Last week we published a report about the privacy risks of Private Banking and Wealth Management websites. The bottom line was that almost two thirds of websites offering online communication through contact forms or email did not care to take even the most basic precautions in order to protect user privacy.

In the light of the recent data thefts affecting mostly European Wealth Managers we find this reckless and negligent. To be fair, there are many cases of banks with role model websites offering all sorts of preacautions and warnings for their users. Yet, it is still deeply unsettling that about 60% of  the analyzed banks across 17 markets have no clue or do not care about privacy. Especially since we are not talking about auto dealerships or mon-and-pap-grocery-stores. We are talking about an industry whose fate rests on a claim of trustworthiness and confidentiality. There is only one thing to do for the affected banks: Realize that you have arrived in the 21st century - a time where online conversations have become as normal as telephone or letter communication and should be protected accordingly.

I just finished the bestseller “Too big too fail”, delivering a behind-the scenes and moment-by-moment account of the months between the fire sale of Bear Sterns in spring 2008 and the announcement of the biggest bailout in history in October 2008. Drawing on hundreds of hours of interviews with the key players the Author Andrew Sorkin of the New York Times was able to write a kind of real-life thriller on the struggle of overpaid bankers and overwhelmed politicans to save the financial systems, there companies, jobs and even more so their egos. A gripping book one reads with disbelief on the lack of self-awareness and competence of main players, but also a lot of amusements on how the “big” world of finance and business comes down to surreal realities in the face of disaster.

One of these hard to belive events is a check over USD 9 billion! that literally saved Morgan Stanley and the jobs of its 45.000 employees in the very last minute. Hand delivered by a Japanese delegation and picked up by a banker wearing flip-flops….

The New York Times Magazine has interviewed Harry Markopolos, an investment manager and math whizz who spent nine years to track the machinations of Bernie Maddoff’s hedge fund.  He concluded  early on that Madoff must be a fraud.  In November 2005 he sent a memo to SEC regulators titled  “The World’s Largest Hedge Fund  is a Fraud.” It described his suspicions about Madoff in more detail and asked the SEC to check his fraud theory.

In the NYT interview, Markopolos judgement of the SEC is a harsh one:

Q: “Why do you think the S.E.C. failed to wake up to Madoff’s $65 billion Ponzi scheme until he turned himself in?”
A: “They weren’t even asleep at the switch; they were comatose. They didn’t respond to heat and light, much less evidence of wrongdoing. They were not engaged in the fight.”

The whole story is a great example how dysfunctional huge regulatory administrations have become in the financial industry. They are not even able to uncover a fraud scheme when someone else does the analysis for them.

Governments around the world are busy these days to develop grand schemes for new regulatory bodies and laws. No doubt, they will be even less functional. The dysfunctionality will most likely be proportional to the complexity of the law and the number of new bureaucrats hired.

Yet, ordinary investors should really take one learning from the Madoff story: Don’t trust the government to see the red flags and protect investors. It won’t happen. Or more precisely, it will happen but far too late. There is only one way for investors to protect themselves from fraudsters - do the critical analysis yourself,  and keep a very skeptical eye on the ocassional fund management Wunderkind.

Great post on the value of short-selling in the WSJ Deal Journal

Innovating to zero: Bill Gates unveils his vision for the world’s energy future

Why “nuanced voices” are not welcome on financial TV

The government of the German state (”Bundesland”) Baden Württemberg has started an initiative to force banks to disclose all kickbacks and commissions. The minister for consumer protection Peter Hauk (a member of the conservative CDU) said that he will soon bring this new regulation to the Bundesrat (the parliamentary chamber that represents the German states). The Minister encouraged the banks to support the new law because more transparency for banking clients will in the long-run strengthen the international competitiveness of the German banking industry.

The initiative is a logical next step after the new MIFID regulation has already compelled banks to keep written minutes of all client meetings detailing the recommendations that were made to the client. MyPrivateBanking research analysts expect that in the long run the reception of  kickbacks by banks and wealth managers will get completely banned.

A few months ago we have made an analysis of data from the Swiss National Bank. It showed that between January 2008 and August 2009 foreign private assets in Switzerland had declined by 25.9% (whereas domestic private assets declined by only 13.8%). Three months later we have gone back and looked at the latest data, covering the period until November 2009. The data have not improved - on the contrary. Whereas the domestic assets have been stable (decline since beginning of 2008 at 13.9%, just 0.1% worse than in August), the private foreign assets are now down by 28.1% since Jan. 2008, a further decline of 2.2 percentage points. This equals a net decline of more than SFR 20 bn between August and November 2009. In addition, there might be quite a bit of foreign private wealth invested in instituional vehicles like trusts which is not even tracked in this statistic.

Potentially, there could be other reasons for this decline than net money outflow across the border. Yet, it is hard to explain why foreign assets are persistently declining while domestic assets stay relative stable.

Today there is also a analysis on Wealth Bulletin which confirms our data. Wealth Bulletin finds the same trends across many offshore destinations in Europe.

We find that this trend is quite frightening from the point of view of Swiss competitiveness. As we said before, it is the eleventh hour for a change of strategy.

A friend of mine has drawn my attention to an initiative called „Responsible Wealth”. It aims at the top 5% of income or wealth in the US that “care about economic justice” and asks them to donate some or all of the tax savings from the tax cuts of the Bush and Clinton administration to “tax fairness organizing”. This raises the question if the top 5% do not already pay a fair share of taxes already? To assess this question I looked at data of the Internal Revenue Service (IRS) to get a better idea of the role of the Top 5% in income generation and tax payments:

As it turns out in 2007, the top 5 percent of tax payers earned 37.4 % of adjusted gross income paid 60.6 % of all federal individual income taxes. In comparison to 1992 (when Clinton came in office) the Top 5% had a share of 28% of the total adjusted gross income and a share of 45,9% of all federal income tax. No shift in the relation between share of total gross income and share of tax paid during the Clinton/Bush era. Just for comparison: The bottom 50% of adjusted gross income in 2007 had a group share of 2.9% of income tax.

While “fairness” is always in the eye of the beholder and one can always argue about the “fairness” of single cases and tax cuts I do not see the overall point of the Responsible Wealth Initiative. If the top 5% of the taxpayers account for 60% of all tax payments and the bottom 50% for 2.89% I find it hard to argue that the wealthy do not already “care about economic justice”. Even more so when taking into account that the wealthy in the US spend each year between 2-3% of their investable assets for charity.

I fully agree that the living conditions of the poor can and should be improved, but for me it isn’t a matter of the wealthy being irresponsible, but instead, a matter of the government spending their huge amount of tax money responsibly. The solution to take more and more money from those who generate economic development in order to increase public spending and improve ecomomy is too populist and shortsighted. It would be much more useful for this purpose to demand more effective investments of tax receipts by limiting the influence of lobby groups, streamlining bureaucracy and thinking beyond the next election day.

The Football World Cup will be kicking-off on June 11 in South Africa. I have spend the last couple of weeks criss-crossing South Africa and the expectations for the impact of the World Cup are skyrocketing. No doubt, the country has already achieved a lot in preparing for the mega event. The stadiums have been finished in time, security has been tightened and everybody is discussing the chances of Bafana Bafana (the SA football team) reaching the semi-finals or even winning the tournament. There are also high expectations that  the World Cup will bring wealth and riches to the country. It would be a much needed boost as the economy has been hit in the short-term by the economic down turn. Hotels, restaurants, entrepreneurs of all types expect to be showered with the money foreigners will bring into the country. It may be that those expectations are disappointed. Ticket sales in Europe have been sluggish so far and the experience of Germany in 2006 and Switzerland/Austria (European Cup) in 2008 show that there was no short-term break even given all the funds that had to be invested.

However, the positive long-term effect of the World Cup can hardly be overstated. South Africa has the opportunity to display itself as a showcase of a successful emerging market on the African continent. Over the last 10 years entrepreneurship has started to take off and is thriving, also and particularly in the black townships around the country. The number of USD-millionaires in South Africa has more than doubled to about 50′000 over the last three years and is expected to keep rising sharply over the next decade. Neighboring countries like Mozambique and Angola boast their own small Wirtschaftswunder which makes the region of Southern Africa also an interesting emerging market for Wealth Managers. Yet it seems that especially European Private Banks have only little interest in the black continent as they are busy hunting in the Middle East and Asia. It is mainly South African local banks, some UK players, Chinese banks and Arab banks who are trying to gain a foothold among the new entrepreneurial class in Africa. Speaking to successful business people in South Africa the brands of UBS, Deutsche Bank, or BNP Paribas are rarely household names. May be the World Cup could be an opportunity for the European Wealth Managers to scout this region on the rise. So, get up from your desks in Geneva, Frankfurt, Paris and Zurich, pick up some VIP tickets, invite  your clients and make the trip to Africa.

Yesterday I attended a conference with Jim Rogers, co-founder of the Quantum Fond (together with George Soros) in the seventies, founder of the Rogers Commodities Index, author of various books on commodities and one of the strongest advocates for commodity investments. He certainly has an exceptional investment record and even it is no guarantee for the future following a summary of his outlook for the decade(s) to come:

Favourite Commodity

Currently he is very bullish for agricultural commodities. He predicts a huge shortage to come, since prices are depressed since years, no investments in more farmland have been undertaken and the silos are close to empty. He regards farmer as the big winners of the next decade. He would buy precious metals on dips and predicts that Gold will be double by end of the decade.

Future Role of Commodities

Not surprisingly he regards commodities as the best investment no matter how the economy will develop. In the case of a new boom the demand for commodities (and prices) will go through the roof because the supply site can not grow as fast. If the economy goes down he is certain that the governments around the world will continue to frantically print money. As a consequence the value of real assets such as commodities will increase.

Role of China:

He regards China as the upcoming economic and political superpower, however, pointed out that the GDP of china is still only 10% of the combined GDP of USA/Europe, so investors need patience. He thinks that the China acts strategically far smarter than the US, buying assets (mainly mines, oil/gas fields) all over the world while the US has only one focus: Printing money.

Relations USA and China

In his opinion China needs the US as much as vice versa. However, historically politicians of a superpower challenged by a growing challenger behave irrational so he foresees more frictions to come.

Timing

He never made good experiences with timing and has given-up on it. If he buys an asset he plans to hold it “forever”. He only will start to sell if everybody has commodities in his portfolio and people talk about pork bellies on the street. In his view commodities are far from a bubble and China (except real estate) as well. Main argument is that the actual exposure to these asset classes in the investor portfolios is still comparatively low.

BTW: Rogers moved to Singapore, because in his view Asia is on the development stage of the US at the beginning of the 20^th century and he wants to be where the action and future is. So given his background and interests (of promoting his commodity index) no surprises, but he made quite a good case for his view.

Again sensitive bank data on offshore-accountsgot stolen. Again these information are offered to the government of the account holders. Again the government seems to be willing to bend the law and to pay for these illegally acquired data.  In our recent analysis on data theft we preditcted that these kind of “private banking data auctions” will happen again and again untill the stolen assets become worthless.

Whistle blowing, breach of confidentiality, and the outright theft of files recently has been enormously popular among some employees of offshore banks. It is almost impossible to stop such individuals. They have the potential to completely destroy the reputation of financial centers like Liechtenstein, Luxembourg or Switzerland, and a lot of damage has been done already. If there are no more potential buyers for confidential customer files the business is gone. But this would be only possible when the banks convert offshore to onshore customers. Or, alternatively, show the door to all customers who are unwilling to co-operate.