Opinion

Hugo Dixon

It’s the funding, stupid

Hugo Dixon
Nov 29, 2010 16:51 UTC

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — Running out of cash — rather than insolvency — is what causes financial crises such as the euro zone’s. Yet the lion’s share of the effort by policy makers around the globe has been to shore up solvency not funding. Unless that changes, the world will lurch from crisis to bailout and back again.

Ireland’s bank crisis is only the latest example of how seemingly solvent institutions can be brought to the brink because they can’t fund themselves. It was only four months ago that Allied Irish Banks (AIB) and Bank of Ireland were given a clean bill of health in the European Union’s official stress tests. One weakness of these tests was that they only stressed solvency not liquidity, although that may be remedied next year.

Ireland’s banks didn’t have a large enough base of retail deposits. AIB’s and BoI’s loan-to-deposit ratios are just above 160 percent. That made them excessively dependent on wholesale money. When that dried up, they had to turn to the European Central Bank. When deposits from corporate customers also started to flee, emergency action was required.

Sadly, this is an all-too-familiar story. Funding was the Achilles’ heel of banks that went to the brink in 2008. The likes of Lehman Brothers, Northern Rock, Washington Mutual, Royal Bank of Scotland and Fortis may have had inadequate equity. But death through insolvency is a slow one. Death, or near-death, through lack of liquidity is a rapid one.

The world is wasting a good crisis

Hugo Dixon
Nov 22, 2010 18:14 UTC

Rahm Emanuel, President Barack Obama’s former chief of staff, popularized the motto that one shouldn’t waste a good crisis. But there is a severe risk that this is precisely what the world has been doing by being excessively soft in bailing out banks and countries since Lehman Brothers went bust in 2008.

Bailouts, such as that being negotiated for Ireland, may be needed to prevent a descent into chaos. But the conditions must be tough. Otherwise, the world won’t learn the lessons from the crisis and justice won’t be seen to be done.

Ireland’s original bank bailout in the wake of the Lehman bankruptcy is one of the most egregious cases of excessive softness. Dublin gave a blanket guarantee to its banks’ liabilities, including wholesale funding. A more targeted guarantee focusing on retail deposits would have been far better. Not only would the creditors have been punished; the state itself wouldn’t now need its own bailout.

UK bank pay collusion would be least bad solution

Hugo Dixon
Nov 15, 2010 21:59 UTC

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.” Normally, Adam Smith’s dictum is a good guide to policy. But in the case of UK banks and their bonuses, it isn’t.

Clubbing together to keep bonuses down wouldn’t please competition purists. Depending on how such talks are orchestrated, it may even be illegal. One could imagine peculiarly tin-eared traders taking their employer to court for
unfairly conspiring to keep down their pay.

Letter from the Editor

Hugo Dixon
Oct 25, 2010 22:31 UTC

Reuters Breakingviews is more used to commenting on other organisations’ behaviour than to having its own actions put under the microscope. But in the last week, as a result of retroactive disclaimers we made to a series of articles in order to clarify potential conflicts of interest, we have rightly been under scrutiny.

We have now completed our inquiries and I wanted to explain to you what happened and how we plan to act in future.
Reuters’ Handbook of Journalism forbids journalists from dealing in “securities about which they have written recently or about which they intend to write in the near future”. It also requires them to notify their manager before writing about a company in which they have a financial interest. The purpose of these rules is to avoid actual or apparent conflicts of interest.

Late last month, a journalist told one of our editors that he had acquired BP shares near their trough following the Gulf of Mexico blow-out. The columnist had written about BP around the time he bought the shares. After further inquiries, it emerged that he had traded in six other stocks (of which four involved taking up his rights in rights issues) within one month either side of writing about them. He also disclosed that he had written about another eight stocks in which he had a significant financial interest. In total, 15 stocks were affected and 39 stories were re-filed with disclaimers. Although we found no evidence that the columnist had abused his journalistic position for financial gain, we view this as a serious matter. The journalist resigned.

Asia should grab hot IPO money while it lasts

Hugo Dixon
Oct 12, 2010 21:25 UTC

Hot money is the bugbear of policy makers in many developing economies. Just ask Brazil or, indeed, Thailand, which has just imposed a 15 percent withholding tax on interest and capital gains earned by foreign investors on Thai bonds.

One worry is that booming currencies will become uncompetitive; another is that easy-come, easy-go money will make economies vulnerable to booms and busts.

But not all inflows are bad. Provided capital can be locked in at cheap rates and turned to productive use, it can even be good. One of the best ways of doing so is for companies to take advantage of the current IPO boom.

Deutsche to kill two birds with one cash call

Hugo Dixon
Sep 9, 2010 23:11 UTC

By Hugo Dixon and Peter Thal Larsen

Deutsche Bank is killing two birds with one cash call. The official reason for the planned 8-9 billion euro ($10-11 billion) rights issue will be to complete the acquisition of Postbank, the German retail bank. But the fundraising also provides cover for jumping to the front of the queue of German banks that will need to top up their capital as a result of upcoming tighter regulation.

Deutsche was proud of the fact that it was one of few major western banks to avoid a big capital call during the financial crisis. And since then, the bank has argued that it would not raise capital, except to finance acquisitions.
But Josef Ackermann, Deutsche’s chief executive, still cannot crow. The Postbank acquisition was a bad one, at least financially. Bulking up in German retail banking may make sense strategically as it will help reduce Deutsche’s reliance on its investment bank. But Ackermann agreed on a high price for a 62 percent stake in the bank just before Lehman Brothers went bust in September 2008.

What’s more, that multi-stage transaction carried extra liabilities. Deutsche was always going to have to make an offer for the rest of Postbank no later than 2012. The good news is that by moving now, it will be allowed under German takeover rules to offer a rather low price. But that still involves doling out cash. Second, Postbank itself is undercapitalised — just squeaking in above the European Union’s stress test levels in July. So Deutsche will need to fill up its new subsidiary’s coffers too.

Lloyds starts succession planning for CEO-source

Hugo Dixon
Aug 3, 2010 09:29 UTC

LONDON, Aug 3 (Reuters) – Lloyds Banking Group (LLOY.L: Quote, Profile, Research, Stock Buzz) has
started formal succession planning for its chief executive Eric
Daniels although no date has been set for his departure, a
person familiar with the situation has told Reuters
Breakingviews.

The process is a contingency planning exercise to identify
successors to Daniels in the event that he stands down, and the
board is not actively recruiting a new CEO.

Lloyds has retained a headhunter and held discussions at
board level, which have included Daniels and the head of human
resources. The aim is to complete the plan by the end of this
year.

Is Goldman rebasing comp at a lower level?

Hugo Dixon
Jul 20, 2010 20:51 UTC

Is Goldman Sachs rebasing compensation at a lower level? For the second quarter in a row the investment bank’s compensation ratio has been only 43 percent. In the past, Goldman paid out around 50 percent of revenue to staff. For ordinary mortals, the numbers are still staggering: on an annualised basis, $545,000 is being set aside for each of the firm’s employees. But it does look like Goldman may finally be listening to its critics.

At the end of what was a blow-out first quarter, it was unclear how to interpret Goldman’s relative parsimony. The bumper results meant Goldman could still accrue huge sums for employees despite the lower-than-normal percentage rate. One senior executive said then that it would be reasonable to increase the accrual ratio only if trading in subsequent quarters was poor. Well, the second quarter was rotten. But the ratio didn’t budge.

Part of the explanation seems to be that Goldman has understood how past greed contributed to its recent public relations disaster. It would have been insensitive to jack up the accrual rate just days after paying a $550 million fine in connection with Abacus, a dodgy structured product it sold investors in the boom. Goldman’s failure to show restraint on pay this time last year helped sow the seeds of the backlash inflicted on the industry at the end of 2009 — leading to a UK bank bonus tax which is now costing the firm $600 million.

What’s your bonus really worth?

Hugo Dixon
Jul 1, 2010 21:06 UTC

By Hugo Dixon and George Hay

What’s a bonus really worth? Under new European rules, bankers will see part of their bonuses retained, another chunk deferred and some may also be clawed back. The present value of a $1 million bonus could be cut to less than $800,000, according to Reuters Breakingviews calculations.

The starting point is how much the banker gets immediately in cash. The new rules specify that 40-60 percent of the bonus must be deferred for three to five years and at least half of the non-deferred portion must be non-cash. That means there’s a maximum of 30 percent upfront cash. But for bankers on big bonuses — and $1 million would presumably be in that category — at least 60 percent must be deferred. The cap on upfront cash, therefore, is 20 percent, or $200,000.

The next step is to see how much cash the banker will get in future. For our big swinging dick, the deferred bonus is $600,000, of which as much as half, $300,000, can be paid in cash. This sum, though, has to be discounted to reflect the risk of a clawback for bad performance and the delay in receiving it. Assume there’s a 5 percent risk of clawback each year and take a 4 percent discount rate for the time value of money. Over a four-year period, that shrinks the banker’s $300,000 to $213,000.

New UK coalition deserves 7 out of 10

Hugo Dixon
May 13, 2010 08:50 UTC

– Hugo Dixon is a Reuters Breakingviews columnist. The opinions expressed are his own –

The new UK coalition deserves 7 out of 10. The pact between the Conservative and Liberal Democrat parties, led by David Cameron as the new prime minister, seems determined to address the country’s most important problem — the deficit. This is vital given that the euro zone debt crisis could still prove contagious. It should also be positive for sterling.

Some good ideas are also emerging on tax and spending. But other plans for tax and banks look odd — and there are doubts about whether these bedfellows will be able to work together. After all, Britain has not had a coalition government since World War Two.