Investment banking Is there a future?

Sep 18th 2008
From The Economist print edition
The loneliness of the independent Wall Street bank

EPA

IN THE early years of this decade, when banks did quaint things like making money, the mantra on Wall Street was: “Be more like Goldman Sachs”. Bank bosses peered enviously at the profits and risk-taking prowess of the venerable investment bank. No longer. “Be less like Goldman Sachs” is the imperative today.

Of the five independent investment banks open for business at the start of the year, only Goldman and Morgan Stanley remain. Doubts about the sustainability of the model are rife. In earnings conference calls on September 16th, the chief financial officers of both firms had to bat away analysts’ questions about their ability to survive on their own. Spreads on their credit-default swaps, which protect against the risk of default, soared as investors digested the implications of Lehman Brothers’ demise (see chart).

Universal banks, which marry investment banking and deposit-taking, are in the ascendant. Bear Stearns and Merrill Lynch found shelter in the arms of two big universal banks, JPMorgan Chase and Bank of America. Barclays, a British universal bank, is picking at the carrion of Lehman Brothers. The mood at Citigroup, seen until now as one of the biggest losers from the crisis, is suddenly bullish: insiders talk up the stability of its earnings and the advantages of deposit funding.

Regulatory antipathy to universal banks has also eased. Although the 1933 Glass-Steagall act, which separated investment banks and commercial banks, was repealed in 1999, the universal model is still viewed with suspicion in America. Among measures announced on September 14th, the Federal Reserve temporarily suspended rules restricting the amount of money that banks can lend to their investment-banking affiliates. Many are sceptical that this rule makes much practical difference. Even if the investment-banking arms of universal banks nominally have to raise money separately, their parents’ ratings still make their funding cheaper. By the same token, if they get into trouble, the effects ripple through the entire balance-sheet. Even so the suspension, and the dramatic reshaping of Wall Street, represents the final repeal of Glass-Steagall.

Can Goldman and Morgan Stanley survive as independents? In normal times, the question would seem ludicrous. Both banks had profitable third quarters, with Morgan Stanley beating expectations comfortably. Rivals’ disappearance should allow them to grab new business and has already helped to increase pricing power: Morgan Stanley hauled in record revenues in its prime-brokerage business. Both have reduced their most troubling exposures; both can call on decent amounts of capital and strong pools of liquidity. And both can marshal strong arguments that they are better managed than their erstwhile peers.

The problem, of course, is that these are not normal times. Although the firms condemn the rumour-mongering, stories that Morgan Stanley was looking for a partner continued to swirl. As The Economist went to press, Wachovia, an American bank, and Citic of China were among the names in the frame.

Three doubts hang over the independent model. The first concerns the risk of insolvency. Investment banks have higher leverage than other banks (in America at least), which worsens the impact of falling asset values. They do not have the safety-valve of banking books, where souring assets can escape the rigours of mark-to-market accounting. And they lack the stable earnings streams of commercial and retail banking. In other words, they have less room for error. Goldman’s reputation for risk management is excellent, Morgan Stanley’s a bit patchier. But asking investors to take valuations and hedging processes on trust is getting harder by the day.

The second, related doubt concerns their funding profile. As a group, the pure-play investment banks have relied heavily on short-term funding, particularly repo transactions in which counterparties take collateral as security against the cash they lend. Both survivors say they are nowhere near as exposed to the risk of a sudden dearth of liquidity as Bear Stearns was. They could also argue that retail deposits can be as flighty as the wholesale markets: just ask Northern Rock and IndyMac, both of which suffered rapid withdrawals. Even so, a further shift towards longer-term unsecured financing will be the price of survival for Morgan Stanley in particular.

That would increase costs, which in turn raises the third doubt, profitability. As well as dearer funding and lower leverage, the investment banks face the prospect of weakened demand for their services. As and when the market for structured finance revives, it will be smaller and less rewarding than before. Demand for many services will not go away, but in a world of scarcer credit, universal banks will be tempted to use their lending capacity to win juicier investment-banking business from companies. “Don’t give me the bone,” says one European bank boss. “Leave some meat on it.”

By these lights, universal banks appear to offer clear advantages to both shareholders and regulators. Yet some of those advantages are illusory. For regulators, larger, diversified institutions may be more stable than investment banks but they pose an even greater systemic risk. “The universal bank is the regulatory equivalent of the super-senior mortgage-backed bond,” says one analyst. “The risks may look lower but they do not go away.” And deposit funding is cheaper than wholesale funding in part because those deposits are insured. Measures to protect customers may end up allowing banks to take on risks that endanger customers.

For shareholders, too, the universal bank may offer false comfort. A model that looks appealing in part because assets are not valued at market prices ought to ring alarm bells. Sprawling conglomerates are just as hard to manage as turbo-charged investment banks. And shareholders at UBS and Citi will derive little comfort from the notion that the model has been proven because their institutions are still standing. If the independent investment banks survive, they will clearly need to change. But they are not the only ones.

introduction of my assignment 1

As everyone who passed or is enjoying the juvenescence knows, the youth have many ways to express their own identities which differentiate them from others. They can choose to become knowledgeable or have outstanding personalities or decorate themselves with noticeable outfits. While the two first ones can only be shaped through long process, a distinct appearance can be achieved easily. Ganguro girl which is mentioned in the article The hip hop impact on Japanese youth culture (X. Liu, 2005) can be considered as a suitable example of this type of youth. These ganguro girls, along with teenagers of other fairly odd groups, identify themselves by opposing the cultural norms, their parents’ expectation and peer pressure while pursuing a lifestyle full of extreme freedom which, nevertheless, can be disdained by a majority of the society. However, it is essential to analyze reasons of the Japanese teenagers to follow Ganguro style before making any comment or judgment.

(Untitled)

I walked in the serene night

looking into my naked mind

though our love had died

still imagine you step by my side

miss you much, my lover xoxo

The Palin effect

Sep 16th 2008 | NEW YORK
From Economist.com
John McCain has wiped out Barack Obama's lead in the polls

AFP

BOUNCES are, by definition, temporary. Nearly a fortnight has passed since the end of the Republican convention and it is clear that it, and the Democratic get-together beforehand, have produced more than just a bounce. The conventions, and especially John McCain’s choice of Sarah Palin, have changed the course of the presidential race. On Monday September 15th both candidates sought to make tough statements on the demise of Lehman Brothers and the turmoil on Wall Street. And both attempted to score points off the other over the strength of those responses.

Even battling for small victories is important at this stage of the race. Before the conventions, Barack Obama enjoyed modest, but enduring, poll leads for weeks on end. Just after, Mr McCain suddenly shot to big leads in many polls himself. Now, public opinion shows that the race is probably tied or that Mr McCain has a small lead. The electoral college is of course more important. But here, too, the dynamics seem to be changing.

A big reason for Mr McCain’s boost seems to be Mrs Palin. She is both a staunch Christian conservative and a western governor. This has helped Mr McCain in the territorial battle. When Mr Obama was riding high, he confidently put resources into states that Democrats had disdained, especially the interior West and the South. Polls provided him with good reason for doing so, showing a race that was surprisingly close in unlikely states such as Montana, North Dakota, North Carolina and Georgia. But Mrs Palin’s selection has brought the Christian wing of his party, formerly sceptical, not only into line but enthusiastically so. Mr Obama is scaling back some of his more ambitious efforts, including pulling money and staff from Georgia (to put them in North Carolina, where he has a slightly better chance).

Other aspects of public opinion have changed too. A post-convention poll shows the two candidates nearly tied in perceptions of who would change Washington. Independents are moving towards Mr McCain despite Mr Obama’s strong advocacy of “change” in his campaign. The “enthusiasm” gap is closing, too: before, many voters told pollsters that they would vote for Mr McCain, but not happily. Now, many more are pleased with their pick. Again, Mrs Palin's elevation has much to do with this. At the Republican convention in St Paul, she generated such enthusiasm that there was jocular talk of flipping the ticket to put her at the top and Mr McCain in the vice-presidential slot.

Mr McCain has not taken control of the race, by any means. But having solidified support in previously wobbly states, it means he can concentrate more closely on a handful of swing states that Mr Obama must win himself. Once again, Ohio is pivotal, along with Pennsylvania and New Hampshire. Mr Obama also has a shot in Virginia and Colorado, traditional Republican territory. If he wins these states, he will probably win the election. If Mr McCain simply holds the states that George Bush won in 2004, naturally he wins. And Mr McCain thinks he also might snatch Michigan from the Democrats.

There is concern, but not panic, on the Democratic side. On Monday, both Mr Obama and his running mate, Joe Biden, sharpened their attacks. And they had good news to back them up: in August, Mr Obama once again smashed the monthly fundraising record for a presidential candidate, hauling in $66m. His press team is responding quickly and furiously to attacks from Mr McCain. One last week was particularly scurrilous: a television advertisement saying Mr Obama wanted kindergartens to have sex education. In fact, Mr Obama supported a bill that would include teaching designed to prevent child sex abuse.

Mr McCain has also been caught telling some straightforward fibs, for example that Mrs Palin, as governor, had “never” sought federal earmark money for her state—her request per head for Alaska was the biggest in the country. He and Mrs Palin continue to insist that she killed an infamous “bridge to nowhere” project in Alaska, even though every journalist in America now knows she did so only after supporting it, and only after it became a political albatross. Mr McCain has good reason to worry about his reputation for straight-talk, the strongest part of his political brand.

Simple Plan

Welcome back, Zola

West Ham boss Gianfranco Zola insisted his lack of managerial experience would not hamper him in his new job when he was unveiled at Upton Park on Thursday.

The 42-year-old Italian has not managed a club side before and has still to obtain the Uefa Pro Licence.

"I know I am not the most experienced manager, but I have ideas and have been involved in football for 20 years," he said after signing a three-year deal.

"It's a great opportunity and I am sure I can do a great job for this club."

West Ham have agreed with the Premier League that Zola, who already has Uefa's B licence, can work as a manager as long as he gains the Uefa Pro Licence by 2010.

There have been reports that Zola wants Chelsea assistant Steve Clarke, who coached him at Stamford Bridge, to be his number two at Upton Park.

He did not confirm this, but said that Antonio Pintus would be coming in as a fitness coach, while caretaker manager Kevin Keen would remain part of the club's coaching staff.

Keen will take charge of West Ham for Saturday's Premiership match at West Brom, so Zola's first match in charge will be against Newcastle at home on 20 September.

Pintus used to work at Chelsea, as well as at Monaco and Juventus.

Zola played for Chelsea from 1996 to 2003 and has been voted the club's greatest-ever player by their fans.

The two clubs have an intense rivalry, yet Zola insisted this would not be a problem.

He said: "I had seven wonderful years with Chelsea and it's something I will never forget. But here I have the opportunity of another experience, as a manager.

"I hope it will be as good as those seven years were. What is important is the present and this club that has faith in me.

"I am totally focused on what I am doing here with West Ham. The club has got tradition and I am just here to help develop the team and to develop the players.

"That is my duty and I will do it with all of myself. I will give to these players all of my experience and all of my knowledge - I am here to be somebody good for them."

Zola, who is West Ham's fifth manager in seven years and their first foreign boss, was an instinctive and lavishly gifted forward.

He promised to also have an attacking philosophy now he is a manager.

"My philosophy is to play offensive football if I can," he said. "I have always done that, because I trust it.

"We have to make it enjoyable for the players first and then for the crowd and everybody.

"Obviously we will have to be a balanced team, but the philosophy will be to play offensive football."

Zola succeeds Alan Curbishley, who resigned last Wednesday because a lack of control over the club's transfer policy.

Zola promised he would have "an attacking philosophy" at West Ham

Technical director Gianluca Nani had been mainly responsible for which players were bought and sold at the end of Curbishley's reign.

Zola thanked Nani for "backing me" and said he had "no problem" working with his compatriot.

He said: "My work is on the pitch, my first duty is to develop the team. The director is working with me, not against me.

"I said to the board that everyone has to work together as a team. We will try to do things together for the good of the club."

And the Italian paid tribute to his predecessor. "I believe Curbishley has done a great job here and I respect him very much," he said.

Chief executive Scott Duxbury said Zola had been the board's "unanimous choice" to be their new manager.

(Source:http://www.bbc.co.uk)

North Korea news

Kim Jong Ill or Kim Jong Well?

Sep 11th 2008 | TOKYO
From The Economist print edition

Fresh speculation about the Dear Leader’s health

RUMOURS have swirled that Kim Jong Il, North Korea’s dictator, is gravely ill. The 66-year-old, officials said in Seoul, had suffered a “collapse”. South Korea’s president, Lee Myung-bak, was worried enough to call an emergency meeting with senior aides. An anonymous American intelligence official in Washington might have been at the bedside: Mr Kim, she told reporters, was probably half-paralysed following a stroke. (Mysteriously, South Korean spooks later reported he was recovering from surgery.) On Wednesday September 10th North Korean diplomat denied the claims as “nefarious machinations”, noting that the Western press had a habit of telling lies (unlike the snow-pure Pyongyang Times).

He is half-right. The Western press has recently shown lurid interest in the theory of a Japanese professor that a double has been standing in for Mr Kim, who has in fact been the Dear Departed since 2003. For years rumours have erupted about Mr Kim’s health following prolonged public absences. Each time, he has eventually waddled back into view. The last scare was in May 2007, when he stopped appearing in public, and diabetes or heart problems were blamed. A team of German heart surgeons, sworn to secrecy, was flown to Pyongyang. Yet they may have operated on any member of the elite, not specifically on Mr Kim. At any rate, by the time of an October summit with South Korea’s then president, Roh Moo-hyun, Mr Kim looked hale enough—by the standards of a man with a podgy, grey demeanour.

Perhaps something is up this time. Neither hide nor tousled hair of Mr Kim has been seen since August 14th. His absence was conspicuous at the huge celebrations marking the 60th anniversary of North Korea’s founding. They included a vast militia parade on Tuesday. Mr Kim became head of the armed forces in 1991, three years before the death of his father, Kim Il Sung, and the world’s first communist dynastic succession. Until now, Mr Kim appears not to have missed a single military parade. A foreign medical team, this time Chinese, is now back in the capital.

Some analysts have blamed Mr Kim’s health for recent setbacks in the “six-party process” meant to wean the regime off its nuclear weapons in return for aid and security guarantees. The current phase of the talks has to do with a proper accounting of the North’s nuclear programmes, in return for which America will drop North Korea from its blacklist of state sponsors of terrorism. Yet the information that North Korea has so far produced is underwhelming: it fails to cover details of existing plutonium weapons, a possible programme for enriching uranium, and proliferation activities in the Middle East.

North Korea is indignant at demands for intrusive inspections: it insists that America drop it from the blacklist before agreeing to a verification protocol. In August it stopped disabling its main nuclear facility at Yongbyon and even threatens to undo the dismantling. North Korea has also suddenly put on hold a recent agreement to launch an official investigation into the fate of Japanese citizens kidnapped during the 1970s and 1980s and taken to the North. One Western diplomat, present at a weekend meeting in Beijing between envoys from America, Japan, China and South Korea, says these four parties are “at a loss over where to go next”.

Yet for North Korea, intransigence is the norm. Its negotiating style is marked by bluster, foot-dragging, blackmail and brinkmanship. Indeed, the same diplomat notes that the North’s recent actions have been “tactically cautious”: for instance, there is no sign that Yongbyon’s dismantlement is about to be fully reversed. In their talks over abductions, the Japanese think their counterparts acted entirely rationally—from a North Korean perspective. One senior Japanese official with long dealings says that North Korean diplomats do nothing without directions from the highest level. The Dear Leader, then, if he is ill, appears to be making clear decisions.

Still, speculation turns naturally to Mr Kim’s succession plan, for if he has one, he has not disclosed it. His possible heirs are little known, and include three sons and his brother-in-law. None has devoted the years spent by Mr Kim in preparing to take over. His eldest son was caught trying to enter Japan in 2001 on his way to Tokyo Disneyland; he subsequently lived and gambled in Macau. Of the other sons, both in their 20s, one is known only for his obsession with Eric Clapton, a rock star. Perhaps Mr Kim, a family man, intends that none of his relatives should be around on the day when international prosecutors come calling on the leaders of a regime that has starved, tortured or worked to death in prison camps many hundreds of thousands of its own people.

(source: http://www.economist.com)