Please don’t misunderstand me, I am a red-blooded capitalist. I always have been and always will be. I believe completely in free markets (business and financial). But even by my standards, things are going too far and somehow, a new breed of capitalism in financial markets needs to be found.

Why?

This quote is taken from EurActiv on the lead story on 29th November, “Ireland will contribute 17.5 billion euros of its own cash and pension reserves towards the bank rescue.”

Pension reserves, eh? When did that start???

And then in this story by EurActiv, “In November, Hungary and Bulgaria came up with very similar policies that embarrassed those attempting to provide an EU-wide solution to budget accounting of the cost of pension reform.” and “The move raised eyebrows in the Commission as both countries decided to nationalise their pre-funded pension schemes, thus reducing both public deficit and debt calculated by the Maastricht criteria“. EurActiv continues, “Although pension fund savings are private property, the Hungarian government pre-empted any constitutional remedies by amending the constitution, just a few days before announcing the plan.”

This all seems rather reminiscent of the misdeeds of Robert Maxwell prior to his death. What did Maxwell do? Its complicated, but in short, he used the reserves of the private pension plan of the Mirror Group to prop up the price of shares in the company. When he died / drowned off his yacht, the charade was exposed as only he seemed to know what was going on. The company then really started to struggle and as the share price collapsed, pensioners in the company scheme saw the majority of their pension fund vanish.

Parts of this are similar to the collapse of Enron in the United States. As Enron collapsed, most employees had used wages and bonuses to purchase equity in the company and it then transpired that the company pension scheme owned a very large amount of company stock. The share price had in part been propped up by the buying of the pension scheme.

These acts were considered to be illegal. Luckily for the rest of society, they caused retirement issues for thousands of people, rather than millions of people. But it seems as though the financial crisis is causing European governments to up the stakes.

We all know that the demographics of Europe suggest that funding the retirements of millions of people – as we all live longer – is becoming harder and harder. We also know that most state pension schemes are very similar to Ponzi Schemes in nature. The phrase ‘pension fund’ is often applied poorly to state schemes. The vast majority have no fund. All the money that comes in via social security payments, then goes out in the form of benefits.

But if those that have some form of fund start to prop up their economy with the money, are we moving into the government sponsored worlds of Maxwell and Enron? This cannot be a good thing for the majority of society, can it?

If these actions were illegal and ruinous on a much smaller scale, what makes sensible and educated people think that they will work when scaled up to a national or continental level?

Obviously, there are differences. Propping up a share price is different to propping up an economy, but it still sounds very much like a misuse of funds.

EU Blogger, Michael Berendt, in his recent post highlights a few of the potential social problems. And in content from earlier in 2010, the European Economic and Social Committee held an entire event to investigate the social costs of the financial crisis.

My real question then, relates to moral hazard and to the fundamental nature of the euro currency. At what point is enough enough? At what point is something not worth saving? At what point is the cost of saving bankers and investors not worth paying? Who is deciding who ought to be saved and why? At what point is the cost of saving the economy of a nation not worth paying?

Bearing in mind that I am an investor (and I own some shares in a bank!) this is hard for me to ask. But ask we must.

When is the juice no longer worth the squeeze?

As if this all was not bad enough, there are a number of very sensible financial people (the FT has been quite vocal on this for example), suggesting that the cost of servicing the interest bill for Greece is unsustainable and that they will default. It is a matter of when and not if. The cost to Ireland of servicing their IMF and EU bailout bills may also be unsupportable.

These bailouts might simply be bankrupting nations, slowly sucking the blood from them, whilst we wait for their total financial collapse (as suggested about Ireland by Wolfgang Munchau in the Irish Times here). This would be terrible.

Even worse, I don’t think I have yet spoken to anyone that believes that these bailouts will work in theory. If people don’t have even that basic faith, what must the hedge fund managers with their billions looking for ‘opportunity’ be thinking? They must be rubbing their hands with glee at the thought of the tens of billions in profits that they will make over the next few years. That is ‘our’ (and German!) money. Bonus time anyone?

The often excellent blog, The Baseline Scenario, writes of The Eurozone Endgame and four alternative scenarios, including, “Third, there is the thoughtful view of Willem Buiter – currently chief economist at Citigroup and still a brilliant critic of the global financial system. In a presentation circulating last week (not publicly available), he predicts “three or more sovereign defaults in the next five years.” His logic is impeccable – once it is easier to restructure debts, the temptation is to do exactly that; the market knows this and so brings everything forward in time.”

And the ever present Nouriel Roubini is reported by Reuters as saying, “(A bailout) happened in Greece. It happened in Ireland, and it’s going to happen in Portugal,” Roubini told a conference in the Czech capital. “The question is whether it could happen in Spain. The official funds are not sufficient for also bailing out Spain.”

Needless to say, the Portugese goverment is now expressing confidence in their economy in the hope of dispersing the blood that has already dripped into the water and started to attract the sharks.

This is, of course, manna from heaven for the eurosceptic press, such as the Daily Express in the UK who lead on their frontpage on Tuesday with, “A bail-out agreed by Chancellor George Osborne means Britain could have to find billions of pounds more to help Portugal and other debt-laden countries such as Spain and Belgium if their economies need to be rescued, as some experts are predicting.”

Are we witnessing the beginning of the end of the European political and social model? And the creation of new generations of financially underprivileged people across Europe? Are we thrusting the current generation into poverty in their retirement years?

Are banks really this important?

He has been fined as part of his sentence. The fine is a whopping 4.9 billion euros!! Is he meant to be bailing out Ireland, or paying a fine?

Don’t get me wrong, I think the risk and reward balance is very wrong for investment bankers and hedge fund managers. When they screw up – as we all do – they need to face more serious implications than they have been doing so far. And when they are caught deliberately doing wrong, they need to face punishment. But 4.9 billion euros? When will he pay that? With what? Its a little unrealistic isn’t it?

But luckily, he is only 33, so he still has the time to work it off…

Clearly, I am a financial buff, so loved the original and frankly, I enjoyed this follow up as well. It may not turn out to have quite the same impact on society as the first film did, but well worth the admission fee anyway. I watched the film with a female friend that has not seen the original and is no financial expert, and she enjoyed it lots as well. Highly recommended.

Once again Oliver Stone is trying to do something with a financial film. In this movie, Gordon Gekko has several opportunities to explain elements of the financial meltdown of 2008. One presumes that Stone has strong opinions on just how the world economy functions (or not as the case may be) and he uses the slimey charachter of Gekko to make his points. And what points they are!

If Gekko thinks things are rotten, how bad must they really be?

Gekko lays the blame on the collapse of the financial system on everyone. On all of our greed to want something for nothing and being willing to remortgage their homes for that right. This ‘greed’ and lazyness is highlighted by Susan Sarandon, playing the mother of another central character. She has moved from nursing into property speculation, is losing mountains of money, needs bailouts of her own and refuses to go back to work and get a ‘real job’.

Much of the firm centres around the events of 2008 and the fall of an investment bank that seems to share a remarkable number of similarities with Lehman Brothers. Meetings – now famous – held over the weekend as banks were unable to borrow and roll over their liabilities (thus facing instant bankruptcy) between the Fed and Wall Street big shots were eye-opening, even though they were shown as reported. Of course, the names had been changed to protect the guilty…

The film also contains some interesting pointers towards green and low carbon energy generation and away from ‘big oil’. Again, it isn’t difficult to spot Stone’s agenda.

Hopefully, this film will be able to get across some important elements of basic financial education to a very wide audience and in a powerful way. If you are a regular reader of financial blogs and columns, you won’t learn much. In that case, just enjoy the movie.

In posts earlier in the year (here I muse that we don’t need more FS regulations, simply to enforce the current ones more effectively and here I question what the impact might be of the proposed regulations on the existing financial centres) I tried to ask pretty obvious questions that anyone that understands financial markets might reasonably ask.

We all know that rules and laws can have myriad unintended consequences, but in financial services, there are also a lot of quite obvious consequences. And at last, I see someone discussing them.

In this article on EU policy website EurActiv is a telling quote. “A diplomat from a large EU member state said that without an international consensus on the FTT, banks would “start doing all their transactions from London or New York, or the Galapagos”.”

That pretty much sums up the problems faced by regulators that are trying to ‘tax’ financial transactions, banks, or whatever else might seem appropriate. Unless the regulators can bring into line every single legal jurisdiction on earth (which I sincerely hope they cannot, it would make the world a very boring place) they cannot enforce these rules. There just needs to be one small island in the South Pacific (or wherever) and the majority of financial transactions will be conducted ‘from’ there.

We all know that in the modern connected world, financial and banking transactions can be virtually conducted from anywhere. Maybe even the Galapagos…

I can recall reading some years ago about a ‘tax haven’ that existed in the Indian Ocean. I cannot recall the details, but it was in the vicinity of the Maldives. This tax haven was a sandbar that only appeared under certain tidal conditions. It had no buildings and no residents. But there were something like 15 banks using it. I’m sure they have mostly (or all) been closed now. The book I was reading suggested that they were primarily there for money laundering purposes as passthrough banks owned by drug cartels.

But still, the point is valid. Look at the behaviour of Enron if you need an example of corporations using the unregulated ‘offshore’ world. If a new regime of taxes on transactions or bonuses or new fees is implemented, the investment banking community may well simply up sticks and move to somewhere more friendly (cheaper).

Somehow – and I do not propose to have the answer – we need to find a balance that keeps the financial services sector in London, Paris, Frankfurt and others whilst also reigning in its worst excesses. This will not be an easy balance to strike, but I would suggest that a small army of financial regulators paid to enforce existing rules will be more useful than a round of taxes that drives everyone away to play on a pitch with no rules.

In case you don’t know, EUREKA is a network that helps to stimulate and foster new projects. Though they have many member nations (mostly European but also now including South Korea as of last year), the projects are chosen on merit – bottom up – rather than from a government level down.

The award ceremony last night highlighted the work of three projects and put a little glitz and glamour into the world of research and development. German TV business presenter Carola Ferstl provided some of the glitz and glamour, while the great and the good of the world of European innovation policy looked on.

First prize for this first ever Innovation Award was won by the catchily named ONOM@Topic+. Their project, lead by Gemalto of France, is leading the way in developing secure digital smartcards. These cards have many potential uses including payment and access to public transport systems, driving licences, medical records and biometric data and access to a wide range of public services.

It almost goes without saying that they have been addressing political issues and societal concerns whilst also working hard on the technological aspects. The project itself displays many of the benefits to firms in fast moving areas of the use of partnerships.

Jean-Pierre Tual, representing Gemalto, explained that the potential life-cycle of new products in their industry can be as low as two or three years. In such an environment, there is pressure to develop and roll out to market their products simultaneously.

As might be imagined, this puts real pressure on all involved to move and move quickly if their lead into the market is to be exploited and the investment in the project recouped.

Gemalto have actually used this product to move even further forwards it seems. Rather than simply bringing in a range of partners to assist in the R&D, they brought in their competitors as well. This has enabled them to develop a product that also now has industry and government support as being the industry standard.

They have been developing both product and business model on the fly. It is a very impressive achievement and they were clearly worthy winners.

The real question though, is how can more innovators and entrepreneurs be brought into the policy debate to help move issues forward in ways that benefit all? It goes without saying that they have much to do under intense time pressure.

At many of the policy related events in Brussels, it is clear that there are almost exclusively policy, government and lobbying professionals attending and few – if any – people that really innovate. Bringing these experts into the policy making arena in a positive manner seems to be the real challenge.

The problems with a bank tax are obvious though. Any country that has some semblance of a financial services industry, and chooses not to introduce such a tax, could easily be catapulted into the role of a new global financial centre. The massive sums of money at stake virtually guarantee this.

We often hear of the amazing sums of money being earned by the top hedge fund managers. The ‘poor’ ones only bring in a few million dollars each year. The ‘rich’ ones bring in hundreds of millions of dollars annually (some even earn into the billions per year!). In total, there are hundreds of billions of dollars in annual fees paid to hedge funds. If that is the case, and many of them deliver pretty average returns and so rely on their 2 to 3 percent annual management fee, then a global tax of (lets imagine) 0.5 percent, will be huge.

Who would want to avoid paying that???

Yep. Everyone.

And so the global financial centres could be crushed by the wrong tax legislation. That would prove to be terrible for London and New York. But possibly less bad for others (perhaps Singapore and Hong Kong for example). My thoughts on this subject in April can be found here.

So the risks are high and as France and Germany push ever harder for this, they risk turning the financial centres of the world upside down. Or perhaps that is the point?

However, much of the content of the conference was dominated by the role of markets and the financial crisis. Many of the speakers had the financial pitfalls in mind when they spoke about the problems being faced by poorer members of society. (For a definition, please click here – social exclusion .)

There was one speaker though, Josep Borrell, that addressed the issue much more concretely. Mr Borrell is former President of the European Parliament, so I think it is safe to presume he has some knowledge and insight to be applied.

He described the influence of the markets and how they are able to dictate policy to governments – albeit indirectly. This power to influence, by devaluing a currency when the financial policies of a government are not liked, is something that he called the “negation of democracy”.

He also highlighted the terrible inconsistency of large financial organisations and their market behaviour. The ability to punish governments in the financial markets by selling currencies down, having just needed a bailout, and using the bailout money to do it, shows the problems we have with markets currently.

If you would like to hear more, get it from the man himself. I asked him to elaborate:

While there, it was my job to interview a number of experts and politicians about the politics, policy and realities of climate change. I cannot lie, it was a fascinating experience.

While I have been a believer for a number of years that we (humanity) need to change our ways, some of the things I discovered there really altered my thinking and understanding of the topic.

The main change for me happened at this side event held by the Committee of the Regions (an EU institution) where I was tasked with conducting a number of interviews after the event ( two of them can be found here and here ).

It was obvious as it was being explained to the room, but had not really crossed my mind before that point, that whatever the heads of government agree (or not!) it all has to be put in place at a local level. Local government, small businesses and private individuals are where the real changes will need to be made. Put bluntly, the future survival of humanity depends upon it.

As I say, it is pretty obvious, but I hadn’t thought about it for even a single second. Even though I was busy trying to do ‘my part’!I know, how stupid am I???

But as the conference continued, it became clear that this is not the focus at all. For now, everyone is still thinking about what government leaders will agree. In the meantime, small island states in the Indian and Pacific Oceans are facing a real and immediate threat to their existence as sea levels rise.

What Can We Do About This?

Several months later, it is clear that many people still seem to doubt if climate change is even real (the scientists all seem to agree though) and remain impervious to change. But really all we can do is try and change one person, business and house at a time. To do that, there needs to be much more education about how and why.

So I have decided to commission an online book about energy efficiency in the home and what householders can do to lower their carbon footprints.

As you may know, I run several websites and currently they generate over 600 unique visitors each day. I plan to simply give the ebook away for free from these websites (they are not all in the right online ‘niches’ but I am presuming that most or all of the people that visit my sites live somewhere…).

Since I am not an energy efficiency expert, I am having to pay for such a person to do the actual writing for me.

What Can You Do To Help?

I am hoping that visitors to my blog(s) and website(s) will be willing to chip in and help me foot the bill for this project. In web-speak, this is called crowd funding and uses the collective power of dispersed individuals online to raise money for projects.

This means that small donations of just a few dollars by a large enough group of people can assist to get a project off the ground. Think of it a little like an ‘angel donation’.

My hope is to raise upwards of US$2,000. The cost of writing the ebook will be close to that value (but in euros). It seems like quite a lot, but I don’t think this is something I can just outsource to an article writer in the Philippines as it needs some pretty specialised knowledge in places.

Any extra raised above this amount, will go towards putting a small website together – and promoting it – that can be used for extra distribution. So if you feel able, please give a little and the more I am able to collect, the more I will be able to promote, more people will be able to read it and, hopefully, less CO2 will be in the atmosphere in years to come!!

Please Click Here To Contribute To This Project.

The Small Print: The site above does not charge a fee for this, but the payment processor does charge a small fee per transaction. Be sure that I have found the lowest cost method of achieving this that I could…

Payments will be sent to a UK Limited company. That is my company and by sending it there, money that goes in can go out as a business expense and I (hopefully) won’t need to pay (much) tax on the money.

As mentioned here, David Wright, Deputy Director of DG Internal Market and Services, is one of the most public voices right now on the direction the the EU is heading in. When it comes to hedge funds, capital requirements, OTC derivative reform, regulatory arbitrage and more, he is the person to listen to.

The interview is separated into two parts. In the first, Mr Wright discusses many of the elements of finance that need to be reformed.

In part 2, I ask about the prospects for increasing transparency and the influence of regulators in financial transactions…

The subject of ‘regulatory arbitrage’ and it’s implications was one of the key themes at Deutsche Bank’s event on 4th May about OTC derivatives in Brussels.

An overriding fear for legislators is that should the new rules be much delayed, on either side of the Atlantic, it will provide an opportunity for financiers to move their operations or trades to the location with the weakest rules. Even if this only happens for a temporary period, it may add further systemic weaknesses to an already weak global financial system.

Dr Swinburne was keen to point out that while the level of understanding in these complex financial instuments was growing rapidly in the CRIS Committee and that much progress had been made, it was still too early to tell what direction their policies would take. She warned participants that second guessing the outcome was pointless at this stage.

Emil Paulis, Director of Financial Services Policy and Financial Markets for DG Internal Market and Services at the European Commission, explained his expectation of the path ahead. Regulating OTC derivatives is clearly a feasomely complex area and since this regulation must start from virtually the ground up, many steps will attempt to bring these contracts in line with other asset classes.

These steps have three main themes. These are:

Counterparty Risk to include the use of the Capital Requirments Directive to help assess counterparty risks and pricing, for central clearing houses to oversee or authorise transactions.

Transparency so that as much information as is possible is available to let regulators and clients see the full terms of contracts. Questions were obviously raised about the competitive nature of these markets and the implications to business models of full disclosure and the usefulness of publishing contracts that are so complex that only those involved will fully understand them.

Increased standards of Market Integrity and the prevention of market abuse. It is likely that corporations using derivatives to hedge the risks in their business will receive exemptions, but for financial firms, the rules currently in place for other asset classes should be applied.

As a part of these measures, a – very – short public consultation process is planned. With the first releases due before the summer break, the revision of market abuse rules planned for the fourth quarter of 2010, and the problems of trying to match rules and progress with the United States, the OTC arena is due for fast and important changes.