A recently spotted American bumper sticker read as follows: “20th January 2009 – The End of an Error”. This really only makes sense if you realise that 20th January is the inauguration day for the new US President, and the last word is pronounced as era – but nonetheless is an interesting commentary on the 8 years of Mr Bush. Despite my rather laboured description, the point is still true – we are at an end of an era and it has been a very bloody error. In this instance I am not referring to GW’s foreign escapades but rather the economic situation we find ourselves in and especially with regard to the blasted ramparts of the international banking industry.
Within the space of a couple of months the investment banking giants have been pulled down and the charade of impregnability shattered, along with many an ego. The next phase will depend upon the agreement of the Congress and any implementation of whatever plan is finally agreed. Sadly of course the unfortunate coincidence of the US presidential and congressional elections means that every politician will be queuing up to have their fifteen minutes of fame to air their own ”considered” view of the situation. Hopefully we will be able to get through the rhetoric and pass into a period of quieter action when we can start to try and expunge the poison from the wound. Band-standing politicians will help little in this cause. None of this is helped by Mr Bush not so much appearing to be a lame duck President but rather now a dead duck President, with his authority seemingly ebbing away faster than a Morecambe tide.
This lack of expertise, as we have noticed, is not just an example of just American politicians. Last week’s Labour party conference not unsurprisingly resounded to excited shouts from those who seemingly had little understanding or appreciations of investment issues but were more than happy to hijack the hyperbole of the titillating tabloids. The seemingly ill-informed comments on short selling make a good example and, when put together with comments about fats cats and city greed, make for great sound bites but provide little practical purpose. Yes reform is needed but by cool heads and informed minds – and preferably not by the Bishops either.
The fury of the storm will now pass to other areas of the world as we witness local banking fears being played out with nervous queues and slamming banking doors. As with previous scares, the pandemic has to run its course, but central bankers and come to that investors as well, must hold their nerves.
However, taking a step back, we are witnessing not the death of derivative based investment banking but the shrinking to near extinction in many eyes. The era of the domination of “Gordon Gecko” investment banking in the world is over, at least for the near future. Those that have not already been put to the sword are endeavouring to change their stripes as both Goldman’s and Morgan Stanley will now seek to persuade us that they are now full commercial banks. Tigers and changing stripes come to mind here?
However, in their place we are going to see a return to a more Presbyterian style of banking where credit is earned and not sold, and customers are respected not just rolled over.
Facilities will be for those who qualify and are adjudged to be suitable – a very different world from before. This in many ways could see the banks returning to some of their Quaker roots – at least for the time being especially as their capital lending ability will be constrained. Combined with the calls for greater regulation this, I suspect, will be how the banks will react in order to prove their probity once again to their clients, investors and regulators. Could it be that we might be seeing the return, if not in the branch then in Head office, of someone that bears more resemblance to Captain Mainwaring with a dog collar?
Global leaders have been calling for more international regulation but all too often these are watered down to well intentioned platitudes, but maybe now there is the momentum to pull together the key players to sit down and draw up a possible Bretton Woods 2. The first Bretton Woods was the momentous agreement that came into force in 1945 to set the terms of financial arrangements between nations in the post war era and to a great extent has served us well - until now.
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What a blinder by Mr Buffett, the sage who has for years warned of the inevitable doom of derivative based investment packages, and who has now taken the opportunity to buy into Goldman’s at what looks like just the right time. However, unlike the Sovereign Wealth Funds who invested in Goldman’s last year, the wily man from Omaha has some protection by buying perpetual preferred stock (close to capital) which has a 10% yield and can only be bought back at a 10% premium. Add to that some warrants that are already in the money and he put together a corker of a package. What revenge on the investment bankers that the “old boy from Omaha” is the one who comes in and helps with the rescue and makes the money.
So who else can provide the cavalry to ride to the rescue? Well an unlikely source came forward last week, in the form of Nomura buying certain European assets from the Lehman debris. These can lead us to consider the huge potential from the Japanese mega banks. You may recall that during their depression of the nineties, the Japanese had their own banking crisis, and following the eventual “rationalisation” the new behemoths arose. The big three now have a combined deposit base of $2,500 bn and with a sluggish economy and dull domestic prospects, maybe some overseas investments into US brands might also provide a timely investment and longer term value.
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Buried under much of the rest of the news was the announcement that the North Koreans have apparently gone back on their agreement about dismantling their nuclear capabilities. Yet another geo-political risk to be concerned about I am afraid. Another one to put on the watch list.
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Whilst in Vermont on holiday earlier this year a somewhat unusual bank was pointed out to me. Apparently it is still very popular, with regular demand for its services and with still some significant liquidity. It is called the Manure Bank which I thought was a good local name for a farming bank – how stupid can I get? It is of course a manure store. Mind you it could well be that this is the inspiration for Hank Paulson’s proposals for all that bank poo that has to be disposed of.
Have a good weekend,
Justin A. Urquhart Stewart
Director
Seven Investment Management