London Whale — some NY Fed blubber

Since it’s curiously hard to find on the NY Fed’s home page, given the prominence of Bill Dudley’s recent firebreathing speech warning against complexity and cultural dysfunction in US banks…

Click for the Federal Reserve inspector general’s account of how the NY Fed failed to follow up on the early signs it had uncovered of risks in JPMorgan’s Chief Investment Office. Read more

FREE e-book offer for FT Alphaville readers

Numbers are limited, so no more than 6 downloads per registered user please. (Before you click, it’s an 8meg file.)

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Markets Live: Tuesday, 21st October, 2014

Live markets commentary from 

Update: moles still largely unwhacked in China

If there’s one sure bet in China it’s that money, uh, finds a way and that shadow banking (or whatever less objectionable name you wish to apply) will do its damndest to help. Otherwise, what’s the point?

In this episode, crowd funding. Read more

The (early) Lunch Wrap

Total chief dies in Moscow air crash || China GDP growth slowest since global crisis || Apple smashes through forecasts || UK public finances deteriorate || Facebook’s new board member apologises for harassment || Libya-Goldman clash sheds light on formerly secretive fund || Asos profits dip unstylishly by 14% on strong pound || Mark Carney launches review after BoE payment system crash || Markets Read more

On the subject of Buffett favourites

After Tesco and IBM, Coca-Cola earnings are out on Tuesday.

You’ll likely have more luck trying to prise a Cherry-Coke from Warren Buffett’s grasp than get him to sell his stake: a favourite since 1988, Coca-Cola is worth multiples of what he paid for it and the Sage is not one for selling much of anything.

Still, Wintergreen Advisors is not going to stop agitating at the soft drink maker. David Winters was a strident critic of the 2014 pay plan for executives that has since been revised, and ahead of Coke’s results he has 12 questions for the company that are worth a read (with our emphasis). Read more

New York Fed taking cues from Occupy on banker pay

That was our takeaway from reading Bill Dudley’s speech at the “Workshop on Reforming Culture and Behavior in the Financial Services Industry”.

His thesis is that skewed incentives in banks and other financial firms encourage excessive risk-taking and even outright illegal behaviour. Losses from wild bets that go badly tend to be borne by shareholders and the rest of society, while the gains are often hoarded by the mid-level individuals making the trades. There is also a timing issue, where a trader can collect a bonus today for engaging in an activity that appears profitable in the short-term but has a high likelihood of catastrophic failure in the medium term. Read more

Further reading

Elsewhere on Tuesday,

- Inside the Ebola wars.

- Insider traders mostly keep their tipping within their ethnic groups, except Western Europeans, who tip and are tipped promiscuously.

- The wiki story.

- Sovereign-debt relief and its aftermath: The 1930s, the 1990s, the future? Read more

The 6am London Cut

Markets: Bourses around Asia were mixed following news that China’s gross domestic product expanded at its slowest pace since the first quarter of 2009, and after a choppy session on Wall Street. The figure raises concerns about global growth prospects, and increases the likelihood of Beijing introducing more stimulus measures. The latest quarterly numbers mean China’s economy this year is almost certain to register its slowest annual growth pace since 1990. However, the reading beat analysts’ consensus estimate of 7.2 per cent, prompting bourses most exposed to the country to heave a sigh of relief. Japan’s Nikkei fell, having on Monday risen nearly 4 per cent – its biggest one-day gain since June 2013 – following local media reports that Japan’s $1.2tn public pension fund was likely to increase its holding of domestic stocks.(FT’s Global Markets OverviewRead more

The Closer


- Why New Yorkers can’t find a taxi when it rainsRead more

Secular stagnation and the paradox of worth

Gauti Eggertsson and Neil Mehrotra’s latest stab at modelling secular stagnation can be found here.

It includes explanations about the role of demographics, technological displacement, the liquidity trap and the paradox thrift, toil and flexibility within the secular stagnation framework — and there’s also a really neat explanation about the effects on capital, and in particular productive capital’s tendency to depreciate more quickly than might otherwise be expected. (You know, there’s more stuff being produced than expected, so the return on investment is never quite achieved in time, due to increasingly lower barriers to entry thanks to technique.)

The flip side of that scenario, however, is that unproductive capital becomes strangely useful for dodging depreciation for as long as there is belief in the asset class; hence the tendency for bubbles to form in asset classes which can’t easily be over-produced. At least not without significant investment. Read more

Floating-rate debt is great when interest rates go down

Many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward…American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

– Alan Greenspan, February 23, 2004 Read more

The Sage gets what he wants at IBM – Update

A brief reminder, amid the headlines about losses for the largest shareholder in IBM, that this is what Warren Buffett said that he wanted.

Back in 2011 Mr Buffett’s Berkshire Hathaway spent about $10.9bn to buy about 63.9m shares in the group. It was the first big technology investment for the famously tech-adverse investor, and his reasons had little to do with disruption, likes, clicks or eyeballs, and a lot to do with the financials.

Happily, the Sage of Omaha explained his thinking in that year’s annual report, and how he would react were the stock price to languish. Read more

A new raison d’être for cryptocurrency, but an age old problem

Steve Randy Waldman’s latest post at Interfluidity talks about econometrics, open science and cryptocurrency. He makes the point that the real potential of “blockchain technology” is rooted in the possibility that it could one day help many different groups and movements achieve consensus for the sake of mutual discovery and progress.

There is, in his opinion, a need to create a public forum in which scientists, academics and inventors can share data and research, and in a way that allows them to shed the mal-effects of groupthink and open themselves up to public scrutiny and refutation. Read more

Real Time Gross Settlements fail at the BoE

From the BoE on Monday:

The Bank of England has identified a technical issue related to some routine maintenance of the RTGS payment system and has paused settlement while we resolve it. We are working to address this issue as quickly as possible, and restart the RTGS payment system in a controlled manner. The most important payments are being made manually and we can reassure the public that all payments made today will be processed.

What does this mean and do you have to panic?

Best consider it a BoE “blockchain” ledger fail. Read more

aMarkets Live: Monday, 20th October, 2014

Live markets commentary from 

The (early) Lunch Wrap

SAP cloud costs || Jindal raid hits shares || Intercontinental Exchange proposes Libor fix fix || Markets mixed || Greene King tops up Spirit offer || UK backs hail Mary medicine || What is Saudi up to?  Read more

Regressing to the mean in China or why if something cannot go on forever, it will stop

With a h/t to Marginal Revolution, here’s Larry Summers and Lant Pritchett on why — for the same reason the USSR didn’t overtake the US, and Shinzo Abe has a tough job on his hands — “excessive extrapolation of performance in the recent past and treating a country’s growth rate as a permanent characteristic rather than a transient condition” is a bad idea.

Most particularly where China is concerned. Read more

Tibco and Pearson: shares and shares alike

The strange story that Tibco Software and their adviser Goldman Sachs had not used an accurate share count in their financial analysis, which evaluated a $24 per share buyout offer from Vista Equity Partners, will awaken unpleasant memories for the Financial Times’ parent company, Pearson PLC.

In May 2010, the publicly-traded securities pricing company Interactive Data Corporation (IDC), which was then 60 per cent owned by Pearson, was in final discussions to sell itself to private equity firms Silver Lake Partners and Warburg Pincus. A price of $34.00/share had been agreed to but, at literally the last minute, some previously undisclosed IDC shares were discovered. Read more

Spending versus consolidation, German political capital edition

Two sets of charts from BCA Research with unclear implications:

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Further reading

Elsewhere on Monday,

- Davies: What is global market turbulence telling us?

- Credit kleptocracy and China’s bezzle.

- European banking stress tests — pour encourager les autres?

- What has happened before will happen again. And we’ll have forgotten.  Read more

The 6am London Cut

Markets: Asian markets started the week on a buoyant note following a last-minute rally in US equities on Friday. “Markets ended last week on a more positive note with equities recovering some ground, but it is probably too early to conclude that we are back into the time of steady and healthy risk appetite,” analysts at Crédit Agricole said. “As such, high volatility will likely remain the story for now especially as expectation on monetary policies shift back and forth.” (FT’s Global Markets OverviewRead more

It takes $200bn per quarter to feed the machine

As usual Matt King et al at Citi’s credit research team breaks things down to the key fundamentals.

Here’s the chart that tells a thousand stories: Read more

Guest post: One virtual account number to rule them all

By David Birch, a director of the secure electronic transactions consultancy, Consult Hyperion. He is an internationally-recognised expert in digital identity and digital money.

The Financial Conduct Authority (FCA) has just launched an investigation into the Current Account Switching System (CASS) that the UK banks were forced to implement a year ago. Interestingly, though, they are also reviving an idea that the Independent Commission on Banking (ICB) put forward three years ago, that of porting bank account numbers across institutions.

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Dear ECB, see Hamlet, Prince of Denmark, Act III, Scene II…

Landon Thomas and Jack Ewing of Dealbook have happened across a delicious leak of ECB council minutes, running from May 2012 to January 2013.

Here’s the ECB’s response:

The E.C.B. neither provides nor approves emergency liquidity assistance. It is the national central bank, in this case the Central Bank of Cyprus, that provides E.L.A. to an institution that it judges to be solvent at its own risks and under its own terms and conditions.

In this specific case, there was full consensus in the governing council on the need to get assurances from the Central Bank of Cyprus that this bank was solvent. The solvency was confirmed explicitly by the Central Bank of Cyprus, which also confirmed the proper valuation of collateral after an intense dialogue between it and the E.C.B.

The E.C.B. was not the supervisor and fully relied on the assessment of the Central Bank of Cyprus. Therefore to draw conclusions about the E.C.B.’s future banking supervision role on the basis of E.L.A. to Cyprus is tendentious.

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Oil sell-off, the Goldman view

Ever the market-moving contrarians, Jeff Currie and team at Goldman came out with a note on Thursday doing for oil markets what Bullard and Haldane have been doing for markets in general.

When it comes to the oil price decline it is, they say, too much too soon. And, critically, the issue is on the expectations side NOT on the current market supply side:

The recent sell-off in oil has been mostly driven by positioning based upon expected fundamental shifts as opposed to currently observable shifts. While looking into 2015 we have sympathy for these medium- to longer- term bearish views that have driven prices lower, we believe it is too much too early. Prices have also likely overshot to the downside particularly as the lower we go the tighter the near-term balances become. This leaves us near-term constructive despite being bearish as we look further out.

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Markets Live: Friday, 17th October, 2014

Live markets commentary from 

In which Haldane warns of the path to the weak side

It may have a David Lynchian “who killed the economy?” title, but in reality Andrew Haldane’s latest speech sees the chief economist of the Bank of England come over all Jedi master. Another sign of the Jedi economic reality we are living in.

As Haldane’s dualistically themed remarks note, he’s feeling a great disturbance in the economic force:

On balance, my judgement on the macro-economy has shifted the same way. I have tended to view the economy through a bi-modal lens. And recent evidence, in the UK and globally, has shifted my probability distribution towards the lower tail. Put in rather plainer English, I am gloomier. That reflects the mark-down in global growth, heightened geo-political and financial risks and the weak pipeline of inflationary pressures from wages internally and commodity prices externally. Taken together, this implies interest rates could remain lower for longer, certainly than I had expected three months ago, without endangering the inflation target.

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The (early) Lunch Wrap

BoE’s Haldane favours a delay in interest rate rises || Rolls-Royce shares tumble after profit warning || BoE lashes out at EU bonus cap rules || Putin, Poroshenko agree to enforce Ukraine ceasefire || Google overtakes Goldman Sachs in US political donations || Jimmy Choo shares flat after London launch || Markets Read more

Unfreezing Ukraine and the Bosnian endgame

Ukraine has elections on October 26, and much of the attention ahead of them has focused on the potential for the country to freeze, politically and literally.

The view we’re hearing from those who have watched this closely, however, is a bit different. The idea that Donetsk, the centre of pro-Russian conflict in the East of Ukraine, could become a new Transnistria, the strip of Moldova trapped in a sovereignty conflict, is the wrong one.

Indeed, we hear it misses a central fact of the recent conflict that is not well understood. There was a war, and Ukraine lost. Read more