The Economist: Finance and economics
Cerberus: Out of the doghouse?
Thursday, July 29, 2010After a few conspicuous flops, a private-equity firm gets back to its roots
“PEOPLE were prematurely writing the epitaph of our investments and our firm,” says Mark Neporent of Cerberus, a private-equity firm and hedge fund. “Hopefully it’s pretty apparent to people that we’re back.” The firm, named after the three-headed dog in Greek mythology that guards the gates of the underworld, has spent the past two years trying to claw its way out of hell. Two of its largest and best known investments tanked. Chrysler, a carmaker, filed for bankruptcy and GMAC, General Motors’ financing arm, had to be rescued by the American government, which now owns most of it. For Cerberus, an intensely private firm, these were very public embarrassments.
Some wondered whether the embattled firm would go the way of those two investments. But Cerberus’s flagship private-equity fund rebounded last year, making up for its 25% fall in 2008. (Its mai…
Finance after the crisis: Vigilante on the move
Thursday, July 29, 2010In the first in a series of profiles of financial institutions after the crisis we look at PIMCO, a giant fund manager
BILL GROSS has a dual passion for philately and philanthropy. In 2007 he gave to Doctors Without Borders the $9.1m he earned from an auction of his collection of British stamps. He has said he is happy to part with “old friends” for a good cause. But the 66-year-old shows no sign of parting ways with the company he co-founded in 1971, Pacific Investment Management Co (PIMCO), one of the world’s largest bond-fund managers and, since 2000, a unit of Allianz, a German insurer. As co-chief investment officer, he manages PIMCO Total Return, the world’s largest mutual fund with $234 billion of assets. It is as successful as it is big, returning an average 7.5% over the past five years—better than 98% of its peers, according to Bloomberg.
PIMCO itself, however, is changing. Having long marketed itself as “the global authorit…
SKS comes to market: Microfight
Thursday, July 29, 2010Can microlenders serve shareholders and the poor?
THE loans that microfinance companies make may be tiny but their ambitions can be vaulting. Take SKS Microfinance. Already India’s biggest microlender, with 6.8m clients and 5.8m active borrowers in the year ending on March 31st (see chart), it intends to become the world’s largest by 2012, with 15m clients. To fund this growth, it hopes to raise nearly $350m by selling a 21.6% stake in an initial public offering (IPO) which got under way this week.
According to the Consultative Group to Assist the Poor (CGAP), a think-tank housed at the World Bank, the IPO is only the second by a pure microfinance institution, after the offer by Mexico’s Compartamos Bank in 2007. More may follow. CGAP reckons that SKS’s move “should set the stage for future IPOs in the sector.” The omens are good. On July 27th SKS announced that it had raised $64m from anchor investors, including JPMorgan Chase, Morga…
Buttonwood: Paying the price
Thursday, July 29, 2010Time to reassess how fund managers are rewarded
FUND managers have been some of the biggest beneficiaries of the financial sector’s growth over the past 30 years. Bankers may routinely earn million-pound bonuses but some hedge-fund and private-equity managers have become billionaires. Seldom has so much been earned by so few.
These riches have been generated despite the ability of investors to take advantage of low-cost exchange-traded funds and index-trackers. Investors have surged off-piste in search of higher returns. In aggregate, however, they will merely end up paying higher fees (typically, a 2% annual fee plus 20% on performance), a phenomenon this column has described as “catch two-and-twenty”. ...
Correction: Big Mac index
Thursday, July 29, 2010Correction: Burger-lovers in Argentina were enjoying a special discount on Big Macs when we collected data for our index (July 24th 2010). At nornal prices the peso is undervalued by 5% not 52%. Sorry for the whopper. This has been corrected online.
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Economics focus: A wealth of data
Thursday, July 29, 2010A useful new way to capture the many aspects of poverty
WHAT IS poverty and when is a person poor? Most would agree that poverty involves not having enough of certain things, or doing without others that richer people take for granted. But what is “enough”, which goods and services really matter, and who should decide these questions—researchers, governments or international agencies—are less tractable issues. Perhaps the poor themselves should have the final word. But this presents its own problems. Tabitha, a 44-year-old woman from a slum outside Nairobi, told researchers from Oxford University that going without meals was “normal for us”. Diminished expectations are only one of the effects of dire poverty.
In the world of international development, most have rallied around the “dollar-a-day” poverty line (or more precisely, the $1.25-a-day measure) and its less acute cousin, $2-a-day poverty. These World Bank measures j…
European banks: Judgment daze
Thursday, July 29, 2010Europe’s stress tests were a mixed affair. Many banks still face an uphill struggle to finance themselves
“IT’S an analyst’s wet dream,” says one banker of the European stress tests announced on July 23rd. If financial detail is what turns you on, then the exercise delivered in style with hundreds of pages of information on 91 banks’ solvency and their exposures to the bonds of under-siege governments in the euro zone. As a piece of organisation, if not quite a triumph, it was an impressive feat. But whether all that new disclosure or the tests’ conclusion—that seven European banks need a piffling €3.5 billion ($4.5 billion) of new capital—help the banks escape their funding problems remains to be seen.
The initial signs were modestly encouraging. Credit-default-swap (CDS) spreads, a proxy for banks’ borrowing costs, improved slightly across Europe, according to Markit, a research firm. Banks’ share…
Spain's cajas: Thinking outside the box
Thursday, July 29, 2010Should the savings banks be embraced by investors, or avoided?
SPAIN’S savings banks, or cajas, have survived for nearly 200 years without the help of shareholders. But lots of these institutions, which are largely controlled by regional politicians, are now short of capital and on the hunt for private investors. A delegation from the Confederation of Spanish Savings Banks (CECA) toured European cities this week, touting what it called the “lighthouse of a new Spanish equity opportunity”.
Bad analogy. A lighthouse warns of dangers, and there are plenty of these in the cajas, chiefly political meddling and a high exposure to dud property loans. The state has already pumped €14.4 billion ($18.7 billion) into the sector, most of it from its Fund for Orderly Bank Restructuring (FROB). Five cajas failed the stress tests, and will require another €1.8 billion in capital. Another four came close, and may also need to raise funds. ...
China's financial markets: Premium puzzle
Thursday, July 22, 2010Enthusiasm for Chinese companies abroad but not at home
OF THE many oddities surrounding Chinese stockmarkets, the most glaring has long been the premium mainland investors pay for shares listed domestically over what those same shares trade for in Hong Kong. Now the puzzle is why the premium has disappeared (see chart).
The usual explanation for the existence of the premium ran as follows. A closed capital account and a tightly run financial system left Chinese investors with only three places to put their money: property, with its high transaction costs and manic price moves; bank deposits, offering diminutive interest; or shares, with price moves as big as property but lower dealing costs. That paucity of choices drove shares higher than in places with more options. ...
Burgernomics: When the chips are down
Thursday, July 22, 2010The latest Big Mac index suggests the euro is still overvalued
Correction to this article
ASK Western policymakers how they intend to squeeze growth from their sluggish economies and most pin their hopes on higher exports. That makes exchange rates an especially sensitive topic. A weaker currency improves the competitiveness of a country by making exports cheaper. It also encourages domestic consumers to switch from expensive imports to domestic goods. The Economist’s exchange-rate scorecard, the Big Mac index, shows that currencies continue to be cheap in the developing world but overvalued in Europe. ...
Banking and IT: Computer says no
Thursday, July 22, 2010Big banks need IT reform almost as badly as regulatory change
WHEN Metro Bank, which claims to be Britain’s first new high-street bank for more than 150 years, opens its first branch on July 29th in inner London, customers will notice the lollipop jars and water bowls for dogs. But what really sets Metro Bank apart is its state-of-the-art IT system. New customers will be able to get their account, chequebook, debit and credit cards within 15 minutes, and all the data for each customer will be kept in one place.
That puts Metro Bank in an enviable position. IT at many other Western banks is often a hotch-potch of homemade systems. Banks were the first to use mainframes in the 1960s; many are still using the original applications because it is risky to swap them out. Over the years more and more systems have been slapped on. Banks were often profitable enough to afford big IT teams, writing programs themselves rather than buying off the shelf. ...
Buttonwood: Losing confidence
Thursday, July 22, 2010Looking at the dollar in the old-fashioned way
WHEN the Bretton Woods system was cracking in the early 1970s the price of a troy ounce of gold, in dollar terms, was raised in two steps from $35 to $42.22. This was, in effect, a devaluation of the dollar.
The authorities then still thought it worth expressing the shift in terms of bullion, rather than against another currency like the Japanese yen or French franc. In the 1930s Franklin Roosevelt had a specific policy of devaluing the dollar against gold, pushing the price from $20.67 to $35 in the belief this would push commodity prices (and thus farm incomes) higher and reduce the burden of debt service. ...
American bank results: Surviving, not thriving
Thursday, July 22, 2010Banks’ bad debts are shrinking but so too are revenues
“PEOPLE may look back at this quarter as essentially the first earnings period of the post-crisis era” for American banks, says Michael Poulos of Oliver Wyman, a consultancy. The comment is intentionally double-edged.
The good news is that loan losses are easing. At JPMorgan Chase second-quarter charge-offs (of loans viewed as beyond repair) fell by 28% compared with the previous quarter, for instance. That allowed the banks to release some of the reserves set aside to cover dud loans. However, this will provide only a temporary pop to earnings. Although the worst is over, many of the forces helping banks in the boom times—such as falling interest rates and buoyant employment—are gone for years. ...
Economics focus: Agents of change
Thursday, July 22, 2010Conventional economic models failed to foresee the financial crisis. Could agent-based modelling do better?
MAINSTREAM economics has always had its dissidents. But the discipline’s failure to predict the financial crisis has made the ground especially fertile for a rethink.
Critics tend to agree on what is wrong with current macroeconomic forecasting. A hearing of the House of Representatives Committee of Science and Technology on July 20th targeted the “dynamic stochastic general equilibrium” (DSGE) models used by the Federal Reserve and other central banks. The hearing aimed to “question the wisdom of relying for national economic policy on a single, specific model when alternatives are available.” The Institute for New Economic Thinking in New York, which had its inaugural conference in April, has attacked many of the assumptions, including efficient financial markets and rational expectations, on which these models are predicated. These…
Fannie Mae and Freddie Mac: Unfinished business
Thursday, July 22, 2010Can the American mortgage market survive without taxpayer support?
THE hefty financial overhaul that Barack Obama signed into law on July 21st (pictured) left behind one big piece of unfinished business. In 2008 Fannie Mae and Freddie Mac, mortally wounded from losses on loans acquired during the bubble, were placed in “conservatorship”, a halfway house between bankruptcy and outright nationalisation. There they remain, their losses duly covered with new injections of capital by the Treasury—$145 billion so far. Tim Geithner, the treasury secretary, has promised to address the matter of Fannie and Freddie by early next year but so far he has no answers, only questions (literally so: in April he asked the public to comment on seven of them).
The hesitancy is understandable. Millstones though they are, the two firms remain critical to the economy. In the first quarter they and Ginnie Mae (which unlike Fannie and Freddie has always enjoyed the explicit bac…
Greece's debt auction: An uneasy calm
Thursday, July 15, 2010Panic about the euro zone has receded—for now
MOST people are not satisfied with mediocrity. But Greece’s auction of six-month treasury bills on July 13th turned inferiority into a cause for celebration. The beleaguered country managed to raise €1.6 billion ($2 billion) at a yield of 4.65% in its first venture into the markets since a €110 billion rescue package from the European Union and the IMF was secured in May.
That is hardly dazzling. The yield was still higher than when Greece issued similar paper in April, before the bail-out package was announced, and over three times what it was in January. Germany’s one-year bills yield ten times less than Greece’s six-month ones (see chart). Short-term bill auctions to roll over maturing debt are encouraged in the deal reached by Greece, the EU and the fund but the threat of an eventual debt restructuring makes investors unwilling to lend for long. Greece’s public-debt agency was fo…
Buttonwood: A mirage, not a miracle
Thursday, July 15, 2010The banks' contribution to the economy has been overstated
THE huge sums earned by banks and their employees over the past 30 years is a recurring puzzle. How has finance done so well for itself and why haven’t its returns been competed away?
Andrew Haldane, the executive director for financial stability at the Bank of England, has co-authored another incisive contribution to this debate in a chapter of a new book* published by the London School of Economics on July 14th. Analysing the recent performance of the banking industry, he concludes that it has been “as much mirage as miracle”. ...
Economics focus: Easy-money riders
Thursday, July 15, 2010An early warning about the dangers of keeping interest rates low
IS TOO much being asked of central banks now that governments are embracing austerity? In its recent update on the world economy the IMF said that interest rates can and should stay low “for the foreseeable future” to mitigate the effects on aggregate demand of tighter fiscal policy. Indeed, central banks should stand ready to do more if the recovery falters—to be “the first line of defence” against renewed recession. That would mean holding interest rates close to zero as well as more imaginative measures such as purchases of government bonds.
Keeping interest rates low while fiscal support is withdrawn is a natural policy mix. Central banks can adjust their policy settings swiftly to shifts in the business cycle, but politicians can take an age to agree upon and implement changes to taxes and to public spending. The costs of further fiscal easing to future taxpayers are clea…
Goldman Sachs: Bombmakers bombarded
Thursday, July 15, 2010The world’s pre-eminent investment bank has more than just image problems to worry about
THE chairman of America’s Financial Crisis Inquiry Commission recently suggested that Goldman Sachs had built a bomb, in the form of toxic securities, and then constructed a bomb shelter, by betting against the market. But the securities firm’s top brass, led by Lloyd Blankfein and Gary Cohn (pictured right and left), must be feeling anything but safe as its role in the crisis and—thanks to looming regulatory reform—its very business model take a pounding. Speculation is growing that the firm will have to sacrifice one of its top men if it wants to stop the bombardment.
Having at first been applauded for risk-managing its way through a crisis that destroyed many of its rivals, Goldman has been recast as a villain that represents capitalism at its most egregious. It stands accused of everything from bilking the taxpayers who rescued AIG, a huge insurer to…