Wednesday 25th November 2015
NEWS TICKER, November 24th 2015: New research from the Consilium Strategic Land Fund suggests 19% of estate agents and property developers expect it to become ‘much easier’ to obtain planning permission to build residential homes over the next three years. 56% think it will become ‘slightly easier’ and only 6% believe it will become harder to obtain. Given the UK needs to build around 250,000 new homes a year to meet growing demand, 21% of those interviewed think the level of government incentives to encourage residential property building will increase dramatically over the next 10 years, and a further 70% think they will increase ‘slightly’. Given this, 82% of estate agents and property developers expect the number of homes built in 2020 will be higher than in 2014. When looking at the South East, which is the main focus of the Fund, the corresponding figure is 79% - On the basis of a final compliance notice from the institutions, the Eurogroup Working Group (EWG) agreed late on Friday that the Greek authorities have now completed the first set of milestones and the financial sector measures that are essential for a successful recapitalisation process. The agreement paves the way for the formal approval by the ESM Board of Directors today for disbursing the €2bn sub-tranche linked to the first set of milestones. It also makes subsequent case-by-case decisions by the ESM Board of Directors on the transfer to the HFSF of the funds needed for the recapitalisation of the Greek banking sector out of the €10bn earmarked for this purpose - The performance of the UK credit card asset-backed securities (ABS) market remained positive during the three months ended August 2015, according to the latest indices published by Moody's. Total delinquencies decreased slightly to 1.54% of the outstanding balance in August 2015 from 1.64% in May 2015 and 1.82% in August 2014. The charge-off rate also decreased to 2.65% in August 2015 from 2.83% in May 2015 and 2.79% a year earlier. The payment rate decreased to 17.47% in August 2015 from 18.56% in May 2015 and 21.72% in August 2014 - ETF Securities Group has listed 18 new 3x short and leveraged commodity ETPs and six new 5x short and leveraged currency ETPs on the LSE today. 2015 has seen increased volatility across currencies and commodities and investors globally have demonstrated an increased interest in short and leveraged ETPs, with ETF Securities own platform experiencing US$135mn of inflows year to date. ETF Securities was the first provider to list European currency ETPs in 2010 and is now the first provider to list 5x short and leveraged currency ETPs on the London Stock Exchange having already launched 3x short and leveraged commodity and 5x short and leveraged currency products in Italy and Germany earlier this year. “We are listing these new short and leveraged products on the London Stock Exchange in response to a strong demand from investors. We have seen tremendous growth in our short and leveraged platform across Europe over the last few years.” says Townsend Lansing, executive director – head of short / leveraged & fx platforms, ETF Securities (UK) Limited. “2015 has been a year of heightened currency volatility. We believe the additional leverage will first and foremost allow investors to use the currency products to hedge currency risk as well provide additional opportunities to trade on a short term basis with a competitive total cost of ownership.” - GoldenSourcea provider of Enterprise Data Management (EDM) and Master Data Management (MDM) solutions for the securities and investment management industry, says that Cattolica Assicurazioni has selected its Market Data Solution to efficiently deliver robust pricing and accelerate reporting capabilities for Solvency II. GoldenSource will provide Cattolica with a complete solution for constructing and disseminating fully audited data sets which validates and cleanses multiple sources, ensuring accuracy and timeliness in product control and reporting. After a rigorous evaluation process, GoldenSource was selected due to the completeness of the solution, ease of use and its rapid implementation capabilities - Yes Bank, one of several of India’s private banks, recently signed an agreement with the London Stock Exchange (LSE) regarding the listing of green bonds and equity instruments to raise funds for clean energy infrastructure. The bank has announced plans to list green bonds on LSE worth $500m by December 2016. Yes Bank issued the country’s first green bond in February this year in which it raised $150m. A second green bond issue, floated in partnership with the International Finance Corporation (IFC), raised almost $50m. The Indian Import-Export Bank also raised $500m through the first dollar-denominated green bonds issued in India, and is also expected to issue more bonds raising up to $1.5bn over the next two to five years – Was last week a turning point? The US Fed has given its clearest sign yet that it might raise rates in December, as it notes that inflation looks to be reappearing. However, with global growth continuing to slow, a rate rise is not without risks. After a torrid start to fall, Australian shares closed at their highest level in about a month as a brightening economic outlook buoyed consumer stocks and countered pressure from falling commodity prices. The S&P/ASX 200 rose 20.3 points, or 0.4%. Elsewhere, it a mixed, but not altogether a depressing picture. The Shanghai Composite Index closed down 0.6%, amid expectations that a four-month moratorium on public listings could lift soon, triggering investors to sell current holdings. Hong Kong's Hang Seng Index fell 0.4%. South Korea's Kospi rose 0.7%. Markets in Japan were closed for a holiday. The Straits Times Index (STI) ended 14.42 points or 0.49% lower to 2903.49, taking the year-to-date performance to -13.72%. The top active stocks today were DBS, which declined 0.71%, NOL, which gained4.46%, SingTel, which declined1.03%, OCBC Bank, which declined1.23% and UOB, with a 1.25% fall. The FTSE ST Mid Cap Index declined 0.13%, while the FTSE ST Small Cap Index declined 0.45%. Expectations of higher rates strengthened the dollar against most currencies in trading today with the euro falling to a seven-month low at $1.0599, no surprise when you couple the promise of a US rate rise with the ECB holding out for more easing. ECB President Mario Draghi said Friday that the bank stands ready to deploy its full range of stimulus measures to fight low inflation. A stronger dollar also pressured several commodities, which are priced in the currency. Earlier Monday, three-month aluminum prices on the London Metal Exchange fell to their lowest level since May 2009, to $1,438 a metric ton. The price later edged up to $1,441.50. Brent crude oil, the global benchmark, was down 1.8% at $43.84 a barrel. Prices of West Texas Intermediate fell 3.1% to $40.62 a barrel, after falling below $40 a barrel last week. Gold prices fell 0.5% at $1,070.60 a troy ounce - The European Council says it has extended the mandate of the European Union Special Representative (EUSR) for the South Caucasus and the crisis in Georgia until 28 February 2017. Herbert Salber was appointed in July last year. EUSRs promote the EU's policies and interests in troubled regions and countries and play an active role in efforts to consolidate peace, stability and the rule of law. The first EUSRs were appointed in 1996. Currently, nine EUSRs support the work the High Representative of the Union for Foreign Affairs and Security Policy, Federica Mogherini - Taiwan's Ministry of Economic Affairs (MOEA) approved 3,118 foreign direct investment projects (except from China) with a total value of $3.689bn in January-October 2015, respectively increasing 6.34% and decreasing 6.77% on year, according to MOEA statistics released on November 20th. In the same period, MOEA approved 378 outward direct investment projects (except in China) proposed by Taiwan-based companies or individuals with a total value of $9.4bn, respectively dropping 5.74% and growing 40.42% on year. Also in January-October, MOEA approved 135 investment projects proposed by China-based enterprises with a total value of $134.27m. On the other hand, there were 276 approved projects of direct investment in China proposed by Taiwan-based companies or individuals with a total amount of $8.723bn, slipping 17.61% and rising 11.43% respectively on year. Taiwan's Ministry of Economic Affairs (MOEA) approved 3,118 foreign direct investment projects (except from China) with a total value of $3.689bn in January-October 2015, respectively increasing 6.34% and decreasing 6.77% on year.

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The Knotty Question of Regulation

Tuesday, 01 July 2008
The Knotty Question of Regulation First came the collapse of its hedge funds; then the mammoth losses tied to mortgage-portfolio write downs. In March, dark clouds circling over Bear Stearns’ Manhattan headquarters suddenly collapsed into a vortex that reduced the former investment giant to a near-worthless pile of debris. Were it not for the sudden resourcefulness of the New York Federal Reserve, things may have turned out even worse. Now a chorus of finger-pointing regulators insist that investment banks be held accountable--before another Bear is let loose. From Boston, Dave Simons reports.
First came the collapse of its hedge funds; then the mammoth losses tied to mortgage-portfolio write downs. In March, dark clouds circling over Bear Stearns’ Manhattan headquarters suddenly collapsed into a vortex that reduced the former investment giant to a near-worthless pile of debris. Were it not for the sudden resourcefulness of the New York Federal Reserve, things may have turned out even worse. Now a chorus of finger-pointing regulators insist that investment banks be held accountable--before another Bear is let loose. From Boston, Dave Simons reports.
On the weekend of March 14th , the New York Federal Reserve gave its blessing (in the form of a $30bn no-risk financing agreement) to JP Morgan Chase & Co to acquire the remains of the 84-year-old Bear Stearns for a mere $2 per share, later sweetened to $10. The takeover bid was officially approved by shareholders in late May. Speaking shortly after the crisis was resolved, US Treasury Secretary Henry Paulson noted that the Bear Stearns episode “raises significant policy considerations that need to be addressed.” The collapse, said Paulson at the time, underscores the rapidly changing role of non-bank financial institutions as well as the interconnectedness among all financial establishments. These changes “require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability,” he added.

Just as last summer’s illiquidity-fueled downdraft prompted calls for universal limits on leveraging, the Bear Stearns experience has critics taking aim at current regulatory standards. These they argue are in need of a substantial overhaul. An important question arising from this development is: how best to carry out these measures? Another is: if those measure are a good idea, why have they not been addressed sooner?

US Federal Reserve Bank chairman Ben Bernanke vigorously defends the Bear bailout, noting that “recent events have demonstrated the importance of generous capital cushions for protecting against adverse conditions in financial and credit markets”. Detractors offer a much less sanguine assessment. One notable hand-wringer is former St. Louis Fed president William Poole, who thinks that, “It is appalling where we are right now … we’ve become a backstop [sic] for the entire financial system.”

Indeed, by all accounts the Fed checkbook may be in for more plundering in the coming weeks and months. In May, Congress put in an emergency call, imploring the Fed to swap Treasury notes for bonds backed by student loans. And with the peak of the credit crisis still months (or perhaps even years off according to some experts) the Fed may have to contend with many more foundering companies arriving in the dead of night, cap in hand. Was the Fed correct in intervening on Bear’s behalf? John Halsey, a former senior managing director at Bear Stearns, says that, given the circumstances, the Fed had to take action. Had Bear failed, says Halsey, “Our financial system would have failed as well. The dollar, already weakened, would have plummeted, and it would have hastened the inevitability of the dollar’s demise as the world’s reserve currency. Stocks would have dropped, markets would have crashed and stopped trading. In effect, Bear shareholders were sacrificed for the good of the system. That said, I do not think it will have much effect on decision making or risk taking.”

The Fed’s willingness to get behind one near disaster after another fails to address some key underlying issues: namely lack of transparency, as well as the enormous complexity of modern financial products, that has rendered normal pricing metrics obsolete. JPMorgan’s valuation gyration over Bear Stearns’ share price is the latest evidence that all is not right. “Free markets can only function in a system where a company’s creditworthiness can be assessed independent of a letter grade supplied by a rating agency,” remarks Jacki Zehner, founding partner of Circle Financial Group, a New York-based private wealth management operation. In reality, says Zehner, this is simply no longer the case. “Before one can declare that this financial crisis is over, the markets have to be able to make this kind of assessment. Unfortunately, we are not there yet.”

Though the Fed may have had little choice but to step in on Bear’s behalf given the magnitude of the counterparty risk, other companies in a similar predicament but with a slower bleed rate may not be as fortunate. Says Erik Sirri, director of the Securities and Exchange Commission’s (SEC’s) trading and markets division, “I think when one of these firms gets into trouble rapidly, liquidity support is needed.” Should that unraveling occur more slowly, however, “that liquidity support may not be needed.”

“Others will fail, though it is not clear what will happen when they do,” says Zehner. “I believe the Fed can and will prevent any sort of systemic collapse which they may have witnessed had they not come to the rescue of Bear. But there will be more problems. Exactly how and where is a difficult bet indeed.”

In the aftermath of Bear, slower client activity, below-normal principal and proprietary trading results and losses from the tightening of structured credit liabilities are just a few of the factors weighing on the investment-banking industry, notes analyst William F Tanona in a recent research paper. Some have been more generous than others. In contrast to Oppenheimer & Co. analyst Meredith Whitney’s assessment of Citigroup’s “antiquated and disparate systems and technology,” Ladenburg Thalmann’s financial institutions analyst Richard Bove sees a much brighter future for the bank. Bove notes that Citi’s turnaround potential is “so significant, it could carry the stock to multiples of its current price.”

While the longer-term picture may be positive--particularly given the prospect of further Fed interventions nonetheless, US banks are in all likelihood looking at a prolonged period of belt tightening and super-scrutiny. “It is truly amazing to see how slow analysts have been in bringing down earnings estimates for the investment banks,” says Halsey. “Of course, at some point soon the bulls will probably be able to point to some very favourable year-over-year comparisons. But the fact remains that the entire sector is going to have to learn to live with much less leverage--and that many of their biggest earning sectors will never recover.”

Is reform needed?

It was the late economist Hyman Minsky who suggested over 20 years ago that “in a world of businessmen and financial intermediaries who aggressively seek profit, innovators will always outpace regulators.” While it may be impossible to prevent changes in the structure of portfolios from occurring, said Minsky, “if the authorities constrain banks and are aware of the activities of fringe banks and other financial institutions, they are in a better position to attenuate the disruptive expansionary tendencies of our economy.”

Speaking at a conference held in Minsky’s honour, Paul McCulley, managing director of fixed-income specialist PIMCO, said that recent events demonstrate how little attention has been paid to Minsky’s words over the last two decades. While initiatives such as Basel I and most recently Basel II may be a step in the right direction, “neither of those arrangements fundamentally addresses the explosive growth of the shadow banking system,” thinks McCulley, referencing the radically leveraged, off-balance sheet vehicles that were so successful in helping institutions sidestep imposed limitations.

To make matters worse, regulators have consistently turned a blind eye to the goings-on within the investment-banking sector, even as the crisis in liquidity was growing more palpable. Their inaction prior to last summer’s meltdown left the banking system vulnerable to the catastrophic run on liquidity that set the stage for innumerable hedge-fund collapses, and ultimately the fall of Bear Stearns, say observers.

In an effort to deflect further criticism, the SEC has wasted little time getting on the case, and has already made clear its intentions to increase the transparency of liquidity and capital positions held by the likes of Morgan Stanley, Lehman Brothers and Merrill Lynch through its consolidated supervised entities (CSE) program. SEC chairman Christopher Cox said the commission wants the changes to take affect prior to the implementation of the new internationally accepted standards for capital and liquidity as set forth in Basel II. Cox has admitted that insufficient regulatory standards in all likelihood helped foster the conditions that led to the Bear crisis. “It’s difficult for anyone to say the system worked or that the regulatory gap that exists in statute lacks any consequence,” said Cox.

Halsey, however, calls the commission’s sudden interest “laughable.” “Where were they when these problems were developing?” he asks. As it relates to the current real estate crisis, “the SEC, banking regulators and especially the Fed were absolutely facilitators to the mess. Alan Greenspan’s legacy has been destroyed.”

To begin to remedy the situation, all institutions that are given access to the Fed’s discount window “must at the same time have pari passu regulatory oversight,” argues McCulley. While banks will undoubtedly balk at such an arrangement, they may have little choice but to play ball. After all, offers McCulley, “if you have access to the Fed’s discount window, the Fed should (and will, I strongly believe) have the power to supervise and regulate your business.” Such increased oversight could take the form of raising core capital requirements, while increasing risk and liquidity management, he adds.

Although regulators appear anxious to expand their legal authority over the investment banking sector, it’s up to lawmakers to ensure that it happens. Speaking before a Senate panel in May, former Clinton administration SEC chairman Arthur Levitt said that “Congress must face these conflicts of interest issues head on, or at least empower the SEC with the proper oversight and disciplinary powers that will enable them to do the job.” As for the near-term direction of the investment banking sector as a whole, Halsey believes that a fundamental shift has already occurred, one that favours the likes of JPMorgan over Goldman Sachs and Morgan Stanley. While product innovation will once again take place and attract new talent and capital, “it will take years for that to happen. In the meantime, the likes of CDOs, CDSs and all mortgage-related trading will deliver a fraction of the profits that stoked Wall Street for so long.” Accordingly, Halsey sees the prospect for a significant brain drain from the various institutions as return on capital founders. “Bright, hungry guys will continue to leave to pursue innovation and profits at hedge funds. That will hurt banks and investment banks alike.”

Can increased regulation be truly effective so long as institutions are allowed to stay one step ahead through the creation of the kind of product embellishments that helped precipitate the crisis in the first place? Absolutely not, says Halsey. Wall Street can afford to hire the best and the brightest and spend more on financial innovation than regulatory bodies can budget for, says Halsey, and as a result, no individual or group can effectively anticipate innovation. Hence, the need for broad, highly flexible guidelines that can compensate for these future product developments.

“As a young guy at Bear, I remember thinking how creative the people who structured collateralised mortgage obligations (CMOs) must have been to come up the concept of interest only strips (IOs) and principal only strips (POs),” recalls Halsey. “By the time they had become commonplace, we were already onto trading inverse floaters. It quickly became apparent that if you could imagine a cash flow of any kind--backed by any kind of credit; then you could create a bond that mimicked such a cash flow. In short, the possibilities of creating new products with unknowable risks when applied to the financial system are endless.”

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