Death Star Economics



Spanish PM in money-laundering scandal; UK to take bold step on banking reform

All drama takes place in Spain today, where the opposition is pressing for Rajoy’s resignation. Over the weekend, the Spanish paper El Pais, showed that members of Rajoy’s People’s Party party received money through ex-treasurer Luis Barcenas, who is currently under investigation for money-launderingread article

The UK is seeing a renaissance of the Glass-Steagall act, as the banking reform moves on ringfencing investment banking from commercial banking. Last week, the EU quietly distanced itself from its own, union-wide ringfencing plan, presumably as part of a deal on the financial transaction tax. As for the UK, Alphaville explains:

The Banking Reform bill to be published today will give the Treasury and the bank regulator the power to break up a bank that doesn’t respect the ringfence between retail banking and the riskier stuff.

Whoa! That’s a pretty bold move, not to mention confusing as hell. First, the UK doesn’t want any of the EU’s regulatory “wisdom” (fair enough) to protect the City and Britain’s fantastic economy, and then, it adopts regulations that are much stricter than those on the continent. A+ for consistency (that is not a credit ranking). According to Credit Suisse, the reform could have a negative impact on Britain’s annual GDP worth 0.04-0.1%.

In Germany, the reform of the financial services sector has become a fixed part of the election campaigns, making reform inevitable. Now the question is just how sensible new policies could be.

Meanwhile over in AsiaChina is having a great day, with retail, banking, construction and transport [composing the non-manufacturing PMI] showing signs of recoveryread article

Yet, not all the grass in greener on the other side. China’s central bank has issued a warning to the Bank of China, which has exceeded its loan quota by more than CNY30bn ($4.8bn). “Loans are capped at 75% of deposits under China’s current Commerical Bank Law.

Have a good week.


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EU cuts its losses on bank bailouts

The week starts relatively quiet with some news from Europe and last week’s news from Japan.

The EU is doing something that could be interpreted as cutting its losses: in a redraft of terms and conditions for countries whose banks sought a bailout from the European Stability Mechanism (ESM). Under the new proposal, the countries in question (Spain, Ireland, Cyprus) will have to co-invest [into the failing banks] alongside the ESM or guarantee indemnities for the EU fund. Fair enough, but why only now? Is it possible that the real smart guys in Brussels noticed that money is finite? read article

In the background S&P is riding the New Year’s resolution wave and announced that 2013 will be a turning point for Europe: it will quit smoking, lose weight and stop defaulting on debt. read article

And it generally seems to have been a busy weekend in Brussels. After UPS proposed a €5.2bn takeover bid for Dutch delivery firm TNT Express, the Commission now swore to block the deal under antitrust rules. In response, TNT’s shares fell by 49%. read article

In other news, Swiss watch maker Swatch bought luxury jeweller Harry Winston for $750m, AIG is suing the New York Fed over bond issuer rights and investment banks Credit Suisse and Deutsche Bank are considering bonus cuts of up to 20%.

After the London Whale shook all of JP Morgan‘s senior management, prompting six of the 15 members of the firm’s operating committee to leave, the bank is now issuing a report for its board of directorsblaming CEO Jamie Dimon, ex-CFO Doug Braunstein and ex-CIO Ina Drew for the losses incurred. The board will vote on whether the report should be made public tomorrow, a day ahead of the firm’s earnings report. read article

So long.

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Something is rotten in the state of the Vatican

So, God and the Bank of Italy are having a stand-off. The Vatican, which is not on the EU’s white list of financially compliant states, is out of cash. Italy’s central bank refused authorization of the Deutsche Bank-run ATMs:

Italy’s central bank has blocked all electronic payments through cash machines and by credit cards in Vatican City following the world’s smallest state’s failure to fully comply with international anti-money laundering rulesread article

And if you’re wondering why we’ve heard so little out of Spain recently, then it might be because the country was busy using its Social Security Reserve Fund where it would otherwise have had to ask for foreign help. The fund, which said in 2010 that it may invest in Spanish debt, has now become a lender of last resort for the government: around 90% of the fund has gone towards Spain’s unpaid bills, eliminating the guarantee of [any] future pension paymentsread article 

Swiss bank Wegelin & Co, Switzerland’s oldest financial institution, will close its doors after 271 years in business. The bank pleaded guilty in a case brought against it in the Manhattan District Court for helping American clients to evade taxes on $1.2bn. The bank had been indicted in January 2012 and will now pay almost $60m in legal costs, including restitution, civil forfeiture and fines. Credit Suisse and Julius Baer are also under investigation on the same matter. read article

It took the Federal Trade Commission more than 1.5 years to look through all of Google’s search business looking for wrong-doing and antitrust violations. Now it’s official, Google has a clean slate. The investigation kicked off after Google’s competitors, such as Microsoft, claimed that Google services would have a preferred ranking in search results. read article

Otherwise, America’s car industry registered its best year since 2007, while that of France is seeing a 15-year low (on that note: “Nothing says Happy New Year like a burning car“). China‘s automotive industry crept on the front pages by doing nothing.

In the background, Venezuela’s president-re-elect Hugo Chavez is suffering form a respiratory infection that keep him from recovering fully from the cancer surgery he had in Cuba. Even though Chavez has not spoken or appeared in public in three weeks, it’s planned that he will be (re-)sworn in as Venezuela’s president on 10 January. In case new elections were necessary, they would have to be held within a month. read article

Weekend reading

– The Economist on the big international topics in 2013watch video

– So middle class, this world we live in, read article

– A case study of Germany’s bipolar voting behaviorread article

– Corporate welfare and the fiscal cliff deal, read article

Have a good one.

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A Swiss kind of problem: Credit Suisse splits and gets sued

It’s a pretty epic day for Credit Suisse. The bank announced to split into two units, wealth management and investment banking, squeezing its asset management arm into the former, which had been planned for a while now to decrease back office costs. The bank cited “the new regulatory reality” as a reason for the restructuring. Capital will be split 50:50 between the two units and the investment bank’s risk-weighed assets are meant to be cut by another 10%. Credit Suisse is aiming to save SFR4bn by 2015.

Some of those ambitious savings, however, will need to be put towards the legal costsEric Schneiderman, New York’s Attorney General, strikes again and filed a civil lawsuit against Credit Suisse after investors in mortgage-backed securities lost more than $11bnread article

Staying with Swiss banks and fines, ex-UBS Kweku Adoboli was convicted in four cases of false accounting and two cases of fraud in the lawsuit brought against him after he lost £1.4bn in trades between October 2008 and September 2011read article

In Japan, the government has announced to put another JPY1tn ($12.3bn) towards its stimulus program to save its economy. Japan’s economy is forecasted to shrink 0.4% in Q4. Following the 3.5% decrease in Q3, this would push the country into the third recession since 2008. Meanwhile, the Bank of Japan has left it’s asset-purchasing program untouchedread article

Yesterday, the FT’s Wolfgang Muenchau, the godfather of the eurozone crisis commentators, denounced France as Europe’s next problem child, saying:

The relatively robust growth during the third quarter was a fitting example that France is often more resilient than forecasters and commentators generally acknowledge. […] the currently fashionable French-bashing is politically motivated – a rightwing reaction against a Socialist president.

This morning, Moody’s, which doesn’t subscribe to the FT, downgraded France to Aa1. Au revoir, A-triple.

With unemployment figures at the highest in 13 years and French household names like Peugeot Citroen losing ground on the global market, this is just another weakness to France’ voice in European negotiations. read article

So long.

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Morals = money: financial incentives for whistle-blowing

Apple’s earnings missed forecasts, posting slightly higher sales but lower EPS. Apple reportedly sold 26.9 million iPhones and 14 million iPads last quarter. Key rival Samsung sold 53.6 million phones, which makes for a market share of almost a third worldwideSamsung’s earnings were better than expected, but South Korea posted GDP growth of 1.6% in Q3, the slowest rate since 2009. That dragged Asian shares, including Samsung, which is the heaviest weighted stock in the MSCI Asia-Pacific index, down to a seven-week lowread article

The European Parliament is working on a new directive to financially incentivize whistle-blowing, says the Handelsblatt Morning Briefing. Of course, much of this aimed at the financial services sector, especially considering recent scandals regarding insider trading and interest rate fixing. What may have been claimed to be the moral high-ground will therefore soon become a way of cashing in. It seems like something Greg Smith would enjoy.

On that note, Societe Generale, Royal Bank of Canada, Bank of America, Credit Suisse, Bank of Tokyo Mitsubishi UFJ, Norinchukin Bank, Rabobank, Lloyd’s and West LB have also been subpoenaed in regard to the Libor scandal. Maybe it’s time to accept that everybody was involved and move on. read article

One of the last firms with a clean slate in this case is BNP Paribas, France’ largest bank, which was downgraded from AA- to A+. The ratings for Credit Agricole and Societe Generale were confirmed with negative outlook. France’s president Francois Hollande has meanwhile hit the lowest voter satisfaction ratings since his inauguration, reaching only 36% in a recent poll by Le Figaro, versus the highest rating of 55%. The poor rating is most likely due to the country’s terrible economic performance that has forgotten what growth even looks like by now. In September, the unemployment rate hit a 13-year high; Hollande expects to take another 12-14 months to see any effects in the jobless numbers. But let’s not forget that Monsieur le president is convinced that the worst is lying behind us, and Europe will flourish again in no time. read article

And in the background, Greece has run out of money again. Officials said that the country requires an additional €30bn to make it through 2016. Greece will also fail to meet the 120% debt (of GDP) target in 2020; officials say it will be more like 136%. Have fun negotiating that with the Germans. If this was last year and anybody would have heard about additional billions that far down the line, Greece would have been kicked out of the EMU faster than they can put on a general strike. read article

Weekend reading

– Why the color of your parachute doesn’t matter if you don’t know where it’s taking you, read article

– the five lies Mario Drahgi told ze Germans about the OMT programread article

– the Harvard comparison: Obama vs Romneyread article

– an economist at the US treasury found the transcript of the 1944 Button Woods negotiationsread article

Have a good one.

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The changing face of finance

All eyes are on Mario Draghi once again, who is holding an ECB meeting in Brussels today. That once thing both Draghi and the rest of the world are waiting for is Spain‘s formal request for a bailout that would trigger the newly agreed bond-purchasing program of the Union’s central bank. Until that happens, however, nothing else will. Most likely statement to come out of today’s press conference is therefore probably a request for a request for a bailoutread article

Meanwhile, the European Banking Authority (EBA) has come back from it’s survey of 71 European banks, finding that only four of them fulfilled the new extra-super-crisis-resistant capital requirements of 9%. The survey did not include Spain’s Bankia or any Greek bank. The EBA said further that banks that don’t reach the prescribed ratios won’t be paying dividends or bonusesread article (read WSJ Deutschland)

Morgan Stanley, which had been rumored to be looking into selling its commodities division, has reportedly entered talks with the Qatari Investment Authority, the 12th largest sovereign wealth fund in the world that owns every other bit of London. The sale is motivated by new regulation through the Dodd-Frank Act and more specifically the Volcker rule, which prevents proprietary trading. read article

Similar news from J.P. MorganLDH Energy, currently owned by Louis Dreyfus and  J.P. Morgan’s hedge fund Highbridge Capital, will be sold to the CEO of Highbridge, Glenn Dubin, and founder of Tudor Investment Corp, Paul Tudor Jones. read article

Both these sales, though the former more so than the latter, are indicators of how post-crisis regulation is shaping the financial services sector into something new. The first result of this seems to be a cutting back of those bank divisions that that were added in the scope of expansions, during more pleasant economic times. Of course, this is not exclusive to commodities. Credit Suisse is looking to get rid of its $385bn asset management division as a “direct consequence” of not being a major asset manager, while Lloyds TSB has continuously offloaded its private equity assets, worth more than £1bn. Time to cut your losses and move on.

In the US presidential race, Romney won the first TV debateThe Atlantic said Obama lacked energy and enthusiasm, the Handelsblatt called him “pale” [which, of course, is a hilarious figure of speech here].

Greece, in its ineptitude of being a serious country, is on track to pool €100m to build a new formula one Grand Prix track. Bernie Ecclestone, CEO of Formula One Group, who is vainly trying to float the company on the Singapore stock exchange, has allegedly backed the project. Not necessarily related, GermanyFinland and the Netherlands have demanded to delay the next bailout tranche for Greece, worth €31bn, until November. read article

In other news, Facebook has hit the 1bn users benchmark. Fair enough, that IS cool. read article

So long.

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You know it’s bad when it impacts the Eurovision Song Contest

The most exciting thing that happened yesterday was Goldman Sachs joining Twitter – for real. The first three tweets regarded an official ‘hello’, shareholder support and the firm’s global sustainability report. Nicest bank out there.

David Cameron‘s ability to learn from public embarrassment seems to be limited. Just about a month after being shunned by European politicians in Brussels, Dave is back on the failhorse, trying to solve the crisis of a currency union his country is not a part of. Moreover, the UK is not exactly known for it’s pro EU statements, so the call for closer integration is a bit off. For this week’s one and only context: the UK is backing the idea of eurobonds as well. read article

All that is angering Mario Draghi of the ECB, who likes his [relative] freedom and independence from the European governments, which would be cut down with every inch of closer fiscal integration. read article

Some Credit Suisse research suggests that Germany spent around €600bn on the euro crisis thus far, which is approximately a quarter of its GDP. Understandable that Angela Merkel wants to keep borrowing at a low cost instead of pooling money via euro bonds.

In Greece, most recently compared to an angsty teenager, the polls show just how confused the country is. While 70%of Greeks allegedly want their country to stay in the eurozone, the party that is trying to accomplish the very opposite (Syriza) is leading the polls with 30%. Time to step back and reconsider? read article

Both Spain and Greece have told their contestants in the Eurovision Song Contest not to win, as the countries don’t have the money to host the event next year:

Perhaps Spain should have taken a lesson from Poland, which isn’t even running this year because holding the European champonships is apparently a headache enough. read article

For some weekend reading, the Economist’s leader advocating “a limited version of federalism [as] a less miserable solution…” Now that just sounds great. On the other hand, like I’ve said before, half-baked is better than not baked at all, right?

Have a good weekend.

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