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Citi’s biggest shareholder forces it into a daft disposalONE of Citigroup’s goals, its chief executive, Vikram Pandit, explained at a recent conference, was “reducing assets while optimising value and mitigating risk”. In selling Phibro, the bank’s freewheeling commodity-trading arm, he has certainly mitigated risk: both the financial sort and the chances of a showdown with the government over a $100m pay package for Andrew Hall, the unit’s star trader and proud owner of a German castle.But optimising value? At $450m, the estimated price tag is little more t
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han Phibro’s average annual net profit in recent years. The finance chief of the buyer, Occidental Petroleum, could not resist gloating publicly about the seller’s lack of leverage in the negotiations. ...
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The rescued may turn out to be rescuersTHERE can be few more extraordinary sights than politicians indulging in a fit of tightfistedness ahead of an election. Normally party leaders compete to bribe voters with their own money. But the British party-conference season, the last before polls expected to take place in May or June, was dominated by a series of pledges to cut government spending. The public has not driven this shift in tone. An Ipsos Mori poll in September found that only a quarter of Britons thought spending cuts were necessary. In America, where “tea party” anti-tax d
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emonstrators have captured media attention, only 3% of respondents to a CBS News poll this month thought the deficit was the most important issue facing the country. Nor have markets forced politicians to put on their hair shirts. Governments are able to sell bonds yielding just 3-4%. Rather it is the sheer scale of government deficits that seems to have triggered the change. Both Britain and America have shortfalls of more than 10% of GDP, a level seen only during world wars. ...
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Constrained lenders and wary borrowers explain falling levels of credit in AmericaTHE worst may be over for America’s financial markets, but they are still abnormal. Bill Dudley, head of the Federal Reserve Bank of New York, captured the mood in a recent speech, bluntly titled “A bit better, but very far from best”. In a survey released this week, members of the National Association of Business Economics said markets would continue to drag on economic growth until at least mid-2010.For many the big question is whether a lack of credit is holding back America’s nascent r
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ecovery. In a sign of easing conditions, usage of the Fed’s special liquidity facilities has fallen markedly and the central bank is gradually winding down its asset purchases. Securitisation markets are thawing, with volumes approaching pre-crisis levels in credit-card debt and car loans—though not in mortgages, which remain dependent on government support. ...
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Spare a thought for departing bank bosses. They were mostly useless, not venalSOME view history as just the biography of great and of villainous men. By this account bank bosses are to blame for the great crash of 2008. Most have now been booed offstage. With the departure on September 30th of Ken Lewis, the head of Bank of America, only three chief executives at America’s ten biggest banks before the crisis remain in position. Europe has let lots of blood, too: the bosses behind fiascos at UBS, Fortis and Royal Bank of Scotland (RBS) have gone to the guillotine.Michael Moore is once aga
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in claiming conspiracy (see article). Yet the cock-up theory of history also has a lot going for it in this case. Certainly, bank bosses displayed the hubris of all big corporate baddies: paying themselves loads, making nutty expense claims (try an $87,000 rug) and, in one case, playing bridge in Detroit as their firm collapsed. Compared with Kenneth Lay of Enron or Bernie Ebbers of WorldCom, however, they were amateurs. Most were useless rather than venal. ...
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Austria’s very own subprime inventionTHE alpine hamlets and valleys of Vorarlberg, Austria’s westernmost province, rarely attract much attention, even at home. Yet the region was the source of an idea for cheaper borrowing that has spread risk not just throughout Austria but into many of its neighbours, too—and is now complicating efforts by the European Union and the International Monetary Fund to rescue Latvia’s teetering economy. It all started innocuously enough in the late 1980s. Many of Vorarlberg’s residents worked in neighbouring Switzerland and earned Swi
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ss francs. So it seemed sensible enough to borrow in the same currency; Swiss interest rates were, after all, lower than those in Austria. Once the idea took off it spread fast and far. By the end of 2007 almost one-third of Austrian household borrowing was denominated in foreign currencies with low rates. ...
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Britain’s endangered regulator takes a lead in drawing up new liquidity rulesBRITAIN’S bank regulator is an unlikely candidate to take a tough stand on bank funding. The Financial Services Authority (FSA) was one of the most permissive big supervisors in the world. When the crisis hit, it acted as a cheerleader for Britain’s shaky banks. On September 17th last year it said that HBOS was “well capitalised” and funding itself “in a satisfactory way”. One day later HBOS was rescued by Lloyds TSB, and a couple of weeks after that both firms were part-natio
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nalised. It turned out HBOS was actually nearly insolvent (the losses it has announced since are equivalent to three-quarters of its core capital then). What made it really special, though, was that it had loaned out almost twice its deposit base, creating a funding gap of almost GBP200 billion ($395 billion) that pretty much guaranteed its failure if wholesale borrowing markets ever dried up. ...
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Competition watchdogs are the new masters of European bankingRESCUE first, ask questions later. Over the past year bank supervisors, central bankers and national treasuries have queued up to bail out European banks’ shareholders and bondholders in a bid to avert panic. That has left the European Commission’s competition watchdogs in Brussels with more responsibility for ensuring that yesterday’s rescues do not encourage tomorrow’s risk-taking.The commission’s competition officials make unlikely taskmasters for bankers. Their paths usually cross only during big tak
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eovers (or, in Germany’s case, when the commission outlawed government guarantees on the borrowing of its state-owned Landesbanken in 2005). Some governments deliberately sidelined their own competition authorities during the crisis in order to crunch ailing banks together. In Britain the government ignored the worries of its antitrust watchdog over the merger of two of the country’s biggest banks, Lloyds TSB and HBOS. ...
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A new culture war is brewing over capitalismSEVENTEEN Uncle Sams were seen begging on the streets of Washington, DC, this week. They were a sad sight, with their slightly bedraggled red, white and blue hats and their cardboard signs with the hand-scrawled plea: “I want YOU to give me $12 trillion.” It was a publicity stunt, of course, staged by DefeatTheDebt.com, a fiscally hawkish pressure group. But it captured something important about the national mood.Unemployment is nearly in double digits. Most Americans think the economy will recover next year, but only 2% think it will mak
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e a complete recovery. And many are worried about Uncle Sam’s ongoing borrowing binge. Has all that money averted disaster and eased the pain of the recession, as Barack Obama insists? Or did it merely postpone the pain? DefeatTheDebt.com’s television commercials leave no room for doubt. A classroom full of children stand as if to recite the pledge of allegiance, but the words are different: “I pledge allegiance to America’s debt, and to the Chinese government that lends us money, and to the interest, for which we pay, compoundable, with higher taxes and lower pay, until the day we die.” ...
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As an embattled boss retires, a celebrated one clarifies successionA COMMON complaint at the height of the crisis was that too few Wall Street bosses were being forced to fall on their swords. With the fog of war clearing, exhausted leaders are rushing to leave the battlefield. James Gorman will succeed John Mack as head of Morgan Stanley on January 1st, when Wells Fargo’s chairman, Dick Kovacevich, will also retire. This week change also swept the upper ranks of Bank of America (BofA) and JPMorgan Chase.Ken Lewis, BofA’s chief executive, announced on September 30th that he too wou
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ld retire at the end of the year, signalling the end of an eight-year reign that had grown increasingly messy. Shareholders stripped Mr Lewis of the chairmanship earlier this year, irate at the handling of the takeover of Merrill Lynch, an investment bank. The deal has proved endlessly controversial and is now the subject of several state and federal probes. A settlement between BofA and the Securities and Exchange Commission over the bank’s alleged failure to disclose bonuses at Merrill was recently rejected by a judge. ...
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Are living wills really the answer to banks that are too big to fail?PROFESSIONAL negotiators recommend against making empty threats. Yet sometimes it seems that is all governments and regulators have left to throw at the banking industry. However bloodcurdling the political rhetoric, financial markets think banks will be bailed out again. That in turn means banks can borrow abnormally cheaply, giving them an incentive to maximise leverage and risk-taking again. Along with wrecked public finances and unemployment, moral hazard is the most toxic legacy of the credit crisis. There is almost unan
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imous support for one set of remedies: making banks safer through bigger capital buffers and more intrusive supervision. Those wary of regulation’s efficacy, however, should be pleased that the debate is now shifting to another tack—making credible the threat that next time, banks will be allowed to fail. Hence the voguish idea of “living wills”, or more amusingly, financial “death panels”, which would force banks and regulators to organise themselves so that it is easier to dismember systemically important firms in a crisis. That should minimise the cost to taxpayers of future bank failures. And if investors fear they could lose money tomorrow, they may penalise badly run banks today. Proposed laws will make it possible to kill any financial firm in a way “that imposes losses on firms’ stakeholders”, Tim Geithner, America’s treasury secretary, promised Congress last month. ...