Financial Services Issues.com

A closer look at Frank’s changes to the U.S. consumer agency bill

Ray Lindsley — Tue, 29 Sep 2009 16:25:05 +0000

Rep. Barney Frank (D., Mass.), has introduced a revised U.S. consumer agency bill that is designed to address criticism that certain provisions of the bill were too vague, while others were too restrictive. The changes:

Eliminated the requirement that financial service providers must offer a “plain-vanilla” or “standard” products like low interest, low fee credit cards and 30 year mortgages.
Clarified who the Consumer Financial Protection Agency (CFPA) would regulate:

o Providers of consumer finance offerings.

o Eliminated:

§ Accountants and tax preparers

§ Auto dealers

§ General Insurers

§ Lawyers

§ Consumer reporting agencies

§ Real Estate brokers and agents

§ Providers of services to financial institutions that are strictly ministerial and support services

§ Merchants providing incidental credit

§ Communications providers

§ Providers o f retirement and pension plans

o Added debt settlement service providers.

Changed the sources of funding to include:

o The Federal Reserve Bank

o “Covered persons” based on:

§ Compliance record

§ Size and complexity of business

Extend the registration, reporting and examination requirements to “covered persons” that are non-depository.
Eliminated the requirement that consumer communications need to be “reasonable.”
Restructure the agency to include a director who will be advised by a Consumer Financial Protection Oversight Board, which will include federal banking regulators and other agencies.
Mandated the coordination of examinations between the CFPA and state and federal banking regulators and clear procedures for resolving disagreements between regulators.

Frank expects that the changes will make it more liely that the bill will be passed. I think the changes make sense for the most part. What do you think?

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Judge’s Rejection of SEC and Bank of America’s Settlement Raises Interesting Questions

Ray Lindsley — Tue, 15 Sep 2009 16:58:07 +0000

Jed Rakoff, a U.S. District Judge in New York, has rejected the proposed $33 million settlement between the SEC and Bank of America that was supposed to resolve the SEC’s claim that the bank deceived shareholders in a proxy statement concerning bonuses to be paid to Merrill Lynch executives. The proxy statement said that Merrill had agreed not to pay bonuses before the Merrill-Bank of America acquisition closed without the bank’s consent. The SEC claims that bank had actually approved payment of up to $5.8 million in bonuses.

In his order, Rakoff wrote that “The parties’ submissions, when carefully read, leave the distinct impression that the proposed consent judgment was a contrivance designed to provide the SEC with the façade of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry.” Rakoff indicated that he wouldn’t accept a settlement that would effectively require shareholders to pay for the alleged infractions of bank executives, and ordered the case to go to trial on Feb. 1. The SEC has previously stated that they did not have sufficient evidence to take action against individual executives.

The ruling raises interesting questions about the case and how the SEC handles regulatory infractions. I think Rakoff has a valid point that it is unfair to penalize shareholders for the sins of wayward executives. I find it hard to believe that the SEC would have sufficient evidence to go after the firm (such as internal emails or memos), but could not attribute that evidence to specific individuals. I suspect it is more that the SEC lacks the appetite to go after individual executives that they have close relationships with. The regulator has a history of settling such cases through a monetary settlement with the company without requiring any claim of guilt or innocence. Such settlements make sense if the SEC’s objective is to raise revenues, but it is my opinion that it is not an effective way to deter executives from committing regulatory violations.

One could argue that the Board and/or shareholders can hold the executives responsible, but experience indicates that that is not likely. And why should the SEC shift that burden to the private sector?

I suppose it is possible that the SEC had little evidence, and the bank felt it was more efficient to take the settlement, but I would then question why the SEC would bring on a lawsuit without sufficient evidence. The last thing a weakened bank needs is to have to pay $33 million, as well as legal expenses, if it may be innocent. I believe the SEC should either go after the responsible parties, or not take action that accomplishes little more than the transfer of wealth.

Please share your thoughts.

Judges Take Action While Regulators and Lawmakers Debate

Ray Lindsley — Tue, 08 Sep 2009 15:32:55 +0000

There is an interesting article at Bloomberg.com that discusses how judges have taken the lead in punishing Wall Street for actions that have contributed to the first global recession since WWII, while regulators and lawmakers argue and discuss regulatory reforms designed to prevent future crises. I view this as a positive development as a history of light sentences in “country club” prisons did little to dissuade illegal activity that can make millions for financial executives. This can provide significant protection for consumers, providing that judges do not take it too far. It is important to ensure that ‘the punishment fits the crime.’

This reinforces my belief that rigorous enforcement of existing regulation would be more effective than the introduction of a huge dose of new regulations.

The kind of financial regulatory reform we really need- how do we best achieve it?

Ray Lindsley — Tue, 25 Aug 2009 15:05:23 +0000

One of my interests that I study in my spare time is the history of Wall Street. Thinking about the events of the last few years in terms of the history of Wall Street disasters, I observed an oft repeated pattern- the SEC cites financial services firms for security law violations (usually in the aftermath of the collapse of the firms and/or financial markets), and it then assesses a fine that represents a tiny fraction of the profits earned from the illegal activity without requiring the firm to admit or deny guilt. Given this history, it is apparent that violating securities regulations is a relatively low risk and highly profitable proposition. In an industry that makes business decisions based on the risk/reward ratios, is it any wonder that regulatory violations occur on a fairly regular basis?

While I am not saying that we don’t need other reforms, I would argue that without giving some real teeth to enforcement of existing regulations, we are really missing the point. What we need are strong disincentives for violating securities regulations. However, determining the most effective way of accomplishing this is problematic. Imposing huge fines during times of economic duress could cripple or kill a firm that would negatively impact the financial markets, and punish innocent employees that had nothing to do with the illegal activity.

It would seem to me that it would make more sense to hold senior management accountable for any illegal activity. Given the enormous remuneration that these individuals receive, I doubt that fines alone would provide the necessary disincentive. I believe that industry expulsion and/or criminal charges would be the most effective options. I would much rather see regulators aggressively pursuing unethical and illegal behavior, rather than heaping more regulatory burden on honest financial institutions trying to earn legitimate profits. These punitive measures already exist to a significant extent, but the regulators seem unwilling to utilize them except for the most egregious cases. But I have to admit that these solutions present issues of their own.

I suspect that the reason that the SEC settles many of the rule violations the way they do is because they lack the resources to build strong cases against highly profitable corporations with armies of lawyers. If a firm faces a relatively modest fine without admitting guilt, they are more likely to accept a settlement rather than face a protracted legal battle. Senior executives facing personal accountability would certainly mount a rigorous defense and the regulators would need the resources to build a strong case. Given the amount of pain that such illicit activity can cause, this is one taxpayer that would be happy to pony-up for the necessary resources.

Another, possibly greater, challenge would be changing the culture within the SEC, which has demonstrated a hesitance to aggressively pursue violators with serious punitive action. The agency’s hesitance to go after naked short sellers and lack of action against Bernie Madoff despite clear evidence and warnings of wrongdoing, are just two examples of this culture. Is it possible in a tight community like Wall Street to avoid conflicts of interest and cozy relations between the regulator and the regulated when most of the regulators come from the industry (most notably Goldman Sachs)?

Equally important is the need to avoid overly aggressive prosecutions. The last thing the industry needs is regulations that discourage innovation and legitimate profit-seeking activity because of management fear. It is impossible for executives to know everything that is going on in their organization, and they should only be held accountable if they should have known that something illegal was occurring under their watch. This test if willful ignorance is not new to the financial regulatory process, but it is important to employ it judiciously to achieve the proper regulatory balance.

I do not pretend to have all the answers to these challenges, which is why I am starting a dialogue to exchange ideas on the subject. Please feel free to contribute to this discussion.

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Does the average taxpayer really understand what it means to be a shareholder?

Ray Lindsley — Thu, 13 Aug 2009 17:08:31 +0000

The U.S. Treasury’s TARP program has essentially made the average taxpayer a shareholder of a number of the country’s largest corporations including General Motors, Bank of America, and Citigroup. With all of the public outcry concerning pay at Wall Street firms, particularly aimed at the receivers of TARP funds, it makes me wonder if the average taxpayer understands what’s at stake here. Recruiting top talent has always been an extremely competitive aspect of doing business in financial services, and it is a large determinant of how profitable a Wall Street firm will be. It has long been a well accepted axiom on the Street that a financial firm’s most valuable assets go up and down its elevators every day.

Yet the average taxpayer seems determined to place the companies that they hold an ownership interest in at a competitive disadvantage by hamstringing their ability to hire top talent by limiting their compensation options. A number of firms, including Goldman Sachs and J.P. Morgan have repaid their TARP money (at a significant profit to taxpayers) in order to regain their ability to keep and attract top talent.

I have long believed that many Wall Street salaries are too high and I am against the concept of guaranteed bonuses, but as long as there are firms willing to pay up for top performers, firms that cannot do so will be at a distinct disadvantage. Granted financial services firms sometimes get it wrong and overpay employees of dubious value, but most of the time the most talented traders and managers represent a good return on investment- just look at Goldman Sachs’ record profits.

The average American wage earner has a hard time relating to the kind of pay that many bankers earn, and I can understand the anger at an industry that had a significant role in the economic crisis, but shareholders should act rationally, not emotionally.

While I would never recommend shareholders to turn a blind eye to compensation, I would urge them to accept the economic realities of their industry and refrain from hampering their company’s ability to compete. Free markets thrive on economic self-interest, not anger.

What Should Be Done About High Frequency Trading?

Ray Lindsley — Wed, 29 Jul 2009 16:23:01 +0000

A recent New York Times article has led to a good deal of discussion about High Frequency Trading (HFT). According to the Times:

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

The article goes on to further explain how HFT works:

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

For most of Wall Street’s history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.

But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.

The Times article has spurred a flurry of blog articles on the subject, most being highly critical of the practice. In fact, some bloggers have been warning of the evils of HFT prior to the Times expose’. A week before the Times article, Tyler Durden, on his blog Zero Hedge likened HFT to a ponzi scheme that is responsible for the recent market rally:

And as the market keeps going up day in and day out, regardless of the deteriorating economic conditions, it is just these HFT’s that determine the overall market direction, usually without fundamental or technical reason. And based on a few lines of code, retail investors get suckered into a rising market that has nothing to do with green shoots or some Chinese firms buying a few hundred extra Intel servers: HFTs are merely perpetuating the same ponzi market mythology last seen in the Madoff case, but on a massively larger scale. When it all blows up, the question is whether the SEC will go after the perpetrators of this pyramid with the same zeal that it pursued Madoff himself. We think not.

Critics claim that violates front-running rules, manipulate markets, and create profits for firms like Goldman Sachs at the expense of individual investors. Goldman Sachs, in particular, has been singled out as the biggest villain in this controversy, and many believe that HFT is the primary source of Goldman’s record profits. However, financial analyst John Hempton of TPM Café states:

That said – these profits can’t add up to sufficient to explain Goldman’s trading profit. Interactive Brokers is (by far) the most electronic and lowest cost broking platform in the world. We use it extensively as do many others. Interactive Brokers has a 12 percent market share in option market making globally and probably a 10 percent share in all market making. Trading revenue was about 220 million. Moreover in the conference call the CEO/Founder (Thomas Peterffy) thought the influx of competition in the area had reduced market maker margins very substantially.

Anyway if 10 percent of global stock volume provides 220 million dollars revenue per quarter then there is no way that a substantial proportion of Goldman’s trading profit can come from high frequency trading. The numbers do not work.

When the New York Times quotes William Donaldson (a former CEO of the New York Stock Exchange) as that high frequency trading “is where all the money is getting made” they are quoting bunk – and they should know it.

This is a plea. Can we have a dispassionate and accurate view of where the (vast) trading profits of Wall Street in general (and Goldman Sachs in particular) come from? The last big boom in trading profits was followed by a bust which came at huge social costs. [Look what happened to Lehman.]

We cannot understand the risks “Wall Street” is taking and hence the economic downside if it all turns pear shaped, and the appropriate regulatory structure, unless we know what is happening.

Mindless articles such as the recent New York Times one – grossly inconsistent with facts are less than helpful. They are distracting.

HFT supporters claim that the practice provides market liquidity. In a Bloomberg.com story, Goldman Sachs spokesman Ed Canaday stated:

“Goldman Sachs believes high-frequency trading should have an accompanying obligation to provide liquidity, and be subject to appropriate regulatory oversight,” Canaday said.

Traders including David Lutz say automated brokerages boost liquidity, increasing the likelihood that buyers and sellers will agree on a price. Competition has driven bids and offers for some of the most widely held stocks, including Microsoft Corp., Citigroup Inc. and General Electric Co., to 1 cent in the U.S., according to data compiled by Bloomberg.

“When high-frequency traders are in the stocks I’m trying to execute, it helps me find the best execution,” said Lutz, a managing director of equity trading at Stifel Nicolaus & Co. in Baltimore. “It’s completely benign to me.”

One of the most controversial aspects of HFT is the practice known as “flash orders” has come under the scrutiny of NY Senator Charles Schumer:

High-speed trading in the U.S. stock market may face its biggest threat after Senator Charles Schumer proposed prohibiting so-called flash orders.

Schumer, the third-ranking Senate Democrat, urged the Securities and Exchange Commission to ban the practice in which some equity exchanges hold orders to buy and sell shares for a split second before publishing them on competing platforms. Nasdaq OMX Group Inc., Bats Global Markets and Direct Edge Holdings LLC, which handle more than two-thirds of the shares traded in the U.S., offer flash orders to their customers.

Schumer’s July 24 letter raises the stakes in a debate over whether computer-driven trading by hedge funds and Wall Street firms gives them an unfair advantage over other investors. While flash trades make up less than 4 percent of U.S. stock volume, they’ve drawn criticism from the Securities Industry and Financial Markets Association, Wall Street’s main lobbying group, and New York-based NYSE Euronext.

As is typical in these kinds of debates, the truth most likely lies somewhere in between the opposing viewpoints. I do not believe that HFT is driving the current market rally, but I believe there are enough questions about the practice to justify the SEC investigation of high frequency trading. Let’s get all of the facts before taking action.

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Court Ruling Underscores Need For National Consumer Protection

Ray Lindsley — Thu, 09 Jul 2009 19:30:41 +0000

On June 29, the Supreme Court ruled 5 to 4 that states have the right to charge nationally chartered banks for violation of state consumer protection laws. The ruling in Cuomo vs. Clearing House Association denied states the right to unilaterally demand bank records the way a supervising regulator can, but they can pursue legal enforcement by suing national banks in court.

This ruling effectively subjects national banks to 51 different sets of regulations, some of which could be conflicting. This will obviously create complexity, confusion, uncertainty, and added costs to banks’ compliance efforts. Additionally, this “opens a ‘backdoor’ for states to review safety and soundness of national banks,” according to FinCriAdvisor.com:

The ability now of states to prosecute national banks for consumer compliance violations means they also can go after issues of safety and soundness, says former OCC Chief Counsel Brian Smith, now a partner with Latham & Watkins in Washington, D.C. "I don’t see how one enforces a state law without implicating the actions of an institution, which is the reason for a bank examination. A bank examiner goes in, sees what a bank is doing and determines if it is safe and sound and complies with the law. Now the states can look at a practice and say, ‘That doesn’t look legal. Here’s a subpoena. Send us all your records.’ Then the results of their enforcement actions are likely to have a material effect on the business practices of the bank, which ultimately is the safety and soundness of the bank itself." [1]

Many industry analysts contend that the additional regulatory burden will adversely affect the profitability and valuations of national banks. "The more states you’re doing business in, the more vulnerable you are," said Paul Miller, managing director of financial services at FBR Capital Markets, in a phone interview. Ultimately, he said, "the Supreme Court decision is another step in the direction of banks becoming regulated utilities, which will most likely lead to lower return on equity and valuations," Miller wrote in a research note to clients.[2]

Others supported the ruling, particularly because it comes at a time when the Obama Administration is seeking regulatory reform to enhance consumer protection in financial services. "It’s not a patchwork, it’s a very healthy set of checks of balances," said Kathleen Day, a spokesperson for the Washington office at the Center for Responsible Lending, a non-profit supporting the consumer-protection legislation. "The checks and balances will address the problems that brought us this crisis," she said. "It’s good for everyone in the long-term and for the economy."

Indeed, those consumer safety harnesses were missing when Countrywide underwrote a massive, and ultimately disastrous, $1.5 trillion loan portfolio with significant exposure to subprime and other risky borrowers.[3]

Predatory industry lending practices combined with a weak federal regulatory response, and banks using the OCC to shield themselves from state consumer protection efforts directly led to this ruling. "Part of the financial crisis was due to states not being able to do more," says Raskin, who also worked for the New York Fed and the U.S. Senate Banking Committee. "When the states tried to examine those activities – subprime and predatory loans – we were told point blank by the federal regulators, ‘This is not your jurisdiction.’ That would have been fine if they had done something. But they didn’t."[4]

In addition, the Obama plans call for a Consumer Financial Protection Agency that would take over all rule-making and enforcement of banking compliance appears to overlap with states’ newly permitted authority, Smith says. "I am confused on what the role of that regulator will be," he says. "I see the potential for duplication, confusion and inefficiency. This new agency now is proposed to do exactly what the Supreme Court said is OK for the states."[5]

There is also a third faction that believes this ruling will not have a significant impact on the industry:

Some of the industry’s allies said yesterday’s decision is hardly disastrous for banks, given that state officials will not have the power to demand documents or compel executives to submit to questioning without a court order.

"Obviously there’s going to be some additional burden on the big banks," said Seth Galanter, of counsel at the law firm of Morrison & Foerster, who filed a brief on behalf of former comptrollers of the currency. "But civil litigation has always been available to private parties. This just adds state attorneys general to the list of groups that can sue."

In my opinion, this development underscores the need for a strong national consumer protection regulator that enforces consistent and robust rules on a national basis. While the financial services industry may fear the added burden that Obama’s proposed Consumer Protection Agency would present, but it would be preferable to the alternative of dealing with 50 different state attorneys. Strong consumer protection on a national level would negate the need for states spending the time and expense of taking banks to court. It would also have the additional benefit of covering non-bank lenders, like mortgage brokers.

[1] “Supreme Court Decision Opens ‘Backdoor’ for States to Review Safety & Soundness of National Banks, Attorneys Warn”, FinCriAdvisors.com, July 6, 2009.

http://www.fincriadvisor.com/2009-07-06/OCClosesSupremeCourtcase

[2] Ryan Williams, “High Court’s Bank Ruling Fallout Debated,” Marketwatch.com, July 7, 2009.

http://www.washingtonpost.com/wp-dyn/content/article/2009/06/29/AR2009062901751.html

[3] Ibid.

[4] “Supreme Court Decision Opens ‘Backdoor’ for States to Review Safety & Soundness of National Banks, Attorneys Warn”, FinCriAdvisors.com, July 6, 2009.

[5] Ibid.

CFTC Considering Limiting Commodities Speculation

Ray Lindsley — Tue, 07 Jul 2009 15:31:55 +0000

The Commodities Futures Trading Commission (CFTC) Chairman Gary Gensler stated that they will seek public comment on whether to set position limits on all commodity futures contracts. According to Reuters: “Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities such as crude oil, heating oil, natural gas, gasoline and other energy products,” said Gensler, who took office on May 26.[1]

The CFTC statement said, "The commission will be seeking views on applying position limits consistently across all markets and participants, including index funds and managers of exchange-traded funds; whether such limits would enhance market integrity and efficiency; whether CFTC needs additional authority to fully accomplish these goals; and how the commission should determine appropriate levels for each market."

After oil prices spiked to record highs in 2008, many analysts indicated that speculation on the part of major oil industry traders, hedge funds and Wall Street firms drove energy prices beyond the level that true supply and demand warranted. The CFTC is also considering reporting the oil and energy futures activities of swaps and hedge funds.

I believe that reasonable limits would help ensure that oil prices better reflect the economic realities of the markets, and further market transparency is needed.

[1] Charles Abbott, “CFTC Considering Tighter Controls on Commodity Trading,” Reuters, July 7, 2009.

PWC 2009 Wealth Management Survey Shows How Crisis is Changing Industry

Ray Lindsley — Mon, 29 Jun 2009 14:56:41 +0000

The Pricewaterhouse Coopers Global Private Banking and Wealth Management Survey 2009 has been released and provides some interesting insight into how the current financial crisis has impacted the wealth management industry, and what further changes lie ahead. Below are highlights of the survey:

After several years of accelerating growth, the economic crisis has brought wealth management’s expansion to a screeching halt. Placing clients at the centre of the business model, providing objective advice and possessing a strong brand are now key to success. Taking care of the client provides its own rewards – the most profitable wealth managers have significantly lower ratios of clients per CRM across each wealth segment.

A wealth manager’s core business is to develop and cultivate the client relationship, but very few firms can truly live up to that promise. Our Survey shows that the most profitable wealth managers have significantly lower ratios of clients per CRM in the different client segments, which shows that taking care of the client really does provide its own rewards.
Our Survey suggests very clearly that there is no direct link between size and profitability (in terms of cost/income ratio).
Almost two-thirds of CEOs place acquisitions in their growth strategy for the next two years.
The crisis shows us that high-margin products, often produced in-house, can be too complex for both CRM and client.
Among the most profitable respondents, 60% of CEOs indicate they can cut more than 10% of the total cost, which would increase their profitability even more.

Servicing strategies must define and address specific client segments, with differentiated offerings designed to support clients’ needs throughout all stages of their lives. Disciplined segmentation will not only help wealth managers tackle today’s client service challenges, but also allow services to be offered to specific clients in a more cost-effective manner.

After a slump in asset prices and a number of investment scandals, many wealthy clients have lost significant trust in their customer relationship managers (CRMs) and their institutions.
Servicing excellence depends on CRMs’ abilities to capture and to understand client needs and expectations. Here, our Survey shows increased sophistication. While 86% of respondents are still segmenting their client bases according to current assets, many respondents are now applying behavioral criteria, such as ‘investment style’ or ‘attitude to risk’.
More than 90% of wealth managers surveyed have seen their CRMs increase interactions with clients and for 69% of organizations the frequency of advice to clients has increased.
Evidently, few wealth managers are using proactive tactics to address issues arising from the crisis, as only 55% of respondents appear to have formal client retention Programs – a dangerous omission in current market conditions.
Our experience confirms that in wealth management CRMs will not be able to elevate service levels sustainably without significant investment.
Market turbulence has caused clients to switch their goals from investment performance to wealth preservation. This is the essence of ‘Nouveau Classic’ banking. Consequently, clients now expect more attention, keener insight and much greater transparency.

Wealth managers are seeking to redefine trusted advisor status. In the wake of investment frauds, transparent product offerings, together with robust suitability and due diligence processes, are critical not only to drive customer value but also to protect the reputations of wealth managers. Product and service offerings need to be clearly aligned with client preferences and financial goals, while also being operationally efficient for the wealth manager.

Some 60% of Chief Executive Officers (CEOs) anticipate moving to an advice-led model with a full open architecture for externally sourced products within the next two years, contrasting with the 53% that use this approach today.
By bundling proprietary and third-party products together – assuming in-house investment performance allows this – CEOs can avoid paying away margins to third-party product providers.
There is a trend for wealth managers to move from transaction-driven to advice driven businesses, with a likely associated shift from commission-based revenues to fees.
Comprehensive financial planning processes are increasingly becoming the foundation of client relationships, and include ongoing reviews for changes in goals and circumstances.
In selecting products that fulfill target allocations, wealth managers are seeking to develop robust client suitability and due diligence processes. The goal is to ensure that recommended products are suitable from both risk and fit perspectives.
The financial turmoil and various investment scandals have highlighted operational risk issues never considered before. As a result clients are demanding transparency at a level never considered before.
- Clients want greater disclosure around areas such as products, services and business relationships.
87% of CEOs say they regard inter-generational products and services to be a priority and 68% consider retirement products to be key. Providing estate- and trust-planning services and vehicles, and identifying and understanding the target beneficiaries’ investment preferences and risk tolerances will be crucial to wealth managers.

Today’s economic crisis presents challenges for which CRMs have neither the experience nor the training. If quality of advice is to be the real differentiator, CRMs need to develop stronger advisory skills, as well as expanding their knowledge in areas such as tax and risk. As governments and regulators drive change in reward structures, long-term compensation and development packages must encourage client-centric behaviors and CRM loyalty.

Many CRMs have neither the experience nor the training to deal with the challenges that today’s economic crisis brings to wealth management. Aside from the obvious difficulties of managing volatile investment portfolios, their communication skills have been found wanting as they have to deliver bad news to clients and respond to mounting frustration and increasing demands for greater transparency.
Currently, the top five factors used to measure CRMs’ performance are increasing assets under management, meeting revenue targets, attracting new clients, satisfying clients and retaining clients (see Figure 18). In the current climate it is difficult, if not impossible, for CRMs to perform well against most of these criteria – indeed they are making CRMs demoralized and disengaged. Wealth managers need to focus on the factors that make a successful CRM in the current market and take steps to measure their CRMs against a new, more relevant set of criteria.
Some wealth managers realize they should change compensation structures to drive more client-centric behaviors and to encourage CRM loyalty. These organizations will focus on aligning bonus and remuneration with desirable organizational behaviors, and rewarding long-term client service, rather than focusing strictly on revenues and assets under management.
- Remuneration structures with long-term pay outs will also encourage CRMs to stay in place at organizations, reducing the amount of CRM poaching.

COOs at successful wealth managers must make changes to their operating models to reduce costs, while simultaneously investing to support and drive business growth. Many COOs surveyed believe there are significant cost savings that can be made over the next two years and place process efficiency towards the top of their agendas. With two-thirds of CEOs identifying acquisitions as continuing to be a part of their growth strategy, there will certainly be significant challenges around the integration of operations.

Over the next two years COOs expect a 5% reduction in the outsourcing of portfolio management. Additionally, they expect a 7% reduction in the outsourcing of tax advice, which currently is the business function most likely to be outsourced in wealth management.
Similarly, functions that were historically regarded as core competencies but are now recognized not to be strategic differentiators are being outsourced. For example, an 8% increase in the outsourcing of trading/executing and payments is anticipated.
CEOs regard use of technology as the weakest element of their organizational capabilities and 63% of COOs expect to increase their IT spend in the next two years. Long-term investment is required; indeed, 82% of COOs will undertake some form of major core system upgrade, including 36% who will introduce enterprise-wide solutions for their organizations.
CEOs certainly believe that there is ample room for costs to be reduced, with 36% of our respondents estimating that 10% to 20% can be eliminated, and 18% estimating that reductions greater than 20% can be achieved with more aggressive non-traditional Programs. Process reengineering is an obvious place to start, with 84% of Finance Directors expecting process efficiency projects to be a cost-control strategy, and process automation appearing second in our COOs’ list of top operational strategies.

Robust risk management is the guardian of every wealth manager’s reputation. Poor risk management when selecting products for clients has been an evident weakness – undermining many established wealth management brands. In this new era, risk management must come of age. Its application must be holistic and driven by clients’ expectations.

While the majority of wealth managers have invested in strengthening their risk management processes over the past few years, only 27% of CEOs are very confident that they have appropriate risk frameworks in place to identify.
The most common method of risk management reporting remains loss prevention and governance reporting, as was the case in our past two Surveys. Yet, significantly, 36%of risk officers expect that in two years’ time their approach to risk management will focus on stakeholder value and integrated risk and value management.
Over the past few years the costs of compliance have increased for most wealth managers. Respondents anticipate that these will continue to rise. The key drivers are mounting regulatory requirements, as well as evolving client expectations and demands.

See the Full survey here: http://www.pwc.com/extweb/pwcpublications.nsf/docid/42A96E5FB805804E852575470015DD8C

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Proposed Regulatory Reform- Wall Street Needs to Respond Carefully

Ray Lindsley — Thu, 25 Jun 2009 15:56:53 +0000

Not surprisingly, parts if the regulatory reform proposal released last week by the Obama Administration have proven to be rather controversial. The plan has attracting criticism from both lawmakers and members of the financial services industry, and praise from consumer advocacy groups. Can the plan prevent future financial crises without overburdening financial institutions with unnecessary and redundant oversight? I believe it has the potential to succeed, but the devil will be in the details that have yet to be determined. Over the coming weeks and months, there will be a great deal of debate, lobbying, and negotiations that will determine what the financial regulatory structure will be going forward.

Arguably the most controversial aspect of the plan is the creation of a new Consumer Financial Protection Agency that will police financial products such as mortgages and credit cards, that have historically only been loosely regulated. The new agency would also play “a leading role” in providing financial information and education to consumers. Some critics are concerned that the agency is adding a new level of regulation that would be overburdening and costly to the financial services industry and, according to financial services attorney Jeremiah Buckley may impair the mortgage lending process:

There is a real danger that this legislation could create uncertainty for secondary market investors, Buckley says, particularly around the consumer protection obligations of lenders and mortgage investors. If these concerns do emerge in the market, Congress needs to offer assurances that this legislation will not substantially increase the legal risks of mortgage investing. If it does, "mortgage credit will be less available and more expensive…exactly the opposite of the result we should be looking for in financial reform," Buckley says.

Buckley sees it will take a long time to set up a functioning CFPA and to integrate all the regulatory functions. "I think that, if Congress goes this way, it should avoid creating some vague liability standard for lenders or investors…that is, until there are clear rules, the new agency should not start making law by enforcement actions, as sometimes happens."

Also, Congress should charge this agency with testing what disclosures work to make sure that consumers are ultimately empowered to make their own decisions. "Care must be taken to avoid going overboard in consumer protection, placing responsibility for every mortgage failure on the lender by arguing that the lender has a fiduciary duty to be sure the outcome is right for the borrower," Buckley says. "We have seen evidence of that in some legislative proposals already." [1]

Another area of concern involves the possibility of eliminating out-of-court binding arbitration as a way of settling investor disputes:

The CFPA would be directed to study mandatory arbitration clauses to see if they “promote fair adjudication” on behalf of the consumer and, if they don’t, the CFPA would have the power to establish conditions for fair arbitrations or simply ban them altogether in “particular contexts.” The only “particular context” example given is mortgage loans, so you can bet what constitutes “particular contexts” will be strong fodder for debate.

The mandatory arbitration clause is mentioned again when the plan lays out “initiatives to empower” the SEC’s ability to protect consumers entering into investment contracts.

Its long been the view of plaintiff’s attorney and self-styled consumer advocates that mandatory arbitration should be banned. And the administration’s overhaul hints that it will probably take exactly this view, claiming mandatory arbitration “may unjustifiably undermine investor interests." The plan proposes to give the SEC “clear authority to prohibit mandatory investment clauses in broker-dealer and investment advisory accounts with retail customers."

That seems a clear way of increasing the costs of broker-dealer and investment advisory costs, which may mean that smaller customers find that brokerages are even less likely to deal with them than before. As usual, there seems to be very little thought given to how brokers will react to having the increased risk of litigation imposed upon them.

What’s more, there are serious questions about whether it makes sense to burden the court system with additional litigation that a ban on mandatory arbitration will sure spur. In effect, a part of the costs of disputes between brokers and their customers are being transferred to the taxpayer who will pay the costs for the extra-burden on courts. It’s far from clear why this shift in cost from the parties to the agreement to taxpayers is warranted. We can squint our eyes and see this as something of a bailout of customers who wind up unhappy with their broker.[2]

The list of supporters and detractors are predictable: Wall Street and Republicans criticize the agency for adding an additional layer of regulation and hampering financial innovation, while consumer advocacy groups and Democrats support the idea, especially in the wake of increasing credit card fees.

U.S. banks are fighting the Obama administration plan to create a consumer agency for financial services as they seek to protect fees, such as credit-card penalties that have almost doubled to $19 billion in five years.

Fees imposed by banks accounted for 53 percent of industry income in 2008, up from 35 percent in 1995, according to R.K. Hammer Investment Bankers, a credit-card advisory firm. JPMorgan Chase & Co., the second-largest U.S. bank by assets, said such revenue doubled in the first quarter. A U.S. Consumer Financial Protection Agency also may add costs by expanding scrutiny.

The supervisor “would be an additional, parallel regulatory system representing a major burden, a potentially punitive approach, and significant indefinable regulatory risk,” Alex Pollock, a fellow at the Washington-based American Enterprise Institute, testified yesterday at a House Financial Services Committee hearing on the proposal.

Banking trade groups such as the American Bankers Association said Obama’s “highly controversial” agency will raise costs for responsible consumers and mandate the types of products banks and financial institutions should offer. ABA President Edward Yingling yesterday testified the agency will “saddle consumers and providers with a new regime of fees.”

The agency will have the power to write rules strengthening consumer protections, supervise and police a bank’s compliance and force institutions to offer “plain vanilla” products that are easy for consumers to understand. The Federal Reserve and other regulators would cede consumer oversight to the agency.

“We’re concerned about the potential impact on the ability to innovate, on competition and on efficiency,” said James Mahoney, director of public policy at Charlotte, North Carolina- based Bank of America Corp., the largest U.S. bank by assets.

Banks may have benefited from dispersed consumer protection activities among the Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and the Office of Thrift Supervision, which are required to ensure the institutions they oversee remain healthy and solvent.[3]

I am somewhat disturbed by what appears to be speculation that there is a direct correlation between the credit card fees and industry concern with the proposed agency. Careful reading of the article does not present any facts to support such a correlation, which leads me believe that this is nothing more than another case of irresponsible journalists presenting their speculation as unbiased, factual news. You can read the entire article here and come to your own conclusions: http://www.bloomberg.com/apps/news?pid=20601087&sid=agR2UE7gabLM

Having said that, I am sure that banks are concerned about protecting their fees, and that may be part of the reason for their opposition to the agency. But that is conjecture on my part, and I would never present that as fact without evidence to support my theory. The banks are well aware that they need to improve their public image and gain public confidence in the wake of the subprime crisis, and the largest industry trade group is embarking on a public relations campaign to improve their image:

In memos of confidential meetings with top financial executives, the Securities Industry and Financial Markets Association said it began this month the “execution phase” of the operation, which pledges to “embrace change” and accountability. The plan targets policy makers and the media in New York, London, Washington and Brussels and calls for a “city-by-city, grass roots” approach.

The securities industry “must be perceived as part of the solution, which will allow it to better defend against populist overreaction,” the documents, prepared for a June 17 meeting of SIFMA’s board, said.

The board meeting minutes and staff-written papers, obtained by Bloomberg News, outline the program crafted by polling, lobbying and public relations companies paid at least $85,000 a month. The memos provide a glimpse, in often candid language, into how Wall Street is grappling with its pariah status.

“It is imperative that in this historic period of reform, the industry be recognized as playing a positive role in seeking change and providing solutions to the problems we face,” one of the documents said. “There is currently widespread skepticism about the industry’s commitment to this needed change.”[4]

The industry faces an uphill battle in their efforts to improve their image, and they need to be careful about how they address proposed regulatory reform to avoid undermining their own efforts to improve their relations with the public. Creating a separate consumer protection regulator was in the Treasury’s Blueprint for a Modernized Financial Regulatory Structure that was released in March of 2008, and has been in most recommendations for regulatory reform that I have read. I think the creation of this agency is inevitable, and the industry should stop fighting it and should focus on ensuring that it is created in a manner that would address their well placed and legitimate concerns.

The banks’ reaction reminds me of the NRA arguments for not banning assault rifles. The NRA was not in favor of putting assault rifles in the hands of the public, but was afraid that such a ban would lead to further restrictions in firearm ownership. I believe this created a credibility problem for the NRA, just as I feel that the wholesale condemnation of a consumer protection agency by the financial services industry will further harm the public image of Wall Street.

What are your thoughts?

[1] Linda McGlasson, “Regulatory Reform reactions: ‘Ambitious’.” Bankinfosecurity.com, June 18, 2009.

[2] Erin Geiger Smith, “The End of Mandatory Arbitration?,” The Business Insider, June 22, 2009.

[3] Alison Vekshin, “U.S. Banks Fight Obama’s Consumer Agency to Protect Their Fees,” Bloomberg.com, June 25, 2009.

[4] Robert Schmidt, “Wall Street Begins Campaign to Thwart ‘Populist Overreaction’,” Bloomberg.com, June 25, 2009.

Administration Proposal to Address Severely Damaged ABS Market

Ray Lindsley — Tue, 16 Jun 2009 18:23:02 +0000

The Obama Administration revealed a proposal yesterday that is designed to safeguard the asset-backed securities (ABS) market that played such a significant role in causing our current economic crisis. The purposes of the reforms are to encourage responsible lending and lower the risks of ABSs by forcing the sellers to share in the risk of the securities and provide more information to investors.

Under the proposal, sellers of asset-backed securities would have to retain at least five percent of the risk of the loan package, and they would be paid gradually to allow for a reduction in payments if loans go into default.

The proposal also calls for increased disclosure of the contents of each security, and would require rating agencies to make a clear distinction between the asset-backed ratings, and those assigned to other forms of debt. Additionally, the rating agencies would have to disclose more information about their rating methodologies and conflicts of interest.

According to the Washington Post:

The administration’s proposal is not just an attempt to clean up the securitization market. The goal is also to help revive that market, which has seen almost no activity in the last year.

That goal was welcomed by industry groups, even as they cautioned that some details needed further examination.

"There may be parts of this proposal where the industry disagrees, but we pledge to work closely with the administration and global policymakers on this vital topic," said George Miller, executive director of the American Securitization Forum.[1]

An interesting component of the proposal is that it would prohibit banks from hedging their retained risk in the asset-backed securities. According to the Washington Post:

But some officials and financial experts still are skeptical about the requirement. They note that lenders often kept a piece of their securitizations during the housing boom, either as a desirable investment or because it could not be sold. This retained risk was a key source of the losses that crippled Citigroup and other banks.[2]

I can appreciate that maintaining “skin in the game” with regards to securitizing loans should lead to more careful loan underwriting, but that retention will also expose the banks to greater risk. I believe that the originators of asset-backed securities grossly misjudged the risks of the instruments that they were creating because they were counting on diversification and a rising real estate market to mitigate those risks. If they have learned their lessons from this crisis, which I believe they have, then they should be better able to manage this risk, and the proposal could help rebuild confidence in the ABS market.

What are your thoughts?

[1] Binyamin Appelbaum, “Regulatory Revamp Targets Securities at Heart of Crisis,” The Washington Post, June 16, 2009.

[2] Ibid.

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Committee Report Provides Insight as to Likely Direction of Regulatory Reform

Ray Lindsley — Mon, 01 Jun 2009 17:41:50 +0000

The Committee on Capital Markets Regulation (the Committee), an independent research organization comprised of twenty five leaders from the investor community, business, law, accounting and academia, issued a report on May 26 entitled “The Global Financial Crisis: A Plan for Regulatory Reform.” This report discusses the think tank’s recommendations for U.S. financial regulatory reform that are broadly similar to those proposed by a number of national and international financial and economic committees, regulators, lawmakers, and organizations. Given the consistency of the recommendations here with similar proposals within the industry and lawmakers, it seems likely that this provides broad-brush insight as to the direction of regulatory reform that the industry is likely to experience, though I would be shocked if all of the recommendations were adopted.

The recommendations are based on two premises:

1. Regulate on Principle. [The Committee] believe[s] market outcomes should not be overridden unless there is a specific justification for government regulation. Such justifications may include:

∗ externalities (the most important being systemic risk);

∗ correction of information asymmetries;

∗ principal-agent problems;

∗ preservation of competition; and

∗ limitation of moral hazard arising from government support of the financial system.

2. Analyze the Costs and Benefits of Proposed Regulations. [The Committee] believe[s] a regulation should be promulgated only when its benefits outweigh its costs, and at the least possible cost.[1]

A. Reducing Systemic Risk

Credit Default Swaps Recommendations

1. Do Not Prohibit CDS Contracts. The Committee believes that CDSs are an important tool for addressing credit risk.

2. Mandate Centralized Clearing to address counterparty risk, liquidity, and transparency issues.

3. Increase Capital Requirements for Non-Centrally Cleared CDSs. The Committee recognizes that some CDSs cannot practically be subject to centralized clearing.

4. Improve Netting Capabilities to include centralized clearing of all derivatives, not just CDSs.

5. Establish 1 or 2 Global Clearing Facilities.

6. Adopt a CDS Reporting System to report volume and transaction data similar to the TRACE system for corporate bonds.

7. Require a Class of Exchange-Listed CDSs. The Committee recommends requiring the listing of certain standardized, high-volume CDSs on exchanges.

Regulation of Capital Recommendations

1. Adopt Standards for Institutional Coverage. “The Committee believes that institutions that have the ability to borrow from the Fed in its lender of last resort role should be subject to some form of capital regulation. Such rules should differ for different activities, e.g., insurance versus banking. Capital rules should be the quid pro quo for protection by the Fed safety net.[2]

2. Leave “Steady State” Risk-Based Capital Calibration Unchanged Pending Further Study. The Committee recommends leaving the “steady state” capital requirements unchanged absent compelling evidence that increased capital levels is warranted.

3. Adopt Counter-Cyclical Capital Ratios. “The Committee believes counter-cyclical capital ratios can be achieved in two ways. First, [the Committee] would encourage dynamic provisioning. This could be done without conflicting with existing securities regulation or accounting standards by providing that additional reserves over “known” losses did not run through the income statement but rather constituted a special appropriation of retained earnings. Secondly, one could require some form of contingent capital. Two promising proposals for contingent capital should be explored—one for catastrophic insurance based on a systemic trigger, and another for reverse convertible debentures based on a bank-specific market value trigger.”[3]

4. Hold Large Institutions to Higher Solvency Standards.

5. Focus Basel II changes on Strengthening Pillars II and III.

6. Maintain and Strengthen the Leverage Ratio. “[The Committee] recognize[s] that in the run-up to the crisis, the capital requirement that arguably performed the best was also the simplest metric—the leverage ratio. The Committee thus believes that a simple leverage ratio constraint should be retained in the United States, and, as proposed by the U.K.’s Financial Services Authority and the Financial Stability Forum (now the Financial Stability Board), adopted internationally. Consideration should also be given to whether the leverage ratio should be recalibrated in terms of common equity rather than total Tier I capital, as presently formulated.”[4]

Regulation of Non-Bank Financial Institutions Recommendations

Hedge Funds

1. Consider the Critical Role of Hedge Funds “…in providing liquidity, absorbing financial risks, and increasing the efficiency of the capital markets. Although [the Committee] support[s] hedge fund registration, [the Committee] reject[s] recent proposals seeking to force hedge funds publicly to disclose information that is otherwise proprietary. [The Committee] likewise reject[s] the imposition of bank-like capital requirements and other leverage requirements that would be ineffective and unsuitable for the diverse hedge fund industry.”[5]

2. Adopt Confidential Reporting of a fund’s liquidity needs, leverage, risk concentrations, and other relevant information. The regulator would bear the burden of demonstrating the need for required information and would have limited authority to take prompt action “where a fund poses a clear and direct threat to market stability.”[6]

3. Provide the Fed with Temporary Regulatory Authority until a permanent hedge fund regulator is established.

4. Facilitate Information Sharing Among National and Supranational Regulators.

5. Introduce Structural Reforms to the Industry.

Private Equity

1. Limit Regulation to Information Collection

2. Relax Acquisition Standards under BHCA and SLHCA. “Given the need for more capital and talented management in the banking and thrift sector, the Committee recommends approval of the acquisition of banks by one or more PE funds without the need for source of strength commitment extending beyond the banking silo of the PE fund complex. [The Committee] further recommend[s] amending the BHCA and SLHCA to permit a PE firm, whether or not it is managing or investing in commercial companies, to acquire a thrift or bank, provided there is adequate separation between the banking and commercial activities of the PE firm.”[7]

Money Market Mutual Funds

1. Introduce Mechanisms for Crisis and Risk Management. The Committee endorses proposals introduced by the Investment Company Institute.

2. Study How to Compensate for Potentially Ongoing Taxpayer Support.

Resolution Process for Failed Financial Institutions Recommendations

1. Establish a Single Insolvency Regime Applicable to All Financial Companies.

2. Provide Adequate Regulatory Flexibility.

3. Apply the Least Cost Test.

4. Authorize Enhanced Resolution Powers for Systemic Risk. “Enhanced resolution powers, including recapitalization, extending loans or guarantees, and “open institution assistance,” should be available to the designated regulator if the risk of insolvency of a particular financial company would pose a systemic risk.”[8]

5. Consider Financing Methods that Protect the Taxpayer.

6. Consolidate or Coordinate Cross-Border Insolvency Proceedings.

B. Reforming the Securitization Process

Incentives of Originators Recommendations

1. Prohibit or Restrict High-Risk Mortgage Products and Lending Practices from Entering the Securitization Market.

2. Strengthen Representations, Warranties, and Repurchase Obligations.

3. Explore Minimum Risk Retention to Improve Incentive Alignment “by requiring [originators] to retain a meaningful portion of the risk associated with the assets that they securitize.”[9]

4. Enhance Disclosure of Retained Economic Interests. “To enable investors to assess the degree of alignment they have with originators, regulators should require sponsors and originators to disclose the following information in public and private securitization offerings:

∗ the amount of economic interest they will maintain in the securitization;

∗ the location in the capital structure of all such retained economic interest;

∗ the duration for which the economic interest will be retained;

∗ the extent to which the sponsor or originator is able and intends to hedge

such retained economic interest during the holding period; and

∗ the amount of fee or other income to be earned by the sponsor or

originator over the expected and legal life of the securitization.”[10]

Disclosure Recommendations

1. Amend Regulation AB to Increase Loan-Level Disclosures.

2. Study Ways of Improving the Standardized Disclosure Package.

3. Revisit the Applicability of Section 15(d). “[The Committee] encourage[s] the SEC to consider whether the less-than-300-holder exemption from the periodic reporting requirements of Section 15(d) was meant to apply to the typical RMBS issuance otherwise covered by Regulation AB and, if so, to seek statutory changes that would exempt RMBS issuance from its provisions.”[11]

Credit Rating Agencies Recommendations

1. Develop Globally Consistent Standards.

2. Vest Enforcement of CRA Regulation at the Highest Government Level.

3. Avoid Governmental Interference in the Rating Determination Process.

4. Review References to Ratings in Regulatory Frameworks. Regulators should review the appropriateness of references to credit ratings to determine if relying on such ratings is appropriate as compared to other alternatives.

5. Increase Disclosure as to How Ratings are Determined.

C. Enhancing Accounting Standards

Recommendations

1. Study How FVA Can Be Improved. “The Committee believes “fair value” accounting is a problematic standard in inactive or distressed markets because it conflates the concepts of market value and credit model value and may confuse investors. [The Committee] do[es] not believe the problem has been solved by FASB’s latest guidance. [The Committee] recommend[s] continuing to study how “fair value” accounting can be improved. [The Committee] further recommend[s] that this be done on a joint basis by FASB and IASB, so the two major accounting standard setters are consistent in their approach.”[12]

2. Supplement FVA with Dual Presentation of Market and Credit Values with full disclosure of underlying valuation methodologies.

3. Allow the Fed to Use a Non-GAAP Methodology.

4. Implement FIN46R.

D. Regulation of Bank Activities

Recommendations

1. Refrain from Reimposing Glass-Steagall

2. Avoid Directed Lending

E. Reorganizing the U.S. Regulatory Structure

Recommendations

1. Retain Two or Three Regulatory Bodies. Retain the Fed and create the U.S. Financial Services Authority (USFSA), and possibly a new investor protection agency.

2. Increase the Role of the Fed to regulate matters relative to systemic risk and capital requirements of financial institutions.

3. Establish the USFSA. The USFSA would regulate all aspects of the financial system and would be comprised of all, or parts of the Comptroller of the Currency, the Office of Thrift Supervision, the FDIC, the Sec, and the Commodities Futures Trade Commission.

4. Enhance the Role of the Treasury Department to coordinate the work of the Fed and USFSA.

5. Study Supervisory Options.

6. Protect Consumers and Investors.

F. Facilitating International Regulatory Cooperation

Recommendations

1. Support Global Regulatory Reforms.

2. Enable the IMF to Play an Early Warning Role.

3. Strengthen Regulatory Dialogues.

[1] Committee on Capital Markets Regulation, “The Global Financial Crisis: A Plan for Regulatory Reform, Executive Summary” May, 2009, Page 4.

http://www.capmktsreg.org/pdfs/TGFC-CCMR_Executive_Summary_(5-26-09).pdf

[2] Ibid, Page 10.

[3] Ibid, Pages 10-11.

[4] Ibid, Page 11.

[5] Ibid, Page 12.

[6] Ibid, Page 13.

[7] Ibid, Page 15.

[8] Ibid, Page 18.

[9] Ibid, Page 22.

[10] Ibid, Page 22.

[11] Ibid, Page 24.

[12] Ibid, Page 29.

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What’s With All This Economic Optimism?

Ray Lindsley — Fri, 15 May 2009 16:52:08 +0000

A steadily advancing stock market, improving economic indicators, positive statements from the Fed regarding the economy, financial services firms raising capital in the markets, and increased consumer confidence- all of this flies in the face of the gloom and doom scenarios that most economic and financial pundits were espousing earlier this year. How is this possible? Since the stock market is widely known to be a leading economic indicator, the strong rebound in equity indexes is a critical factor in this newfound optimism. The critical question, at this point, is whether this is a true bull market, or merely a bear market rally. In order to answer this question, I believe that we need to examine what is driving the market advances that have surprised just about everyone on the Street.

What I think almost everyone has been overlooking is the fact that one of the primary determinants of securities prices is the relative attractiveness of alternative investments. When fund managers pull out of stocks, they need to invest the proceeds elsewhere. During a market panic, managers put their money into short term treasuries until the dust settles and they have time to seek out more attractive alternatives. With short term interest rates near 0%, they certainly don’t want to leave their money there for long. So let’s look at the alternatives:

Gold- While a certain amount of money heads into tangible assets like gold during a panic, such price movement has historically proven to be relatively short lived. Getting into gold at these times can be risky, and long term returns in gold have been extremely inconsistent.

Fixed Income- Treasury yields are at extremely low levels- around 3% for 10 years and 4% for 30 years. These are not extremely attractive long term returns, and you have significant market risk when rates are this low. At these levels, it is more likely that rates will rise rather than fall over the long term. Corporate bonds offer better yields, but this comes with additional default risk and there is still the issue of market risk due to the current low rate environment. The risk/return factor is just not that attractive.

Real Estate- Still too risky for most investors.

Given how far stock prices had fallen and the lack of attractive alternatives, most investors realized that a carefully selected equity portfolio offered the best risk/return prospects. While I’m not saying there won’t be some turmoil ahead (commercial real estate loan and credit card defaults are likely to cause temporary market pullbacks), I believe that we have seen the market lows and the medium to long term trend will continue to be up.

I am also more positive than most on the strength of the economic recovery. Inventories are currently low and I believe that there is a significant amount of pent-up consumer demand. Economic uncertainty has caused consumers to significantly cut back on spending and increase their saving. Many consumers have over-borrowed and over-spent and have no choice but to reel in their consumption. Although unemployment is historically high, and many people have lost a lot of wealth to falling real estate prices- the reality is that most Americans have not been that severely impacted by the recession. The majority of consumers did not lose their job, and did not buy their home near the top of the real estate bubble.

I believe that once consumer confidence returns, this pent-up demand will lead to stronger spending than most people expect. I do not see a spending boom by any means, but I believe it will be stronger than is widely believed. America has always been a nation of consumers, and I do not see that changing for an extended period of time. Our economy and financial structure has changed drastically since 1929, and has proven to be exceptionally resilient in the last three or four decades.

One can argue whether the economic stimulus plans are sufficient or properly structured to reverse the economic downturn. I think such arguments miss the point. I believe it is more important that significant action is being taken, as this will restore confidence. Confidence will get consumers spending and banks lending, again. I believe that we are near the bottom of the economic downturn, and I foresee a moderate recovery over the next year or so.

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B of A Moves to Make Mortgage Origination More Consumer Friendly- Will Others Follow?

Ray Lindsley — Mon, 11 May 2009 14:26:56 +0000

When it comes to mortgage lending practices, it appears that at least one bank has learned its lesson. After integrating Countrywide Home Loans and doing away with the name, Bank of America has taken steps to help potential home buyers with the mortgage process. According to The New York Times:

Bank of America’s new Web site (www.BankOfAmerica.com/HomeLoans) features a “Home Loan Guide” that explains loan components and simulates the mortgage application process. Visitors can determine whether they might qualify for loans and how much they could comfortably afford.

“We wanted to change the conversation to ‘How much house can I comfortably afford?’ rather than ‘What’s the maximum I can buy?’ ” said Aditya Bhasin, the product, pricing and strategy executive for Bank of America Home Loans.

Once would-be borrowers type in their financial information, the Web site offers “sliders” that show how the loan picture might change, say, if they reduced their monthly credit card debt.

For those who apply for loans, Bank of America summarizes the terms in a single page of understandable language. That page, given to customers with other loan documents within three days of their loan application, spells out the monthly payment, the date it is due and the interest rate, among other things.

If the borrower has applied for an adjustable rate mortgage — where the rate varies, typically after a set period of five or seven years — the summary discloses the maximum possible monthly payment.

The summary will be distributed with loans that are processed by Bank of America representatives but not mortgage brokers who market the bank’s loans.

The federal government late last year said a similar summary should be included in the so-called good faith estimate, which lenders must submit to borrowers within three days of a mortgage application. But lenders have until next year to actually make the change, and most lenders have not offered their own in the meantime.

The third element of Bank of America’s recent changes — the Flat Fee Mortgage Plus product — is aimed at home buyers with loans of up to $650,000.

(Bank of America says it’s not profitable to offer mortgages above the $650,000 threshold; most of its customers seek loans for under that amount anyway, it said.)

The loan has no application fee. There is a single closing fee that includes processing costs and fees for third-party services like appraisals.

The fee does not include other costs that are not part of the mortgage financing process but which borrowers typically incur at closing, like property taxes, homeowners’ insurance and prepaid interest for the days between the settlement date and the first mortgage payment.[1]

Bank of America seems to understand the need to rebuild consumer confidence and is proactively enhancing consumer protection policies in its mortgage origination operations. I enthusiastically applaud these efforts and hope that it is the start of a trend, both at the bank and within the industry. Will others follow?

[1] Bob Tedeschi, “An Emphasis on Simplicity,” The New York Times, May 8, 2009.

http://www.nytimes.com/2009/05/10/realestate/10mort.html?_r=1

Expect Plenty of Fireworks as Washington Tackles the ‘Too-Big-To-Fail’ Issue

Ray Lindsley — Tue, 05 May 2009 17:26:47 +0000

There will be plenty of activity for those of us in the financial services industry to keep an eye on as Washington grapples with the prospect of granting the government authority to take over, and possibly close, large financial institutions. The Senate Banking Committee will hold a public hearing Wednesday on that very subject, and The House Financial Services Committee is likely to do the same as early as next week.

In March, President Obama asked Barney Frank (D-MA) to push forward legislation that would give the government similar power to what the FDIC has over thrifts and banks that hold FDIC insured deposits, but the effort stalled. Now the measure is likely to be part of a broader financial regulatory reform effort.

According to CNBC.com:

Supporters say resolution authority would close a dangerous and somewhat inexplicable hole in the government’s regulatory powers over large financial institutions other than commercial banks and would help prevent the messy collapse and collateral damage that occurred with Lehman Brothers last fall.

“The situation is showing us, we need more regulation,” says banking industry consultant Ken Thomas, who also teaches at the University of Pennsylvania’s Wharton School of Business.

Under current law, the FDIC uses its “bridge bank authority” to prevent a struggling bank from failing, while arranging for a friendly takeover, which creates a relatively seamless change in operations and avoids a run on deposits.

In rare cases, the FDIC closes the bank and pays off depositors.

The FDIC, however, does not control bank-holding companies, the parent companies of the commercial banks.

That is the responsibility of the Fed, but the central bank is only legally allowed to make the company take "prompt corrective action" to deal with such things as capital requirements.

Under the Treasury’s proposal, the new authority would “enable the federal agency acting as conservator or receiver to sell or transfer the assets or liabilities of the institution in question, to renegotiate or repudiate the institution’s contracts (including with its employees), and to address the derivatives portfolio, thus reducing the potential for further disruption.”

Few doubt the need for all that after Federal Reserve Chairman Ben Bernanke last winter got the attention of one congressional panel looking into the industry’s escalating problems when he said: “I think what is missing is a comprehensive dissolution authority to address systemically critical firms.” Thus far, the financial services industry has been relatively supportive of the concept, but that doesn’t mean an easy ride for the legislation.

Analysts as well as former government officials say the regulatory reform package—and the resolution authority in particular—will be subject to power struggles within Congress and regulators.

There’s already been ample speculation about what regulator would get the new—and considerable—authority: The FDIC, the Fed and Office of the Comptroller of the Currency have all champions, but analysts expect plenty of political infighting and jockeying along the way.

Some, however, say none of the above is the best course.

“If they have it, it has to be some kind of a new body,” says Thomas. The only current legal option is the bankruptcy court process, which entails either protection from creditors or outright liquidation, neither of which would work particularly well given the complicated counter-party nature of such complex operations, whose assets and liabilities now reach into the hundreds of billions.[1]

This should get pretty entertaining, given the fact that there are competing agencies vying for authority, and there are some complicated legal issues involved.

While I can understand the necessity of exploring this issue, it always makes me nervous when politicians tackle such complicated and sweeping issues- especially when jurisdictional conflicts are involved. I will be watching with extreme interest.

[1] Albert Bozzo, “’Too-Big-To-Fail’ Banks May Be Next Hot-Button Issue,” CNBC.com, May 4, 2009.

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Off-Balance-Sheet Accounting Change-So Near Yet So Far

Ray Lindsley — Thu, 30 Apr 2009 15:26:16 +0000

Here is some very good news that contains an interesting twist. According to Bloomberg.com, FASB is close to announcing rule changes that will force banks to severely limit off-balance-sheet accounting. The twist is that it will not be implemented until next year:

FASB ‘Pretty Close’ on Off-Balance-Sheet Rule Change, Herz Says

By Ian Katz

April 30 (Bloomberg) — The Financial Accounting Standards Board is “pretty close” to approving rules on off-balance- sheet accounting that will force banks to add billions of dollars of assets to their books, Chairman Robert Herz said.

Rules letting companies keep assets including mortgages and credit-card receivables off their balance sheets “were stretched,” Herz said today at an accounting conference at Baruch College in New York. The changes would take effect next year, he said.

U.S. bank regulators conducting stress tests on 19 banks calculated that the financial institutions would record $900 billion in off-balance-sheet assets in 2010, according to an April 24 Federal Reserve report.

In July, FASB postponed by at least a year the effective date of the changes after banks including Citigroup Inc. and trade groups complained. The Securities Industry and Financial Markets Association and the American Securitization Forum said the measure may make companies appear to be short of capital during regulatory reviews.

To contact the reporter on this story: Ian Katz in New York at ikatz2@bloomberg

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAeavKEKcIgI&refer=home#

If banks were forced to recognize these off-balance-sheet items immediately, it would undermine the confidence in the banks, but is delaying the implementation just going to stretch out the recovery period? Would we be better off letting the affected institutions face the music right away? Personally, I think the banks have enough to deal with at the moment with problem credit card and commercial RE loans. By the time they need to recognize the off-balance-sheet items, I believe they will be in much better financial condition.

As Banks Try to Shore Up Their Balance Sheets With Profits, How Much Risk is Too Much?

Ray Lindsley — Mon, 27 Apr 2009 15:19:33 +0000

It is clear that the recession that we are in is largely due to the excessive risks that banks were taking on (and off) their balance sheets. While some banks have become more risk averse as a result, Goldman Sachs continues its aggressive proprietary trading practices. According to Bloomberg.com:

Goldman Sachs Group Inc., unbowed by the securities industry’s worst year since the Great Depression, increased its trading bets at the fastest rate on Wall Street.

Goldman Sachs’s so-called value-at-risk, the amount the New York-based bank estimates it could lose from trading in a day, jumped 22 percent to $240 million in the first quarter, twice what Morgan Stanley stands to lose, company reports show. VaR climbed 2.8 percent in the same period at JPMorgan Chase & Co. and dropped 14 percent at Credit Suisse Group AG.

Offense beat defense in the first three months of 2009 as Goldman Sachs reported record revenue of $9.4 billion, dwarfing Morgan Stanley’s $3.04 billion. Since Goldman Sachs and Morgan Stanley, the two biggest U.S. securities firms, converted into banks in September, Morgan Stanley Chief Executive Officer John J. Mack has reduced proprietary trading and principal investing to focus on the firm’s role as a financial adviser and broker.[1]

Many Wall Street analysts feel that Goldman’s aggressive approach gave it a distinct earnings advantage:

“Morgan may have it right for 2010, but for the first quarter of 2009 that wasn’t the right answer,” said Peter Sorrentino, a senior fund manager at Cincinnati-based Huntington Asset Advisors Inc., which oversees about $13.3 billion and owns Goldman Sachs shares. “Goldman saw the moment completely differently. They saw the opportunity, saw the pricing and realized this isn’t going to last forever.”

Goldman Sachs wasn’t alone. New York-based JPMorgan generated a record $4.9 billion of fixed-income revenue, and profits at Citigroup Inc. and Credit Suisse, based in Zurich, were helped by trading revenue that exceeded analysts’ estimates. Deutsche Bank AG, Germany’s biggest bank, may report record trading when it discloses first-quarter earnings tomorrow, people with knowledge of the situation said last week.

VaR is just one measure banks use to try to gauge losses. It isn’t designed to capture the risk of rare and extreme losses. For that reason, some critics such as Nassim Taleb, author of the “The Black Swan,” say the metric is inadequate.[2]

Market Spreads

Wall Street made money in the first quarter from traditionally unprofitable corporate loans and trades for their customers, as the gap between what banks pay to buy fixed-income securities and what they sell them for, the so-called bid-ask spread, almost doubled.

“Spreads are way up,” JPMorgan CEO Jamie Dimon told analysts April 16 after the biggest U.S. bank by market value reported a 10 percent drop in first-quarter net income. The past three months represent “a historically high quarter, and if you were looking at it, it’s not reasonable to expect it to continue at that level,” said the 53-year-old Dimon.

Credit Suisse Chief Executive Officer Brady W. Dougan, 49, said last week that taking fewer chances to lose money “remains a key area of focus” for the biggest Swiss bank by market value. Barclays Plc President Robert Diamond, who runs the London-based bank’s securities unit, said in an April 15 interview that he’s “reasonably optimistic” as he looks ahead.

“It has been quite a while since we’ve seen analysts talk about revenue as opposed to writedowns and balance-sheet risks,” said Diamond, 57.[3]

The Bloomberg.com article details the different approaches that the banks took:

Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York, said Morgan Stanley hampered its traders from participating as so-called counterparties in even safer, liquid markets because of efforts to reduce balance-sheet assets. That limited the financing that the firm could provide to customers, he said.

“Fixed-income traders without the ability to provide customer financing and with limited use of balance sheet are unable to take advantage of even favorable market conditions,” Hintz wrote in an April 23 report.

Total assets climbed 5 percent at Goldman Sachs to $925 billion in the four months ended March 31, while Morgan Stanley’s assets dropped 5 percent to $626 billion.

Morgan Stanley’s conservative stance may stem from its need to win over investors. The firm’s stocks and bonds are priced at a discount to Goldman Sachs’s. Morgan Stanley shares dropped below $10 in October and still trade at less than the firm’s $27.32 book value. Goldman Sachs’s stock never fell below $50 and trades above the company’s $98.82 book value.

Lehman’s Collapse

“If you think back to last fall, Morgan was in a much more precarious situation than Goldman Sachs,” said Roger Freeman, an analyst at Barclays Capital in New York who worked for Lehman Brothers Holdings Inc. when it went bankrupt last year. “It’s perfectly understandable that there’s shock there.”[4]

For Goldman Sachs, it is just business as usual:

Blankfein has shown no inclination to change the business model that helped Goldman Sachs set industry records for earnings and pay in 2006 and 2007.

“Nothing that happened this year altered the core of what Goldman Sachs is,” Blankfein told investors at a Nov. 11 conference in New York. “We won’t stop doing the things that made us a leading investment bank.”

Trading is such an integral part of Goldman Sachs’s culture that Blankfein has no choice, Huntington’s Sorrentino said.

“Goldman is Goldman because they’ve done that,” he said. “If they can get paid to take a risk, they’ll take it. You don’t get paid for doing safe stuff.”

Revenue Per Employee

First-quarter revenue-per-employee and compensation figures bear that out. At Goldman Sachs, each of the firm’s 27,898 employees brought in, on average, $338,017 in revenue, compared with $68,760 apiece for Morgan Stanley’s 44,241 employees, according to data compiled by Bloomberg.

Compensation and benefits at Goldman Sachs totaled $4.71 billion in the quarter, an average of $168,829 per employee, compared with $2.08 billion at Morgan Stanley, or $47,060 for each person.

Mack began pulling out of businesses that used a lot of the company’s capital in November, reducing proprietary trading, principal investments, mortgage origination and the prime brokerage division that caters to hedge funds.

“They’re just trying to get to where the puck is going to be, whereas Goldman just said, ‘No, we’re still playing the game we’ve always played,’” Sorrentino said.[5]

All of this raises some fundamental questions about how Wall Street does business in the post-crisis environment- VaR does not take into account what type of assets the banks are taking positions in, which raises the question of transparency. Should the regulators have access to this information in order to monitor the banks’ exposure?

I think it bears noting that Goldman Sachs came through the crisis in better shape than most financial firms, and that their trading activity appears to be in fixed income instruments. If these are treasury, agency and, investment grade corporate instruments, the risk may be manageable, and we don’t know what hedging strategies they may have employed. The folks and Goldman are very sharp traders and they have profitably exploited a short-term aberration, but I would feel a lot better if I knew someone was monitoring the situation for the taxpayers.

[1] Christine Harper, “Goldman Sachs Boosts Risk-Taking at Fastest Pace on Wall Street,” Bloomberg.com, April 27, 2009.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.DWey.dMKrw&refer=home

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid

Are the Bank’s Profits Really Good News?

Ray Lindsley — Wed, 22 Apr 2009 13:58:12 +0000

Goldman Sachs, J.P. Morgan, and Bank of America all recently announced earnings that far exceeded analyst’s estimates- Halleluiah! But wait a minute, where did those profits come from? The answer is: trading. But didn’t trading losses help create this mess to begin with? This underscores a fundamental problem with our financial institutions- an inordinate amount of earning power is concentrated in a few small profit centers. These profit centers employ traders and money managers whose skills allow them to theoretically make huge profits and amass enormous bonuses, and that creates an incentive to take on excessive risks.

These traders earn a return based on beta risk, which is the measure of the volatility of the portfolio versus a benchmark. A beta of 1 indicates that the portfolio’s volatility is equal to the benchmark, and a beta of 1.5 indicates the portfolio is 50% more volatile than the market. If the trader of that portfolio is getting a 50% greater return than the benchmark, he is not adding value since that incremental return is entirely based on the beta. It would make no sense to pay a bonus to a trader based on a return that matches the beta. Traders and money managers are paid based on their alpha return. The alpha return is the risk adjusted return. Going back to our example of the portfolio with the beta of 1.5, let’s assume that the return on the benchmark is 10% and the risk free return is 2% (based on short term treasury rates). The incremental return on the benchmark is 8% (10%-2%), thus the portfolio should see an incremental return of 12% (8% X 1.5), and the total return should be 14% (12% + 2%). If the portfolio returns 17%, the alpha is 3% (17%-14%). This indicates that the trader is adding value to the portfolio.

Unfortunately, it is very difficult for traders and money managers to create a positive alpha and add value- it requires above average skills that very few possess. The majority of traders and money managers get paid based on “fake” alpha by taking on hidden “tail” risk. Tail risk is a risk that occurs only infrequently during adverse market conditions. A good example of this occurred when investors that loaded up on mortgage backed CDOs. As long as home prices were rising, there was very little risk of default, but when the housing bubble burst the CDO market dried up and the banks ended up with toxic assets that they could not sell. When the tail risk becomes reality, the alpha disappears.

So these traders are compensated based on the fake alpha, but the compensation structure does not allow for the bank to recoup the compensation when the hidden risk is revealed and the profits turn into enormous losses and the alpha disappears. Because there is a strong market for traders under normal market conditions, they have a lot of leverage and can demand lucrative compensation based on short term results, even though those results are often based on fake alpha.

Wall Street will need to change this compensation model and institute more rigorous risk controls if it hopes to discourage the assumption of these hidden risks that can eventually prove disastrous. The problem is that any firm that does so will most likely lose their best traders. Given the fact that financial institutions will not want to give up their best talent, these changes will have to be instituted through regulation. Compensation structures should include stock grants or options with long holding periods and forfeiture provisions. Any cash bonuses should be pooled and paid out over an extended time period with provisions for removing funds from the pool to cover any trading losses. Incentive compensation plans need to be based on regulatory standards and subject to regulatory review and approval.

Finally, risk management must be robust enough to reveal tail risk and cannot just be backward looking in nature. The financial regulators need to provide guidance in this area and make risk control assessment a part of their periodic review process.

Is there hidden tail risk in the recent trading activity that has created these bank profits? I would hope that the banks have learned from recent history, but I would suspect from the size of these profits that there is- I just hope that management has a tight rein on the risks. It seems clear to me, though, that regulatory reform in this area cannot come soon enough.

Carl Icahn to Shareholders: When it Comes to Incentive Comp, Just Say No

Ray Lindsley — Mon, 20 Apr 2009 15:33:48 +0000

Legendary investor and shareholder rights activist Carl Icahn wrote an article that appears in the Huffington Post, and on his Blog The Icahn Report- “It’s Up to the Shareholders, Not the Government, to Demand Change at a Company.” In this excellent article, Mr. Icahn describes how he addressed the issue of retention bonuses at a company that he was saving from bankruptcy:

Several years ago, I bought a big chunk of ‘distressed’ debt in a major company and landed on the creditors committee when it filed for Chapter 11. Shortly thereafter, the bankers who were hired by senior management told me that I would have to pay retention bonuses to keep its top managers from leaving.

The company, they warned, would crumble if these star managers left. Nine had already threatened to march out the door if they didn’t get substantial bonuses. I told them I was fed up with retention bonuses. Where was the line waiting to hire these "star" managers who were responsible for bankrupting the company in the first place?

So I flatly refused. After much argument, the company’s lawyers and bankers said, let’s take it to the bankruptcy judge.

The judge said, "Mr. Icahn, why don’t you want to pay retention bonuses?"

"It’s simple, your honor," I replied. "It’s because I don’t want to retain them!"

"Hmm, good point," the judge said. "You win."

To make a long story short, we eventually replaced these allegedly irreplaceable managers and restructured the company. The net result? We saved $500 million in costs over two years and the company is in much better shape today than is has been in years.[1]

What a novel idea- shareholders actually saying no to undeserved executive compensation. But let’s take this a step further. How about shareholders of financial services firms paying attention to the decisions that it’s managers are making regarding leverage, risk management, off balance sheet transactions, and speculative trading activities? In other words, the very decisions that got our financial institutions into the crisis that we have found ourselves in. A lot of professional money managers held huge positions in our financial institutions, but were too busy counting their profits to pay attention to how much risk was being assumed in the creation of those profits.

While a lot of attention is being paid to the failure of our government to adequately regulate the financial markets (and rightfully so), I would contend that there was also a failure on the part of shareholders to ensure that the firms that they owned were being managed responsibly. It seems inconceivable to me that sophisticated investors that have considerable experience at analyzing and assessing corporations failed to see the warning signs of the excessive risks being assumed by the firms that they were so heavily invested in. Why are large institutional shareholders so passive when it comes to the management of the firms that they own? Is it due to the short term focus of many investment managers these days? Your insight would be greatly appreciated.

[1] Carl Icahn, “It’s Up to the Shareholders, Not the Government, to Demand Change at a Company,” The Huffington Post, April 15, 2009.

http://www.huffingtonpost.com/carl-icahn/its-up-to-the-shareholder_b_187421.html

When the Going Gets Tough, The Tough Try One More Time

Ray Lindsley — Thu, 16 Apr 2009 20:52:02 +0000

While tenacity is always a trait of successful individuals, in difficult economic environments like these it is even more important than ever. In The “Just One More” Solution,” John Baldoni tells about a friend that made sixty-two phone calls over a sixteen month period to a prospect before he got a meeting and landed the account. He goes on to describe the “one more” solution:

Make one more connection to a customer. Many customers are not buying. Do not let that dissuade you from reaching out and meeting with them. Those who stay close to their customers today will be those who reap the benefits tomorrow.

Make one more attempt to sell an idea upstairs. Tough times are great times to pitch new ideas. Some bosses are naturally resistant to change. But you can make an extra effort to demonstrate the benefits of your great ideas. Be certain to argue the business case. Use the downturn to reinforce your salient propositions.

Make one more effort to engage your employees in the challenges facing your business. Listen to what they are telling you. Learn from what they share with you. Find ways to put some of their ideas into play. Not everything an employee suggests is golden but you demonstrate a willingness to learn if you listen.

And finally, think about what you can do more of in your own job, your own function, and in your own business.[1]

I think this is very sound advice in our current environment, and I think it is especially important for those that are searching for employment. As Baldoni sums it up:

"The most difficult thing is the decision to act, the rest is merely tenacity," said famed aviator, Amelia Earhart. "The fears are paper tigers. You can do anything you decide to do." Tenacity will pay dividends. Perhaps not immediately, but over time it will. Those employees and managers who exercise tenacity today will be those who have earned their resilience. That will hold them in good stead now and in the future.[2]

[1] John Baldoni, “The “Just One More” Solution,” HarvardBusness.org, April 16, 2009.

http://blogs.harvardbusiness.org/baldoni/2009/04/the_just_one_more_solution.html?cm_re=homepage-041409-_-body-middle-tert-_-voices

[2] Ibid.

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