On demand computing, under a variety of brand names, is a hot topic again in financial services, in part because city centre locations favoured by banks are running out of space and power for data centres. IBM, HP and Sun have offerings, but so do companies from outside financial services, such as Amazon. Slight problem there for any mission-critical users – its system went down for eight hours on 20 July, a jump in outage time from February when the system was down for 2 hours.
Not quite ready for prime time, I’d say. Still, the model is an interesting one. Larry Scott, Sun’s former president for financial services told me that in a tour of startup tech companies about the only computer he saw were laptops. Firms were leasing compute power from suppliers like Amazon as they needed it and many planned to run their entire operations on Amazon.
You can find details on the Amazon web site under “For Developers”

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With banks having lost half a dozen years’ profits since last August you might believe headlines which suggest that they are prepared to scale back business.
Ah, but that does miss a key point. The banks may have lost, but the bankers didn’t lose past salary and bonus pay.
So while it is inspiring to read that yet another report from Gerry Corrigan, formerly NY Fed chair, now at Goldman, has released a report as co-chair of the Counterparty Risk Management Policy Group.
“His latest report, ‘Containing Systemic Risk: The Road to Reform’ is dubbed Corrigan III because it is his third effort to reduce risks,” report Aline van Duyn and Gillian Tett in the FT.

Philip Purcell, who got the boot as CEO at Morgan Stanley a year or two back, weighs in with advice for bankers and for shareholders. When banks were partnerships, profits reigned supreme. But as corporations, they pursued short-term revenues which generated big pay and bonuses for the bankers. When big bets went bad, shareholders lost. Funny that what would have seemed merely sensible 10 years ago now sounds like deep insight – such as the value of diversified businesses that don’t rely too much on trading.

Purcell calls on the Fed and the SEC work more closely together but he also notes that banks under different regulatory regimes in England, France and Switzerland have not done any better than the Americans.

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In a bit of writing that could change the image of The Dismal Science, Economist Todd Buchholz in the WSJ notes that Americans seems to be living well despite headlines forecasting the next Great Depression (This is our version of looking back nostalgically to rough times – sort of like gaining Londoners longing for a return of the Blitz and rationing.) Starbucks Lattes run about $1,200 a barrel, he says. And Americans spent more, not less, at Starbucks last year than the year before, even if the company’s stock is tanking.

He adds a bit about Green enthusiasm, a topic I shall be covering as its affects banks, or bank posturing, in a future issue of Banking Technology. The price premium for a Prius will take 3.5 years to recover in saved petrol costs, Buchholz notes. “The ageless Paul McCartney’s spanking new Lexus LS600H will take him 102 years. Rock on, Sir Paul.”

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“Champagne sales have slipped at the Wine Library, a shop on the fringe of the financial district, at a time when neighborhood businesses have little to toast,” reports the WSJ’s Letter from the City.

In another sign of the grim economics of downsizing, wine sales appear to be getting a boost as City types buy gifts for departing colleagues, says Andrew Rae, director of Uncorked, a specialist wine shop in the City. Sales at his store are up 20% on the year, he says.
“There are a lot of people with office cash collections coming in at the moment,” he says.
Have a drink before heading to Dubai: “Outplaced” investment bankers are often being offered jobs off-shore, way off-shore. It’s a way to keep them in reserve and also a method of recruiting talent to fast-growing markets where it is needed.

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WSJ economics writer Stephen Moore suggests environmentalism is a way to bully ordinary citizens, noting that San Francisco garbage collectors could levy fines up to $1,000 for recyclables mixed with garbage improperly.

Looks like America is catching up with the UK here. But he does have an interesting statistical twist noting that Daniel Benjamin, an economist, says the US could store all its garbage for the next 100 years on Ted Turner’s ranch in Montana and still have 50,000 undisturbed acres for the horse and bison.

Fine, but would they object to the smell?

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No Page 3 girls, but the Journal has become somewhat livelier under Rupert Murdoch. Word was he planned to cut the length of some of the long feature stories, which had occasionally verged on parodies of themselves.
But what I have enjoyed is the way some topics are covered two or three times in different sections of the paper. Sound redundant? The paper has a couple of columns like one from breakingviews.com which offered insight on the central counterparty (CCP) for derivatives, a topic covered as a straight news story elsewhere in the finance section.

Richard Beales and Rachel Sanderson asked why this hasn’t happened before, since it would reduce the risks of a Bear Stearns-like failure by confining them to the CCP. “One reason is that the big dealers have wanted to keep control over the market – after all, they currently collect a bid-offer spread as well as knowledge about what others are trading.”
And, they noted, the CCP started with CDS index products which are not particularly profitable. Watch out for the exchanges which will try to get in, they warn.

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Lawrence Lindsey, former advisor to the U.S. president for economic policy, either read the 700 pages of the Fannie-Freddie bailout or had a staff person do it – more than any member of Congress has done, he suspects.
In the Wall Street Journal he offers a devastating critique of what happens when Congress has its way. The mortgage agencies have provided nice employment for ex-Capital Hill residents, and they have showered money on housing nonprofits across many Congressional districts. Their good work shows in the recently passed housing bill which allows them to continue to pay dividends to shareholders even while taking injections of capital from the government. They become a pass through.”Congress chose to protect the shareholder at the expense of the taxpayer.” Moral hazard, anyone?
Second, notes Lindsey, the government left the shareholder the sole beneficiary of the upside. In the Chrysler bailout, the government received warrants which it cashed out for $300 million when the company recovered. Chrysler did make an effort to talk the government into returning the warrants, but it lost. Another detail of the bailout – the government made Chrysler chief exec Lee Iacocca give up his jet, which he absolutely hated to do. No indication that Fannie and Freddie execs have had to trim their lavish ways. As another commentator noted, they could be run by civil servants and civil servant pay…

For a country that claims to be free market, the folks in Washington just hate to let the markets operate without their wise guidance. So the new bill bans risk-based pricing and sets down payments at 3.5 percent of the mortgage. Ah, what Washington has learned about risk!
“If any other country announced that its finance minister could print unlimited debt to do something similar, financial markets would dump both the country’s debt and the country’s currency.”
Makes Northern Rock look like a walk in the park.

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Chicago is definitely the Second City for most people working on Wall Street, as suggested by that famous New Yorker cover showing a native’s view of the world west of the Hudson as an alien wasteland.
But the Chicago Tribune says that the city’s futures markets have flourished, in part because they don’t do OTC trades and their trades go through a clearing house, something New York firms are finally backing but only for some index products. (See Wall Street Journal piece below).
“Chicagoans primarily buy and sell commodities, foreign currencies, US Treasury bonds and stock options through the CME Group or the Chicago Board Options Exchange,” notes Trib reporter Joshua Boak. “The prices on those contracts are public and all deal go through a clearinghouse, which ensures that brokerage accounts have adequate funds.”
In other words, a Bear Stearns crisis is unlikely because the Fed doesn’t have to worry about unknown counterparty exposures … the deals have been done and cleared. Now New York seems to be coming around to a central counterparty, at least for a few OTC derivatives.
That would provide transparency; the flip side it is would threaten fat margins on custom contracts. No surprise then that, as Boak says, the CME group is among those looking to provide exchange services for OTC derivatives.

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 After years of passivity and inaction, the SEC launched a ban on naked short selling of selected financial stocks over a weekend. Compare this to the decades it sat by and let a handful of credit rating agencies enjoy oligopolistic profits as the sole official guardians of investment grading. Now the SEC chairman, Christopher Cox, tells Congress his agency, not the Fed, should have oversight responsibility for the investment banks.
What’s going on?

Reuters does a nice analysis and quotes a couple of regulatory experts saying Cox is under pressure from others in the agency to become more active – he was missing in action during the Bear Stearns meltdown.

A couple of years ago I heard an investment banker who used to work at the SEC say the agency was simply scared of the investment banks. The banks do, after all, have a lot of political clout and a lot of very bright, very highly paid people working for them. Compare that to the SEC.
Paul Krugman, the liberal economist and columnist for the New York Times, says something must be done to bring American financial regulation into the 21st century, although the politics and economic power of the financial sector gives him some doubts that intelligent change will occur.

“Basically, the financial framework created in the 1930s, which brought generations of relative stability, needs to be updated to 21st-century conditions.

“The desperate rescue efforts of the past year make expanded regulation even more urgent. If the government is going to stand behind financial institutions, those institutions had better be carefully regulated — because otherwise the game of heads I win, tails you lose will be played more furiously than ever, at taxpayers’ expense.

“Of course, proponents of expanded regulation, no matter how compelling their arguments, will have to contend with very well-financed opposition from the financial industry. And as Upton Sinclair pointed out, it’s hard to get a man to understand something when his salary — or, we might add, his campaign war chest — depends on his not understanding it.”

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Killing time with a corporate M&A lawyer over the weekend, the ritual trawl for a subject of mutual interest threw up the topic of Virtual Data Rooms, on which we carried a feature in  the June issue. He wasn’t a big fan, having used them several times.

The point of VDRs is that teams of corporate M&A lawyers don’t have to fly around the planet, so I assumed that it was the reduction in expense-account travel that put him off. “No,” he said. “It’s because you have to proof-read everything on-screen, and we’re getting worried that sooner or later one of the staff will sue for damage to their eyesight.”

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