Regulators expect US banks to undergo significant restructuring as a result of the Basel III deal on bank capital, with trading books reduced in size, riskier positions unwound and minority investments sold off, reports the FT. Banks’ shares rose sharply on Monday after the weekend’s international agreement on capital requirements fuelled expectations of dividend increases and share buy-backs. “The new rules will act as a catalyst for well-capitalised banks to request approval [from regulators] for buy-backs and dividends,” Richard Ramsden, a Goldman Sachs analyst, wrote in a note to clients. But even if most US banks can avoid any rush to raise equity to meet an eventual core tier one capital standard of 7 per cent, they are expected to make more changes to their business models. Read more
The ECB bought €237m of government bonds last week – the biggest amount since mid-August – signalling continuing problems in the eurozone, the FT reports. While relatively modest, at millions rather than billions of euros, the fact that the ECB has had to step up purchases highlights investor fears that the eurozone debt crisis is far from over. Traders said the ECB bought Greek, Portuguese and Irish bonds last week as the extra premium the so-called peripheral eurozone markets have to pay in interest rates over Germany rose amid deteriorating sentiment. Read more
Fees paid to lawyers and accountants for unwinding Lehman Brothers in the US and Europe are on track to surpass $2bn (€1.55bn) even after some of the legal services have been provided at discounted rates, reports the FT. The fees charged to Lehman’s US estate stood at $917m in July and should top $1bn this month. In London, expenses for unwinding the European arm, with legal costs, are estimated at almost $900m. The US estate is paying more than 1,000 people while in London, PwC, the administrators to Lehman’s main European operations, still has more than 300 of its people on the project. In spite of the huge headline numbers, bankruptcy experts say the total cost of dealing with the assets of the collapsed bank are small when measured against the size of its $691bn balance sheet when it failed. Read more
The San Francisco Fed looks at an issue that is important to understanding the US unemployment problem but often is neglected in broader debates over cyclical vs structural influences.
The labour force participation rate is the percentage of the total working-age population that is employed or looking for work. In previous recessions, a significant decline in the rate was normally attributable to structural factors such as demographics, with cyclical factors having only a marginal effect. Read more
China’s leading foreign policy official raised the stakes in the latest diplomatic dispute with Japan on Sunday, warning Tokyo not to make “wrong judgments” over the seizure of a Chinese fishing boat in contested waters, reports the FT. The warning from State Councillor Dai Bingguo came after China, on Friday, postponed negotiations with Japan over disputed undersea gas beds in the East China Sea in protest over the detention of the captain of the Chinese boat. Mr Dai issued the warning after summoning the Japanese ambassador in what Xinhua’s English language service described as “the wee hours”, the fourth time that Uichiro Niwa has been called to meet Chinese officials over the incident near the Japanese-controlled Senkaku islands. Read more
Japan’s prime minister and a heavyweight challenger from his ruling Democratic party battled on Monday for the backing of colleagues to decide a close-fought leadership battle, the FT reports. Naoto Kan, prime minister, is facing a challenge from Ichiro Ozawa, known as the “shadow shogun”, in an election for party president that concludes on Tuesday. The contest could make Mr Kan the shortest-lived of a long line of “revolving door” Japanese premiers. Mr Kan, who took office in June, is much more popular with the public and looked almost certain to have secured most of the postal votes of DPJ local assembly delegates, members and supporters who account for more than 30 per cent of the voting points used to decide party leadership contests. However, analysts said Mr Ozawa might still prevail among the 412 DPJ members of the national Diet who account for the remaining almost 70 per cent of voting points, clearing the way for the veteran powerbroker to become Japan’s sixth prime minister in four years. Read more
China will keep up its campaign to bring the housing market under control, Premier Wen Jiabao pledged on Monday, amid new evidence that the property sector is beginning to heat up again despite government efforts to reduce speculation and bring prices down, the FT reports. Speaking at a meeting of the World Economic Forum in Tianjin in eastern China, Mr Wen called on local governments to take part in the drive to discourage speculation and said that limiting price increases was central to maintaining social stability. Beijing unveiled a series of measures to cool the property market in April amid widespread fears of a potential bubble. However, recent figures suggested that sales of houses in many cities were taking off again. Read more
The Communist Party of China has launched an online bulletin board where citizens can leave messages to their top political leaders in the ruling party’s latest attempt to meld propaganda with the public relations techniques of the internet age, the FT reports. “Direct Line to Zhongnanhai” – referring to the compound housing the party leadership’s offices and homes in central Beijing – features a box where users can type in messages and click on the name of Hu Jintao, the party chief, or any other members of the politburo inner circle, to send it to. The move is part of a broad and growing effort of the leadership to demonstrate responsiveness and transparency as it is trying to deal with myriad social and economic pressures without ceding its grip on power. Read more
Developments in Beijing and Basel have provided the pep to lift stocks into a higher gear, though still-bearish bond buyers began to creep back into the markets, the FT reports. Stock markets are enjoying broad gains as traders welcome satisfactory Chinese economic data and news that regulators meeting in Switzerland have agreed a deal on banks’ reserves. The FTSE All-World equity index was up 1.4 per cent, the S&P 500 on Wall Street closed up 1.1 per cent, above key technical averages (see Market Eye sidebar), and commodity prices were higher. “Haven” sovereign debt pared early losses, however, as the US Federal Reserve said it was accelerating its purchase of Treasury bonds. Banks are leading the charge in stocks. The FTSE Global Banks index is up 2.7 per cent, with traders apparently comforted that the new Basel III rules are not as onerous as some had feared. The Markit iTraxx Senior Financials index, which tracks the price of credit default protection on large European financial institutions, began rising a bit later in the afternoon, but overall it fell on the day by 5.5 basis points to 113.5 basis points. Read more
Top bankers in the UK, US and Switzerland are braced for their national regulators to impose tougher capital requirements than those required by Sunday’s landmark global agreement, even as investors bid up bank shares on relief that the standards were not more rigorous, the FT reports. The 27 member countries of the Basel Committee on Banking Supervision agreed on Sunday that banks would in effect be required to triple core tier one capital ratios from 2 per cent to 7 per cent by 2019. This ratio measures the buffer of highest-quality assets that banks hold against future losses. Investors welcomed the agreement, sending bank shares higher. Those banks considered to be the best capitalised gained the most, including France’s ociété GénéraleS, up 4.3 per cent, and JPMorganof the US, up 3.7 per cent by midday. But critics of the deal complained that the capital definitions, timetable and overall ratio had been watered down to win over Germany and others. They also warned that putting off new rules on liquidity standards until 2015 could endanger the financial system. Read more
Here is a disturbing, though not unfathomable, possibility envisioned by Economics of Contempt:
Let’s say the European sovereign debt crisis flares up again, and one or two Euro banks fail. (Not a bank like UBS or Deutsche Bank, but a medium-sized bank like Bank of Greece or a Landesbank.) That, in turn, causes a U.S. money market fund — many of which have large exposures to Euro banks — to “break the buck,” which leads to another run on money market funds. Read more
Included in last week’s thoughtful paper by Andrew Haldane, the Bank of England’s executive director of financial stability, was this chart:
It’s now been just over a month since the first sighting of the Hindenburg Omen — the fearsome indicator which supposedly foretells stock market crashes.
It does so by counting the number of NYSE stocks making new highs and new lows simultaneously. If the level is high, it supposedly suggests some critical dislocations in the market. Read more
More on global demographic time-bombs, this time from Deutsche Bank, which has stumbled upon a potential answer: mass migration from the developing to the developed world.
Writing in the latest edition of Deutsche’s Long-Term Asset Study, Jim Reid says that moves to push up retirement ages by a year or two won’t do enough to ease the problem facing public finances in the developed world. Read more
It’s not the capital, it’s the liquidity. It’s not the Maginot Line; it’s how many Panzers are pummelling through the Ardennes beside it.
And thus it’s not Basel III; it’s what banks will do — and where they will find the liquidity and the counterparties to do so — to get around it. Read more
Ho hum. Another day, another Hewlett-Packard bid…
The acquisitive US tech giant is nearing a deal to buy US security software maker ArcSight, fresh from its $2.35bn victory in a bidding war against Dell for data storage company 3Par, reports the FT. Read more
Here’s an entertaining rant from veteran City fund manager Barry Olliff.
It can be found in the annual results statement of City of London Investment Group, as Olliff spells out why the guidelines on pay in the Walker report are wrongheaded, why they won’t be conforming, and why the existing system of remuneration in the Square Mile is broken. Read more
FT Alphaville noted last week how dividend futures were still clawing back ground they’d lost on the back of the May 6 flash crash.
With this in mind, Graham Secker’s team at Morgan Stanley have put out a note suggesting there’s currently a strong investment case for index dividend futures or swaps. Read more
The FT Alphaville inbox is getting chock-full of analysts reacting to the confirmation of Basel III’s new rules revising bank capital ratios.
So here — in due fashion — is the best of the best for our readers. Read more
Live markets commentary from FT.com
From Morgan Stanley’s global banking analysts on Monday morning.
A big positive for US and other strongly capitalized banks and suggests buybacks could be larger and occur sooner than currently expected. Basel 3 capital requirements are in-line with recently lowered expectations and pave the way for capital management in 2011. Read more
JP Morgan’s most recent note on the future of investment bank wallets is so good, we’ve decided to quote some other interesting findings from it. (It does, after all, run to 176 pages.)
One area that analyst Kian Abouhossein looks at, for example, is the rise of correlation trading, and how it may be having an unexpected effect on some banks’ equity revenues. Read more
BAE Systems, Europe’s biggest defence contractor, has confirmed it plans to sell parts of its US commercial businesses in a house-cleaning sale that could yield as much as $2bn (£1.3bn), reports the FT. “The company regularly reviews its portfolio to ensure it is delivering the best value for shareholders and customers,” BAE said in a statement on Monday. The sale comes as BAE and its competitors look to rationalise their businesses as they prepare to deal with the consequences of defence budget cuts in the UK coupled with Washington’s drive to slow military spending as the administration aims to save $100bn over the next five years. BAE last week announced it was shedding almost 1,000 jobs, mainly in its UK military aircraft division. The news followed job cut announcements by Boeing and Lockheed Martin of the US. Read more
The shakeup at the top of Nokia continued on Monday as Anssi Vanjoki, the company’s executive in charge of smartphones and services, resigned in the wake of Stephen Elop’s appointment as CEO last week. Vanjoki, who is also executive vice president and a member of Nokia’s group executive board, has a six-month notice period and will continue in his position for now, reports the WSJ. Nokia shares rose 1.9 per cent on the news, following an initial increase of some 7 per cent on Friday. “This marks the end of an era at Nokia and could signal further management changes to follow,” UK-based telecoms research firm CCS Insight said in a note, according to Reuters. Read more
Volkswagen, Europe’s largest carmaker, plans to announce a new US chief executive officer on Monday to replace Stefan Jacoby, reports Bloomberg on Monday. The move is set to put an end to a two and a half month leadership vacuum at the division. According to Bloomberg sources, Jonathan Browning, a former General Motors executive who joined VW in June, will be named CEO. As the FT reported, it is expected that Volkswagen will also extend CEO Martin Winterkorn’s five-year contract by another three years, either at the group’s supervisory board meeting in November or in February. Volkswagen is currently heading for an eighth annual loss in the US, which is why reviving revenue and profit there is imperative to Winterkorn’s plan of surpassing Toyota in size and profitability by 2018. Read more
Prudential was trading top of the FTSE gainers board on Monday on news a group of Chinese investors were considering a break-up bid for the UK insurer. According to the Sunday Times, the billionaire entrepreneurs were among the Asian backers who wanted to throw their weight behind Prudential’s failed $35bn takeover bid for its Asian rival AIA earlier this year. But, according to FT Alphaville, there are a number of reasons to be sceptical about the idea of a Pru break-up — among them the cash-flow dynamics. Read more
Beijing and Basel provided some pep to risk appetite at the start of the week, reports the FT’s global market review. European stock markets opened up 0.8 per cent – following a positive session in Asia and a solid close in the US on Friday – as traders welcome satisfactory Chinese economic data and news that regulators meeting in Switzerland have agreed a deal on banks’ reserves. The FTSE All-World equity index was up 0.5 per cent, commodity prices were higher and “haven” sovereign debt was losing its lustre as a more optimistic mood prevailed. US equity futures were up 0.9 per cent. Leading the charge, though, were banks. The FTSE Global Banks index was up 1.5 per cent, with traders apparently comforted that the new Basel III rules were not as onerous as some had feared. Read more
Deloitte Touche Tohmatsu, the global accounting firm, said on Monday that it would hire an average of 50,000 workers a year during the next five years as it revealed strong revenues, reports the FT. Revenues at Deloitte rose by 1.8 per cent to $26.6bn in the fiscal year ending May 31 on the strength of its consulting business and growing demand for its services in Asia. Deloitte, which is one of the “big four” accounting firms, has been helped by the greater regulatory scrutiny that companies are facing along with the need to streamline their businesses in the wake of the downturn. Read more
The incoming boss of BP has been striking a confident tone in recent meetings with City analysts, reports FT Alphaville. The message that Bob Dudley has been keen to convey is that BP is financially sound, the provisions made against the costs of dealing with the aftermath of the Macondo spill should cover the liabilities, and the $30bn disposal programme is going well, according to analysts. And while BP has not made any decision on the optimal size or shape of the business going forward, there is an acknowledgement that it has to change. Read more