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Friday, 28 January 2011

"Genius or Folly"?? Challenge & my proposed solution Banks that combine retail and investment banking. look set be carved up by John Vickers -WSJ

Banks that combine retail and investment banking. including the U.K.'s biggest--Barclays, RBS and HSBC, look set be carved up by John Vickers in his review of the banking system - The Source - WSJ

In our presently worldwide financial and electronic/digital market,

1.) it is for certain that no one government can legislate for the world,
2.) nor can any mathematician be clever enough to create a 100% accurate model to 'predict' what might happen in the coming months to the instruments, assets (various classes) and multitude of geo-political risks which might affect the intrinsically transient spot price of various 'securitised' instruments which form the bigger transatlantic asset classes.. plus cash and currency risks of each multi-national financial institutions. (where prices of certain assets are also dependent on counter parties' risk/market prices... like CDS etc.)

The sooner we recognise these facts, the sooner we can be humble enough to try to figure out what really happened (to the credit meltdown, because apparently, we still do not know!?? Ahem.) and what might need to be done to resolve all this mess, but most importantly plan for the future to ensure that it will NOT happen again (which seems to be the focus of all these new study bodies and select committee and or senate hearings etc.).

If it all above meant total gobbledygook for the laymen.. it probably is, some might argue that it is the same even for some industry insiders...

In our now short term world, shareholders and investors are all chasing the short term spot share prices and hence market capitalisations that we may have all lost sight of what is important for the business world, namely: "Long term viability" of the companies and the industry itself!! (sadly most conglomerates do not exist now, maybe except the Sage Warren Buffet's Berkshire Hathaway, or GE.. sadly, we have ONLY one Warren! as sadly all boards are now only caring about short term share price, it was refreshing to see comments on Reid Hoffman's LinkedIn IPO document, saying that they would do things despite it might negatively impact on their performance, way to go Reid!)

As the short term culture become now pervasive worldwide across all sectors, especially for consolidated and super competitive digitised world of financial market (which is essentially one market for most of the western world now!), Basis of competition is shifting from non transparency to (as efficiency & speed kills the margin/spread), now 'customised' instruments is used to differentiate but in some cases would mean less transparent nor totally understood, to 'increase' the value, hence bring hopefully margin/profit to client, and consolidate potential return....

Such value chain, during the good times do not need to worry much as the whole chain is raking in the fees. Using the 3 little piggy parable, all 3 piggy brothers do not need to even consider building the sand house, let alone the straw nor brick houses.. as they would be driving Ferrari by just end of the month, as sadly that task of worrying about sustainability of the market rested squarely on the regulators for the financial/insurance/ electronic regulators..

Sadly, the financial regulators worldwide only has power given by the local/national government(s), which invariably is limited in the world stage (e.g. US cannot legislate for Switzerland), as what really would happen if UK forced the banks' hand too much??

Opportunity cost dictates that likes of Goldman, Citi and Morgan to take a few examples, would have to calculate the 'real' cost.. and weight up whether and where to move the operations & jurisdiction.. as surely the power in fact, lies with the companies that has Money/cash to lose!!

[There are initiatives like International Centre for Financial Regulation, but, whether the regulators would want to meet, coordinate, and push through new co-ordinated regulations is another big issue (as governments invariably would make decisions that they can see results within their term, this will be a 2->3term initiative!) of course, some have more to loose than others like Zurich and London for example if they do not get it right!]

As CASH is till king... but for different people, there are different view of what the CASH should be used for.. some might not even want to keep much of it, as one expect better return of any classes of asset, especially CASH... but a virtuous circle could be created to encourage risk based (maybe anonoymised or delegated) information can be shared for one purpose, which is to help put price on the default risk of the industry and an individual company within it!

Therefore, no matter what regulations, carving, or financial/cash requirements/modelling is done, one thing that is not considered is this:

Surely it make sense for the regulated institutions to open their book(s) or risk assessment systems (real-time, or near-real-time) to an independent party which compare data with the value chain with ONLY one goal in mind, which is to establish the on-going viability of the company, benchmarking against others, and put a price on the said company's default risk??

And of course, at present, this product does not exist worldwide, and hence, everyone is preferring to do what the peers tell them, and or prefer the status quo (looking forward to the next senior advisor role for KKR etc.) and waiting for the regulators, and independent boards to advise how best to further monitor (oh, btw, where are the rating companies !??)

This as I see it now is the only way, and whether, why, and how that can be done is still to be devised, and that is what GamBond® has been working on tirelessly since 2004.. and sadly no one listened and thought we were singing loony tunes..

If you are an investor with £100m plus, please do get in touch!!! We can together revolutionise and dare I say it, attempt to potentially fix the now all pervasive connected financial world!

Am I dreaming still? I would prefer to make it a reality!

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