Corporate Treasury Blog by Magnus Lind

2012-01-27T08:30:00.000+01:00

ATEL, the Association of Corporate Treasurers in Luxembourg, recently published a very good article with a very different perspective from that of the "Western" world. It's name "Finance and ethics: the Islamic View" gives a hint. Enjoy with the compliments of Francois Masquelier et al.

"I Can't Get No Satisfaction..."

2012-01-25T14:11:00.000+01:00

"...if I can't raise the tax burden. Heyheyhey that's what I say."

Sometimes that is what comes to my mind when I hear raising taxes is the answer-to-all-problems. That seems also to be the case regarding the tax on financial transactions.

Facts:

1. The collected tax has to come from somewhere, those imposed will charge it to the next party in the chain ending up that the consumer will have to pay, in the end. The expectations are 10th of billions of EUR in tax revenues. From where shall that be taken and for what will it be used?

2. Implementation of a tax on financial transactions in Sweden in the 1980-ties was a severe failure and therefore abolished in only a few years

3. Volatility will increase since market liquidity will decrease. I was a bond dealer in Sweden at the time we had the tax. The Reuter screens stopped blinking overnight and each large trading post made the price jump up or down when market makers pushed it like a hot potato onto each other

4. There is a dispute among different country leadership risking legal problems

5. Market liquidity will decrease making it more costly and difficult hedging commercial exposure from corporates

6. Financial transactions will move out of the EUR area learnt from Swedish empirical evidence. Is that something we will benefit from at this stage?

What shall we, the corporates do, to make the EU leadership understand the consequences on the real economy of their decisions?

First Smells of Victory

2012-01-23T10:14:00.000+01:00

Today the Financial Times and Reuters refer to the French and German ministers of Finance wanting to relax Basel III to steer off any possible negative effects on the real economy. Especially on the SME...

A wish come true, or maybe "be careful what you wish for"? Wishes are powerful, you see.

LINKS
Basel III for Dummies!
Basel III posts
Posts on Regulation

Basel III Survey Results

2012-01-22T19:56:00.000+01:00

Getting the Financial Incentives
right is crucial in a company
as well as in society. We need
to steer right, not just steer.
Take the "Highway to hhh..."?

I found these very interesting survey results from Eurofinance on corporate expectations from the Basel III implementation. The fact is that many corporates have already prepared themselves and reduced dependence on funding for growth. Interestingly a majority of the respondents didn't believe the regulatory bodies understand the effects on the real economy. It is a strange situation that the corporates do not rely on the ruling elite's ability to create good conditions for growth and welfare generation in the private sector . Let's think of that for a while...

Regulation Forces Corporates Become Banks

2012-01-16T20:02:00.000+01:00

Keeping eyes and ears open
for the corporate perspective

I talk to treasurers and many of them realize that in the future they will not any more be able to rely on the banking system for funding. Basically all funding needs to come from the capital markets, through working capital management and own cash generation. Decreased leverage is therefore a trend that will continue. As one peer puts it: "Cash sourcing will be the big issue in the future, the cash is no longer available in the places we have been used to. The treasurers job will be to re-invent the way we secure cash." For the large and cash rich corporates that is further challenged since they also have to consider that the strongest part of the supply and demand chains needs to take a much stronger role in financing.

Pushing through the
regulatory glass walls

Thus Regulation Forces Corporates Become Banks.

When regulation is putting banks in the role of being cheap ATMs for the public sector, it is time for a Radical Rethink. We will continue presenting more players reinventing the financial system for corporates, a system where banks play a much smaller role than yesterday. The corporates will push the glass walls .

The regulators and ruling elite need to understand the corporates are pragmatically adapting to reality, not trying to change it. The regulators and ruling elite have therefore a huge responsibility to create rule sets benefitting growth and prosperity of the corporate sector.

Euro Contingency Planning

2012-01-10T13:20:00.000+01:00

With the kind permission from the UK ACT I here post a link to a very good structure for analyzing your effects of a possible EUR breakup.

Enjoy the "Final Countdown" on "broken wings with a heart of stone".

Rock on Merkozy for a Radical Rethink!

Basel III Faces Serious Opposition

2012-01-06T16:59:00.000+01:00

Othmar Karas
MEP EU Commission

It seems as if Basel III is getting serious opposition by members of the EU commission in Othmar Karas. They are starting to realize the liquidity quotas cannot contain only sovereign bonds.

In the US they have realized Basel III cannot be implemented in all banks, instead only the largest, showing understanding it is not the best construct.

Us corporates shall be very content and feel the support. Thanks Othmar et al.

Trends in Corporate Treasury

2012-01-04T10:00:00.000+01:00

Dave Robertson

Petr Polak

I havepublished an academic paper together with my dear friends Dr Petr Polak, AssociateProfessor in Finance at Universiti Brunei Darussalam, and Dave Robertson at Treasury Strategies. The titleis: "TheNew Role of the Corporate Treasurer: Emerging Trends in Response to theFinancial Crisis". Hopeit proves useful to you.

ECB On Right Track

2011-12-31T11:59:00.000+01:00

The complete
ECB logotype

Stressful situations requires boldness, cold mind and a warm heart. During stress a leader must be able to take risks and point out the direction despite not having time to perform complete analysis and he or she even has to take unexplored routes. This is what the ECB (European Central Bank) did on the 21 December when they granted a 3-year 490-billion financing to the banks, at the unbeatable rate of 1%. This action is proof of bold leadership and may not work without hiccups but with the information we have today it seems to be a clever thing to do. It will certainly counter some of the liquidity quota problems in Basel 3.

Mario Draghi

This is a quote from a Financial Times interview with Mario Draghi, new head of the ECB: "The objective is to ease the funding pressures that banks are experiencing. They will then decide what the best use of these funds is. One aspiration is to have them financing the real economy, especially small and medium sized enterprises (SMEs). What we are observing is that small and medium sized banks are the ones having the biggest funding difficulties, and they are generally the ones who provide most of the financing for the SMEs. And SMEs account for about 70 per cent of employment in the euro area’s corporate sector".

I have had some discussions with people in the industry and there are two main scenarios as to how effective this program will be.

Optimistic Scenario
Since the European leadership previously has done several blunders unnecessarily escalating the debt crisis to unforeseen levels, something had to be done. Too many investors are leaving the European debt markets, they have especially stopped investing in sovereign and bank debt. A similar operation is planned on February 29, 2012. The credit institutions may use this new cheap resource to finance governments, corporates (remember the emphasis on the SME, often being the weak links in the supply chains) or households, or merely to anticipate the refinancing of most of the banks own 600-billion debts maturing in 2012. In both cases, this operation will provide them with a few dozens of billions of Euros of additional profits over the next 3 years, some easy money to facilitate their recapitalization.

Pessimistic Scenario

Will the Transmission Effect
work this time?

Draghi does not say that this money will go to the SMEs or weak, but important lenders, he says that ideally it should go to them. However the banks can do whatever they want with this money. Many people working in the banking sector or in the capital markets don't believe banks will use these funds to finance the economy instead they will keep them to refinance their own debt maturing next year and deposit them with the central banks and finance old lending only. That is actually what they did with the hundreds of billions injected in 2008-2009 blaming a sharp fall in credit demand and surprisingly got many central banks believing them.

Recommendations
This huge bank financing scheme could have been combined with a method to limit how much a bank can deposit with the central banks to ensure the so called Transmission Effect remains effective.

The ECB might also consider introducing certain quotas of collateral originators, e.g. x % for SME, the banks have to submit to receive the funding. This could be expected to ensure the ambition to steer the funding to the ailing sectors.

Missing Tomas and Season's Greetings

2011-12-22T09:59:00.000+01:00

This Tuesday Tomas, a very dear friend passed away. He had been ill for quite some time and fought bravely and forcefully his lethal disease. Tomas was wonderfully crazy and always full of ideas. Talking constantly sharing his thoughts with everyone. He was very particular with whom he spent time as if he wanted to optimize to whom he gave his energy. Tomas is a role model of how to live a life and a great source for inspiration. Meeting Tomas was always extremely energizing. I'm very glad he could be active, making plans and starting projects to the very end. He left this life as he had lived it, full of ideas, positive, and energized. I also want to send special greetings to Tomas' wife, another dear friend, with same qualities as Tomas. She described Tomas as someone who didn't regard life as a problem to solve, instead as an opportunity to enjoy.

/Magnus

Starting this blog has been a very valuable experience. It has taken us places, made friends and acquaintances we could only have dreamt of before. To all of you reading and supporting this blog, we thank you. To all of you who have joined our private network, the Peer Group, we are proud of being in your network. To all of you who sign up to our ambition to create an optimal global financial regulatory environment, we thank you.

Look forward to talk to you, to meet with you and to work with you in the coming year. We are always available for a call.

Aneth Eriksson, Magnus Lind, Susanna Bondéus

We wish you a wonderful Christmas and a Happy and Prosperous and Healthy New Year!

Titles in Treasury Updated 2011-2012

2011-12-19T08:34:00.000+01:00

Mike Richards, MD
MR Recruitment

The treasury industry has specialized recruiters with a vast knowledge of the treasury profession and impressive track record and networks. One of them is MR Recruitment with front figures Mike Richards and Mike Tucker. They are really experts in their field and we are particularly impressed they manage to cover almost all corners of the world. If there is someone knowing the global recruiting trends in treasury it is these two Mikes. When we met recently we discussed trends in recruiting and the MR Recruitment's salary survey.

As part of that survey is their definition of someone’s official job title. When they review the information of the participant in the survey they have to consider factors such as:

how many people report into them
how long someone has worked in Treasury
what size of treasury department does someone work in
the size of company and how this affects the complexity of the treasury operation

They therefore have to sometimes reclassify someone’s official title using the following guidelines:

Secret Mike

Group Treasurer

Head of the Treasury Function
Reports directly to the CFO / FD
Potentially on the board of the treasury entity or similar
Is ultimately responsible of all treasury operations of the group

Deputy Treasurer

There is often only one Deputy Treasurer. They will be the clearly defined second in charge of the treasury department they will be the absolute Deputy for the Group Treasurer. As deputy they have the same “sign-off” capability that the Treasurer possesses and would be expected to act in their stead whenever needed, whereas an Assistant Treasurer would be expected to refer many major decisions to / through their Group Treasurer.

Assistant Treasurer

Often there are two Assistant Treasurers in the group. Typically one may focus on front office activity and supervision of the operations team and the other Assistant Treasurer will oversee treasury control and the middle / back office functions.

International / Regional Treasurer

This position often has a number of similarities to that of Deputy Treasurer however they will usually report into a Global / Group Treasurer and will not be number two in the overall group treasury function. It will be considered a senior treasury role but they will have specific responsibility for an area linked to geography, global financial markets, group risk etc.

Mike Tucker, director
MR Recruitment

Typically from then the following are titles with linked responsibility areas:

Treasury Manager
Cash Manager
Treasury Dealer
Treasury Accountant
Treasury Systems Manager
Treasury Analyst
Treasury Assistant

The European Treasurers' Peer Group is very successful in recruiting the most experienced treasurers to the peer group where we many times discuss the new role of the treasurer and business leadership. There are many examples when treasurers have taken on the role as business leader.

To Basel III or Not to Basel III

2011-12-14T21:27:00.000+01:00

Our famous Hamlet with a
very dead bank

This is the very detail oriented program for a 2012 Basel III event in London. Only analysts, bank directors, vendors are invited as speakers. Not any of this event's target groups are corporate representatives, or any other major stakeholder, e.g. unions, or consumer groups. This is an upside down world. The Basel III regulation is the financial incentives and framework for the whole world (anyway it's the intention) and only a group of experts are involved in the design. That is really scary!

Remember that the Basel I and II had the intention to create financial stability and avoid banks defaulting. How successful have these experts been? Shall we leave them alone one more time or join them and arrange for a transparent discussion with all stakeholders agreeing? That's the question...

Find "Basel III for Dummies" here...
Apply to the Peer Group here...
We need a Radical Rethink
If the event organizer wants to sign me up as a speaker here...

Corporates Key Choices from Regulatory Pressure

2011-12-09T08:00:00.000+01:00

Stefan Ingves, Governor
Central Bank of Sweden,
presently Chair of the
Basel Committee

After meeting with a large number of peers during our European tour, currently in the UK, and talking to many of you, group treasurers, CEOs and CFOs, over the phone we understand you share a deep concern over the present credit crunch and the outlook for the future. We have also been in frequent and close contact with large banks and other players in the market. The conclusion is clear that the new regulation, mostly Basel III and the OTC regulation, will impose severe restrictions on corporate lending and risk management from banks. The corporate community reacts on this fact:

1. Default reaction– Pragmaticallyadjust the business to the newconditions. In this case it means adjusting to less availability of cashleading to reduced employment, growth, investments, cash tied up in new margincalls, increased vulnerability of the supply chain etc

2. Necessary reaction – Build up a new ”corporate financial system” with peer to peer lending, derivatives trading, A/R auctioning etc. The strongest company in thesupply chain will have to take increased financial responsibility for theweaker parts

3. Optional reaction – Actively act to change the new regulatory regime. Here is where the peer group and this blog come in....

1and 2 is already happeningand by passively adapting to the situation we risk further severe disruptions in theglobal economic activity. 3is at the moment not even contemplatedby the corporates themselves. Thereason is that the probability of the regulatory framework to change isregarded as slim and there has been no uniting force voicingthe concerns of the corporates. Contact me if you want to discuss ideas to change the situation.¨

Peer to Peer Hedging

2011-12-08T10:23:00.001+01:00

Yesterday we met with Philippe Gelis, CEO of Kantox, definitely a smart guy (check him out on linkedin). He and his team has a very interesting new solution for peer-to-peer derivatives trading starting with foreign exchange. Regulated under the FSA in the UK Kantox provides a platform for corporates to connect and peer to peer exchange foreign currency exposure. We were very impressed by the simplicity of the solution and have chosen to publish it under our page "Time for a Radical Rethink".

The European and the American Way

2011-12-07T08:11:00.000+01:00

A Swedish ministry of treasury remarked already in the 80-ties that the more we spent on health care the less we got. Bureacracy is in the European DNA since centuries.

Before the EMU (European Monetary Authority) we had 17 central banks managing 17 currencies and 17 interest rates. In EMU they all replaced their currencies to EUR but we now have 18 central banks. In Europe bureaucracy is constantly added and never questioned or forced to transparently present its value add to society. There seems to be a total lack of respect for the tax payers' money.

Au the contrary the actions to remedy the financial crisis in the US were swift and precise. On July 20, 2010 President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. The Act is comprised of 16 titles, more than 200 new rules, 60 to 70 studies and 22 periodic report. End of story.

In Europe we tried to increase the financial stability by adding several new authorities in the European Systemic Risk Board (ESRB) and three new European Supervisory Authorities (ESAs). The ESAs are comprised of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA). These new authorities was added to the three bodies we already had, which wasn't regarded as powerful enough. In turn the ESAs shall work in a network with all the existing 27 national supervisory bodies. In addition the European Financial Stability Facility (EFSF) was introduced to supply financial support to ailing EU sovereigns. I stop the listing here despite it can be much longer...

It is obvious the European solution is never going to work and it won't be increasing neither financial stability nor transparency. As with most public authorities they will strive to restrict their responsibilities over time and the gaps between what they actually perform and what we expect from them will grow bigger and bigger. And it is impossible to see the big picture and how each authority fit in and what they actually are supposed to do. That is very convenient for the bureaucrats of course. There is actually something like a free lunch. The EU is sadly a perfect example of how bureaucracy is self feeding and performing less the bigger it gets.

There is a huge difference between the European and the American way and I'm really concerned about Europe, there is not any leadership, just an enormous overhead. That was not what the EU intended to be and I feel betrayed.

We can now also see why it is so important for them to:

1. Implement a tax on financial transactions since they believe it will create more income to support and increase their numbers and sizes

2. Censor the rating agencies to decrease the transparency so no one really sees what has and is happening.

Corporates need to voice its opinion

Another sad effect is that the immense funding needs of thisoverhead is forcing Europe to pay extra high taxes and ofcourse bureaucrats introduce bureaucracy forcingcorporations doing lots of none value adding activities. It is no wonder Europe is lagging in growth and has high real unemployment since the corporate world is pragmatic. If Europe is not structured to promote, instead demote corporate activity it will decrease and since decades we have experienced a silent revolution where corporates have abandoned Europe and few new have appeared. Soon there will be an infliction point where it all has to be reversed. We are getting closer and closer to that point. I believe we must voice the corporate position more widely. CEO, CFO and Group Treasurer of companies say they are not paid for philosophical or even political discussions. That is correct. However we all have a responsibility to voice our concerns of the development of our homelands. Support this blog by becoming a "follower" and/or join the peer group so we can act.

Great Analysis of Basel III by S&P

2011-12-05T10:00:00.000+01:00

I have kindly received the permission from Standards and Poor's to publish this analysis on the effects on corporates from Basel III and Solvency II. I'm not opposed to tightening of capital requirements as such since it will impose higher financial discipline in society. However the most disciplined and well governed sector is the corporate sector and they do not need higher capital requirements per se. We also need to consider the large tax burden the European corporations has to pay, e.g. largest social contribution, high capital gains and income taxes for entrepreneurs, large hidden taxes in the sense of immense and multi-layered bureaucracy and expensive labor laws. All these costs has to be financed. If the highest capital requirements are imposed on the corporates, how are they going to finance all this and have any cash over to run and grow the business? That is the crucial question.

We also see a significant risk for the SME sector, being the weakest parties of the supply chain, already basically unable to attain sufficient financing. We should respect that a very large part of the population is employed in SME and they require working capital. If the banks are pushed out from SME financing the strongest company in the supply chain will need to step in or we need to find other solutions.

The sector in most urgent need of very tight governance are the sovereigns but they will remain capital requirement favored. The crowding out of the corporate funding is a huge risk, which will continue to enforce the misallocation of capital being a major cause behind the present crisis. We need a paradigm shift in regulatory strategy.

An interesting quote from the S&P paper on new initiatives in the corporate financial markets:

"When considering the future, it’s tempting to make the mistake of projecting changes in a static environment. Capital markets have in the past shown their capacity to reinvent themselves with the emergence of new players and innovative sources of funding. In the current transition phase that could prove to be challenging for corporate borrowers, we believe such innovation may well influence the development of the capital markets."

It's Time for a Radical Rethink

2011-12-03T12:41:00.000+01:00

We have introduced this new page where providers of new models for financial services firms are listed as they appear. The first firm is Corporate Funding Association (CFA) in Paris.

Connected through peers Susanna and I met with Philippe Roca of Corporate Funding Association (CFA). CFA is a project aiming to build a bank only focusing on corporate lending to counteract the regulatory actions to force the banks from corporate lending. The Basel III framework is very aggressively and consistently acting towards corporate activity and most likely it will be implemented to its full extent only in Europe since other regions will probably not let their corporate community suffer from lack of corporate funding.

The CFA is looking for more members joining so contact them if interested. Contact details and more information here.

Ideas to Improve Corporate Funding

2011-12-02T10:00:00.000+01:00

Cash for corporations are drying up fast now and it is becoming more worrying for each and every day. This is a short posting to list and link to three measures I have discussed with peers to improve corporate funding:

The financially strongest party in the supply and demand chain introduces supply chain financing programs
Central banks limit the amount of deposits they accept from each bank forcing excess liquidity out to the real market
Delay tax collections

There will be other ways presented soon on a blog near you :)

Please send me ideas and I'll post them. We need to work together on this.

Central Banks Should Limit Bank Deposits

2011-11-30T09:30:00.000+01:00

Waterfall symbolizing the
Alan Greenspan Theory

There is something called the "transmission effect" meaning that when the central banks infuse liquidity into the banking system it sooner or later comes out into society. Alan Greenspan, former Fed Governor, described it as pouring water at the top of a mountain. You know it will eventually get to the valleys but you do not know when and which ways it will take. During the crisis of 2007-2009 the transmission effect stopped functioning. We discussed with central banks about it and we found that some did find other ways to get liquidity out in the none banking system and some did not. We are again seeing that the transmission effect does not work. Banks deposit a huge amount of its cash with the central banks, which in effect are bank runs and the central banks need to put even more money into the bank system in a vicious circle. This must now stop. One way might be to limit the amount each bank can hold with the central bank forcing the excess liquidity out to the real economy. Just a thought...

Responsibilities of Strongest Chain

2011-11-29T21:31:00.000+01:00

The effects of the present credit crunch and new regulation is putting a huge strain on the weaker companies in the supply and demand chain. The strongest parties have for many years outsourced capital expenditure and costs to the weaker parties and the chain is not stronger than its weakest link. Unfortunately we still see strong, cash rich companies holding onto cash for much longer than the payment terms say, all for improving its own working capital. Large corporations proudly present how they have been able to shrink the cash conversion cycle simultaneously forcing other parts of the chain to expand its number of cycle days. This will not be possible any longer since this credit crunch risks becoming a systemic shift substantially reducing the cash availability for corporates and only those with high ratings might be the only ones able to find sufficient funding. Pushing the payment terms unilaterally to suppliers will not any longer work, alternatives have to be presented. We already have reverse factoring and dynamic discounting and new models are being developed, such as web auctions of account payable.

In the short term however the strongest parties have to consider the cash conversion cycles not only for themselves in isolation but for the whole chain. In the longer terms we need to develop solution to replace the cash that has disappeared when regulation forces banks to leave us.

In Important London December 6-8

2011-11-29T10:11:00.001+01:00

Next peer group meeting will be in London 22-25 May 2012 and we are planning the program details to be sent out to all members shortly.

The peer group and this blog is receiving very much interest from all over the world. Our aim is to voice the corporate perspective and present what, from a financial perspective, is important for the corporate society. During the next six months we have to focus our attention on the regulatory framework since it will be set in stone next summer. We need to change it before then. The more followers and support we get from you, the more we can voice our opinions. Joining the peer group is a good way to show your support.

In preparation of the meeting and following up the great interest from the London group treasurers and other parties Susanna and me will come to London next week. Looking forward to meet you all. If we haven't contacted you and you want to meet contact us here please.

Marie-Antoinette Governs EU?

2011-11-28T09:30:00.000+01:00

The best with falling
is getting back up.

I have repeatedly referred to "blunders" made by the EU politicians and bureaucracy leading up to the debt crisis and coming recession. Some examples include:

Basel III pushing the banks to allocate its investments to sovereigns and leaving the corporates. The Basel III framework is by some described as an act of war against the corporate society and the whole corporate world is now discussing ways to build up a new financial system without the banks. Because we need to be able to offload financial risk and borrow and invest cash disregarding of the regulation. The banks are also leaving the EU sovereign debt instead investing directly in the ECB to protect themselves further escalating the crisis. Remember that the previous crisis started in the regulated part of the financial industry.
Censoring the rating agencies making investors unsure what risk each EU country's debt represents. Most investors have investment policies using official rating as the basis for allocating capital.
Introducing a Tobin tax taking away the liquidity of the markets forcing the corporates to find natural or strategic hedges, which in one way is good but may force some to move even more operations to the growing markets where the business is. The Tobin tax will definitely make corporate business more risky since fewer risks can be hedged instead borne by each individual corporation.
There is a discussion and worry that corporates will not be exempt for the central clearing of OTC derivates. The concern is what such a clearing would require in respect of collateral forcing the corporates to tie up even more capital leading to cancelled capital expenditure.

Slipped too many times now

On top of all this there is now circulating a rumor that during the discussions of a rescue package for Greece the Elite decided that the CDS (Credit Default Swaps), being an insurance against default, should be worthless as part of the 50 per cent hair cut on Greece debt. The background is that the large funds managing our pensions and savings and the banks had invested in Greek debt and had bought CDS to cover for the risk of Greece defaulting or the risk of loosing money in a hair cut. By making the CDS worthless the investors who do not want to take the risk of default of e.g. Greece and Italy have now left the market, which dried up liquidity and further escalated the crisis.

We need to stop this Marie-Antionette behavior by the Ruling Elite instead starting a dialogue so the corporates can avoid loosing too many jobs rampaging growth completely. The corporates are pragmatic and needs to act to mitigate for the political decisions, which now in all ways adversely affect their business.

Delay Tax Collections - Save Jobs

2011-11-26T09:00:00.000+01:00

The double effects in Europe of many severe blunders by the ruling elite leading to investors withdrawing from Europe and the severe effects from Basel III is making corporate funding more difficult for each and every day. The construct of Basel III strives to crowd out corporate lending instead favoring sovereign debt since corporates' are charged with full capital requirements and sovereigns with none. This means that we URGENTLY need to take constructive actions easing the situation for corporates. One such effective measure is to improve the cash flow by delaying tax collections. Many countries did that already in the previous crisis, some made the delays permanent some did not. Now it is time to consider delaying tax collections even more since the basic fact is that if there are no funds there are no jobs. Our Precious Ruling Elite, make a few smart moves now please, for a change.

Cash Cushion Makes Sense?

2011-11-25T10:13:00.000+01:00

Singing in the rain?

Two weeks ago we had a great meeting with a peer discussing capital structurestrategy. Is there any idea having a cash cushion? We all know it costs innegative interest carry and it distorts key indicators calculated as percentageof total asset. Is that price worth having a considerable cash balance, or cashcushion, for a rainy day?

In myprevious discussions with peers we have come to the conclusion that it is necessary. But now this peer challenged our conclusion. He had drawn his conclusion from the previous meltdown in 2007-09 that we have a credit risk both ways. Both when we borrow and when we invest. Having a bank counterpartygoing bust means trouble. A bankrupt bank wants to get its lending backand cannot repay what we have deposited with them. Either way we turn the credit risk on the banks remain. Maybe keeping the old-fashioned capitalstructure of lean balance sheets, repaying and taking up new debt to cover foryour cash flow swings, might not be so bad after all. It is necessary though tobe very close to your banks and keeping their performance in focus andupdated with yours. Something you need to do anyway especially in Europe wherethe results of the stress tests have not been disclosed as in the US. In Europe we have no clue what state the banking sector is in.

Where to invest and
where to borrow?

Some peershave chosen to borrow from one bank group and deposit with another to safeguardthis risk of off-set. However it does not protect from a systemic crisis.

Thecorporate sector is pragmatic and adapts fast, the banking sector is locked inby rules and regulation so hard they can’t hardly breath and the sovereigns default on us. Where to invest and where to find the funds?

Sell Assets to Repay Debt

2011-11-22T18:57:00.001+01:00

Organizations that can afford these kind of offices
must be very profitable and valuable -
let's disinvest

The EU is in deep financial problems and we must sell assets to repay debt. Last week I passed through Brussels and I got an idea. During the past few decades there has been huge growth of city center expensive and luxurious offices filled with the EU administration.

Considering how fancy the buildings are and the fact they are located downtown in the most exclusive locations, I conclude the local produce has to be immense and thus the value of the assets enormous. Being bad times and all we should expect fire sale prices but remember it is not only in Brussels we own these kind of operations so we are actually very rich despite lower prices. Think about it, I'm serious. We would not only be able to earn a fortune we would cut costs too. For instance we have only one currency and 18 central banks. Maybe we can sell one or two to Zimbabwe?

Eating silver is not healthy,
better to sell it

I realize it is going to get tough and we need to survive without large parts of our bureaucracy. Just realize how much the poor Belgian people having had to suffer from not having a government for over 500 days in a row. It must have been tough for them, but they have endured. If you loose all your money, you need to dispose of your silver ware. Maybe China is interested? They have lots of money, I've heard. Maybe we could even ship the buildings like we did to the American tycoons years back?

We must find cheaper and easier ways to keep the EU and the EMU. The EU administration should learn from the corporate sector how to continuously improve efficiency and effectiveness and quality of its services and management. Europe will no longer afford these huge public apparatus.

Treasury's Largest Challenge is Increasing Sales

2011-11-22T17:02:00.000+01:00

"Treasury's largest challenge is increasing sales" was the opening statement from a treasurer I met last week. Isn't that a statement issued by a business leader nothing is. The ability to think broader than the financial remit is the characteristic and so is having the guts to address key strategic issues pragmatically.

I had a very interesting discussion the other day with another peer working in a company in financial distress where he tried to find remedies to the symptoms created by lack of strategic response to high financial leverage and declining revenues. We discussed at length the actions the company would need to take, for instance replace loans with new equity and decrease the costs levels. Actions being obvious and necessary but not taken since the executive management must have been in some state of shock or despair. (I know that feeling having been there myself). Many might fear authority and believe top managers are some kind of supermen and women.

I tell them we all look the same in the shower and anyone can be paralyzed for some reason or another and that strategy does not have to be complicated. If you know the conditions of the company and its market, the strategic choices are clear for most. But no strategic decision is easy to implement, and there is where the differences lay. Making the decision is 1 percent of the success. Seeing the strategy succeed through hard times, obstacles and failures is what management is all about being 99 percent of the effort. I encouraged the treasurer to develop a strategic plan based on getting the cash flow positive and derive all actions therefrom. He should present the conclusions and recommendations consistently over time to all he met and to all management. He should prepare to present underlying analyses and scenarios but only if asked for. If proper actions are not taken by management you have anyway tried and should be proud and trust having high integrity will always benefit you in the end."The winner never quits and the quitter never wins".

A very successful example was when a peer succeeded to transfer the credit risk on the distributors over to the banking system, which also increased predictability of the collections and making the banks grateful for the new customers. Treasury has very many opportunities to take a strategic role redefining the business.

Going to Paris - ECB Must Develop Tool Boxes

2011-11-21T09:48:00.001+01:00

Nice-Cannes Riviera Marathon,
my first full marathon 42,2 km.
Arrived in Cannes after 4 h and 8 m.
Next time sub-4.
(Sculpture bonbon drapeau Grèce)

Susanna and me are leaving lovely Riviera for great Paris today with peer meetings in the following days.

I fear the coming weeks will be very turbulent since EU foreign investors are exiting the market after the extreme blunders by the EU leadership. Putting a ban on independent rating was outright stupid as is fighting the investors with a tax on financial transactions. The complete ignorance from the EU leadership is very worrying. First of all they make Europe something investors shy away from and they do absolutely have no interest in understanding the corporate positions. I hear basically everyday of corporates decreasing capital expenditure, postponing investments since there is no financing available. Some peers even have to turn down orders for that reason! I believe that the European central banks do not always have a proper tool box (Bank of England being the exception) to assist corporates, instead they expect pouring money on the banks means it will eventually reach the corporates at some time. We know from the previous credit crunch that the so called "transmission mechanism" does not work. The European Central Banks therefore urgently need to implement a toolbox for buying commercial papers etc. Bank of England implemented such a toolbox already 2008 (hurrah!) and should be a role model for the other central banks. This is urgently needed, we do not have time for lengthy discussions. We need leadership and action!

The EU central banks urgently
need to develop tool boxes
for corporate financing.

We still have some time slots next few days in Paris if you are interested in a meeting. Please call Magnus +46704809900 or Susanna +46705206124.

Corporates Have No Financing - Let's Introduce the Tobin Tax

2011-11-18T11:00:00.000+01:00

The French revolution took place in 1789 when the old kingdom was overtaken and replaced by la République. After many years of very poor management the people basically got fed up of the king's and his courts' bad policies leading to starvation and impoverishment for anyone but the ruling elite. The last queen, Marie-Antoinette beheaded in 1793, was told to have asked: "If the people do not have bread, why do they not eat pastries?" symbolizing the ignorance.

Anyone finding a similarity with: "If the corporates have a problem finding working capital, why do we not implement a tax on financial transactions?"

More and more of us treasurers just shake our heads in despair to the actions the European leadership takes to solve the crisis: Tobin tax, censoring credit rating agencies, Basel III as just a few examples. Not very impressive.

On Tour in La Belle France

2011-11-17T22:00:00.001+01:00

Today I started in Brussels, Belgium with a great meeting with a young group treasurer who definitely understood the rules for becoming a business leader. It will be very interesting to follow him and his career in a highly leveraged company. I hear more and more from treasurers in all kind of companies, regardless of leverage ratios, business models etc that funding gets increasingly difficult. The corporate sector suffers from crowding out by sovereign debt and banks suffering from too much PIIGS bonds. We are returning to a situation similar to 2008-09 fast, in Europe anyway. No wonder when considering how the EU leaders are failing to solve the debt situation.

After Brussels Susanna and me are going to France, first stop is the Riviera where we will have a peer dinner on Saturday and I will run my first full marathon on Sunday. The race starts in Nice and ends in Cannes and it must be one of the most wonderful marathon races in the world. I just love France and have spent the past more than 15 summer vacations there. Next week Susanna and me will have lots of meetings in Paris, returning to Brussels and then back to Amsterdam.

Peer discussions are always energizing and provide plenty of material to blog on. Thank you all for taking time to meet with us.

Searching for Fiscal Discipline

2011-11-15T10:00:00.000+01:00

Professor Jeffrey Frankel
Harvard Kennedy School

A very kind peer pointed me in a direction of an interesting recent paper by Jeffrey Frankel, professor at Harvard Kennedy School. Here is the abstract:

"The paper studiesforecasts of real growth rates and budget balances made by official governmentagencies among 33 countries. In general, the forecasts are found: (i) tohave a positive average bias, (ii) to be more biased in booms, (iii) to be evenmore biased at the 3-year horizon than at shorter horizons. Thisover-optimism in official forecasts can help explain excessive budget deficits,especially the failure to run surpluses during periods of high output: if a boom is forecasted to last indefinitely,retrenchment is treated as unnecessary. Many believe that better fiscal policycan be obtained by means of rules such as ceilings for the deficit or, betteryet, the structural deficit. But we also find: (iv) countries subject to abudget rule, in the form of euroland’s Stability and Growth Path, make officialforecasts of growth and budget deficits that are even more biased and morecorrelated with booms than do other countries. This effect may help explain frequentviolations of the SGP. The question becomes how to overcomegovernments’ tendency to satisfy fiscal targets by wishful thinking rather thanby action."

Basically the EU governments (generally speaking) has avoided compliance to the stability and growth pact by saying: "We won't comply this year, but we'll do that next year" and supplied budgets not being serious in the first place with largely overestimated surpluses. Frankel again: "political leadersmeet their targets by adjusting their forecasts rather than by adjusting theirpolicies." My immediate reflection is that we need to implement similar governance discussion in the political sector as we have in the corporate sector. In the present environment a political elite can bring a whole nation to the brink of disaster without any repercussions and there are no contingency measures in place.

Jeffrey Frankel concludes that the best way to mitigate improper budget practices as those in the EU, independent advisers need to do the forecasting and adhere to practices without being controlled by the political sector. In the EU we have bureaucrats employed by politicians and paid by the people. Maybe it should be the other way around, anyway we need a tight leash on them both.

Boat is Leaking - Trim the Sails

2011-11-14T10:00:00.001+01:00

There is a hole in the boat. Maybe
we shall start by fixing the hole?

It doesn't matter if the implementation is impeccable you will anyway fail if the strategy is wrong from the start. Obviously I talk about the financial regulation having the strategy that avoiding banks to default will lead to financial stability and prosperity. The corporates realize this isn't logical and therefore they are reluctant to participate in the discussions of the final revisions of the Basel III framework being passed in only about six months.

The peers are contacted by banks, and the peer group is contacted by banks to assist in making the regulators agree to minor adjustments of the Basel III. The regulators have been hearing from banks that the effects of liquidity quotas etc will make it much harder for corporates to lend and off load financial risks. The regulators then requests the banks to come up with corporates to discuss the last details in Basel III. The banks fail finding corporates wanting to assist and then they become more and more frustrated.

"No no, we shall trim the Sails"

The question is why are not the corporates participating? Well the reason is that why discuss a regulatory system that starts from a wrong platform and with the wrong target? Having a bank centric model, aiming to save the banks with higher capital requirements for corporates only (not for sovereigns or real estate investments) will lead to yet another disaster. This is actually an insult by the regulators and politicians supporting Basel III. The whole framework very bluntly says that banks should reach a bankrupt remote position through limiting risk taking on corporates. Instead they should pour money into public sector spending and real estate speculation. Why do they not understand that corporates just turns around and leave and prepare for a system where banks have less importance for their funding? The corporates do not trust committed credit facilities any more, instead they have cash at hand, and they postpone or abandon leveraged growth since they cannot rely on bank funding. This is the implication of the financial regulation and how would minor alterations change that fact?

We are in the same boat and it is leaking like crazy. The corporates being in the real world say "we must fix the leak". The bankers and regulators focus on "trimming the sails". I believe that the only way to get the corporates interested in any discussion is when politicians and regulators are prepared to discuss the strategy, not only minor details:

A reasonable strategic platform for financial regulation according to me:

Provide financial conditions topromote global trade and wealth creation for MNC, SME in rich and poorcountries
Encourage fiscal discipline bysovereigns
Encourage balanced investments incommunity infrastructure

Value of EU Rating

2011-11-13T16:11:00.001+01:00

The EU commission is preparing to limit the CRA (Credit Rating Agencies) such as Moody's, Standard & Poor's and Fitch, abilities to independently apply a rating to an EU state. There is a very high risk it will backfire. The last thing you should do when being in a financially distressed situation is to decrease the transparency. It signals, actually screams, that you have no control of the situation and only want to buy time.

Consider how it would work in practice. A CRA performs a rating exercise and concludes that the rating should be A, which it presents to an EU body approving ratings. Since A in this example would mean a downgrade the EU body does not approve of the rating, instead saying it is to be AA. What should the CRA do? Issue an AA rating inflicting on its integrity? If I would be a CRA I would sincerely consider abandoning the market of EU state rating. It would be a severe loss of revenues, but the other alternative would jeopardize the business altogether. An independent CRA issuing ratings not complying to professional rating standards will sooner or later go out of business.

A much better way out of the EU financial disaster would be to increase the transparency and clearly point out a credible way to prosperity. Unfortunately the EU leadership is constantly failing doing so and has also sent a strong signal threatening the CRA if they were to expose the failures. What happens if the CRA refuse to rate EU states? How would the public sectors attract investors to buy all the bonds they need to issue without any credible rating?

I'm sure the investors are starting to question EU states' ratings already and it will affect their investment decisions. Consider how investors in North America or in Asia interpret the situation. Rather safe than sorry, I would presume.

France Top Rated

2011-11-12T10:00:00.000+01:00

Today I heard rumorsthe French state sent
the Légion Étrangère to
pay the office of the S&P acourtesy visit.
Making them "an offer they can't refuse" or
"it's your name or your brain on the paper", or
“I would prefer to haveour AAA maintained”.
Love that movie…

Standard andPoor's unintentionally issued a note to some subscribers that "Francecredit rating has been changed" and immediately after denied it referringto a technical error. The newspapers quoted the French Finance MinisterFrancois Baroin having said: "We will not allow any negative message topass". Relate it to the recently released plans by the EUcommission of censoring the rating institutions and you can't avoid becoming suspiciousregardless of which country in question. Now it happened to be France and Ihave no reason to believe the top rating is anything but correct. However if weare seeing the birth of a strategy of demolishing the thermometer to fix thefever we should clearly state it as being unprofessional and definitely notworthy of democracies. In that case we would be talking of restricting the freedomof speech. Blaming the banks or the rating institutions would not betrustworthy. The ruling elite remain responsible for the state of affairsin Europe, that can’t be questioned.

It isn’t easybeing a rating agent. Remember the Enron collapse and the questioning of therating institutions being too late to downgrade and that the rating nevershowed the true state of Enron. But of course Enron was a corporation and they shallalways have a true or lower rating. Another example could be if I would be aninvestor managing the pension holdings for thousands of future retirees. If Ihad invested in 7 year PIIGS debt a few years back I would today be very disappointedof the high ratings the PIIGS had at the time. However all that is suddenlyforgotten and we have a new rule book for ratings:

Corporations –downgrade frequently and willingly and be reluctant when upgrading and only doso when it cannot be avoided.

Sovereigns – well sincethey by law are totally risk free, always give them AAA.

Banks – give themthe highest possible rating according to circumstances and never touch it again.We want to avoid run on banks at all costs.

Shame on me! I’mdefinitely too cynical now. Obviously yesterday’s unfortunate mistake was justa technical flaw that never should have been able to happen but did anyway.Puih! We can rest assured that a sovereign downgrade in Europe is even moreunrealistic than a will-never-happen technical error.

Strategic or Natural Hedging is the Trend

2011-11-11T11:00:00.000+01:00

Prepare for Mr Roubini being right.

The liquidity risk in the derivatives’ marketis increasing substantially. This trend is created through new regulation andbanks reducing proprietary trading. This means that prices will not be availableat all times, spreads will increase and bigger tickets become harder to trade. Otherfactors negatively affecting costs and abilities for hedging commercial flowsare the Tobin tax and the high volatility in the markets. In situations ofsevere stress many markets will stop working in the same way as during thedarkest periods of 2008-09.

As always corporates adjust to new conditionsfast and pragmatically in order to survive and stay competitive. We will findways to counter for the reduced efficiency in the financial markets.Effectively it means that strategic or natural hedging becomes more important by changing our risk structure, e.g. in what currencies we procureand sell. Just be careful not to offload your risk on weaker parts in thesupply chain making the costs return in other ways or in worst case as defaultsof suppliers or distributors. A demand and supply chain is obviously notstronger than its weakest link and extreme working capital practices might be counterproductivein the long term.

A frequent guest in treasury
waters.

Strategic hedging of credit risks includes managing the sovereign default risks that may spread into a counterparty risk with banks,customers and vendors. Therefore keep financing flows in the secure countries; as well ascash pools and top accounts. Adapt the payment terms to suppliers and customers dynamically as conditions change. Keepsurplus cash in bank accounts in stabile country with stabile banks. Be sureyour investments (e.g. investment funds) do not have any embedded unintentional sovereign risk and remember to borrow from stabile banks.

The conditions are changing fast andsometimes without control. Hedging and risk management are important issues we returnto regularly in the peer group. The treasurers role is to prepare rather than to predict.

Visiting DACT Tomorrow

2011-11-10T10:00:00.000+01:00

I'm ending a very energizing and positive week in the Netherlands by visiting DACT's (Dutch Association of Corporate Treasuries) annual meeting tomorrow Friday. Hope to see you there.

Greece Requires No Capital

2011-11-09T18:35:00.000+01:00

Wait a minute...

If a bank lends to Greece, the bank is not required to put up any capital in a risk buffer. You see, during the present financial world order sovereigns are totally risk free despite any hair cuts and state collapses.

When a bank lends to a solvent, profitable, well run corporation the bank is required to put up maximum capital in a risk buffer according to the so called capital requirements.

What is it I do not get? Can it be that the public servants setting up the rules wanted their employers to have a secure backstop if the tax collection did not suffice for their remuneration so they decided transforming the banks into cheap ATMs for public spending? Anyway thecurrent financial world order is questioned by the corporate treasuries.

I'm still in the wonderful Netherlands having great meetings and discussion. Thank you all for sharing.

Secure Your Cash

2011-11-08T11:44:00.001+01:00

Today I learnt that some huge corporations have entities with a bank status using that as an opportunity to put their cash balances with the central banks to secure it. The crisis has transformed the banks being the credit exposure and the corporates the lendors. The regulation is continuously pushing the corporates stop lending from banks. The end effect is that the corporations sit with the risk of banks losing creditworthiness with its sovereign investments, which the regulation pushed them to make. What a strange world and when will the policy makers do anything that favors the corporates? Maybe the policy makers need to raise their horizon.

On Tour in Beautiful Netherlands

2011-11-07T20:43:00.000+01:00

Today I started on a tour meeting peers in the Netherlands. There are few things so inspiring and enriching as discussing with professionals, topics close to the heart. The peer group is growing fast and we have new members every week. It is a private network of like-minded individuals who want to learn from each other. We share the common interest of also sharing our failures and mistakes, which we definitely learn more from than success stories. The role of this blog is also becoming clearer. It is a channel to funnel and present the corporate view and position in the society. Today we had a record day hitting all time high on readership. For those who have followed us for a while know that the present regulation is a huge problem, outright discriminating corporate lending and risk-taking from the banks. And Basel III will even make the situation worse. Therefore please use this blog to share your experiences and also to take a stand to improve the conditions for corporations globally. After all it's us that create growth and prosperity. One way is to join this site as "Follower". Thanks

Best Practice Hedge Accounting

2011-11-04T17:02:00.000+01:00

DONG Energy of Denmark
has developed a revolutionary
model to manage the situation
when hedge accounting practices
create a Catch 22

Hedge accounting is a practice many times creating Catch 22 situations. You should hedge to secure cash flow risk and operational contingency but you do not achieve compliance with hedge accounting standards. Therefore many corporations either abandon hedge accounting and/or even hedging. DONG Energy of Denmark has launched a very interesting solution abandoning hedge accounting, while continues to hedge and provides accounts showing business performance and IFRS in parallel. DONG (short for Danish Oil and Natural Gas) was not able to use hedge accounting practices since it restricted sensible hedging practices of commodity risks. From my discussions with treasury peers I know they are not alone.

DONG's solution is as simple as it is clever. DONG presents the IFRS results and then creates separate accounts they believe better depicts the actual state of affairs. They present the IFRS and "Business Performance" in parallel in the official accounts.

Read here how DONG does it

PIIG Reflection

2011-11-01T19:09:00.000+01:00

Greece has just received 100 B€ in a gift from the people of the EMU. The Greek people rejects it. Maybe it was too embarrassingly large or Christmas is too far away?

Actually announcing a referendum was probably the smartest thing to do. All those opposed now need to come up with a better alternative. All populist states have a large part of the population just saying NO to every necessary change without having the responsibility to present another way forward. If we are lucky the referendum will shorten the time for the Greek population to start realizing one cannot spend more than you earn. It took Sweden 20 years to wake up to realization from 20 years of extreme populist policies. Greece have had those policies for 40 years. They can't wait that long.

Basel Admitting Mistake Making Sovereign Risk-Free

2011-10-31T10:43:00.000+01:00

Even I think anyone should realize
politics is a dangerous profession
and they should not have given the
politicians a blank check as in the
Basel Framework. Of course that
would lead to a public debt
bubble sooner or later.

Bank of International Settlements in Basel, the mother of the Basel Framework recently (October 2011) admitted the large mistake to zero risk sovereign debt. In this paper they describe the problem and that "the regulatory treatment of sovereign risk could be seen as supporting “financial repression” (ie policies that require private savings to be invested in government bonds and are likely to end up with a long-term misallocation of capital)". Then the paper goes on and on describing that it has definitely not been the case and it is only a misperception by some that the Basel Framework did promote sovereign risk at all.

Anyway the paper concludes: "Moving from denial to recognition of sovereign risk in bank regulation is one key element that will help to restore confidence and to foster fiscal discipline" and a "Need to put an end to the fiction of a uniform zero risk weight for sovereigns" thus admitting its fatal mistake.

The key question is what did the notion came from that politics is risk free and how did it end up as a cornerstone in the financial regulation? Maybe because the Framework was created in Europe in the 80-ties, when we still had the Iron Curtain and we were overly confident of the benefit of large public sectors. That would fit with introducing the highest capital requirements for corporates, since they were not overly popular at the time.

The paper defines the way forward : "[We] Need to put an end to the fiction of a uniform zero risk weight for sovereigns."

A Leader Faces the Future, Not the Past

2011-10-29T12:30:00.002+02:00

I received a very interesting comment yesterday regarding leadership from De Kiewit Treasurer Search claiming not all treasurers are fit to be business leaders but the concept of "business leader" is better understood than previously. Thanks Pieter, for your much valuable input.

The past few years have been extremely turbulent and have excelled the role of treasury from an accounting to a strategic management role. I've discussed this with many CEO and board directors to be able to pinpoint more exactly the new requirements on the treasurer:

* You need to understand the business model and modelling. This is not in a conceptual way, it is in a detailed way and having the ability to view it as a three-dimensional model. Expect to answer questions like: "How does the new capital requirements and scarcity of cash affect our business model and how can we change it to increase our market shares and customer offerings?"

* You need to be able to understand and support your business areas by approaching the market and optimizing the supply and demand chain. Figure out how you can improve the financial supply chain to create more revenues and increased profitability.

* You need to understand your core markets and customer offerings. Visit the customer fronting units often. Show you understand and that you are interested, and learn from them. The best business development happens when interacting with the customers.

* Always act in a group perspective and be expert in your field. This might force you to break rules - do it!

* Never communicate detailed reports unless explicitly asked for. Communicate areas of importance and conclusions first and substantiating analysis only if requested. Do not lecture. Present only the parameters needing attention, be precise, do not expect your audience to draw the conclusions. Give recommendations for decisions and take responsibility for them.

* As a Leader you are hired to improve top and bottom line and when doing so you earn your right to grow and only then.

* Have your eyes on the future, not the past. Most treasurers and CFO focus on past quarters and dissect them in boring detail. Every CEO on this planet wants a treasurer and CFO who focuses on the future and performs reliable forecasting, with no surprises and excuses, and contributes with scenario analysis, and mitigation plans. It is usually very easy to predict what might happen. The real difficulty lies in predicting when and where, and by whom. This is the focus of the CEO, share it if you want to grow.

* Physical stamina. Your body and mind is the same system. To take the pressure of being a business leader and staying sharp at all time, physical stamina is key.

Credit Risk on Borrowings Too

2011-10-27T10:16:00.002+02:00

I have had the good fortune of working in two banks that got bust. Honestly it was an incredibly valuable experience since I got the opportunity to see the extremes. In such situations everything comes into the light, even things you could not image. In hindsight it is actually very simple. When a bank goes bust it lacks capital and therefore always immediately the balance sheet has to be slimmed to comply to capital requirements. Therefore the account executives are ordered out to collect the loans. After a while the so called bad loans are taken out to a new entity called the bad bank that receives state funds as capital with the ambition to close all engagements as soon and as profitably as possible. Remember the state always makes the profits in the end.

So if you borrow from a bank that later becomes insolvent, the first step is to figure out if you end up in the bad bank. You may risk ending up there even though you are fulfilling all your obligations since engagements in sectors the good bank shall not have in its portfolio will end up in the bad bank. Even if you remain in the good bank you need to understand that banks ability and ambition to build new relations and expand on existing ones. Usually good banks do not receive a proper strategy and expansion plan for a very long time. Therefore remaining in the good bank may not be that good after all and the chance is that where ever you end up you want out.

So whatever way you turn you have a credit risk - also when you borrow.

P.S. I hear this morning that the EU leadership has agreed a 50% hair cut for Greece by the banks and on top of that they want the banks to increase capital requirements. We risk a serious crowding out effect of corporate lending. Hope it will not be like the one I've sketched in this post.

High Readership on "Where To Invest"

2011-10-26T10:20:00.000+02:00

The man in the picture has no
connection to this blog, to ballooning
public debt, to an unhealthy regulation,
or to Basel.

There are many readers globally of the post "Where to Invest?" published 21st October 2011. Every day I speak to treasurers of their concerns for raising cash. We have a situation when the crisis again is slowing growth in the Western World. Thankfully the demand in the growing markets (mainly Asia) compensates for many peer companies.

Meanwhile the European banks are squeezed by the EUR crisis developing into a Latin America disaster from severe political failure. American banks are cautious bi-sitters. Meanwhile the investors search alternatives to sovereign risk and the corporates postpone capital investments and acquisitions. There is not much advise to give rather than prepare for the worst case scenarios as discussed in the previous peer group meeting in London end of September.

Fortunately the corporate sector is in a better shape than 2008 and will be more able to sustain a recession next time. However when the banking system is built to be a cash machine for the public sectors and crowding out the corporates - growth and welfare creation will severely suffer. "The system isn't broke, it was built this way."

For the future we need a much more stable and sensible financial rule set. It's time to scrap the idea behind the Basel Framework and instead balance the financing needs of the public, private and corporate sectors equally. Implement same capital requirements for all sectors!

EU Commission Censoring Ratings

2011-10-22T09:00:00.000+02:00

The figures have no connection to this blog post or to
the EU Commission, or to Esma

Esma, the European market regulator shall now approve all rating methods and approve all sovereign ratings. This was reported by the Financial Times yesterday (21st October).

The verybest method to cure the fever is to cool the thermometer. We the European peoplesmust hail our leaders in the EU Commission for the wisdom and deep concern forour welfare they show to us. We are so happy they use their immense collective intelligence and sharp brains to come up with the conclusion that they are muchbetter suited to device rating methods and individual sovereign’s ratings thanthe gangster credit rating agencies. Since Esma has no bias rating sovereigns thebest solution is obviously they do it. Censorship is democracy at its best.

Consideringthat our EU leadership has created and is promoting the Basel frameworkstipulating that sovereign risk is no risk, they have surely proved they havean extremely good judgment for the rating profession.

Thedecision is as clever as it is simple. If everyone would be AAA rated we wouldnot have any financial crisis. The crisis will be over in a whim and these badtimes will go away and all demonstrators can go back to work.

Freud hadthe theory that in social groups the dumbest person determines the group’sintelligence level. The EU Commission has proven him right with yet another extraordinary accomplishment.

With thisand other well-grounded and wise decisions and actions our leadership again clearlyshows the world that Europe is the region with highest potential for growth,wealth creation and entrepreneurship. Dear leaders, we praise the paths youtake and are prepared to pay even more taxes to prove our obedience to you.

Where to Invest?

2011-10-21T09:51:00.000+02:00

Neither the man in the picture nor
his hand has anything to do with
this post or this blog.

I had a great discussion with an investment banker yesterday. I met him on Eurostar from London to Paris and learnt a lot and he gave me many new perspectives. We got an additional two hours since the train collapsed in the tunnel. Anyway his main problem was to find papers to invest in. He was very cautious to increase his sovereign exposure since yield is low and the credit risk is increasing. We hear France risks a downgrade maybe forcing Germany to take on an even higher burden with possible implications on its rating and risk profile. Now he instead searched safer paper, such as high rated corporate bonds. Just look and feel at that strategy. It's 180 degrees from Basel! Corporate risk is regarded lower than sovereign risk, despite Basel requires full capital requirements for corporates and no capital at all for states even when they are throwing out debt right, left and center. As you might understand I have some philosophical issues with the Basel Framework ;). The regulators do not take the satellite perspective, they are on the gravel level. But since many of them are raised in the state bureaucracy what can you expect? If you look inside your hand, you only see a hand.

On the other side I currently hear from corporates that the banks cannot help them find investors with reasonable yield expectations. But I happened to bump into one such investor on a train....

Maybe the corporates should go directly to investors and circumvent the banks? That idea is not new and will probably become even more valid the higher versions of Basel we get.

Regulation is Like Penicillin

2011-10-20T14:06:00.000+02:00

Thefollowing rules apply:

1. Use thecorrect Penicillin for the disease you intend to cure

2. Do not overdose.Remember you are killing necessary and good bacteria too

3. Be carefulfor bacteria becoming resistant. A bit farfetched, I admit ;) but I mean avoid creatingsystemic risks

4. Manage yourbody and mind so you become naturally resistant, for instance with proper governance in all sectors of the society

Corporate Governance vs Political Governance

2011-10-18T11:40:00.000+02:00

Thecorporate governance debate forced for decades has created a rigorous system oftransparency, control routines and reporting requirements. Understanding thecorporate accounts and the risks in the company is no hassle and theinformation you need is easy available. Corporate crime including tax fraud leadsto long term sentences and humiliation. Never, ever in modern time hascorporate defaults led to a severe financial crisis. Despite that fact the Baselframework still regards corporate risk as something that shall be crowded outfrom the banks’ balance sheets into the second engine.

The Baselframework regards real estate collateral as a semi high risk. Since the mid 1980-tiesand the first version of Basel we have had several real estate bubbles burstingcreating huge financial meltdowns. In 1991-92 the Swedish real estate bubble almost made Sweden go bankrupt. It was avoided thanks to the country’ssmall size and international limited importance and clever politicians making fast andbold decisions. Generally speaking Sweden’s high tax rate still depend on the tax payers to mortgagetheir homes for larger investments (such as a new car or a kitchen). Saving money after tax is for most Swedes impossible. In fact the whole Swedish economic system is built on creating real estatebubbles, which is a clear systemic risk facilitated by Basel.

Globally weare now in the largest and most devastating financial crisis since the 1930-ties again created by a real estate bubble, which the Basel framework regards as a limitedprobability of happening! The first crisis 2007-09 disclosed inappropriate sovereignrisks effectively leading to countries defaulting with Iceland being the firstand who knows what PIIGS countries will follow? All of us will lose money in thiscrisis and on the countries defaulting in particular. The “private investors” shall cut 50% of theholdings it’s told. We, the people, are the private investors through our retirement funds and savings. Noone is open about who the private investors actually are. The word privateinvestors lead us to believe they are the rich and glorious bankers we all aretaught to hate. But eventually we – the people – will have to pay the costs –again.

Politicalgovernance does not at all reach the same standards as corporate governance. Farfrom. Effectively any political administration can bankrupt any country andlive happily ever after. There is no transparency where the tax payers’ money isspent. There is no percussion for financial crime in the political world. Genocide is the only thing an administration shouldavoid. That may lead to a conviction in The Hague. But impoverish a wholenation and putting the global financial system at risk is ok. The Baselframework encourages speculation in sovereign risk! We should acknowledge thelargest financial crashes are caused by political failure. From where is thenotion that politics is low risk?

We need tobalance capital requirements in a way so they are as high for corporates as forreal estate collateral as for sovereign debt. A director of the Swedish CentralBank recently said: “The problem is thatGreece has been able to borrow to the same low cost as Germany. No one made a country analysis [mytranslation from Swedish]”. Of course this happened since it is what EMU is allabout! Blame directly the systemic risk caused by the Basel framework makingeveryone regarding sovereign risk as low risk. Unfortunately the analysts puttoo much faith in the political system to enforce financial discipline in the EMU. There are lots of criticism against the financial institutions forthe crisis and that’s ok. But I believe this financial crisis is created by thepolitical system. The lack of governance has given us incompetent, shortsightedand populist politicians. We urgently need systems for strict politicalgovernance or they’ll draw another disaster on us immediately after we’ve enduredand paid for this one.

What Direction Will We Take on Future Financial Rule Set?

2011-10-16T12:37:00.000+02:00

The Wall Street demonstrations are a bad sign that populists might take over the discussions on the future financial rule set. We risk of ending up in an environment of Tobin taxes and weird legislation imposed on us by politicians seeking votes. I hope you agree that it is necessary to take a more strategic and holistic discussion with the woman and man in Main Street. How shall we regulate the financial sector and what purpose shall the sector and regulation have? The demonstrators do not have a clue how it works and the central bankers and commercial banks have internal discussions no one else understands. Envy to bank bonuses risks to be the driver for future regulation and that will surely not benefit growth and global value creation.

I feel it is time the the corporates - large and small - start to voice their opinions and concerns.

From the September Meeting in London

2011-10-14T22:19:00.003+02:00

In end of September we had a great few days in a summer hot London. We welcomed several new members to the groups. We met with board directors, economists, supra nationals assisting us to perform even better in our positions and bring home very valuable insights for managing this very volatile period. We are extremely proud of regularly receiving such good feedback and rating from the peers. It's a pleasure and honor to participate and learn from you. It's interesting to see that despite our distinguished guests it is always the round tables that receive the highest praise because of the competence and open atmosphere.

There were multiple take-aways from the meetings e.g. yet another model how to avoid profit and loss volatility without hedge accounting, how to find the most comprehensive political insurance, how to communicate with the board, the economic scenarios currently, best practice in SWIFT connectivity just to mention a few. The program for the next meetings is being put together and revealed later.

Magnus moderating

Peers preparing to present conclusions

Susanna gathering ideas for next meeting

Playing With Fire

2011-10-12T21:47:00.000+02:00

I fully agree with JPMorgan Chase's chief Jamie Dimon's criticism of the Basel Framework. The terribly confused discussion of Basel III, tax on transactions, regulation of OTC derivatives etc have brought us far away from a holistic and philosophical view on why we have banks in the first place and how to organize the future financial set of rules. I mean we should have a financial system supporting global wealth creation instead of one that primarily aims (and constantly fails) to prevent banks defaulting!

The design of the financial regulation is far too important to delegate to European social engineers! Unfortunately the present debate is hardly visible in the society and only restricted to banks and central banks. Politicians seem uninterested since it does not create any votes to spend time on it. Scary to say the least.

I blame the Basel framework for the real estate and sovereign bubbles we have had the past decades and even the present crisis. It is terrifying that the corporate treasuries hardly participate in the debate and instead plan for alternate funding alternatives outside of the banking system. This is true for large investment graded corporates as well as for small and medium sized companies having less and less interaction and businesses with banks. And image the world after Basel IV and V! Hasta la vista, Banks.

Am I Greedy?

2011-09-23T22:51:00.001+02:00

Why don't the investors write down all the debt to PIIGS? Just solve the euro crisis in one go? Some believe the investors are too greedy. They mean we must let the public servants in PIIGS get their salaries. It is only money after all. Why are the investors so heartless?

Maybe we must separate the money dealers (popular: "the investors") from the money owners, which mostly are us. We hire the money dealers to invest and manage our savings in funds.

When we say the investors are greedy, they correctly are greedy under our management and with our money. All my life I've been working hard, saving for retirement and for a rainy day. If I would be reluctant to loose my savings on a sovereign default forcing me to work until 70. Would that make me greedy?

Size of Cash Cushions

2011-09-19T12:06:00.002+02:00

Airbag on bike

The size of the cash cushions vary between companies dependent on the conditions under which they do business. Here are some factors:

Cash generation capabilities. This factor hits both ways. A company generating much cash automatically develops a large cushion. On the other hand a company with very slim margins may require to borrow money to create a cushion for contingency.
Highly leveraged balance sheets requiring using cash to repay debt, meaning that the cushions rarely gets significant size. Large amount of debt usually also creates a high burden of interest rate payments.
Cash forecasting accuracy. The more accurately the less need for a safety margin in cash holdings.
Risk for game changers forcing sudden need for major product and market investments. This is typically the case for the technological and telecom markets for instance.
Trust in commitment for the corporate’s banking relations. In situations of preparations for market distress corporates tend to store cash and maybe even perform opportunistic borrowings to achieve cash reserves..
Merger and acquisition strategy requires headroom.
Amount of trapped cash in especially growing markets such as Brazil, Russia, India and China. The trapped cash can only be used locally and can be substantial amounts. It is important to adjust for the trapped cash when performing corporate analysis.

Airbag for chic bikers

The present economic uncertainties increase the need for cash cushions and this is a systemic shift of the corporate treasury's strategies. I believe this strategy will remain for a considerable time. We saw the same shift from high leverage to low leverage and building up of cash cushions after the Great Depression. It was only abandoned at the rise of the corporate raiders in the 1970-ties when the corporates increased the debt leverage to defend themselves from takeovers. It has not been possible to find an actual best practice ratio of cash holdings in relation to assets or similar key figures.

Mobile Collections Far From Ubiquitous (found everywhere)

2011-09-13T10:47:00.000+02:00

Before summer I was contacted by one peer in the food retail business and he wanted input on what's happening in the world of mobile and card collections. For his company cash collections are still a big thing with lots of disadvantages. He wondered how other companies are doing in this space so I sent out a survey to the peer network. The survey question was:

A card anyone?

"For many peers cash collections are still cumbersome and the present solutions present lots of disadvantages. Do you have an idea how to move customers to plastic or mobile payments? Can you expect cost savings in doing so, or may you find hidden traps?"

I usually receive many answers but this time very few, which made me draw the conclusion that mobile and plastic collections are very early on its development curve. Maybe even more early than we anticipated. It turns out that this peer is usually an early adopter and very few has started to explore this opportunity (September 2011). Here is the conclusion I came to when reading the answers:

How mobile are the payments?

With new technology providing better solutions for collections and purchasing, new vendors enter the market. One example is purchasing cards for B2B relations. However they are still very expensive for the suppliers and therefore mostly applicable for the SME segment. In B2C on the other hand we can see a shift towards providing customers to pay with credit cards, which many times are incentivized through discounts, in order to change customer behavior. For the selling company receiving payments through mobiles or card payments result in fewer DSO (Days-Sales-Outstanding) and thus reduces working capital that has to be off-set by the seller’s margin, being shared with the mobile network or the card issuer. A special concern with mobile and card payments is security on several layers, e.g. stolen cards and keeping customer payment data secure from improper use.

Please send your comments to build a repository/database of treasury knowledge and views

This blog has more and more readers from all parts of the globe, which is very encouraging. I try to divide the topics so the blog becomes very generic about corporate treasury as such, and how corporate treasury participates in society. Corporate treasury has always fascinated me since it is like a company in itself. It has a separate IT platform, although integrated. It participates in the whole money flow of the company, the sometimes called financial supply chain and it is very strategic to the company. With a continuously larger readership I invite you to participate in commenting and developing the posts and the information. This blog spot has the opportunity of becoming a center point for developing the treasury profession globally. The mobile and card collection is such a topic where it would be very interesting to get a discussion going. So please comment away.

Lack of Political Leadership in Europe

2011-09-11T14:09:00.000+02:00

In leadership one basic rule is not to hide problems everyone anyway sees. It is to solve those problems that are the true essence of leadership. There is no way Germany, Netherlands, France, Finland, and a few other countries can take on the responsibility to fund PIIGS out of their self created misery. No way whatsoever. Especially when a large part of the PIIGS population is not prepared to, what could only be described as, normal austerity. EUR positions itself for losers and no country with a strong economy would ever like to join.

The only outcome I personally can see is that PIIGS have to be disentangled from the EMU. Either forced by the financial markets in an uncontrolled volatile way or in a much more controlled way by the leaders of Europe. Maybe such plans are already being made however many signs are pointing to that this massive cover up will continue until the bitter end.

Time is running out and time requires strong leadership. Maybe they are too concerned by the huge credit losses and the consequences for the banking system but that is already too late. They have already occurred.

One way could be splitting into two EUR, one for better run countries, one for PIIGS. It is clear however that this time we must be prudent on the convergence criteria. This time the leaders have to shoulder the leadership role.

This discussion will continue in the peer group in our London meeting in September.

Financial Markets vs Politics is a Sound Balance of Power

2011-09-08T16:11:00.002+02:00

Who forces PIIGS to shape up and get serious, the political system in the EU or the financial markets? If the politicians would control the financial markets they would continue pouring money on PIIGS and to anyone who would vote for them. Without any questions asked. Money that would be taken from our future pensions and our children's welfare. Of course politicians and bureaucrats are furious that their actions are 24/7 measured by an independant financial market they do not control.

We achieve power balance when the competing forces are equally strong and when each party does its utmost to survive and prosper. In the free markets competitors are forced to continuously improve customer offerings and lower the costs. In monopolies they don't. The monopolies have no incentives to improve, only to exploit its position. A very unfavorable situation for the customers indeed.

It is the same for politics. One can not give them full authority. There has to be a counter balance. This balance is the financial markets that constantly provide health checks on political discipline. So why do so many politicians and bureaucrats want to regulate the financial markets? Well, they say: "The financial markets create an unhealthy volatility". Unhealthy for whom? One recent example was banning short selling in some European countries.

"But he is naked"

The PIIGS problem proves the need for the financial markets to put politics on a constant beauty parade. Locking very badly managed countries together with better managed countries within one single currency created a situation where the badly run didn't have the FX and interest rates adjusted by free markets to force the politicians to introduce serious and professional economic policies. Instead the EUR lockup gave politicians in PIIGS a window of 12 years to continue being irresponsible and serve its own purposes of re-election. The political system was not potent enough to force obedience to the rules they themselves had set-up.

Lessons learnt:

1. Why do the politicians and bureaucrats scream for regulation? Everyone is acting in his or hers self interest more or less. They want reduced competition.

2. Regulation only postpones market corrections. Either we have a free floating rate with constant adjustments or forced appreciations and depreciations. The end result is the same.

3. Political leadership needs a whip to stay sharp and bright. The financial markets punished the USA with a credit downgrade after severe lack of political leadership. The EUR is under extreme pressure since the European leadership has proven unable to harmonize the continents policies and implement sufficient financial discipline..

A power balance is required for democracy. Free elections are not sufficient by itself. We need a power balance forcing the political system to act responsibly and in the best interest of society.

Export Unemployment

2011-09-06T13:56:00.000+02:00

All countries want to export unemployment, but to where? It was definitely a very bold move by the SNB (Swiss National Bank) to introduce a semi peg to the EUR today. One thing is clear; the financial market is a power balance to the political world. The financial markets force transparency and political discipline. One must ask why some scream for regulation of the financial markets. Maybe their intention is to give the politicians free reigns to act in their own best interests? Power struggles are not always a bad thing.

What happens with the EUR now? Is the EUR + CHF suddenly a safe haven? Will the Swiss salvage the PIIGS?

The very best FX hedging technique I'ver ever come across was introduced by a CEO of a very large multinational company. He intended to put the factories on wheels.

"All Predictions Lead to Catastrophe..."

2011-09-01T23:31:00.001+02:00

"...so why predict?" one clever peer so wisely said today. In the next peer group meeting in end September we will spend time on finding all possible scenarios of how the global economy will develop. We will not shy away from low probability scenarios or even those that may be considered black swans. We will be assisted by a very well reputed chief economist to understand the different scenarios in this very complex economic situation. We will use the scenarios and adapt them to our special conditions, and stress test each scenario for contingency planning. "The role for the corporate treasurer is to prepare rather than predict".

How Can Basel Framework Better Be Adjusted for SME?

2011-08-31T09:13:00.000+02:00

The Basel Framework is based on the idea that arm's-length banking and automated risk management (using more or less sophisticated algorithms) are superior to tacit knowledge from bankers, relationship banking and social collateral. It comes from the belief that detailed social engineering works and that society can be micro managed by super bureaucrats creating rules and procedures for everyone to follow. But it has been tried for decades and failed over and over. It just does not work.

One must instead dare to trust each woman and man's own judgment and delegate responsibilities. I have read papers claiming relationship banking creates less credit losses, but so far found none claiming arm's-length banking does the same. Changing the perspectives of the Basel Framework is paramount for making the financial system the enabler of growth. Relationship bankers having close and long term relations to the SME creates a much more sound financial system based on capital requirements, social collateral, local bankers' judgment and debt levels in relation to the production of products and services. The Basel Framework's arm's-length mentality has instead provided a mindset of trading and growing debt by financial institutions far away from the real economy. Add absurd bonuses and you create a scenario for a public wanting revolution of the financial system and the scalps of some bankers.

Support of SME is In the Role of Central Banks

2011-08-30T09:09:00.001+02:00

I have on several occasions highlighted many of the problems with the present regulatory platform for the financial industry, in particular the Basel Framework soon on its third version. In general I have no problem with capital requirements and risk management and that we need regulation for it. However it has to come from the correct perspective. The Basel Framework was created in the 80-ties during deregulation of the financial markets, mainly the credit markets, which came as a natural consequence of president Nixon abolishing Bretton Woods in 1971.

The perspective of the Basel Framework:

1. Banks shall be protected at all costs. No banks shall be able to default. There shall be no run on banks.

2. Corporate lending is dangerous and therefore shall be restricted in the banks' balance sheets.

3. Sovereign risk and real estate mortgage is very low risk and should therefore be incentivized for the banks to invest in.

What have we seen:

1. Banks do go bust. There are still run on banks and financial institutions, e.g. Lehmann Brothers. It is not possible to regulate away bad management. We also saw big flaws in the Basel risk management procedures which did not consider liquidity risk for instance.

2. Corporates have been pressed out to the credit markets outside of the banking system. SME (Small and Medium Sized Enterprises) can only borrow very small parts of the needs from banks. Most lending requires owner's guarantee and/or mortgage of their houses.

3. Banks balance sheets explode on sovereign debt and real estate mortgages. Pretty good bubbles no doubt.

The problem is that the SME market provides most money and employment in the society but they are discriminated by the Basel Framework. This should be a major concern for the central banks and governments. Instead they push for Basel version III.

Many scream for regulation. But the regulation has to have the correct perspectives otherwise they become counter productive. I would say that the bubbles we have seen during the past 20 years many times have been fuelled by the Basel Framework.

Dynamic Discounting and Reverse Factoring - pros and cons

2011-08-26T13:28:00.000+02:00

Here I have listed the pros and cons for Dynamic Discounting (DD) and Reverse Factoring (RF). There are related blog posts available from the list of "Labels in Blog" far down in the right column of this page.

This list is developed from a practible corporate treasury perspective. The aim has been to cut through any sales pitches from the vendors. It is not necessarily the case that you implement either DD or RF. There are situations when both can be applicable in parallel or different solutions applicable in different geographical areas and jurisdictions. Hope this grid is helpful.

Factors to consider	How the factors affects each solution
Factors to consider	Reverse Factoring (RF)	Dynamic Discounting (DD)
Decrease DSO (days sales outstanding) for Suppliers	Yes	Yes
Attractive financing terms for the Suppliers	Yes. This is the main argument for RF, the less creditworthy Supplier can use the higher rated Buyer’s credit terms, benefiting from lower interest rates and, with approved invoice, higher amounts that can be borrowed	Not necessarily. DD’s main argument is for the Buyer being able to exploit the restricted financing capacity of its Suppliers, offering typically 2% flat for 20 days faster payments. The Buyer can thus use its free cash to improve its yields. DD is in this respect an improvement of early payment (static) discounts where many times the payment arrived late but the discount was anyway taken off the amount
Time and Date secure collection	A very good argument for the Suppliers since it provides predictability of the collections and facilitates liquidity planning. Even large Suppliers with no particular need for the extra financing can choose RF for this reason. May improve rating and save money on reduced lending
On- or off balance sheet treatment, i.e. decrease of working capital for the Buyer	This is possible in RF however it has some requirements i.a. Buyer’s arms’-length relation to the banks’ lending to the Suppliers	Highly unlikely this will be anything other than on-balance. Decrease cash holdings and AP
Decrease working capital for Buyer, that is removing payables from the balance sheet (decreasing DPO)	Yes, if requirements of arms’-length to banks providing the loans is fulfilled	No
Full automation of P2P (purchase to pay) process	This is a requirement
Repair need of P2P process	Full automation decreases the risk of error and late payment and extra costs for repair of payments and/or bookings. Requires fully standardized processes
Suppliers have the flexibility to choose which invoice to be requested for earlier payments	Yes, BUT in this solution many (smaller) suppliers may have collateralized all its receivables to one bank making it difficult to “sell” individual invoices to the Buyer’s bank	Yes
Supplier on-boarding	Historically a problem since RF is a very complex solution and many times hard for procurement and Suppliers to grasp. Many stakeholders create a risk of delays and obstacles in the on-boarding. Important to remember RF is not only an IT rollout. RF is often expensive to maintain	Easier than RF but still requires IT connectivity, education of the Suppliers and set-up of internal administrative processes for support and requires IT rollout
Changes in lending capacity of the Buyer affecting the financial strength of the supply chain and Suppliers’ funding may be jeopardized	Can happen if e.g. the bank(s) are not able to provide sufficient funds, or attractive interest rates. Another reason can be that the Buyer gets downgraded or the banks want to reduce the exposure to the Buyer.	DD in its most basic form uses the Buyer’s cash and no banking facilities. The risk is that the Buyer’s cash headroom is not sufficient at all times for funding. Just consider in a situation when the Buyer makes a significant acquisition. Does the DD challenge the cash head room capacity?
Suppliers acquire new behavior	The suppliers get used to this financing alternative and have no short term backup facilities. This means that the Buyer cannot expect to easily withdraw from this SCF program. It can not be regarded as a swing line facility
Banks’ involvement	In RF the bank prefers the Buyer to use the bank’s own proprietary solution but a bank independent platform can be an alternative. One shall be aware that the banks sometimes regard the bank independent platforms as competitors, which may inflict on the solution’s efficiency	DD is still uncharted territory for most banks. They are a bit concerned they will be left out. I have not yet heard of any banks providing solutions or special credit facilities for DD
Payment method	I believe the Seller shall only pay interest or discount from the date she or he has the amount available on its account. Payments shall therefore be some sort of wire transfers, checks are so much 20 century and such a silly payment method that it can not belong in fully automated processes. A success factor for a supply chain solution is that the Buyer does not try to delay payments from agreed terms. That is not a serious way of doing business. Remember that the Suppliers are usually the weaker part having the biggest relative financing burden
Applicability to local legislation	Must be analyzed and can provide stumbling blocks. Factoring or invoice discounting are regulated differently dependent on jurisdiction. A particular problem if RF does not allow off balance treatment according to local legislation	Should not provide a problem since it is only early payments from Buyer’s cash account

Please let me know if I've missed out on something and I will add or correct. Thanks

Comparing Central Banks

2011-08-24T20:43:00.000+02:00

In our contacts with the central banks we can now draw conclusions on the two most important in Europe - the European Central Bank (ECB) and the Bank of England (BoE). One might believe that the central banks take a holistic perspective of the economy but that is not always the case. A central bank's main concern is the stability of the banking system, which makes sense. However the banking system provides a very tiny part of the growth and welfare in society. The welfare of the corporate sector is actually more important in a societal perspective. We saw during the peak of the recent credit crisis 2008 and 2009 how differently the central banks acted in seemingly small details, but those details were paramount for individual corporates.

I believe the ECB very much draws the line with the banks and the sovereigns and expect other authorities to care for the rest of society. The risk for a gap is obviously huge in this case leaving the corporate sector in limbo during a credit crunch. Not caring for the corporate sector is jeopardous but unfortunately a continental European legacy.

The BoE on the other hand takes a broader aspect on society than the ECB and is very keen on building a toolbox also to support the corporate sector during periods of severe credit stress. The BoE directly purchased commercial papers and other loan instruments from companies with a "substantial British presence". Protectionism in a less brutal form but regardless the BoE assisted many corporate treasuries from disaster scenarios.

From this perspective my conclusion is that it is safer to be a corporate based in the UK instead of continental Europe if you someday would require assistance from a central bank.

Reverse Factoring and Dynamic Discounting

2011-08-23T10:53:00.001+02:00

I recently mentioned the Dynamic Discounting solution, which is cash discounts on a gliding scale. Dynamic Discounting and Reverse Factoring (read Primerevenue's introduction for info) are two different solutions for supply chain financing with vendors pointing on each others weaknesses and its own strenghts. But from a corporate treasury perspective what are the pros and cons? And are the solutions mutually exclusive? Maybe they can be used in parallel to provide the suppliers with a spectrum of choices? Important to remember is the background to why supply chain financing has developed.

Over several decades we have had a trend for the large corporations to outsource production facilities, distribution networks etc. The aim has been to reduce working capital and capex. This trend continues. The problem however is that the working capital does not disappear, it just pops up somewhere else in the supply and demand chain. And if the most creditworthy company in the whole chain pushes it up or down, the funding requirements end up in the weaker parts of the chain. The weak parties have less availability of cash from the financial markets and definitely higher costs. This will become an even bigger problem with Basel III. (If you want to read my views on the Basel framework - go to "Labels in Blog" below in the right column of the page). This trend has created large finanical risks in the chain, which many industries experienced recently, e.g. the automotive business. The fact is that treasury must be the driver of financial risk mitigation because it is the financial supply chain and the treasurer sits on the competence.

I'm compiling a list of pros and cons for Dynamic Discounting and Reverse Factoring. It will soon appear on a laptop near you. Stay tuned ;)

What are the Economic Scenarios?

2011-08-22T15:09:00.000+02:00

Today I read a very good article of the present state of the global economy by Robert Bergqvist, chief economist at SEB. He has previously been a guest to one of our meetings in the European Treasurers' Peer Group. Basically Robert concludes the global debt problem, being built up during the past 25 years, was punctuated by the US toxic loans in 2007 and since the crisis has spread to the lenders of last resort, the sovereigns themselves. We are in a situation with overcapacity in many industries, a weak financial sector, and at the same time a requirement to deleverage sovereigns and households. The situation is now so complex it is basically impossible to foresee the future and take a position.

Important instead for the treasurer is now to list the scenarios and create an action plan for each scenario. For that reason we have invited another bank's cheif economist (we aim to please all banks ;) ) to our meeting in London in September. He will help us list the scenarios. A task not very easy this time.

Dynamic Discounting One Way to Increase Yield on Cash Cushions

2011-08-22T12:33:00.000+02:00

Discount according to a sliding scale.
Courtesy PurchasingInsights.com

I recently learnt about a new initiative in the P2P (Purchase-to-Pay) space - Dynamic Discounting. What caught my attention was a successful round of raising venture capital by Taulia. Generally Early Payment Discounts have been a problem to make successful since the invoice approval processes were not sufficiently automated and the payments rarely arrived as agreed but the discount was anyway taken off the amount. This eventually led to that Early Payment Discount models never got off the ground. Dynamic Discounting is trying to solve this issue through providing discount on a gliding scale and related to the actual date the payment was made. The improvement in A/P automation and approval processes now provides a framework to implement Dynamic Discounting.

Dynamic Discounting requires though that the buying company has access to cash either as its own cash or from credit faciltities. I have recently mentioned the problem with the cost of having a cash cushion and that the board expects higher returns. This can be one way to increase yield on cash even though theoretical examples of 2% for 20 days may be unrealistic in reality. During ideal conditions Dynamic Discounting can be withdrawn and payment terms prolonged if the buyer needs its cash for other purposes. However one might expect the suppliers get used to this financing alternative and have no backup facilities forcing the buyer to keep Dynamic Discounting active even when he or she runs out of cash.

Tax on Financial Transactions

2011-08-18T09:38:00.000+02:00

I found a very well written paper I want to share from the Adam Smith Institute discussing tax on financial transactions. It is not very supportive of a "Tobin" tax obviously. Neither am I. However I think this paper provides an excellent discussion and could even be read by those who support such a tax.

Quotes:

"Sweden is the only country to have tried a “pure” Tobin tax, of 0.5%. It raised only one thirtieth of the proceeds predicted by its proponents and was scrapped after five years. The taxes sparked an exodus of financial activity from Sweden."

"The claim that £20 billion (expected income from a tax, my comment) annually can be removed from the UK financial sector without causing significant disruption is both illadvised and reckless. This recklessness is augmented by the fact that we are emerging from one of the most accentuated cycles of boom and bust to date."

How to Adjust to the Economy?

2011-08-16T11:07:00.001+02:00

One peer wisely said in the meeting last May: "Treasurer's job is not to predict but rather to prepare". So very true. I continue having discussions with peers being concerned of the economy. We are having a very complex economic situation presently. Much more complex than in 2008, I believe. This time we do not have a lender of last resort, actually it's the sovereigns themselves on stake. Quite predictable actually but nevertheless it has created another level of complexity. We also see a softening of the demand in many markets.

So what are the most successful treasuries doing to adjust to this level of uncertainty?

1. They do not take a position on what's going to happen

2. They map all scenarios they can think of, even really bad worst cases

3. They stress test the scenarios in the perspectives of risk, financing, cash head room, liquidity etc

4. They adjust their strategies so they can manage all scenarios

5. They communicate to the stakeholders what scenarios they find and what actions they take. This serves two purposes; (i) it calms the stakeholders that treasury is on top of the situation, and (ii) it prepares the stakeholders for what is expected of them

Good Luck out there - be a Business Leader!

Shortselling Creates Budget Deficits?

2011-08-12T10:53:00.003+02:00

Please, anyone, contact me and explain how shortselling and high liquidity in the financial markets create sovereign budget deficits. France, Italy, Spain and some other countries have prohibited short selling just to decrease budget deficits, replace bad economic policies, and improper governance and populism. What is the connection?

Because volatility is created as a result of bad economic policies, not from short selling. Short selling increases the liquidity and thus decreases spreads and costs for society.

I hear the next step is tax on financial transactions. Apparently all tax strategists (yes, they exist) agree it is a crazy tax but it is a politically correct thing to do. Sweden had that for a while in the 80-ties since the envy on the rich yuppies (Young Urban Professionals) was so immense that the government needed to tax them. They did and much of the financial transactions moved to London and stayed there until the tax was abolished.

2 is a number and so is 1. Therefore 1 and 2 is the same....

Peer Focus Right Now

2011-08-11T20:05:00.001+02:00

I've started the peer interview round for our meeting in September in London. It will definitely be an interesting meeting with exciting guests. Contact us if you want more information.

There are many IT projects going on, as one peer said: "this is the year of IT". Obviously the other key issues revolve around funding, working capital and cash management. But this meeting's big issue will be the economy. The market volatility in September will probably be the same as in Q4 2008, but this time the situation is much more complex. The scenarios are so different that it will be hard to create contingency plans. As it looks now the we will spend lots of time to discuss this area in the meetings.

US Downgrade and Corporate Status

2011-08-09T11:04:00.000+02:00

As expected the volatility has increased with large portfolio restructuring arising from the US downgrade. A Black Swan pushed us out from the eye of the storm to a real storm again. This is how our experiences from 2008-09 helped us prepare:

We now have a liquidity focus and a much better control of where our cash is. Cash is first, earnings is second in priority
We have an improved understanding of our risks since the 08-09 crisis exposed previously hidden risks
We have lowered the break-even levels in the business with more flexible production sites and models to increase or decrease capex as we go

I conclude we have increased our organizational flexibility and we are definitely more agile to handle crises. We are better to react but what have we yet to develop?

It concerns me that I hear few signs on how we can be more pro-active. Few corporates have a concerted program for discussing and analyzing the markets and economic conditions on a strategic level. Few companies dare to take positions on financial risk. We are still in a situation where financial risk is not a business risk and that financial risks can be hedged. Technically it is true but changing financial market conditions finally affects the business. Hedging only postpones the effects and hedge accounting hides them! Maybe this crisis will lead to more pro-actively managed market expectations. Shying away from that financial markets provide volatility directly affecting any corporate's business conditions seems to me as a highly risky strategy.

Buffet Provides Perspectives

2011-08-08T16:45:00.000+02:00

I believe this video provides good perspectives for a day like this.

Opening Pandora's Box

2011-08-06T22:26:00.001+02:00

We knew that the PIIGS countries had not been prudent enough allowing low retirement ages, too generous welfare systems, high real unemployment, huge public sector employment etc. Frankly, I do not believe many of us (in Europe particularly) was surprised when Portugal, Italy, Greece and Spain had to face the facts. Ireland was probably more of a wild card but so small they did not really matter.

But what has lately happened in the US could not have been forseen. The US stupid political games have been the latest Black Swan. According to the newspapers quoting S&P the US could have avoided the downgrade if they only had agreed earlier on the debt ceiling. As I've said here previously, few US politicians is forcing the whole people of the US and the world the extra costs we now will have to pay in the form of higher inflation and higher interest rates. Messing around with the debt ceiling, leading to a credit downgrade has opened the Pandora's Box. Printing money like crazy, fighting to have the weakest currency, going on a borrowing spree PLUS acting stupidly will eventually led to investors requiring higher risk premiums and inflation forcing the interest rates up. We all know that. Before the risk was contained in the PIIGS countries, now it has spread. The uncertainties has spread outside the box.

The good news however is that the US is the most entrepreneurial country in the world, the population has a drive to earn a living in a way we do not see in Europe. We shall be clear that the problems in the PI(I)GS countries are an effect of decades of populism and therefore will require decades to solve. The Americans go to themselves to solve their problems, the Europeans go to the state. I believe we will experience very nervous markets until we see the US political leadership regaining control and start acting in a predictable and professional manner. The financial problems in the US is much easier to control than those in the EMU. Of course it requires the US political leadership to start delivering.

How shall we act on Monday when markets open? Let us figure out our strategies.

Quotes from Previous Peer Group Meeting

2011-08-04T11:30:00.000+02:00

I gathered some great and insightful comments at the peer group meeting in London in May 2011. Enjoy

On the role of the treasurer:

“Treasurer’s job is not to predict but rather to prepare”

“A treasurer shall be very open, communication prone and focus on risk management”

“The challenge is to make cash forecasting dynamic and adaptive to changing market conditions”

“Treasury is moving from transactional processing to a business partnering role”

On banks:

“Basel III will cause banks to revisit their business models” was one opinion, challenged by “Banks lend to sovereigns so the banks set the terms. We shall not expect too many changes of the banking industry despite new regulation.”

“Banks think globally regardless of the economy”

“Banks are slow to innovate – but fast to follow”

Comments on "Lack of Leadership in the USA"

2011-08-01T23:17:00.000+02:00

The purpose of my post "Lack of Leadership in the USA" was to make the readers realize that now the unthinkable has become thinkable. I'm very impressed by the USA and its democratic model, which is much different from how democracy works in most European countries. My post was therefore not written to all Americans. It was written for them. Long term rates have for long been an accident waiting to happen, I believe. The timing has come closer now. It was really stupid for the politicians to take it this far. And nothing of real essence was won. All investors of US debt will likely sooner or later request a higher risk margin as a direct consequence.

Investor Relations and Treasury Tie the Knot

2011-08-01T09:10:00.000+02:00

I've come across corporate treasurers that have merged the departments of investor relations and treasury. Usually they remain separated but perform joint road shows and coordinate activities. IR takes on the role of describing the business model and the overall operations, while treasury describes the balance sheet and financial risks. The crisis has created an understanding that the investor base is not only the equity investors. Instead it consists of all investors, equity and debt.

For the peer group I have just issued a global benchmark study on how the organization of corporate treasury looks like. Please let me know if you want to participate.

Lack of Leadership in the USA

2011-07-29T22:04:00.000+02:00

I’m amazed over the lack of leadership in the US right now. How can the leaders of the most powerful nation in the world behave so immaturely playing silly political games instead of acting as forceful leaders? It is outright shocking and a total lack of understanding of the seriousness of the situation. A few hundred politicians are jeopardizing the future of the people of the US of America and for the rest of us. They have awakened the fear that US will not pay its obligations. Rating is defined “as capacity and willingness to pay your obligations” according to the CRA. What is the capacity and willingness of the

leadership to solve this situation?

One could expect that in a situation like this the political leadership would unite – in good time – to find a solution. Now it is far overdue and therefore most of the collateral damage has occurred. And what has been won? If they finally solve this problem 1 minute to 12 it would anyway have created a doubt of the willingness of the US to pay its obligations.

Cash Contingency Planning

2011-07-26T11:56:00.001+02:00

In the May Peer Group meeting we discussed the risk of Greece or any of the other PIIGS countries defaulting. Drilling into the subject was daunting and presented a catch 22 situation, however you turn, you have to turn again. The demonstrations in Greece present not so much a financial risk per se, however they represent the mentality of the demonstrators. It is apparent that many of the Greek citizens don't comprehend that one can't spend more money than one has access to. I remember the same mentality from the Swedish meltdown in 1990-92, when Sweden quickly had to convert from a populist “I request – someone else shall pay” mentality until the people realized basic fundamentals. Sweden had built up a huge leveraged position both in the private and in the public sectors that collapsed when the asset prices plummeted at the end of 1989. In 1992 the peg to the EUR was dropped and O/N interest rates did hit 500% for a few days. Thereafter Sweden has had a 20 years highly disciplined fiscal regime. Now the Swedish government has small debt thanks to very high taxes and continuously reduced public services. The high tax rates force the population into high level of personal debt and mortgage, which is a huge transfer of wealth from the private to the public sector only sustained with high property prices. In such the Swedish economy has inherent risks but not in the magnitude of Greece. Since in Greece we see the opposite situation with low taxes, low personal debt, and the Greek state being on the brink of default, extremely leveraged.

How shall we device contingency plans for countries close to default? Step one is obviously to reduce all risk on the sovereign itself, and take out all cash from the country (which may be more easily said then done as most money funds do not immediately disclose holdings). Step two is to reduce capex and step three is to disinvest. This becomes a vicious circle that we experienced during the recurring Swedish crises from end of 70-ties to the huge 1990-92 crisis. All crises led to that most companies took cash out and avoided taking Swedish export revenues back over the border forcing depreciations. This is what happens in Greece now. The difference is that

Sweden

had its own currency so the simple remedy was depreciation. Can Greece take the Drachma back? Is that an option at all? The Swedish Krona (SEK) depreciated immensely in the period 1975-1995 to the Deutsche Mark (DEM) because bad policies and populism. See graph:

Next sovereign to worry about now is the USA being heavily discussed in the media, here is one example.

How to place the cash? What are the alternatives? I would like to test the water for new solutions I have found in my research. For the below text I have therefore kindly asked assistance from Eric Lansky, Director StoneCastle Cash Management when listing alternatives for the cash holdings:

Money Funds gave us lots of problems in the previous crisis. Is the market better equipped this time to cater for a run on funds? However we do not yet know the impact of new regulation. A large part of the funds are kept by institutional investors and how do they act if rates rise and overnight rates present better value?

Treasuries used to be zero risk but what now? And the rate is not so compelling. 0.00% doesn’t increase ones returns, regardless of volume invested.

Direct Bank Deposits are state secured up only to a very modest amount. In the US there is a new offering launched, basically allowing treasurers with larger cash balances to receive expanded FDIC coverage (up to 20 MUSD per tax entity), providing higher rates, daily transparency and a single statement. FICA® is a network of hundreds of FDIC insured money market deposit accounts which are electronically linked together through a single, convenient account. All deposits are divided into several banks' deposits under the FDIC limit. The solution is called FICA® or the Federally Insured Cash Account. Another program similar to FICA, but places deposits in less liquid bank CD’s is CDARS. Any of you have any experience of FICA or CDARS, please share in Comments below. Thanks.

My conclusions

The alternatives basically remain the same as in 2008 but the cash holdings at corporations are so much larger this time since balance sheet improvements have been going on for the past 3 years. This does not decrease the financial risk since the cash cushions represent counterparty risk. We are therefore probably returning to a situation when we will focus on return OF cash instead of return ON cash. But this time it is the sovereigns defaulting and who will be the lender of last resort? And where did zero risk go? Oooops

During the credit crisis we in the Peer Group kept close contact discussing how to mitigate risk for individual banks and other deposit holders. We shared information and intelligence from the market and stayed on top of the situation. It was comforting and surely saved our employers’ money.

Avoiding a Dead-End Career

2011-07-25T11:43:00.002+02:00

In one of my first treasury positions for a corporate I was regarded as an expert. Despite the company was a heavy machinery producer and I had recently graduated with a Master of Science in Mechanical Engineering. I had to accept that just because I did choose a financial career made me an expert in a field no one in management and succession planning understood properly. Being a treasurer therefore became a dead-end career path so I left.

Is this the treasurer's domain?
Fancy but outside of the main building

Another reason why many treasurers remain in treasury most of their careers, I believe, is that the step outside of treasury requires deep understanding of doing "ordinary" business. This means understanding business model generation, product development, marketing and sales etc. Or in other words being a business leader.

The crisis changed the way we regard treasury and the treasurers' role. During the crisis I met with treasurers finding themselves in the spotlight and confused over the expectations that they should explain how the business model needed to change from the financial crisis. We did discuss this at length in the Peer Group and I decided to make a survey to CEOs and board members asking them of their expectations on the treasurer. Basically it boiled down to that all the basic stuff (risk management, cash management and funding) was a given for treasury to manage. But a good treasurer should also participate actively in growing the top and bottom line. He or she should work together with the business unit to meet customers, suppliers and develop the company’s offerings and find cheaper ways to operate the basic business using the treasury skill sets. The treasurer was expected to increase competition and margins. These new expectations position the treasurer a as Business Leader instead of an expert. And it is much easier to make a career as a Business Leader. An expert usually remains in his or hers field.

I tell my two daughters that there are only two main skills you need to have: sales and communication. If you do not have the ability to communicate your worth and value adds you can not sell it. And then all your other skills are basically useless and you are dependent on someone else to promote you and your products. This I believe is true for treasurers as well. The basic skills of a Business Leader are communication and sales.

The Contrast of the Tradegy in Norway and the Death of Amy Winehouse

2011-07-24T22:15:00.000+02:00

Sometimes you get reminded of what’s important in life. The tragedy in Norway is such an event. So sad for all involved and so completely unexpected and just horrible. Norway was the calmest country on earth. Oil rich and safe with beautiful nature and life. The last country where one would expect such a tragedy.

Our daily work many times makes us focus on short term gains and optimization. Being ambitious and hard working towards targets and personal goals lets life pass quickly and many valuable days go by without reflecting on what’s really important. I’ve been there. Lost in the hard strive to reach life goals that did not mean as much as I had expected.

A few years back I had an experience that made me better understand what’s really valuable in life. This made me make important prioritizations. Now I feel much better equipped to understand the sorrow that has taken a grip of Norway. Norway has lost its innocence. But even worse is to grasp the evilness in the person doing the crime. How can anyone be so vicious? And what formed him and why?

Today we also learnt of Amy Winehouse, 27. Amy, on the other side, never really appreciated life. She understood so many things visible in her artistry, but on the other hand she did not understand to take care of life as a gift. In contrast to Norway, where people were killed, she lived a life that would kill her too very young. What a contrast.

Being a good business leader requires you need to keep a mature, sound and balanced mind and physical stamina. You must be able to balance targets and goals with what really matters in life. The best way to really understand is to get hit hard, at least once, I believe. Loosing and failing sometimes is a blessing. “Do not count the times you fall, only count the times you get back up.”

7 Hot Topics in the Previous Peer Meeting in May 2011

2011-07-21T12:30:00.024+02:00

These were the 7 hot topics in the previous peer meeting in May 2011 and how many per cent of the peers mentioning them.

Topic for meeting May 2011	% Peers Highlighting	Description
Systems	46%	SWIFTNet and moving away from banking terminals, implementation of SSC with payment and collection centers. STP and integration. Niche TMS versus ERP TMS. Introducing Business Intelligence (BI) tools benefitting from technology shift in that area
Revolving Credit Facilities	42%	Concern for bulk of rollovers in 2012 disappearing. Early renewals and improved pricing. Some uncertainties from banks on their strategies but mostly calm
Cash Management	42%	Enhancements of cash pooling solutions, implementations of in house bank solutions and SSC for AP and AR. Bank connectivity. Centralizations and cash concentration continues
Economic Conditions	29%	Major concerns on inflation, presently for commodities but also expecting to spread into other sectors. What will be the consequences for business models, funding and risk management? Another major concern is the EUR zone stability and mitigation plans if it breaks up. Developing models to adhere to unexpected and anticipated changes and liquidity in market conditions
Updating Hedge Accounting regulation	25%	New changes in HA will affect present models. Expectations on adopting feasible HA of commodities
Optimal Capital Structures	25%	How to spread the funding risks and shall we have an on-balance cash cushion or rely only on committed lines? US Private Placements presently popular “new” market for European treasurers. How shall the structure be to improve rating? Increased level of financial engineering
Organisation	21%	Increased treasury profile, cash focus and treasury integration to operating companies force changes to treasury organisation and processes. Improvements to become for efficient

Decreased Risk Aversion

2011-07-20T14:27:00.000+02:00

I doubt we will see large excesses in risk taking during the next decades with the experiences we have had. But the risk aversion high readings in 2009 has subdued amongst corporates. Now we even start to discuss how to improve yield on our cash cushions. We have the three variables in our investment portfolios S = Security, L = Liquidity, and Y = Yield. SLY has been the prevailing order, now we receive expectations on the need for higher yields. The boards realize the effects of negative carry from the cash cushions but might forget them being an insurance premium. This tendency is a warning sign, I believe. Is it worth it to decrease S and L in favor of Y? 10-20 basis points extra? What is the price we will pay?

We are continuously reminded we might be in the eye of the storm. Greece, Italy, Spain, and bank stress tests failing (read Ireland).

When regulation forces banks to decrease risk in their portfolios, corporates should not increase it.

Are We In the Eye of the Storm?

2011-07-15T16:33:00.000+02:00

During the past few peer group meetings we have been mostly focused on process improvements, and policies and such issues. The funding conditions have improved substantially and can be regarded as normal, I would say, and has therefore rendered little attention.

But with Italy starting to become a great concern after Greece and Portugal, is the next storm soon to come?

The calm we have seen is not normal but have given us the opportunity to prepare for our future challenges. Because that is what we have been doing. We have turned into business leaders, we have diversified our funding, and we have analyzed our risk positions (including implicit risks hidden in contracts and ledgers). We have gained a much better understanding from the board on financial risks and funding issues. The group KPI has a much improved cash flow perspective. So we are prepared for a storm. But what will ignite the storm this time? PIIGS? Or something else? What will be the Black Swan this time? Or will the central bank’s QE and high credit risk strategies postpone or even eliminate the next storm? Is pouring money into the system and adding regulation avoiding future storms?

Meeting With A Credit Agency

2011-07-12T15:57:00.006+02:00

At one of the peer group events we met up with a Credit Rating Agency (CRA) to get their views on how banking business models will change as a consequence of new regulation and capital requirements. Some of the conclusions:

Proprietary trading will become expensive and is shredded à lower liquidity in markets
OTC will be very expensive and plain vanilla/exchange traded instruments cheaper
Fee based banking requires very little capital
Banks will be incentivized to lend short term

This in turn will lead to:

We will probably not have any global banks providing a full product portfolio
For the SME sector, well they can forget bank funding with reasonable collateral requirements

Basically the regulators want to further decrease bank lending to the corporate sector. Previously the venture capitalists and the hedge funds took on that risk (read more here). But who will assume the lending responsibility now? Or shall the corporate sector expect not having sufficient cash to build and grow?

It is definitely a problem that the bureaucrats and central bankers are creating the rules for the financial market. Many of them are hugely risk avert and believe that decreased risk in the banking sector will bring good to society. But who will bear the risk of funding corporates and SME? The basic problem is probably that most bureaucrats and politicians have no clue how welfare and societal value is created. It is in the corporate sector, stupid!

We also need to consider that the high taxation in Europe drains the corporates and SME on cash and that cash has to be replaced. A natural consequence of the reduced lending must therefore be to lower cost when employing by reducing taxes. Probably that is the way forward.

Returning To Take Up My Blog Again

2011-07-12T15:43:00.006+02:00

One year goes very, very fast. I’ve have had lots to do. Started up new businesses and changed my life in many other ways. It feels like I’ve taken a lot of good decisions. It’s sometimes necessary to make a halt in life and evaluate which road to take. Meanwhile I had to move the blogging into a lower priority level.

Anyway the European Treasurers’ Peer Group has been doing very well this past year. We have had our meetings regularly and have improved our reach and taken opportunities to meet with central banks and other major players to make them aware of the corporates’ needs from the financial market. I’ve been surprised by how bank centric some of the central banks are. No wonder the Basel framework could be implemented in the previous form. I must say though that the central banks are more humble now and understand that regulation is not the answer to everything.

The corporate treasury industry is mostly experiencing a calm period, feels sometimes like we are in the eye of the storm. During 2008-09 we were definitely in full storm and we have now emerged with new roles in our companies and being much more business oriented than before. Previously the treasurer was more like a turbo accountant (read: “hedge accountant”). Now we have grown into business leaders.

As one of the peers so wisely put it: “Treasury is moving from transactional processing to a business partnering role”.

Glad to be back. See you soon.

/Magnus

Financial Regulation Is The Answer

2010-06-04T07:35:00.002+02:00

In the 1970-ties before deregulation of the capital markets there were book keepers in every bank and corporation managing the effects of government administratively changing exchange and interest rates. There was no need to manage risk, no derivatives, no financial volatility (well apart from occasional devaluations and rate hikes). However with time this paradise came to an end with sky rocketing inflation and too little access to capital. It made it hard to build companies to create the jobs and prosperity we all expect from them. We were lucky having the now so celebrated Mr. Volcker keeping Fed rates so high it created such a deep recession, which later gave us good growth in the coming decades. Meanwhile our great leaders were spending much of their valuable time to figure out how we would get the economy going again. They came to the conclusion we needed many more loans. They launched a new buzz word: “Credit Expansion”. They explained to us, the common men and women, that we must deregulate the financial markets. Prices on financial assets and debt should be set in open market auctions organized through exchanges or on a bilateral basis. This would make the world strive and everyone being very happy creating easy credit flow to everyone wanting money.

Then there was a wake up call for all banks and corporations in the 1980-ties. Now suddenly the inherent positions from cash flows and balance positions could be marked to market in real-time. We were so happy and even so more when we also were blessed with the computer enabling us to expand on market information coverage and how to define and calculate financial risk. Meanwhile the always so clever leaders were worried since they felt we could loose control over the financial development. A special worry was what would happen with the financial system if a bank defaulted. “Oh no”, they so intellectually stated; “We cannot allow for any bank to go belly up.” So they created the Basel Framework in detail stipulating how the banks would measure and report risk. In this way they succeeded creating a solution to avoid the financial system to collapse for any reason. We felt safe and proud. The first crash happened not until the beginning of the 1990-ties when Sweden went through a PIIGS crisis and basically all but one bank got bust. But Sweden was so small and no one really cared (except the Swedes of course). Eventually they developed a very nice solution with even higher taxes and an expanded public sector hiring more bureaucrats than doctors and nurses. This was very clever since it created well paid employment with very low demand of output for our distinguished leadership.

In the 1990-ties we were blessed with sophisticated treasury systems, value-at-risk, and separation of duties. Now the field lay open for anyone to trade, regardless of underlying commercial position. Sometimes it popped up scandals with some sorry guy who had taken too big positions, doubling and doubling, even hiding trade tickets in the drawers. But that was all forgotten when he came out of jail and wrote a book. Some even earned more on books than trading. It was a wonderful time. We all continued to trade and sometimes we also hedged. We built portfolios of our financial positions; Trading, Strategic and Tragic were their names. Some positions even had so long duration that the traders were long gone when they expired. This did upset the auditors for the right reasons. They felt they had no control, which shall never happen. They therefore eagerly and faithfully started to lobby for new legislations for accounting. The most famous was Hedge Accounting. (Fair Value Accounting is also another valuable milestone in their careers, but unfortunately it came way later). One thing is clear; if you want to solve a simple problem ask an auditor and you will have plenty of valuable spend and bureaucracy to fill your time for at least a decade. We owe a lot to them.

The 2000-ties started a bit sour. We had a big crash. Who could have guessed that all those solid companies with p/e ratios in the millions would crash? It struck like lightning on a clear day. Anyway we had a great comfort in eagerly implementing Hedge Accounting in our spare time. A special treat was that if we had the assistance from a consultant to implement it, we surely would hear from our auditors they would not approve it creating ample opportunities for interesting and high energy creating discussions. And we were happy, hedge accounting created immense value for society and it was reaching our target of creating annual accounts leaving no question marks on the financial position whatsoever. In parallel we excelled the skills of defining policies that would eventually eradicate all financial risk for ever. The policies and hedge accounting combined was so successful that we would develop so robust procedures that we would be able to even control our future. Anyway that was what we believed. However something happened in 2008. Two very old brothers in the US (heard they were more than 150 years old) – the Lehmann Brothers – did something to interrupt the whole scheme of things. Somehow they managed to eradicate the water proof protection to financial volatility that hedge accounting and treasury policies and credit expansion so wisely had provided. The brothers even made banks go bankrupt. Poor central bankers having worked so hard for so long time to build up the perfect remedy for financial domino effects (the Basel framework). But the Lehmann brothers got what they deserved, I have even heard they are dead now – for real! And being America, they probably had it coming in the good, old fashioned way from a tree.

But now everything is back on the road again to full control and final eradication of financial risk. Our clever leaders have come to the divine conclusion that we must regulate again. I feel so much comfort in their common sense, high spirits and smart actions. I’m so grateful they borrow very much to ensure we can have our good standard of living forever. They have recently informed us that the good thing with government loans, regardless how many or how big, is the fact they create absolutely no financial risk what so ever. Only derivatives on loans do. This has made me understand the connection so clearly. I cannot understand why I have not realized this long ago. Probably that is why I’m not a bureaucrat.

Now it makes complete sense that our distinguished leaders want to regulate and even ban financial derivatives. That must be the very best way to eradicate financial risk once and for all so we can continue being safe and sound.

Hey, hey for a job well done.

Benchmarking on Asian Cash Pools

2010-05-30T16:10:00.000+02:00

The European Treasurers’ Peer Group has conducted a benchmarking survey on set-up of Asian Cash Pools. Of special interest was to map if and how such a cash pool could be managed from another time zone, typically North America or Europe.

Please contact ETPG if you are interested in receiving a copy. This offer is only open to corporate treasuries.