Category Archives: Finance

Puerto Rican Debt

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Michelle Kaske writes: Puerto Rico and its agencies have amassed $72 billion of debt as the junk-rated island’s economy has shrunk every year but one since 2006. Investors bought the securities, which are tax-exempt in all U.S. states, for their relatively higher yields. There are fewer residents to help repay the obligations: The island’s population has declined 7 percent in the past decade as residents moved to the U.S. mainland.That combination of rising debt, sluggish economy, and falling population has pushed yields on Puerto Rico debt above those of Greece. The securities have been trading at distressed levels for nearly two years as investors doubted the commonwealth’s ability to repay its debt on time and in full. Puerto Rico warned in its latest quarterly filing that it may place a moratorium on debt payments in fiscal year 2016 if the government can’t cut spending or raise enough revenue.

The island’s state-run power utility, Puerto Rico Electric Power Authority (Prepa) is currently negotiating with creditors to potentially reduce its nearly $9 billion debt load. Such a restructuring would be the largest ever in the $3.6 trillion municipal bond market.

Winner: Law Firms

Unlike Detroit, Puerto Rico and its agencies can’t file for Chapter 9 bankruptcy protection. Without a clear legal blueprint, the process of guiding the island and its creditors through a workout agreement will take more time and legal wrangling. That means lawyers for all the different parties—bond holders, banks, bond insurance companies, and government entities—will probably have to rack up lots of billable hours as they seek the best outcome for their clients.

Winner: Hedge Funds and Distressed-Debt Buyers

For nearly two years, hedge funds and investors in riskier debt have been purchasing Puerto Rico securities at distressed levels. Meanwhile, traditional tax-exempt investors such as municipal mutual funds have reduced or eliminated exposure to the island.

A group of 35 hedge funds, led by Fir Tree Partners and others, holds $4.5 billion of Puerto Rico debt. Firms that bought at a discount may make a profit on Puerto Rico entities that can either avoid a default or that offer recover rates higher than what the hedge funds originally paid to own the bonds.

Governor Alejandro Garcia Padilla and legislative leaders last week agreed on a proposal to cut at least $500 million of spending—following prior year reductions—and boosted the sales tax to 11.5 percent, from 7 percent. To lower the commonwealth’s payroll, the governor has cut 12,500 jobs payable from the general fund, a 12 percent drop.  Puerto RIco’s Debt

Puerto Rican Debt

Coal Pollution

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David Zucchino writes: Duke Energy may have been hauled into federal court and smacked with a $102-million penalty for polluting North Carolina rivers with potentially toxic coal ash, but that didn’t do much for the tainted well water at Barbara Morales’ house.

Morales is one of at least 123 North Carolina residents who have received letters from state health and environmental officials warning them that their well water is contaminated and unsafe for drinking or cooking.

Duke pleaded guilty Thursday to nine misdemeanor violations of the Clean Water Act, but environmentalists say the conviction does not require the utility to clean up coal ash ponds that still threaten waterways, wetlands and groundwater.

Duke would consider extending municipal water lines to affected residents if testing shows neighbors’ wells have been influenced by plant operations..

The state is testing wells for about 30 substances and heavy metals associated with coal ash, including arsenic, chromium, lead, mercury and hexavalent chromium. Some of the substances can cause cancer or serious health complications at certain levels of exposure.

Duke Energy had revenue of $23.9 billion and profit of $1.9 billion last year.

The Dan River spill also prompted North Carolina legislators to pass a law that requires Duke to close four of its most vulnerable coal ash ponds by 2019 and the rest by 2029. The ash must be stored in dry, lined pits that are regularly monitored. The law also requires the testing of wells near coal ash ponds.

But in addition to the potential coal ash threat to wells, Duke has reported nearly 200 seeps of coal ash in the state. Environmentalists said the plea deal does not require the company to stop the seeps, which release 3 million gallons of coal ash water a day.

Over a nine-day period, said Suttles, the environmental lawyer, the amount released by the 200 seeps would equal the amount of coal ash released during the Dan River spill. Pete Harrison, an attorney with Waterkeeper Alliance, a national environmental group, said Duke “is trying to legalize those leaks.”

A 62-page plea agreement, known as a joint factual statement, said seeps are common in the earthen dams used to contain Duke’s coal ash. The seeps contain “dissolved chemical constituents” and “may transport pollutants,” the federal court document said.

 Coal Pollution

 

Modi’s Trip to China

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Tanvi Madan writes: Some quick thoughts on Indian Prime Minister Narendra Modi’s trip to China thus far, following the release of the Joint Statement, and Modi’s remarks at the Great Hall of the People, at Tsinghua University, and at a bilateral forum of state and provincial leaders:

Winner: Social media—it’s been ubiquitous, from Modi joining China’s Weibo to the Modi selfie with Chinese Premier Li Keqiang to the continuation of the Modi-looking-at-things meme.

Loser: Panchsheel. It’d been a bit odd that India had continued to choose to mention Panchsheel and the Five Principles of Peaceful Coexistence—principles that are remembered by many in India as being honored by China in the breach than in the observance in the late 1950s and early 1960s. There was even a shout-out to it in the Modi-Xi joint statement in September 2014. But it’s missing in action in the 2015 joint statement and seems to have been replaced by this:

The leaders agreed that the process of the two countries pursuing their respective national developmental goals and security interests must unfold in a mutually supportive manner with both sides showing mutual respect and sensitivity to each other’s concerns, interests and aspirations. This constructive model of relationship between the two largest developing countries, the biggest emerging economies and two major poles in the global architecture provides a new basis for pursuing state-to-state relations to strengthen the international system.   Modi’s Trip to China

Modi to China

 

Are Bitcoins Digital Gold?

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Are Bitcoins Digiital Gold? This is the title of Nathaniel Popper’s intriguing new book released today in the US by Harper Collins.  The subtitle: Bitcoin and the Inside Story of the Misfits and Millionaries Trying to Reinvent Money.

Although Popper uses the word money, his reference to gold in the title suggests that Bitcoins are a commodity.  Debate has raged between these two definitions of the new virtual currency.

When paper money was first created, it was backed by a commodity.  Not so today.  There is no ‘gold standard.’ The traditional definition of a currency is that it is a medium of exchange and a store of value. The traditional definition of a commodity is that it is a nearly-perfectly fungible good. A commodity could be used as a currency if it is convenient to do so. Likewise, a currency can become a commodity under certain conditions.

We will look more closely at all the facets of Bitcoins as described by Popper in a series of articles this week.

Critics of the Bitcoin are large financial institutions who do not want to be up-ended by an upstart digital financial system with a new currency.    A new way of banking might not require the Jamie Dimon’s of the world, or the JP Morgan Chase’s. In fact, Jamie Dimon, perhaps to distract people from his problems, attacked virtual currency in Davos in January of 2014,

Change in the world is happening rapidly, and while no one expects Bank of America to cave to techies from Silicon Valley soon, it could happen much sooner than we think.  The banking industry watches nervously as tech firms like Apple take on the banks.  Apple has 400 million consumers with credit cards attached to iTunes. In many different ways, tech firms can deeply disrupt the financial services sector.

Bitcoins cut even deeper into the banking system, because they have the potential to provide a new way to store money and then spend (or trade) it.

The first parry of banks against the bitcoin operators is that they are crooks.  After Libor and sub-prime mortgages that seems on odd word for the banking ‘criminals’ to lob at others.  The US Department of Justice is seeking criiminal pleas from Barclay’s, CItibank, JPMorgan Chase and Bank of America.  The Silk Road drug dealers on a bitcoin site who the FBI hauled in may just have been the rogues in this game.  Many Bitcoin players seem serious and honest, although some are over-the-top libertarians.

To be sure, the technology that drives Bitcoins insures anonymity. Yet anonymity is not always attached to criminal intent.  In fact, as Popper weaves his tale, we meet a host of dedicated technology experts who are fascinatied by the problem of creating a new currency and seem not at all interested in crimincal possibilities.

Popper described the structure of bicoins efficiently and clearly.  Encyrption is step one.  Numbers and letters are in long sequences, but there is nothing particularly unusual about signing up for a bitcoin account.  What is really brilliant is the ‘blockchain,’ which we will devote one article to describing.

Blockchains are at the heart of the matter for a new banking system.  Popper describes a meeting between one of the early entrepreneurs in the Bitcoin field with Bill Gates.  He approached Gates at an event and asked to speak with him about Bitcoins.  At first, Gates sloughed him off.  But when more detials of the possibilities of offering free banking to the nundreds of millions of under-served people in the developing world was suggested, Gates said he wanted to know more.  And he is presumably thinking about the prospect right now.

No, Bitcoins are not the evil Wall Street and the bankers would have us believe.  The system holds promise for cheaper and faster banking in the future.  It will probably not come in the forms avaialable today, but so much capital, including lead Silicon Valley firm Andressen Horowitz, has been invested already, that it’s hard not to see this as a very good idea that will be shaped for easy use in the future.

Remember online banking and the ATM?  After John Reed earned his MIT degrees at the Sloan school, he went to work for Citibank.  In 1967, the bank commissioned a report on the future of the industry. One finding raised the question of what impact computers might have on banking. The Citibank president told Reed, “You went to MIT, surely you understand computers…Read this and take some time and figure out what this means for the banking industry.”

Reed, who had only written a few lines of Fortran during his MIT studies, took a year to study the problem, returned to MIT to study with several faculty members, and visited equipment manufacturers who were developing computers. And he decided that online, interactive systems would have the most influence on banking, akin to the airline reservations systems then being developed. Reed launched a company, Citibank Systems Inc., on the edge of the MIT campus, since he thought he could hire good people there. “It was a very unusual project because we had a solution looking for a problem,” Reed noted.

Moving money online was an early successful application, and it still earns millions of dollars for banks every year. On the retail side, Reed’s startup looked at branches and how to replace cash registers with speedier equipment. The developments allow Citibank’s to take the lead in issuing credit cards that allowed customers to transact business without carrying cash.

For Automated Teller Machine (ATMs), the main proposition was this: “We decided that the electronic dispensing of cash was going to be a real change agent,” he said. In 1970, Citibank had 1,600,000 customers in New York City so that became the test site. Reed moved his operation to California to combine his startup team with a group of engineers who had just developed a related system. They designed computers and multiplexers and leased telephone lines from AT&T. And then they had to figure out how human beings were going to interact with the machines….and that was just the beginning.

Who among the bankers today will switch and cut bait and do what John Reed did for Citi?  That remains to be seen.  But the cast of characters in the Popper book is a start.

Tomorrow: Popper describes how the Bitcoin system works.

Bitcoins

 

 

 

 

Big Banks Safe, Small Banks Thrive?

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Democrats on the Senate Banking Committee are drafting financial legislation as an alternative to a Republican bill they see as an effort to dismantle the Dodd-Frank Act, a committee aide said Monday.

Ten Democrats, led by Senator Sherrod Brown of Ohio, are signing onto the proposal ahead of a Thursday meeting of the committee, according to the Democratic aide. The lawmakers have signaled support for measures to help community banks and credit unions, while criticizing Republicans for pushing plans that would help banks with as much as $500 billion in assets and relax some mortgage regulations.

“We can provide small financial institutions the help they need without undermining important financial safeguards,” Brown said last week in a response to the legislation unveiled by Senator Richard Shelby, the Alabama Republican who leads the Banking Committee. Brown said the Republican draft bill “is a sprawling industry wish list of Dodd-Frank rollbacks.

”Shelby’s bill, which seeks also to toughen oversight of the Federal Reserve, was released as a discussion draft ahead of possible negotiations with Democrats. Republicans will need at least six other senators to back their bill to overcome procedural hurdles and pass it out of the Senate.  TBTF Draft Bill

Community Banks and Regulation

 

Grexit?

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Mohamed A. El-Erian writes: In 2011, overwhelming opposition from Greece’s European partners forced Prime Minister George Papandreou to withdraw a proposal for a referendum seeking a “clear mandate” from voters to carry out European Union-backed policies. Last week, the opposite scenario unfolded: Germany suggested that the Greek government hold a plebiscite on whether to accept creditors’ demands for economic reforms or ultimately leave the euro zone. Greece demurred.

This role reversal reveals at least three consequential aspects of the changes:

  •  First, having achieved progress on containing and isolating the Greek crisis, Europe seems a lot less worried about the potential for negative spillover effects should the multiyear drama now end in tragedy.
  •  Second, Europe is becoming less resistant to the notion of Greece exiting the single currency, especially if this were the result of a Greek decision rather than one imposed by its EU partners.
  •  Third, the proposed referendum would push the Syriza-led government into a lose-lose situation.

To understand these three developments, it is worth recalling why Europe crushed the referendum proposed by the Greek government in 2011.

Confronted by pockets of internal opposition, Papandreou saw the referendum as a way to mobilize broad-based voter backing to implement difficult economic reforms.

Almost four years later, Europe is far less worried about the adverse consequences of a Grexit.  The change in Europe’s attitude has been influenced by events in Greece. Syriza’s election success was fueled by repeated promises to alter course on economic policy, including by being less compliant with the austerity demands imposed by Greece’s European partners and the International Monetary Fund. At the same time, the government’s ability to secure agreement with its creditors has been repeatedly undermined by public disagreement, a trust deficit, and rookie governing mishaps. In such circumstances, a referendum presents a lot more downside for the Greek government than in 2011.

A referendum that showed broad-based support for EU-imposed measures would undermine both the unity and electoral credibility of Syriza.

Even the rejection of EU-imposed measures in a referendum wouldn’t be a good outcome for Syriza. The vote would accelerate capital outflows, risk a large-scale run on banks and make it very hard for the European Central Bank to continue to provide Emergency Liquidity Assistance, all of which would bring closer the country’s economic and financial implosion.

The Greek government’s hope is to retain control as it secures time to compel creditors to agree to an easing of austerity measures, a reorientation of some structural reforms, greater debt relief and a large injection of immediate funding beyond what is being provided by the ECB.  That is why it will resist a referendum; and why its European partners will continue to insist on such a vote.

Grexit?

France’s Tough Stand Against Russia

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Josh Gelernter writes:  Early last year Russia invaded and annexed Crimea, and ginned up a separatist movement in Ukraine’s east. Ever since, it has supported those separatists financially, with arms, and, sometimes, in battle.

When Russia started violating “21st-century norms,” the West responded with 1930s-style anti-aggression sanctions. As the EU worked out what its sanctions would include, France made sure they excluded two Mistral helicopter carriers that France was building, for which Russia had already paid nearly a billion dollars.

The deadline for the carriers’ delivery to Russia was last September. As the deadline approached, France suffered a stroke of conscience and announced that it wouldn’t deliver the ships until there was a ceasefire, and movement toward a political settlement, in East Ukraine. The September deadline came and went. Russia demanded the ships; France wouldn’t budge. Russia gave the French a new, December 1 deadline to turn the Mistrals over. That deadline came and went as well.

What’s the big deal about helicopter carriers? Like Ukraine, each of the three Baltic countries — Latvia, Lithuania, and Estonia — has a large ethnic-Russian population. NATO, and any number of geopoliticos in the U.S. and Europe, believe that after East Ukraine joins Crimea and northern Georgia in Russia’s new empire, Putin plans a pivot to the Baltics. Last September, Russia held an enormous war game along the Latvian and Lithuanian borders. About the same time, Russian spies crossed into Estonia, kidnapped an Estonian intelligence officer, and tossed him in prison. (Where he remains. Free Eston Kohver!)

Russia’s threat to the Baltics is backed up by its Baltic fleet, which is based in Kaliningrad, the Russian Baltic-coast enclave sandwiched between Lithuania and Poland. Kaliningrad is the focus of new military investment.

Here’s the kicker: According to the wiki-leaked Stratfor analysis, if the Mistrals join Russia’s Baltic fleet, they will “[cut] deployment time [of Russian forces] to anywhere in the Baltic states from five days to 24 hours.”

So give the French credit; they’re taking a big financial hit in order to do the right thing. They will, evidently, repay Moscow’s money.

Surprisingly, the Russians — who have lost two carriers and, according to the Moscow Times, are stuck with “a special batch of Ka-52 attack helicopters” specially designed “to fill them” — have responded to France’s hard line with conciliation.

It’s a sad day when the U.S. gets lessons in courage from France.

Mistral ships

Inuits from Seal Hunting to Social Security?

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Malcolm Brabant writes:  Greenland’s Inuit chefs, clad in sealskin outfits and trousers fashioned from polar bear fur, will not be offended if MEPs decline morsels of the whiskered marine mammal from the grill. But the chefs hope that their planned cookery session will help to convince European lawmakers to reverse what they regard as a misguided ban on the importation of seal products that is driving a centuries-old way of life to the edge of extinction.

Exports of seal pelts have plummeted by 90% since the introduction of the European ban in 2009. The impact on subsistence economies in Greenland’s 60 coastal communities has been catastrophic. “It’s a tragic situation for us,” says Karl Lyberth, a hunter who used to be Greenland’s minister of fishing, agriculture and food. “A lot of people in the EU don’t understand our way of life.”

A delegation of Greenland seal hunters will board a bus in Copenhagen on Monday for the journey to Strasbourg to lobby parliamentarians.

They are steeling themselves for a clash of cultures and a struggle to change public perceptions. The hunters’ main hurdle is to overcome the image promulgated by animal welfare campaigners of helpless cuddly baby seals being clubbed to death on ice floes in Canada.

International public outrage at the annual Canadian cull contributed in no small way to the European moratorium. “To a large extent it’s the last call for a lot of the hunters,’ says Rasmus Holm of Inuit Sila, the Greenlandic Hunters and Fishermen’s Association. “If the current crisis continues, they won’t have any alternative but to claim social security.”

 Inuit tent of seal skins

Better Regulation in the EU?

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James Panichi and Quentin Aries write:  The European Commission is trying to exert more control over both the European Parliament and Council of Ministers in determining the make-up of a powerful new legislative board that forms a key component of its “Better Regulation” initiative.

The Commission has watered down plans to allow the Council and Parliament to each appoint a member of the seven-member “Regulatory Scrutiny Board” (RBS), which had been envisaged as a gate-keeper for legislative proposals. The Commission will instead demand that the other institutions appoint board members who would act “independently.”

These new criteria would appear to rule out any attempt to appoint either sitting MEPs or officials employed directly by the Council.

What’s more, the main text of the document now makes no reference at all to either Parliament or the Council in the appointment process. “Three temporary posts will be created to permit the recruitment of the remaining three RSB members from outside of the European Commission on the basis of their proven academic expertise,” the document reads.

Instead of giving the RSB authority to make or break legislative proposals by carrying out impact assessments on them, the board now appears to be more of a body which would distill other impact assessments into a legislative recommendation.

Timmermans, who is spearheading the Commission’s drive for better regulation, is expected to announce that the new board will replace the Impact Assessment Board.

The RSB will broaden the scope of the Impact Assessment Board by carrying out retrospective evaluations as well as scrutinizing legislation still in the pipeline.

The Commission is planning to create another body to focus on the REFIT initiative — the Commission’s program to cut red tape and simplify EU law.

Chaired by Timmermans himself, this REFIT “platform” would help the Commission collect comments and feedback on EU regulations.

REFIT is often targeted by NGOs and trade unions, who consider it a Trojan horse used to weaken social and environmental policy.

Timmermans’s renewed approach to REFIT is likely to keep the Commission’s focus on curbing administrative burdens for small business — one of the key items of Commission President Jean-Claude Juncker’s work program, which he made public after taking office.

Regulation

Merkel and Lagarde Soap Opera?

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Can the German chancellor and International Monetary Fund chief find a Greece solution that pleases their own restless constituencies?  Time is fast approaching for the latest installment of Europe’s long-running drama: The Greek Bailout. Christine Lagarde and Angela Merkel are expected to star in season three of this often suspenseful tale, with the main storyline centered around the continuing question of how to get Greece’s debt down in order to lift the country up.

The essential plot of season three: Can the managing director of the International Monetary Fund and the German chancellor find a way to agree on a deal while minding their respective, restless constituencies?

Lagarde’s institution is still feeling the scars of the 2010 and 2012 Greek bailouts. Merkel’s Germany is gripped by bailout fatigue as Germans feel they have been asked to pay the taxes Greeks refuse their own government. The IMF chief may look for reelection next year and must take into consideration her staff and her board’s reluctance to get involved in the Greek funk yet again. The chancellor has to deal with a Bundestag — parliament — reluctant to fuel “moral hazard” and with rising anti-euro sentiment in the electorate.

Both would rather agree, because a deepening of the Greek crisis would be bad for Europe’s and the world’s economy. But both may also feel less pressured to do so, because the EU economy is recovering slowly and a Greek meltdown isn’t seen as threatening the existence of the eurozone as it did five years ago.

In terms of their own relationship, the two women leaders see eye to eye on most European issues, and they have had a good personal chemistry ever since the four years Lagarde spent as finance minister of then-French president Nicolas Sarkozy, from 2007 to 2011. Last year, according to media reports, Merkel even approached France to put forward the IMF chief as European Commission president — not hiding her lack of enthusiasm at the time for Jean-Claude Juncker, who ultimately got the job.

The result of “extend and pretend,” noted Ashoka Mody, professor of international back almost €5 billion to the IMF, and €6 billion to the ECB by the end of the year. This is a country heading back towards recession after the first four months of the Syriza government, and struggling every month to pay some €1.7 billion in public sector salaries. If Tsipras finally decides to tackle the Greek economy’s structural flaws, he will have to trust Lagarde and Merkel to show him a way from under the country’s debt burden. That will not happen — and the situation will spiral downwards — if the two can’t agree.  Germany, the IMF and Greece

Lagarde and Merkel