Posts from Friday Dec 23 2011

A very Merkozy Christmas to you all…

Abstractions and morality in modern finance

Over the last three years, modern finance has been bailed out by policymakers and, by extension, taxpayers. But policymakers and financiers are taxpayers too, and hence themselves bear at least some of the costs of the crisis.

Why are we so good at creating complexity in finance? How do we reconcile the bad decisions that we make when we do things like structure single-tranche CDOs, trade the ABX index, or give mortgages to people who can’t afford them? Read more

Immigration economics and “dirty jobs”, plus a Q&A with Giovanni Peri

We’ve seen a lot interesting and deservedly favourable commentary about Alex Tabarrok’s argument that liberalising high-skill immigration policy in the US would be an economic boon.

Hey, we’re all for it and it’s more politically feasible than wider substantive reform on illegal immigration, in part because its entrepreneurial and societal benefits are intuitively easy to grasp. Read more

How to arb Basel II

In a previous post, we detailed trades that while making no sense economically, allow banks to game regulations around capital requirements and kick the recognition of losses further down the road.

This may have left you wondering how this is possible under the Basel II regulations, so we thought we’d walk you through the relevant sections, and outline the cases where this trade does, and doesn’t, work. Read more

A Dickens of a mess

Ebenezer Draghi sighed. These bank books would never come out right, and it was Christmas Eve already. As he struggled, the numbers began to swim before his eyes. So many hundreds of billions of euros, so many classes of security, collateral, refinancings… He started to doze. He found himself back a decade, in that glad, confident morning when the world was fresh and new, and the first currency to be entirely illustrated by pictures of fantasy bridges was sprung on a delighted world.

How wonderful life was then! Those perfidious Brits had, predictably, declined to join the euro, but we’d show ‘em! The single currency would be the cement that held Europe together, financially as well as symbolically, and would soon threaten the greenback as the world’s premier medium of exchange. Knocking the Yanks off their perch while leaving Britain in the slow lane. What’s not to like? Within a decade the economies of north and south would have converged into one magnificent powerhouse. The euro would have become a deutschemark with a suntan. Read more

François Baroin, Christian Noyer, François Fillon are you watching?

RTRS-UK TEN-YEAR GILT YIELD FALLS BELOW 2 PERCENT FOR FIRST TIME EVER

 Read more

Presenting… the inaugural FT Alphaville awards

Our NY correspondents Cardiff Garcia and John McDermott present what we expect will be the first of many mirthful FT Alphaville annual awards. Watch the video below and:

LAUGH at Cardiff’s impression of Bernard-Henri Levy!
CRY at the ridiculously vast number of EU summits from which John had to choose the best EU summit of the year!
GET RICH with their incredibly insightful forecasts for 2012*! Read more

Falcone rejects SEC settlement

Hedge fund manager Philip Falcone has turned down an offer by the SEC to settle charges by accepting a ban from the securities industry, reports the WSJ. His fund, Harbinger Capital Partners, is being investigated for alleged market manipulation. The SEC is also querying a loan from the fund to Falcone in October 2009 and investigating the allegation that certain investors, such as Goldman Sachs, were allowed to cash out of the fund while other investors continued to be locked up.

Regulators may extend comment period for Volcker rule

The comment period for the proposed Volcker rule, that bans banks from proprietary trading, is set to close on January 13th. However, Reuters reports that a 30-day extension is expected, citing a person with knowledge of the decision. On Thursday, Texas Republican Randy Neugebauer released a letter from 121 lawmakers that states concerns from various industry stakeholders that the rule in its current form will ultimately lead to higher borrowing costs for American businesses. The letter also suggests that a second proposal is released for comment before the publication of the final rule.

Mild weather to help US retailers

A weekend without snow in many parts of the US may provide a boost to retailers who have already seen a strong holiday shopping season, reports Bloomberg. Last year a blizzard on the east coast closed many stores, just as consumers would have gone for a post-Christmas bargain hunt, redeemed gift cards, and made exchanges. Christmas eve falling on a Saturday may also provide a boost. Last year, it fell on a Sunday, when religious services and football games hold sway.

European stocks rise amid risk-on rally

European stocks have opened in buoyant mood, with the FTSE Eurofirst 300 up 0.5 per cent and London’s FTSE 100 higher by 0.4 per cent. Asian stocks also rallied – the FTSE Asia Pacific index climbed up 0.8 per cent – following healthy gains for a third straight day on Wall Street in the wake of further falls in weekly jobless claims and higher than expected gains in consumer sentiment on Thursday, which overshadowed a downward revision in GDP data, according to the FT’s Global Markets Overview. Hong Kong’s Hang Seng index climbed 1.4 per cent on a rosier outlook for exporters and the Shanghai Composite registered a 0.9 per cent rise, led by utilities and consumer services stocks. The stock rally looked set to continue on Wall Street, with US futures pointing to further gains of 0.5 per cent at the open for the S&P 500 as investors await data on US personal spending, durable goods orders and new homes sales. Italian sovereign bond yields continued to edge higher, with yields on 10-year sovereign bonds 2 basis points higher at 6.92 per cent, according to Bloomberg data, below recent euro era highs of 7.26 per cent reached in November. The climb in yields marks the third straight session of rises reflecting growing disappointment that proceeds from the European Central Bank’s three-year auction may not be used to prop up peripheral eurozone government bond markets.

Further reading

Elsewhere on Friday,

- Hey United Nations, you owe me a $1 trillionRead more

Pink picks

Comment, analysis and other offerings from Friday’s FT,

Martin Wolf: America’s inequality need not determine the future of BritainFT logo
“The poor you will always have with you,” said Jesus. Despite vast rises in wealth, mainly over the last century, this remains true today because we define poverty relatively, says the FT’s Martin Wolf. Some object to this judgment: has destitution not disappeared from high-income countries and is it not diminishing in the developing world? The answer is: yes, although much poverty remains. But we are social animals. As stomachs fill, we wish to participate fully in our societies. But rising inequality is in the way. Read more

Snap news

Breaking pre-market news on Friday,

- Blacks Leisure says equity worthless; talks over sale of assets and brands continue — statementRead more

Petronas in talks with Exxon, Shell on petrochemical JV

Petronas is in talks with several oil majors including Shell and Exxon Mobil to develop petrochemical plants within its $20bn refinery complex in southern Malaysia, Reuters reports, citing two sources with direct knowledge of the matter. Malaysia’s national oil company is also talking to Japanese firms Itochu and Mitsubishi as well as Dow Chemical  as it seeks to tap surging Asian demand and diversify its earnings, the sources said. Petronas is expected to make a decision on the partnerships by mid-2012, which signals it is quickly moving beyond the feasibility stage of the project. “Petronas is getting a lot of interest for the joint venture undertakings,” said one source, who declined to be identified as discussions are ongoing.

The Cut: Taking a break until January 3

Along with the rest of FT Alphaville, The Cut is taking a break starting Friday afternoon, and returning Tuesday January 3 — though we may pop back early if any any dramatic events take place in the meantime. See the blog for the full Christmas opening hours (plus artwork from ex-AVer Tracy Alloway), and there will be some more end-of-year specials published today.

Have a good break, everyone.

Overnight markets: Slightly higher

Asian stocks edged up on Friday, as signs of a strengthening economy in the US encouraged a modest year-end rally in riskier assets, says Reuters. Wall Street stocks had risen for a third straight day on Thursday, leaving the S&P 500 index virtually flat for the year, after data showed new claims for unemployment benefit dropped to their lowest in three years.

The euro crept higher, but remained subdued amid doubts over whether this week’s European Central Bank tender of cheap loans will be effective enough to ease the financial strain on troubled eurozone economies. The euro crawled up to around $1.3065, from $1.3050 late in New York, in thin trade. Read more

Three Gorges outbids rivals for stake in EDP

Three Gorges Corporation has won a bidding contest to buy a stake in Energias de Portugal, the country’s dominant power company, for €2.7bn ($3.5bn) in a deal that is seen as a forerunner of other potential asset sales to China by debt-stricken eurozone economies. The FT reports Three Gorges defeated rival bids from Eon, Germany’s largest utility, Eletrobras, Brazil’s state-controlled power company, and Cemig, another Brazilian contender. The Chinese group will pay €3.45 a share, representing a premium of 53 per cent over Wednesday’s closing price. EDP shares rose more than 4 per cent to €2.33 on Thursday ahead of the announcement. The sale of Lisbon’s last remaining stake in EDP, a former state monopoly, is one of the first eurozone privatisations to go ahead in the wake of the region’s sovereign debt crisis. Forceful lobbying by the contenders, including support for Eon’s bid by Angela Merkel, German chancellor, has made the sale a contentious political issue in Portugal, with opposition parties insisting on a demonstrably impartial decision

IAG wins BMI with £172.5m cash deal

International Airlines Group has signalled it is looking for further acquisitions after winning the takeover battle for BMI British Midland, Lufthansa’s lossmaking UK subsidiary, by agreeing to pay up to £172.5m, reports the FT. However, Sir Richard Branson, founder of Virgin Atlantic, responded to the failure of its bid for BMI by calling on European regulators to block IAG’s proposed deal, claiming the transaction “cuts consumer choice and screws the travelling public”. The newspaper says people close to IAG – parent of British Airways and Spain’s Iberia – accepted that competition regulators might insist on the company relinquishing some of BMI’s valuable take-off and landing slots at London’s Heathrow airport.

Anglo launches Codelco legal battle

Anglo American has launched an explosive volley in a Santiago court against Codelco, the Chilean state miner trying to buy 49 per cent of Anglo’s most productive copper mine, the FT reports. The London-listed miner filed wide-ranging claims on Thursday, alleging Codelco is in multiple breaches of contract and should be blocked from trying to exercise its rights over the mine. The claims include allegations of a high-profile campaign against Anglo that scared off potential trading partners. In November, Anglo sparked a multibillion-dollar dispute by selling 24.5 per cent of Anglo American Sur – a suite of copper assets based around its star Los Bronces mine – to Mitsubishi for $5.4bn.

Congress reaches payroll tax deal

Republicans in the US House of Representatives have backed down and agreed to extend payroll tax cuts for the first two months of 2012, ending the risk of a sudden tax rise on January 1, reports the FT. Under a deal with Democrats in the Senate, there will be administrative tweaks to reduce the cost to business of complying with a two-month extension, and the House and Senate will negotiate how to offset the cost of an extension for the rest of 2012. But the deal gives no ground on the main Republican demand of an immediate full-year extension paid for by limits on unemployment benefits and welfare eligibility. Reuters says House Speaker John Boehner caved in to growing criticism from within and outside his Republican Party, leading to an about-face that contrasts with a year of dominance in Congress in which their staunch opposition to higher taxes and spending yielded a string of successes.

Sale of Blacks said to be imminent

KPMG could announce the sale of Blacks Leisure through a pre-pack administration deal as early as Friday, says the Telegraph, adding that unnamed City financiers believe the entire company will be sold to a single buyer in January. Mike Ashley, Go Outdoors, and Edinburgh Woollen Mill were said to be interested in buying the outdoor retailer. Meanwhile the FT says retail sales are finally beginning to pick up after slow pre-Christmas trading. Sales at John Lewis, the department store chain, rose 20.7 per cent year-on-year in the four days to the end of Wednesday. John Lewis’s figures compare with a period affected by snow disruption last year, and the group is widely expected to outperform the high street. Supermarket chains are also seeing strong demand in the final few days before Christmas. However some analysts said a last minute rush would be insufficient for many retailers to offset slower sales to date.

Fed ‘may signal low rates into 2014′

The WSJ says Fed officials have grown increasingly uncomfortable with their August statement that they are likely to hold short-term rates exceptionally low at least through mid-2013, and some believe low inflation and high unemployment could warrant low rates into 2014 or beyond. Changes to the central bank’s communications policy will be discussed at the next FOMC meeting in late January, and the WSJ says “there is a good chance” the Fed will begin publishing a range of their forecasts for rates along with their quarterly economic projections, instead of offering a specific date for the timing of rate increases.

Bini Smaghi calls for QE in face of deflation risks

Lorenzo Bini Smaghi, ECB executive board member, has called for quantitative easing to be used to boost the eurozone economy if deflation risks emerge in the strongest indication yet that the central bank would expand its policy tools to prevent a potential disastrous economic slump in continental Europe, the FT says. Mr Bini Smaghi said: “I do not understand the quasi-religious discussions about quantitative easing.” Such steps had been taken in the US and UK, where the central bank had seen deflation risks. Currently, the ECB did not see deflation risks for the eurozone. “But if conditions changed … I would see no reason why such an instrument, tailor-made for the specific characteristics of the euro area, should not be used.” Mr Bini Smaghi also hinted at frustration over the UK’s reluctance to join efforts to strengthen the eurozone. The FT has published the full interview transcript.

India group seeks $7.8bn in state funding for Afghanistan

An Indian government-backed group that won rights to mine Afghanistan’s biggest iron ore deposit has sought $7.8bn in state aid and loans to develop the venture, Bloomberg says, citing two people with direct knowledge of the plan. The Indian steel ministry is said to be backing the proposal by the Afghan Iron & Steel Consortium, which comprises seven companies led by state-owned Steel Authority of India (SAIL). The ministry will seek approvals from the foreign and finance ministries, they said, without giving a timeframe. The consortium was last month awarded the rights to mine three out of four blocks of Hajigak, a series of rugged mountain ridges 100km west of Kabul which hold an estimated 1.8bn tonnes of ore.

Yanhzou Coal to buy Gloucester

Yanzhou Coal Mining, China’s fourth-biggest coal producer, agreed to buy Gloucester Coal for A$2.1bn ($2.13bn) in cash and shares to gain more mines and port access in Australia, reports Bloomberg.  The deal,  values Gloucester at as much as A$10.16 a share, or 45 per cent more than its December 19 close, the day before the stock was halted. Under the plan, Gloucester will merge with Yancoal Australia and its shareholders will get A$3.20 cash and own 23 per cent of the new combined company, with Yanzhou owning the remaining 77 per cent. The deal is conditional on the merged company obtaining an ASX listing. Gloucester’s majority shareholder is Noble, the Singapore-listed commodities trading group.