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All bankers are criminals

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All bankers are criminals

  1. 1. All bankers are criminals Chris Skinner cskinner@towergroup.com +44 790 586 2270
  2. 2. All bankers are criminals
  3. 3. © 2006 The Tower Group, Inc. All bankers are criminals Trust Scandal Greed Compliance
  4. 4. © 2006 The Tower Group, Inc.
  5. 5. © 2006 The Tower Group, Inc. Benchmark: Trust in Sectors 42% 44% 47% 38% 55% 59% 36% 36% 38% 40% 42% 43% 45% 48% 51% 65% 66% 66% 30% 42% 54% 54% 51% 58% 0% 20% 40% 60% 80% 100% Telecomm Energy Professional services Healthcare Retail financial services Investment & insurance services Pharma & drug Airlines Automotive Technology Consumer packaged goods Consumer durables US Europe Source: the Annual Edelman Trust Barometer, 2003 Rank 8 of 12
  6. 6. © 2006 The Tower Group, Inc. We don’t trust less … we trust differently
  7. 7. © 2006 The Tower Group, Inc. Trust is upside-down Religion Government Authorities Institutions Media Family Friends Neighbours traditionally today
  8. 8. © 2006 The Tower Group, Inc. Source: Standard & Poor’s RatingsDirect high-profile corporate defaults, 2001–2003 Companies losing trust 2003  Marconi  HEALTHSOUTH  J Crew Group  American Cellular  Loral  Parmalat 2002  Worldcom  Qwest  Tyco  Williams  Nortel  Goodyear  AT&T Canada  Georgia Pacific 2001  Enron  Calpine  JCPenney  PG&E  Lucent  Delta Airlines  KMart
  9. 9. © 2006 The Tower Group, Inc. “WorldCom chief's part in $11bn fraud”
  10. 10. © 2006 The Tower Group, Inc. “It was the finance chief's doings”
  11. 11. © 2006 The Tower Group, Inc. What happened to $12 billion in assets?
  12. 12. © 2006 The Tower Group, Inc. Sarbanes Oxley Derek Higgins Who?
  13. 13. © 2006 The Tower Group, Inc. Response Sarbanes Oxley  US firms’ auditing fees up 17% in 2003 and 40% increase in 2004 to $3.5 billion in 2004.  Section 404 ensuring management can prove effective internal controls cost $35 billion alone according to the American Electronics Association, about 20 times more than anticipated.  University of Rochester graduate Ivy Xiying Zhang estimates the overall cost of SOX is over $1.4 trillion..
  14. 14. © 2006 The Tower Group, Inc. $650m cash found in Baghdad, April 2003 Sources: New York Times, June 6, 2004
  15. 15. © 2006 The Tower Group, Inc. $650m cash found in Baghdad, April 2003 Sources: New York Times, June 6, 2004
  16. 16. © 2006 The Tower Group, Inc. $650m cash found in Baghdad, April 2003 Sources: New York Times, June 6, 2004
  17. 17. © 2006 The Tower Group, Inc. $650m cash found in Baghdad, April 2003 Sources: New York Times, June 6, 2004 Social Club
  18. 18. © 2006 The Tower Group, Inc. Liberty National Securities Broker, Martin Frankel
  19. 19. © 2006 The Tower Group, Inc. Credit Suisse Banker, Frank Quattrone
  20. 20. © 2006 The Tower Group, Inc. Morgan Stanley Securities Analyst Henry Blodget
  21. 21. © 2006 The Tower Group, Inc. Salomon Analyst, Jack Grubman
  22. 22. © 2006 The Tower Group, Inc. Not forgetting …
  23. 23. © 2006 The Tower Group, Inc. Allied Irish Bank, John Rusnak
  24. 24. © 2006 The Tower Group, Inc. NAB, FX Trader, David Bullen
  25. 25. © 2006 The Tower Group, Inc. Theodore Sihpol, Bank of America
  26. 26. © 2006 The Tower Group, Inc. NextCard, CEO, John Hashman
  27. 27. © 2006 The Tower Group, Inc. Citi CEO, Chuck Prince
  28. 28. © 2006 The Tower Group, Inc. Deutsche Bank CEO, Joseph Ackermann
  29. 29. © 2006 The Tower Group, Inc. it’s not just a few  John Rusnak and Allied Irish Banks  Banco Ambrosiano and the Vatican Bank  Bank of Credit and Commerce International  Nick Leeson and Barings Bank  Bre-X and Canadian Mining Scandals  Butcher Brothers and the United American Bank  Cendant Corp.  Credit Lyonnais  Toshihide Iguchi and Daiwa Bank  The Dot-Com Bubble and Investment Banks  Enron Corp. and Arthur Andersen  The Flaming Ferraris  Jardine Fleming  Martin Frankel  Griffin Trading Co.  Conrad Black and Hollinger International  Joseph Jett and Kidder, Peabody & Co.  The "Nigerian 419" Advance Fee Scam  Lottery / Sweepstake Offers  Orange County  Metallgesellschaft  Morgan Grenfell  NASDAQ Stock Market  NatWest Markets  Lloyd's of London and the Insurance Industry  Operation Wooden Nickel  Parmalat  Maritime Fraud  The Savings and Loan or Thrifts Crisis  Smith Barney  Robert Maxwell  Pension Funds, Mortgages, Split Capital Investment Trusts, Precipice Bonds ...  Yasuo Hamanaka and Sumitomo Corp.  WorldCom
  30. 30. "Bankers who hire money hungry geniuses should not express surprise when some of them turn around with creative and illegal means of making money." Linda Davies Author and former Investment Banker
  31. 31. © 2006 The Tower Group, Inc.
  32. 32. © 2006 The Tower Group, Inc.
  33. 33. Greed Is Good As long as you know what you’re talking about
  34. 34. © 2006 The Tower Group, Inc. “It was the finance chief's doings”
  35. 35. © 2006 The Tower Group, Inc. 1973, Fischer Black and Myron Scholes published "Value of Derivatives"
  36. 36. © 2006 The Tower Group, Inc. John W Meriwether buying bonds without authority  Gutfreund  Merriwether  Mozer
  37. 37. © 2006 The Tower Group, Inc.
  38. 38. © 2006 The Tower Group, Inc. John W Meriwether January 1998 LTCM had capital of $4.8 billion Portfolio of $200 billion Derivatives with a notional value of $1.25 trillion Debt:Equity Ratio of 100:1
  39. 39. © 2006 The Tower Group, Inc.
  40. 40. © 2006 The Tower Group, Inc.
  41. 41. © 2006 The Tower Group, Inc. $33 trillion in Credit Derivatives
  42. 42. Where did this come from?  Assets under management of the hedge fund industry totaled $1.225 trillion at the end of the second quarter of 2006, up 19% on 2005 and twice the total of 2003  Because hedge funds use gearing to invest, the positions they take are much larger than their assets – most estimate that over $10 trillion leverage is possible …  There are now over 10,000 hedge funds, up 10% during the past year  TowerGroup predicts that hedge fund assets will grow at an annualised rate of 15% between 2006 and 2008 while the actual number of hedge funds is likely to remain relatively flat.  London is Europe’s leading centre for the management of hedge funds with assets up four-fold between 2002 and 2005 from $61bn to $225bn.
  43. 43. © 2006 The Tower Group, Inc. And it’s growing fast …
  44. 44. © 2006 The Tower Group, Inc. “It was the finance chief's doings”
  45. 45. © 2006 The Tower Group, Inc. 1973, Fischer Black and Myron Scholes published "Value of Derivatives"
  46. 46. 1989  No mention of derivatives  Stock options only mentioned as a postscript in index on page 364 2006  $33 trillion in credit derivatives  $10 trillion+ hedge fund industry
  47. 47. © 2006 The Tower Group, Inc. a long, long time ago … 1989
  48. 48. © 2006 The Tower Group, Inc. fifteen years …
  49. 49. © 2006 The Tower Group, Inc. Black-Scholes didn’t know about Moore’s Law
  50. 50. © 2006 The Tower Group, Inc. %age of USA equity trades flowing through algorithmic trading strategies, 2004-2006 Source: TowerGroup Exhibit #: 40:20MS-E7 BuySideSellSide 48% 18% 27% 16% 32% 7% 16% 3% Institutional Broker: Program Desk Institutional Broker: Cash Desk Hedge Funds Institutional Asset Managers 2004 2006
  51. 51. © 2006 The Tower Group, Inc. The point of human traders?
  52. 52. © 2006 The Tower Group, Inc. 0 50 100 150 200 250 1980 1993 1996 1999 2003 2004 2010 Financial Assets Investment Business Financial Services Assets US$ Trillion 1993 – 2010 Growth Rate 8.4% Total Growth Rate 8.6% Equities 10.2% Corporate Debt 6.9% Government Debt 7.8% Bank Deposits Regional Growth Rates 9.8% Euro Zone (3.1x GDP) 11.3% UK – 19.3% Eastern Europe 8.6% USA (4x GDP) 4% Japan (4.1x GDP) 14.5% China (3.2x GDP) 1 2 5 3 6 9 9 6 11 8 11 9 209
  53. 53. © 2006 The Tower Group, Inc. amounts outstanding for all derivatives 72134 80309 81458 88202 94008 95200 99755 111178 127509 141665 169658 197167 220058 0 50000 100000 150000 200000 250000 Jun 98 Dec 98 Jun 99 Dec 99 Jun 00 Dec 00 Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 (billions of US dollars)
  54. 54. © 2006 The Tower Group, Inc. Monetary Stability or Instability $2.7 trillion traded in FX markets every day 100x more than the daily volume of all the world’s stockmarkets combined only 2% relate to real goods and services 98% is purely speculative
  55. 55. © 2006 The Tower Group, Inc. Monetary Stability or Instability $33 trillion in credit derivatives $10 trillion+ hedge fund industry
  56. 56. “It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed have grown so enormously.” Alan Greenspan July 2002
  57. 57. © 2006 The Tower Group, Inc.
  58. 58. © 2006 The Tower Group, Inc. not a problem
  59. 59. © 2006 The Tower Group, Inc.
  60. 60. © 2006 The Tower Group, Inc. 2006 Hedge funds account for 32% of credit-default swap sellers and 28% of buyers, up from 15% and 16% in 2004 Credit-default swap contracts jumped to $20.3 trillion from $13.9 trillion at the end of 2005 and are the fastest growing financial instrument Total Derivates Trading in 2006 is estimated at $370 trillion
  61. 61. © 2006 The Tower Group, Inc. Uh-oh “In our view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal. Warren Buffet Berkshire Hathaway Annual Report, 2002
  62. 62. © 2006 The Tower Group, Inc.
  63. 63. © 2006 The Tower Group, Inc. result: a series of regulatory actions Sarbanes-Oxley Basel II IAS39 Financial Services Action Plan
  64. 64. © 2006 The Tower Group, Inc. result: a series of regulatory actions Directive to Modernise Accounting Provisions of 4th & 7th Company Law Directives Consumer Credit Directive Electronic Money Directive Financial Conglomerates Directive Insurance Mediation Directive Solvency II Directive Takeover Bids Directive Collateral Directive Distance Marketing Directive Market Abuse Directive EU Savings Directive UCITS Amendments Directive Capital Adequacy Directive/ Risk-Based Capital Directive Directive on Markets in Financial Instruments (MIFID) aka ISD II Prospectus Directive 2nd/3rd Money Laundering Directive Transparency Directive
  65. 65. © 2006 The Tower Group, Inc. Rolf Breuer Former Chairman Deutsche Bank Ieke van den Burg MEP Antonio Borges Vice Chairman Goldman Sachs International Henri de Castries Chairman and CEO AXA Alex Schaub Director General European Commission Fabrice Demarigny Secretary General CESR Should we have a Pan-European Regulator?
  66. 66. © 2006 The Tower Group, Inc. Henri de Castries, AXA CEO and Chairman Under EU Solvency II Regulations, AXA has to hold €23 billion in reserves to cover capital risk. An equivalent USA insurer with a Triple B rating (AXA is Aa3) would only need to reserve €19 billion. AXA has €4 billion sitting doing nothing. Invested wisely, €4b would earn €900 million per year. AXA is forced to invest in Government Bonds and Real Estate, rather than Equities and Growth. And this is good for the EU’s competitiveness?
  67. 67. © 2006 The Tower Group, Inc. Alternative: lots of fines …
  68. 68. © 2006 The Tower Group, Inc. One of the biggest changes in banking … my role is to “find the chinks in the regulators’ armour” Salomon’s General Counsel, Donald Feuerstein
  69. 69. © 2006 The Tower Group, Inc. “not so much sleeping as comatose”
  70. 70. © 2006 The Tower Group, Inc.
  71. 71. © 2006 The Tower Group, Inc.
  72. 72. © 2006 The Tower Group, Inc.
  73. 73. © 2006 The Tower Group, Inc. All bankers are criminals Trust Scandal Greed Compliance Conclusions
  74. 74. © 2006 The Tower Group, Inc. Conclusions the destruction of trust is due to high risk, high loss disasters stakes have been raised exorbitantly by derivatives derivatives are turbo-charged by technology what were complex products are simple today simple products are now auto-traded human trading now focuses upon complex, cross- asset class, derviatives of derivatives the more complex, the greater the risk and return result: the more tech, the more complex, the more greed, the more scandal, the more disasters, the more systemic risk … and regulators are only just keeping up.
  75. 75. All bankers are criminals

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