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European banks battle old enemies and get it wrong again
Capital Markets
<p>I hate to say this, but European banks have a penchant for adopting similar strategies—and usually strategies that deal with yesterday’s problems instead of tomorrow’s opportunities. The recent flight from investment banking is a case in point. Swiss, German, French and British banks all have cut back their investment banking operations sharply. Some of them are embracing instead the mantra of “wealth management”.</p> <p>Rich folk, it appears they believe, will pay up for service, even though there is little magic to so-called wealth management. Wealth management is little more than portfolio diversification, combined with good tax strategies for passing wealth to succeeding generations. Asset allocation, low-cost mutual funds, and a good tax accountant or lawyer are what is called for. High management fees are not required, though perhaps the rich are willing to pay them on the theory that you get what you pay for. And maybe some like to boast about which gold-plated bank has their money.</p> <p>I do admit that a profitable part of wealth management is lending wealthy customers money they do not need. The customer wants a new Rolls, no problem. The customer wants a new yacht or an expensive painting, why spend money? Credit is available, so long as there are securities in the vault.</p> <p>There used to be another aspect to European wealth management: Tax evasion through placing funds in secret accounts and tax haven jurisdictions. There still is some of that, and it never will be entirely eradicated. But the world is moving away from permitting such shenanigans, and in twenty or so years, the jig likely will be up. It is pretty much up for U.S. taxpayers already.</p> <p>Too many banks focusing on wealth management is likely gradually to reduce fees and profitability for many of them. Building a boutique bank like Julius Baer based on wealth management still may make sense. A Credit Suisse based on wealth management will have to be a much smaller Credit Suisse.</p> <p>But if we look to the future of European finance, we can see that Europe is going to need stronger and more diversified capital markets. That is the direction in which the world naturally progresses. Traditional banks are relatively inefficient intermediators. It is naturally inefficient or dangerous to engage in spread lending and its attendant maturity transformation. That is why traditional banks have had to be subsidized—and somehow recapitalized when they fail.</p> <p>Capital markets, by contrast, match investors and borrowers/equity sellers, usually in less leveraged ways. Capital markets lenders and borrowers lose money or fail without systemic consequences.</p> <p>Yet what is happening in Europe is that the banks are impairing their ability to participate in capital markets and the authorities are trying to impair European capital markets by regulating “shadow banks”. Thus, by learning what they see as the lessons of the last crisis (they are wrong even on that, by the way), they are impairing the ability of European businesses and consumers to obtain funding. And the banks are reducing their future profitability.</p> <p>The American banks and investment banking boutiques will be only too glad to fill the void and to try to get around whatever rules the Europeans make to try to prevent efficient funding mechanisms.</p> <p>In wondering why the European banks are shooting themselves in the foot, I am guessing that they have not understood that the investment banking business as practiced in the 2000s was really two very different businesses: Trading, on the one hand, which is capital intensive and, being a zero sum game, is dangerous; and the combination of broking, underwriting and M&amp;A that is highly profitable, uses relatively little capital, and has dangers only to the extent that personnel costs are high. Managements must understand that simple distinction. But if they do, then I do not understand why they would abandon a capital-efficient, potentially highly profitable business, unless they just think they cannot compete with American ag
Daily Scan: Stocks rally ahead of Fed decision; Raul Castro headed to NYC
Capital Markets
<p>Updated throughout the day</p> <p>September 15</p> <p>Good evening.</p> <p>U.S. stocks rallied just before the Federal Reserve begins discussions about whether to raise interest rates. The Dow had a 1.4% boost Tueday, the S&amp;P 500 gained 1.3%, and the Nasdaq added 1.1% after steady gains all day. Oil gained more than 2.5%, ending the day above $45/barrel. In Asia, the Shanghai Composite closed down 3.5%, and Hong Kong's Hang Seng fell 0.6. Meanwhile, the Stoxx Europe 600 closed with a 0.92% gain.</p> <p>Here is what else you need to know:</p> <p>Cuban President Raul Castro headed to New York. Castro will address the U.N. General Assembly later in September. The visit will be the first to the U.S. for Castro as the Cuban head of state. Castro's brother Fidel holds the record for longest U.N speech, at four and a half hours. Reuters</p> <p>Survey says: Insiders are beating the market before event disclosures. Researchers at Columbia and Harvard universities found that executive and board members regularly beat the market with returns from buying and selling stock before they disclose significant events. Wall Street Journal</p> <p>Judge all you want. Facebook is adding a "dislike" button. Founder Mark Zuckerberg revealed that the social media network is "very close" to having a dislike button ready for user testing. Since the "like" button was introduced in 2009, users have steadily requested a dislike button. BBC</p> <p>Died: Subway co-founder Fred DeLuca. The cause of death has not been revealed, but the 67-year-old DeLuca was diagnosed with leukemia in 2013. DeLuca helped found the sandwich chain in 1965, and had just recently turned the day-to-day operations of the company over to his sister. New York Times (paywall)</p> <p>House considering a lift on the oil exports ban. Republicans are planning to vote in the coming weeks on a bill to lift the 40-year ban on oil exports. Oil companies have been lobbying Congress to allow them to benefit from the domestic oil boom. Wall Street Journal</p> <p>Credit Suisse nears deal to settle claims over dark pool Credit Suisse is expected to pay at least $80m to settle allegations that it misled clients about its dark pool, trading venues meant to allow asset managers  to trade large blocks of shares without moving the price against them. Financial Times.<br /> Suspected Mississippi gunman dead after shooting himself. A professor who allegedly killed his live-in girlfriend before shooting and killing a fellow professor on the campus of Delta State University killed himself during a police pursuit. Washington Post<br /> North Korea Nuclear site "in operation". North Korea says its main nuclear facility, the Yongbyon complex, has resumed normal operation</p>
The myth of active hedge fund management
Hedge Funds
<p>A new academic study adds yet further proof to the growing mountain of evidence that "active management" is largely a myth, at least among hedge fund managers. Mikhail Tupitsyn and Paul Lajbcygier of Monash University in Australia highlight that not only are two out of three hedge fund managers actually "passive" in their investing approach, even those that are active managers at first tend to become passive over time.</p> <p>The authors also point out that passive managers tend to outperform active managers, especially over the long run.</p> <p>Read the details at ValueWalk.</p> <p>Photo: yuki55</p>
The bank that is also an operating system
<p>The accepted wisdom around fintech currently is that banks need to think of themselves as technology companies if they want to stay relevant and ride out the oncoming wave of disruption. </p> <p>Few banks has take this message to heart as much as Germany’s Fidor bank which just unveiled its new banking platform: FiderOS. </p> <p>Broadly speaking, this so-called bank operating system is a way Fidor bridging the gap between traditional banking and new fintech-enable banking. </p> <p>The platform uses something called APIs (application program interfaces), these are similar to kinds of protocols that let you use popular internet services, like Facebook or Google, with third party services. Banks have been making limited use of APIs for a while.</p> <p>But Fintech blog Finovate explains that banks like Fidor are at the vanguard of an API revolution in banking. Why is this important for banks? In short, it is helping banks stay relevant by connecting, and not competing with fintech. </p> <p>These protocols are not only at the core of the next wave of  fintech innovation but are key to linking the old and the new. The flexibility afforded by the cloud computing and APIs offer banks a way they can apply fintech solutions that enhances their ongoing operations without the massive infrastructure cost.</p>
Transferring wealth to the next generation
Asset Management
<p>Succession planning and achieving a smooth transition of wealth from one generation to the next can be a messy process. Feuding siblings in the shadow of a controlling (usually) father make for fun soap opera but can quickly dissipate hard-earned riches and forge lasting enmities.</p> <p>HSBC Private Bank is one of several wealth managers who recognize that their role extends beyond portfolio management or simply finding the best investment returns.</p> <p>The UK-based bank recently hosted events entitled “Exploring the Future of Wealth as part of its Next Generation Programme” in London and Miami where opportunities and obstacles faced by the children of family business owners were discussed.</p> <p>Topics on the agenda included the latest entrepreneurial trends, leadership best-practices, sophisticated investment strategies, philanthropy and social awareness, explained Gerry Joyce, US head of private wealth solutions at HSBC Private Bank in an interview.</p> <p>“Equally important, they were a chance for young people to share their experiences with their peers,” he said.</p> <p>Managing inevitable conflicts, especially when business and family interest overlap, and creating and communicating a clear framework for succession that is then committed to by all parties is critical, he added.</p> <p>“The transference of control is the acid-test for a wealthy business family,” he stressed.</p> <p>But, the big challenge for HSBC and other banks will surely be Asia. Here, maneuvering and scheming for position as an octogenarian patriarch’s powers decline is as much a staple of tabloid coverage as are the daily dramas of the Kardashian clan in the US.<br /> Photo: Tom Brandt</p>
Women and VC: The aftermath of Ellen Pao vs KPCB
&nbsp; Last week we saw Ellen Pao finally throw in the towel and drop her appeal after losing her sexism case against former employers Kleiner Perkins Caulfield and Byers, a Silicon Valley-based venture capital. In article published in Re/code, the former Reddit CEO draws a line under her three-year-long battle, detailing exactly what she was up against, and why she
Delayed birth of Asia Region Funds Passport Scheme
Asset Management
<p>The Asia Region Funds Passport scheme has been gestating for about five years. Workshops among the thirteen APEC economies (excluding China) were followed by a statement of intent in 2013. Four days ago, finance ministers from seven of the region’s leading nations met at Cebu in the Philippines to announce that its birth was on schedule for early next year.</p> <p>Except, they didn’t. Singapore declined to add its signature because the statement of understanding failed to address the crucial issue of equal taxation, a Monetary Authority of Singapore spokesperson told AsianInvestor today.</p> <p>The passport scheme would allow asset managers from countries within the region access to each other’s retail investor markets through the distribution of their products. According to the APEC Policy Support Unit, it could save the investors $20 billion a year annually in fund management costs, offer higher investment returns at the same or lower degree of risk, and encourage the establishment of locally domiciled funds which could create 170,000 jobs in APEC economies within five years.</p> <p>But, clearly the scheme will be still-born if the tax issue is unresolved. South Korea and Australia, especially, have unequal tax regimes for domestic and overseas fund providers – and basically shut foreign interlopers out.</p> <p>Singapore, with its highly sophisticated fund management industry, would be a likely winner if taxation is neutralized across the region. It’s just as likely that the rest of APEC know this – and are fearful.<br /> Photo: Chris Guillebeau</p>
Inside the brain of an investing genius – Peter Lynch
Asset Management
<p>Those readers who have frequented my Investing Caffeine site are familiar with the numerous profiles on professional investors of both current and prior periods (See Profiles). Many of the individuals described have a tremendous track record of success, while others have a tremendous ability of making outrageous forecasts. I have covered both. Regardless, much can be learned from the successes and failures by mirroring the behavior of the greats – like modeling your golf swing after Tiger Woods (O.K., since Tiger is out of favor right now, let’s say Phil Mickelson). My investment swing borrows techniques and tips from many great investors, but Peter Lynch (ex-Fidelity fund manager), probably more than any icon, has had the most influence on my investing philosophy and career as any investor. His breadth of knowledge and versatility across styles has allowed him to compile a record that few, if any, could match – outside perhaps the great Warren Buffett.</p> <p>Consider that Lynch’s Magellan fund averaged +29% per year from 1977 – 1990 (almost doubling the return of the S&amp;P 500 index for that period). In 1977, the obscure Magellan Fund started with about $20 million, and by his retirement the fund grew to approximately $14 billion (700x’s larger). Cynics believed that Magellan was too big to adequately perform at $1, $2, $3, $5 and then $10 billion, but Lynch ultimately silenced the critics. Despite the fund’s gargantuan size, over the final five years of Lynch’s tenure, Magellan  outperformed 99.5% of all other funds, according to Barron’s. How did Magellan investors fare in the period under Lynch’s watch? A $10,000 investment initiated when he took the helm would have grown to roughly $280,000 (+2,700%) by the day he retired. Not too shabby.</p> <p>Background </p> <p>Lynch graduated from Boston College in 1965 and earned a Master of Business Administration from the Wharton School of the University of Pennsylvania in 1968.  Like the previously mentioned Warren Buffett, Peter Lynch shared his knowledge with the investing masses through his writings, including his two seminal books One Up on Wall Street and Beating the Street. Subsequently, Lynch authored Learn to Earn, a book targeted at younger, novice investors. Regardless, the ideas and lessons from his writings, including contributing author to Worth magazine, are still transferrable to investors across a broad spectrum of skill levels, even today.</p> <p>The Lessons of Lynch</p> <p>Although Lynch has left me with enough financially rich content to write a full-blown textbook, I will limit the meat of this article to lessons and quotations coming directly from the horse’s mouth. Here is a selective list of gems Lynch has shared with investors over the years:</p> <p>Buy within Your Comfort Zone: Lynch simply urges investors to “Buy what you know.” In similar fashion to Warren Buffett, who stuck to investing in stocks within his “circle of competence,” Lynch focused on investments he understood or on industries he felt he had an edge over others. Perhaps if investors would have heeded this advice, the leveraged, toxic derivative debacle occurring over previous years could have been avoided.</p> <p>Do Your Homework</p>
Daily Scan: China markets slump, oil prices swing
Capital Markets
<p>Updated throughout the day</p> <p>September 15</p> <p>Good evening everyone. China has now posted it biggest two-day fall in three weeks. The Shanghai Composite Index closed for the day down 3.5%, meaning it has now lost 7% of its value this year. The Guardian reported today that economists are now concerned that the Chinese economy is weakening faster than the official data suggests, showing growth of around 7% this year. Research from energy consultancy Wood Mackenzie suggests the Chinese economy grew at an annual rate of 5.3% in the second quarter of 2015, and just 4.5% in Q3. Here is how the markets ended elsewhere in Asia: </p> <p> Hang Seng: -0.49%<br /> Jakarta Comp: -1.01%<br /> KLSE Comp: +0.46%<br /> Nikkei 225: +0.34%<br /> Straits Times: -0.92%<br /> Seoul Comp: +0.32</p> <p>The Wall Street Journal reports that oil prices were also choppy in Asian trade today. The Brent crude swung between gains and losses on the back of volatile Chinese markets amid signs the US oil producers are suffering more from low prices.Here is what else you need to know:</p> <p>Alibaba takes a hit after Barron's article rebuttal. US investors sent shares of Alibaba Group stock tumbling Monday following a critical article from Barron’s - despite a detailed rebuttal,  The stock fell as much as 4.9% Monday, touching $61.48. Wall Street Journal.</p> <p>Credit Suisse nears deal to settle claims over dark pool Credit Suisse is expected to pay at least $80m to settle allegations that it misled clients about its dark pool, trading venues meant to allow asset managers  to trade large blocks of shares without moving the price against them. Financial Times.<br /> Malaysia wants state companies to repatriate foreign earnings. Malaysia wants its state-owned funds to repatriate some earnings from the more than 500 billion ringgit ($115 billion) worth of investments made abroad. This is seen as a way to help stem the decline of the nation's currency, which has weakened by 26.3% against the dollar over the past year. Nikkei<br /> North Korea Nuclear site "in operation". North Korea says its main nuclear facility, the Yongbyon complex, has resumed normal operations. The country was improving its nuclear weapons "in quality and quantity", a state-run news agency said. Yongbyon's reactor was shut down in 2007. BBC<br /> Beijing builds third airstrip on contested South China Seas islands. China appears to be building a third airstrip in contested territory in the South China Sea, a US expert said on Monday, citing satellite photographs taken last week. Experts say the strip is long enough  for most Chinese military aircraft, giving Beijing greater reach into Southeast Asia. </p>
Financiers prove again they can do anything you can do better
Lifestyle, 4:01
<p>Serena Williams failed America by losing the U.S. Open to an unranked Italian. But American Wall Streeters refused to be shamed by Europeans. Last weekend they hosted their own tennis tournament.</p> <p>The first annual Finance Cup pitted Team Wall Street against Team Europe in a different version of a Grand Slam event, reports Business Insider. London-based portfolio manager David Anving and New York-based investment banker Jeffrey Appel organized the event, which took place on Randall's Island.</p> <p>Financiers slammed balls, grunting like a Williams sister, running like Roger Federer, and sweating like the players at the U.S. Open nearby. Wall Street beat Europe after three rounds, winning 8-1. Pershing Square Capital's Bill Ackman secured an American victory in his epic battle against Cevian Capital's Christer Gardell.</p> <p>Competition was fierce. Credit Suisse's Mario Ancic was once ranked number 7 for men's singles globally, once beating Federer. Ludovic Walter, an associate at Cohen partners in London, was once the top player at Duke. Walter's doubles partner Alexander Hartman, formerly of Goldman Sachs, used to be number one at Ole Miss. Thomas Blake, of Jaffe Tilchin Investment Partners, was the top player at Harvard during his day.</p> <p>The finance world brought out a number of other American and global champs to compete for the honor and glory. Rumor has it a second tournament will be hosted in London next year. Start practicing now.<br /> Photo: PughPugh</p>