2012年6月23日 星期六
Should the Fed Open a Brokerage Account?
It wasn’t so long ago that the Federal Reserve left at least some things to the imagination. Was the central bank going to hike rates? Or ease? Did the addition of an adverb in its outlook statement mean it was about to go hawkish? Alan’s Greenspeak was so painstakingly premeditated that it was sanitized of any specific meaning; financial pundits tracked the size of his briefcase.
One Great Recession later, the Fed has pretty much dispensed with that mystique. Chairman Ben Bernanke has pursued three-plus years of zero-interest rate policy, with repeated telegraphing that drinks will stay this cheap until at least 2014. Then add QE1 and QE2 for an extra $2.3 trillion of stimulus. Not good enough? Throw in Operation Twist. And now, Twist, Rinse, and Repeat, even as interest rates just touched record lows. Bernanke has done everything he can to boost this sickly economy.
Or has he?
What if the Fed were to buy stocks? It already buys mortgages—just one way Bernanke constantly blows kisses to the housing sector. But Tobias Levkovich, a strategist with Citi Investment Research, notes that stock market changes have more correlation to consumer shopping activity than changes in home prices. He calculates that the top 20 percent of income earners (who happen to own 90 percent of stocks) account for nearly 50 percent of discretionary consumer spending in the U.S.
Roger Farmer, chairman of the economics department at the University of California at Los Angeles, has been outspoken on the need for the Fed to get more creative by purchasing equities. He writes (PDF):
The [Fed's] credibility issue arises, because, when the interest rate is zero, there is no way to signal a change of policy to the markets using conventional open market operations. The purchase and sale of treasury bills has no effect on the economy, because, when the interest rate is zero, treasury bills and money become perfect substitutes. Monetary policy becomes like “pushing on a string.” That’s where unconventional monetary policy comes in.
Farmer’s research hones in on what he calls the “transmission mechanism” from Fed actions such as QE to the real economy. He views stock market wealth effects as the most important. As evidence, he notes that the Standard & Poor’s 500-stock index bottomed in March 2009, just as the Fed began purchasing mortgage-backed securities. The ensuing one-year bull run, he adds, sharply U-turned in April 2010—coinciding with the removal of the Fed’s program to buy risky assets. In a recent paper (PDF) entitled The Stock Market Crash of 2008 Caused the Great Recession: Theory and Evidence, Farmer offers evidence that U.S. stock market performance has been linked to employment for 60 years.
The economics professor wants the central bank to cut to the stimulative chase by investing in a broad index of U.S. equities. ”It is not just the size of the Fed’s balance sheet that matters,” he says. “It is the composition.”
Of course, this proposition invites tens of questions. When should the Fed buy? If investors are enjoying a rip-roaring bull market run, should the Fed feel obligated to counter that enthusiasm with well-timed sales? Could mere disclosure of these sales prompt a rush to the exits? (Update: The Fed could only purchase equities if the Federal Reserve Act was changed to allow it to do so.)
Even so, the idea of direct central bank intervention in the stock market is not wholly unprecedented. The Hong Kong Monetary Authority did it in 1998, when shares were melting down amid an emerging markets contagion. The practice is old hat for the Bank of Japan, whose chronic zero-interest policy has hardly been enough to jolt the huge economy out of its prolonged slumber. Farmer’s philosophy got a shout-out by an external member of the Bank of England, who in a recent speech (PDF) called for central banks to more aggressively purchase private-sector securities.
The Federal Reserve buying stocks? As unlikely as it seems, it is impossible to count out. After all, the institution is not even 100 years old. The Fed has experienced a Great Crash, Depression, stagflation and, now, all manner of unprecedented interventions toward a Great Recession that is still not in the country’s rearview mirror.
Vanguard Thrives in a Sour Climate
A dozen years of disappointing stock returns have soured investors on professional money managers, especially ones who charge high fees for their ability to pick winning stocks. For Vanguard Group, which sells mainly index funds at one-fifth the industry’s average fee, investor angst has been a windfall. Vanguard attracted $48 billion in deposits in the first quarter, the most in its 38-year history, and roughly one-third of all the money that went into mutual funds and exchange-traded funds (ETFs). “The world is coming around to our way of doing things,” says Chief Executive Officer F. William McNabb in his office on Vanguard’s suburban campus, which looks like a no-frills community college.
Vanguard funds charge an average fee of 16? on every $100 invested, compared with 79? for the industry as a whole, data from analyst Lipper show. Stock market returns that averaged 1.2 percent a year since 2000 and ultralow interest rates have forced investors to be more aware of such fees, says Burton Greenwald, a mutual fund consultant based in Philadelphia. “These days people are looking at every crumb they can pick up,’’ he says.
While Vanguard offers actively managed funds, it has never emphasized stockpicking or promoted star managers. It is best known for its index funds, which are designed to match various market benchmarks, such as the Standard & Poor’s 500-stock index. That has helped Vanguard benefit from a general loss of confidence in the financial industry since the 2008 credit crisis, says Nancy Koehn, a historian at Harvard Business School. “Their credibility is stronger, not because they have done anything different, but because the rest of the landscape looks so dubious,” she says.
With $1.9 trillion under management, the Valley Forge (Pa.) company is the largest mutual fund manager in the U.S.—a title it wrested from Fidelity Investments in 2010. Both Fidelity and American Funds, the second- and third-largest mutual fund firms in the country, have experienced net redemptions from their funds during the past year. Vanguard has 17 percent of the U.S. ETF market, up from 6.1 percent in 2007, Morningstar (MORN) data show. Its share of stock and bond funds grew to 16 percent from 13 percent over the same stretch.
The Vanguard way was laid out in founder John Bogle’s 1951 Princeton University senior thesis, in which he criticized the investment industry for putting the needs of firms ahead of those of customers. When he set up Vanguard in 1974, Bogle devised a structure in which the company was owned by its funds, which in turn were owned by the funds’ shareholders. Profits were to be used to lower costs or to improve service.
Sixteen years after he stepped down as CEO, Bogle, 83, still retains an office and influence at Vanguard, from the pictures of British warships that he picked to decorate the walls to the emphasis on low costs and diversification that were his trademark. “We have strong Kool-Aid here,” says George Sauter, the firm’s chief investment officer. “If you don’t like the taste, you have to bail out.”
McNabb, 55, is spreading the Vanguard gospel to new audiences, including financial advisers, whose assets with Vanguard have grown 80 percent in the past three years. Wayne Blanchard is a convert. A financial planner in Orlando, Blanchard recommended actively managed mutual funds to his clients for most of the last 20 years. Over time he lost faith in his ability to find funds that could beat the market. “I wasn’t doing my clients any good,” he says. Today he uses mainly Vanguard ETFs, which mimic indexes but can be traded like stocks. His motivation: “They’re cheap.”
McNabb wants to make sure the company retains the positive image it has with the investing public. To reinforce his message, he recently spoke to a group of young Vanguard employees, stressing familiar themes: keeping costs low, putting the customer first, and investing over the long term. When one of the employees described that approach as “boring,” McNabb had a ready response: “Boring works.”
The bottom line: Fees almost 80 percent lower than the industry average helped Vanguard pull in a record $48 billion from investors in the first quarter.
For 'Eco Flippers,' There's Green in Foreclosed Homes
When Christine Fisk toured a foreclosed home in Phoenix that had been renovated to be more energy-efficient, she wasn’t sold on its environmental benefits. But the two-bedroom bungalow was just minutes from her office and in good shape, so the financial adviser bought it for $150,000. A year in, Fisk is a believer: Her last electric bill was under $40, far less than she expected. “My day-to-day reality is dollars and cents, so everything that trickles down into my pocketbook is important,” she says.
The retrofit of Fisk’s 1947 home was overseen by G Street, one of a growing number of small businesses that buy old homes, renovate them to be more energy-efficient, and sell them. These “eco flippers” spend tens of thousands of dollars to gut properties, revamp heating and cooling systems, improve insulation, and install greener appliances. The business model is “a convergence of the vast number of foreclosed or short sales on the market and customers’ increased interest in energy efficiency,” says Peter Brown, a director at Earth Advantage Institute, a Portland (Ore.) nonprofit that advocates sustainable construction methods. “It goes beyond marketing.”
With 11 million-plus homeowners owing more on their mortgages than their homes are worth, eco flippers have plenty of potential inventory. And the idea holds promise for remodelers, says Kermit Baker, chief economist for the American Institute of Architects. “The big opportunities are really older homes that were not built very energy-efficiently to begin with,” he says. Of course, “It’s a tough time to sell a home. If you’re investing more and therefore need to increase the sale price of the home, that’s an even riskier undertaking in this economy.”
Brent Farrell is convinced that spending $75,000 to $120,000 to retrofit houses in Houston makes economic sense. The founder of ReCraft Construction Services has completed about 15 green remodels since 2009 and says that all sold within a month. Energy-saving features make homes “more marketable, so I will sell faster,” says Farrell, who expects more than $7 million in revenue this year, at least 50 percent more than in 2011.
Countering the doubts of skeptical home buyers about efficiency claims is crucial. Those concerns can be eased by groups such as Earth Advantage Institute, the U.S. Green Building Council, and the National Association of Home Builders Research Center, which oversee the verification process and issue certifications. G Street, which has bought and renovated seven houses in Arizona since 2007, is now focusing on hand-holding rather than buying homes. The four-employee company charges about $5,000 for plans, oversight of a project, and help getting the renovation certified. “We’ll take all the pain out of what typically is perceived as not an easy process,” says G Street founder Philip Beere. He anticipates his company will handle about 1,000 eco-renovations in the next year.
Why not just tear down drafty old houses and build energy-efficient ones in their place? It’s cheaper to renovate a solid existing structure than demolish and start anew, says Aaron Fairchild, who founded Green Canopy Homes in Seattle in 2010. “We’re putting capital to work two times as fast as a new construction homebuilder because we don’t have to go through new construction permitting” and other hassles, he says. With seven renovations sold and six more in progress, he plans to double his staff by yearend, to 20.
Like Christine Fisk, attorney Timothy Harris hadn’t been in the market for “a super eco-friendly home” when he and his wife paid $572,000 for Green Canopy’s first renovation, a 1926 Tudor, two years ago. Now, he says, “When we tell our friends how much lower our gas and electric bills are, they’re amazed. I had an old house that was half the size that cost twice as much to heat. It’s a remarkable difference.”
The bottom line: Entrepreneurs are thriving by buying old homes, investing tens of thousands to make them more energy-efficient, and reselling them.
Leiber is Small Business editor for Businessweek.com, Entrepreneurs editor for Bloomberg.com, and covers small business for Bloomberg Businessweek.The Fed Keeps Twisting in Its Quest for Lower Rates
(Updates with economic projections and comments from Ben Bernanke’s press conference.)
The Federal Reserve will keep spiking the punch bowl at the economic dance party through the end of the year. The Fed said Wednesday it will continue what economists like to call Operation Twist, an attempt to bring down long-term interest rates to stimulate economic growth. The operation “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said in a written statement.
William McChesney Martin, who chaired the Fed in the 1950s and 1960s, once said that the central bank’s job was to “take away the punch bowl just as the party gets going.” But under Chairman Ben Bernanke, the Fed is more worried about the ho-hum party grinding to a complete halt. Rate-setters are trying to push mortgage rates to historic lows to revive the housing market, which is a key to overall growth.
The concept of Operation Twist is to sell some of the Fed’s short-term Treasury securities and use the money to buy long-term ones—to “twist” the maturity of the portfolio. Short-term rates are already super-low; the objective is to bring longer-term rates down as well by shifting demand. The original program, announced last September, was set to expire at the end of this month with $400 billion shifted. Now the Fed will reallocate a further $267 billion toward long-term securities through the end of 2012, leaving it with precisely zero in short-term Treasuries.
While the Fed is twisting, it isn’t quite shouting. Shouting would be taking the more extreme measure of adding to the size of its bond portfolio, which already stands at about $2.7 trillion. The current program shifts the maturity of the portfolio without making it bigger.
Will this help? Probably some, but not a lot. Low mortgage rates—the 30-year fixed rate average is currently 3.71 percent— have already made houses the most affordable they’ve been in decades. The problem for many potential buyers is not the cost, but their inability to get a loan because of damaged credit. The Fed’s initiative won’t do anything about that.
The rest of the Fed’s statement was as expected: It darkened its portrayal of the economy’s health and repeated its prediction that weak economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented from the open market committee’s decision, opposing the continuation of Operation Twist.
The Fed is now looking for 2012 economic growth of just 1.9 percent to 2.4 percent [PDF], down sharply from the range of 2.4 percent to 2.9 percent in April. That’s the range excluding the three highest and three lowest forecasts. It includes predictions from all of the Federal Reserve governors and bank presidents, not just the ones currently voting on the Federal Open Market Committee. The new unemployment prediction is for a fourth quarter 2012 average of 8 percent to 8.2 percent, up from 7.8 percent to 8 percent.
At a press conference, Bernanke fended off questions about whether the Fed wasn’t doing enough, or was doing too much. His most intriguing answer was in response to a question about a new initiative of the Bank of England–the Fed’s counterpart in Britain–to require that banks lend more to consumers and businesses as a condition for receiving new, long-term loans from the central bank. It’s called the “Funding for Lending” program, and details remain vague.
“We’re very interested in it and we’re certainly going to follow it,” Bernanke said. American banks have been criticized in some circles for taking funds from the Fed and not boosting lending. They say the problem is a lack of demand for loans, not an unwillingness to lend. Bernanke said the Bank of England’s plan may involve a subsidy from the British Treasury. A subsidy would presumably become necessary to compensate the Bank of England if banks defaulted on their loans. BBC Economics Editor James Peston says that, based on what he has been told, “the issue of whether taxpayers will guarantee the scheme is not definitively settled.”
A Tougher 'Say on Pay' Migrates to the U.K.
The say-on-pay movement, which gives corporate shareholders a greater voice in setting executive pay, has leapfrogged the Atlantic—and the Europeans may adopt a tougher line than the Americans have.
Britain announced Wednesday that public companies would have to give shareholders a binding vote on compensation every three years. In the U.S., the Dodd-Frank financial reform law of 2010 also requires a shareholder vote on pay at least once every three years, but those votes are nonbinding.
Michel Barnier, the European Union’s internal markets commission, wants to go even further. Besides mandatory shareholder voting on executive pay in European-listed companies, shareholders should have the power to vote on the ratio between the lowest and highest-paid employees in the company and the ratio between fixed on variable compensation.
Britain’s say-on-pay requirement, announced by Business Secretary Vince Cable, would take effect in October 2013. It would require all listed companies to publish a single figure for each director’s compensation, as well as a chart comparing the company’s performance and the chief executive officer’s pay. “There is compelling evidence of a disconnect between pay and performance in large U.K.-listed companies,” Cable told Parliament. “It is right that the government acts to address this clear market failure.”
A study released last year by the High Pay Commission, a British lobby group, found that over the preceding decade, directors’ salaries at major British companies had risen 64 percent and average annual bonuses 187 percent—even though share prices fell an average 71 percent during the period.
The Europeans also are taking aim at bankers’ bonuses. On June 18, European Parliament lawmakers rejected efforts by national governments to water down a cap on banker bonuses that has been included in a draft law on bank capitalization. As in the U.S., public outrage and shareholder rebellions have forced some banks to retreat from initial pay plans. Barclays (BCS) CEO Robert Diamond agreed in April to forgo about 11 percent of his total compensation until the bank’s profit increases.
Shareholders in 44 U.S. companies have voted this year against proposed compensation plans, according to data collected by Semler Brossy, an executive compensation consultancy in Los Angeles. Chesapeake Energy (CHK), facing a shareholder rebellion, said last month that it had made “significant” changes to compensation for its board and CEO. In April, Citigroup (C) shareholders refused to endorse CEO Vikram Pandit’s $14.8 million package after the stock fell more than 44 percent in 2011.
With Robert Hutton and Jim BrunsdenA Crisis Cripples South Korea's Savings Banks
On the day in May she was supposed to have appeared before prosecutors for questioning, an executive of a shuttered South Korean savings bank hanged herself with her scarf in a Seoul motel. The woman, identified by the police only as “Kim,” was a credit officer at Mirae Mutual Savings Bank, whose chairman was caught fleeing to China in a fishing boat three weeks earlier. She’s the latest casualty in a scandal hitting the periphery of Korea’s banking industry for more than a year.
Since early 2011, regulators have closed 20 Korean savings banks, where risky real estate bets gone bad have wiped out the savings of many ordinary Koreans. Even the prime minister saw money disappear. Prosecutors’ probes have uncovered cases of illicit lending and lax oversight, leading to the indictments of nearly 200 people and at least two jail sentences. Four bank executives have committed suicide, according to police, while more than 88,000 depositors and bondholders, many of them retirees, saw 1 trillion won ($857 million) vanish. “Everyone’s become a victim,” says Nam Joo Ha, an economics professor at Sogang University in Seoul. “Regulators lost the people’s confidence. The savings bank industry lost trust, a financial company’s most important virtue, and the people lost their money.”
South Korea’s savings bank industry was born in the aftermath of Asia’s 1997-98 financial crisis. Regulators allowed private lenders and rural cooperatives to call themselves “savings banks” in 2001 to boost confidence in the usually tiny, regional lenders. The state then granted deposit protection comparable with the insurance at nationwide lenders. This allowed savings banks to grow. In 2006 the government eased lending rules and the banks expanded their scope to include the property market.
Real estate lending became the banks’ downfall when defaults increased following the global financial crisis in 2008. To survive, savings banks started selling customers subordinated bonds that had low priority for repayment in the event of default. Because of high annual yields—as much as 10 percent, almost double the savings account rates at national banks—the securities became popular, particularly among the elderly living on interest payments.
The most recent round of closings came on May 6, when the Financial Services Commission announced the shutdown of four lenders including Korea Savings Bank, whose more than 10,000 depositors included 50-year-old Je Mi Young. The Seoul housewife sat trembling in her pajamas that Sunday morning, as headlines streamed across her television screen delivering the news that the bank was out of business. Her savings would be protected by state-run Korea Deposit Insurance Corp. (KDIC), which guarantees as much as 50 million won. Still, the additional 40 million won bond investment she made on behalf of her mother would be wiped out. “I always wondered what kind of stupid people put precious money into messy banks,” says Je. “Now I am one of them.”
Prime Minister Kim Hwang Sik was also swept up in the bank closures. He lost 40 million won when the FSC shut down Seoul-based Jeil Savings Bank in September. Like other Jeil depositors, he eventually got his money back from the KDIC, says Choi Hyung Du, a spokesman in Kim’s office.
Jeong Gu Haeng, president of Jeil’s affiliated bank, Jeil 2, was the first to commit suicide. On Sept. 23, he jumped six floors from his downtown Seoul office, according to police. A credit officer at Tomato 2 Savings Bank, and the chairman of Ace Mutual Savings Bank also killed themselves, according to police.
The government is discussing how to raise the money needed to repay an estimated 1 million-plus depositors. The 70,650 customers who had amounts exceeding the 50 million won insurance limit, along with 17,445 bondholders, need to stand in line as debtors in bankruptcies and civil suits.
Customers have pulled their money from savings banks, sending deposits down 23 percent since the end of August to a four-year low of 54.8 trillion won at the end of March, according to Bank of Korea data. Kang Sin Ah, a 43-year-old Seoul office worker, in January moved 20 million won to a state-run lender from a savings bank that had been paying as much as 3 percentage points more in interest. “What’s the advantage, if I have a nightmare every day about losing it?” she says.
The bottom line: More than 88,000 depositors and bondholders saw $857 million of their savings vanish in the failure of 20 savings banks.
Greece's Anti-Bailout Brigade Is Here to Stay
When Alexis Tsipras, the 37-year-old leader of Greece’s leftist Syriza party, addressed supporters on Sunday night, he couldn’t hide his mixed emotions. His party had collected 27 percent of the vote, making it the second-largest party in the Greek Parliament. The total was six times more than what Syriza polled in the 2009 elections. And yet the enormous attention showered on Tsipras and his anti-bailout stance over the last month had raised expectations so high among party members that coming in second felt like a defeat. “We reached the well, but we didn’t drink any water,” Tsipras said.
In fact, Syriza has plenty to celebrate. Until recently a fringe party consisting of disparate elements ranging from ecologists and feminists to Marxists and Social Democrats, the party has transformed itself into a sophisticated and cohesive force. After it stunned Greece’s political class by winning 17 percent of the vote in the country’s first round of elections on May 6, Syriza discovered it had neither the party structure nor the organization to deal with this extra pressure. The leftists gradually pulled together, made their message more coherent, and displayed savviness in their dealings with the media. Tsipras, who a few years ago was being interviewed by school magazines, held his own in interviews with seasoned journalists from around the world.
This experience will stand Syriza in good stead as it prepares to take on the role of Greece’s main opposition party. The leftists face a tricky test. The coalition government due to be formed by center-right New Democracy, center-left PASOK, and the Democratic Left has suggested it intends to continue with austerity measures and contentious structural reforms such as labor market liberalization and the sale of public assets. Doing so may encourage Syriza to rally growing public discontent with the measures demanded by the European Union and International Monetary Fund—either through street protests or by trying to strengthen ties with labor unions.
Tsipras’s party, however, will have to tread a fine line. While Greeks are austerity-weary, they are also tired of uncertainty about their country’s future. They crave stability and are firmly in favor of remaining in the euro. If Syriza’s populism is seen as a cynical ploy to ruffle feathers and gain votes, the leftists could face a backlash from some of the Greeks who voted for Syriza on Sunday night.
With an untested coalition government having to rebuild trust with Greece’s lenders, while continuing its fiscal adjustment program and seeking a way out of a deepening recession, Sunday’s election result is a gift to Tsipras and his colleagues. They have the benefit of burgeoning support without the responsibility of government. The world is unlikely to have heard the last of Syriza.
Facebook's Rocky IPO Might Spur Reforms
Facebook’s (FB) initial public offering had more bumps than an unpaved road after a Midwestern winter. The exchanges went haywire, the stock plummeted, the Nasdaq boss was on a plane, incommunicado. All those potholes have prompted both chambers of Congress to examine the way companies go public and are traded.
On Wednesday, the Senate Banking Committee looked at whether the IPO process works for retail investors, while the House Financial Services Committee’s hearing focused on whether U.S. stock markets are reliable.
Nasdaq OMX (NDAQ) Chief Executive Officer Robert Greifeld declined an invitation to testify before the House hearing, Bloomberg News reported last week. Greifeld, who opened the May 18 trading day in California with Facebook executives, was traveling back to New York when the trading problems surfaced, the Wall Street Journal reported on June 11.
In the Senate, several panelists expressed concern that large institutional investors may have had access to more information about Facebook’s future prospects than retail investors did. “The deck is stacked against us,” said Ilan Moscovitz, a writer and analyst for the Motley Fool website.
The panelists proposed several fixes. For example, many companies post online—as Facebook did—a version of the roadshow presentation they make to big investors. Ann Sherman, an associate professor of finance at DePaul University, says those videos are tightly scripted. (Bloomberg Businessweek’s Jim Aley reviewed Facebook’s roadshow movie for its production values.) Still, Sherman says individual investors miss the Q&A portion of the roadshow, which provides not only greater information but a chance to evaluate how top executives interact and handle tough questions. Both Sherman and Lise Buyer, a consultant who worked with Google (GOOG) on its IPO, told the Senate panel they support making a Q&A available online; this could be recorded from presentation to institutional investors or hosted as a live-streamed session answering questions from Main Street investors.
Several panelists also said the situation for retail investors is getting worse because of the JOBS Act, which Congress passed in early April. The law loosens the reporting requirements for companies that have less than $1 billion in annual revenue and wish to go public. Moscovitz said it will lead to increased low-quality IPOs. “Think more Pets.com than Google,” he said. Moscovitz said the $1 billion limit was too high and that Congress should lower the threshold at which companies must fully comply with accounting and reporting rules.
In the House, the hearing looked at a range of issues, including high-frequency trading and the rise of so-called dark pools that move trading onto private platforms. Duncan Niederauer, CEO of NYSE Euronext (NYX), said people have lost trust in the market. “What used to be an investors’ market is now thought of as a traders’ market,” he said.
In his testimony, Dan Mathisson, a managing director at Credit Suisse Securities (CS), said exchanges such as NYSE and Nasdaq should be legally liable for major problems like the software glitches that plagued the Facebook IPO. “We believe the best way to reduce the chances of similar technology problems from occurring in the future is to remove protections which grant exchanges ‘absolute immunity’ from liability,” he wrote.
When major technical problems arise, as Nasdaq encountered with the Facebook IPO, other players are left in the dark, said William O’Brien, a former Nasdaq executive who is now CEO of Direct Edge Holdings, a Jersey City (N.J.) company that owns exchanges. “No hotline, no market-wide escalation procedures, no nothing,” O’Brien said in written testimony. He said that during trading failures, better coordination among trading sites is needed to stop problems from cascading. He also called for greater SEC oversight of the technology that runs exchanges.
Most of the suggestions Congress heard on Wednesday were not new ideas—the Facebook IPO just provided a recent and stark reminder of problems that persist.
Mongolia's Uneven Boom
As Mongolia prepares for parliamentary elections on June 28, the resource-rich Central Asian country buzzes with campaign activity. On a sunny afternoon vans festooned with the banners and flags of the Democratic Party and Mongolian People’s Party careen through the potholed streets of Ulaanbaatar, loudspeakers blaring out the candidates’ virtues. Students march through the city center wearing T-shirts bearing the images of those vying for the 76 legislative seats.
Sitting in his ramshackle wooden home, Dorjsuren (many Mongolians use a single name), an unemployed plumber, bitterly dismisses the electoral spectacle. “Right now Mongolia is rushing to give away its land and resources to foreigners, and it makes me deeply angry,” says the resident of one of the capital’s sprawling slums, which are largely made up of round felt tents called gers. “Our government does nothing for the people while the rich just get richer.”
Stoyan Nenov/ReutersEx-President Nambaryn Enkhbayar is barred from seeking office
Endowed with some of the world’s largest reserves of gold, iron ore, copper, and coal, Mongolia has become a magnet for foreign money. The nation’s 10 biggest deposits are worth more than $1.3 trillion, according to estimates by Quam Asset Management. Yet anger is rising among the country’s 2.8 million people, close to one-third of whom still live in poverty. “The economic growth from the last few years hasn’t trickled down yet, and that is creating more social tension,” says candidate Sanjaasuren Oyun of the opposition Civil Will-Green Party. “Pressure for more populist policies is growing.”
In May lawmakers approved a new foreign investment law that requires parliamentary approval for deals in which overseas investors hold more than 49 percent of the equity and for transactions of more than $75 million in sectors deemed strategic, including media, telecommunications, banking, and, crucially, mining. The legislation was sparked in part by an attempt by the Aluminum Corporation of China (ACH) to purchase some mining assets (90 percent of Mongolia’s trade is with its neighbor China). “In Mongolia, there has always been concern about losing control of their resources to foreign countries,” says Peter Markey, who leads Ernst & Young’s China mining and metals practice.
Politicians have also proposed rewriting tax treaties that have allowed many foreign mining companies to limit their effective tax rate to close to zero. “We don’t want people to come in and clown around and escape with whatever hot profits they make, without contributing to the well-being of Mongolians,” says Vice Finance Minister Ganhuyag Chuluun Hutagt, speaking during a break between campaign stops in Ulaanbaatar.
The flood of foreign direct investment has sparked concerns of overheating: FDI totaled $5.3 billion last year in a country with a gross domestic product of $8.2 billion. Mining amounts to one-fifth of the economy and supplies a third of government revenue. The economy grew 17.3 percent last year, driven by a 56 percent surge in government spending, including cash handouts. The government largesse has stoked inflation: Food prices jumped 31 percent in April over the same month last year.
The rising populism is making business executives anxious. They say the investment law’s requirements on parliamentary approval could delay projects. “We have these possibly time-consuming hurdles that have to be crossed that could hurt the prospect of deals getting done,” says Jim Dwyer, executive director of the Business Council of Mongolia, an advocacy group for some 200 international and Mongolian businesses.
Mining companies are also alarmed by calls to renegotiate existing deals, including a massive $6 billion copper-and-gold mine that is managed and part-owned by the Anglo-Australian giant Rio Tinto (RIO). Some lawmakers want to boost the Mongolian government’s share in the mine, called Oyu Tolgoi, or Turquoise Hill. “Mongolia needs foreign expertise and foreign capital to help develop its resources, despite talk of resource nationalism,” says Cameron McRae, chief executive of Oyu Tolgoi. “The next step for Mongolia should be an informed, national-level conversation about how to use the profits from mining for the long-term benefit of the country.”
One big obstacle to a more equitable distribution of the proceeds from Mongolia’s mining boom is endemic corruption. Transparency International, an organization focused on graft, ranks Mongolia 120th out of the 183 nations it surveys. As an example of just how gothic the corruption can get, in April former President Nambaryn Enkhbayar was arrested on charges of enriching himself while in office and subsequently barred from participating in the upcoming election; the moves are seen by some as an attempt by the current administration to sideline a powerful rival rather than a good-faith effort to clean up government. “In my view, the former president’s jailing was to prevent him from running for parliament,” said California Senator Dianne Feinstein in a May 14 statement.
“What we are seeing now in Mongolia is not a real rule of law, but instead something that is common in many post-Soviet republics,” says Enkhbayar, who is free on bail. “The ruling party is trying to use the law and law enforcement agencies to get rid of its political opponents.” A pre-election opinion survey showed Enkhbayar as the most popular politician in the country, despite the charges against him.
Some 60 percent of Mongolians believe government policy is characterized by either “support for the rich” or “lack of concern for society at large,” according to a survey released on June 17 by the local Sant Maral Foundation. “There is an expectation that the next parliament will do something to reduce the gap between the rich and poor,” says Sumati Luvsandendev, executive director of the foundation. “I don’t expect any big uprising this summer. But the fall and winter are very difficult times here. It all depends on what steps the next government takes.”
The bottom line: Politicians contesting seats in Mongolia’s parliamentary election are exploiting popular discontent over a growing income divide.
Greece Steps Back From the Brink
(Updates with analysts’ comments.)
Greece isn’t ready to call Europe’s bluff. If early indications from the polls are correct, the top vote getter in Sunday’s parliamentary elections was the pro-euro New Democracy Party—not the leftist Syriza coalition, which campaigned on a platform of rejecting Europe’s conditions for bailout assistance.
That’s good news for the rest of Europe—and indeed the rest of the world, which would be harmed by a chaotic exit of Greece from the 17-nation euro currency region.
New York University economist Nicholas Economides, who was in Greece for the elections, said in a telephone interview that “if things go the way it looks like now, the Europeans should breathe a sigh of relief.”
Bloomberg News reported that according to final exit polls, center-right New Democracy had narrowly edged out Syriza, with Pasok, the center-left party, which is also pro-euro, coming in third. It appeared New Democracy and Pasok would have enough seats to win an outright majority in parliament if they formed a coalition government.
“I don’t see a collapse now. There’s going to be a lot of noise, a lot of worry, but I think at some point we will have a government. When, I don’t know,” says Tufts University economist Yannis Ioanides. “I don’t predict that the financial markets are going to say, ‘Oh, my God. This is the end.’ ”
Leaders of all three parties said they favored staying in the euro region, and all three also said the conditions imposed on Greece to receive bailout funds are unacceptably draconian. The difference is that only Syriza was prepared to reject the conditions unilaterally. The more centrist parties favor renegotiation.
Taking party leaders’ statements at face value, it appeared that a coalition would be hard for New Democracy leader Antonis Samaris to form, because Syriza leader Alexis Tsipras said he would refuse to join a government, and Pasok leader Evangelos Venizelos said he wouldn’t join if Tsipras didn’t. But observers were betting that Venizelos would eventually either join a government headed by New Democracy or at least give it a vote of confidence. “A lot of people interpret it [Venizelos' statement] as posturing,” says Ioannides. Francesco Daveri, an economist at the University of Parma in Italy, said, “This seems to be a definite improvement compared to the last election.”
“New Democracy will have some heavy negotiating to do with Pasok if a government is to be formed in the next few days,” Charles Diebel of Lloyds TSB Bank said in a note on Sunday. “Clearly the tone adopted by Pasok is to do with internal politics as they try to avoid being marginalized in the new Greek political landscape.”
“We dodged a bullet, for now, if these results hold up,” wrote Wells Fargo (WFC) economist John Silvia.
Economides predicts that the troika—the European Commission, the European Central Bank, and the International Monetary Fund—will make some concessions to Greece as a reward to the nation for pulling back from outright confrontation, and as a way to give the choked economy some breathing room. He expects Greece will receive more government funds for infrastructure, and extra time to balance its budget—perhaps three or four years instead of one or two.
Whether such concessions will ultimately be enough to rescue Greece and keep it as a member in good standing of the single currency is another question. But for the moment, at least, a sudden and uncontrolled “Grexit” is a less immediate threat.
Comcast 'Invents' Its Own Private Internet
Comcast (CMCSA) went public in 1983. Track its share price, and you’ll see that it tootled gently upward as the company expanded its cable television service around the country. Then, in 1997, the share price spiked. This was the year the company began testing a new product—the cable modem, which offered Internet access at a blazing 1.5 megabytes per second, then 50 times faster than dial-up. Comcast didn’t invent the Web. It didn’t invent the cable modem, either. Like other cable operators, it happened to own the right network at the right time.
That history is helpful to remember as the Department of Justice begins an antitrust probe into whether Comcast, Time Warner (TWC), and other cable providers are now trying to manipulate the way customers use the Internet—specifically, whether imposing caps on the amount of data people can download monthly discourages them from using Netflix (NFLX), Hulu, and other rival online video sites and steers them to the cable companies’ own video-on-demand services, which aren’t subject to the caps.
Comcast spokeswoman Jennifer Khoury declined to comment on the investigation. In a May 15 blog post, executive vice president Tony Werner explained how Comcast is offering video over its own “managed network” via Microsoft’s (MSFT) Xbox: “We provision a separate, additional bandwidth flow into the home for the use of this service—above and beyond, and distinct from, the bandwidth a customer has for his or her regular Internet access service.”
Comcast’s defense of this tiered system rests on a semantic distinction: that there’s a difference between watching a movie through Netflix, which exists on what the cable companies call the “public Internet,” and watching the same movie through a provider’s on-demand service, which they say is a private network. In pushing the phrase “public Internet,” Comcast and other Internet providers want customers to accept that they are the proprietors of separate, special Internets. You can see this in the way they’ve tried to rebrand the Web as a private product. Comcast refers to its Web access as “Xfinity.” AT&T (T) calls it “U-Verse.” Verizon (VZ) doesn’t sell Web access, either. It sells “FiOS.”
Of course, these are just fanciful names for … the Internet. “It’s a very slippery thing,” says Michael Calabrese, senior research fellow with the Open Technology Institute at the New America Foundation, a think tank. “It is one pipe—and they control the pipe.”
There’s a reason it’s not called the Comcasternet. The Internet beat out rival private networks because it grew faster and created more value. Comcast was perfectly free to build the Comcasternet, but it didn’t. That’s not an accident. Every network benefits when all networks interconnect. For cable companies to claim now that they did in fact build a private network and that it shouldn’t be subject to the same rules as the rest of the Internet is a tough sell.
It’s hard to blame them for trying. They’ve had luck with this line of reasoning before. In a 2005 Supreme Court case, Comcast, among other cable companies, maintained that the Federal Communications Commission couldn’t regulate them as “telecommunications services”—Internet access providers—because cable companies bundled their Internet access with what the FCC considered “information services,” such as Web hosting and e-mail addresses. The justices agreed, 6-3. But in a dissent, Antonin Scalia ridiculed the argument with a withering analogy. A pet store “may have a policy of selling puppies only with leashes, but any customer will say that it does offer puppies,” he wrote. “Because a leashed puppy is still a puppy.” Now, as then, the cable companies insist they’re not puppies, and they don’t want to be leashed.
The bottom line: The Department of Justice is investigating whether cable companies’ video-on-demand services cripple Hulu and other competitors.
Why Your Bank Wants You to Refinance
Nearly 80 percent of all mortgage applications are for refinancing now, according to the Mortgage Bankers Association, a near-record level. Why is the figure so high? Two reasons. First, demand for refinancings is up because homeowners want to take advantage of the historic low interest rates to reduce their monthly payments. Second, there are still very few new purchases as the housing market tries to recover. “When rates go down, it doesn’t spur homebuying, it spurs refinancing,” says Guy Cecala, publisher of Inside Mortgage Finance.
The Mortgage Bankers Association says nearly 30 percent of refinancings are part of the federal program HARP 2.0, designed to let borrowers who are current on their mortgages refi even if they owe more than their home is worth. Under HARP 2.0, borrowers don’t have to go through a new application process if they refinance with the bank that already services the mortgage, and if the loan is guaranteed by Fannie Mae or Freddie Mac, explains Cecala.
Lenders have an added incentive to offer refinancings to existing customers—Fannie Mae and Freddie Mac don’t require lenders to vouch for the quality of the new mortgages, making it less likely that the lenders will be forced to buy back soured loans. That incentive has lenders scouring the databases of their customers to find borrowers who are eligible for the program, says Frank Donnelly, president of the Mortgage Bankers Association of Metropolitan Washington.
HARP refinances could lower monthly payments by 26 percent, estimate economists at the Federal Reserve Bank of New York. The White House bills refinancing as part of its effort to “heal the housing market.” When HARP 2.0 was announced last fall, the housing data firm CoreLogic explained that the program would have “little direct and immediate benefit” to distressed borrowers and housing markets. Instead, CoreLogic said, the benefit of lowering monthly payments for borrowers is more like an economic stimulus “on the order of several billion dollars.” Of course, the economy can use all the help it can get—whatever form it takes.
Markets Deliver Sobering Response to Greece's Election
Greece got a little breathing room. The rest of Europe didn’t. Yields on Spanish and Italian bonds soared to euro-era highs and European stocks slumped on June 18, the morning after Greek voters gave pro-bailout political parties enough support to form a parliamentary majority.
The message was clear: Even if Greece has stepped back from the brink of a euro-zone exit, that hasn’t slowed the spread of the financial crisis across the region. Investors are now demanding 7.14 percent returns on 10-year Spanish debt, above the 7 percent threshold that forced Greece, Ireland, and Portugal to seek bailouts. Italian 10-year debt is at 6.07 percent. Depositors have withdrawn tens of billions of euros from southern European banks in recent months.
Even as European Union leaders sent post-election signals that they’d compromise on Greek austerity measures to keep aid flowing to Athens, there was more scary news from Madrid. The Bank of Spain reported that bad loans reached 8.37 percent of total lending in April, an 18-year high. With the Spanish government piling up more debt in the aftermath of a €100 billion ($126 billion) bank rescue agreed this month, “The probability is rising that it will be asking for a bailout for the sovereign,” says Craig Veysey, head of fixed income at principal investment Management in London.
Sandra Holdsworth, a fund manager at the Kames Capital unit of Dutch insurance company Aegon, put it in even starker terms, saying Spain was “doomed” to a bailout. “Only a move, or even a sniff of a move, toward a fiscal union will encourage investors back into problem countries on a long-term horizon,” she wrote in an e-mailed note.
Fiscal union, simply put, means that Germany and other northern European countries with strong credit ratings would accept higher borrowing costs so that troubled southern European countries could borrow more. Berlin is having none of it. In interviews after the Greek vote, a representative of the German finance ministry reiterated the government’s opposition to jointly financed debt instruments, such as euro bonds and shorter-maturity euro bills.
It’s not even clear how much leeway the Germans are willing to grant Greece. A spokesman for European Council President Herman van Rompuy told Bloomberg Television that the European Union would consider “some adjustment” in the austerity measures required for Greece to receive additional aid—which is urgently needed, as the government could run out of money by July 20. The International Monetary Fund issued a statement that it was “ready to engage with the new government.”
But German Chancellor Angela Merkel left little wiggle room, telling reporters on Monday before a Group of 20 summit, “There can be no loosening on the reform steps.” A spokesman for Merkel said she told Antonis Samaras, leader of the pro-bailout New Democracy party, by phone after the party’s narrow election victory on June 17 that she hoped Athens would honor its commitments under the current aid agreement.
Even if Greece gets additional help, its future within the euro zone is far from assured. A softened bailout package might allow Greece to reduce annual interest payments by €5 billion while extending the repayment period, analysts at Morgan Stanley said in a June 18 report. But they predict that won’t be enough to return the country to solvency. Athens has failed to meet targets for tax collection, state asset sales, and public procurement that were required under the €240 billion bailout package it has received so far.
With the economy mired in recession and unemployment above 20 percent, Greece has little hope of generating more revenue or attracting investment. “The election has solved little and in our view is actually just another iteration toward the risks of a euro exit,” Harvinder Sian, senior rates strategist at RBS in London, told Bloomberg News. “The adjustment path is likely to remain too much for Greece to bear.”
With reporting by Emma Charlton, Simon Kennedy, and Lukanyo Mnyanda of Bloomberg News
Workday: The Gentleman's IPO
There was Facebook (FB)—the Justin Bieber of initial public offerings—making us all wonder how a company in its quiet period could generate such a nauseating amount of noise on its way to trading on the Nasdaq. And now here comes Workday and the chance to experience something altogether different.
Workday sells human resources and financial management software. Some of you will say “Ho Hum” to that, which is fine. But Workday has managed to generate a ton of buzz in Silicon Valley, because it’s taking huge customers away from Oracle (ORCL) and SAP (SAP) and has proved that the cloud computing model works with even the most complex and crucial software running inside large companies. Workday’s investors include Dell’s (Dell) Michael Dell and Amazon’s (AMZN) Jeff Bezos and, I can reveal, Linkedin’s (LNKD) top two executives, Chief Executive Jeff Weiner and co-founder Reid Hoffman, who have contributed a bit of the $250 million Workday has raised to date.
As it happens, more than 50 percent of the company is still owned by the co-founders, Dave Duffiield and Aneel Bhusri, whom I profiled in a story this week for the magazine. The executives refused to discuss Workday’s IPO plans, but during the course of my reporting I learned that the company plans to raise $500 million through an IPO that it will file for later this month. And, I’m told, Workday will make its filing under the JOBS (Jumpstart Our Business Startups) Act, a recent law that loosens some of the regulatory hurdles smaller companies must face if they want to go public—while also lowering the cost of the IPO process.
Workday could certainly afford the standard IPO rigamarole. The company has filthy-rich backers and lots of money rolling in through its cloud computing software and services. It should post bookings (a measure of long-term software deals) of $500 million this year.
Still, Workday could gain a strategic edge by filing under the JOBS act. It can, for example, initially turn over its financials in secret to the SEC for review, rather than filing a public S-1. Workday can discuss any issues with the SEC in private, instead of having competitors and the press give their opinions on the numbers.
Companies like Workday with less than $1 billion in revenue do eventually have to file a public S-1—but only 21 days before their IPO roadshow begins. They also don’t have to include as many years of past financial data.
The $500 million that Workday seeks to raise is a modest proposal as well. Workday gets held up as the leading member of a wave of business technology companies heading toward IPOs and could have sought to go bigger and bolder.
Workday’s fellow startups will be watching to see how the whole Mellow Yellow approach to going public fares in the wake of Facebook’s pump and slump show. And so, of course, will investors.
Could Congress Compromise on Taxmageddon?
Right after Election Day, Congress and the president will face a gargantuan problem: By Dec. 31, drastic tax increases and spending cuts will kick in to suck about $607 billion from the economy. The Congressional Budget office has said the combination could push the U.S. back into a recession. It would also result in 83 percent of U.S. households facing an average $3,701 in tax increases, according to the Tax Policy Center.
Resolving the problem before the deadline, will of course be up to the very people who brought the country to the brink of default on its debt last summer and almost shut down the government at year-end because they couldn’t agree on whether to extend payroll tax cuts everyone claimed to support. With a track record like that, no one feels confident. And as my Bloomberg News colleague Richard Rubin reported Monday, lawmakers are nowhere near a deal. Representative Henry Waxman (D-Calif.) told Rubin that he and other lawmakers “don’t expect much from Congress” until after the election.
Yet there are signs that a compromise on Taxmageddon could be reached.
One hint is a comment made on television last week by Senator Lindsey Graham (R-S.C.). Graham told ABC he’d be willing to go against his own pledge never to raise taxes. A majority of Republicans has signed this pledge, which was espoused by anti-tax crusader Grover Norquist. It has come to be treated as dogma by Republicans who swept the House in 2010. The government possesses limited tools to get out of its fiscal mess—tax or spend—and unwillingness to cave on one of them has left both sides paralyzed.
“We are so far in debt that if you don’t give up some ideological ground, the country sinks,” Graham said. He seemed to suggest that he’d allow the expiration of the Bush tax cuts, which contributed $1.8 trillion to the deficit over the past decade. “When you talk about eliminating deductions and tax credits for the few, at the expense of the many,” said Graham, “I think over time the Republican Party’s position is going to shift.”
Graham isn’t the only one who has changed his mind about the pledge, but he is one of the most prominent. A number of additional members of Congress, citing the urgency of the country’s fiscal situation, have shifted positions as well.
These shifts probably won’t avert the drawn-out fight in December that everyone in Washington is bracing for. But they are a sign worth paying attention to: They signal that more Republicans are growing weary of the stalemate, and that on the biggest issues, some of them are willing to bend.
How to Tweet Money to Your Favorite Politician
Campaigns that were just getting excited at the prospect of vacuuming up cash through text messaging, which the Federal Elections Commission green-lighted on June 11, may have yet another way to collect donations with a couple taps of the keyboard. Up to 140 taps, that is. Chirpify, a social-commerce startup based in Portland, Ore., has rolled out a site called Tweetlection at which donors can send money to Barack Obama and Mitt Romney via Twitter.
The process seems simple. All you need do is create an account with Chirpify, link it to your PayPal (EBAY) and Twitter accounts, and you could donate up to $200 instantly, just by tweeting “Donate $200 to @MittRomney for POTUS.” You log into Chirpify only once for the account setup, and then use Twitter, TweetDeck, or any other tweeting app as you normally would. ”There’s no shopping cart or checkout process,” says Chris Teso, Chirpify’s chief executive officer. “We’re calling it conversational commerce.”
The startup processes donations through PayPal. For the presidential candidates to collect the money, though, there’s a catch: Teso says they’ll have to create their own, free Chirpify accounts to cash in. If they don’t, your credit card won’t be charged. (Neither campaign has responded to a request as to whether they’ll participate.)
Teso says neither Romney nor Obama has signed on to a bigger deal with Chirpify that would let their campaigns collect more money in exchange for Chirpify’s 4 percent fee per contribution. That’s obviously the company’s hope. At least two dozen Republican senators and members of Congress will announce in the coming weeks that they’ll use Chirpify to solicit donations by tweet, Teso says. (He won’t name them.) Under those deals, campaigns can collect as much money as they want per tweet and Chirpify will supply them with information required by the FEC (i.e., donors’ full names, addresses, and occupations). The service could end up being a lot less costly than fundraising via text message, which the mobile payment aggregator known as m-Cube plans to roll out this summer at fees of up to 50 percent per donation.
Chirpify went live four months ago and is primarily used by individuals paying off IOUs. (As in: You didn’t have enough cash for your beer tab last night and need to pay back a friend today.) Teso says the company is also processing donations for the Make-A-Wish Foundation and running promotions for companies including Nestle (NESN:VX) , Power Bar, Pawngo, Sir Richard’s Condom Co., and Hewlett-Packard (HPQ). Those brands can advertise products to their Twitter followers, who can then place an order for a product by tweeting the word “buy;” Chirpify then coordinates with PayPal and the vending company to get the product paid for and shipped out.
Teso says the startup has tens of thousands of members and that “over 50 percent … have transacted in one form or another. That could be purchasing, donating, or paying you for dinner last night.” That’s nothing compared with Barack Obama’s 16.7 million followers, or even Romney’s 563,000. So far, though, their Twitter brigades aren’t exactly flooding Tweetlection. The site rolled out Tuesday; by noon Romney had $150 in pledges—and Obama just $132.
Europe's Firewall Has Some Loose Bricks
As Europe veers from one crisis to another, financial authorities led by European Central Bank President Mario Draghi have reassured the rest of the world that they have the firepower in place to keep the euro intact. Bond traders aren’t buying it.
Investors have shrugged off the Continent’s latest efforts to increase the bailout capacity of various lending programs, including new International Monetary Fund commitments, to €859 billion ($1.09 trillion). Already, we’re seeing diminishing returns to Europe’s piecemeal bailouts. On June 9, Spain received a €100 billion loan courtesy of the European Financial Stability Facility, a bailout fund created in 2010. By June 18, yields on the country’s 10- year government bonds were up more than one percentage point to 7.2 percent, the highest ever for Spain since it joined the euro. Italian borrowing costs have also surged since March, crossing 6 percent on June 13.
At the recent Group of Twenty meeting in Los Cabos, Mexico, European leaders made soothing pronouncements in support of the single currency. The IMF announced it would nearly double its own lending capacity to $456 billion, thanks to increased commitments from emerging countries such as China, Brazil, and India. Next month, Europe is set to unveil its permanent €500 billion bailout fund. All of this still falls short of what would be needed for a wholesale rescue of Spain and Italy, Europe’s third- and fourth-largest economies. Spain has €345 billion of principal and interest due through 2014; Italy faces €704 billion.
Yet at this point, the size of the financial firewall to contain the crisis is less important to investors than progress on creating some sort of enforceable fiscal discipline on EU member states. “There’s no magic number out there,” says Simon Johnson, an MIT professor and former chief economist at the IMF. Increased ECB lending will eventually lower the borrowing costs of countries such as Spain and Italy. “The question is by how much and for how long,” says Johnson. “Adding more credit in the system is merely papering over the cracks.”
One big reason Europe’s crisis has continued to unnerve the bond market is the circuitous way rescue funds have been distributed since the crisis began in 2010. The ECB is prohibited from lending directly to governments: Instead the central bank made funds available to banks, which in turn often used the money to buy their own governments’ debt.
This approach has created a negative feedback loop in which the contagion spreads back and forth between banks and governments. For example, Spain’s banking crisis morphed into a sovereign debt crisis as the realization took hold that the cost of saving the banking system would end up bankrupting the Spanish government. In Greece and Italy, the problem started with overindebted governments and spread to their countries’ banks, which are loaded down with deteriorating government bonds. “Markets are much more focused on crisis mechanics being developed that break the contagion cycle between sovereigns and banks,” than on the firewall, says Guillaume Menuet, a euro-zone senior economist at Citigroup Global Markets (C).
Investors might be reassured if Europe’s leaders moved to create a more unified banking system, one with a cross-border deposit insurance system and a stronger, pan-European bank regulator to replace the ineffective European Banking Authority. Officials have said they’re working on a proposal along those lines.
An even more ambitious goal is for Europe to craft a tighter fiscal union where sovereign spending levels are subject to enforceable controls. That may pave the way for the creation of Eurobonds, where countries collectively pool their debt.
All this would take months, if not years, of negotiations. Europe may not have that much time, especially if Italy and Spain get into serious trouble. The ultimate fear is that demand for Italian and Spanish debt dries up. “We’re talking more than a trillion dollars to cover the financing needs of those two countries if they were shut out of the markets,” says Paul Ashworth, chief economist at Capital Economics.
That’s the apocalyptic scenario. If Spain and Italy can hang on and Europe’s leaders demonstrate progress toward more fiscal and bank regulatory unity, then the firewall becomes relevant again. The bulwark at least will buy policy makers time as they work to address long-term issues.
The bottom line: European efforts to build a $1.09 trillion firewall to keep the debt crisis from spreading aren’t reassuring bond investors.
Regulators Still Trying to Understand JPMorgan's Trading Flub
Just how did regulators miss the $2 billion trading loss at JPMorgan Chase (JPM)? And how can they prevent similar losses in the future? Those were the big questions Tuesday at a House Financial Services Committee hearing.
That five panelists were called on to testify shows the web of regulators that keep an eye on banks like JPMorgan. The Office of the Comptroller of the Currency oversees national banks, while the Commodity Futures Trading Commission regulates the type of derivatives trades that caused the bank’s loss. The Federal Deposit Insurance Corporation insures customer accounts in the event of bank failures, while the Federal Reserve Board of Governors keeps an eye on risks across the banking system. Then the Securities and Exchange Commission watches disclosures that banks make to their shareholders.
Responding to a grilling, the five regulators’ defense boiled down to three main points.
We didn’t get good info from the bank. Regulators said they needed better and more detailed information to spot how JPMorgan was taking on risk. Thomas Curry, the comptroller of the currency, said, “In hindsight, if the reporting were more robust or granular, we believe we may have had an inkling of the size and potential complexity and risk of the position.” Scott Alvarez, general counsel for the Federal Reserve Board of Governors, said that since JPMorgan’s own internal reports didn’t fully capture the risk, the regulators were limited. “We have to rely on information that we get from them,” he said.
We’re looking into it now. Curry, the primary regulator over JPMorgan, says the OCC is working now to examine what actually happened with the soured trade and is monitoring the “derisking” as JPMorgan unwinds its position. He also said the OCC is checking on its own procedures to see why it didn’t spot the trade in its ongoing examination of the bank. SEC Chairman Mary Schapiro said that her agency is looking into whether JPMorgan accurately reported changes to the model it used to measure risk in its first-quarter earnings. She said if those disclosures were insufficient, JPMorgan could face penalties.
We won’t miss it next time. Schapiro and Gensler both say that pending changes as part of Dodd-Frank financial reform will help regulators spot problems in the future. While much attention has been giving to whether the Volcker Rule would have prevented JPMorgan from making these trades, regulators pointed to lesser-known parts of Dodd-Frank with wonky names like “722(d)” and “Title VII regulatory regime” that are bringing more transparency to derivatives markets. For example, Gensler says that the CFTC will be able shrink what he called “the London loophole” in its interpretation of the 722(d) provision that gives U.S. regulators some oversight of overseas trades.
The regulators hope that when financial reform is finally implemented, they’ll have more data and powers at their disposal — so that next time, they won’t be a step behind.
A Royal Family Energy Windfall
It’s good to be the Queen. British monarch Elizabeth II, who celebrated 60 years on the throne in June, may see her income rise 16 percent after the Crown Estate’s earnings increased and lawmakers changed the way royal finances are calculated. The monarch will be entitled to ?36 million ($56 million) for the fiscal year that runs from April 2013 through March 2014, up from ?31 million for the current year.
The Crown Estate manages real estate surrendered by the monarchy in 1760 in exchange for annual payments. Its profit increased 4 percent to ?240.2 million in fiscal 2012, which ended March 31, thanks in part to revenue from offshore leases for wind farms, which more than doubled. The former landholdings for the royal family include the seabed around Britain extending to 12 nautical miles offshore. “They’re a landmark set of results,” Crown Estate Chief Executive Officer Alison Nimmo said in an interview at the corporation’s office off Regent Street in central London.
Getty Images(6); Bloomberg(1)
Another positive development for the royal family’s finances involves the sovereign grant, the amount the government provides to cover expenses the Queen incurs in her official duties. Under rules adopted by Parliament last year, it is pegged at 15 percent of the profit generated two years earlier by the Crown Estate. Previously, the amount was set once every 10 years by the Treasury and supplemented by grants.
The Crown Estate has offered leases for offshore sites since 2000 to companies including Centrica (CNA), Dong Energy, and Siemens (SI). The parks in operation now generate 1.5 percent of the U.K.’s electricity production, and that should double next year as more sites become operational, lifting income. The Crown Estate also oversees 36 sites across the U.K. earmarked for tidal or wave power generation, Nimmo says.
Getty Images(6)
The Queen’s other sources of income are the estates and assets owned by the Duchy of Lancaster as well as her privately owned estates, Balmoral in Scotland and Sandringham in eastern England. The monarch owns the royal palaces, most of the royal art collection, and the Crown Jewels on behalf of the nation and therefore is prohibited from selling them for her personal gain.
The Crown Estate also is the majority owner of Regent Street in central London, along with half the land in the St. James district, as well as shopping centers across the U.K., golf courses, Ascot Racecourse, and farms.
Nimmo, 48, joined the Crown Estate in January after overseeing the design and construction of most venues for the London 2012 Olympic Games. She says she is proceeding with the next phases of a ?1 billion project to revamp Regent Street in London’s West End. Work done so far has transformed it into one of the U.K.’s premier shopping strips. A ?500 million makeover of the St. James neighborhood also is under way. Says Nimmo: “We are making serious investment in the development pipeline.”
The bottom line: Queen Elizabeth may see a 16 percent rise in income to $56 million next year thanks in part to revenue from offshore wind farms.
A Global Bond Rally With Grim Tidings
Mohamed El-Erian knows why bond markets from the U.S. to Germany and Japan have seen yields drop to record lows even after outstanding debt has ballooned. “We may be in a synchronized slowdown,” says El-Erian, chief executive officer of Pacific Investment Management Co., the world’s largest bond manager. “We could stay here for awhile.”
The credit markets are signaling tough times ahead. Yields on government securities in the U.S., Germany, the U.K., the Netherlands, and Australia tumbled to all-time lows this month as Europe’s debt crisis intensified and unemployment in the U.S. unexpectedly rose.
The average yield on bonds issued by Group of Seven nations (Canada, France, Germany, Italy, Japan, the United Kingdom, and the U.S.) has fallen to 1.23 percent as of June 12, from 3 percent in 2007. Germany’s two-year note yield fell to less than zero for the first time on June 1, while Switzerland’s has been negative since April 4, meaning investors are paying those nations to hold their money.
Those rates imply that bondholders don’t expect global economic growth to exceed 3 percent this year, according to John Lonski, chief economist at Moody’s Capital Markets Research Group (MCO). In comparison, the global economy expanded at an average of 4.7 percent in the five years before the financial crisis took root in 2008. “As far as developed economies are concerned, the credit market is coming to the conclusion that real economic growth will be slower than what we’ve become accustomed to since the Second World War,” says Lonski.
The slowdown matches the prediction by El-Erian in 2009 for a “new normal” in global economies characterized by a slower pace of expansion, higher unemployment, and a greater role for governments in private markets.
Gains in the bond market have come even as supply has expanded which, all things being equal, would depress bond prices and increase yields. The Bank of America Merrill Lynch Global Broad Market Index now tracks debt issues with a face value of $40 trillion compared with $23.9 trillion in June 2007, and up from $15.3 trillion in June 2002.
Some of that new supply is being bought by central banks, including the Fed, the European Central Bank, and Bank of Japan, as policy makers purchase government securities in attempts to bolster their economies. The holdings of the world’s six biggest central banks have more than doubled since 2006 to $13.2 trillion, according to Chicago-based Bianco Research. Financial institutions are also buying government bonds as they seek to increase their capital to meet regulations set by the Basel (Switzerland)-based Bank for International Settlements.
In recent months, bond investors have been rewarded by falling yields. Since March 20, when the 10-year Treasury yield peaked at 2.4 percent, U.S. government securities have returned 3.7 percent, with benchmark 10-year notes gaining 7.2 percent, Bank of America Merrill Lynch (BAC) indexes show. The MSCI All Country World Index of stocks declined 10 percent over the same period.
With rates so low, buying government bonds is not likely to deliver similar profits anytime soon. Investors from Leon Cooperman, founder of hedge fund Omega Advisors, to Warren Buffett, the chairman of Berkshire Hathaway (BRK.A), have said investors should avoid bonds. Bond yields at current levels are not sustainable and investors should buy stocks instead, says Marc Faber, author of the Gloom, Boom & Doom Report. “The government bond bubble will also burst,” Faber said in a June 7 interview on Bloomberg Television. “I don’t know whether it’s going to be tomorrow or in three months. But I suspect that it will happen sooner rather than later.”
Other analysts say the strong demand for bonds shouldn’t be compared to the housing boom or the mania for Internet stocks. “You’re not talking about a bubble because a bubble is about greed,” says Jeffrey Rosenberg, chief investment strategist at BlackRock (BLK). The bond boom is “not a reflection of ‘I expect prices to go higher and I have to jump in,’” he says. It’s “a reflection of ‘I want to preserve my principal.’”
Stuart Thomson, a money manager at Ignis Asset Management in Glasgow, discounts the possibility of a sudden spike in rates that would inflict big losses on bondholders. “Yields are extremely low for a very good reason, and that’s fear,” he says. “History suggests in an environment of extreme risk aversion, yields will go down in an elevator but go up on an escalator.”
The bottom line: Bond yields approaching 1 percent suggest that global economies will grow at 3 percent annually or less.
2012年6月22日 星期五
Chris Foley, Jester of Wall Street
Chris Foley was so stressed working as a stockbroker that in 2008 he started getting Botox injections in his armpits to reduce perspiration. He developed rashes and suffered through a monthlong bout of diarrhea. His body, he says, was telling him he was in the wrong profession.
Photograph by John Loomis for Bloomberg Businessweek
Foley tells this and other stories in his one-man show, Off the Desk (Tales of a Mediocre Stockbroker), which he performed on May 8 and 9 at the Barrow Group Theater in New York. The show recounts his experiences in finance and lampoons the bullies and chauvinists he encountered. “The year I made the most money, I’d never been more unhappy,” he says in an interview.
John Loomis for Bloomberg Businessweek
For 7 of his 13 years on Wall Street—which included jobs at Lehman Brothers and other major firms—he moonlighted as a stand-up comedian in New York clubs. The lure of financial stability kept him at desk jobs until he was laid off in 2010. Foley took it as an opportunity to give acting a shot. Like most novice performers, he faced a lot of rejection. Casting agents tended to see him only in cop roles.
So he wrote, rewrote, and rehearsed with his acting teacher. “I rehearsed to the point where I was almost numb,” says Foley, now 38.
Photograph by John Loomis for Bloomberg Businessweek
Both performances of Off the Desk sold out at the 100-seat theater. Foley hopes to take the show to other cities. He is also working on ideas for a television series using characters from his act.
“You can be mediocre in Wall Street and still make a low-six-figure salary,” he says. “In acting, if you’re mediocre, it won’t work. You have to be great.”
FOLEY’S BEST ADVICE
1. Leave your apartment
After losing my job, I had to get out of my head, stay active, and avoid being isolated in my apartment. Good distractions: long walks, free museum tours, meditation, and yoga.
2. Make your pennies scream
I figure out what I need rather than what I want and cut back on spending. I cook at home more often and use the subway everywhere I go in New York.
A Hedge Fund Hunts for Greece's Hidden Gems
George Elliott is used to being treated as a curiosity. As founder of Naftilia Asset Management, the financier is raising money for a hedge fund that plans to buy nothing but Greek stocks. In March he met in London with an investment manager who within seconds of sitting down made it clear that he had no interest in wagering on Greece. He just wanted to hear about the hedge fund’s strategy, Elliott says.
Elliott responded by asking a few questions of his own, including whether the money manager had invested in Russia after its 1998 currency crisis, in Argentina 10 years ago after the nation defaulted on its debt, or in the Standard & Poor’s 500-stock index in March 2009 when the benchmark plunged to its lowest point in 13 years. In all cases, the answer was no. “Then you are not qualified to be discussing Greece with me because you have missed the best investment opportunities over the past 20 years,” Elliott says he retorted.
The money manager eventually agreed to invest in Naftilia’s Greek Opportunity Fund, says Elliott, declining to identify his new client. Once he starts talking about specific stocks, “then people start to get excited,” says Elliott, who’s been fundraising since October. “At the same time, we are extremely lonely. We are one of the few people out there feeling optimistic.”
Hard to imagine why. Greece is struggling through a fifth year of recession and has an unemployment rate of 21.9 percent. The Athens Stock Exchange has plunged 90 percent since the end of 2007. “There’s a huge uncertainty about the clarity and the sustainability of earnings” for Greek companies, says James Butterfill, a global equity strategist at Coutts & Co. in London. “If you have a very high-risk profile, then maybe you can pick out opportunities.”
Even so, Elliott, 39, has raised more than €50 million ($63 million) for the fund, according to a person with direct knowledge of the matter. He has not put any of that money to work, while waiting for the Greeks to get a government in place. On June 20 Antonis Samaras, leader of Greece’s New Democracy party, was sworn in as prime minister after political leaders agreed on a coalition that will seek relief from austerity measures tied to international loans.
Kostas Tsironis/BloombergElliott opened an office in Athens to scout for stocks
After studying money management at City University London, Elliott started his finance career in 1997 as an investment banker at Societe Generale (SCGLY). Naftilia manages about $400 million and runs hedge funds focused on the global shipping and nuclear energy industries. Naftilia’s main shipping fund, started in 2004, rose 29 percent in its first year and gained in the three following years before dropping 26 percent in 2008 and 20 percent last year, according to a person briefed on its performance, who was not authorized to speak publicly. Elliott was based in Dubai until he decided to open an office in his native Athens in October 2010. He has spent the past year and a half examining corporate balance sheets, building a network of contacts in government and the business community, hiring analysts from banks, and meeting with investors.
Elliott says he’s focusing on companies punished by the stigma of being in Greece that generate most of their business outside the country, and companies whose cheap share prices may make them attractive takeover targets. He will avoid banks. “When Argentina defaulted, they had incredible returns on the stock market but incredible volatility on the currency as well,” says Elliott. “If Greece remains in the euro, we think this is going to be an incredible investment opportunity.”
If Greece returns to the drachma, which Elliott says is very unlikely, investors can buy stocks even more cheaply. “If we go to the drachma again, there will be tremendous amounts of money to be made for speculators,” he says. That would also create hardship for Greeks. The National Bank of Greece estimates per capita income would drop by at least 55 percent in euro terms after the introduction of a new currency. “Whether we are going to take advantage of such a situation and try to make money on the back of a population that is really going to have a tough time is going to be a tough debate for me,” says Elliott. “I don’t know whether I would be able to do it.”
The bottom line: With the Greek market down 90 percent since the end of 2007, Elliott has raised more than $63 million to invest in stocks.
China's Top Regulator Woos Investors
Carrie Pan is about as intrepid as they come. Since she began investing in Chinese stocks six years ago, the 29-year-old Shanghai accountant has seen almost half the value of her portfolio evaporate, including a 40 percent loss last year alone. Undeterred, Pan recently bought 1,000 shares of Yang Quan Coal Industry Group. “I believe stocks will rise,” says Pan, watching her holdings on a computer screen in her two-bedroom apartment on a recent afternoon of maternity leave. “Guo has already done lots of things to support the stock market since he took office, and he is very keen on improving the market’s performance.”
That would be Guo Shuqing, who in October was appointed chairman of the China Securities Regulatory Commission, the equivalent of the U.S. Securities & Exchange Commission. A fluent English speaker, Guo is also a former vice governor of the central bank and most recently was chairman of China Construction Bank, the nation’s second-largest lender by market value. His challenge is modernizing China’s capital markets so that they can better support the country’s $6 trillion economy.
Photograph by Jason Lee/Reuters
In the last few months he has set about instituting reforms to shore up investor confidence, wean businesses off state-backed financing, and lure more foreign money into China. “Our current stage of work is focused on improving the fair play of the market, protecting investors’ legal rights, and enhancing the ability of serving the real economy,” Guo, 56, said in a People’s Daily report posted on the CSRC website in March.
A key aim for Guo is restoring the trust of investors who’ve taken a beating in the stock market over the last few years. After peaking at 6,092 in 2007, the benchmark Shanghai Composite Index fell to just above 1,700 by the end of 2008. Four trillion yuan ($630 billion) of government stimulus provided a temporary lift in 2009, yet the market fell another 33 percent from 2010 through 2011. China’s 50 million individual investors lost an average of 40,000 yuan last year, according to a May 9 People’s Daily report. To entice them back into the market, Guo has urged listed companies to pay more cash dividends and persuaded the Shanghai and Shenzhen exchanges to cut stock-trading fees by 25 percent.
He also has taken aim at China’s initial public offerings. Over the last year individual investors were burned by a series of overpriced offerings that plunged after their debuts, including that of Sinovel Wind Group, China’s biggest maker of wind turbines. The stock is down about 60 percent since the company began trading in January 2011. The CSRC has taken steps to prevent overpricing of IPOs. If the price-to-earnings ratio of an IPO is expected to be 25 percent higher than that of publicly traded companies in the same industry, the company will need to disclose the factors that went into the pricing decision, the CSRC said in an April 28 statement. The CSRC will now invite as many as 10 individual investors to advise on IPO pricing, a role previously restricted to institutional investors. Guo is dealing with “all the historical hangover,” says Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting. “That’s definitely very helpful for the healthy, long-term development of China’s capital market.”
Guo also has moved to attract more cash from outside the country. Only approved foreign institutional investors can buy or sell yuan-denominated securities. In April the CSRC announced that it would nearly triple the amount that approved investors can invest in Chinese securities, to $80 billion.
Next on the agenda: the bond market. For years China’s bond market has amounted to little more than money shuffling between state entities, with state-owned companies selling their debt to state-owned banks at controlled interest rates, and banks holding the bonds on their books. In this cozy system, corporations aren’t allowed to default. Borrowers that come close are bailed out by local governments and banks. As a result, China’s bond market is tiny. At $661 billion, it’s just 9 percent of China’s gross domestic product. In the U.S., the $7.9 trillion in fixed-income securities equals more than half the country’s total economic output. A more active bond market would provide funding for small businesses and divert risk away from banks, which provide 75 percent of the nation’s credit via loans.
In early June Guo launched a plan to let small and medium-sized companies sell debt comparable to speculative-grade bonds. Translation: Get ready for Chinese junk bonds. The first went on sale as a private placement on June 8, with a 50 million yuan offering by Suzhou Huadong Coating Glass. Speculative-grade offerings could lead to China’s first corporate default—which could be a good thing because it would help bond investors price risk, says John Sun, managing director at Citic Securities International in Hong Kong. “The high-yield issuers will be small companies, so the impact on the whole market will be small,” he says. Psychologically, though, it will be important because it will show investors that the market is operating freely. “For a mature bond market, we should allow some firms to go bust,” says Sun.
Pushing through these reforms has required Guo to consolidate his power over other regulatory agencies, moves that could create enemies who might stymie his efforts. “What he needs to do is pick fights he can win,” says Fraser Howie, a Singapore-based managing director of CLSA Asia-Pacific Markets.
Guo has already shown his bureaucratic dexterity. From 2001 through 2005 he was head of the State Administration of Foreign Exchange, which manages China’s foreign exchange reserves. In that role Guo pushed through reforms by forging relationships between departments and building support for his positions, according to Hong Weizhi, a former SAFE spokesman. In the end, it’s all about inspiring confidence, something Guo seems to be good at. Says Hao Hong, chief China strategist at Bocom International Holdings in Hong Kong, “Guo is the man.”
The bottom line: Guo is trying to build a bond market and lure investors back to stocks after the market fell 33 percent from 2010 through 2011.