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A rich round of bank analysis

Took a long haul flight yesterday and it’s one of the few times that you can grab all the business magazines and digest them properly.

This month had a real crop of great items from Alan Greenspan's fightback to the future of reading; from a deluge of data and how to cope with it to living through the meltdown of AIG.

Here’s a few highlights.

From Fortune Magazine were two front of face articles that hit the mark:

 

Alan Greenspan fights back

"Counterparty surveillance failed to protect the system this time," he says. "I always thought it would. I held that belief for 60 years."

Yet he doesn't believe tougher regulation by the Fed could have saved the banks. The problem in his view is that regulators would be much worse than the banks themselves at judging banks' counterparty risk. "I was on the board of J.P. Morgan (JPM, Fortune 500) prior to becoming Fed chairman," he says. "I knew what J.P. Morgan knew about Citi, Bank of America (BAC, Fortune 500), Wells, and others. When I arrived at the Fed, I quickly learned that J.P. Morgan's knowledge of those organizations was far greater than what the Fed knew."

Greenspan isn't opposed to more regulation, mostly fine-tuning. But on the central issue of self-interest, the safeguard that failed, he isn't giving up. He wants banks more exposed to market discipline by making sure that the "too big to fail" doctrine disappears. "Counterparty surveillance will remain the regulators' first line of defense," he says.

Mmmm … watching each other’s backs. The new order of the day.

The other major article that hit my eyes was an interview with the former chief lawyer at AIG, Anastasia ‘Stasia’ Kelly, who worked there from the end of 2006 to last year.

 

Inside the crisis at AIG

Q: Spell out where you stood in your 2009 compensation.

AK: I got a promotion to vice chairman at the first of the year, took on new responsibilities like human resources, and got a big raise. I was due to make $900,000 in salary in 2009 and a bonus that could go from $0 to $2.2 million. I also was scheduled to get some compensation held over from earlier years. But Feinberg's final determination was that most of the top 25 in compensation at AIG — which in 2009 would have included me — would get no more than $500,000 in cash, to which would be added some quantity of AIG stock that would be handed out periodically, as if it were salary.

Q: So, by Feinberg's ultimate determination, you were going to get cut in 2009 from $900,000 in cash, and potentially much more, to $500,000 plus some quantity of stock?

AK: That's right, and I had another problem to think about too. There was a possibility that I would end up being — under Feinberg's plan — among the top 10 at AIG in pay for 2009. Now, most people don't know this, but the rules specify that none of the top 10 in a TARP company can receive severance pay — or as the law puts it, golden parachutes — if they leave their company. That meant that if I ended up in the top 10, stayed until 2010, and then decided I wanted to leave, I would not be able to collect severance.

Q: I'm sure you realize that, to most people, $500,000 — much less the $3.8 million you'll reportedly receive in severance — seems outrageous for somebody who's high up in a bailed-out company.

AK: I totally understand that. My father was a Boston Irish Catholic cop who probably made $60,000 in his best year. But I've spent my life working myself up a career ladder to where I am, and I had been working 18 hours a day, seven days a week, and killing myself. I wasn't tainted with what happened at the company. For someone to say, "I think you're doing a great job, Stasia, but the American people hate you and therefore we think you should make no more than $500,000 a year" — there's no logic to that. It wasn't something I could live with. I guess that's the Irish in me.

And a top of the morning to you too ma’am.

Meanwhile, interesting article in Bloomberg’s Business Week re-confirming Canada’s #1 banking status:

What U.S. Banks Can Learn from Canada

While America's bailed-out banks lobby against reform, Canada's profitable banks are asking for more … Royal Bank of Canada holds $117 billion in residential mortgages, more than 40% of its loan portfolio. RBC's provision for losses on domestic mortgages last year? Less than $18 million.

And finally, saving the best for last, there's a great analysis in the Economist of RBS’s takeover of ABN AMRO in October 2007:

Scots on the Rocks

What pushed RBS over the brink was ABN—and not the deal’s mediocre logic or crazy valuation, but rather the losses within the Dutch bank and the strain it put on funding … Depending on which set of subsidiary accounts you use, in 2008 and the first half of 2009 ABN accounted for 75-144% of the combined group’s operating losses and 47-50% of its loan impairments and gross writedowns from credit and trading activities … Few people think ABN went berserk on risk during the takeover battle, but there is evidence it was slow to put the brakes on risky activities. For example, 79% of its super-senior CDO exposures at the end of 2007 seem to have been originated that year. Only 7% of RBS’s were … The purchase of ABN widened RBS’s dependence on wholesale funding just as it was drying up. From about £230 billion of debt and interbank borrowing in mid-2007, RBS had £524 billion by the end of that year.

Ouch!  Based upon this article, it's obvious that ABN stands for “Absolute Banking Nightmare” or “Absolutely Bloody Nightmare”, whichever you prefer.

More reading later …

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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