Ah, for the good old days when bankers made money by providing useful services – taking deposits and making loans, for example. Is it too much to expect bankers to make money honestly rather than through hidden fees and “gotcha” programs?

Now the New York Times reports a massive effort in the industry to keep fees rolling in from overdraft charges, and they are alarmed by US regulatory efforts to restrict this source of income. The issues are similar in the UK where “free” accounts have made banks look to other sources of income, often overdraft charges against some of the least able to afford them.

“So many people now dip their balance below zero that banks generated an estimated $20 billion from overdraft fees on debit purchases and ATM. transactions in 2009, according to Michael Moebs, an economist who advises banks and credit unions. All of this revenue is potentially at risk, since these are the two areas that the new Federal Reserve regulations cover. (Banks generate an extra $12 billion by covering checks and recurring bills; under the new rules, they can still cover those and charge fees without customers’ consent.)”

Customers could still incur more than $100 in fees a day if they opt to take overdraft coverage, says The Times.

Do regulators have to force the banks to be honest?

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Larry Ellison has said that with the acquisition of Sun he is ready to take on IBM in the enterprise.

Others don’t think so.

I’ve been steadily impressed with what IBM is doing in financial services. Everyone talks solutions, and has done for years, but IBM seems to offer the combination of hardware, software and services to make it actually happen.

Plus the company has some pretty good advertising, especially when you compare it to Microsoft – has anyone NOT seen the Windows 7 Launch Party commercial?

Now compare it to IBM’s snarky response to Larry Ellison’s claims that Oracle with Sun is ready to mop the floor with IBM. Big Blue hit hack with an electoral campaign-style spoof you can find on YouTube.

IBM hits back with YouTube electoral campaign-style spoof, Servers for Truth.

As Forbes’ Andy Greenberg put it

“Oracle and IBM’s knife-fight over high-end enterprise hardware is about to begin – and IBM intends to bring a cannon.”

Bob Evans, writing for  InformationWeek’s Global CIO, looks at what IBM has done and how it has tuned systems for high performance in risk management and insurance.

IBM has begun compiling lists and qualifications of its “workload-optimized systems” and offered some insights into its optimized-systems strategy from VP of next Generation Computing Systems Bijan Davari.

“We’re the only company in the world that designs the chips, fabs the chips, installs them in the systems, writes the hypervisor, writes the database, etc., etc., so that we, quite literally, have many tens of thousands of people focused on actually doing this.”

As an example, Davari talked about the risk-management side of the financial-services industry where “shaving off a few milliseconds can mean billions of dollars.” Achieving that type of breakthrough, he said, “requires optimization at every single point, in every single piece of the system, with every component, and every interaction.”

Pretty impressive and a challenge for Oracle.

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Some new research by David De Cremer, a professor at Rotterdam School of Management, Erasmus University and visiting professor to the London School of Economics, raises a few interesting questions about bonuses, the main one being – should anyone trust bonus-driven bankers?

In his research involving 15 top Dutch banking executives, De Cremer, also of first concentrated on the importance of bonuses for the interviewees themselves. The focus then shifted to how important these bonuses, in their view, were to others in the financial sector. The findings clearly reveal a psychological preconception: all top executives believed that bonuses were more important to others than to themselves.

According to the research executives also believe it is only their colleagues who are spurred into better performance by bonuses, and not themselves. De Cremer said: “The findings of my research demonstrate that the need for giving bonuses within the banking world is a self-created myth.”

The final series of questions put to these executives inquired about the type of bank they preferred to consult for their private investments. They were given a choice of two types of bankers: Banker A was presented as someone driven by self-interest and financial gain, while Banker B was painted as an individual who put the interest of the customer above anything else and was keen to provide good service. Without exception, all the executives taking part in the study opted for Banker B, while having earlier made clear that they would appoint Banker A within their own banks.

In summary then, no-one in the study was motivated by bonuses and no-one trusted bankers that were.

Doesn’t that suggest that bankers are either untrustworthy (and motivated) or unmotivated (and trustworthy)..?

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Reinforcing some of the statements in my piece on customer retention in the current issue of  Banking Technology, is this amusing comment from Stan Demarest, SVP of segment management at Hibernia National Bank:

“There was an article that came out probably 15 years ago in one of the banking trade journals, saying banks were so product-focused they’d build Cinderella’s slipper first, then go find someone it fits. CRM may be on the cutting edge for the banking section of the financial industry; the retail industry has had several years’ head start. But it’s not rocket science.”

Demarest said the bank got serious about customers after realising it knew some were profitable, but it didn’t understand why.  After making some calls, they realised profitability could result from high account balances, but it could also come from late fees, interest, and insufficient fund fees.

Once the bank determined profitability, it segmented customers into Retention, High Growth, Limited Growth and Cost Management.

Cost Management is presumably a euphemism for a negative retention campaign, or “Just go away!”  Bankers and CRM vendors will say, although never for attribution, that getting rid of unprofitable customers is a common goal – probably in retailing as well as retail banking.

Forget those clichés about the customer always being right – that’s too expensive, as Larry Selden and Geoffrey Colvin point out in their book, Angel Customers and Demon Customers. The goal is to lavish attention on the former and transform or dump the latter.

I was pleased to learn in my conversations that banks are increasing their focus on their Internet channels for customer interaction.  When I see a toll-free number but no email or web site contact, I figure a company is a technology laggard which is best avoided. Of course, one also sees the web sites with no contact information at all. That’s just rude.

Or maybe a cookie on my computer has identified me as a demon customer and the web site is trying to send me away. Hmm, hadn’t thought of that before …

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Word has it – from respectable sources – that Michel Barnier, the incoming Internal Markets Commissioner, thinks Stock Exchanges should be part of the national infrastructure. Hmm.

In some eyes, an exchange should assist with the creation of an orderly market.

You can certainly put a case for MiFID creating a disorderly market. Outgoing Commissioner Charlie McCreevy and the EC has run the market through hell and high water putting MiFID in place. Shaking it up any more would be disastrous.

Could he effect changes anyway? Would Sarko back such changes? Is it ’populist twaddle’ as one esteemed observer put it? But the chaps at the bourses can’t be too happy. They are presumably lobbying like the tobacco industry right now. They all want competition. The US has invested heavily in competitive Europe.

On the 11^th January Barnier will be in place and we shall see whether he still holds this view. It could be a ploy, letting him start on the front foot. It could be populist twaddle. But it could be madness.

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In Financial Speculation, Gerald Ashley has some advice for investors.

But he doesn’t really expect them to take it.

With 30 years experience in finance, including Baring Brothers in London and Hong Kong and the Bank for International Settlements, he knows his way around the markets. Despite the changes in technology – fast computers and immense increases in bandwidth – he notes that “… however good the data, or indeed the computational prowess or the organisation, the weakest link in the chain still remains human judgment.”

Ashley illustrates the lack of human judgment, and calls into questions the wisdom of markets, with the example of 3Com in March 2000 when it floated off 6%t of Palm, Inc. – maker of a handheld PC and later a smart phone. Planned for an IPO of $14, it launched at $38 and hit $165, or 1,800 years earnings. Even weirder, although 3Com held 94% of Palm’s shares, its valuation remained stable.

He is a strong believer in simplicity, and urges investors to take the time to understand what they are buying and to steer clear of exotic instruments whose complexity is often designed primarily to hide the profit margins of the issuers.

Sounding a little like Woody Allen, who described a broker as someone who invests your money until it is all gone, Ashley reminds would-be investors, or speculators, that the handsome buildings on Canary Wharf were built on the fees they pay to brokerage houses. Day traders might win or lose, but the brokerage always wins, fee upon fee, not to mention the earnings on traders’ accounts that don’t pay interest.

He urges investors to expand beyond equities and bonds to include commodities, especially gold, oil and copper, and also to consider investing in currencies. A little research into the way prices move  –  gold and stock prices often move inversely – can open up some investment opportunities.

He also warns of group-think, especially around risk measures like VAR: “The VaR approach has caused herding of selling activity that often spills over unto totally unrelated markets. The denouement of such activity could be the equivalent of a financial nervous breakdown.”

He watches the relationship between gold and oil – how much oil will an ounce of gold buy – usually runs between 10 and 30 and is a “an extremely good indicator for understanding global inflationary pressures. The gold market is the single best asset class with which to understand most other markets.”

Keep it simple and don’t T get bogged down in equations.

“When you are trading, it’s your discipline that counts, not just the most elegant mathematical solution. It’s likely you will find simple rules the easiest to execute, so stick with them.”

And keep a diary of all the details of trading, the simple act of writing down your investments strategies seems to help keep focus.

Ashley sees three dimensions to successful investment – direction, timing and money management – and disciplined money management is the most important.

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Nice comment from criminologist and broadcaster Professor Laurie Taylor on BBC Radio 4’s Today Programme this morning: “If you steal someone’s savings or pension you’re more likely to end up with a yacht than a jail sentence.”

He’ll be expounding on this in a full Thinking Allowed programme this afternoon, and there is a wider debate to be found at the programme’s website.

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The announcement that the London Stock Exchange is in talks to buy Turquoise signals the death of the Bourse.

Tied to the Exchange’s departure from the Federation of European Exchanges, it suggests a seismic shift in strategy. FESE has been campaigning for a level playing field of regulation to be run across exchanges, multi-lateral trading facilities, dark pools and internal crossing networks.

The regulations for exchanges (they argue) are making it uneconomic to run an exchange instead of an MTF for example.

It would seem the LSE, having lost significant market share over the last year, not only agrees that this is true but sees arguing for justice to be pointless.

Chief executive Xavier Rolet recently said that regulatory burdens have held back the launch of the LSE’s Baikal, a dark pool and aggregator of liquidity. As Turquoise performs those functions it will presumably replace Baikal, cutting the red tape that held the LSE back.

The move is a shrewd one. Combined with the recent purchase of MillenniumIT to replace its TradElect system, Rolet now has the old LSE head on a much younger body.

While the older exchanges appeal to the referee, he is continuing to fight, by the same rules as the new kids on the block.

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I am preparing a story for the Sibos issue of Banking Technology, and if there is a discernible trend it is that experts think Asia will come out of the financial crisis before Europe and North America. And along the way, Asian banks and multinationals have acquired some attitude.
Two different sources talked about “flexing muscles,” one referring to expected increases in M&A activity, another talking about Japanese banks, particularly Nomura, which has bought up significant chunks of Lehman and plans to make good use of them.
Look for it in the post shortly, or on the magazine racks at Sibos.

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Uh oh – FT columnist Gillian Tett is quoting a French sociologist …
This sort of thing could get dangerous, but it looks intriguing. Drawing on her time in Japan, which prompted me to pull her book about the experience off the shelf, she reminds readers that westerners were constantly telling Japan they had too many middlemen, especially in sectors like retail.

“However, amid all that debate about American efficiency, one point that western commentators almost never discussed was the proliferation of middlemen in America’s financial world.

“If you were to sketch a map of how credit has been sliced and diced in 21st century banking, there would be so many stages and commission hungry middlemen in that process, that the Japanese dairy industry might seem positively rational …
“Three decades ago, Pierre Bourdieu, a French sociologist, observed that elites in a society typically maintain their power not simply by controlling the means of production (ie money), but by dominating the cultural discourse too (that is, a society’s intellectual map). And what is most important in relation to that cognitive map is not what is overtly stated and discussed – but what is left unstated, or ignored. Or as he wrote: “The most successful ideological effects are those which have no need of words, and ask no more than a complicitous silence.”

Her new book recounts the invention of credit derivatives and Tett gets back on the topic here, showing how financial markets are based on a concept of freely flowing information, yet credit derivatives have become so complex they are almost never traded and have to be valued by model.

One does suspect that banks, and their associations such as ISDA, like it that way, because once you break complex derivatives into components that can be listed and traded on an exchange, the margins go away.

In the past I have criticized Tett and the FT for glancing at this topic and moving on without examining the banks’ arguments that OTC derivatives have saved nice guys like pension funds substantial amounts of money. Perhaps it will take some smart investigators – has the SEC hired any at last? – or the nonpartisan Congressional GAO — she cites Adair Turner as a potential source of clear thinking – to delve into these issues in more detail.

Maybe she will take it on. As she notes:

“…one reason why this doublethink persisted for so long is that bankers and policy makers alike have all been trained in recent years to take economic theories at their face value, shorn from social context, or power structures.

But if regulators and politicians are to have any hope of building a more effective financial system, it is crucial that they start thinking more about power structures, vested interests – and social silence.”

She promises to go further into the topic next week.

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