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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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Fixing Japan – a bucket list

Japan is all over the news today, trying to weaken its currency (or not), stimulate growth and create jobs. It’s ambitious, to say the least. But it’s also good news for Europe. After all, new PM Shinzo Abe is planning to weaken the Japanese yen by buying euro-denominated bonds from the ESM: to save Europe, the world and its currency. Unfortunately  the world moves faster than politics and while business executives had begged for a weaker currency, they now fret that the yen could fall too far. Abe also set a 2% inflation target alongside stability and prosperity for everyone, causing Japan’s pension funds, which hold the second largest pool of retirement assets in the world after the United States, to increase their gold holdings from JPY45bn to JPY100bn. And then there is this hint of an idea to eliminate the interest-rate floor for deposits at the Bank of Japan, something the ECB has done as well to try and incentivize lending. The final policy decisions will be announced at the Bank of Japan’s meeting on 21-22 January.

In the background, Eurozone unemployment has once again broken all records, while German and Finnish exports declined. Meanwhile, Spain announced that it would have to issue €215-230bn gross debt throughout the year, which is 7.5% more than accounted for in the November budget.

Norway’s Foreign Minister Mats Persson has called on the UK to reconsider its currently rather hostile relationship with the EU to save the City of London and influence European legislation. During a trip to Ireland, Persson pointed out that Norway, while swimming in oil money, only had very marginal influence in its status as a member of the EEA (European Economic Area). read article

Follwing yesterday’s mortgage crisis-related settlement charges, Bank of America has agreed to pay $11.6bn to state-backed Fannie Mae, the Federal National Mortgage Association, which was bailed out during the crisis. The settlement regards mortgage putbacks, those loans Fannie Mae wants BoA to buy back due to their questionable nature. read article

After the American SEC took the first step in fighting services providers in December, when it opened the investigation into potentially fraudulent behavior of the big auditing companies in China, Ernst&Young is now subject of an Washington-based inquiryAllegation say E&Y lobbied on behalf of its clientscompromising its independence in auditing said corporates. In 2004, E&Y was suspended from entertaining new client businesses with publicly traded companies for six months in response to violating independence rules. read article

So long.

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Japan’s recursive debt dilemma; Papandreou’s mother evaded taxes on €550m

The morning news sang the song of positive Chinese manufacturing data as the savior of the world economy. Quietly, in the background, the CEO of the Bank of Tokyo pointed at the systemic risk deriving from government debt exposure of Japanese banks. According to the Bank of International Settlements, Japan’s lenders hold 900% of their tier 1 capital in Japanese government bonds. For comparison: since 2002, the equities to tier 1 ratio is capped at 100%.

As usual, things are messier in Europe, where Moody’s downgraded the credit worthiness of the ESM super-duper rescue fund over the weekend, while Greece announced its intention to buy €10bn in debt back.

Angela Merkel said in a weekend interview that she was willing to consider a Greek debt haircut in a possible world in which Greece got its finances back under control and doesn’t require additional debt. In other words, she isn’t really.

In other Greece news, Margaret Papandreou, the former prime minister’s 89 year-old mother is the beneficiary of an HSBC account worth €550m in Geneva. Oh well that is awkward. Switzerland has loosened its privacy laws on bank accounts to give the troika a better look at Greek tax evasionread article

In an embarrassing attempt to market Paris as a location, Christian Noyer of the Banque de France as argued that it was intolerable for the eurozone to have its financial center, i.e. London, outside the monetary union. Under normal circumstances, one should laugh at Noyer for being French […] and ridiculous [……..], but he has influence in the ECB, which will be have power over all European banks as soon as the banking union is agreed upon. read article

In the world of aviation, Delta, the world’s second largest airline after United Continental, is considering buying the 49% stake in Richard Branson’s Virgin Atlantic that is currently held by Singapore Airlines. In 1999, the stake was wrth £600m. If the deal goes through, Delta’s partners in crime Air France-KLM could acquire part of Branson’s 51%. Delta’s motivation for buying into the airline is (surprisingly) not the midnight ice cream-trolley on 34,000 feet, but Virgin’s slots at Heathrow, where it is ranked third in terms of take-offs and landings per week. read article

No room for news from the fiscal cliff, in a word: deadlockread article

So long.

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Black Monday: 25 years later, the world hasn’t learned much

Half time at the EU summit, we don’t have much but a step forward on the banking union front. From 2013 on, “a single supervisor“, i.e. the European Central Bank, will monitor certain undecided actions of an undecided number of banks in Europe. For EU standards, that’s a pretty solid plan. Monsieur Hollande of la France commented most eloquently:

There was an agreement, a good agreement, on timing and about the banks as [a] whole.

Aha. Oblivious to the Spain issue (not to mention the Italy issue), which is likely to be on the agenda for today, Hollande continued:

Tonight, I have the confirmation that the worst is behind us […] We are on track to solve the problems that for too long have been paralyzing the euro zone and made it vulnerable.

Thank you, France, you’re dismissed.

On the little detail there is, we know that all of the around 6,000 banks within the European Union will fall under the ECB supervision until 2014, presumably starting with those that were bailed out by their respective governments. read article

Today‘s part of the summit is likely to focus on what they didn’t agree on yesterday: a time line, followed by another press conference geared at Germany-for-all-and-all-for-one sentiment.. At this point, nobody knows when exactly the ESM will be able or allowed to inject money into [Spain’s] banks. Any debate regarding the increased fiscal integration that will save the continent, has been pushed back until the end of the year.

Google accidentally released its earnings report during the trading day as opposed to after the closing bell last night. And the numbers weren’t great, with earnings per share and revenues coming in 15% and 4% below estimatesGoogle’s shares fell 10% on the news, were then suspended, but registered an overall drop of 8%. Contrary to all of that, CEO Larry Page made a statement regarding the strong performance of the company last night. read article

Today is the 25th anniversary of Black Monday, the day in 1987 when the Dow Jones Industrial Average plunged 23%, erasing about $1tn between October 19 and October 22. Time to reflect on what we have learned and whether things are better now. Considering the above, the jury is still out. read article

Weekend reading

– “Would I have done Bear Stearns again knowing what I know today?”, why governments should be careful in suing banksread article

– another one bites the dust: Newsweek discontinues print edition, read article

– James Bond in numbers: Pierce Brosnan most badass (what!!), Daniel Craig on way to alcoholism, read article

– Sallie Krawcheck, former president of Merill Lynch on why she worked more hours than any man she knows, read article

Have a good one.

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EU getting ready to pay, China-Japan conflict boosts German car production

There won’t be a news brief tomorrow and Wednesday, 09/10 October 2012.

Hugo Chavez won another six-year term in Venezuela’s national elections held on Sunday. By the end of the new term, he will have been in office for 20 years. Chavez is planning to step up effort to nationalize companies in areas like finance, nutrition and healthcare. Prior to Sunday’s elections, Chavez underwent cancer treatments in Cuba; his illness may pose a threat to his upcoming term as president, commencing on January 10. read article

The Eurogroup of Finance Ministers is meeting today to officially launch the ESM, concluding the day with a press conference in the evening. The second bailout fund will hold €80bn paid-in capital (mostly by Germany, as we know), with €620bn of callable capital, which will be used as a base to borrow money in the public markets, reaching full capacity in 2014. The focus of the meeting will be next steps for Spain and possible the progress of Greece, where Angela Merkel and an army of 7,000 policemen will observe the situation tomorrow. read article

Following last month’s conflict between China and JapanToyota, Honda and Nissan are cutting their production targets for Chinese plants by about half until further notice, due to a slump in Chinese demand. In direct response, sales for South Korea’s Hyundai rose 15%, while German brands Audi, BMW and Mercedes-Benz rose 20%, 55% and 10% respectively last month. read article

Also in ChinaHan Hoi Precision Industry, a subsidiary of Foxconn that assembles iPhones, iPads and other Apple products, is the bullseye in a labor rights dispute that is igniting in China. Foxconn employs 1.2 million people in China, some of which were involved in a strike last week Friday. The strike regarded increasing working hours and quality assurance, was supported by China Labor Watch and involved employees working on the new iPhone 5. According to WSJ:

Labor groups have criticized Hon Hai for its work practices after several workers at the company’s massive manufacturing base in China jumped to their deaths in separate incidents in 2010. Hon Hai has since increased salaries and outfitted worker dormitories with safety nets in an effort to prevent such incidents.

In the US, earnings season is starting tomorrow evening with Aluminum producer Alcoa. Expectations are depressing and will underline the poor performance of the Western economies despite government efforts to boost growth. But a quarter doesn’t make a year, according to the FT, “S&P 500 companies are on course for record cash profits in 2012.”

Also in the news, Google is tapping into its massive cash reserves and will launch its own credit card. The card will be exclusively linked to its AdWords business and make it easier for clients to purchase advertising space. This is following Amazon’s announcement to make loans to their vendorsread article

Otherwise, applications for the position as Governor of the Bank of England have closed. Alphaville considers the contestants Paul Tucker and Lord Turner.

So long.

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Shakespeare was a central banker/ Greg Smith is back

After the German ESM court ruling, adding €190bn from Germany to the fund, lifted everything in Europe, and Asian shares couldn’t decide whether to rise or fall upon Apple’s iPhone 5 presentation (kind of cool that it’s all black, by the way), the rest of the world is waiting to hear from the FOMC meeting.

So QE or no QE, that is the question. Interestingly, the following lines of the Shakespeare quote also kind of apply to monetary policy:

Whether ’tis nobler in the mind to suffer

The slings and arrows of outrageous fortune

Or to take arms against a sea of troubles,

And by opposing end them? To die: to sleep […]

Well then.

Reuters’ economist poll shows a 60% chance of QE3. So far, the financial crisis and the monetary policies it forced the Fed into, increased the central bank’s balance sheet to $2.9tn. But some actually disagree, and say the question isn’t “whether”, but rather “how” the Fed is going to do it. From 12.30pm EST onwards, there will be interest rates, economic projections and Ben Bernanke’s long-awaited press conference.

More clarity in the Dutch election results (map): with 26.6% for the incumbent VVD (People’s Party for Freedom and Democracy) and 24.8% for the PvdA (labor), the Netherlands has avoided an extremist and eurosceptic government once more. Congratulations. A liberal-labor coalition would form a majority government, which is definitely progress after the last coalition consisted of five different parties.

EADS, the parent company of Airbus, wants to merge with BAE Systems, the British defence, security and aerospace company and largest contractor of its kind in Europe. Just like Boeing does in the US, the new company would combine military and commercial operations. Under the current proposition, EADS would hold 60%, while BAE would hold the remaining 40% of the company that is estimated to have a joint market cap of €38bn (in comparison, Boeing stands at €41bn). A decade has passed since a merger was first spoken of. The Handelsblatt calls the deal an “industrial-policy breakthrough”, which wouldn’t have been possible without a European Union. read article

In the case of Heineken‘s attempt to acquire full control of Singapore beverage conglomerate Fraser&Neave, a new player has entered the stage. Charoen Sirivadhanabhakdi, Thai billionaire and owner of Thai Beverage, F&N’s largest single shareholder since a couple of weeks, has made an $7.2bn cash bid for the company. read article

Also in the news: Greg Smith – again. After publicly resigning from his position in Goldman Sachs‘ London office on the Op-Ed page of the New York Times in March, publishers were throwing themselves at him. This year, we can give our loved ones his book for Christmas. On October 22, Why I Left Goldman Sachs is coming to a book store near you. Smith’s advance, in a time where book advances rarely make 6-figures, is rumored to have been $1.5mread article

In local news, Rafiq/c/k HaririLebanese Prime Minister until 2004, has put his Hyde Park mansion up for sale. For £300m, more than twice the original purchasing price of £140m. The sale would be highest valued housing transaction England has ever seen. Wild guess on the nationality of the buyer: Qatari or French, there’s a pattern.

So long.

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ESM approved/Dutch elections in full confusion

There’s a lot going on today, so we’re going to do this very structured, with headlines and everything.

ESM

The first catastrophe was avoided when the German constitutional court approved of the ratification of the European Stability Mechanism (ESM). However, the court added a clause regarding Germany’s financial exposure to fund, which has to be approved by parliament. The inaugural meeting will take place on the October 8, kicking off the administration behind the scenes, while the fund itself won’t do anything until January 2013.

Dutch elections

In the Netherlands, it’s labor against liberals. These two parties are most likely to secure the largest number of seats in parliament. But it wouldn’t be the Netherlands without a coalition government, forcing the country to continue its policy limbo. One thing that will change for sure, though, is financial regulation. It will be stricter in every way, the question is just how much stricter. We will know more tomorrow.

Maybe it’s time to take a look at Diederik Samsom, leader of the labor party, whose name sounds a little bit like taken from a Scandinavian children’s book. After completing a degree in applied physics focusing on nuclear energy at the University of Delft, he became a Greenpeace activist. During his time as a “campaigner”, he was arrested ten times, but never got a criminal record. He also founded Echte Energie, a provider of sustainable energy, which was acquired by gas and electricity company Eneco in 2008. Samsom also won five TV quiz shows and has an IQ of 136. He is also a convinced vegetarian and has admitted in an interview with Marie Claire (Marie Claire interview politicians??) that he has cheated in previous relationships.

In other news
Electronic giants Sharp and Philips both announced to cut positions and wages to save $1.8bn and €300m p.a. respectively.

Moody’s announced that it may or may not downgrade the US from AAA in 2013, which is really just a gentle reminder that the debt ceiling debate never ever goes away. read article

Morgan Stanley is taking full control of its joint venture with Citigroup, Smith Barney, valuing the brokerage services firm at $13.5bn. The transaction transfers 49% of the company to Morgan Stanley and will result in $2.9bn write-down after tax for Citigroupread article

After the EU initiated an investigation into Gazprom‘s market position in Eastern and Central European countries, the Kremlin has now taken steps… The FT reports:

A decree signed on Tuesday by Vladimir Putin, president, aims to protect “strategic” companies operating abroad, demanding that any foreign organisation requesting information, assets or changes to contracts from strategically important companies must first seek permission from the Russian government.

Russian Economics Minister Andrei Belousov said today that Russia’s GDP will fall under 3% in the second half of 2012, contraicting Putin’s forecast of 4-5% growth. read article 

The Bank of England is going to advertise Mervyn King’s governor position for the first time in history, seeking to find a replacement by the end of the year. read article

The FOMC meeting starts today, but won’t be significantly interesting until tomorrow. Apple’s product launch is scheduled for 1pm EST (6pm GMT) (share analysis here).

So long.

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Great expectations, or the state and finance

Overall, this week is about Wednesday [and Thursday]. On September 12, we’ll see the two-day FOMC meeting begin (see below), the German constitutional court ruling on the ESMDutch national elections [round 1] and Apple’s presentation of the new iPhone. Considering the current situation of the world at large, at least one of these is going to result in catastrophe. But for now, we remain stuck in act 4, falling action, the boredom before the storm.

MarketBeat kicks us off with expectations:

Economists at Goldman Sachs predict the probability is “now above 50%” that the Fed will unveil a third round of quantitative easing, or QE3, on Thursday, when the Fed’s two-day policy meeting comes to an end. Barclays expects an extension of the Fed’s low-rate policy into 2015 and a reactivation of open-ended asset purchases, which would include the buying of both U.S. Treasuries and mortgage-backed securities.

More QE “remains a close call even if the chances of it happening have increase,” wrote Barclays analyst Guillermo Felices. “If it does, we think it would weaken the U.S. dollar and support risk appetite.”

The big bailout news of the day are coming out of the US, where the taxpayer en generale, represented by the US Treasury, is reducing its stake in AIG. The American International Group had received $182bn in bailout funds back in 2008. Now $20.7bn of the share is going up for sale (According to WSJ it’s only $18bn.). The Treasury’s, pardon me, the taxpayer’s stake will be reduced to less than 20% upon completion of the divestment. read article

Some $23bn of their overall investment remains unpaid. Combined with the share offering and the valuation of the remaining stake, the US Treasury probably will eventually book a profit on its rescue of what was once the world’s largest insurer.

Volcker (US) and Vickers (UK) are getting a new friend: Erkki Liikanen. With some more effort we could have made that an alliteration, but hey. Liikanen is the governor of the Bank of Finland and the man behind the Liikannen report (Report of the European Commission’s High-level Expert Group on Bank Structural Reform BLAH), which is to be published in a month’s time. The man behind the man behind, however, is Michel Barnier, the secret puppeteer of Europe who stands behind every new and potentially ineffective piece of financial regulation that is created in Brussels. According to rumors overheard by the FT, the report will combine the UK and US approach, meaning banks will be forces to ringfence the shit out of everything and stop trading with their own money.

If we’re lucky, this will inspire an intelligent and necessary conversation about effective policy. More likely, however, is the introduction of an overly complex framework, to reach implementation five years from now, which will mostly do one thing: create a lot of opportunity for lawyers. I guess that is one way of stimulating the economy.

So long.

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Euro[pe] 2.0, or doing whatever it takes

So yesterday, Mario Draghi put some meat on the bare bones of his “doing whatever it takes”-skeleton and officially revealed the ECB’s latest bazooka. The bond purchasing program that tastes a lot like QE, comprises of the unlimited buying of European government bonds with maturities between one and three years. The whole charade is called OMG OMT, for Outright Monetary Transaction. According to Draghi, the OMT plan is an “effective backstop to remove tail risk from the euro area.” Alright then. Watch the rally while you canread article

Yesterday, Morgan Stanley remarked that one reason of the ECB’s vague plans may be the prevailing disagreement within the institution about whether bond buying would actually accomplish anything. But the only outright criticism came form Germany – as expected… The Handelsblatt called it a “blank cheque” and Jens Weidemann, president of the Bundesbank was the only ECB council member who voted against the plan, but said he would not stand in its way [any more than he already does].

The next important date in the eurozone crisis diary is now Germany’s final ruling on the European Stability Mechanism on September 12.

Meanwhile, Glencore is doing whatever it takes to save the Xstrata merger (trending phrase, by the way…). The company cancelled this morning’s shareholder meeting about the Xstrata merger, to put a new proposal on the table. This one would amount to $37bn and include raising the merger ratio of shares from 2.8 to 3.05. We shall see what the Qataris say to that.

Across the globe, central planning (*cough*communism*cough*) at its finest: to boost economic growth and domestic demand [for construction in this case], China has commissioned to build 2,018km (1,254m) of roads. It is, quite literally, doing what(ever) it takes… This is in addition to yesterday’s announcement on subway construction projects in 18 cities across the country.

And in the US, we’re seeing nonfarm payroll and unemployment data in about an hour’s time. Expectations brought to you by Goldman Sachs, here.

Weekend reading

– Signal and noise, an excerpt from Nassim Taleb’s new bookread article

– Shut up about hyperinflation, will you? Enter Felix Salmon, read article

– Assessing Michelle Obamaarms role as a “partisan weapon”read article

– How we didn’t notice the decrease in US credit card debtread article

Have a good one.

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‘Fremdschämen’ for Barclays, China’s imports lower and the mess that is oil

Marcus Agius, resigned chairman of Barclays, is sitting where Paul Tucker sat yesterday: in front of the Treasury Select Committee. Tucker yesterday denied having intervened on Libor. Watching the hearing was an exercise in what the Germans call ‘Fremdschämen‘, feeling embarrassed FOR someone else[‘s actions]. The most asked question by the Treasury was “don’t you think that’s rather odd?” Full summary of the awkwardness here.

In terms of the Chinese data marathon that is this week, the country’s imports and exports both slowed down in June from May, with import growth almost halving to around 6% in June. Not only does that show the slowing domestic demand, but it is also hitting China’s trade partners and gives a reason for last week’s rate cuts by the People’s Bank. Its main import partners are Japan, South Korea, the US and Germany, most of which could really do with some growth right now, there are bailouts to be paid for…

After yesterday’s 10-hour Eurogroup meeting that led to nothing (statement here) we didn’t already know before, a blueprint for Spain‘s additional €100bn aid package was agreed upon, leading to the first tranche of €30bn being deployed by the end of the month, sourced from the ESM, which is not fully ratified yet. The German Constitutional Court is hearing arguments in favor and against the ratification of the fund today. A decision won’t be made until later in the day, but a positive response would give the bailout mechanism the ‘okay’ from its largest contributor. read article

The effect of Francois Hollande‘s introduction of the 75% maximum tax rate, a higher wealth tax for those with an annual income above €1.3m and taxation of foreign-owned French property is mostly felt by London’s real estate market, it seems. While housing prices in the rest of the country are falling at their fastest pace since Q4 2011, London, which is usually immune to price drops, sees a changing buyer profile: Les French. They’re buying fast and they’re buying big. The FT reports that luxury property sales to French buyers have picked up by 40% in the last three months, with the average price increasing from £1.1m to £3.9m.

Otherwise, Norway has reached an agreement over pensions claims with its oilworkers, preventing the country’s resource industry to shut down. Important fact in this regard, the government can actually force these worker, who count as the country’s top earners back to work. Norway is the world’s eight largest exporter of oil and the 16-day strike over lowering the retirement age from 65 to 62 cost the country more than $500m. Meanwhile in Iran, which ranks number four in terms of oil global reserves, oil production has fallen to a 20-year low in response to international sanctions. It’s all a bit messy.

So much for today, let’s hope tomorrow has more new news…

So long.

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