Is Marcus the new Soros?

On 27th September 2018, Goldman Sachs (Goldmans) launched its first foray into retail banking outside the USA with the establishment in the UK of its online savings account called Marcus. Offering an interest rate of 1.5% on sterling deposits, the account went straight to the top of the various, best easy access savings account tables.

Of course, older heads may remember the Icelandic and Indian banks offering market beating rates prior to the GFC, but this is Goldmans so it’s different this time!

Goldmans is no doubt pleased to be seen as the champion of the small saver in the UK. Savers in the UK have seen the base rate move from 0.25% in October 2017 to 0.75% in August 2018 but few if any institutions have passed on the 50bps uplift to their depositors. Indeed, the government’s National Savings arm has been lowering interest rates on its products, most notably removing the RPI linkage for its index-linked products from May 2019.

So the disruption to the traditional mainstream banking and building society structure has been welcomed by savers. In fact, so aggressive is the Goldmans offering that even the challenger banks cannot match the rate it now offers. Furthermore, the rate offered seems to be uncorrelated to the group’s credit rating.

 

The question no one seems to be asking is, “What is Marcus doing with the deposits”? Ford Money is raising funds but we know that within Ford there is a large vehicle financing operation. Similarly Tesco and West Bromwich have retail activities on the other side of the balance sheet.

In respect of Goldmans, there is no corresponding advertising of loan products, so what assets are Goldmans buying? Goldmans could simply be lending in the sterling interbank market but my feeling is that it is selling sterling and buying dollars, a nice carry trade as the USA has somewhat higher short-term interest rates as liquidity tightens as a result of the Fed shrinking its balance sheet.  

Goldmans alumni feature among noted EU “remainers” in the UK. Mark Carney, the Governor of the Bank of England is also a Goldmans alumnus. Brexiteers have feared that a financial crisis could be engineered to frustrate a Brexit on 29^th March 2019. They could be right. Some fear that the remainer Chancellor, Philip Hammond, would welcome such a crisis, if not actively engineer it.

George Soros famously shorted the pound in 1992 in anticipation of the UK leaving the ERM pegging mechanism. When it occurred in September that year, the BoE responded with higher interest rates to protect sterling. Perhaps Marcus is in the vanguard this time.

Notably, Goldmans didn’t launch Marcus until after Carney had agreed to stay on beyond 5^th June 2019 in order to steady the UK through the post-Brexit era. This decision mitigated Goldman’s risk with Marcus. Firstly, Carney is an arch rate dove and has not even considered normalizing UK interest rates even 10 years after the GFC. This means that a rise in interest rates after Brexit is unlikely, thus putting sterling at risk of declining further and enhancing any short sterling position. Secondly, Goldmans should be able to read the nuances better than most in the guidance given by their alumni. Therefore, they should be ahead of the game were the BoE to make any “surprise” moves. Of course, if, in the case of Marcus, it successfully corners the UK’s retail deposit market, then the BoE and the Government will be taking guidance from Goldmans!  

Apparently, the name Marcus was selected as it is the name of one of the bank’s original founders. Knowing how smug, investment bankers like to dream up codenames for the various deals they construct with an intellectual allusion, I suggest that Marcus is a reference to a character in Shakespeare’s Titus Andronicus.

 
At the end of the total carney (sorry carnage) in Titus Andronicus, Marcus is one of two adult survivors and thus in a position to install his brother as Emperor of Rome (the then EU). The twist in this case, which Shakespeare would have liked, is that dumb Brexiteers are probably putting the most shekels into Marcus and thus reducing the likelihood of the clean, "no deal" Brexit they so desire.

Will they TWiG?

Christine Tan’s Managing Asia series on CNBC is always interesting as it attempts to display Asia’s business at its best. The item shown on Sunday February 23rd, an interview with Taha Bouqdib (TB), the Co-Founder and President of TWG Tea, was more fawning than usual.

TWG Tea was founded by TB and Manoj Murjani, when TB came to Singapore in 2007. The tea business opened in 2008. So how has it been so successful in such a short time? Perhaps it’s all in the name.

Singaporeans love three letter acronyms or abbreviations be it HDB, PAP, CTE, AMK etc. There’s a world famous tea brand named after a Mr Twining. What if we take the three key consonants from that name, and start with the “T” and end with the “G”. Not to be confused with Twinings, of course, but let’s call it TWG.

Singaporeans are also suckers for brands - although they still have trouble distinguishing between fake and genuine Rolex watches or between real and rip-off Louis Vuitton handbags. So hopefully they will confuse TWG with Twinings.

To be a brand in Singapore, all you need is more than one outlet. So simply rent two or three shops from the start and in Singaporeans’ eyes, you are now a brand.

Trusted brands tend to have a long track record. Twinings was founded in London in 1706, over 300 years ago. How does TWG compete with that? Simple, just invent some heritage.

The oldest TWG can be is 1819, when Sir Stamford Raffles founded Singapore. OK, so let’s add a few years to that. How about printing 1837 on all our packaging and signage so that customers think we are steeped in tradition, dating back over 170 years?

Of course, Ms Tan didn’t actually address the choice of name or the implied provenance of the company in the interview. In fact, her best question to TB was, “How do you protect your brands from copycats in China?”.

I think she would have done better asking Twinings that.

Time for Zeti

One name that should perhaps be in the frame for the top IMF role is Dr Zeti Akhtar Aziz. She took over as the head of Bank Negara Malaysia in 2000, unusual given her gender. However, the appointment was a promotion, and recognised her skill at handling Malaysia's situation during and after the Asian financial crisis.
Whether or not she agreed with Dr Mahatir's metaphorical two fingers to the IMF rescue plan, I don't know, but the subsequent recovery of Malaysia economy is testament to a well-implemented policy.
Having trundled along in 2005/6 at around 2.50/$, the Ringgit declined in 1997 to 3.80/$ as its ASEAN neighbours felt the heat in H2 1997. In the first half of 1998the Ringgit moved lower to 4.40/$.
The capital controls introduced in September 1998 certainly shocked the market, as Dr M countered the Ringitt speculators. The Ringgit was pegged at 3.80/$, a stronger level than was perhaps expected. However, pegging the Ringgit ensured stability and meant that genuine investors had a base point for their future plans.
Coming off the peg was harder to judge. Hot money came into Malaysia in 2004 in anticipation of a de-pegging and a strengthening of the currency. Malaysia knows that it is part of the greater China region with respect to its trade and competitive position. China was under pressure from the USA to float its currency. When the Yuan FX rate was relaxed in July 2005, Malaysia quickly and quietly depegged the Ringgit while all the markets were focused on the Yuan. A lucky but nevitable break for Malaysia
Bank Negara adopted a managed float after depegging. Today, with the MYR at 3/$ compared with the peg of 3.8, the currency has clawed back much of Asian crisis losses.
Banks in Malaysia have had tricky times in the early 1990s and even Bank Negara struggled after some specualtive trades around that time. But since the crisis of 1997, BNM and Dr Zeti, in particular, have been performed well.
Apart from cocking a snook at the IMF and its one-size-fits-all policy, Dr Zeti has a good understanding of how Islamic finance can run alongside traditional banking.
At 64 years old she is a couple of years older the Strauss Kahn; furthermore, earlier this year,she was reconfirmed in her current job for the next 5 years so it might be that time is not on her side. Someone once told me that she was a gooner - not sure if that's true, but it is a slight blot on her otherwise impeccable credentials to be the new head of the IMF.

Nationwide clerical bungles, service gaps and waste

What’s up with the Nationwide? The back office is falling apart it seems. David Rigney and his operations managers, needs to start managing.

Two weeks ago I had a closure statement for a Capitalbond 92 account that I hadn’t even opened. Fortunately, there was no interest shown, but I would love to know where the phantom principal is.

Last week a family member received back her tear off slip in a window envelope, acknowledging that her bond maturity instructions had been received. Unfortunately, stuck behind her slip was a similar slip addressed to a Mr Alexander in Kilmarnock. The stray slip was handed in, same day at the local branch for forwarding to the rightful recipient. Staff at the branch at least took responsibility for sending it on, once I made it clear that it was nothing to do with me. So Sir, it should be with you soon!

And on Saturday, I eagerly opened a plain front envelope expecting a cheque for about 30p from Nationwide – more on this later. But the cheque was only for 2p and payable to a Mistry person. I will pass the wrong cheque to the local branch later today, so I hope the person who has my cheque will do likewise! Mistry will be 2p better off; but how much is First Class mail, even assuming Nationwide gets a bulk discount?

One of Nationwide’s problems is the internet offering. I can do transactions on the internet at home but can't send messages to Nationwide from home, without being timed out on the server. I therefore have to complain over the phone or via the terminal in the local branch.

As for the reason for the 30p cheque. There is a problem affecting people who have access to internet banking but who have not signed up for a FlexAccount. When an e-bond matures, it is automatically transferred into an e-bond maturity account if the final balance, is not reinvested on the bond maturity date. If a few days elapse before the reinvestment decision is made, the internet only gives the option to transfer the maturity date balance into a new account. The few days of accrued interest in the e-bond maturity account becomes orphaned. The actual amount of such interest is not however, displayed.

Nationwide advised me to use the close account option for the e-bond maturity account and the “hidden” interest would appear. Simple, you might think, but the balance from closing an e-bond maturity account can only be sent to a FlexAccount and not to an Instant Saver account, which is deemed to be a branch account. Therefore, on closing the e-bond maurity account, I was internet messaged to inform me that a cheque for the interest was being sent to me.

Why is Nationwide struggling? Are there too many ISA’s being opened now? Has the unemployment rate in Swindon suddenly fallen and they can’t get the staff? (I’ve been out of work for over a year now – I’d be happy to stuff envelopes)

Repo 105 vs FSA soft touch regulation 101

Two things strike me about the Lehman Brothers accounting for the over-collateralised repos. What did the counterparties do in respect of their own accounting treatments of the repos and what anti-money laundering investigations were made?

If Lehman's booked a sale, how did the counterparties such as Barcap, UBS etc, account for the repos? Were they purchasing the assets on an outright basis or did they regard these as normal repo transactions?

Unfortunately we'll never know. Lehman's year end was November while European banks have December, and Japanese banks March year ends, respectively. Thus banks can readily teem and lade assets and liabilities in order to help each other present the best balance sheet possible at the year end.

Perhaps as part of the global reform of the banking system, all banks should have the same financial year end.

The money laundering angle is simply the case that if I, as a customer of a bank, were happy to accept $100 for liquid assets clearly worth $105, such a suspicious contract should lead to the bank investigating me for potential money laundering.

But then the FSA withdrew its rule book on money laundering in early 2006, relying on banks to use their own code of practice for "know your customer" procedures based on a risk-based approach.

A typical in-house code would require a bank to investigate customers entering loss-making transactions where the loss is avoidable or transactions which have no apparent economic purpose. Also any suspicion of illegal activity or attempts to hide money from law enforcement and tax authorities should be followed up.

What the risk in the risk-based approach has come to mean, is the risk that the activity is found out or that the FSA will admonish the financial institution. The FSA's light touch has been a soft touch as far as the banks are concerned.

AA - desperation from the owners

Having failed to float the company on the stock market, Acromas the private equity joint venture (funded by debt of course) has decided to rake in the cash to help solve its GBP6bn debt problem.

As the very wise, Ian Griffiths pointed out, in a recent Guardian report, Acromas had negative net assets and pre-tax losses of GBP300m in FYE January 2009, but the auditors still signed it off as a going concern. The investment bankers behind the flotation presumably took a dimmer view of the situation or had seen preliminary figures for FYE January 2010.

As for raking in cash, I don't mean that the owners of Saga and the AA are widening the services on offer, such as the AA's home repair and maintenance offering currently mooted, or Saga's attempts to woo the over-50 semi-silvers, or the insurance arm is fighting hard to gain market share, I mean that the AA is top of the moneysupermarket.com best buy savings accounts for internet only banking and the five year fixed rate bonds.

The Icelandic banks also shot to the top of the savings charts before going down, as they tried to suck in as much money as they could before the inevitable crash. So why has the AA has gone for the top spot just after its latest financial year end?

Admittedly deposits in the AA accounts are protected under the FSCS arrangement as the AA uses the Bank of Scotland as its cover. But then if you already have savings in BoS, Halifax or Birmingham Midshires, your GBP50k protection limit under one deposit taker might be quickly reached.

The Lloyds Banking Group (as the owner of BoS) must be quite happy for the AA to steal the show. Lloyds, given its market share and credit rating, does not need to raise money at these unusually high rates. While banks as a whole are still too heavily supported by purchased funds, Lloyds can easily address its need for deposits over time. One is left wondering if Lloyds is a major creditor of Acromas by any chance?

The AA must be hoping that the full-silver haired, retired Saga punters will put their money into the AA account, (they've been reining in their spending horns due to the low returns on their savings until now) and that Acromas survives. Perhaps the old folk now know that if a deposit rate is too good to be true then someone else will pick up the pieces.

As for the home maintenance plan, Centrica, the last real money owners of the AA, didn't seem to think that was synergy between car roadside rescue and British Gas bolier repairs. Perhaps they saw that cars were getting more reliable; we've certainly seen the number of AA patrolmen reduced since 2004.

Finally, as the urbane Mr Peston notes in his recent blog, the remaining 5,000 AA men are seeing their pension benefits come under pressure as the Acromas management target savings. We taxpayers and pension fund members should worry about the GBP190m deficit in the AA pension fund as we know who will pick up the tab for that when the Acromas cambelt breaks.

QE and inflation denial

What's Mr Bootle taking? As a leading proponent of Quantitative Easing and one of the world's inflation deniers, his piece in yesterday's Daily Telegraph came as a shock. It seems that he feels that there is a risk of inflation in 2011 after all!

Better late than never, this shift of stance, but I would suggest that we are already past the "minor uptick" he refers to; RPI has run at an annualised rate of 3.7% since January. I don't expect today's figure to halt this trend.

A key plank of Mr Bootle's argument for persistent deflation, is that of "spare capacity" in the economy. Unfortunately, there are few idle machines because in a service-based economy, there were few active machines prior to the downturn.

The argument thus hinges on labour availability. I would suggest that employers have little demand for workers at the minimum wage of #5.80/hour and the associated red-tape headaches of employment, equal opportunity and anti-discrimination etc. legislation - (it's a miracle that anyone is employed). In fact they would rather employ immigrant "gang" or other cheap manual labour to staff the leisure and food production sectors or outsource the job overseas, if it is an indirect service.

The same service industry skew means that sterling weakness does not boost exports to any great extent compared with past crises. It may serve to increase tourism levels in the UK, if the elevated oil price doesn't deter potential visitors, but for all the imported food, goods and energy, sterling's weakness is inflationary.

Back to the spare capacity argument, what about the supply of labour at #5.80/hour? It is perhaps not that great after all. Many of the unemployed would seem to be better off on benefits at a higher equivalent hourly rate. Furthermore, despite the internet, the plethora of databases and employment agencies, the ability to match buyers and sellers of labour has not noticeably improved. Systemic unemployment may well be higher than many think.

On the other side of the inflation equation, I haven't seen anything to threaten the pricing power of retailers, energy suppliers or tax gatherers.

QE at #200bn will be about 10% of money supply as measured by M4. Unfortunately, M4 still hasn't grown to reflect the QE already smouldering away. It has been totally useless because unlike national stimulus schemes that have targeted the borrower, such as in Singapore and Australia, throwing money at the banking system will never work if their potential customers remain too scared to borrow.

So more QE and more loose money until after the election next May. But what if inflation takes hold and the world tires of sterling before then, will we get a rise in interest rates to defend sterling? What about the capital loss on the government's holdings of debt which will be dramatic given the long duration of their holdings?

So will it be an IMF rescue or a surge in UK interest rates? Probably both.