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peterbirksI try to steer clear of individual company comments these days - burnt fingers from the LLMA fiasco. Any stuff here will lean closer to Stephanie Flanders' remit than Robert Peston's.
But as I was skimming through Royal Bank of Scotland's 274-page annual report (I'll have you know that I did six sets of annual results, from three continents, this morning before 10.45am -- Allianz, RSA, RBS, IAG, Trygvesta, and Aegon) I was muttering to myself "Jesus, this company is shit". And so it was a bit of a surprise to see the main thrust of the business commentary as positive.
Peston this morning covers much of the ground that occurred to me -- mainly that a bank that managed to coin £6.35bn from its investment banking arm still managed to book £3.6bn in losses, and that its impairments are still rising. It must be awfully disheartening to be on the investment banking side at RBS -- seeing all of the money that you are making, and a bit more besides, vanish into a black hole on the other side of the building. I heard a rumour that one of the stars on the RBS investment banking side said "fuck this for a lark, I'm off" and has promptly been snapped up by Nomura. The risk to RBS could be a reapeat of the Abbey National fiasco (which eventually led to it falling gratefully into the arms of Santander), where only children will be left to work in a world of sharks.
However, even Peston missed the arcane area of RBS Insurance -- a sizeable operation that RBS will have to sell as part of the EU stamping on companies that have the nerve to get state aid.
To be honest, the insurance results stank (compare and contrast them with RSA's numbers), but the most impressive performance (or, rather, the most impressive non-performance) was on the reinsurance side. RBS cut the amount it reinsured out from £206m (in 2008) to £165m. Its claims went up from about £3.1bn to £3.6bn. But the amount that it could claim back from reinsurers fell from £104m to £55m. Or, in simple terms, last year I had claims of £3.1bn, but I got half of my reinsurance premiums back. This year I had claims of £3.6bn (on roughly the same level of gross written premiums), but I got only a third of my reinsurance premiums back.
To be frank, that kind of thing would be hard to arrange even if you were trying. I can only guess that RBS had certain "attachment points" (in effect, the levels of loss from an event or a sector before the reinsurance payments kick in) that were just high enough not to kick in. One immediately has to suspect that the guys doing the underwriting at the reinsurance companies knew rather more about the business than did the buyers of reinsurance at RBS. Or maybe the guys at RBS were unlucky. After all, there has been a lot of bad luck there in the past few years.
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But as I was skimming through Royal Bank of Scotland's 274-page annual report (I'll have you know that I did six sets of annual results, from three continents, this morning before 10.45am -- Allianz, RSA, RBS, IAG, Trygvesta, and Aegon) I was muttering to myself "Jesus, this company is shit". And so it was a bit of a surprise to see the main thrust of the business commentary as positive.
Peston this morning covers much of the ground that occurred to me -- mainly that a bank that managed to coin £6.35bn from its investment banking arm still managed to book £3.6bn in losses, and that its impairments are still rising. It must be awfully disheartening to be on the investment banking side at RBS -- seeing all of the money that you are making, and a bit more besides, vanish into a black hole on the other side of the building. I heard a rumour that one of the stars on the RBS investment banking side said "fuck this for a lark, I'm off" and has promptly been snapped up by Nomura. The risk to RBS could be a reapeat of the Abbey National fiasco (which eventually led to it falling gratefully into the arms of Santander), where only children will be left to work in a world of sharks.
However, even Peston missed the arcane area of RBS Insurance -- a sizeable operation that RBS will have to sell as part of the EU stamping on companies that have the nerve to get state aid.
To be honest, the insurance results stank (compare and contrast them with RSA's numbers), but the most impressive performance (or, rather, the most impressive non-performance) was on the reinsurance side. RBS cut the amount it reinsured out from £206m (in 2008) to £165m. Its claims went up from about £3.1bn to £3.6bn. But the amount that it could claim back from reinsurers fell from £104m to £55m. Or, in simple terms, last year I had claims of £3.1bn, but I got half of my reinsurance premiums back. This year I had claims of £3.6bn (on roughly the same level of gross written premiums), but I got only a third of my reinsurance premiums back.
To be frank, that kind of thing would be hard to arrange even if you were trying. I can only guess that RBS had certain "attachment points" (in effect, the levels of loss from an event or a sector before the reinsurance payments kick in) that were just high enough not to kick in. One immediately has to suspect that the guys doing the underwriting at the reinsurance companies knew rather more about the business than did the buyers of reinsurance at RBS. Or maybe the guys at RBS were unlucky. After all, there has been a lot of bad luck there in the past few years.
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Date: 2010-02-25 10:38 pm (UTC)Incentivise This, Sucka!
Date: 2010-02-27 05:43 pm (UTC)Once it comes down to outright failure ("To be frank, that kind of thing would be hard to arrange even if you were trying"), corporations flip from the bonus culture to CYA, and now it's a beauty contest more than anything else. Simply put, you get fired because your boss doesn't like you, or is afraid of you; not as some sort of disincentive scheme. (Voltaire might disagree with me on this one.)
I'd love to see external evidence to support the banks' assertion that "we have to pay top dollar, plus incentives, otherwise our smartest people walk." This appears to be an axiom in the City. The unspoken, and unexamined, corollary is that "our smartest people don't have the ability to step up."
In other fields of life, this would be regarded as just so much self-serving bollocks. Cristiano Ronaldo cannot be allowed to leave, because then all we've got is Wayne Rooney. Let's pay Cristiano a twenty million bonus to make sure he stays!
Even in the smartest corners of the financial media, I've never seen anybody serious challenge the concept that bottom-line performance and pay are closely correlated. Even given that assumption, correlation does not imply causation.
My personal hypothesis is that Taleb is right, and that (over time) market success is mostly a good run of the dice. You can make exceptions for people like Diamond, who clearly knows what he's doing, but to throw a million dollars each at a thousand random idiots is clearly insane.
Much better to clear out the deadwood and concentrate on the bits you can back with institutional knowledge. (It's even odder that some people will actually pay good money for the deadwood: cf ABN.)
Re: Incentivise This, Sucka!
Date: 2010-02-28 09:25 am (UTC)I suspect that there is a high degree of skill involved in what these top performers do, but that there is also a high degree of standard deviation/noise. And I think that the world as a whole (not just banking) tends to put too little emphasis on the noise part of the equation. In other words, yes, you have to be good, but you also have to be lucky. And there is no guarantee that the lucky part will continue (see Guy Hands, Terra Firma).
The difficulty in the banking world is that it's v difficult to keep the "star in reserve", as he is often on his bike before the superstar decides that he wants more money. And what "star in reserve" is going to want to be at RBS? That's what I mean by the fear that, not just the lucky talent will leave, but the talennt-in-waiting will either have already left, or won't even apply to join in the first place. "We'd like you to give up five years of your life and, if you do that, and you get lucky, you might earn £150,000 in a year". Err, no thanks.
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Re: Incentivise This, Sucka!
Date: 2010-02-28 09:54 am (UTC)If someone radically outperforms their peers, then fine, they deserve to get a percentage of that outperformance. If they merely do well then everyone else is doing well, they should get free Luncheon Vouchers.
Re: Incentivise This, Sucka!
Date: 2010-02-28 11:11 am (UTC)It's February. It's raining. Why aren't you in the Caribbean, Geoff?
Re: Incentivise This, Sucka!
Date: 2010-02-28 06:46 pm (UTC)Guy has always been good at intensive networking. He was known at Oxford for his, ah, intensive friendship with William Hague. Both of them seem to have done well out of this particular talent (the networking, I mean); one at McKinseys, the other at Nomura.
It is indisputably true that Mr Hands made a huge amount of money, whilst at Nomura, both for himself and for the bank. Picking apart how he did so, and whether he just hit a sweet spot in the market, is not a matter I wish to discuss here.
However, it does seem to me that he is a pretty good exemplar of somebody who does extremely well in a particular environment (in his case a large investment bank backed with Mrs Watanabe's savings and a sodding good set of analysts) and, well, not so well in any other environment. This is part of what I was getting at with the reference to fitness landscapes.
Not to say that Terra Firma has been an utter failure, but I do suspect that, in so far as it has been a success, it is because of networking, and salesmanship, and an entirely irrelevant track record, all of which bring in money from Greater Fools. The moment Terra Firma ponied up for EMI, I started thinking about some of the gorier Greek tragedies -- hubris, nemesis, and catharsis; all that sort of thing.
It'll be interesting to watch the catharsis from the sidelines. I note from a quick breeze through google that hamartia is often taken as the first step, but since hamartia has at least three meanings, I'll leave that one to the scholars.
Re: Incentivise This, Sucka!
Date: 2010-02-28 06:49 pm (UTC)Problem is, I can't bring myself to give a fuck either way.