How often does a bank regulator feature in a rap video? Check this out.

Elizabeth Warren, a Harvard law prof who is now in line to become head of the new Consumer Financial Protection Bureau, an idea she proposed and Congress recently wrote into its financial reform legislation.

Joe Nocera in The New York Times cited it in his Saturday “Talking Business” column, which is always worth reading.
The lyrics are not exactly what you expect from a YouTube video:

“Sheriff Warren’s what we need-o/ She’s not about the money and the green-o… /She wants to expose the banks and all the greed/ and get rid of unnecessary fees/Which means more money in my pocket?”

In the late 1980s, writes Nocera, she did a landmark study with Jay Lawrence Westbrook on personal bankruptcy in the US which refuted bank claims that consumers filed for bankruptcy because they were too lazy to pay off their debts.

People who filed for bankruptcy were genuinely in over their heads, the researchers found. They had accumulated debt they couldn’t repay because they had lost their jobs or had some other life event that robbed them of their ability to earn a decent paycheck. They were often middle class, homeowners even. They filed for bankruptcy because they were desperate. Looking through thousands of bankruptcy filings, Mr. Westbrook said a few days ago, “you got a sense of human beings in real trouble.” He added, “All of us were very much affected by what we found in those files.”

She uses very clear language, accusing the banks of “tricks and traps, and fleecing their customers. She wants credit card contracts written in plain English that a high school student can understand to end the practice she terms “cheating by contract.”

Nocera says that Timothy Geithner, Treasury secretary, would prefer to have one of his deputies take the slot, and President Obama hasn’t made any decision yet.

But if she does win the job, she could set a new global standard for bank regulation and encourage others to take a tougher stand with financial institutions.

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“Liquidity risk…is the most significant of all business risks in that the inability to fund a position imminently can lead directly to insolvency,” said John Jay, senior research analyst, Aite Group and author of “Leveraging Technology to Shape the Future of Liquidity Risk Management,” a report sponsored by Sybase.

The UK’s FSA has been the most aggressive regulator in pushing banks to monitor and be able to report on liquidity risk, but the concern has been growing among regulators around the world.

“The single most consistent and significant challenge identified by practitioners is that of gathering information from disparate systems,” said Sinan Baskan, Senior Director of Business Development, Financial Services, Sybase. “Lack of timely and accurate visibility into all components influencing bank liquidity hinders a financial institution’s ability to manage liquidity risk-for many large banks, the number of systems containing liquidity information is upwards of 25.”

The report contains several recommendations for effective risk management. Unfortunately, the press release didn’t provide a link to the report.

However, in a June report on liquidity risk, Jay said that
““Global regulators have put financial institutions on notice that the LRM process must now be a robust endeavor.Firms that fail to heed LRM regulatory imperatives run the risk of being forced to close shop; market participants will view these institutions as counterparty and funding risks — ironies that cannot be overlooked.”

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Looks like JP Morgan expects the global economy will bounce back in the next couple of years. The bank has announced that under the leadership of Global Trade Executive Daniel Cotti, J.P. Morgan is expanding the bank’s award-winning Global Trade organization, hiring several new senior managers for key positions and adding nearly 100 trade and supply chain professionals.

“J.P. Morgan is positioning itself for unprecedented growth in its Global Trade business,” said Cotti. “By adding key personnel and redesigning our business to more quickly meet clients’ needs, we aim to increase our traditional trade market share and expand our supply chain management and structured trade finance businesses.”

Among the new senior management positions are:

Pravin Advani, MD,, Global Trade Executive for Asia where most of JP Morgan’s clients remain very active and tremendous growth opportunity exists.

Andrew Betts, MD, Global Head of Supply Chain.  In this new Global Trade position, Andrew Betts and his global team will deliver modular, integrated solutions to address clients’ financing and regulatory needs across the entire supply chain. The organization incorporates the existing Logistics practice globally.

David Conroy, Regional Trade Executive for North America and Global Trade Sales Head; Andrea Leonel, Regional Trade Sales and Advisory Head, Latin America; Kao Fang Ming, Trade Head for China.  Ming assumes this newly created position with responsibility for partnering with the Global Corporate Bank to lead Global Trade’s business and growth in this important market.  Also announced is Prashant Pillai, Trade Head for India and South Asia.

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In response to new regulations in the US restricting overdraft fees, banks have the choice of trying to preserve the fees or use mobile alerts to allow consumers to move funds and avoid overdraft fees, according to Javelin Strategy & Research report on Reg E.

Almost twice as many overdraft violators – consumers who have paid at least one overdraft charge in the past year – use mobile banking as do consumers overall and they want to be alerted before an overdraft occurs, said the research firm.

“Many consumers see financial regulations as a victory and feel they now have greater say over what fees to pay,” said Mary Monahan, research director. “FIs can transform their image from adversary to partner by being more transparent about the fees they charge and by giving their customers the control they want – such as being able to respond to a mobile alert before incurring an overdraft fee.”

The Reg E and Overdrafts report gives an overview of Reg E and its existing fee structure and covers how banks and credit unions can reposition themselves and revamp their business models to recoup lost fees due to Reg E – and what certain FIs are doing already. It also discusses who overdraft violators are, the behavior of overdraft violators and how they should be targeted, how consumers are impacted and their options post Reg E and how mobile can be used as a solution for both banks and customers.

Selected Key Report Findings – Reg E and Overdrafts
•    Mobile banking can play a key role in enabling financial institutions to communicate more effectively with their customers by delivering relevant information and notifications in real time whenever customers want it, wherever they are located and through a lower cost channel.
•    The mobile alert that both overdraft violators and all consumers most want is a warning that an overdraft is about to occur.
•    Young consumers and the newly banked – consumers who opened their first checking account in the past three months – are the most likely to incur overdraft fees due to their inexperience with banking.
•    Consumers cite ‘too many fees’ as the No. 1 reason they leave their financial institution.

“The last thing a bank should do is alienate a new – and especially an inexperienced – customer by automatically imposing a hefty fee when they have overdrafted on a one-time debit card transaction or at their ATM,” said Mark Schwanhausser, senior analyst, multi-channel financial services.  “Instead, the bank can send them a mobile alert, which empowers the consumer to choose what action to take to avoid overdrafting such as transferring funds from another account or paying in cash. By working with the consumer, the FI can reap the added benefits of reducing fraud costs, creating future cross-selling opportunities, and building customer loyalty.”

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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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