It’s nice, sometimes, to be able to say I told you so. Well, as I did say in my new year predictions, 2010 is turning out to be the year when Big Banks learn to live with new realities. Barack Obama just unveiled one of the most draconian proposals to cut them down to size.
Back in Wall Street, it seems that despite the desperate and high-profile lobbying — one estimate is that Wall Street spent over $500 million last year — Mr Obama has decided to go with the ballot box, and public opinion — after Scott Brown won a shock Republican victory to the Senate. We’ll have to see how much translates into reality, especially as the legislation has to make its tortuous way through US congress. Now, people are betting how much more Wall Street will spend in lobbying support.
I’ve been getting some outraged responses from the banking lobby, including how pandering to ‘ignorant’ public opinion will kill now, both London and New York as financial centres. Yes, but then where will all the bankers go? Timbuctoo? I know these people. There’s no way they want to live in Geneva, for instance. And even if they do, they’ll come and spend their money on weekends in London.
Obviously, this issue will now pretty much take centrestage in Davos, where the rich and powerful gather to schmooze this week. Bankers are out in full force this year, but then so is everyone else — and the anti-banker lobby is just getting stronger every minute. May be the global get-together will bring home to top bankers that they really need to change their bad old ways.
If the auto industry, the IT industry, companies like Pepsico and even Tetrapak can change the fundamental way they do business, so can bankers. Bank shares have tumbled, yes. There are those who think, at least here, that is a good thing.
Yes, it’s nice to have the markets up and so on, but when a company like Cadbury gets swallowed by a hostile takeover, simply because it was so badly undervalued when the bid started — and still is, most would say — maybe it’s time banks stopped hogging more than their fair share of almost every resource.
After all, shareholders don’t even benefit much when banks make obscene profits — they just dole it out as bonuses. The new ‘low’ at Goldman Sachs, of over 35% of its profits being given to its employees, to the average of 50% across the industry, is ridiculous compared to other industries. It works out to a measly average of about $500,000 per employee.
Oh, and if Mr Obama’s reforms go through, they won’t have this excuse that ‘talent’ will flee to hedge funds and the like if their pay is cut because, well, they won’t need that kind of talent any longer. Yes, all the arcane stuff will move into other entities — but those don’t have to be backed by taxpayers. The world is not affected if a hedge fund speculator loses his shirt.
Every gift horse has hidden booby-traps. Just last week, the SEC cracked down on high-frequency trading — now traders and brokers in US aren’t allowed ‘naked’ access, when a broker gives his access to someone to trade directly using formulae that does zillions of deals a minute, without using the brokers risk management controls.
Algorithmic trading, if I may use an oversimplification, is a bit like when a Chef writes a recipe, but a bunch of robots actually make the food.
As long as the ingredients are perfect, it’s machine-efficient. But the robot can’t tell if the fish is off, or the veggies rotten, or the chilly too much or too little. Mathematicians and programmers set up those algorithms, hence the demand for mathematics PhDs in high finance.
It then uses computers to match prices and do deals, at a speed no human can track or match. Sure, an algorithm can’t invent toxic derivatives products, but can spread the infection faster than you can say Salmonella. That’s more or less what happened last year, and why it took so long for traders themselves to figure out what was going on. At least, being late to the algorithm party, we know what the potential pitfalls are. The trick is not to fall into them as well, which is where I have my doubts.
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