Posts from May 2012

Bankia’s influence spreads

After a weekend with lots of Bankia news, the spread between Spanish and German 10-year debt reached new euro-era highs:

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Bankia going GUBU … but what about the rest?

Oh, Bankia” has become a common refrain around these parts and this morning Joseph pointed out a few of the oddities surrounding Spain’s incipient bailout and a similarity or two with Ireland’s.

(What’s Spanish for GUBU again?  H/T Conor Cruise O’Brien and Nomura’s Daragh Quinn). Read more

Is Chinese real estate nearing a tipping point?

China’s property developers — who last year contributed a collective 13 per cent of GDP — seem determined to hang on.  Despite months of falling prices in most cities, completions are powering ahead.

Chinese real estate investment reportedly rose 23.5 per cent in Q1, year-on-year. And yet new construction rose only 0.3 per cent and sales of residential and commercial property fell 14.6 per cent. As Patrick Chovanec points out, despite accounting for the aforementioned 13 per cent of GDP, there was little questioning of the incongruence of these Q1 2012 numbers which showed steeply rising investment in a sector that was actually shrinking in terms of revenue. Read more

Entwined, with Bankia

Starring A. Spanish Banker as the Cookie Monster, bank assets as cookies, and Mario Draghi as the Count:

Both: Eat! Count! Eat! Count! Eat! Count! Read more

Further reading

Elsewhere on Monday,

- China is building 70 new airports. Read more

The 6am Cut London

Spain is considering directly injecting its own government debt into BFA-Bankia to help fund the stricken lender’s €19bn nationalisation, in an attempt to sidestep high bond market rates, reports the FT. The plan involves Madrid issuing Spanish government guaranteed debt to Bankia in return for equity, with the bank then able to deposit the bonds with ECB as collateral for cash.

Newedge is abandoning the Greek stock market. The broker has told clients that it will process only sell orders, and stop extending margin loans for existing positions in Greek securities, according to a memo obtained by the FT. Securities subject to the new restrictions include foreign-listed shares and American depositary receipts for Greek companies. Read more

Overnight markets: Mixed

Asian shares and the euro edged up from lows on Monday as opinion polls showed a lead for Greece’s pro-bailout parties, says Reuters. The MSCI Asia Pacific ex-Japan index was up 0.4% after hitting its lowest level since late December on Friday, and Japan’s Nikkei index was flat. Speculators also were net short on the Australian dollar, having cut their net long positions all month. The Hang Seng swung between profits and losses on reports of falling Chinese industrial profits, and more stimulus pledges from Wen Jiabao, says Bloomberg.

Asian markets
Nikkei 225 up +15.82 (+0.18%) at 8,596
Topix down -0.58 (-0.08%) at 721.53
Hang Seng up +68.22 (+0.36%) at 18,782 Read more

Weekend news catch-up

Weekend headlines from the FT and other UK media:*

From The FT,
-       European leaders should create a vehicle to inject state equity into undercapitalised banks, according to the head of HSBC
-       The former head of fraud and security for digital banking at Lloyds Banking Group, which is 40% owned by the taxpayer, faces a criminal charge for allegedly claiming nearly £2.5m in fake invoices
-       Rexam, the FTSE 100 packaging specialist, is in final-stage negotiations over a sale of its personal care division, in a deal that is estimated to be worth about £350m
-       Oil and commodities prices stabilised following a sell-off during the week triggered by fears of a worsening eurozone crisis. The benchmark Reuters-Jefferies CRB index fell during the week to its lowest level since September 2010, dropping to 280.35
From The Sunday Times,
-       Europe fund to rescue bust banks: Secret plans are being drawn up in Brussels for a European rescue fund that could seize control of struggling banks across the Continent
-       Apple’s £36m bonus for former Dixons Boss: The former Boss of PC World and Currys will receive a $56m (£36m) golden hello from Apple for taking charge of its retail arm
-       Nuclear subsidy ‘illegal’: Britain’s plans for new nuclear power stations have suffered a blow with a warning from Centrica that a subsidy scheme is illegal
-       Cowdery in £1bn bid for Dutch fund Robeco: The insurance tycoon Clive Cowdery is ready to grab an Asset Manager put on the block by Holland’s Rabobank
-       BSkyB mulls mobiles move: BSkyB has held talks with the Owner of Orange and T-Mobile over an audacious assault on Britain’s mobile phone industry
-       Monsoon rains cash on founder: Monsoon Holdings, the Jersey company through which Peter Simon owns the retailer, received £76.2m in dividends for the 12 months to August 2011
-       Watchdog threatens to cap Wonga fees: The City regulator could cap the interest rates charged by controversial short-term loan companies such as Wonga, sources say Read more

FTfm on AV

Some highlights from Monday’s FTfm

Donors hit by lower returns
Companies that make political donations produce worse investment returns than their non-donating peers, with the reduction in shareholder value “far outstripping” the value of the donations, research into the US market has found Read more


This week on FT Alphaville,

- Don’t miss Lisa’s four-part series on Hewlett-Packard vs the IRS and international tax arbitrage (also available as an e-book thanks to Zach Seward!). Read more

More on auto-driven growth

Karl Smith is mildly annoyed at us for not mentioning in yesterday’s auto sales post that the trend fits into the broader Smithian/Neo-Wicksellian/Kindasorta-Woodfordian view of the US economy. He’s kidding, we think.

But he’s also right, and he did call the motor vehicle trend early, just as he explained early how the combination of reversing household formation trends and under-construction since the crisis could lead to a residential construction kick and a self-perpetuating economic upswing. Read more

The capital monster strikes

The final number will exceed the €14bn Bankia needed to meet government-enforced provisions. The €19bn investment is in addition to an earlier €4.5bn government investment in preference shares which was flipped into equity, giving the state a 45 per cent shareholding two weeks ago. Existing investors face being all but diluted out of the bank unless they take up pre-emption rights to buy new shares.

The same number comes from El Mundo, which adds that two capital increases are planned — one for BFA, Bankia’s very messed-up parent, and for Bankia itself. Read more

Autonomy: a postscript

Here’s something odd.

Related links:
Lynch mobbed – FT Alphaville
Revisiting Autonomy’s Iron Mountain deal – FT Alphaville


Ahem. The full, semi-annual US Treasury report to Congress on exchange rates is here:

Click image for full doc. Read more

The defeat of an FTC generator

The investment that Hewlett-Packard made in an entity called Foppingadreef back in 1996, thinking that it would give rise to significant tax benefits over the next seven years, was not typical of so-called “foreign tax credit generators”.

Barclays’ structured trust advantaged repackaged securities (Stars) are perhaps the most well-known FTC generators and they have allowed multiple US banks to reduce their tax liabilities — though the Internal Revenue Service is challenging this in the courtsRead more

The anatomy of a transaction

In our last post, we presented the genesis of a transaction set up by AIG Financial Products in 1996 that stood to reap significant tax benefits by generating an abundance of foreign tax credits (FTCs) as well as a deduction arising from a capital loss.

The Internal Revenue Service fought back when some of the benefits were claimed, and on May 14, 2012 they won in the US Tax Court, leading to the benefits being disallowed. This case, along with another won by the IRS in September last year, allows a rare glimpse into the world of international tax arbitrage. Read more

The genesis of a transaction

On May 14th, 2012, the US government won a case against Hewlett-Packard. The company was trying to reduce its tax bill by claiming certain foreign tax credits (FTCs) and a deduction on a capital loss that arose from a transaction it had entered into in 1996 with a Dutch entity called Foppingadreef. Both were claims disallowed in the ruling. The case may go to appeal.

The type of transaction can generally be classified as a so-called “FTC Generator” as one of the main benefits, if not the main benefit, concerns positive tax attributes created by it. Read more

Inefficient market hypothesis

Hewlett-Packard recently lost a big tax case with the US IRS. An intricate structure known as an FTC generator was at the heart of this dispute – and it’s left us wondering what the consequences might be for all those institutions so busy in this space over the past decade or two.

Hopefully, this four-part series will walk you through the basics, giving a glimpse into the world of international tax arbitrage…
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Greek tax revenues: very little, very late

Greece’s latest tax revenue numbers were out on Friday, reports the Ekathimerini. Everyone expected them to be dire and, guess what?  They are really dire.

Inflows in the first 20 days of May were down 20 per cent on the same period a year ago. The general election in early May didn’t help things, but these figures are still worse than most analysts were expecting. Read more

On the ECB’s attempts to ring-fence its balance sheet

The European Central Bank has recently started talking more about risk, and in particular the risks to its balance sheet. Yesterday, Standard Chartered analysts Thomas Costerg and Sarah Hewin had a note out talking about how the ECB was concerned about capital outflows from the periphery being replaced by TARGET2 inflows, and how TARGET2 imbalances might lead to a more fragmented policy. From StanChart:

ECB President Draghi recently hinted that managing risks was his utmost priority, further differentiating the ECB from other major central banks (Japan, US, UK), which have shown less reluctance about conducting broad-based quantitative easing (QE). Read more

Totting up Germany’s eurozone exposure

Any discussion that involves a discussion of the Euro-system’s TARGET2 mechanism carries a big fat tail-risk that this correspondent’s head will explode. But we’ll run that risk in the interests of readers…

Christian Schwarz and Matthias Klein at Credit Suisse have produced a tome entitled, rhetorically: Will Germany Continue to Pay? Read more

Markets Live transcript 25 May 2012

Live markets commentary from 

‘Bye Bye Basel?’, seen in the RWAs

Portrait of a bank capital-counting model in trouble – charts via Barclays Capital:

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The (early) Lunch Wrap

Good morning, New York…


Eurovision fans, please do not vote for us!

Just the sort of news to make Terry Wogan chortle (via BBC):

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Bankia suspended… uniquely

Last Friday Bankia gained 23.5 per cent… this Friday it has been suspended (along with its parent company) by its regulator “due to circumstances that may affect the normal share trading”.

The rumours circulating suggest the suspension is due to a request for more than €15bn in state-bailout funds Bankia likely is likely to make when its board meet later on Friday. Read more

Further reading

Elsewhere on Friday,

- Commodity margins are coming down. Read more

The 6am Cut London

Some of Europe’s biggest fund managers have confirmed they are dumping euro assets amid rising fears over a possible Greek exit from the eurozone and single currency turmoil, the FT reports. Amundi, Threadneedle Investments and Merk Investments are among the funds identified.

Comments by Mario Draghi went some way towards soothing markets worried about a Greek eurozone exit and Chinese growth, the FT reports. Draghi called for the European political leaders to make “a brave leap” towards greater fiscal union. However the euro reached a 22-month low against the dollar on Thursday. Read more

Overnight markets: Mixed

Asian stocks were under pressure as deep-rooted anxiety over the fate of the eurozone and concern about global growth, says the FT.

The MSCI Asia Pacific index retreated 0.4 per cent, down 1 per cent this week and heading for its longest weekly losing streak since November. Japan’s Nikkei and Australia’s S&P ASX 200 were both flat while South Korea’s Kospi Composite index gained 0.5 per cent. Hong Kong’s Hang Seng index added 0.2 per cent but China’s Shanghai Composite index slipped 0.1 per cent. Read more

The Closer


Stocks shuffled forward, closing higher on optimism over Europe. Comments from the Italian prime minister were blamed for the move. The Dow Jones Industrial Average closed up 0.3 per cent at 12530, while the Nasdaq fell 0.4 per cent 2839. The S&P 500 closed mostly flat, up 0.1 per cent at 1,321 (Wall Street Journal). Read more