The Music Stops at Deutsche Bank

The recent resignations by the Co-CEO's of Deutsche Bank, Juergen Fitschen and Anshu Jain have come as a bit of a surprise to many.

To me it was just a matter of time before the music of the investment banking merry-go-round that was Deutsche Bank would stop and there would be far too few chairs for everyone to find a seat.  

Mr Jain, an excellent salesman who honed his skills in the 90's forging excellent relationships with the hedge fund community was one of the first people Mr Mitchell took with him when he left Merrill to join Deutsche in 1995.  

The Deutsche Bank they joined was essentially a large commercial bank with a poor investment banking franchise outside of Germany where it was big player in a small pond. The Merrill Lynch Mr Mitchell joined in the mid 80's had been a similar animal.  A player with the slow accounts, and pretty much not involved with fast money.  It was known as a wire house which essentially traded in between the institutional and the retail market.  

Upon joining Deutsche Bank they set about turning it from a "broker" into one of the premier principal houses on the street.  At Merrill everyone wanted to be Goldman Sachs, but the retail broker mentality of the senior management never understood risk and so were always uncomfortable with it.

The cultural gap between a Deutsche Bank, or a Merrill and a Goldman was that the former were big and ponderous and the latter was smart. very smart, and utterly ruthless. In addition to this despite the fact that it had gone public, which in and of itself was a reflection of their smarts and their ruthlessness, the partnership culture hadn't been defaced.

Deutsche didn't necessarily yearn to be a Goldman Sachs, but they were certainly not happy to be a big fish in the (relatively) little pond of Germany.  Under Mitchell and Jain the way forward would be to work with the fast money, essentially becoming one of them, willing to take serious principal risk and looking for the slow money, institutional or retail to help take them out. 

And although Mitchell and Jain were certainly smart enough and definitely ruthless enough to work at Goldman, Deutsche offered the best of both worlds.  They could replicate Goldman's culture, but unlike Goldman, use OPM- other people's money.  

And those other people were the shareholders, large and small, representing one of the bastions of the German financial, social and political establishment. 

Moving over to Mr Fitschen for a moment, he was part of that German establishment.  That is not necessarily a compliment.  Without going into a longwinded history of Germany there are still remnants of what Prof. George Stein described as "feudal modernity" in Germany, especially in such institutions such as Deutsche Bank.

Meritocracy is not a hallmark of such institutions.  Many would say that the only reason Mr Fitschen was elevated to Co-CEO  was that he was a Deutsche Bank insider. Mr Ackermann who picked up where Mr Mitchell left off* with the added benefit that he could speak German could fit into the Deutsche Bank hierarchy.  Anshu Jain could not.  

The Co-Head solution is the worst solution an institution can impose.  The suggestion that the world could be split into a domestic and non-domestic market was a throwback to pre-Mitchell days.  

And so, regardless, the co-head structure meant that as long as Mr Jain could deliver profits, his star would stay aloft. 

But his profits stagnated, and his organisation began to find itself embroiled in regulatory/legal disputes which took much management time and in the end would require far-reaching changes in the way the Bank operated.  

Enter Mr John Cryan.

A Brit, who speaks German.  A finance guy which is bankspeak for someone who not only looks at the revenue side of the balance sheet, but also the cost side.  

Under Mitchell Deutsche Banks cost ratio was continually bumping up against 98-99%.  My motto was that one wanted to work at Deutsche Bank, but not own the stock.  This continued under Ackermann and as recently as the end of 2014 it was still over 75%. 

Most investment banks target a cost income ratio below 65% and in really good years are in the 55% range.  Those with high cost income ratios tend to focus on revenues, or more specifically revenue growth.  Those with lower ratios look very closely at costs.

I should expect that Mr Cryan will swing a sharp blade cutting into much of the fat at Deutsche Bank.  He will certainly cut into muscle.  The question is will he cut into the bone.
Cost ratios are important.  As are capital ratios.  Human capital is probably the most expensive, and so it is where Mr Cryan will focus, followed by capital usage.  

The question is whether the accountant Mr Cryan will be able to square the circle of cost cutting while maintaining the revenues.

I understand he left UBS because he found the stress of the turnaround overwhelming.  

Herzlich willkommen nach Deutschland.....

*Mr Mitchell died in a private plane crash December 2000.

Private Violence

I just read a review on the nature of States and how they have changed over the last 500 years.  The premise is that we have evolved from the Princely State of 1500 through to the Kingly State; the Territorial State; the State Nation followed by the Nation State and that we are now entering the time of the Market State.

The article described the various State types and the causes/stimuli for their evolution over the last 500 years.  Although there were many interesting points I was struck by two specifically.

The first is that the constitutional order of a state and its strategic posture towards other states form an inner and outer membrane of a state.

So far so good. It wents on to explain that these membranes of States are secured by violence, without which a State cannot exist, and that the violence a State deploys must be viewed as legitimate.

Now throughout history there have been innumerable cases of the private sector exercising violence on behalf of the state.  I think of the privateers Sir Francis Drake and Sir Walter Raleigh as perfect examples of how the State allowed the private sector to further its goals through the use of violence.
 
This is not to say that the private sector wasn't involved previously, nor that it has been dormant since Elizabeth I.

The military-industrial complex Eisenhower warned against didn't occur overnight.  Weapons, ammunition, vehicles etc have been supplied by the private sector for centuries.

But the assumption of many activities by the private sector, be it a Burger King on Haliburton built army bases in Afghanistan, Iraq or even in the USA to the hardly discernible division between "Security Services" and mercenaries not only reflects the old adage that War is Good Business, but also portends to a more sinister transition.

For if we are indeed morphing into the next state of Statehood, and that is indeed the Market State,
do we now have the private sector determining the use of violence, externally as well as domestically?

The Transatlantic Trade and Investment Partnership (TTIP) hints at the first step of removing legal responsibility from the State to the private sector.  Rather than turning to the legal system to solve disputes TTIP will bring in "corporate courts" which will follow guidance written by corporations for corporations.

These courts will be controlled by arbitrators who oversee proceedings undertaken in a closed "court" focusing on questions of free trade and (quite probably) disregarding issues such as public health, environmental protection, employment rights and other social rights in favour of maximizing profits.

Nothing wrong with maximizing profits.

But something very wrong with corporate kangaroo courts.  And those "courts" will be the basis for Investor-State Dispute Settlements (ISDS) which allow un-elected transnational corporations to sue governments if the policies of those governments cause a loss of profit.

This is already happening to an extent for example in Germany Vattenfall, a Swedish company operating nuclear facilities in Germany is suing Germany for its decision to exit from nuclear energy in favour of renewable energy.  But it is being discussed within the confines of the German Constitutional Court.  Not a private ISDS forum.

This sort of snowballs into my second point.

Privatization has been the battle cry of the Chicago School of Economics.  Free Marketeers are the modern version of privateers.  Market decisions are always right, and although initially the neo-classical economists were content to confine government to the 18th century functions of justice, police and arms I am unclear as we move into the Market State what role government will have in this new Jerusalem.

For without government what legitimizes the use of violence....and without violence there is no state.

True Democracy

I am a member of a Public Interest Research Group (PIRG) which is essentially an environmentally driven organisation which chases its' members to write letters to their congressional representative to vote for or against any number of bills such as bottle refunding laws, clean water etc.

For those causes with which I agree I dutifully write letters and get responses from my congressional representative thanking me for my interest and explaining how they will vote and why.  For those causes that I disagree with I write letters back to the PIRG explaining why I disagree, and sometimes I get a response.

Granted the PIRG doesn't have a congressional staff at its fingertips it is still curious to me that they sometimes don't even acknowledge my note.

But recently they hit a nerve which cut across a number of sectors and with which I was completely in favour.

Specifically they asked me to write to McDonalds to get them to stop serving meat that came from animals which had been treated with antibiotics.

The use of antibiotics in industrialised agriculture has two sources.

One is the overcrowding of animals where they are held in such close proximity to one another and in such a manner that hygiene is severely impacted thus requiring antibiotics to combat what is essentially poor animal husbandry.

The other is the overwhelming power of the corn lobby.  It has created a relationship with the beef industry that has replaced grass as the main staple of feed for beef cattle with corn- a feed stuff that makes cattle ill thus requiring antibiotics.

This disturbing practise of feeding cattle with a foodstuff that makes them ill thus requiring antibiotics is and the use of antibiotics to counter industrially induced diseases in chickens is compounded by the transmission of these medicines up the food chain to humans thus rendering many many standard antibiotics useless and accelerating the evolution of diseases which are resistant to  new and improved (my italics) seemantibiotics.

But back to true democracy.

Much to my pleasant surprise, McDonald's announced that they would stop selling chickens which are free from medically important antibiotics.  Chickens are one of the prime examples of the overcrowding of livestock.l. I am not totally comfortable with the condition of "medically important" in their announcement, But it is still a massive step in the right direction.

And surprise surprise, in addition to Purdue and Pilgrims Pride, two large producers of chicken who have announced their commitment to phasing out antibiotics, earlier this week one of McDonalds largest providers, Tyson Foods announced that they too will be abolishing antibiotics.

So through the power of the "ballot box" we were able to make a rational positive change.

Next up is the corn lobby....

Democracy can work.

Is QE Musical Chairs or Russian Roulette?

Since the start of the Great Recession in 2007 the world's Central Bankers have done everything in their powers to ensure that the liquidity in the financial system doesn't dry up.

The crowning glory of this effort has been QE or quantitative easing.  Essentially quantitative easing is a form of monetary policy whereby the Central Bank creates new money to buy financial assets such as government bonds but expanding in most instances to also support other asset classes.

The goal of this process is to directly increase private sector spending and to combat deflation by increasing inflation.

So, where has this taken us.

• In 2015 there have been 26 rate cuts by global central banks.  Since  the fall of Lehman Brothers there have been a total of 569 cuts.
• There are now $5.3 trillion of government bonds trading with a negative yield.
• In March 2015 more than Euro 60 billion of new corporate bonds were issued-a new record.
• Switzerland issued a 10 year bond at a negative yield- a new record.
• Mexico launched a Euro 1.5 billion 100-year Euro bond at 4%.
• And the Market cap of the US tech/biotech industry now exceeds that of Emerging Markets and the Eurozone.

These QE purchases means that central bank assets now exceed $22 trillion.  This is the equivalent to the combined GDP of US and Japan.

Central banks now collectively own nearly a third of global GDP in government bonds and equivalent assets and over half of the world's government bonds yield 1% or less.  Parallel to this the globe's major stock markets are also in reach of all time highs.

So what does this mean.

It means that we are riding on the back of a tiger.  We could discuss ad nauseam how we got here. Why we shouldn't be here.  But it wouldn't change the facts.  We are now riding a massive tiger with no clear plan as to how we are going to dismount.

The Federal Reserve Bank is slowly marching to the exit. They began by reducing their purchases in the so-called "taper".

In its' place the ECB has stepped up to be the QE liquidity provider of choice.  They have an extremely aggressive buy program requiring them to purchase over 2.5 times the net new issuance of Euro governments out to 2016.

During the heyday of the FED's QE program, 2009-2013, foreign issuers, primarily from Brasil, Russia, India and China (the BRIC's), and other developing countries raised over US$9 trillion, which is now having to be paid back with a much stronger dollar resulting in a massive fx move.

Using Mexico's stunning feat of issuing Euro 1.5 billion 100 year bonds at 4%  as an example of a similar frenzy in the Euro denominate market on the back of the ECB's QE program it is clear to me that at some point the ECB too will have to start to put the brakes on.  One can assume that the value of the Euro will also gyrate wildly as issuers once again scramble to find Euros to repay their debts.

The FED decided that after years of  lowering rates whereby the liquidity thus generated rather than stimulating consumption resulted in deflation that they had to face the tiger.  Their answer was to introduce the "Taper" which meant a measured reduction in the purchases by the FED.  This was accompanied by noises about raising interest rates at some point in the future.

The hope on the part of the FED was that the economy was now robust enough to create its' own demand and they could gradually move away from a zero interest rate environment.

The most recent economic statistics in the US suggest that the economy might not be as strong as the FED has assumed it to be.

So as QE moves from the USA to Japan and now to Europe deflation remains a problem.  Raising interest rates won't ignite inflation.  And restarting QE will ensure we remain on the back of the tiger.

These are interesting times.

Reflections on 4U 9525

Over the weekend I listened to an interview with a brain researcher who made two statements that really stuck with me.

The first was that humankind is the only being in the animal kingdom that is fully aware that it will eventually die, and yet has built in a defence mechanism that somehow manages to deal with that reality and generally does so without cracking.

The second thought was that perhaps that the very ability to build that construct is also what allows people to create walls in their minds to combine seemingly incongruous actions.  I refer to torturers and their ilk that happily go home every night to their families where they are perceived as wonderful loving parents and spouses, and yet in the morning go off and commit brutal acts against humanity as thugs in police or military units.

I believe the interview was taped before the Germanwings disaster so there were no references to the crash.  Despite this the actions of the pilot somehow fit in to the discussion. Although this interview was concerned with the workings of the brain as a series of chemical reactions which are governed or at least tempered by the creation of cultural umbrellas under which civilisations function in normal circumstances, it hinted loudly that cultural mores were necessary but not sufficient to ensure that an individuals actions didn't go beyond the accepted norms.

There was of course the usual nurture versus nature argument, but essentially the researcher's take was that it is a mixture of the two.

But it did segue into the plane disaster.

There has been a lot of talk as to the mental state of the pilot. He suffered from depression. Apparently he had had suicidal thoughts. But in none of the documents made public to date was there any indication that he was actively suicidal or that he was harbouring seriously aggressive thoughts towards others.

First and foremost I think on the part of Germanwings, and to a degree Germany as a whole there was some sort of relief that there was not a mechanical failure.

Germany is a highly industrialised nation which takes great pride in its' engineering prowess.  Having a plane crash because of a mechanical fault does not sit well.

And so it was almost with relief that the first reports were of pilot error.

Which then turned to fear.

Pilot error is one thing.  But a suicidal murderer is another.

It breaks every convention that society has constructed to ensure a basic code of conduct.  And for Germany, which has a leaning towards viewing every problem, mechanical or human, as being solvable and therefore avoidable, this pilot's actions cuts deeply in the nation's collective psyche.

The Public Sector Again to the Rescue?

It is a strange quirk of capitalism that the private sector is always clamouring for independence or freedom from government intervention and regulation.  Yet the private sector has no qualms about using the public sector as a major source of income through government contracts.  

It is even more galling that these champions of the private sector in times of crisis-and these seem to come with increasing regularity- have no pangs of conscience in allowing the public sector to bail out the private sector "in the name of the nation"....

This idea of privatising profits and allowing losses to be borne by the public purse has traditionally been the unspoken catechism of the banking sector so it was somewhat surprising to see a new variant of this in the world of soccer or football as it is known outside the USA.

The newly (re)elected president of the Union of European Football Associations or UEFA, Michel Platini came out today blaming the increase of hooligan in European Stadiums on a lack of policing on the part of the public authorities, and therefore reiterated calls for a European sports police force to ensure that hooliganism doesn't take over the stadiums. 

Now part of his argument is that the rise of nationalism with its ugly sisters racism and extremism are not really the responsibility of Football as stadiums are the stage for undesirable acts but not the cause.

It would perhaps be harsh to blame these "isms" on Football, but they are all part of a tribalism that was present in the very nature of supporter groups when it was city against city or even intra-city.  As always, part of the "acting out" took place under the perceived protection of mob psychology and safety in numbers often leaving the perpetrators immune to prosecution.  

Recently, after many years of benign antagonism there has been a marked increase of verbal and physical abuse in stadiums which has been either ignored or even defended as part of the game.  

The first line of defence has to be the clubs and their stadium security stewards.  Mr Platini however seeks to put the blame for this increase in undesirable behavior on trends within society as a whole that are merely being manifested in football tribalism, and are therefore not Football's responsibility.  

Hmmm.

This year the poster child of UEFA, the English Premier League sold the television and marketing rights for even more obscene numbers than the already ridiculous prices paid in the past

.From that comes footballers earning hundreds of thousands of dollars per week, and yet the public sector should stump up for increased policing of stadiums in a time of austerity budgets for the public sector.

I know Panem et Circenses was a means of keeping the masses distracted from the actual stresses of life.  They were however financed essentially by the public purse and as such were part of the socio-political fabric of the state which served the purposes of the political elite.

The modern version of the games, especially in their global extravaganzas such as the World Cup and the Olympics are incredibly profitable for the organisations that run them, but are often ruinous for the host nation.  They require massive investment in infrastructure and security and yet the "games" negotiate tax breaks in the host countries as part of the selection process.

A classic example of private profits and public losses.

And now Monsieur Platini would like the public sector to provide security and oversight of Football stadiums throughout the season with an ever increasing plethora of leagues and competitions.

I might be too harsh and he intends to have UEFA pay for this public service.

I wouldn't bet on it.

For Clarification

A good friend of mine asked why it appeared that I have an obsession with radical Islam.  Because he is a good friend and I value his opinion I thought it merited some reflection on my part.

My reflection was shattered with the events in Paris last week.

Our western ideals have been developed over the past 500 years.  It was not always pretty.  The West's conquest of overseas colonies was perpetrated by soldiers going hand in hand with priests spreading Christianity under the banner of God and Country.

But those same cultures brought about the American and French Revolutions and with them the march of secularism.

And it was precisely the development of secularism, drawing a radical distinction between public and private life and more importantly the relegation of the religious to the private sphere which stopped the internecine warfare within Christianity removing one of the great causes of war and strife in Europe.

This secularism provided the basis for the West's pursuit of freedom- the freedom to believe whatever you wish in private, while still adhering to the rules and regulations of the public sphere. It tried to implement a social contract which allowed the individual many freedoms and rights, while demanding that the individual still remain subject to the rule of law and the requirements of the state that provides for that freedom.

These freedoms were enshrined in our democratic institutions in the form of our Constitutions, Basic Law Books or Parliamentary Procedures.

Democracy means that the majority determines who runs the State but the method of checks and balances ensures that the changes any one party can institute are within the remit of the State.

It took the Judeo/Christian world 500 years to reach our present state.  As mentioned, it hasn't always been pretty.  But I have no intention to sit idly by and watch our hard fought freedoms-despite the fact that the concept of Freedom of Speech has been bastardized in any number of legal defenses-and allow religious fanatics to run rampant over our values.

I appreciate that the cartoons of Charlie Habdo were often crude and intentionally offensive.  But the Charlie Hebdo's of the world are what provide me with my way of life.  And I like my way of life.

If Islam still has 500 years of development to go through before it too can embrace a secular society that is a saddening thought.  But it does not mean I have to subject myself to it.

I choose to live in a secular society, exercising my freedoms within the structures of the State.

If anyone, regardless of race, creed or colour wishes to live in a non-secular state, be my guest.  But don't try and impose your rules and regulations on me in my state.

I would maintain that radical Islam has every intention to try and make me live according to their rules regulations.

I object to that, and for the record, I am equally adverse to any other religious group which attempts to coerce me into their belief system.