Wednesday, May 22, 2013

Banking still lures bright grads

Banks and bankers have getting bad publicity since the financial crisis. Many bankers have lost jobs. Bonuses are down. One would think that bright young grads would want to steer clear of banks. Apparently not, according to Andrew Hill. management editor of the FT. He writes that in St Gallen in Switzerland, the lure of banking persists:
Many of the young students who run the St Gallen Symposium in Switzerland, where Mr Noonan spoke, still have their sights set on the peaks of high finance. Senior bankers are ready to welcome them. “I think it will still be cool for young people to join banks and financial institutions,” Urs Rohner, chairman of Credit Suisse, declared during the same conference. “I think there’s a lot of potential there.”
And the attraction is not confined to St Gallen:
Careers advisers at another business school specialising in finance told me recently they were in despair at the number of graduates who refused to consider joining industrial companies and retained rosy expectations of what high finance offered. 

Hill would want the new recruits to do their bit to change the culture in banking:
But today’s highly intelligent graduates will only realise their potential and render themselves socially useful if they aim higher than mere monetary reward. Having learnt the banker’s trade, they must refuse to mimic their Praetorian predecessors. 
Sorry to sound cynical but his exhortation is unlikely to make much of a difference. Culture in a company is seldom created by new recruits. It is overwhelmingly the creation of people at the top. The best that new recruits can do is imbibe the culture as speedily as they can; if they attempt to change it, chances are they will be shown the door. As for the people at the top, their behaviour will not change because of moral exhortation or media criticism. It will change when regulators wield the big stick. Regulation and legislation alone can change the culture in banking in any meaningful way. 

Sunday, May 19, 2013

Capital markets are no longer about capital

Apple has raised an enormous amount of capital- to hand back cash to shareholders. It is sitting on tonnes of cash, yet resorted to the capital market because repatriating cash to the US from other parts of the world would have been tax inefficient. This, says John Kay in an article in the  FT, "illustrates a paradox in the modern relationship between business and finance. Companies have never had so little need for capital nor so much engagement with capital markets.

The point about listing in the market is not to raise capital- knowledge-based businesses do not need to own a whole lot of assets and hence do not need large amounts of capital. Rather, listing on the exchange has to do with providing an exit route to investors or rewards to managers who own stock options: "corporate governance, not capital allocation, is the principal economic and social function of those capital markets.".

What does this mean for investment banks, one of whose main businesses, was raising capital for firms? It would mean loss of a significant stream of revenue. Another important stream, proprietary trading, is being whittled away by regulation. No wonder investment banks are losing their sheen, as reflected in market value to book value ratios.

Unusual appointment in the Indian media

Indians holding high positions in MNCs abroad no longer makes news. Foreigners holding similar positions in MNCs too does not make news. But foreigners holding high positions in Indian firms in India still makes news. The airline industry has opted for foreigners (for example, Jet Air) from time to time but I can't think of this being phenomenon being pervasive.

So it's interesting that Hindustan Times has appointed a South African as its Chief Editorial and Content Officer ( in itself a new designation in the Indian media). A foreigner determining editorial content- deciding how the news is to be played and, perhaps, what commentary is appropriate- would mean a completely new perspective on newspaper content. As somebody who welcomes newness, innovation and fresh perspective, I am inclined to believe that this is a positive development, no matter what the eventual outcome (in terms of commercial success) is. So, what do we expect next? A New York Times or Guardian journalist as editor of one of our English papers?

Judicial Accountability Bill

I was somehow under the impression that the proposed Judicial Standards and Accountability Bill would provide the necessary correctives to wrongdoing in the judiciary. I stand corrected after reading Pavan Varma's article in TOI recently. Varma highlights several infirmities in the proposed legislation:

First, the Oversight Committee proposed by it has no real powers except to pass on a complaint to another layer, namely the Complaints Scrutiny Panel. This scrutiny panel is to consist of three members, two of whom will be sitting judges of the same court as the judges against whom the complaints have been made, clearly an unfair and unworkable proposition.

Second, the composition or the modalities of the investigation team is undefined. Thirdly, the penalties are merely in the form of advisories or warnings or, at best, a recommendation of removal to the president. Fourthly, the Oversight Committee consists of the Attorney General (how can someone who regularly appears before judges, including possibly the one being investigated, take an objective stance on the accusations made). Fifthly, the Bill has no mention of a vital area of reform, viz, the procedure for the appointment of judges. Sixthly, the entire lower judiciary is kept out of the ambit of the Bill. And seventhly, the Bill evokes an atmosphere of total secrecy to proceedings, going so far as to exclude the operation of even the RTI.
There is, of course, the separate issue of appointment of judges. On this, a consensus seems to be emerging within the government and parliament that the matter cannot be left entirely to judges- nowhere in the world do judges appoint themselves.

More dissection of Rajat Gupta

Enough has been written about Rajat Gupta's quest for more wealth and how it brought about its downfall. (Gupta is now out on bail pending disposal of his appeal against his conviction). For those wanting  another blow by blow account of the events leading up to his conviction, here is one from the NYT:

(Thanks to Rajive Chandra for the pointer)

Friday, May 10, 2013

Karnataka election verdict

A vote against corruption. A pro-Congress wave. An anti-BJP mandate. We have had much instant punditry since the Karnataka assembly election results came in. Much of it is not persuasive when one looks at the changes in share of the popular vote.The Congress vote share went up by just 1.8 percentage points over 2008. That of the BJP declined by 14 percentage points of which 10 percentage points went to the Yeddyurappa faction. This, of course, suggests that if the BJP can mend fences with Yeddyurappa, it can do better next time.

Also, as Vidya Subrahmanyam points out in the Hindu, the BJP's share of the vote in 2008 of 33.86% was less than the Congress' share of 34.76% but that did not prevent the BJP from getting the largest number of seats.

Splits and alliances, rather than issues of corruption and governance or even incumbency, appear to be the decisive factor, as in so many other elections.Who gets the alliance combination right may matter more ultimately in the general elections of 2014 than, say Raga versus Namo.

Tuesday, May 07, 2013

An independent CBI?

There is renewed clamour for an independent CBI in the wake of the Coalgate investigations and the government's attempts to vet reports submitted by the CBI to the Supreme Court. Every political party thinks the CBI is a handmaiden of the government of the day but days nothing to alter the situation when it is in power.

Many activists would like the CBI to be free from political supervision. Then, we will have professionals in the CBI bravely investigating the corrupt and prosecuting them. What a pathetic delusion ! Politicians are not a special breed in society. They are drawn from the same genetic pool as lawyers, doctors, chartered accountants, bureaucrats, policemen, corporate executives and academics. True, politics is a game at which one needs ruthlessness in order to succeed but the same is true of most other professions. Only, the stakes in politics may be higher.

Make the CBI independent and you will have a set of privileged officers with frightening powers and amenable to nobody in the executive. Absolute power, we know, corrupts absolutely.  The police force is apt to misuse its powers even when under the supervision of civilian and political authority.Think of what might be when it is totally freed from such supervision.

Prescriptions, such as those for an omnipotent Lok Pal or an independent CBI, fail to answer the crucial question: who will these bodies be accountable to? Parliament and political parties are accountable to the people. The bureaucracy and the police must be accountable to parliament and the political authority. Perhaps, it does not suffice to have political oversight, it must be supplemented by parliamentary oversight and independent external audits by a panel of eminent persons. But this is not the same as saying that agencies such as the CBI should be independent of the political authority.

Harish Khare, writing in the Hindu, underlines this point and also warns against judicial intervention in such matters:
Given the context of this political culture of suspicion and accusation, it would be tempting to judicially “liberate” the CBI. This can only produce an institutional disequilibrium of the most unhelpful kind. Any democratic society should be very suspicious of a policeman, however competent a professional he may be, with powers to determine political life and death. As it is, we have yet to evolve a code of conduct for an ever enlarging plethora of regulators and independent commissions. Everyone goes about hypocritically believing that we have found the magic formula to make honest appointments of honest individuals to such “institutions.” 

Once an appointment has been wangled, then it is entirely open to an incumbent to take a maximum or a minimal view of his or her brief. We are becoming wise to another aberration: the potential — and, in a few cases, the reality — of a corporate house suborning these so-called “independent” authorities. Before we succumb once again to the allurement of installing unelected gods as our saviours, let us just remember that it is easy to proclaim and grab “independence” but it is much more difficult a task to produce the requisite institutional culture, anchored in balance, fairness and rectitude. That balance can be produced and enforced only by democratic processes of accountability. This balance can neither be produced nor imposed by a court.

Friday, May 03, 2013

Excellence in professional firms

What is it that makes some professional firms stand out? The Economist reviews a book that has come out on the subject and highlights some of the points in the book. Firms covered include McKinsey, Goldman Sachs, Capital Asset Management, Mayo Clinic and Cravath, Swaine & Moore (a law firm).

Some of the factors identified ring true but are not terribly helpful as guides to action:
These (factors common to these firms) include leaders who devote their lives to serving their firm rather than enriching themselves (though that tended to follow naturally), a good sense of what motivates staff to get up early and work late and the ability to get individualistic professionals to function unusually well in teams.

Which is fine but what makes the leaders so devoted and how exactly do the firms get teams to be effective? Echo answers.

One point is striking. The firms are fanatical about recruiting the right person and spend enormous time in getting the recruitment process right with people all the way to partners getting involved:
Each McKinsey applicant can be interviewed eight times before being offered a job; at Goldman, twice that is not unheard of. At Capital a serious candidate is likely to be seen by 20 people, some more than once. Recruitment, these firms believe, is the start of a lifelong relationship. At the same time, Goldman and McKinsey also have a policy of helping their staff to find suitable work elsewhere, all in the expectation that they will eventually become loyal customers.
The point, however, is not just ensuring that recruits fit the firm's culture but having a certain culture in the first place and defining it explicitly. It all comes down to having the "right culture". And key elements in the culture are pride in the firm and ensuring that nothing short of excellence in performance (in terms of meeting the customer's requirements) will do.

Such a culture is invariably the work of a few dedicated founders and leaders. Their contribution lies not just in creating the culture but in disseminating it and ensuring that it is passed on- by getting the right recruits in .

Thursday, May 02, 2013

Should governments spend even when debt is high?

We have been following the RR debate in these posts. The latest twist is a seeming softening in the RR position in a recent FT article.They suggest that a stimulus might still be worth it in the present situation of high debt provided it goes into infrastructure:
A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower.
Government of India, please note. Here, the concern is not so much the debt to gdp ratio but high inflation and a high current account deficit. But if these two indicators are showing signs of coming under control, a case for public spending in infrastructure could arise. Let's face it: in the run-up to elections, private investment simply won't revive, so any impetus to growth can come only from public spending. Absent growth, all debt indicators will rise and pose risks of a rating downgrade.

RR also make a case for higher inflation as a way to bring debt under control:
One of us attracted considerable fire for suggesting moderately elevated inflation (say, 4-6 per cent for a few years) at the outset of the crisis. However, a once-in-75-year crisis is precisely the time when central banks should expend some credibility to take the edge off public and private debts, and to accelerate the process bringing down the real price of housing and real estate.
This point is also worth pondering in India. Our debt to gdp ratio has declined, contrary to trends elsewhere, thanks to high inflation. We need to bring inflation down to 6% or so but leaving it at that level should be ok. RBI seems to have accepted this de facto, but is yet to accept it de jure. The reality is that we do have a 'new normal' for inflation; might as well acknowledge it.

Wednesday, May 01, 2013

Breaking up large banks

This is one item that has been on the academic agenda, if not the political agenda, ever since the sub-prime crisis erupted. It hasn't gathered momentum because the 'how to' issues are not easy to tackle. Which parts of the universal banks to break up? Where are the buyers? And so on.

And yet one shareholder did pose the question at Citibank's annual meeting last week. FT's Lex comments:
Meantime, the US universal banks trade at discounts to some smaller, more focused peers on a price to tangible book basis. And break-up values seem attractive. CLSA, for example, puts a sum-of-the-parts valuation of $73 a share on Citi versus a market price of $47. 

Citi counters that it continues to shed non-core assets and it is cutting 11,000 jobs. But chairman Michael O’Neill says “dismembering [the bank] in an uneconomic way” would not be in the best interest of its shareholders. The likes of Citi, JPMorgan and Deutsche Bank argue that there are still real benefits to universal global banking. For now, the too-big-to-fail legislation does not seem to have much traction. Lobbyists are out in force. Still, if politics does not break up banks, then investor greed might – unless banks can boost their returns.
As Lex points out, legislation being discussed in the US Congress could give a push to the break up of large banks. Congress wants to raise capital requirements for large banks to 15% against the 10.5% proposed by Basel III. The US Fed is weighing in with a higher leverage requirement. than the 3% contemplated under Basel III. A UK regulator Andy Haldane has proposed  4-7%. 

Mind you, these are minimum requirements. Banks generally hold capital above the regulatory minimum. In India, the regulatory minimum of 11.5% will translate into a market expectation of 15-16% of capital. Banks would be wise to plan their capital requirements accordingly.