Are All CLOs Equal? Stavros Peristiani and João Santos Federal Reserve Bank of New York Liberty Street Economics, December 05, 2016 Asset securitization is an important source of corporate funding in capital markets. Collateralized loan obligations (CLOs) are securitization structures that allow syndicated bank lenders and bond underwriters to repackage business loans and… Read More The post Are All CLOs Equal? appeared first on The Big Picture.
The world economy faces huge infrastructure financing needs that are not being matched on the supply side. Emerging market economies, in particular, have had to deal with international long-term private debt financing options that are less supportive of infrastructure finance. While unconventional monetary policies in advanced countries in the aftermath of the global financial crisis have led to a global liquidity glut, some traditional sources of long-term finance have been strained and alternatives have not been able to adequately compensate. The threat of an eventual reversal of the global liquidity abundance makes even more urgent that emerging market and developing countries find new sources to tap for long-term funding, if they are to fill their infrastructure gap and keep growing. Domestic institutional investors and strengthened local long-term debt markets will be key in that regard. Official development banks can be of help to the extent that they focus on their potential "additionality." The world economy faces huge needs of infrastructure finance... Last year, a report by McKinsey Global Institute (2013) estimated that, in order to realize its potential global growth from then to 2030, the world would have to invest in infrastructure (roads, bridges, ports, power plants, water facilities, and other forms) in the range of $57-67 trillion, depending on three different methodologies (Chart 1). To give an idea of what a tall order such a challenge will be, the report notes that the lower bound of the range corresponds to nearly 60 percent above the amount spent in the last 18 years and it is larger than the estimated value of today's infrastructure. Source: McKinsey (2013). The share of infrastructure finance requirements in emerging market economies (EMEs) in those figures corresponds to 37 percent. As those estimates do not embed "development goals" beyond where emerging market and developing economies are nowadays, as well as additional expenditures associated with adaptation to climate change and sustainability needs, they may be considered a lower bound (Swiss Re and IIF, 2014). The World Bank estimates that these countries need to invest in infrastructure at a rate of an additional $1 trillion per annum through 2020, just to keep pace with the demands of urbanization, growth, climate change, and global integration. ... but the financing gap is yawning Several factors have been leading to a shortfall of infrastructure finance supply, including in advanced economies. Public sector funding has faced stringent conditions. With a few exceptions -- like China -- most advanced and emerging market economies have become more fiscally constrained in the last few years, as counter-cyclical fiscal policies have reached their limit, either for political and/or debt sustainability reasons. On the private sector financing side, there is an ongoing transition toward a new configuration of infrastructure finance that has left a void: while banks have been retrenching, their replacement by non-bank institutions, wherever feasible, has been inadequate. Some combination of bond issuance and bank lending is what usually works best in debt finance of greenfield investments in new projects and the creation of new productive assets. Banks are better equipped to address issues of information asymmetries, particularly at the early stages of project design in cases of complex financing needs -- like infrastructure -- whereas the arms-length relationship typical of long-term bond issues and institutional investors is more appropriate for extending and consolidating investment financing. Infrastructure assets are appropriate investments for pension funds, insurance companies, and other long-term financial institutions (mutual funds, sovereign wealth funds, etc.) because they tend to match their long-term liabilities, provide inflation-protected yields, and have a lower correlation to other financial assets. A significant presence of mature long-term debt markets and institutional investors as ultimate asset holders enhances the risk-transfer and risk-transformation functions of financial intermediation as a whole and can make the system more stable. The problem is that the financial crisis has been followed by a bank retrenchment from the field, without non-bank institutions filling the finance gap. The weight of banking can be gauged by its share in global project finance (Chart 2). In that context, infrastructure financing by banks has been curtailed as part of a deleveraging process which is still in course. This is particularly the case for European banks, which had traditionally played a significant international role in infrastructure financing prior to the global financial crisis. Their balance-sheet repair and capital-ratio adjustment, since the euro-zone crisis -- as depicted in Chart 3 -- has been obtained mainly by retrenchment on the asset side of their balance sheets, by unwinding existing positions and shunning new commitments. Such propensity to retrench has been widespread among banks in crisis-afflicted countries, given the higher levels of balance-sheet risk aversion. Remaining uncertainties about the crisis recovery, coupled with prospective regulatory changes (e.g. Basel III) penalizing liquidity and maturity mismatches in deposit-taking institutions, have led banks in general to reduce leverage, shorten finance terms, and raise counterparty requirements across the board. Source: IIF On the other side of the finance spectrum, had the financing previously supplied by banks been replaced by pension funds, insurers and mutual funds, their portfolio allocation to infrastructure debt would currently correspond to 12.5 percent; in reality, the actual current allocation is less than 1 percent of global pension fund assets (Swiss Re and IIF, 2014). To be sure, as noted above, bank and non-bank infrastructure finance are not perfect substitutes, given their distinctive abilities and willingness to deal with different risks along an investment cycle -- as illustrated in the revealed preference of non-banks toward "brownfield" relative to "greenfield" investment projects. However, given prevailing trends in banking, it is no wonder that so much attention has been dedicated to what it will take to raise "infrastructure as an asset class" -- see the 10-point agenda outlined by IIF (2014) -- and raise the profile of non-bank institutions as a necessity in order to fill the infrastructure finance gap. EMEs have faced a cross-border infrastructure finance drought amidst a liquidity glut... Has the relative abundance of capital flows to EMEs since 2008 meant that they have been spared from the challenges associated with the yawning infrastructure finance gap? Despite massive foreign capital inflows to EMEs in recent years (Chart 4), it is doubtful that these will constitute a sufficient solution to the EMEs' infrastructure finance gap. While foreign direct investments have maintained an exuberant pace and can play a significant role in funding infrastructure investments, long-term debt finance -- fundamental to many projects -- has not performed up to the needed levels. There is a relevant underlying change of composition in the debt component of those heavy capital inflows. International long-term debt flows to developing countries -- bonds and syndicated bank lending with maturities at or beyond five years -- fared well indeed from 2000 to 2012, reaching a fourfold increase in nominal terms at the end of the period, despite a blip in 2008-09 (Canuto, 2013a). However, this rise comes with an important caveat: lending from foreign banks has declined in absolute terms since 2007, a trend hardly reversible in the foreseeable future. Bond issuance has been primarily used to refinance existing debt at lower costs, or simply to replace syndicated lending that was not being rolled over. Bond purchases surged after the crisis, reflecting a combination of unconventional monetary policies in large advanced economies, as well as hype about growth prospects in developing countries (Canuto, 2013b; 2013c). However, not only are bond flows experiencing the effects of the current unwinding of those two factors, but they have been imperfect substitutes to bank's infrastructure financing via long-term lending (Canuto et al, 2014). The mere abundance of international liquidity of latter years has not been conducive to an equivalent creation of new productive assets in developing countries. As for cross-border asset acquisition by institutional investors and other long-term financial institutions, assuming that the above-mentioned agenda of tasks for the full development of infrastructure as an asset class is accomplished, one should keep in mind the competition for infrastructure investments in home (advanced) economies, in a context of perceived risks unfavorable to EMEs. On the other hand, if hypotheses of secular stagnation in some advanced economies are right -- Canuto, O., 2014 -- long interest rates will remain too low to comply with retirement pension needs for a long time. In this scenario, it is worth recalling that today: "Two particularly pernicious and inter-related challenges confront the global financial system. On the one hand, pools of trillions of dollars of savings, particularly in OECD economies, are trapped in sub-optimal investments earning poor returns. On the other, many developing countries face a serious shortage of capital, even for investments that can generate high financial and economic return. The world's financial system fails to intermediate between the two at any scale. " (Kapoor, 2014) Source: IIF. Country sample: BRICS, Turkey, Mexico, Chile, Poland and Indonesia. Note: f = IIF forecast, e = IIF estimate. Inward - Other: Other Inward Investment (mainly bank loans, but also trade credit and official lending, plus some more obscure items like financial derivatives, financial leases, etc.) ... and EMEs need to tap new sources for long-term funding EMEs have been gradually building their own pool of sizeable long-term assets managed by institutional investors, mainly pension funds and insurance companies, totaling around $5.5 trillion as of end 2012 (Charts 5-6). Besides the increasing role these institutions are expected to play in funding infrastructure, an additional benefit is that a large base of domestic institutional investors could make infrastructure investments more attractive to foreign investors, because they will be perceived as a potential liquidity buffer in times of capital outflows. As discussed by Canuto et al (2014), the task ahead is to develop financial vehicles that can channel EMEs long-term institutional savings into financially viable infrastructure projects. The growing share of public-private partnerships (PPP) for infrastructure projects is facilitating the development of innovative financial structures to fund these projects. Source: Official sources and J.P. Morgan. Local fixed-income markets, complemented by more traditional unlisted products, could fill in a large share of the remaining funding gap through infrastructure project bonds,, as long as policy makers develop the appropriate framework for issuers, investors, and intermediaries. Infrastructure project bonds are an innovation in advanced economies, but are showing growing relevance in wider markets, with several types of bonds and credit enhancement schemes being tested, depending on the variety of project (for example, greenfield, brownfield). Source: Official sources and J.P. Morgan The challenge for EMEs in developing these bonds is threefold. The first is building or strengthening the fixed-income market regulatory and institutional framework so that structuring, issuance, and placement of infrastructure project bonds becomes cost-efficient. Most large EMEs already have that framework in place and are in a position to support such bonds. The second challenge is to develop the appropriate credit risk enhancement instruments so that project bonds have credit ratings that are acceptable to institutional investors, generally at domestic investment grade or above (BBB-). Governments, multilateral organizations, development banks, and commercial banks should play a key role in either supporting or providing these risk-mitigating instruments. The third challenge is to implement solutions for liquidity support, such as more effective market-making arrangements, so as to attract a broad group of investors and mitigate the "drying effects" of buy-and-hold by institutional investors. The availability of markets and instruments that allow hedging from exchange-rate risks will also help. Public policies and the direct engagement of government and development agencies in making long-term vehicles financially viable are critical for their success. Furthermore, the development of an active infrastructure project bond market could have a number of positive externalities in reinforcing a long-term fixed-income market for a broader range of issuers. This could compensate for the higher volatility in foreign capital flows and support local fixed-income markets in EMEs that are less dependent on foreign investors. What Development Banks Can Bring to the Table In such a context, it is no surprise that the creation/expansion of national and multilateral development banks has been getting so much attention. For instance, most G20 countries now have some type of national development bank and the aggregated sum of their assets amounted to more than $3.5 trillion, according to a recent survey made by UN DESA. By the same token, several existing multilateral development banks have made efforts to raise their financial capacity, while new institutions have been created (e.g. the NDB from the BRICS countries) or are about to be. In principle, even with a domestic base of banks and other financial intermediation vehicles willing and able to fill the gap left by shrinking international syndicated lending, there would be a unique additional role to be played by such development banks. The key word here is "additionality," i.e. to provide some value added relative to what markets and institutions are already able and willing to do. First, there is a core financial additionality offered by development banks, when they play a key role as a catalyst, drawing private capital into long-term projects in countries and sectors where significant development results can be expected, but the market perceives high risks. Those institutions contribute their own funding (loans, equity) and/or guarantees, providing partners with an improved creditor status. Bringing partners into specific deals through syndications also generates additional financing. It is relevant to stress that "more becomes less" after a certain point. The size and composition of development bank portfolios must aim to maximize the "crowd in" of private engagement, rather than taking their place ("crowding out"). This is particularly the case when the supply of development bank finance embeds substantial public subsidies. Counterparty finance and complementarity with private investors at the project level can also mitigate "moral hazard" risks. Furthermore, those portfolios should be moving frontiers: When success is obtained, perceived risks tend to fall and finance starts to acquire "plain vanilla" attributes. Typically, a development bank helps with infrastructure project finance; then, the investment starts to operate with funding from loans; building and operational risks fall over time (greenfield becomes brownfield); the originator development bank securitizes and makes public offers to institutional and other long-term investors; and the originator is able to initiate a new project cycle. Development banks can also provide "design additionality," when they help improve the "bankability" -- or "financeability" -- of project designs. There is also a "policy additionality" when their expertise and policy advice contribute to improvement and stability of policy and regulatory environments. While both are obviously the case with multilateral development banks, very often national development banks are also local repositories of technical knowledge. Finally, as a corollary to these contributions, development banks may offer "selection additionality," often improving the process of project selection by governments (Chelsky et al, 2013). Ultimately the cost-benefit balance of development banks' operation depends not only on the additionality provided, but also on its funding, particularly as it embeds some level of subsidies. Given that long-term financing needs in general, and developing country infrastructure project financing needs in particular tend towards unequivocal upward growth, the potential retrenchment and inappropriate composition of existing international debt flows, as well as the need to make the way for deeper non-banking financial intermediation, highlights the potential catalytic role of development banks. Nevertheless, as exemplified in the imperfect substitutability -- and indeed the complementarity -- among types of private finance, development banks should make sure they maximize the development bang for their little -- and often costly -- buck by ensuring additionality in what they do.
The week ahead is packed with events and data. The monthly cycle of purchasing managers surveys and the US jobs report are featured. There are also central bank meetings in six high-income countries and three emerging markets. Given the recent geopolitical development, in Ukraine, as well ISIS, will give the NATO meeting extra significance. At the end of the day, there will be little to learn from the PMI data and most of the central bank meetings. Yes, there may be some headline risks, but our information set will not change very much. The euro area flash report steal most of the thunder from the final report. Arguably, more important for the outlook will be German industrial orders and production reports. Modest improvement is expected. The German economy is not really contracting, though it did in Q2. German exports to Russia are no more than 1% of GDP. Assume that the sanctions cut German exports to Russia by three-quarters. Now put that in the context of last year's growth (0.4%) and this year's projected growth of the German economy (~1.7%). This is not to argue, like many have done that Germany has not interest in a rigorous sanction regime. Such arguments seem to repeat the error of those who thought the euro zone was going to break up over Greece or Cyprus. So many investors seem to exaggerate economic influences and dismiss political motivations. We have argued the advent of EMU and the euro is first and foremost an economic solution to a political problem, the reunification of Germany. Europe itself is more a political construct than a geological one. Political interests overrode economic interests, and that is why EMU survived. Similarly, the political elite is not Philistines. They can and are putting larger political interests ahead of narrow economic interests. Yes, there are compromises, but an economic determinist explanation and forecast does not do the situation justice. The PMI data is likely to confirm that the UK economy has lost some economic momentum that was recorded earlier this year. It continues to operate a high level, but the moderation seen in July likely extended into August. The US employment data will also most likely confirm what we already know, and if it does not it will likely shrugged off as a fluke. There is no reason not to look for the 200+ monthly increases in non-farm payrolls to extend the streak to seven consecutive months. Nearly all the inputs that have been reported that economists use to shape their forecasts improved. Fed officials are looking at the general trend and here is what they see. The acceleration of improvement can be seen in the averages. The more recent averages are above the long-term term averages. The three-month average is 245k. The six-month average is at 244k. The 12-month average is at 214k, and the 24-month average stands at 203k. The other of the labor market are less volatile, but the forward guidance has raised their significance over the unemployment rate, which is likely to have ticked down to 6.0%-6.1% from 6.2% in July. Average weekly earnings may have ticked up, but the underlying trend remains flat. A small increase would lift the year-over-year rate to 2.1%. The three- and six-month averages are at 2.0%, and the 12-month is at 2.1%. The 24-month average is 2.0%. Nor will Chinese PMI data likely change investors' views of the world's second largest economy. The economic data shows an economy that continues to expand 7.0%-7.5%, while being in some kind of economic and political transition, though the destination is not immediately obvious. The PMI data will not shed much light on the immediate economic challenges will are emanating from the circulation of capital and real estate market. The softer Chinese demand for iron ore is thought to be the key factor driving down prices. The Australian dollar has been resilient, largely in a broad trading range. This underscores our understanding that the ultimate driving force of currencies from open high-income economies is the market for capital more so than the market for goods. Australia's AAA rating and high yield appeals to both private and public asset managers. Most of the central bank meetings will not amount to much either. The central banks of Brazil, Mexico and Poland, are expected to leave rates unchanged at 11%, 3% and 2.5% respectively. Among the major central, banks, the BOE is not expected to say anything at the conclusion of the MPC meeting. The Bank of Canada meeting will also likely be a non-event. The Reserve Bank of Australia has indicated a stable rate, and there is little reason to expect a change. The Bank of Japan is surely disappointed with the recent economic readings that showed that the pullback in household consumption deepened in July and the half-hearted gain in industrial output. However, Governor Kuroda is likely to give it an optimistic spin on it, though the debate is likely to intensify below the surface. The Riksbank surprised the market at its last meeting with a 50 bp rate cut that was delivered over the objections of the Governor and his deputy. A follow-up rate cut is possible, but it seems unlikely. Sweden's central bank may alter its expected repo rate path, which is a type of forward guidance that also has not proved particularly reliable. The ECB meeting is the most significant event. Draghi all but pre-committed the ECB to action by acknowledging the disturbing decline in inflation expectations. In the past, he said that this would trigger an official response. The key issue is what action will be announced. There has been much speculation that the ECB will announce an ABS purchase program. We think the risk of this is very low for both practical and political reasons. They might be moving quickly toward an ABS purchases, but there was much ground to cover, including regulatory issues, that have yet to be addressed, it seems. It also appears to be risking putting the cart ahead of the horse if an ABS purchase program is announced, before the TLTRO is launched, and before the results of the asset quality review. Indeed, it is through this process, that officials will have a greater understanding of the capacity and limits of bank balance sheets. We would attribute a greater chance of some small rate cuts, and possibly pushing the deposit rate into deeper negative territory. We attribute an even greater probability to the ECB providing more details about what Draghi called the "modalities" of the TLTRO. While reassuring investors that the ECB will do more if there is no substantial improvement, it may content itself with emphasizing and/or tweaking some of the rules regarding the access to the TLTRO facility, with an eye toward ensuring strong participation in the launch later in the month. This may include spelling out the ability for smaller banks that don't have access to ECB facilities to participate (through other banks). Draghi may also explain how in the second of two phases of the TLTRO, banks that are still deleveraging can still participate. If our assessment is right, we suspect many investors may be disappointed. Given the extreme market positioning, we are concerned that many shorts are in weak hands. A squeeze higher would provide medium and longer term investors with an opportunity to adjust exposures directly or through hedging. Geopolitics continues to be a concern for investors. The Ukraine situation has escalated as Russian forces have entered the east. In addressing the militants, Putin referred to "Novorossiya", or New Russia, which seemed to confirm his intent on removing another piece of Ukraine, whether in the form of a new state or to be part of Russia, as was the case with Crimea is immediately clear. We have argued that diplomacy is about nuances and that these nuances matter. Some observers dismiss the references, for example, of incursion instead of invasion as pusillanimous in the extreme. Yet, there may be a significant consequence. If it is a declared war, Ukraine would most likely not qualify for IMF assistance, which it desperately needs. Over the weekend, the IMF agreed on disbursing another $1.4 bln of the $!7 bln aid package. There is a subtext of the events to consider as well. After the collapse of the Soviet Union, NATO was brought to Russia's doorstep. The EU was also expanded into what a key part of Russia's elite, and not just Putin, had seen as its sphere of influence. Russia did not have the political will or resources to resist. In Georgia and Moldova, Russia pushed back. In Ukraine, it is making a clear stand. Just like Russia has not struck at a NATO member, the US and Europe are not prepared to sacrifice their young people to take secure territory in Russia's near abroad. It took what it could on the cheap, and expresses its displeasure with Russia's behavior where it cannot take. More sanctions are likely that seek to further isolate Russia. These could include access to syndicated bank loans and restrictions on the sale of high-tech gas equipment. UK Prime Minister Cameron suggested limiting Russia's access to SWIFT payment system. Russia has indicated that its retaliation could include cars, aerospace, and shipbuilding. While developments in Syria, Iraq and Iran are still of much concern, events in Hong Kong warn of a potentially new flash point. The stage is set for a more intense confrontation between China and Hong Kong and between the Hong Kong economic and political elite and the pro-democracy movement. Ahead of the Hong Kong election in 2017, Chinese officials indicated that there will not be public nominations for the chief executive. There will only be 2-3 candidates, and they will need to be approved by a majority of the 1200-person nominating committee. The next step is for it to be affirmed by the Hong Kong legislature. A blocking minority of 27 members (of the 70 member legislature) is likely. If it is rejected, the nominating committee will appoint the next chief executive for Hong Kong. Hong Kong has been the recipient of hot money flows. Some appears to be coming from Russian sources. Some appear to be an effort to play the Chinese stock market, which, thus far in Q3, is among the world's best performers. The Shanghai Composite is up 8.2% since the end of June, and the Hang Seng is up 6.7%. The Hong Kong Enterprise Index, which tracks mainland companies, is up 6%. The capital flows have exerted upward pressure on the Hong Kong dollar and triggered intervention by the Hong Kong Monetary Authority. The risk of social unrest may discourage new inflows.
The company adds an additional lender to its syndicated bank credit facility, boosting the size by $30M to $650M. Fifth Street's (FSC) line now includes 15 lenders and an accordion feature allowing expansion up to $800M.Press release Post your comment!
Authored by Howard Davies, originally posted at Project Syndicate, Bank of England Governor Mark Carney surprised his audience at a conference late last year by speculating that banking assets in London could grow to more than nine times Britain’s GDP by 2050. His forecast represented a simple extrapolation of two trends: continued financial deepening worldwide (that is, faster growth of financial assets than of the real economy), and London’s maintenance of its share of the global financial business. These may be reasonable assumptions, but the estimate was deeply unsettling to many. Hosting a huge financial center, with outsize domestic banks, can be costly to taxpayers. In Iceland and Ireland, banks outgrew their governments’ ability to support them when needed. The result was disastrous. Quite apart from the potential bailout costs, some argue that financial hypertrophy harms the real economy by syphoning off talent and resources that could better be deployed elsewhere. But Carney argues that, on the contrary, the rest of the British economy benefits from having a global financial center in its midst. “Being at the heart of the global financial system,” he said, “broadens the investment opportunities for the institutions that look after British savings, and reinforces the ability of UK manufacturing and creative industries to compete globally.” That is certainly the assumption on which the London market has been built and the line that successive governments have peddled. But it is coming under fire. Andy Haldane, one of the lieutenants Carney inherited at the BoE, has questioned the financial sector’s economic contribution, pointing to “its ability to both invigorate and incapacitate large parts of the non-financial economy.” He argues (in a speech revealingly entitled “The Contribution of the Financial Sector: Miracle or Mirage?”) that the financial sector’s reported contribution to GDP has been significantly overrated. Two recent papers raise further doubts. In “The Growth of Modern Finance,” Robin Greenwood and David Scharfstein of Harvard Business School show that the share of finance in US GDP almost doubled between 1980 and 2006, just before the onset of the financial crisis, from 4.9% to 8.3%. The two main factors driving that increase were the expansion of credit and the rapid rise in resources devoted to asset management (associated, not coincidentally, with the exponential growth in financial-sector incomes). Greenwood and Scharfstein argue that increased financialization was a mixed blessing. There may have been more savings opportunities for households and more diverse funding sources for firms, but the added value of asset-management activity was illusory. Much of it involved costly churning of portfolios, while increased leverage implied fragility for the financial system as a whole and imposed severe social costs as over-exposed households subsequently went bankrupt. Stephen G. Cecchetti and Enisse Kharroubi of the Bank for International Settlements – the central banks’ central bank – go further. They argue that rapid financial-sector growth reduces productivity growth in other sectors. Using a sample of 20 developed countries, they find a negative correlation between the financial sector’s share of GDP and the health of the real economy. The reasons for this relationship are not easy to establish definitively, and the authors’ conclusions are controversial. But it is clear that financial firms compete with others for resources, and especially for skilled labor. Physicists or engineers with doctorates can choose to develop complex mathematical models of market movements for investment banks or hedge funds, where they are known colloquially as “rocket scientists.” Or they could use their talents to design, say, real rockets. Cecchetti and Kharroubi find evidence that it is indeed research-intensive firms that suffer most when finance is booming. These companies find it harder to recruit skilled graduates when financial firms can pay higher salaries. And we are not just talking about the so-called “quants.” In the years before the 2008 financial crisis, more than a third of Harvard MBAs, and a similar proportion of graduates of the London School of Economics, went to work for financial firms. (Some might cynically say that keeping MBAs and economists out of real businesses is a blessing, but I doubt that that is really true.) The authors find another intriguing effect, too. Periods of rapid growth in lending are often associated with construction booms, partly because real-estate assets are relatively easy to post as collateral for loans. But the rate of productivity growth in construction is low, and the value of many credit-fueled projects subsequently turns out to be low or negative. So, should Britons look forward with enthusiasm to the future sketched by Carney? Aspiring derivatives traders certainly will be more confident of their career prospects. And other parts of the economy that provide services to the financial sector – Porsche dealers and strip clubs, for example – will be similarly encouraged. But if finance continues to take a disproportionate number of the best and the brightest, there could be little British manufacturing left by 2050, and even fewer hi-tech firms than today. Anyone concerned about economic imbalances, and about excessive reliance on a volatile financial sector, will certainly hope that this aspect of the BoE’s “forward guidance” proves as unreliable as its forecasts of unemployment have been.
Editor's Note: Welcome to Crash Week! This week marks five years since the bankruptcy of Lehman Brothers and the financial crisis that followed. A lot has happened since then, but how much has changed? All week long we will be exploring this question from a variety of economic angles. Below is the second piece from Institute for New Economic Thinking Senior Fellow Adair Turner. You can also check out the first entry from Institute for New Economic Thinking President Rob Johnson. Stay tuned for contributions from our grantees, community members, leaders, and other prominent economic thinkers! Five years after the collapse of the U.S. investment bank Lehman Brothers, the world has still not addressed the fundamental cause of the subsequent financial crisis – an excess of debt. And that is why economic recovery has progressed much more slowly than anyone expected (in some countries, it has not come at all). Most economists, central bankers, and regulators not only failed to foresee the crisis, but also believed that financial stability was assured so long as inflation was low and stable. And, once the immediate crisis had been contained, we failed to foresee how painful its consequences would be. Official forecasts in the spring of 2009 anticipated neither a slow recovery nor that the initial crisis, which was essentially confined to the United States and the United Kingdom, would soon fuel a knock-on crisis in the euro zone. And market forces did not come close to predicting near-zero interest rates for five years (and counting). One reason for this lack of foresight was uncritical admiration of financial innovation; another was the inherently flawed structure of the euro zone. But the fundamental reason was the failure to understand that high debt burdens, relentlessly rising for several decades – in the private sector even more than in the public sector – were a major threat to economic stability. In 1960, U.K. household debt amounted to less than 15% of GDP; by 2008, the ratio was over 90%. In the U.S., total private credit grew from around 70% of GDP in 1945 to well over 200% in 2008. As long as the debt was in the private sector, most policymakers assumed that its impact was either neutral or benign. Indeed, as former Bank of England Governor Mervyn King has noted, “money, credit, and banks play no meaningful role” in much of modern macroeconomics. That assumption was dangerous, because debt contracts have important implications for economic stability. They are often created in excess, because in the upswing of economic cycles, risky loans look risk-free. And, once created, they introduce the rigidities of default and bankruptcy processes, with their potential for fire sales and business disruptions. Moreover, debt can drive cycles of over-investment, as described by Friedrich von Hayek. The Irish and Spanish property booms are prime examples of this. And debt can drive booms and busts in the price of existing assets: the U.K. housing market over the past few decades is a case in point. When times are good, rising leverage can make underlying problems seem to disappear. Indeed, subprime mortgage lending delivered illusory wealth increases to Americans at a time when they were suffering from stagnant or falling real wages. But in the post-crisis downswing, accumulated debts have a powerful depressive effect, because over-leveraged businesses and consumers cut investment and consumption in an attempt to pay down their debts. Japan’s lost decades after 1990 were the direct and inevitable consequence of the excessive leverage built up in the 1980’s. Faced with depressed private investment and consumption, rising fiscal deficits can play a useful role, offsetting the deflationary effects. But that simply shifts leverage to the public sector, with any reduction in the ratio of private debt to GDP more than matched by an increase in the public-debt ratio: witness the Irish and Spanish governments’ high and rising debt burdens. Private leverage levels, as much as the public-debt burden, must therefore be treated as crucial economic variables. Ignoring them before the crisis was a profound failure of economic science and policy, one for which many countries’ citizens have suffered dearly. Two questions follow. The first is how to navigate out of the current overhang of both private and public debt. There are no easy options. Paying down private and public debt simultaneously depresses growth. Rapid fiscal consolidation thus can be self-defeating. But offsetting fiscal austerity with ultra-easy monetary policies risks fueling a resurgence of private leverage in advanced economies and already has produced the dangerous spillover of rising leverage in emerging economies. Both realism and imaginative policy are required. It is obvious that Greece cannot pay back all of its debt. But it should also be obvious that Japan will never be able to generate a primary fiscal surplus large enough to repay its government debt in the normal sense of the word “repay.” Some combination of debt restructuring and permanent debt monetization (quantitative easing that is never reversed) will in some countries be unavoidable and appropriate. The second question is how to constrain leveraged growth in the future. Achieving this goal requires reforms with a different focus from those pursued so far. Fixing the “too big to fail” problem is certainly important, but the direct taxpayer costs of bank rescues were small change compared to the damage wreaked by the financial crisis. And a banking system that never received a taxpayer subsidy could still support excessive private-sector leverage. What is required is a wide-ranging policy response that combines more powerful countercyclical capital tools than currently planned under Basel 3, the restoration of quantitative reserve requirements to advanced-country central banks’ policy toolkits, and direct borrower constraints, such as maximum loan-to-income or loan-to-value limits, in residential and commercial real-estate lending. These policies would amount to a rejection of the pre-crisis orthodoxy that free markets are as valuable in finance as they are in other economic sectors. That orthodoxy failed. If we do not address the fundamental fact that free financial markets can generate harmful levels of private-sector leverage, we will not have learned the most important lesson of the 2008 crisis. Originally appeared on Project Syndicate
Authored by Daniel Gros, originally posted at Project Syndicate, Emerging markets’ currencies are crashing, and their central banks are busy tightening policy, trying to stabilize their countries’ financial markets. Who is to blame for this state of affairs? A few years ago, when the US Federal Reserve embarked on yet another round of “quantitative easing,” some emerging-market leaders complained loudly. They viewed the Fed’s open-ended purchases of long-term securities as an attempt to engineer a competitive devaluation of the dollar and worried that ultra-easy monetary conditions in the United States would unleash a flood of “hot money” inflows, driving up their exchange rates. This, they feared, would not only diminish their export competitiveness and push their external accounts into deficit; it would also expose them to the harsh consequences of a sudden stop in capital inflows when US policymakers reversed course. At first sight, these fears appear to have been well founded. As the title of a recent paper published by the International Monetary Fund succinctly puts it, “Capital Flows are Fickle: Anytime, Anywhere.” The mere announcement that the Fed might scale down its unconventional monetary-policy operations has led to today’s capital flight from emerging markets. But this view misses the real reason why capital flowed into emerging markets over the last few years, and why the external accounts of so many of them have swung into deficit. The real culprit is the euro. Quantitative easing in the US cannot have been behind these large swings in global current-account balances, because America’s external deficit has not changed significantly in recent years. This is also what one would expect from economic theory: in conditions approaching a liquidity trap, the impact of unconventional monetary policies on financial conditions and demand is likely to be modest. Indeed, the available models tell us that, to the extent that an expansionary monetary policy actually does have an impact on the economy, its effect on the current account should not be large, because any positive effect on exports from a weaker exchange rate should be offset by larger imports due to the increase in domestic demand. This is what has happened in the US, and its recent economic revival has been accompanied by an expansion of both exports and imports. The impact of the various rounds of quantitative easing on emerging markets (and on the rest of the world) has thus been approximately neutral. But austerity in Europe has had a profound impact on the eurozone’s current account, which has swung from a deficit of almost $100 billion in 2008 to a surplus of almost $300 billion this year. This was a consequence of the sudden stop of capital flows to the eurozone’s southern members, which forced these countries to turn their current accounts from a combined deficit of $300 billion five years ago to a small surplus today. Because the external-surplus countries of the eurozone’s north, Germany and Netherlands, did not expand their demand, the eurozone overall is now running the world’s largest current-account surplus – exceeding even that of China, which has long been accused of engaging in competitive currency manipulation. This extraordinary swing of almost $400 billion in the eurozone’s current-account balance did not result from a “competitive devaluation”; the euro has remained strong. So the real reason for the eurozone’s large external surplus today is that internal demand has been so weak that imports have been practically stagnant over the last five years (the average annual growth rate was a paltry 0.25%). The cause of this state of affairs, in one word, is austerity. Weak demand in Europe is the real reason why emerging markets’ current accounts deteriorated (and, with the exception of China, swung into deficit). Thus, if anything, emerging-market leaders should have complained about European austerity, not about US quantitative easing. Fed Chairman Ben Bernanke’s talk of “tapering” quantitative easing might have triggered the current bout of instability; but emerging markets’ underlying vulnerability was made in Europe. The fickleness of capital markets poses once again the paradox of thrift. As capital withdraws from emerging markets, these countries soon will be forced to adopt their own austerity measures and run current-account surpluses, much like the eurozone periphery today. But who will then be able – and willing – to run deficits? Two of the world’s three largest economies come to mind: China, given the strength of its balance sheet, and the eurozone, given the euro’s status as a reserve currency. But both appear committed to running large surpluses (indeed, the two largest in the world). This implies that, unless the US resumes its role as consumer of last resort, the latest bout of financial-market jitters will weaken the global economy again. And any global recovery promises to be unbalanced – that is, if it materializes at all.
The $61 billion, 364-day bridge loan backing Verizon Communications’ planned $130 billion acquisition of Vodafone Group’s 45% interest in Verizon Wireless is currently being syndicated among the company's existing relationship bank group, sources said.
Global LNG trade and shipping has been rapidly expanding worldwide over the past few years and Greece is at the forefront due to the dynamics of its shipping industry as its considerable investment in the sector. At the 4th Mediterranean Oil & Gas Conference in Athens, interesting details on the subject were discussed that highlighted an emerging trend that will surely impact the European natural gas market as a whole, especially since the European Union is actively pursuing a rise in LNG consumption for the long-term. Presently eight Greek ship-owners are building almost 50% of the new LNG vessels with an estimated $8.5 billion in investments just in the past two years. An additional $4 billion was spent on LNG vessels between 2008-2011 in the midst of the global financial crisis, a detail of significance since the deteriorating global environment did not change the overall global energy trade, which calls for the greater use of this kind of gas. The Greek Minister for shipping Kostis Mousouroulis emphatically pointed out that shipping and energy are interrelated and the dynamics of each affected the other. More specifically, he explained that the sea transport of energy is the most important link in the global energy supply and all that it implies for the world energy index and the competitiveness of the industry in a worldwide level. He also explained Greece's vital role since the country's ship-owners control almost a quarter of the world's sea energy transport, in addition to optimistic findings in the Eastern Mediterranean and Greek seas. That is of importance not only for the Greek economy but also for the EU, which is supplied by foreign markets. Presently South Korea has emerged as the top manufacturer of LNG vessels. Out of 82 constructed, 38 belong to the Greeks with the most important companies being, Maran Gas Maritime with 11 LNG vessels on order, GasLog (8 vessels), Dynagas (7 vessels) and Cardiff Maritime with another 4 in construction. Each ship of this type costs on average $250 million, making an expensive investment usually covered by syndicated banking loans, which shows that the financial world has also bet on a rise in LNG trade worldwide in the coming years so as to achieve high yields from this financing as well. In 2012 world LNG trade totaled 239 million tons with a 5.4 million additional increase to be expected for 2013. Moreover, countries such as Pakistan, Uruguay, El Salvador, South Africa, Bahrain, Croatia, Philippines, Jamaica and Lithuania are planning to establish terminals in the short-term and it is also expected that the shale gas boom will enable in the mid-term US to begin significant exports of LNG to European and Asia markets. In the Eastern Mediterranean the most important projects of such kind is the Cyprus in the Vassilikos region in order to exploit its gas offshore and talks are underway between the Noble Energy and Nicosia to agree upon the timetable, while Israel is undecided if it will join Cyprus or if it will proceed with its own terminal. It is of interest also to note that Gazprom Marketing & Trading Switzerland AG and the Israeli Levant LNG Marketing Corporation had recently signed an agreement for the former to exclusively buy LNG from the latter who has the rights to explore the Tamar field. The participants in the conference were certain that eventually all the discovered gas fields in the East Mediterranean would be exported by LNG terminals thus further increasing the importance of that sector. In the meantime it was widely discussed that there also a future opportunity for Israeli gas to be linked with the Trans-Adriatic Pipeline (TAP), since the vice-President of the European energy regulators council, Valeria Termini, has had talks with Israeli senior officials from the Ministry of Energy on the issue, which most probably would include the transfer of LNG quantities to Greece. This would certainly be decided by Tel Aviv in due time if it wants to link its exports towards the European markets, while Greek DEPA already lobbying in Brussels for the Aegean LNG terminal, as the head of its international department Dimitris Manolis stated, a plan which is inexorably related with the export routes to be followed both by the Cypriot and the Israeli gas reserves.
(Reuters) - Goldman Sachs Group Inc is trying to work around a financial reform regulation to keep investing in the profitable, albeit risky, business of buying and selling companies, three sources familiar with the new business said over the past week. The Volcker rule - named for former Federal Reserve Chairman Paul Volcker and part of the Dodd-Frank financial reform law - is expected to limit bank investments in private equity funds, but not necessarily private equity-style investments outside of a formal fund structure. In a bid to pool money for deals without raising a private equity fund, the Wall Street bank has been lining up clients who are willing to put money into accounts set up to invest in private equity-style deals, the sources said. Goldman would also set aside some of its own money and partner capital into separate accounts for the same purpose, they said. Under the new plan, Goldman would then make investments in a syndicate fashion, contributing investor money, along with its own capital and partner dollars, the sources said. That would be different from a traditional private equity fund, where money from various investors has already been pooled together in a formal fund structure. "It is the same pitch as before, 'We are putting a lot of our own money in this,'" said a person familiar with Goldman's marketing of the new business. "They are saying, 'We are still in this business.'" The details of the new structure, including whether Goldman would still get fees for managing client money and how profits would be taxed, could not be learned. Goldman spokeswoman Andrea Raphael said on Monday that the firm is merely taking a strategy used in other investment businesses and applying it to private equity. "We believe these investments will continue to be important to our clients and the economy, more broadly," Raphael said. "We will, of course, comply with all aspects of the Volcker rule as it is finalized." VOLCKER RULE The Volcker rule aims to limit banks' exposure to these kinds of investments. The rule, which has not been implemented yet, will allow firms to place up to 3 percent of their Tier 1 capital into private equity funds. It will also prevent them from contributing more than 3 percent of any new private equity funds they raise. A draft version of the rule appears to allow banks to continue making private equity investments, as long as the investments do not reside in a fund structure. "It's not a model of statute writing," said Dwight Smith, an attorney at Morrison & Foerster who focuses on bank regulation. "In terms of merchant banking and direct investments in portfolio companies as opposed to investing in funds, those are fine and not subject to Volcker at all." Some major banks such as Bank of America Corp and Citigroup Inc have been pulling back from private equity investments ahead of the rule. But others, including Goldman and Wells Fargo & Co, are betting that workarounds will help them retain at least some lines of business. Returns from private equity investments can be high. But they are also risky. The largest leveraged buyout, the $45 billion takeover of Texas utility TXU in 2007, has turned into one of the most spectacular failures of the last decade's buyout boom. Goldman was part of the private equity consortium that took TXU private. The company is now known as Energy Future Holdings. Since the financial reform law passed in 2010, Goldman has shut down its proprietary trading desks and outlined plans to gradually wind down its stakes in hedge funds each quarter to prepare for Volcker rule. But it also gathered a team of lawyers, lobbyists and strategists to devise arguments that would protect as much of its proprietary investing business as possible, sources said. The central argument that emerged from their effort was that activities like merchant banking and debt investing through credit funds should be exempt from the rule - or parts of it - because they are akin to making loans, the sources said. PARTNER MONEY Goldman has a long history of successfully raising private equity funds that mix its own capital with money from employees and clients. GS Capital Partners VI, the largest such fund Goldman raised, closed in 2007 with $20.3 billion in assets, 45 percent of which came from the firm and its partners. Goldman's private equity assets represented 19 percent of its Tier 1 capital at year-end, though it is not clear how much of those assets are tied up in funds. Goldman partner capital is also invested in other types of investment vehicles, such as credit funds, and the firm has been trying to make sure they are exempt from Volcker restrictions as well. In a February 2012 meeting with the Federal Reserve, for example, Goldman executives argued that credit funds should not be subject to Volcker restrictions because investors typically require a 5 percent "skin in the game" from sponsors. Goldman's private equity and merchant banking businesses are large and lucrative, and hold a sizable portion of the personal wealth of senior Goldman executives, including Chief Executive Lloyd Blankfein, one of the sources said. Goldman is betting that its investments not tied up in funds will be protected from Volcker rule. Members of Goldman's regulatory reform group -- overseen by Harvey Schwartz, who is now chief financial officer, and John Rogers, who is chief of staff -- have given presentations to regulators about potential pitfalls of Volcker, and tried to educate the Fed and other regulators on the best way to write the rule, sources have said. One source who attended meetings with regulators said that officials seemed receptive to Goldman's arguments, but cautioned that they worried about banks becoming overexposed to risks in private equity investing. NEW PRIVATE EQUITY It is unclear when the final Volcker rule, which had been scheduled for July 2012, will be unveiled. It may not be fully implemented for years to come. In the meantime, a group of Goldman bankers, in the merchant banking division headed by Richard Friedman, have been pitching clients on the new way of co-investing in private equity deals with the firm. Tanya Barnes, a newly minted managing director, is one person working on the project, sources said. Barnes has a background in distressed debt investments and previously worked in Goldman's Special Situations Group. The firm has been upping its marketing game to persuade clients that the deals are worth their time, even though they are not in a traditional fund, one of the sources said. Smith, the attorney, said banks may still be required to reduce exposure to the merchant banking business. "The Federal Reserve has this inherent authority to tell banks not to do things even though it's technically legal for them to do so," he said. "The Fed could look at a bank's array of merchant banking activities and just say, 'Look, that's too much, even though you haven't triggered the Tier 1 capital limitation.'" (Reporting By Lauren Tara LaCapra and Jessica Toonkel; Editing by Paritosh Bansal and David Gregorio)
US braced as cuts deadline passes (FT) U.S. stares down start of steep "automatic" budget cuts (Reuters) Yeltsin-Era Tycoons Sell Resources for Distance From Kremlin (BBG) Italy's center-left leader rules out coalition with Berlusconi (Reuters) Apple Required Executives to Hold Triple Their Salary in Stock (WSJ) BOJ Seen Spiking Punchbowl in April Under New Chief Kuroda (BBG) Diplomatic fallout from EU bonus cap (FT) Italy’s Stalemate Jeopardizes Resolution of Crisis, Finland Says (BBG) Chinese trader accused of busting Iran missile embargo (Reuters) JPMorgan No. 1 Investment Bank Amid a Flurry of New Deals (BBG) Eurotunnel’s Ferry Strategy at Risk as Rivals Cry Foul (BBG) Telepathic rats team up across continents (FT) Overnight Media Digest WSJ * The $85 billion in so-called sequester cuts take effect Friday if, as expected, U.S. President Obama and congressional leaders find no way to avoid them. * Libya's sovereign-wealth fund said it is cooperating with the U.S. Securities and Exchange Commission in the ongoing investigation into Goldman Sachs Group Inc over the securities firm's dealings with the fund when Col. Muammar Gaddafi was in power. * Some of the biggest U.S. banks were on pace to find a higher rate of past foreclosure mistakes than regulators disclosed in January when they halted a review in favor of a $9.3 billion settlement for homeowners. * Groupon Inc ousted Chief Executive Andrew Mason a day after reporting a quarterly loss that heightened scrutiny of the company's business model. * Best Buy Co ended talks with founder Richard Schulze over a deal in which he and a group of buyout firms were proposing to take a minority stake in the firm in exchange for three seats on the board, according to people familiar with the matter. * Apple Inc earlier this month reversed its stance on a corporate-governance measure related to executive compensation, implementing a new rule that executives must hold triple their base salary in company stock. * Mexico's political parties are coming together to take on the country's three most powerful businessmen, including the world's richest man Carlos Slim, by negotiating a broad set of constitutional overhauls to boost competition in the country's telephone and television markets. * A federal jury in Manhattan ordered ESPN Inc to pay Dish Network Corp $4.86 million in damages in a dispute over licensing rates for sports broadcasts. FT The United States is braced for automatic across-the-board spending cuts which are set to kick in on Friday under a process known as sequestration. Groupon co-founder Andrew Mason was fired as chief executive of the daily deals company on Thursday. RBS Chief Executive Stephen Hester on Thursday signalled that the British bank could be ready for reprivatisation as early as next year. Lloyds Banking Group will set aside an additional 1.4 billion pounds to cover the mis-selling of payment protection insurance. European Council president Herman Van Rompuy said Europe would not prioritise treaty change despite British Prime Minister David Cameron's desire for a new settlement to put to a referendum. Executives at European banks have warned that they are in danger of losing key traders and managers to U.S. and other international rivals after the EU provisionally agreed to a bonus cap for banks. Carl Icahn and Herbalife have reached an agreement to nominate two directors to the company's board NYT * U.S. President Obama will formally notify government agencies on Friday that an obscure process known as sequestration is in effect, triggering deep, across-the-board budget cuts that will force federal spending to shrink. * The American economy grew just barely in the last quarter of 2012. Output expanded at an annual rate of 0.1 percent, far below the growth needed to get unemployment back to normal. However, the economy did not shrink, as the Commerce Department estimated in January. * One of Citigroup Inc's internal hedge fund units is spinning off, free from its corporate parent and the restrictions that have come with new banking regulations. * Investment firm Paulson & Company, the largest shareholder in MetroPCS Communications Inc, announced that it would oppose a planned merger with T-Mobile USA, saying the deal would saddle the new company with too much debt. * After spending four years leading the investigations of some of the world's biggest banks, Lanny Breuer plans to leave the U.S. Justice Department on Friday, then interview at law firms. * Daily deals website Groupon Inc reported weak fourth-quarter earnings on Wednesday, and fired its chief executive, Andrew Mason, a day later. * Talks between Best Buy Co Inc and a group comprising its founder and three private equity firms have ended, people briefed on the matter said. By the end, the company's founder, Richard Schulze, had been seeking an enlarged minority stake. Canada THE GLOBE AND MAIL * As Alberta's controversial C$10 million inquiry into queue jumping in the healthcare system ended on Thursday after months of testimony - and a few revelations - the retired judge at the helm accused the Alison Redford government of "interference" with the commission's independence. * Ontario's elementary teachers' union has advised members to continue boycotting students' clubs, sports teams and other after-school activities, sparking parent outrage and raising tensions in the province's public schools. Reports in the business section: * The Canadian government is opening a vast new frontier for oil and gas activity in Nunavut's high Arctic with a call for companies to indicate their interest in bidding for exploration rights. FINANCIAL POST * Renewables could make up as much as 30 percent to 40 percent of the global energy mix by 2060 as oil loses its reign as the world's biggest energy source, Royal Dutch Shell Plc said in a forecast on the energy sector's changing landscape. * ConocoPhillips said moves by Ottawa to limit foreign investment in Canada's resources have made it more difficult for some buyers. China CHINA SECURITIES JOURNAL - In a front-page opinion article commenting on two recent alleged investment scams involving Chinese hedge funds, the author says China's hedge fund industry is suffering from a trust gap that must be addressed with more transparency. SHANGHAI SECURITIES NEWS - Analysts expect the Government Work Report, which is yet to be approved at the National People's Congress, will set a GDP growth target of 7.5 percent, an inflation target of below 4 percent, and a foreign trade growth target of 8 percent for 2013. The report will keep current "relaxed fiscal policy, prudent monetary policy" stance unchanged. SECURITIES TIMES - Beijing's second land auction of the year showed strong demand from developers, with 35 developers spending 10.7 billion yuan on 13 parcels of land. CHINA DAILY - Naw Kham, the Burmese drug lord convicted for the murder of 13 Chinese sailors in 2011, will be executed on Friday in Yunnan province along with three accomplices. PEOPLE'S DAILY - China should encourage consumer finance operations to boost domestic demand, said a commentary in the newspaper. Fly on the Wall 7:00 AM Market Snapshot ANALYST RESEARCH Upgrades Aflac (AFL) upgraded to Overweight from Equal Weight at EvercoreAlcatel-Lucent (ALU) upgraded to Market Perform from Underperform at BernsteinAutodesk (ADSK) upgraded to Buy from Hold at JefferiesHCP Inc. (HCP) upgraded to Market Perform from Underperform at BMO CapitalIllumina (ILMN) upgraded to Buy from Neutral at UBSInternational Paper (IP) upgraded to Outperform from Sector Perform at RBC CapitalIntuitive Surgical (ISRG) upgraded to Buy from Hold at CantorSequenom (SQNM) upgraded to Overweight from Neutral at Piper JaffrayTarget (TGT) upgraded to Outperform from Market Perform at Wells FargoTelefonica (TEF) upgraded to Equal Weight from Underweight at BarclaysTelefonica (TEF) upgraded to Neutral from Conviction Sell at GoldmanWestlake Chemical (WLK) upgraded to Overweight from Neutral at JPMorganpriceline.com (PCLN) upgraded to Buy from Neutral at Lazard Capital Downgrades AIG (AIG) downgraded to Equal Weight from Overweight at EvercoreCNOOC (CEO) downgraded to Reduce from Neutral at NomuraCincinnati Bell (CBB) downgraded to Outperform from Strong Buy at Raymond JamesDarden (DRI) downgraded to Neutral from Buy at UBSDeutsche Bank (DB) downgraded to Sell from Neutral at GoldmanDuke Energy (DUK) downgraded to Hold from Buy at Deutsche BankDuke Energy (DUK) downgraded to Neutral from Buy at CitigroupFulton Financial (FULT) downgraded to Neutral from Buy at Sterne AgeeHealth Care REIT (HCN) downgraded to Underperform from Market Perform at BMO CapitalMICROS (MCRS) downgraded to Hold from Buy at JefferiesOmniVision (OVTI) downgraded to Market Perform from Outperform at Raymond JamesRoyal Bank of Scotland (RBS) downgraded to Hold from Buy at Societe GeneraleTriangle Capital (TCAP) downgraded to Market Perform from Outperform at Raymond JamesU.S. Silica (SLCA) downgraded to Equal Weight from Overweight at Morgan StanleyVentas (VTR) downgraded to Underperform from Market Perform at BMO CapitalWeatherford (WFT) downgraded to Underperform from Market Perform at BMO CapitalWendy's (WEN) downgraded to Underweight from Equal Weight at Morgan Stanley Initiations Acuity Brands (AYI) initiated with a Market Perform at Northland SecuritiesAixtron (AIXG) initiated with an Underperform at Northland SecuritiesCoronado Biosciences (CNDO) initiated with an Overweight at Piper JaffrayCree (CREE) initiated with an Outperform at Northland SecuritiesEnphase Energy (ENPH) initiated with an Outperform at Northland SecuritiesFirst Solar (FSLR) initiated with an Underperform at Northland SecuritiesGladstone Land (LAND) initiated with an Outperform at JMP SecuritiesHorizon Technology (HRZN) initiated with a Buy at WunderlichNanosphere (NSPH) initiated with a Buy at CanaccordNorwegian Cruise Line (NCLH) initiated with a Hold at Deutsche BankPower-One (PWER) initiated with an Outperform at Northland SecuritiesSunPower (SPWR) initiated with an Outperform at Northland SecuritiesTCP Capital (TCPC) initiated with a Buy at WunderlichTesla (TSLA) initiated with an Outperform at Northland SecuritiesVeeco (VECO) initiated with a Market Perform at Northland SecuritiesWestern Gas Equity (WGP) initiated with a Hold at Deutsche BankWestern Refining (WNR) initiated with an Overweight at BarclaysWhiteHorse Finance (WHF) initiated with a Buy at Wunderlich HOT STOCKS Groupon (GRPN) named Executive Chairman Eric Lefkofsky and Vice Chairman Ted Leonsis to newly created Office of the Chief Executive, replacing CEO Andrew MasonPaulson & Co. to vote against MetroPCS (PCS) merger as currently structuredFlowers Foods (FLO) won Hostess bread assets with $360M bidSinclair Broadcast (SBGI) to purchase broadcast assets of 18 television stations owned by Barrington Broadcasting Group for $370MSky (BSYBY) to acquire Telefonica (TEF) UK’s broadband and fixed-line telephony businessFitch upgraded Host Hotels (HST) IDR to 'BB+' from 'BB', outlook stableDresser-Rand (DRC) sees 2013 new unit bookings $1.8B-$2BMorgan Stanley (MS) sold legacy ownership interest in DigitalGlobe (DGI)Greenbrier (GBX) sold wheelset roller bearing reconditioning business to Timken (TKR)Publix (PUSH) considering bid for Harris Teeter (HTSI), Bloomberg reportsMagnum Hunter (MHR) to delay filing Form 10-K EARNINGS Companies that beat consensus earnings expectations last night and today include:Great Plains Energy (GXP), Universal Health (UHS), Rosetta Stone (RST), Air Lease (AL), SandRidge Energy (SD), Salesforce.com (CRM), Deckers Outdoor (DECK), Gap (GPS) Companies that missed consensus earnings expectations include:Buenaventura (BVN), Atlantic Power (AT), Morgans Hotel (MHGC), Dresser-Rand (DRC), McDermott (MDR), Sotheby's (BID) Companies that matched consensus earnings expectations include:Autobytel (ABTL), Cell Therapeutics (CTIC) NEWSPAPERS/WEBSITES Drugstore chains (CVS, WAG, RAD) are branching out into health-care services, as a way to counter a slowdown in prescription drug sales and evolve beyond just dispensing pills. They see big opportunities as millions of uninsured Americans pick up health coverage next year. The upside is in making sure current patients stay on their medications or providing alternative venues for medical treatment, even if it is done virtually, the Wall Street Journal reports. What happens when the "bundle" begins to unravel? The question is taking on intense importance for the cable-TV business (CVC, TWX, NWSA, DIS, VZ, CMCSA, DTV). Attacks on the bundle approach have escalated. Now pay-TV executives, as well as its customers, are openly pondering a world where the bundle no longer reigns, even though such a scenario could be years away, the Wall Street Journal reports. Glencore (GLNCY) supplied thousands of tons of alumina to the Iranian Aluminum Company (Iralco) that has provided aluminum to Iran's nuclear program, intelligence and diplomatic sources say, Reuters reports The $85B in across-the-board "sequestration" cuts designed to hit most U.S. government programs were set to begin today. What they were not likely to do, at least as far as financial markets were concerned, was cause enough damage to derail a U.S. economy that has been gaining momentum, Reuters reports The firing of Groupon (GRPN) CEO Andrew Mason puts pressure on Chairman Eric Lefkofsky to find a replacement who can create a money-making business after the daily-deal provider lost $723.8M in the past three years, Bloomberg reports Two Chinese Manufacturing indexes revealed a slower-than-estimated pace of expansion, a signal that the nation’s economic recovery may be losing steam, Bloomberg reports SYNDICATE Campus Crest Communities (CCG) 22.2M share Spot Secondary priced at $12.25DCP Midstream Partners (DPM) 11M share Secondary priced at $40.63Icahn Enterprises (IEP) 3.175M share Spot Secondary priced at $63.00Pzena Investment (PZN) files to sell 529,590 shares of Class A common stockSafe Bulkers (SB) files $300M mixed securities shelf ACTIVIST/PASSIVE FILINGS S.A.C. Capital Advisors reports 5.0% passive stake in Annie's (BNNY) Waterfall Asset Management reports 9.98% passive stake in Jacksonville Bancorp (JAXB)
Wal-Mart's Sales Problem—And America's (WSJ) Investors fret that Italy may undermine ECB backstop (Reuters) Monti Government Mulls Delaying Monte Paschi Bailout (BBG) Norway Faces Liquidity Shock in Record Redemption (BBG) ECB's Praet Says Accommodative Policy Could Lose Effectiveness (BBG) EU Chiefs Tell Italy There’s No Alternative to Austerity (BBG) New Spate of Acrimony in congress As Cuts Loom (WSJ) BOE's Tucker hints at radical growth moves (FT) Kuroda Seen Getting DPJ Vote for BOJ, Iwata May Be Opposed (BBG) Russian Banks Look to Yuan Bond Market (WSJ) Dagong warns about rising debt (China Daily) Italy Election Impasse Negative for Credit Rating, Moody’s Says (BBG) Overnight Media Digest WSJ * Regulators investigating alleged interest-rate manipulation are hoping to reach settlements with at least three major financial institutions by the end of summer, according to a person familiar with the probes. * JPMorgan Chase & Co stepped up the pace of bank cost cutting, setting plans to eliminate 17,000 jobs by the end of next year and reduce expenses by at least $1 billion annually. * U.S. Federal Reserve Chairman Ben Bernanke came down firmly in favor of continuing the central bank's bond-buying programs, even as he acknowledged concerns that the efforts might encourage risk-taking that could someday destabilize markets or the economy. * Pay-TV distributor Cablevision Systems Corp sued MTV's owner Viacom Inc alleging antitrust violations. Cablevision alleged Viacom forced it to carry and pay for more than a dozen "lesser-watched" channels such as "Palladia, MTV Hits and VH1 Classic" for the right to carry its popular networks such as Nickelodeon, MTV and Comedy Central. * Boeing Co's proposed fixes for lithium-ion batteries on its 787 jetliner face an uncomfortable reality: government investigators' limited experience with such devices is hobbling efforts to determine precisely why they burned. * Wall Street cash bonuses for 2012 are expected to climb 8 percent to $20 billion from a year earlier, boosted in part by the payment this year of compensation deferred from prior years, according to a report from New York State Comptroller Thomas DiNapoli. * Clearwire Corp plans to tap financing made available by Sprint Nextel Corp, people familiar with the situation said, in a move that further complicates Dish Network Corp's effort to buy the wireless broadband operator. * New Jersey Governor Chris Christie signed a bill that legalizes online gambling in the state, allowing Atlantic City casino companies to take bets online. * Much anticipated knockoff versions of costly biotech medicines are facing delays and obstacles that could cost patients and health systems billions in missed savings - several high-profile projects have faltered in recent months. FT The Co-operative Bank's deal to buy more than 600 branches from Lloyds Banking Group is under threat as the Co-op faces a 1 billion pound capital hole. All companies involved in project shared responsibility for safety on the Deepwater Horizon rig, a BP executive said at the trial in New Orleans centred on the 2010 Gulf of Mexico oil spill and its aftermath. Repsol has sold a set of LNG assets to Royal Dutch Shell in a deal with an enterprise value of $6.7 billion. British bank Barclays is set to reveal a list of employees who earned over 1 million pounds last year in its annual report next week. JPMorgan Chase & Co will cut 17,000 jobs, or 7 percent of its workforce, over the next two years. British home and motor insurer Esure has been warned by fund managers against overpricing its initial public offering. Paul Tucker raised the possibility of charging negative interest rates on a portion of banking reserves fuelling speculation that the Bank of England may redouble efforts to prop up economic growth. NYT * On the first day of testimony in the oil spill trial, BP Plc's top executive for North American operations at the time of the disaster acknowledged that a well explosion had been identified as a risk before it happened. * Boeing Co is conducting laboratory tests on its proposed fixes for the lithium-ion batteries on its new 787 jets, and U.S. federal regulators said Tuesday that they would need to see the results before deciding whether to allow flight tests. * The U.S. Senate Finance Committee, dismissing some Republican objections, on Tuesday approved the nomination of Jacob Lew for Treasury secretary and sent it on to the full Senate for a confirmation vote in the days ahead. * Lawmakers are scrutinizing Mary Jo White, U.S. President Obama's choice to lead the Securities Exchange Commission, ahead of her Senate confirmation hearing, raising questions about the former prosecutor's lack of regulatory experience and the challenge of policing Wall Street firms she recently defended in private practice. But White is seeking to quell concerns about potential conflicts of interest. * SFX Entertainment, the company led by media executive Robert F. X. Sillerman, has agreed to buy the music download site Beatport, part of the company's plan to build a $1 billion empire centered on the electronic dance music craze. * The average cash bonus for people employed in New York City in the financial industry rose by roughly 9 percent, to $121,900, in 2012, the New York State comptroller said. * Jamie Dimon, the chief executive of JPMorgan Chase & Co , vowed to change how the bank deals with Internet-based payday lenders that automatically withdraw payments from borrowers' checking accounts. Canada THE GLOBE AND MAIL * Declining enrolment numbers are forcing the Toronto District School Board to consider cutting back on high-school teachers. Staff have suggested to trustees that they cut 248 secondary school teaching jobs, based on enrolment numbers that show 2,300 fewer students than initially projected. Reports in the business section: * Air Canada shouldn't be granted any additional reprieve by the federal government on financing its pension deficit unless Ottawa also gives similar relief to all Canadian carriers, the Air Transport Association of Canada, which represents small Canadian regional airlines and flight training groups, says. NATIONAL POST * The federal government is writing off another C$231 million ($224.57 million) in unpaid student loans this year from more than 44,000 cases, meaning taxpayers are on the hook for more than half a billion in uncollected student debt over the past few years. FINANCIAL POST * The U.S. Defense Department said it plans to open its networks by next February to about 100,000 mobile phones and tablet computers made by companies such as Apple and Google. The move may pose a threat to BlackBerry , the Pentagon's biggest supplier of smartphones. China CHINA SECURITIES JOURNAL -- The Shanghai Futures Exchange said it will issue petroleum asphalt futures, which would be the first of its kind in the world, as soon as June. -- China Mobile said it would invest 180 billion yuan ($28.89 billion) to build 200,000 TD-LTE stations in 2013. CHINA DAILY -- China's sea level hit a record high in 2012 due to global warming and land subsidence, threatening millions of coastal residents, the State Oceanic Administration said in a report. SHANGHAI DAILY -- China's navy has taken delivery of a new type of stealth frigate which will be mainly used for escort missions and anti-submarine operations. Fly On The Wall 7:00 Market Snapshot ANALYST RESEARCH Upgrades Allscripts (MDRX) upgraded to Outperform from Neutral at Credit SuisseBiogen (BIIB) upgraded to Buy from Hold at CanaccordDarden (DRI) upgraded to Neutral from Underperform at BofA/MerrillEMCOR Group (EME) upgraded to Buy from Hold at KeyBancEdison International (EIX) upgraded to Buy from Neutral at SunTrustGoogle (GOOG) upgraded to Buy from Neutral at BofA/MerrillRadioShack (RSH) upgraded to Market Perform from Underperform at Raymond James Downgrades E.W. Scripps (SSP) downgraded to Neutral from Overweight at JPMorganFirst Cash Financial (FCFS) downgraded to Hold from Buy at JefferiesFirst Solar (FSLR) downgraded to Neutral from Outperform at RW BairdFirst Solar (FSLR) downgraded to Underperform from Neutral at BofA/MerrillGrafTech (GTI) downgraded to Neutral from Overweight at JPMorganGrafTech (GTI) downgraded to Sell from Neutral at GoldmanHomex (HXM) downgraded to Underperform from Neutral at BofA/MerrillInvenSense (INVN) downgraded to Neutral from Outperform at RW BairdMarkWest Energy (MWE) downgraded to Neutral from Outperform at Credit SuisseNuVasive (NUVA) downgraded to Neutral from Buy at MizuhoOasis Petroleum (OAS) downgraded to Neutral from Buy at SunTrustRoyal Bank of Canada (RY) downgraded to Neutral from Buy at CitigroupVeriSign (VRSN) downgraded to Neutral from Outperform at Credit Suisse Initiations Bank of Montreal (BMO) initiated with a Buy at CitigroupCanadian Imperial Bank (CM) initiated with a Neutral at CitigroupNorwegian Cruise Line (NCLH) initiated with a Buy at UBSNorwegian Cruise Line (NCLH) initiated with a Neutral at GoldmanNorwegian Cruise Line (NCLH) initiated with a Neutral at UBSNorwegian Cruise Line (NCLH) initiated with an Outperform at Wells FargoNorwegian Cruise Line (NCLH) initiated with an Overweight at JPMorganRentech Nitrogen (RNF) initiated with a Sector Perform at RBC Capital HOT STOCKS The FAA could allow Boeing 787 (BA) test flights next week, DJ reportsNew Jersey Governor Christie signed Internet gaming bill into law (ZNGA, IGT, GLUU, MGM, HOT, LVS, WYNN, CZR, BYD, PENN)Accretive Health (AH) postponed results; evaluating revenue recognition procedureFirst Solar (FSLR): Market to remain turbulent for ”some time to come”CommonWealth (CWH) REIT to continue to pursue offering, debt tender offerCorvex, Related want talks with CommonWealth over $25 per share offerRange Resources (RRC) sees 2013 production growth of 20%-25%MasterCard (MA), Beam collaborate on new mobile companion pre-paid cardAdvantage Oil & Gas (AAV) formed special committee to consider strategic alternativesPapa John's (PZZA) to restate financials for FY09-FY11, part of FY12 EARNINGS Companies that beat consensus earnings expectations last night and today include:AES Corp. (AES), Joy Global (JOY), Range Resources (RRC), NuVasive (NUVA), Bio-Rad (BIO), Jazz Pharmaceuticals (JAZZ), Big 5 Sporting (BGFV), Edison International (EIX), First Solar (FSLR), priceline.com (PCLN) Companies that missed consensus earnings expectations include:GasLog (GLOG), Ormat Technologies (ORA), Papa John's (PZZA), American Water (AWK), TiVo (TIVO) Companies that matched consensus earnings expectations include:Erie Indemnity (ERIE), Uni-Pixel (UNXL) NEWSPAPERS/WEBSITES Fed Chairman Bernanke came down firmly in favor of continuing the central bank's bond-buying programs, even as he acknowledged concerns that the efforts might encourage risk-taking that could one day destabilize markets or the economy, the Wall Street Journal reports Sales of new homes are surging in the U.S.,and the trend partly reflects the small inventory of previously owned homes, now at a 13-year low after investors picked over the long-depressed market. But the strong sales of new homes also show how the nation's home builders (TOL, LEN, PHM, DHI) have mastered the art of selling, even to cash-poor buyers or those with spotty credit histories, the Wall Street Journal reports Investment firm Royalty Pharma doesn’t want to take "no" for an answer to its $6.6B offer for Irish drugmaker Elan Corp. (ELN), and plans to spend the next few weeks calling Elan shareholders about its February 18 offer, sources say, Reuters reports The European parliament and EU states could agree today to impose caps on bankers' bonuses, a measure that would channel public fury at financial sector greed, but which opponents say marks a reckless overreach into private pay deals, Reuters reports Wall Street junk-bond underwriters (GS, JPM, DB, C, BAC) selling debt at a record pace after the securities returned 19% last year, say it’s obvious that prices will drop when interest rates rise. So don’t blame the banks, Bloomberg reports JPMorgan Chase (JPM) CEO Jamie Dimon said banks are accumulating more capital than they need as regulators push lenders to build equity. Dimon has said excessive regulation could impede growth as international authorities and the Fed push banks to guard capital to better withstand another financial crisis, Bloomberg reports SYNDICATE El Paso Pipeline (EPB) files to sell $500M equity shelfHyperion Therapeutics (HPTX) files to sell $50M of common stockMeru Networks (MERU) announces proposed offering of common stockPG&E (PCG) announces offering of 7.2M shares of common stock ACTIVIST/PASSIVE FILINGS Caledonia Investments reports 13.49% passive stake in Zillow (Z)Caledonia Investments reports 12.43% passive stake in Trulia (TRLA)
In 1829, John Stuart Mill made the key intellectual leap…. Mill saw that excess demand for some particular set of assets in financial markets was mirrored by excess supply of goods and services in product markets, which in turn generated excess supply of workers in labor markets…. If you relieved the excess demand for financial assets, you also cured the… shortfall of aggregate demand…. When the excess demand is for liquid assets used as means of payment – for “money” – the natural response is to have the central bank buy government bonds for cash…. When the excess demand is for longer-term assets – bonds to serve as vehicles for savings that move purchasing power from the present into the future – the natural response is… induce businesses to borrow more and build more capacity, and encourage the government to borrow and spend…. When excess demand is for high-quality assets – places where you can park your wealth and be assured that it will still be there when you come back – the natural response is to have credit-worthy governments guarantee some private assets and buy up others, swapping them out for their own liabilities and thus diminishing the supply of risky assets and increasing the supply of safe assets. The full piece: Brad DeLong : John Stuart Mill vs. the European Central Bank :: Project Syndicate: July 2010: One of the dirty secrets of economics is that there is no such thing as “economic theory.” There is simply no set of bedrock principles on which one can base calculations that illuminate real-world economic outcomes. We should bear in mind this constraint on economic knowledge as the global drive for fiscal austerity shifts into top gear. Unlike economists, biologists, for example, know that every cell functions according to instructions for protein synthesis encoded in its DNA. Chemists begin with what the Heisenberg and Pauli principles, plus the three-dimensionality of space, tell us about stable electron configurations. Physicists start with the four fundamental forces of nature. Economists have none of that. The “economic principles” underpinning their theories are a fraud – not fundamental truths but mere knobs that are twiddled and tuned so that the “right” conclusions come out of the analysis. The “right” conclusions depend on which of two types of economist you are. One type chooses, for non-economic and non-scientific reasons, a political stance and a set of political allies, and twiddles and tunes his or her assumptions until they yield conclusions that fit their stance and please their allies. The other type takes the carcass of history, throws it into the pot, turns up the heat, and boils it down, hoping that the bones will yield lessons and suggest principles to guide our civilization’s voters, bureaucrats, and politicians as they slouch toward utopia. Not surprisingly, I believe that only the second kind of economist has anything useful to say. So what lessons does history have to teach us about our current global economic predicament? In 1829, John Stuart Mill made the key intellectual leap in figuring out how to fight what he called “general gluts.” Mill saw that excess demand for some particular set of assets in financial markets was mirrored by excess supply of goods and services in product markets, which in turn generated excess supply of workers in labor markets. The implication of this was clear. If you relieved the excess demand for financial assets, you also cured the excess supply of goods and services (the shortfall of aggregate demand) and the excess supply of labor (mass unemployment). Now, there are many ways to relieve excess demand for financial assets. When the excess demand is for liquid assets used as means of payment – for “money” – the natural response is to have the central bank buy government bonds for cash, thus increasing the money stock and bringing supply back into balance with demand. We call this "monetary policy." When the excess demand is for longer-term assets – bonds to serve as vehicles for savings that move purchasing power from the present into the future – the natural response is twofold: induce businesses to borrow more and build more capacity, and encourage the government to borrow and spend, thus bringing the supply of bonds back into balance with demand. We call the first of these “restoring confidence,” and the second “fiscal policy.” When excess demand is for high-quality assets – places where you can park your wealth and be assured that it will still be there when you come back – the natural response is to have credit-worthy governments guarantee some private assets and buy up others, swapping them out for their own liabilities and thus diminishing the supply of risky assets and increasing the supply of safe assets. We call this “banking policy.” Of course, no real-world policy falls cleanly into any one of these ideal types. Right now, the European Central Bank worries that continued expansionary fiscal policy will backfire. Yes, it argues, having governments spend more money and continue to run large deficits will increase the supply of bonds, and thus relieve excess demand for longer-term assets. But if a government’s debt emissions exceed its debt capacity, all of that government’s debt will become risky. It will have relieved a shortage of longer-term assets by creating a shortage of high-quality assets, and so be in a worse position than it was before. The ECB contends that the core economies of the global North – Germany, France, Britain, the United States, and Japan – are now at the point where they need rapid fiscal retrenchment and austerity, because financial markets’ confidence in the quality of their debt is shaken, and may collapse at any moment. And policymakers are falling into line: in late July, Peter Orszag, Director of the US Office of Management and Budget said that the coming fiscal consolidation in the US over the next three years will be the country’s deepest retrenchment in 60 years. Yet, as I look at the world economy, I see a very different picture – one in which markets’ trust in the quality of government liabilities of the global North’s core economies most certainly is not on the brink of collapse. I see production 10% below capacity, and I see unemployment rates approaching 10%. More importantly for near-term economic policy, I see a world in which investors have enormous confidence in core economies’ government debt – for many, the only safe port in this storm.
A syndicated loan raised by the EBRD for Rosbank, a Russian private bank controlled by France’s Societe Generale group, has been heavily oversubscribed and the total loan amount nearly doubled to USD 290 million due to strong interest from commercial banks.
"Europe's leaders were right about the pressure. Monetary union without banking union will not work, and a workable banking union requires at least some elements of fiscal and political union. But they were wrong about the irresistible part. There is no inevitability about what comes next."