A True Prisoner’s Dilemma

Banks are no strangers to controversy – we only get a glimpse of their colossal levels of errors of judgement during times like the great financial crash of 2008.

Most big banks have a mandate (without your consent) to use funds deposited to trade and participate in complex and highly risky investments like stocks, currencies, futures and derivatives – but to what extent?

This also brings to the fore a potential issue of what is known as the principal-agent problem. Where the agents – bank employees, are given a ‘license to “ deal’ in all sorts of investments, often under the radar of both local and global financial authorities.

When one of such agents makes an overwhelming error in judgement, causing a large chunk of investment monies to be lost;  the agent is said to ‘go rogue’.  Questions arise as the agents often do not operate alone without supervision or consent from their seniors/managers.

A good example is that of a convicted bank fraudster; imprisoned and released on good behaviour, 38-year-old Kweku Adoboli who was eventually deported from Britain to Ghana.  A country he has lived in for 26 years in comparison to Ghana where had lived for a mere 4 years. This ends a long-protracted appeal process to allow him to remain and continue living in the UK after serving his sentence.

Some say he was a scapegoat for the deportation policies in the UK and argue that the colour of a person’s skin has no bearing on the immigration policy of Britain. This assumption holding some substance after what happened with the Windrush scandal

Others have also contended that he was the perfect scapegoat to throw in jail as a warning shot that the UK was willing to crack down on fraudulent bankers especially after the 2008 financial collapse which banks played a significant role in.

N26_banner-300x250-ENThis is also the reason why no top manager went to jail at UBS. Had Adoboli believed regulators did not know about money laundering and illegal trading in central London? The banks want to continue raking in profits and the last thing they wanted was a former insider with an appetite to take them on. These are the practices that have made them powerful. Adoboli failed to recognise that.  

“Adoboli did not syphon money to a private personal account, he did not pay himself a golden parachute, he did not launder money for terrorists or drug cartels, he did not manipulate interest rates and did not cause financial loss to the UK government. Other UK bankers who were never prosecuted however did.”

The word scapegoat is applicable because the banks that needed bailouts like RBS were savings banks, unlike UBS which was at least at that time, an investment bank. Adoboli did not syphon money for himself, he did, however, recklessly trade to make money for the Bank.

UBS is a bank which ordinary folks do not readily have access to. The very practices by Adoboli that lost the bank $2 billion led them to eventually record an overall profit of over $3 billion that same year. We, therefore, need to deprive our minds of the fact that Adoboli defrauded taxpayers of the UK and was a rogue agent of the bank.

He was, however, not alone in this practice and UK taxpayer bore no responsibility for the money that he lost. Therefore, in several ways, the own architect of his misfortune; either advertent or inadvertently.  

Let us, however, turn our attention to finance because this is what this post is about. And even before that, it is essential to get some perspective before jumping on to ‘lynch’ Adoboli. The Royal Bank of Scotland which manages cheque accounts of ordinary workers had to be given taxpayers money of £45,5 billion as a bailout.

It appears that the government will not get the money back according to the current chair of UBS, Sir Howard Davis. Interestingly enough, no one was arrested for causing financial loss to the state (that happened). UK taxpayers had to take a hit for this.

 Another interesting issue worth considering is the LIBOR scandal which was the manipulation of interbank lending rates by a host of global financial institutions. These banks, incidentally, including UBS by the way, have been implicated in manipulating interest rates for profit sharing. This was as far back as 2003 according to the counc39935_1200x628il of foreign relations. Again, no one was jailed for this ‘heist’. Before addressing Adoboli ’s case again, some large multinational banks were publicly known to launder money (for terrorists and drug cartels) guess who was convicted? That’s right, no one.

We do not refute that what he did constituted a crime –  it apparently was and perhaps he deserves the jail time he got. But the way he was plastered all over the newspapers in the UK in 2011 as some poster boy for out of control banking in the UK was why the term “scapegoat” was used.

  In investment banking, trading of commodities and currencies can go wrong which is why he should have insured his bets. But then, what no one is willing to talk about is the reward associated with high risk (uninsured) betting in the financial markets. That is the modus operandi of these banks; which does not make for sufficient juicy material for the corporate press. 

This is the height of the power of the big financial institutions and what they can get away with. Lose taxpayer’s money and there is no consequence. Fund terrorist or drug cartels and you will just be fined a fraction of your profits; fix international interest rates and all you receive is a fine. However, dare to lose their money through a risky bet and you will be undone just like Adoboli was.

Until the current financial framework is considerably changed to end monopolies of big financial institutions, the risky bets will continue. With blockchain and cryptocurrencies, who knows what the future hold? All the best to the “rogue trader” in his future endeavour nonetheless.

**This is a summarised section of a column by Julius Owusu-Paddy.  He is a staunch advocate for challenging social norms that elevate the powerful and suppresses the powerless. The full article can be read here. This section attempted to cover the issue of principal-agency problem and related issues in the financial industry.

One unanswered question is why investigators never scrutinised the practices of the entire UBS bank rather than just hauling two comparatively low-level managers to court (the afore-mentioned Kweku Adoboli and another Ron Greenidge). UBS did, however, make a profit that year despite the loss of $2 billion attributed to Adoboli.

Vocations of the Future

There is a lot of banter, which is backed up by well-research papers on how Automation and Robotics (powered by machine-learning systems) will replace jobs in the manufacturing and labour-intensive industries.

Blue-collar jobs are not the only ones however, that face imminent and progressive extinction.

A recently survey report conducted by the World Economic Forum predicts futuristic trends affecting certain jobs in the modern workplace.

Robert Solow predicted decades ago, in his Solow-Swan model, a massive driving force of global growth: technology.

And the evidence is prevalent with the likes of Apple, Microsoft, Google and Amazon championing stock markets with Billion-dollar market capitalizations and in the process creating an abundance of jobs globally.

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Disruptive technological advances such as AI (Artificial Intelligence); the ubiquitous high-speed mobile Internet (5G); widespread adoption of big data analytics; cloud technology; and the recent Blockchain technology will be the drivers of this job evolution.

Based on the report, by 2022, this job evolution will be firmly in place as it has already.

In a matter of just 4 years, we could have a situation where jobs such as postal service clerks, data entry clerks, and bean-counters (accountants and auditors) would be made redundant.

Impact on services

Software like Microsoft’s Dynamics 365, aims to remove ‘silos’ within customer relationship management (CRM) and enterprise resource planning (ERP) processes.

The latter takes over (fully automates) back-office operations such as stock-taking and supply chain management.

Such tasks will be performed via software, reducing the need for more human supervision. Consequently, the focus would be more on managerial roles.

In the sales and customer service realm, technologies like Microsoft’s AI will provide automated insights to guide employees on improving customer experiences.

Furthermore, it may lower support costs by using virtual agents or Chatbots to eliminate in-house AI experts and those writing code. This will  result in more redundancies!

World's jobs

On a positive note, newer and more exciting jobs such as data analysts, machine learning and AI specialists, digital transformation experts and in general information system services will be on the rise – up to 135 million globally, according to the Report.

The fields to benefit directly from new technologies would be information technology; information security; innovation; customer services and risk management (financial services).

Impact on finance

Another group of professionals whose nature of work will be affected due to the advent of ‘disruptive technology‘ are financial middlemen. Likewise, smaller banks and money transfer institutions.

Decentralised systems were primarily put in place to eradicate extra fees associated with transferring money across borders, and from one account to another. This because fees increase due to such intermediaries (financial middlemen).

Cutting them out completely undoubtedly renders them redundant. It is therefore pertinent for them to innovate their products in order to open up sufficient job position.

Read more about the effect of Cryptocurrencies on the banking sector here

Recently, Malta’s finance minister whilst in a private interview during a Blockchain Conference, echoed this. He said that the advent of cryptocurrency has changed financial middlemen into traditional “photo developers”.

“I can see this, just like in photography when you could tell that […] those who process the photos will lose their jobs; a lot of financial intermediaries will be facing the chop in the not too distant future,” says Edward Scicluna.

The good news for governments will be that the trend shows that the jobs created will surpass those lost.

Be proactive and skill yourself accordingly or get the right personnel who can quickly adopt some of the mentioned skills so that you do not fall behind!

The fuss about trade disputes

What does a small-scale farm-holding, two presidents, some tech companies and their respective local currencies all have in common?

The answer might be obvious if you have been paying attention to the so-called trade war between China and the US in the news lately.

But why is it of concern and what are the far-reaching implications for the rest of the world?

Well, active involvement in international trade is a vital sign of a country’s financial health and a significant input to its Gross Domestic Product (GDP).

GDP measures the value of all goods and services produced in a country from raw materials (input costs), to value added (assembly and skilled labour costs) to come up with final goods or services.

And though “domestic” implies that this refers to a country’s internal economy as a whole, the contributions can be extended from a services perspective.

This occurs when the country places emphasis on or relies on income from Foreign Direct Investment (FDI) to help boost its economy via its GNP. GNP is a similar measurement but slightly different from GDP as it incorporates.

Importance of trade

Fact is, all goods and services come from the price or costs starting with that of the initial extraction/acquiring of raw materials.

These then undergo the production and assembling process leading to the product or service of intrinsic value for both local and international (via exports) consumption.

An ideal situation for a country is to export more then it imports to maintain a positive balance of trade. So basically more money flowing in than out.

The extra surplus can be ploughed into the economy via the fiscal budget and can supplement a shortage of funds raised from domestic taxes.

The opposite, which isn’t always a bad thing, (called a trade deficit) would have to be managed and nursed like any other loan.

The US has often criticized Germany for exporting a lot (of its cars, trains and machinery) and not importing much and thus not being ‘fair’ in trade practice. But trade itself, arises from market forces, priorities and consumer demand.

Everyone loves a BMW, Audi and Mercedes Benz so these German-made products will always be in demand compared to US car makes.

Who you chose to trade with will often give rise to favourable balance of trade if you are engaged in a trade agreement or part of a trading bloc.

Why this is also a big deal

The demand for your country’s goods and service will directly impact the strength of its local currency – more trade means more of your currency is required to pay for goods and thus the value of the Dollar, Euro, Yen or Naira etc., goes up.

A strong local currency leads to stronger purchasing power for its citizens and residents. This comes in handy when you plan things like holidays, purchase goods online, invest or just send cash abroad as gifts.

So, you can see why a strong Dollar or Euro is always favoured and why sometimes drastic measures are taken to keep it that way.

“A higher demand for a country’s goods and services has a direct positive impact on its currency and exchange rate”

A quick glimpse of the world in terms of the input costs for goods and services that gives countries a competitive edge when it comes to trade.

USintellectual property, services, weaponry;

Germany – steel and engineering machinery giving rise to high performing automobiles;

Many African countries – mineral resources such as oil, tobacco cocoa and precious stones;

Israel – military intelligence,

South America – agricultural produce;

India – IT and customer services;

China – agriculture, building/(manual) labour and of late technology.

Country Trades

The beef with China

The said technology that China (no.2 on the list) offers the rest of the world is the subject of hot debate. The alleged theft of US intellectual property for tech gadgets and software by China.

This is one of several unfair trade practises and motives for why the US recently decided to start imposing heavier (punitive) tax-like increases on multiple goods imported by China.

These extra costs, referred to in trade terms as import tariffs, have a spill-over effect on the costs of production.

China then reciprocated by hitting the US with tariffs (mainly on agriculture produce) causing the trade war that drives each country to protect its own economy.

The higher input costs naturally, lead to the price of the product going up and reducing its competitive advantage and demand. Higher input costs can also affect the local labour force for the worse too.

Factories, multinational corporations and industries such as farms (both commercial and subsistence) will have to cut the cost of labour. In worse cases which we have seen, workers are laid-off in a heartbeat to stop or prevent accounting losses.

These factors would have hopefully been taken into consideration by the respective leaders before pulling the tariff triggers. Acting with emotions rather than looking at the far-reaching implications is irresponsible and affects all recipients of the goods and services.

Have the talks of the trade war impacted productivity and the global trade economy? So far its just the stock markets (securities and commodities) reacting.

Only time will tell.

The ramifications will also depend on the price elasticity of demand of the commodities under the tariffs. That is, how markets and respective industries affected react to the sentiment versus the actual economic activity they engage in.