East Eats West

India vs Swiss banks

Swiss banks are making headlines as far as India. In an article in India Today (31^st of January 2011) Swiss banks were accused of being instrumental in the “great Indian robbery”, the stashing away of illicit funds abroad. According to a study by a US-based outfit by the name Global Financial Integrity, since India's independence apparently $500bn were stolen and stashed away. According to the study the illicit money stems from tax-evasion and the underground economy and the top destination for this money was apparently Switzerland (named were LGT Bank from Liechtenstein and UBS AG from Switzerland). Although this topic is not new, it got new life by a much trumpeted statement by the ruling Congress Party to name all politicians with illicit funds abroad. However, so far no names were made public and the Government party is back-pedaling. It seems that too many politicians have money abroad, illicit or not.

How to gain trust in a post-financial crisis world

Picture: ...or shall I trust a bank?

Often one discovers in a crisis that the emperor is not wearing any clothes. As in any crisis the thing that evaporates the fastest, besides money, is trust. So many companies wonder how to regain clients' trust. And the buzz word often is transparency. However, I got the feeling that transparency is thoroughly misunderstood if you only talk and write more. More of the same useless information is not transparency. Transparency means being able to trust because one trusts the person in the company. People trust someone if they know, where this person stands on key topics. And just a nice ad-campaign as many big banks currently do will not save the underlying problem of greed in banking. So should a bank for example truly want to change, they for example could start giving car-sharing membership, e.g. Mobility in Switzerland, to employees so that they can trade in their expensive German cars.

 

Stable death for banks?

Picture: Maybe they are working in the bank?

As an observer of banks I am baffled by the fact that the solution of many CEOs, be it Oswald Grübel of UBS or James Gorman of newly resurrected Morgan Stanley, is to beef up proprietary (and risky) trading. No wonder that President Obama is trying to curb such behavior (probably in vain). So big banks answer to the financial crisis is not better risk management (aka smaller risk) but more speculation. Isn't that why they got into trouble? Why are banks falling bank on the same business models again and again? I recently attended a presentation by a strategy consultant who works with financial institutions. He highlighted that banks are about stability (at least on the outside). Right after the government (and the church) they are among the most stable organizations, at least up to the financial crisis. Stability in banks means high standardization and regulation and steep hierarchies. Stability used to be a bank's most priced asset so change is the natural enemy. And if change means less bonus stability is even better. Even if it might mean slow death in the long-term.

 

If you are intelligent, why aren't you rich?

Picture: Intelligent men on board!

Many big international banks made losses in 2009. But they still pay their employees bonus', smaller ones maybe, but nevertheless. And funnily many of the bankers think that they rightfully deserve it (the public begs to differ). Why do they think that they deserve it? That answer might baffle you as much as it baffled me. I recently read in an article in the Financial Times that uncovered the basic belief in banking: success means wealth and also intelligence (dumb people don't get rich, eh). So if you are intelligent, you get rich (if you are a banker). And because intelligence does not disappear in a financial crisis, a banker still deserves a bonus. Right? Bankers also love to turn the equation around in asking: “if you are intelligent, why aren't you rich?”. Unfortunately, as we learned in the recent past, for bankers failure still means richness, as former bank CEOs like Marcel Ospel of UBS or John Mack of Morgan Stanley are testimony to. Maybe the government who bailed out big banks should start to ask what type of bankers or “success” their national banks need.

 

Bankers in fear

Picture: Safer than public transport!

With the stock-markets in free fall and thousands of investors loosing money, bankers start to loathe their job. I was told by a colleague that some Swiss bankers in Zurich are afraid to wear a suit and a tie when they commute on the train: they are afraid of angry investors physically attacking them!

Road-to-riches

Picture: Maybe in the next bull-market you get one of those?

Have you ever wondered how you could earn so much in order to afford a red-hot Ferrari, a 100-feet yacht or a big mansion in London? Hard work, sweat, being cleverer than the rest? Maybe, but not very likely. I recently talked to a few people in the hedge-funds world who made their fortune in the last couple of years. Here is their secret. During the bull markets after 2002 up to last year many leveraged their investments in hedge-funds; leverage meaning taking credit in order to invest more than they actually owned. The banks happily did lend for a small interest up to four times the capital. This amplified the returns by four. Unfortunately this party is over but the next one is surely coming along. And if you want to party big next time, here is what you should remember: first, hard-work alone hardly ever makes you rich (ask any doctor working in a hospital). Secondly, in contrary to the common investment rule of diversification, one has to concentrate the bets in order to strike it big. And thirdly, riding the wave (bubble) is everything: being at the right time at the right spot counts more than hard work.

How to get rich – an entrepreneur’s recommendations

Picture: Bentleys can fly!

My friend Tim (an entrepreneur from Silicon Valley) responded to my “How to get rich” series and came up with the following list to riches:

• Start your own company
• Invest in real estate
• Invest in stocks and hedge funds
• Inherit money
• Get an insurance payout
• Win the lottery

Furthermore he recommends to read the following books: by Stanley and Danko The Millionaire Mind and The Millionaire Next Door; Rich Dad Poor Dad by Kyosaki,
by Benjamin Graham The Intelligent Investor and any annual reports by Warren Buffett of Berkshire Hathaways fame.

How to get rich – Part II

In a former entry I explained quickly how private equity company make money, big money. But not only the private equity companies (PEC) make money. PEC need specialist-CEOs to engineer the turn-around. And they get rewarded. Recently a leading international top executive search agent told me that a CEO can earn $20-30mio. as reward for his few years of hard cost-cutting and financial engineering. So it is wrong that only your own company or an inheritance can make your rich. If private equity and such lavish salaries are eventually good for the acquired company might be disputed. Some bloom as Ducati Motorcycles or Bally Fashion of Switzerland, others like Hertz car rental basically are leveraged to death. Anyhow, as soon as interest rates will go up and the economy will slow down, leverage will see its end (at least in this boom-cycle).

How to get really rich – Part I

Have you ever wondered how to get rich? Have you even read some books like “Secrets of the Millionaire Mind” by T. Harv Eker or “The Last Chance Millionaire: It’s not too late to become wealthy” by Douglas Andrew? Well, let me be frank. There are only two ways (for men) to get rich: inherit or start your own company (women can also divorce). And if you want to start a company and hit it big time, better think big money. Think finance. Think private equity! And learn from Mr.Schwarzman. Mr.Schwarzman is the founder of the Blackstone Private Equity Group and earned $398m last year. And he convinced the Chinese government to $3bio. in his company. And he went public with his company and made about $8bio.

One uses the term private equity in contrast to public equity (companies listed on stock markets). How private equity typically works nowadays was explained to me recently by a CEO of a traditional Swiss industrial company: private equity companies for example buy an ailing but cash flow steady industrial company that cannot cope with globalisation anymore. The acquisition is made by using high leverage, meaning the private equity company (PEC) pays less than 20 percent of the price and let’s the acquired company raise the rest of the money in the form of low-interest debt happily provided by banks. In the first year the PEC then pays out a super dividend to the shareholders (themselves) and immediately recoups most of the initial investment. In the consecutive years the acquired company is constantly squeezed for cash in order to service the interest payments and dividends. Finally after about five years the company is trimmed to the max in order to dress for resale. And as a PEC you can expect anything between 20-30 percent of annual return (so far).