Knowledge is the only cure
There is a horrid fascination about watching the unprecedented events in the global financial markets. The daily question is what is going to happen next and to whom? Whatever the latest twist and turn – commodity price rise, another fund heading into the arms of the receivers, banks bailing out each other, central banks and regulators struggling to regain control – treasurers not immediately caught up in the events will be ensuring as far as possible that their companies will not be drawn in.
The longer-term question is – when the markets ease themselves out of panic’s grip – what will be the consequences? Talk to the banking industry and it is impossible to avoid a new realism which could at times be mistaken for gloom. Yes, deals are being done, mostly by blue chips with cast-iron reputations, but even so there is no doubt that caution and prudence are the relearned watchwords being uttered by re-empowered credit committees.
The events of the past few years resemble a modern version of the emperor’s new clothes. Now we’ve all been caught out, the regulators are desperate to chart a course away from the current conditions. One common theme is a desire to tackle complexity. In our article on hedging on page 42, the point comes over loud and clear: if you don’t understand what the instrument is doing, and in particular are not completely aware of the downside risk, you should either find out or forget it. Good treasurers don’t give in to pressure to change their mind.
US Treasury Secretary Henry Paulson is trying to prescribe some new medicine to cure us of our current fever of market turmoil for good. More specifically, Paulson says he wants a complete overhaul of the market for mortgage derivatives and has criticised the complexity of the products. For him complexity is the enemy of both transparency and market efficiency.
His comments weren’t greeted with universal approval in the US, but European Commission boss Charlie McCreevy is also tackling complexity and transparency. McCreevy argues that financial innovation in itself is a good thing because it facilitates the more efficient hedging and dispersion of risk, the better management of capital and liquidity, and generally enables financial products to more closely match the needs of market participants. If he is right, the problem isn’t financial innovation, but the understanding of what exactly has been innovated. The opportunities and products that financial innovation spawns have implications for virtually every dimension of risk: regulatory, documentary, credit, market, operational, and last but not least reputational risk.
McCreevy points out that from the board room to the dealing room, the understanding of the nature of the risks associated with innovative financial products and techniques – and the way they are managed and measured – has fallen too far behind the pace of innovation itself. This lack of understanding must be addressed at regulator, supervisor and boardroom level. It seems the only realistic course: we can’t turn back time and uninvent these products. The only option is greater control through greater knowledge.
PETER WILLIAMS
Editor
Treasurers told to look to HR in M&As
Treasurers and other financial professionals should rely on human resources professionals in merger and acquisitions (M&As) deals to ensure greater success.
Payment systems take the strain
The Bank of England published its fourth payment systems oversight report at the end of February. The Bank currently has non-statutory responsibility for ensuring the resilience of payment systems, while the Financial Services Authority (FSA) has responsibility for the regulation of members and other elements of market infrastructure (for example, clearing and settlement systems).
Markets spy the first green shoots of returning liquidity
The first green shoots of a return to some form of liquidity in the credit markets took hold in March as big defensive stocks with solid investment-grade paper tested whether the thaw was under way.
Ask the experts: Navigating choppy waters
Arthur Burgess and Stephen Pugh look at the lessons of Northern Rock, while Martin Cade looks at the wider lessons
to be learnt from the liquidity crisis.
With growing problems surrounding the employability of school leavers who opt out of further education, the Education and Skills Bill, due for debate in 2008, is set to engage more employers and young people in education and training.
Safety first
Executive summary
Alistair Darling’s first Budget contained a number of announcements that are relevant to treasurers. This article considers the key ones.
Brewing giant Scottish & Newcastle has transformed itself from a regional to an international force in recent years. Alan Dick, its Director of Financial Group Services, tells Graham Buck how the group reinvented itself.
CDS contracts are no longer seen as improving the overall stability and security of the financial system but as actually creating additional risks. The rapid growth of the CDS market, coupled with a lack of regulation, makes it unclear how deep the recently uncovered problems go. Already, a number of financial institutions have revealed heavy losses.
In the third of its series of articles, the RBS Debt Capital Markets team reviews themes and trends in financing and corporate capital structure, suggesting some considerations for treasurers and chief financial officers (CFOs) operating in a changing, and challenging, financial environment.
In response to critics, the UK hedge fund industry is looking at establishing a new body to implement and promote standards. However, the Hedge Fund Standards Board, as it would be known, will not take on the role of regulator, and treasurers need to think about taking their own action.
Graham Buck reports from an ACT conference on the impact of private equity deals on the role of the treasurer and how these could be affeted by the credit crunch.
Northern Rock’s funding methods caused controversy in the press, particularly for its use of an offshore trust. Yet much of the coverage was based on misplaced assumptions about offshore jurisdictions. Reputable offshore financial centres play a legitimate and integral role in international finance and offer corporations attractive risk management and financial planning opportunities.
A survey of foreign exchange risk management practices in prominent multinationals show that more than 90% of respondents work along a centralised treasury model which drives banking relationships. Add to this that FX management usually means minimising earnings volatility or mitigating transaction risk and a clear pattern emerges: the focus is often on hedging programmes and accounting standards.
Although many companies like to think they have an open-door policy, it is not always easy for employees to let superiors know that a corporate has, or may have, a problem. More prudent companies offer staff access to a third party, through which they can safely blow the whistle without fear of reprisals.
Treasurers have taken the lead in developing the discipline of pension financial risk management. By participating in the fourth annual ACT/Mercer pension financial risk management survey, which is now available online (see link at end), you can contribute to the maintenance of this lead and help ensure that what treasurers are doing to contribute is well understood, both within the profession and outside.
Beware the treasury analyst who insists there is always some clever game to be played with a derivative transaction. Stand your ground and demand the proof.
At the end of 2007, a report criticised HM Treasury for its poor leadership and lack of direction. The report – a Whitehall-wide performance scrutiny commissioned by Sir Gus O’Donnell, the Cabinet Secretary – looked at the Treasury when Gordon Brown was Chancellor and accused him of “leading in splendid isolation”, with his department failing to encourage teamwork, motivate staff and liaise effectively with other parts of government.
