MyPrivateBanking Blog
Daily Comments on the World of Wealth Management

Archive for June, 2009

How Governments Mess Up Their Banks

Friday, June 26th, 2009

Yesterday we saw the news that UBS Asia chief Rory Tapner is leaving the bank immediately. It is only the latest in a series of departures of highly qualified executives of the bank. In May Deutsche Bank lured away Robert Rankin to head its Asia-Pacific business. Alex Ehrlich left for Morgan Stanley. More departures are expected. Others have already happened on the lower levels of management.

This outflow of talent is the direct results of the Swiss government meddling in the salary and bonus policies of the UBS. Within the government and the Swiss public, who has injected billions of fresh capital into the bank, broke out a heated debate back in January about whether there should be any bonus payments at all to employees.

As a result, bonuses have been extremely limited and shrank overall by 90%. There is a similar situation at many other banks who have the government as shareholder of last resort.

But only now we see the results of these policies. Banking is a peoples’ business. If the most talented people leave a financial firm in droves, the value of this firm will inevitably decline . And the decline will be by magnitudes bigger than the money that has been saved on cutting bonuses. This is not irrational exuberance it is irrational politics. Just have a look at the stock chart of UBS. Ultimately, the tax payer will have to pay for this loss of value because it will take much longer before the government can recoup its capital.

 

Update on Buffett Lunch Auction

Friday, June 26th, 2009

Only a few more hours to go and the price tag is at USD 352,100. Not bad for a few charcoal grilled burgers but still way below last years record of USD 2.1 m….

 

Power Lunch With Buffett? It’s 136,000 And Going…

Wednesday, June 24th, 2009

Warren Buffett, second wealthiest man on earth and one of the most successful investors of all times, is again auctioning off a lunch with himself. Right now the bid is at USD 136,000. Buffett will give 100% of the proceeds to the Glide foundation, a charity. Last year the winning bid was USD 2.1 m: a hedge fund manager was the auction winner. He and seven of his friends are scheduled to have their Burgers with Buffett on Wednesday. I am curious to see if there is this time another hedge fund manager who wants to spend his clients’ money so freely on Buffett. Wednesday 7 pm is the deadline for the acution - we will keep you posted…

 

US Citizen ? Working in Switzerland ? Bring cash to pay our bills !

Wednesday, June 24th, 2009

On sunday the leading swiss paper NZZ published an article with the headline “Swiss banks do not welcome US-customers anymore” (Article in German). It describes the actions Swiss banks take on US customers in light of the upcoming law suit againts the UBS. According to the author several banks are already closing all accounts of US citizens and do not accept any new US clients. Others are seriously considering these harsh measurements as well. The general mood is described by on banker as “There is just no future in doing business with US citizens”.

Obviously due to the seemingly neverending pressure and compliance rules that US authorities impose on banks dealing with US citizens abroad it is just not attractive anymore to have US clients.  As a side effect US-Executives that come to work in Switzerland have a hard time to find a bank to open a local account. Banks can not even tell them where to go, because according to US laws they potentially could be prosecutued for aiding tax evasion. We have talked about the double standards of the US tax regime before. If the next chapter of this vendetta on Switzerland means that US citizen moving to Switzerland better bring cash to pay their rent the absurdity reaches a new level.

 

Investment Legend John Bogle: Don’t speculate with ETFs

Monday, June 22nd, 2009

John Bogle is the founder of Vanguard, a mutual fund firm and one of the founding fathers of the index industry. In investment circles Bogle is a legend because he has preached for more than 35 years what is now taking over the investment industry: Indexing. It is the idea that passive index funds are almost always beating comparable actively managed funds.

Here is a very recent speech of Bogle on a related topic: The use of ETFs (Exchange Traded Funds, tradeable index funds) for rapid fire trading or speculation. Bogle lies out a shocking case: He proves with hard numbers that traders who are using ETFs for speculation using rapid-fire trading techniques to move in and out of ETFs do much, much worse than the fund itself. He calculates that over the last five years index funds have shown a total of 6% positive returns whereas active investors using ETFs to time the market and trade were 12% negative. That is an average, but the numbers are consistent across 40 out of 46 major ETFs. This difference is much bigger than the difference between ETFs/passive index funds and active funds in general.

What is the take-away for a private investor? It is not enough to use index funds or ETFs. It is necessary that you hold them long-term. So, if your wealth adviser or private banker tells you that he uses ETFs make sure he is keeping them long-term and is not trying to trade and time the market. Because that could be indeed very costly for you.

 

Against Short-Termism

Thursday, June 18th, 2009

This morning I came across this very interesting piece on a speech by Seth Klarman who is the founder and president of Baupost group, a Boston based investment firm specializing in value oriented strategies. Klarman gives a well thought through summary of the financial crisis and its implications for professional but also private investors. He critisizes heavily the short term orientation of many asset managers, a result of wrong incentives but also client pressure. Klarman pointed out, for example,  that the flight into Treasuries exposed many portfolios:

“Having a long-term focus requires keeping the emotions of fear and greed in check.  For most of the last 12 months, fear dominated greed, causing investors to flee to cash, despite its negative yields.  Those investors, along with many who suffered losses on Treasury bonds bought at depressed yields, also paid dearly in opportunity cost – their inability to buy securities at depressed valuation.”

I could not summarize the flawed strategies of many wealth managers better. Reading the whole piece is well worth your time!

 

Another Industry In Recession: Ponzi Schemes

Tuesday, June 16th, 2009

It seems that the recession has now also reached those more or less sophisticated crooks and thiefs who trick people out of their hard earned money with so called Ponzi Schemes. Madoff was only the tip of the iceberg, the Washington Post reports that law enforcement officials in the United States are confronted with an avalanche of Ponzi cases. The FBI has opened about 500 Ponzi cases. “We have more open Ponzi scheme cases than at any time in FBI history,” says Special Agent David G. Nanz, chief of the FBI’s economic crimes unit, as quoted by the Washington Post.

I personally have a few acquaintances and friends who have been victim to such fraudulent schemes.They are typically intelligent, normal  people, who had their greedy moments which made them listen to Ponzi proposals. Had they been better educated by their wealth advisers or bankers they would probably have not been cheated so easily out of their money. With the Internet being such an easy access tool to everybody’s mailbox, to me it seems necessary that banks and advisors take a more pro-active approach in educating their clients about the dark world of Ponzi. Ohhhh…  I forgot, some should start by educating themselves.

 

Former Credit Suisse Banker Makes Friends Homeless

Thursday, June 11th, 2009

Julian Tzolov, a former CS banker in New York,  stands accused of  investing his clients’ money in risky mortgage securities - without their permission. Instead he told them that they were invested in government guaranteed loans. As we all know, such schemes blew up a while ago. The guy was charged and grounded at his house. Friends have put up a bail of USD 3 million including a Manhattan apartment and a Miami Beach home belonging to his girlfriend’s brother.

Tzolov was last seen on May 9th when he got permission to go to the gym and shopping. Brooklyn judge Weinstein ordered prosecutors to seize all assets of Tzolov’s friends. He commented: “They’re going to lose everything.”

My learning? Immediately check your account statements when your banker tells you he just went to the gym and will be back soon…

 

The Rich Are Getting Poorer. So Are The Banks Serving Them.

Wednesday, June 10th, 2009

Today, coincidently, I came across an article in the Economist of August 2006. Subtitle of the article is “The rich are getting richer. So are the banks serving them”. In a nutshell the story is that the boom in stock markets and emerging economies fuels the growth of individual wealth, served by private bankers with the “aim to please”.  Superbly  summarized in one caricature:

economist2

We all know how the story went on. Now the best title probably would be “The rich getting poorer. So are the banks serving them”.

However, the sketch also reminds me of the story mostly ignored in the discussions of the last months: Nobody forced the rich to take all the extra doses of hedge funds, derivatives etc. Certainly, banks were willing servants. But it required a huge amount of greed and naivety on the clients’ side to allow this toxic mix of of products in their portfolio.

 

Learn From The Super-Rich

Tuesday, June 9th, 2009

It is always a pleasure to have lunch with a private banker, sitting at the shore of sunny Lake Zurich. Of course, he does not want to have his name quoted, but he gave me some interesting insights in the business model of managing the ultra rich (50 Mio. USD or more investable assets). Starting point was my question, whether it makes sense for all those big and small wealth managers to chase the ultra rich and intensify their family office marketing. My lunch partner was quite nonplussed by this strategy since he knows that the banks’ margins for the ultra rich are significantly thinner than for the merely rich. He argued that UHNWs (ultra high net worth individuals) are much tougher negotiators, they use independent advisors and consultants, employ multiple banks and exert massive pressure on their wealth managers. He estimates that the net margin for the UHNWs is about 30% lower.

Now that’s a statement! So if you are merely rich you should definitely learn from those in the Upper Class above you: Get tougher with your banker and squeeze your fees by 30%. Any details? Just look here.

 
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