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CommentP&M Notebook

P&M Notebook: end of an era

Politics, once again, grabbed the headlines, but it’s been a bad week for at least two bankers. In case you are as sick as we are of politics then, here's the people news first.

The first is Halkbank’s deputy chief executive, stopped and detained at JFK airport while on the roadshow for Halkbank’s mooted tier two. He was detained in relation to possible breaches of US sanctions against Iran — giving banks further reasons, if any were needed, to be ultra-cautious about not only knowing their own clients, but knowing their clients’ clients. Investors, too, need to keep their hands demonstrably clean, meaning not only is Halkbank’s deal likely off the table in the near term, its outstanding bonds also sold off.

US policy here is unpredictable and scary. Senior figures who are literally part of running the country might be under investigation for their connections to the Russian state, but that’s not going to make enforcement of other sanctions down the tree less vigorous, and with BNP Paribas’s $8.9bn fine still fresh in the minds of many institutions, no chances will be taken. 

John Kerry, the previous US secretary of state, encouraged European banks to do (some) business in Iran, before the US had fully lifted sanctions, but if the Trump administration has any policy coherence at all, it’s likely to be harsher to Iran and more lenient on Russia (under the Obama administration, US banks were told to stay out of underwriting a Russian sovereign bond, despite the Russian Federation itself remaining an unsanctioned entity).

The second situation is more of a farce than a tragedy — Jefferies investment bank Chris Niehaus leaking confidential trade details to “impress” his friends and clients. A little digging by GlobalCapital strongly suggests he leaked details of the Cobham rescue rights issue last June, though the company, Jefferies and the FCA all declined to comment.

Cobham, back in the market for more capital, is itself under FCA investigation for improper handling of inside information, but presumably, whatever the regulator thinks it might find there is rather more serious than an investment banker trying to impress their friends — even if one receipient of the info happened to be a direct competitor. Niehaus was fined only £37k, thanks to robust co-operation and the fact nobody involved seemed to have gained from the disclosures, but presumably, following the incident, he’s unlikely to gain investment banking work any time soon.

Try as we might, it’s increasingly difficult to keep GlobalCapital focused on the deals, the institutions and the people of the capital markets, when politics keeps messing things up. Last week’s triggering of Article 50 by the UK passed without a hitch in the markets — it was well-flagged, widely trailed and didn’t give UK-hosted financial services companies any more detail whatsoever on what they can expect after the two years negotiating period is over.

The EU’s negotiating guidelines, published on Friday, ruled out any special sector deals, but most banks had already assumed nothing would be forthcoming, and are figuring out the best way to ensure business continuity regardless, with the minimum possible moves to whichever European centre makes most sense.

The most prominent financial casualty of the UK’s Brexit extravagnaza is of course, the London Stock Exchange-Deutsche Börse exchange group, a collosus of clearing and trading that now is unlikely to ever exist. The European Commission formally blocked the merger last week, following LSE’s refusal to sell Italian bond trading platform MTS.

Ostensibly its concerns were about competition in clearing and data — a curious combination, since there are strong arguments that concentration in clearing strengthens a financial system. Having a smaller number of clearing houses improves collateral efficiency, and means regulators can easily consolidate financial exposures and understand the transfer of risk. Yes, it concentrates risk, and could increase some costs for users, but it’s easier to make one or two clearing houses bombproof, and more efficient collateral netting surely compensates for higher costs at the point of use.

Intriguingly, though, the EC’s Competition Commissioner says the problems stemmed from the two parties to the merger. After refusing to sell MTS, the two exchange groups submitted an alternative plan, involving limits to behaviour in the market, which they submitted too late for the Commission to consider properly.

In the US, politics is also in turmoil. Congressional Republicans got cracking on their financial reform agenda last week, and it’s not pretty. First up was the “Audit the Fed” bill, which has passed committee, though may never make it to the floor of the house. It’s been a pet project of right wing Republicans for years now, and is supposed to muzzle the central bank, limit its capacity to conduct monetary policy, and push the US towards a “hard money” policy. The Fed is already audited in the ordinary sense of the word. These are the kind of people that are still smarting about Roosevelt’s decision to limit private holdings of gold in the 1930s.

(an interesting financial digression; there’s a somewhat convincing theory that the Wizard of Oz was conceived as allegory about US monetary policy. The symbolism of Oz, the gold bricks, and the fraudulent wizard manipulating levers behind the curtain should be pretty simple to figure out).

The House has also started on repealing Volcker, with an evidence session in the House Financial Services Committee’s sub group of capital markets last week. Though prop trading, at least in its minimal, Volcker-defined form, had little to do with the financial crisis, by the same token, it’s not easy to figure out how to directly connect it to lending in the real economy, though assembled witnesses, led by the chief executive and chairman of Stifel, gave it their best shot.

The politics of ditching Volcker are complicated though — the original Republican intention to ditch broad swathes of Dodd-Frank may fall victim to the same problems as the healthcare reform. Too complicated and not effective enough; too centrist for the right and too right-wing for the centre and for Democrats. That could, however, make tweaking Volcker more likely, not less, since after the failure of a broad financial reform bill, a straightforward amendment of the complex and unloved Volcker Rule could be an easy win.

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