the government shouldn’t waste time evaluating things and should simply start writing checks. Unless it does so, hundreds of early-stage businesses that need of capital may go to the wall. The BVCA recently published figures showing that investment in British venture capital collapsed by 62 percent from its peak in 2006, to 346 million pounds last year. Whether this had anything to do with the investment decisions that venture capitalists made in this period, BVCA didn’t say.

The future is smaller for private equity

Margaret Doyle– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

Investors’ faith in banks may be reviving, but 2009 is shaping up as a year of reckoning for private equity. Two of Europe’s most prominent listed buyout funds — Candover Investments and SVG Capital — are considering their options, with sale or dismemberment a serious prospect.

How the mighty are fallen! For more than a decade, the listed PE funds outperformed the market, and the managers earned rich fees nicknamed “2 and 20″ — 2 percent of funds under management and 20 percent of performance above a certain benchmark. But that outperformance has disappeared in little more than a year with many funds languishing in the “90 percent club” of shares that trade for less than 10 percent of their peak. Funds are blaming a killer combination of lousy returns, a debt drought and an investors’ strike.