Archive for the ‘Career’ Category

S&P 500 P/E Ratio Still Below Long Run Average – Market Realist

Wednesday, February 27th, 2013

According to Market Realist’s senior financials analyst:

As the S&P 500 index approaches new highs not seen since 2007, the current market’s P/E is some 2 multiple points lower than in ’07 which means that stocks are not as expensive despite being close to making new highs. In concert with this more favorable valuation currently for stocks, we point out there is still ample cash on the sidelines that could be invested which could fuel even further gains for equities.

As the stock market approaches the all-time high for the S&P 500 of 1,565 which was hit on October 10th, 2007, we note that the current valuation of the S&P 500 in early 2013 is substantially cheaper than that high level made in ’07. This could mean further gains for stocks as investors continue to adjust their asset allocation. The current day’s market level of 1,507 represents $108 in all S&P 500′s company’s earnings per share (EPS) resulting in a price to earning’s ratio of just 13.9x. This $108 in EPS for the index currently is a much improved number from the earnings level expected in 2007 which was only $95 per share. This valued the market at 16.5x earnings at the time in 2007, or over 2 multiple points higher than the current valuation now.

For the full article, please follow the link below: Market Realist S&P500 P/E Ratio Below Long Run Average

Understanding Bankruptcy as the World Collapses Around You (1)

Saturday, June 9th, 2012

We have seen the dire economic consequences of excessive consumer, corporate, financial, and sovereign leverage of the past 5 years. Our global economy has been a punching bag for corporate greed, political incompetency, and poor central bank planning. From shadow banking and derivatives (“weapons of mass destruction” according to Mr. Buffet) in the United States to Greece’s fraudulent attempt to the enter the Eurozone, world markets have been whipsawed every year since 2007. I cannot help but feel deep remorse after witnessing multiple occasions of the VIX above 40, sovereign CDS making multi-year highs, and political uprising. Five years later, we have yet to learn that leverage is the primary cause of our pain.

Despite an Icelandic bankruptcy, 2 Greek bailouts, a Portuguese bailout, and Irish bailout, and a U.S. bank bailout, 35% of U.S. homes underwater, and 20%+ unemployment rates in certain Western nations, student loans have emerged as yet another bubble, the U.S. consumer savings rate remains below 4%, European banks are levered 26x on average, and countries continue to borrow at astronomical rates. Are we doomed to repeat our mistakes? Sadly, the answer seems to be yes.

Every 2 generations (70-80 years), individuals tend to forget the pain that their forefathers felt in a deep economic contraction. The Great Depression certainly did its job. Maybe we need a constant painful reminder to reign in our tendency to express “irrational exuberance?” Luckily, for learning purposes, a global debt deleveraging cycle is the most painful type of contraction. Hopefully, our children and grandchildren can learn from our mistakes.


Until then, I have started this series to explain the BANKRUPTCY process, specifically the U.S. Ch. 11 process, as I continue to do my part to clean up the riff-raff, the banksters, the incompetent politicians, and the corrupt corporate bureaucrats holding back true capitalism.

  • Bankruptcy is governed by federal statute (11 U.S.C., Section 101):
    • For the equitable distribution among creditors and shareholders of a debtor’s estate in accordance with either the principle of absolute priorities or the vote of bankruptcy majorities of holders of claims
    • To provide a reasonable opportunity, under Chapter 11, to effect a reorganization of business
    • For the opportunity to make a “fresh start” through, among other things, the discharge of debts

  • The goals of bankruptcy are:
    • To afford the greatest possibility of resolution for the estate as a whole, while maintaining the balance of power as between all creditors and the debtor as of the petition date
  • Debtor’s rights and protections include:
    • Automatic stay: an automatic injunction to halt action by creditors
    • Exclusivity to formulate/propose plan of reorganization
    • Continued control and management of the Company
    • Assumption/rejection of executor contracts and unexpired leases
    • Asset sale decisions
    • Avoidance actions
    • Discharge of claims
  • Secured creditor’s rights and protections:
    • Secured to extent of value of collateral
    • Limitations on debtor’s ability to use proceeds/profits of collateral (“cash collateral”)
    • Entitled to “adequate protection” for use of collateral or diminution thereof
    • Entitled to relief from automatic stay for cause shown
    • Entitled to interest and reasonable legal fees when collateral value exceeds debt
    • Entitled to be paid in full in cash or to retain lien to the extent of its allowed claim and receive deferred cash payments totaling at least the allowed amount of such claim

  • Unsecured creditors’ rights and protections include:
    • Majority voting controls
    • Improved and mandated disclosure by debtor
    • Committee representation at debtor’s expense
    • Ability to challenge business judgment of debtor
    • Absolute priority rule generally ensures payment before distribution to existing equity security holders
    • Ability to examine/challenge validity and enforceability of liens and, if debtor refuses, to obtain authority to bring fraudulent conveyance, preference and other actions
    • May continue to exercise corporate governance subject to limitations
    • Valuation as the fulcrum and equalizer of debt and creditor powers
  • Equity may also seek committee representation under certain circumstances and thereby obtain leverage similar to that of creditors’ committee

~Xavier, Leverage Academy Instructor

(All similar entries are in LA’s “Bankruptcy” folder on the right of the blog.)

Learning Spanish for Business – CBS Online Lessons 4-80

Wednesday, November 2nd, 2011

Finally, to aid your understanding of basic Spanish, we are now including lessons 4 through 80 from Coffee Break Spanish (.mp3 links are included at no cost below). These are excellent podcasts that are both entertaining and educational. After listening to these lessons at your leisure in the home, at work, in the gym, or while running, one should have a basic understanding of conversational Spanish.  For those who have learned Spanish in school, this should serve as a good review and should help one strengthen his or her accent. All of these .mp3 files can be downloaded by right-clicking on the file and saving on your desktop. The files are also available for free on http://radiolingua.com. These links may only be accessible on LA’s blog…they may not be available in syndicated versions of this article.

cbs-42-guide

Learning Spanish for Business – CBS Online Lesson 3

Wednesday, November 2nd, 2011

To follow up with the previous entry on learning Spanish for business, we are including the third lesson audio (only accessible on LA blog) from CBS.  We are also including the corresponding PDF below, which goes through how to address superiors in a formal context, how to ask someone’s name, and how to ask where someone is from:

cbs-03-guide

Learning Spanish for Business – CBS Online Lessons 1 & 2

Wednesday, November 2nd, 2011

The Leverage Academy team has increased its efforts in targeting the Latin American market, as more financial firms enter the region because of robust growth and legal reform. For example, since Brazil’s credit rating was upgraded above investment grade in 2008 by Moody’s, hot money flows have increased dramatically from institutional investors. For it’s surrounding countries, a commodity rally has also contributed to economic growth. The bulge bracket banks have increased their exposure to the region as well.  For example, in the Latin American derivatives market, Barclays and Socgen hold the strongest positions.  JPMorgan, UBS, and HSBC also have strong Latam coverage groups. In an effort to help our readers practice their Spanish, we have included a link here for free Spanish lessons online using CBS – Coffee Break Spanish. The first lesson audio (link only available in blog entry) goes over greetings and salutations. You can listen at work or during a lunch break. The second lesson audio elaborates on basic conversation. The corresponding PDF is below:
cbs-02-guide

This PDF goes over greetings, saying goodbye, introducing yourself, and informal greetings. Enjoy!  Hasta otra!

Defined Benefit Plans & Defined Contribution Plans (CFA III) – 2

Wednesday, November 2nd, 2011

In our previous blog on pensions, we discussed defined benefit plans, defined contribution plans, cash balance plans, and profit sharing plans. We discussed funded status, ABO, PBO, future liability, retired lives, and active lives.

It is vital for the CFA III curriculum to understand the difference between defined contribution plans and defined benefit plans in more detail:

In a defined benefit plan:

  • The employee receives periodic payments beginning at retirement based on an eligibility date formula
  • Does not bear the risk of portfolio performance or market movements
  • Receives stable retirement income
  • Usually faces a vesting period and faces a restricted withdrawal of funds
  • There is an adverse effect on diversification because both job and pension are linked to employer health
  • Employee is subject to early termination risk if employee is terminated prior to retirement
  • The employer is responsible for managing the plan assets to meet pension liabilities
  • The employer thus takes investment risk
  • Benefits are determined by stated criteria usually associated with years of service and salary at retirement
  • Pension benefits are a liability
  • Regulated by ERISA and state governments

In a defined contribution plan:

  • The employee bears all the investment risk
  • Legally owns all personal contributions, and owns all sponsor contributions once vested
  • DC plan lowers taxable income
  • Employee must make all investment decisions for his/her retirement
  • Employee must decide on asset allocation and risk tolerance
  • There is restricted withdrawal of funds
  • Employee owns plans assets and can move assets to other plans
  • The employer must offer employees a sufficient variety of investment vehicles
  • The only financial liability is making contributions to the employee account
  • Has lower liquidity requirements
  • Has fewer regulations to deal with, but is usually required to have an IPS that addresses how plan will help employees meet objectives and constraints
  • Defined contribution plans also come in 2 forms, participant-directed and sponsor-directed (profit sharing)
  • In a profit sharing plan, the employer decides the investments

A plan is considered qualified in the U.S. if it meets federal and state tax laws for retirement funds.

Defined benefit plan objectives include:

  • Returns: To have pension assets generate returns sufficient to cover liabilities
  • Return requirement depends on funded status and contributions based on accrued benefits
  • Also determined by future pension contributions: return levels can be calculated to eliminate the need for contributions to plan assets, contribution minimization goal more realistic
  • Pension income should be recognized in the income statement
  • Plan Surplus: Indicates cushion provided by plan assets to meet liabilities
  • Greater the surplus, greater ability to take risk
  • Underfunded means decreased ability to take risk
  • Risk: Common risk exposure measured by correlation between firm’s operating characteristics and pension asset returns
  • Lower the correlation, higher the risk tolerance
  • Higher the correlation, lower the risk tolerance
  • Financial Condition: Can be measured by debt-to-asset or other leverage ratios (debt-to-cap, debt-to-EBITDA), using sponsor’s balance sheet
  • Lower debt ratios imply better ability to tolerate risk
  • Higher debt ratios imply lower ability to tolerate risk
  • Profitability: Can be represented by current or pro former financials
  • Workforce: Age of the workforce and ratio of active to retired lives is a strong indicator of performance
  • Usually the younger the workforce, the greater the ratio of active to retired, increased ability to tolerate risk
  • When older, lower rate of active to retired and higher risk
  • Plan Features: Some offer option of either retiring early or receiving lump-sum payments instead of a retirement annuity

Defined benefit plan constraints include:

  • Liquidity: Pension plans receives contributions and payments to beneficiaries…any outflow represents liquidity constraint.
  • Liquidity is affected by the number of retired lives; greater the #, the more liquidity is needed
  • The amount of sponsor contributions; smaller the contributions, the greater the liquidity need
  • Plan features; early retirement features would increase liquidity need
  • Time horizon: mainly determined by whether the plan is a going concern and workforce age and ratio of active to retired lives
  • Legal & regulatory: ERISA, the Employee Retirement Income Security Act regulates defined benefit plans, above state and local pension law
  • Pension fund assets should be invested for the sole benefit of the participant, not the sponsor
  • Pension funds have to exercise diligence before alternative asset classes can be added to asset base
  • Pension plans may prohibit investment in traditional asset choices like investments in defense industry, firms that produce alcoholic beverages, or firms that have a reputation for being destructive to environment

Bank Stocks Beware: Bernanke & Fed Support Increasing Capital Requirements

Tuesday, June 7th, 2011

U.S. bank indices fell 2% yesterday after fears that capital requirements would increase as much as 7%.  Bank of America (NYSE: BAC), fell below $11.00, the lowest since last year.  The discussion came about after the Basel Committee on Banking revealed how levered large financial institutions still were, and tried to reconcile levels with future recession risks.  A 7% equity capital raise for most banks would be catastrophic and dilute equity by 50%+, but a 3% raise seems manageable in a functioning economy.  The problem is that the U.S. economy is on life support, and that life support is called Quantitative Easing 2.  Once this support fades on June 30th, how will U.S. banks (at their already low valuations due to real estate risk and put backs) raise new equity capital?  A replay of 2009?  You be the judge.

According to Bloomberg, “The Fed supports a proposal at the Basel Committee on Banking Supervision that calls for a maximum capital surcharge of three percentage points on the largest global banks, according to a person familiar with the discussions.

International central bankers and supervisors meeting in Basel, Switzerland, have decided that banks need to hold more capital to avoid future taxpayer-funded bailouts. Financial stock indexes fell in Europe and the U.S. yesterday as traders interpreted June 3 remarks by Fed Governor Daniel Tarullo as leaving the door open to surcharges of as much as seven percentage points.

“A seven percentage-point surcharge for the largest banks would be a disaster,” said a senior analyst at Barclays Capital Inc. in NY. “It will certainly restrict lending and curb economic growth if true.”

Basel regulators agreed last year to raise the minimum common equity requirement for banks to 4.5 percent from 2 percent, with an added buffer of 2.5 percent for a total of 7 percent of assets weighted for risk.

Basel members are also proposing that so-called global systemically important financial institutions, or global SIFIs, hold an additional capital buffer equivalent to as much as three percentage points, a stance Fed officials haven’t opposed, the person said.

Bank Indexes Fall

The Bloomberg Europe Banks and Financial Services Index fell 1.45 percent yesterday, while the Standard & Poor’s 500 Index declined 1.1 percent. The KBW Bank Index, which tracks shares of Citigroup Inc., Bank of America Corp., Wells Fargo. and 21 other companies, fell 2.1 percent.

In a June 3 speech, Tarullo presented a theoretical calculation with the global SIFI buffer as high as seven percentage points.

“The enhanced capital requirement implied by this methodology can range between about 20% to more than 100% over the Basel III requirements, depending on choices made among plausible assumptions,” he said in the text of his remarks at the Peter G. Peterson Institute for International Economics in Washington.

In a question-and-answer period with C. Fred Bergsten, the Peterson Institute’s director, Tarullo agreed that the capital requirement, with the global SIFI buffer, could be 8.5 percent to 14 percent under this scenario. A common equity requirement of 10 percent is closer to what investors are assuming.

‘Across the Board’

“I think 3 percent is where everyone expected it to come out,” Simon Gleeson a financial services lawyer at Clifford Chance LLP, said in a telephone interview. “If it is 3 percent across the board then it will be interesting to see what happens to the smallest SIFI and the largest non-SIFI” on a competitive basis, he said.

U.S. Treasury Secretary Geithner, in remarks yesterday before the International Monetary Conference in Atlanta, said there is a “strong case” for a surcharge on the largest banks. Fed Chairman Bernanke is scheduled to discuss the U.S. economic outlook at the conference today.

“In the US, we will require the largest U.S. firms to hold an additional surcharge of common equity,” Geithner said. “We believe that a simple common equity surcharge should be applied internationally.”

Distort Markets

Financial industry executives are concerned that rising capital requirements will hurt the economy, which is already struggling with an unemployment rate stuck at around 9 percent.

Higher capital charges “will have ramifications on what people pay for credit, what banks hold on balance sheets,” JPMorgan Chase & Co. chairman and chief executive officer Jamie Dimon told investors at a June 2 Sanford C. Bernstein & Co. conference in New York.

The Global Financial Markets Association, a trade group whose board includes executives from GS and Morgan Stanley, said the surcharge may apply to 15 to 26 global banks, according to a May 25 memo sent to board members by chief executive officer Tim Ryan.

Dino Kos, managing director at New York research firm Hamiltonian Associates, said the discussion about new capital requirements comes at a time when banks face stiff headwinds. Credit demand is weak, and non-interest income from fees and trading is also under pressure.

Best Result

U.S. banks reported net income of $29 billion in the first quarter, the best result since the second quarter of 2007, before subprime mortgage defaults began to spread through the global financial system, according to the Federal Deposit Insurance Corp.’s Quarterly Banking Profile.

Still, the higher profits resulted from lower loan-loss provisions, the FDIC said. Net operating revenue fell 3.2 percent from a year earlier, only the second time in 27 years of data the industry reported a year-over-year decline in quarterly net operating revenue, the FDIC said.

“You can see why banks are howling,” said Kos, former executive vice president at the New York Fed. Higher capital charges come on top of proposals to tighten liquidity rules and limit interchange fees, while the “Volcker Rule” restricts trading activities. Taken together these imply lower returns on equity, he said.

“How can you justify current compensation levels if returns on equity are much lower than in the past?” Kos said.

Deutsche Bank Discriminates Against Indian Rainmaker

Thursday, March 10th, 2011

It is March 10, 2011, and today I read that a German bank is discriminating against a top banker, a “rainmaker,” because he is Indian.  Anshu Jain is a 48 year old head of investment banking at Deutsche Bank and has generated hundreds of millions of Euros in fees for the bank since 1995.

Anshu was born in 1963 in the humble town of Jaipur, India and later studied economics at Shri Ram College of Commerce at Delhi University.  He earned a bachelor’s degree with honors in 1983 and then pursued a Masters in Finance at UMASS Amherst.  He then started as an analyst in derivatives research at Kidder Peabody (now UBS), from 1985 to 1988.  Anshu joined Merrill lynch in 1989, where he started the first hedge fund coverage group.

By 1995, Anshu joined Deutsche’s markets business and stared a unit focusing on hedge funds and institutional derivatives, later becoming the head of fixed income sales and trading and global head of derivatives and emerging markets.  In 2002, he joined the Deutsche Bank Group Executive Committee and became the head of Global markets and joint head of the Corporate & Investment Bank in 2004.  Anshu’s segment of Deutsche Bank’s business generates 80% of the Company’s revenues, and he still may be passed over for CEO.

Mr. Jain has been in the media under speculation that he could succeed Josef Ackerman, but the Company’s Board of Directors won’t have it.  Key members of the bank’s supervisory board are not in favor of an Indian born banker at the helm.  They want to see the bank under more “traditional” leadership.  The bank also wants to diversify revenues away from the profitable investment banking segment.  Is this just an excuse to pass over Mr. Jain?

The next CEO of the 141 year old bank needs a 2/3 majority vote and approval by the 20 member advisory board.  The board has 10 German labor representatives and 10 shareholder representatives.

According to Reuters, “In a written statement Deutsche Bank said selecting the CEO is a task which the “supervisory board is pursuing in an orderly and professional manner. A decision will be taken when the time is right. There is no urgency, given that Dr. Ackermann’s contract runs for another two years.”

BARCLAYS SOLUTION?

Investors, though, are sure to worry that the move could alienate the hard-charging Jain. Supervisory board chairman Clemens Boersig knows this, according to two people familiar with the supervisory board’s thinking, and is working on ways to retain Jain and his colleague, Chief Risk officer Hugo Baenziger. In the end, however, “the supervisory board believes everybody is replaceable,” a member of the supervisory board said on condition of remaining anonymous. The board feels it is too dangerous for the bank to rely on any one person. “You cannot be held to ransom,” another person, who is familiar with the supervisory board’s thinking, said.

Jain, who would not comment on the issue of succession, could well stay. He has had a hand in hiring most of the key staff at the investment bank, and his considerable stake in Deutsche in the form of shares and options gives him a vested interest in the place. But if he does walk, the bank hopes one of his proteges will step up in the same way that Jain himself emerged after his mentor Edson Mitchell died in a plane crash in December 2000. Most of Deutsche’s top 15 investment bankers have been with the firm for more than a decade, something that should instill loyalty toward the firm and not only its leader, the person close to the supervisory board said.

In private conversations between supervisory board members and Deutsche Bank executives, there has been talk of a “Barclays” solution, named after a recent arrangement at British bank Barclays where John Varley, a Briton with connections to the political establishment, took the title of chief executive, while Robert Diamond, a powerful American investment banker, held de facto power in the background. Diamond finally took the reins from Varley two months ago.

“Perhaps one could whet Jain’s appetite for a similar solution,” one of the people close to the supervisory board said. “In the end we may have to divide up the role among different sets of shoulders,” a supervisory board member said adding. “But we’re not yet at that stage.”

A decision on succession won’t be made this year, another supervisory board member, who declined to be named, said.

The German establishment has long been skeptical of investment banking, a conviction that has hardened since the subprime debacle and the ensuing financial crisis. When the German government stepped in to bail out a raft of lenders including Hypo Real Estate, IKB and Commerzbank, many Germans pointed to “casino” style investment banks as the main culprits. Deutsche Bank, Germany‘s biggest, did not require a bailout itself, but had long been a lightning rod for criticism as Europe’s largest economy moved away from old-fashioned “Rhineland Capitalism,” in which a close-knit clique of bankers, politicians and company executives fostered business and dictated change in corporate Germany, toward a more cut-throat “Wall Street” model where shareholder return is the main driver of change.

A raft of supervisory board members believe Deutsche should focus solely on providing simple financial services to corporations and the “real economy,” rather than dabbling in more complex and higher margin financial products. “Wall Street style capitalism doesn’t have many friends on the supervisory board,” a person close to the supervisory board said.

The opposing camp believes that Deutsche should be a place where gifted and risk-hungry bankers can make outsized bets to generate profits for themselves and shareholders. That view is often associated with Jain, who oversees some of the world’s most talented bankers.

Perhaps crucially, members of the board’s four person chairman’s committee, which is formally tasked with drawing up the shortlist of CEO candidates, consists of only Germans: two labor representatives, chairman Boersig, and Tilman Todenhoefer, former deputy chairman of the board of management at Robert Bosch, an engineering company that specializes in high-tech automotive technologies and is known for its skeptical view of Wall Street-style capitalism.

Although not bestowed with formal powers to appoint the next leader, chief executive Ackermann and shareholder representatives on the supervisory board will have considerable influence over who makes it on to the shortlist, a person close to the supervisory board added.

A PILLAR OF THE GERMAN ESTABLISHMENT

For decades the system that helped steer Europe’s largest economy was controlled by Deutsche Bank and insurer Allianz. Working with large German corporations in which the two financial institutions held stakes, the network of bankers and executives formed what became known as “Deutschland AG”.

The system worked, in its own way. By holding large stakes in companies like Daimler-Benz, Siemens and Thyssen, Deutsche protected German industry from foreign takeovers and provided a system of mutual support in the event of large-scale bankruptcies. Market forces were an afterthought. When German Chancellor Helmut Schmidt decided Germany’s aerospace companies needed to consolidate to stay competitive, he simply talked to then Deutsche boss Alfred Herrhausen, who promptly nudged Daimler-Benz to absorb the big aerospace and defense companies and form German aerospace company DASA.

Deutsche Bank’s seats on corporate boards meant it could win mandates for bond and stock issuances and force changes when it saw the need. In one infamous incident, in 1987, Herrhausen dismissed Daimler-Benz chief Werner Breitschwerdt and installed another executive, Edzard Reuter in his place.

But by the 1990s, as German companies pushed more aggressively into global markets, they needed more sophisticated products even to meet simple needs such as currency or oil price hedging. When Ackermann joined Deutsche in 1996 he was tasked with transforming Germany’s corporate fixer into a “global champion”.

“Joe,” as Ackermann is known by colleagues, had worked at SKA — later to become Credit Suisse — and liked to use tactics and strategy he learned as a Swiss army officer. He decided to accelerate a selloff of industrial stakes — which made up half of Deutsche Bank’s market value as late as 1998, and were proving a drag on the company’s share price — and use the proceeds to build up its core business of banking. The last significant holding — a stake in Daimler — was sold in October 2009.

GLOBAL EXPANSION WEAKENS LOCAL TIES

When Ackerman became the first non-German in the top job in 2002, his academic background and gentle demeanor masked an ambition to shake up the lender. He embarked on a radical program to boost the profitability of bread-and-butter corporate loans, even if that meant alienating established customers.

In early 2003, Ackermann, together with investment banking co-chiefs Jain and Michael Cohrs, and Baenziger, then head of credit risk, introduced the “loan exposure management group” to ensure that each loan to be approved was priced in accordance with international market standards, rather than traditional German ones, and to guarantee that the “overall customer relationship” was generating a 25 percent pre-tax return on equity. The move helped lift Deutsche’s pre-tax return on equity to 14.7 percent today from just 1.1 percent back in 2002.

Competitors like Commerzbank also quietly introduced profitability targets for corporate loans. But it was — and still is — Deutsche that attracted the most criticism for abandoning the old system. Ackermann remains unrepentant. “As a bank with global operations that conducts more than 75 percent of its business outside of its home market, we have obligations to numerous stakeholders around the world,” he told shareholders at Deutsche Bank’s annual general meeting last May. “We have to carefully weigh up these obligations. Sometimes, in Germany, this can lead to criticism by the political community. We have to be able to take it.”

One of Deutsche’s key stakeholders is internal: golden boy Jain. A keen cricket fan, he built up what has become known within Deutsche as “Anshu’s Army” from the original core of mostly American bankers who defected from Merrill Lynch in 1995. The defectors had followed Edson Mitchell, a brash American who demanded fierce loyalty from those who served under him.

Mitchell’s team was instrumental in introducing a more aggressive Anglo-Saxon style of management which sacrificed long-term job security for eye-popping pay packages. Ackermann later cemented the new culture by transferring decision-making power away from the German “Vorstand”, or management board, to a new committee known as the Group Executive Committee, dominated by London-based investment bankers.

The power of the investment banking arm became clear in 2000, when its senior officials sabotaged a signed 30 billion euro merger deal with Deutsche Bank’s main rival, Dresdner Bank, because of overlaps in investment banking. Following a strategy meeting in Florida, Deutsche told Dresdner that of the 6,500 investment bankers at its investment banking unit Dresdner Kleinwort Wasserstein, Deutsche could only take 1,000, a person familiar with the conversation said.

Another clash between the Deutsche’s management board and the supervisory board came in February 2004, when it emerged that Ackermann and senior executives had met Citigroup’s chairman Sanford “Sandy” Weill, and chief executive Charles Price a few months earlier to discuss a takeover of Deutsche Bank. When Ackermann raised the possibility of a sale, members of the German-dominated supervisory board blocked the deal, arguing that Deutsche would be reduced to a local branch office of a New York bank.

As the investment banking arm has grown more powerful, Deutsche’s center of gravity has shifted to London, where key staff including Baenziger and Jain spend most of their time, and where the company now employs more than 8,000 staff. Their London base helps Jain and Baenziger remain close to key clients. But has it also hampered their ability to build up a network of political and corporate contacts in Germany.

CASINO BANKING?

A sign of potential trouble emerged two years ago, when the supervisory board chose to dodge the issue of succession by extending Ackermann’s contract until 2013. Some inside the bank blame that in part on Ackermann, who has not successfully nurtured a clear successor.

Tensions between the supervisory board and Deutsche’s management have grown since 2008, when the global financial system went into meltdown. Deutsche was under extreme pressure to help rescue failing rivals. In mid-March 2008, while Ackermann was in New York, U.S. treasury secretary Henry “Hank” Paulson called him and tried to get Deutsche to buy Bear Stearns, a person familiar with the matter said. Later Deutsche was pushed to buy parts of Lehman. In both instances, Ackermann declined. Deutsche also turned down offers to buy parts of UBS in the second half of 2008, two senior executives familiar with the lender’s thinking said. The Swiss bank was looking for fresh leadership and mulling a sale of its investment bank, but Deutsche preferred its wealth management assets, these people familiar with the talks said. Deutsche walked away when it couldn’t get sufficient detail on balance sheet risks. Regulatory approval may also have been a hurdle, a senior Deutsche banker said.

Only months earlier the bank had been giving its traders a remarkable degree of leeway to place large directional bets, a strategy that had proved extremely successful, current and former employees of the global markets division said, also declining to be named. Proprietary traders — small teams that bet with a bank’s own money — made up to 15 percent of revenues at the sales and trading division between 2002-2007, a senior banker familiar with Deutsche’s strategy told Reuters.

At the sales and trading division, managers such as Boaz Weinstein, a former head of credit trading North America and Europe, and Greg Lippmann, global head of asset-backed securities trading and syndicate and collateralized debt obligations (CDOs), were particularly aggressive. Lippmann made a $1 billion bet against the subprime market, a gamble that started to come good in the second half of 2008 when global markets fell. Weinstein — a chess fanatic known for taking teams of traders to Vegas for poker tournaments — also had large positions running into the billions, a person familiar with his business said.

Single bets could be very large. One left the bank with 600 million euros of rates exposure, a former colleague who worked at Deutsche’s credit trading division at the time told Reuters. This sort of extreme trading led The Economist to describe Deutsche as a “giant hedge fund” run by an “Indian bond junkie” in 2004, a view some could argue was not justified by the investment bank’s relatively consistent performance over the past decade.

Things were less rosy at the proprietary and credit trading divisions during the financial crisis: they fueled Deutsche’s 4.8 billion euro loss in the fourth quarter of 2008 and prompted its management board to abandon proprietary trading the same year — months before regulators discussed a move in that direction.

Despite shedding almost a third of its risky assets between 2009 and 2010, Jain has managed to retain his top staff and win market share in key areas of investment banking. Research firm Greenwich Associates last year ranked Deutsche Bank No. 1 in U.S. bond trading. Profits from the corporate and investment bank have jumped from almost 4 billion euros in 2000, to a near record level of 6 billion euros in 2010, a testament to Jain’s ability to deliver profits in extremely challenging market conditions, analysts and rivals say.

GERMAN REQUIRED

Ackermann’s recent language indicates how difficult it has become to defend risk-taking. In countless speeches to the German business community and politicians, he has said the country “needs to decide whether it wants a globally successful investment bank or not.”

But the son of a doctor from the village of Mels in Switzerland has also tried to ease tensions between business and politics. “Especially here in Germany where those responsible in business and politics live and work further apart geographically than in other countries, we must make a greater effort to listen to one another,” he told the company’s annual general meeting in Frankfurt in May. “Verbal attacks on so-called speculators and political rhetoric about a ‘war’ between governments and markets is not conducive to such a dialogue,” he said.

Bundesbank president Axel Weber’s name has surfaced as a potential candidate though critics on the supervisory board highlight his lack of experience running a commercial bank, as well as his recent clash with Merkel as weak points for such a candidacy.

Helmut Hipper, a fund manager at Frankfurt-based Union investment, thinks Deutsche should not leave it until the last minute to reveal who will take over: “For an institution like Deutsche it is important to announce a successor. Designating a candidate will provide security and predictability.”

Also in the race with an outside chance are internal candidates such as Deutsche’s Germany chief Juergen Fitschen, retail chief Rainer Neske or Chief Financial Officer Stefan Krause.

Whoever does get the job will need to be able to mediate between Berlin and Germany’s financial players. That became clear during the credit crisis. In September 2008, Ackermann was involved in rescue talks for German lenders IKB and Hypo Real Estate. Discussions involved the then finance minister Peer Steinbrueck, regulator Jochen Sanio and representatives from the German banks.

“You need to speak German, period,” a senior German financial figure who was familiar with these talks said. Ackermann himself, asked if the next chief of Deutsche Bank needs to speak German, said, “That’s for the supervisory board to decide.” He had found speaking German “helped.”

Although Jain has been with the Frankfurt-based bank since 1995, he has never spoken a word of German in public and relies on a translation service during press conferences. Late last year when Jain made an appearance at a banking conference in Frankfurt he was asked “Sprechen Sie Deutsch?” a question designed to find out whether he had been brushing up his German. Jain dodged the answer with a smile and said, “I’m not going to go there,” before walking away.”

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BusinessWeek 2011 Undergrad Rankings

Friday, March 4th, 2011

The top undergraduate business school rankings are out…and as usual, their ranking methodology doesn’t make much sense.  Wharton is fourth, for the 2nd year in a row.

http://www.businessweek.com/interactive_reports/bs_ugrank_tab_0303.html

Top 10:

1. Notre Dame (Mendoza)
2. Virginia (McIntire)
3. Emory (Goizueta)
4. Pennsylvania (Wharton)
5. Cornell
6. Michigan (Ross)
7. Villanova
8. North Carolina (Kenan Flagler)
9. MIT (Sloan)
10. Georgetown (McDonough)

Feedback appreciated.

UBS Worried About Bonuses

Friday, February 4th, 2011

Swiss bank, UBS announced on Thursday that it would not be announcing it’s 2010 bonuses until next week. UBS executives are concerned that pending bonus values are not sufficient to keep their leading bankers from moving to competing banks. Many European banks have been worried that pay restrictions due to the financial crisis will undermine their ability to compete with U.S. based lenders. UBS’s fear of losing their principal bankers comes at a time when the bank is working to rebuild it’s investment bank in the aftermath of the financial crisis. UBS, one of the hardest hit banks, posted a loss of 34 billion Swiss francs ($36.2 billion) in 2008, forcing the Swiss government to bail them out. UBS Chief Executive Oswald Grübel commented on the situation stating: “The future looks like a balancing act between capital building, dividend payments and employee remuneration,” but also added that “We must pay out top performers competitively.”

Should public sentiment be considered when deciding bonuses? Should the 2010 bonus pool be smaller than usual?

ZURICH—UBS AG will delay payment of bonuses after executives expressed concerns that the pending payouts would be inadequate to retain the top talent it has been hiring to rebuild its investment bank, according to a person familiar with the matter.

This week, the Swiss bank sent a memo to employees saying the announcement of 2010 bonuses would be delayed by a week to Feb. 16. Payments have been delayed from late February to early March.

The delay appears to be due to concerns that the bonus pool won’t be enough to keep UBS’s top bankers from defecting to competing banks, according to a person familiar with the situation. European banks generally have fretted this year that tougher pay restrictions implemented after the financial crisis will crimp their ability to compete when compared with U.S.-based lenders.

Another person attributed the delay to negotiations between top executives of UBS’s investment bank and its board over the size of the bonus pool, which isn’t unique to 2011. Part of what is motivating the board is a desire to book the best possible results, which the bank plans to announce next week, this person said.

The internal grousing over pay at UBS highlights the challenges it faces in rebuilding its investment bank, which was one of the hardest hit during the financial crisis. In 2008, the investment bank posted a loss of 34 billion Swiss francs ($36.2 billion), forcing the Swiss government to step in to bail it out.

Banks across Europe also face greater political heat. Both UBS and Credit Suisse Group still are under the gun in Switzerland, where public sentiment is critical of bank bonuses.

Last April at a shareholder meeting, activist investors tried unsuccessfully to reject UBS’s 2009 bonus plan.

Credit Suisse paid Chief Executive Brady Dougan stock valued at 70 million francs last spring under a bonus plan dating back to 2004. At the bank’s annual general meeting soon afterward, shareholder activists assailed the bank for the payout.

Over the last year, UBS has moved to rebuild the investment bank under the leadership of Carsten Kengeter, whose 13.9 million franc bonus for 2009 raised hackles in Switzerland during a year in which the bank reported a net loss. Chief Executive Oswald Grübel declined to take a bonus that year. Last year, UBS hired 1,300 new staff in the investment bank, with nearly half in fixed income, currency and commodities. It managed to lure away a slate of high-level bankers from rivals.

At UBS’s investor day in November, Mr. Grübel acknowledged that the bank faces a tough task in facing down outrage in Switzerland over bonuses, paying bankers enough to lure them to the bank, and building up its capital cushion to protect the Swiss company from future crises.

“The future looks like a balancing act between capital building, dividend payments and employee remuneration,” Mr. Grübel said at the time. “At the same time, we must pay our top performers competitively.”

During the next four years, UBS aims to increase investment-banking revenue by more than 50% and more than double its pretax profit from 2010 levels, with its fixed-income business at the heart of the planned turnaround.

But after three consecutive quarters of profitability during which UBS rose in the ranks in areas such as initial public offerings and underwriting, the investment bank reported a pretax loss of 406 million francs for the third quarter of last year as client activity waned. As a result, some analysts are skeptical whether UBS will hit its investment-banking targets.