Category Archives: Finance

Warren Fighting for Americans, Not Running for President

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“You’re one of the household names in American politics,” Colbert said, “and yet you are one of the few household names that is not running for president of the United States. Are you sure you’re not running for president of the United States? Have you checked the newspapers lately? Because a lot of people have jumped in. You might have done it in your sleep.”

“I’m sure I’m not,” Warren said.

“These days, politicians actually have to check the opt-out button,” Colbert said. But he wasn’t ready to give up.

“Can you tell us why you’d be such a terrible choice?” Colbert said. “… Why we shouldn’t be clamoring for an Elizabeth Warren presidency?”

“I’m out there every single day,” Warren said, “in the middle of a huge fight. And it’s a fight about what this country is going to look like going forward. The game is rigged.”

“What is the game you’re talking about?” Colbert said.

“I’m talking about our country and how it’s run,” the senator said. “… We have a federal government that works great for millionaires, it works great for billionaires, it works great for giant corporations.”

But many, Warren said, were left out.

“For the rest of America, it’s just not working,” Warren said. “It’s time for us to take that government back.”

Colbert’s crowd erupted in applause.

“Well, you don’t sound like you’re running for president,” the show’s host said.

In Colbert’s previous life as a buffoonish right-winger on Comedy Central’s “Colbert Report” in 2014, the talk-show host needled Warren about the benefits of lax financial regulation – mostly to her benefit.

“Have you ever heard of the invisible hand of the market?” Colbert said. “You can’t put handcuffs on an invisible hand. The cops can’t find it… . What you call breaking the law, I call pushing the envelope.”

“You can put handcuffs on people that break the envelope,” Warren said. “When they break the law, they deserve to have handcuffs.”

warren

Does Structure of German Corporations Work Against Whistleblowing?

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Leonid Bershidsky writes: As it accepted the resignation of Chief Executive Martin Winterkorn on Wednesday, the executive committee of Volkswagen’s supervisory board praised his “towering contributions” to the company that stands to lose much of its $37 billion cash stash making amends for major fraud committed on Winterkorn’s watch. Such graciousness is a German tradition, and it raises the question whether there’s something fundamentally wrong with the country’s corporate establishment.

The committee declares as fact that Winterkorn “had no knowledge of the manipulation of emissions data.” There was no way to establish that in the short time since VW’s use of special software to cheat emissions tests came to light. The board, which in April backed Winterkorn in a battle with company patriarch Ferdinand Piech, must have taken the chief executive’s world for it.

When Anshu Jain stepped down as co-chief executive of Deutsche Bank in June, the bank’s stock price was down 17 percent from this year’s high in April, dogged by continuing heavy fines for all sorts of past misdeeds — many committed on Jain’s watch — and a helpless restructuring plan he had proposed. Yet Paul Achleitner, chairman of Deutsche’s supervisory board, expressed his appreciation for the contribution of Jain and the other co-chief executive, Juergen Fitschen, who is leaving at the end of this year, in almost the same words the VW board used for Winterkorn.

In 2013, the supervisory board of Siemens, Germany’s fifth biggest company by revenue, announced the resignation of Peter Loescher, whose time as chief executive was marked by costly delays in important projects and woeful strategic errors, noting that “Under his leadership, the company achieved a substantially higher level of performance and profitability.” Loescher was credited with cleaning up Siemens after the company was caught bribing officials in a number of countries to land contracts.

It may be that malfeasance of the kind seen at VW, Deutsche Bank and Siemens over the years, as well as a lack of executive responsibility for it — beyond the nuisance of having to resign and be sorely missed — is built into the German corporate governance system.

This system is distinctive in that it recognizes the interests of more than just the shareholders. Other stakeholders, such as workers, local governments and often creditors are represented on supervisory boards. Half of Volkswagen’s board consists of employee representatives elected by the workforce. Besides, two of the board’s 20 members are delegated by the state of Lower Saxony. Votes by the workers and the local bureaucrats secured Winterkorn’s boardroom triumph in April. Workers’ representatives, including labor union leaders, take up half the seats on the boards of Siemens and Deutsche Bank, too.

This is called “co-determination.” The term has more to it, though, than joint decision-making. As a result, employees’ and other stakeholders’ interests become closely aligned with those of management.

It is a feature of every scandal that it is followed by promises of a clean-up.

No wonder it often takes intervention from foreign authorities to uncover wrongdoing by German corporations. In the cases of VW and Siemens, U.S. probes led to the damaging revelations. At Deutsche Bank, shady practices might have continued but for the attention of financial regulators in the U.S. and the U.K.

Chancellor Angela Merkel, who has run Germany for the last decade, has done a lot to turn it into a values-based society

The German corporate establishment is out of step with a society that is actively atoning for its 20th century sins. If it cannot cleanse itself, perhaps changes are needed to the corporate governance system to give investors a bigger role and give other stakeholders a stronger voice.

Fixing VW

A Circuit Breaker on Brazil?

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Mohammed El-Erian writes:  Brazil is experiencing a repeat of the kind of emerging-market financial dislocation that many hoped it had left behind in the 1980s and early 2000s. If unchecked by a circuit breaker, this self-sustaining cycle could gather further momentum, exposing the country to economic shocks that would hit the poor particularly hard and add to the political dysfunction.

In response to an outflow of investment funds and accelerating capital flight, Brazil’s three main financial markets are stuck in a mutually reinforcing process of value destruction. The result is a horrid combination of sharp currency devaluation, rising external borrowing costs and increasing domestic interest rates.

These damaging trends exacerbate the threat of two additional vicious cycles, also of the self-feeding variety:

The first links the sovereign and the corporate sectors. The more government bonds and the currency come under pressure, the greater the threat of contagion to the corporate market.

The downgrade of Brazil’s sovereign credit rating to junk status by Standard & Poor’s this  month already has pulled down the ratings of the country’s corporates, increasing borrowing and refinancing costs across the board. Meanwhile, the scandal at Petrobras, the country’s biggest company, has raised concerns the state may be forced to intervene with a bailout, adding to discomfort about the sovereign balance sheet.

The second links the financial sector and economic prospects. The more financial markets are disrupted, the greater the risk to the broader economy, which already is struggling with a recession and high inflation. This cycle could lead to skyrocketing production costs, declines in activity, increases in unemployment, falling real wages, curtailed consumption and accelerating capital flight.

If left to fester, these sorts of linkages feed upon themselves, exposing the country to what economists call a “multiple equilibrium”: the risk that, rather than being on course to revert to the mean (finding its way back to stability), Brazil’s economy deteriorates further, enhancing the risk of a slide toward an even worse outcome.

Brazil desperately needs a circuit breaker to eliminate the mounting threat of cascading negative outcomes. The best way to achieve this would be a series of official decisions, designed by the government and passed by the legislature, that restore the country’s growth dynamic, contain its fiscal deterioration and reverse mounting inflationary pressures.

The government has submitted a series of fiscal proposals to the National Congress. Unfortunately, the country’s political dysfunction makes the prospects for full passage less than comforting.

History tells us that when a country delays putting in place a domestic circuit breaker, that potential role eventually will shift to external actors, including multilateral organizations spearheaded by the International Monetary Fund.

Without the rapid implementation of circuit breakers, a stabilization of Brazil’s financial conditions would depend on the large-scale re-engagement of foreign capital and the return of flight capital.

Hope for Brazil is based on the knowledge that, with improved governance, it wouldn’t take much to turn this promising economy around, but the country’s political class again may fall short in properly serving citizens, risking misery for the most vulnerable segments of the population.

Circuit Breakers for Brazil?

Entrepreneur Alert: Pope Bobbleheads?

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Joshua Keefe writes: Pope Francis’ ’historic visit to the city could be a gift from God for street vendors and small businesses.

Enterprising merchants have already started to cash in on His Holiness’s arrival, hawking a wide array of papal swag — from solar-powered pontiff figurines to key chains and buttons of the beloved Catholic leader.

The $25 “Solar Pope” statues were lighting up registers at the West Village home-goods store Kikkerland.

“We’ve been getting a lot of attention. Our sales have definitely increased,” store employee Alex Holland, 25, said of the statues, which wave at passersby. “People seem to really like them.”

Pope Francis merchandise was also selling briskly in tourist-heavy parts of Midtown and near St. Patrick’s Cathedral, where he will celebrate Mass.

Two blocks away at souvenir shop Grand Slam New York, magnets, T-shirts and umbrellas with the pope’s image sold faster than indulgences during the Middle Ages.

“The [$6] magnets have been selling very good,” the store’s manager, John Palha, 52, said just after he sold two pope shirts for $10 apiece.

Pope mania has also been inspiring peddlers to give back.

Christopher Burrus, 53, hawked $3 prayer cards of Pope Francis at a table set up a couple blocks from St. Patrick’s. The retired cook said that a nearby Episcopal church that feeds the homeless will get some of the money he makes.

“I’ve agreed to donate $70 of my proceeds to the church, but I might give more,” he said.

While many merchants saw the visit as a blessing, some were praying that street closures wouldn’t hurt business.Pope Bobblehead

 

 

Boeing to China

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Boeing Co has signed deals to sell 300 aircraft to three Chinese firms and set up an aircraft plant in China, becoming the first U.S. firm to clinch a business tie-up in the country since Chinese president Xi Jinping began a U.S. state visit, the official Xinhua news agency said.

The aircraft deals, potentially worth tens of billions of dollars in total, are collectively the largest order the aerospace firm has received from Chinese companies.

China’s ICBC Financial Leasing Co, a unit of the Industrial and Commercial Bank of China, on Wednesday separately confirmed it will buy 30 of Boeing’s 737-800 jets, worth $2.88 billion at list prices.

China Aviation Supplies Holding Company and China Development Bank Leasing are the other two customers for the aircraft, said Xinhua.

Boeing, which is locked in a fierce battle for plane orders with European rival Airbus, will build its first aircraft completion plant outside the United States in China in order to gain a foothold in that important market, say industry observers.

Boeing raised its forecast for China’s aircraft demand by 5 percent in August, saying that the country will need 6,330 planes over the next 20 years.

It signed a cooperation document with Commercial Aircraft Corporation of China (Comac) to build the aircraft completion center for its 737 passenger jet in China, added Xinhua. The agency didn’t disclose further details.

An aircraft’s interiors and some systems are usually installed, and the plane is painted in the customer’s livery, at completion centers. The final flight trials are then completed before the aircraft is delivered to the customer.

Boeing executives and officials from the Chinese firms could not immediately be reached for comment. Xi, who arrived in Seattle on Tuesday, is set to visit Boeing on Wednesday.

The number of air passengers traveling to, from and within China is set to nearly triple by 2034 to some 1.3 billion, surpassing an expected 1.2 billion for the United States, according to official estimates.

State-owned airlines like Air China, China Eastern Airlines and China Southern Airlines, and privately-owned budget carrier Spring Airlines, are growing fast and adding new planes to meet this demand for both short and long haul air travel.

Boeing’s plans for an aircraft completion center comes after Airbus signed an agreement in July to set up its second Chinese plant.

Boeing to China

 

End Fossil Fuel Subsidies?

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Bloomberg editorial writes:  Subsidies, as a rule, distort financial incentives and leave the economy less efficient. Subsidies on fossil fuels are doubly foolish: They also divert investment and consumption away from cleaner energy, and cost taxpayers a bundle.

Yet last year, for all the talk from world leaders about cutting greenhouse-gas emissions, the richest nations spent more on subsidies for coal, oil and natural gas than they did a decade ago. Those subsidies — a mix of direct spending and tax breaks — amounted to $65 billion among the 34 members of the Organization for Economic Cooperation and Development, and another $103 billion in China, India, Brazil and other large countries outside the OECD..

Developed countries have made some progress: Their fossil-fuel subsidies have inched downward for each of the past three years. But inertia remains a problem. About two-thirds of the individual subsidies have been in place since before 2000. Times change, and so should policies. When people and businesses need incentives to use less fossil fuels, it makes no sense for taxpayers to give them an advantage in the marketplace.

 Fossil Fuel Subsidies

Entpreneur Alert: The Streaming Business

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Leonid Bershidsky writes:  Deezer, the Paris-based music streaming service, will be the first company in that budding industry to go public. Its initial public offering prospectus, for a share sale toward the end of the year, provides fascinating insight into how the streaming business works — or rather, how it could work.

The service is an important global player (though it isn’t well-known in the U.S., where it launched last year). It operates in 180 countries and boasts 3.8 million revenue-generating subscribers. Spotify, the streaming industry leader, claims “more than 20 million.” Apple Music has only reported 11 million trial subscribers so far. Thanks to the IPO filing, though, Deezer is the only company in the industry to provide validated numbers.

Of the 3.8 million, only 3 million actually listen to music from the Deezer catalog — the industry’s biggest, with 35 million tracks, 5 million more than Spotify or Apple Music. The rest are so-called “inactive bundle subscribers.” Deezer sells subscriptions bundled with various devices, such as audio equipment. About 1.5 million such customers use the service at least once a month. Another 1.5 million heard about the service or saw its advertising before subscribing.

This user base brings in about 96 percent of Deezer’s revenue. The rest comes from advertising, played to non-paying users. In the six months ended June 30, it made 93 million euros ($104 million) in revenue and paid back 76.4 percent of that to rights owners — a bit more than the 70 percent Spotify says it returns or the 71.5 percent claimed by Apple. The gross margin isn’t bad, but it’s easily eaten up by development, marketing and administrative expenses. For the six months ended June 30, Deezer reported a 12 million euro loss, practically unchanged from the same period last year, though revenue increased 41 percent.

This is standard for the industry. Spotify, too, loses money. Apple Music hasn’t even started charging subscribers yet. 

Both Deezer and Spotify hoped that their user bases eventually would be big enough for revenue growth to overtake increased development and marketing budgets. It’s not really happening, though: Costs are growing in step with revenue. So the services keep putting off their break-even point. In the IPO filing, Deezer uses these industry revenue projections from Enders Research:

It’s probably true that streaming revenues will surpass those from sales of CDs and vinyl records, as well as those from downloads from stores such as iTunes. In the U.S., streaming has already beaten physical sales, and downloads will probably yield leadership next year because they’re dropping. Streaming is growing even faster in Europe — in Sweden, Spotify’s home country, it accounts for 70 percent of recorded music revenue, and in France, Germany and the U.K., listeners also are switching to streaming services. So Enders’ prediction that streaming will become the leading channel for music sales globally in 2018 is probably conservative. It’s far from certain, though, that total music sales will start growing this year: They’ve been on their way down since 2012. 

Compared with popular music’s heyday, the industry is far less influential and less interesting. Larger-than-life stars are hard to come by — there’s no new Michael Jackson or Kurt Cobain, no new giant bands such as U2 or Radiohead. 

Yet Deezer is betting on that growth and, at the same time, hoping that people will subscribe to more than one service. It may be right: I now use three services because my favorite music — including Russian, Polish, Ukrainian, German and French groups — isn’t all available on any single outlet. Yet there is a tremendous amount of overlap between the biggest players’ catalogs: After all, they deal first with the same big record companies and then with smaller publishers if they have the resources left.

France is the biggest market for the Paris-based company, just as Spotify is especially popular in Scandinavia. It’s possible that, with the exception of Apple, which has a large user base throughout the world, successful companies will be strong in their home territories, providing access to the music that people there most enjoy. That, however, would limit user base growth.

Deezer hopes the IPO will value it at 1 billion euros. That’s a much more modest number than Spotify’s valuation of $8 billion from its latest funding round, and it should be achievable — streaming is clearly the music industry’s future, and Apple, despite its enormous power, won’t be able to eliminate all the competition.

The lack of great content that could boost interest in streaming, and in popular music in general, remains the biggest problem. Streaming may have contributed by making is next to impossible for new artists to make any money from recording their music. Deezer, Spotify, Apple Music and others are taking over a shrinking market, so profits will remain elusive.

Ubiquitous Streaming?

Abe Going Forward in Japan

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In the wake of his reinstatement as leader of the Liberal Democratic Party for another three-year term, Prime Minister Shinzo Abe plans to reshuffle his Cabinet and LDP executive posts possibly in early October as part of efforts to push forward his economic program.

The Japan Post initial public offering could be just what the doctor ordered to enliven the country’s stagnant banking sector.

The Bank of Japan refrains from boosting stimulus even though the economy shrank in the last quarter.

Standard & Poor’s has cut the nation’s long-term credit rating one level to A+, saying it sees little chance of the government’s current strategy accelerating growth and inflation over the next few years.  Downgrade not thought to matter much.

The Bank of Japan’s closely watched tankan survey of business sentiment, due out Oct. 1, is expected to show the first decline in three quarters.

Abe Going Forward

Emissions Scandal: Libor on Four Wheels

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In the US, in important consumer areas like banking and automobiles, we pass legislation that protects consumers and keeps them safe.  In theory.  We have often discussed the problem of banking regulation on this site.  The ongoing Volkswagen emissions scandal is part and parcel with our failure to jail culpable bankers.

In this case, we regulate fuel emissions to improve the environment.  Often car manufacturers conduct the emissions tests.  If they don’t, the test are conducted in controlled venues.  Cr manufacturers have figured out how to make cars look like they are complying with emissions standards  under these tests.  When the car goes out on the road, the car no longer meets the standards.

In Europe and in the US, diesel cars are desirable because they burn less fuel.  However, with emissions standards, it is apparently difficult to make a profit with a fuel efficient, environmentally-sound vehicle.

What happened with VW was Libor on wheels.  There is no doubt that other car manufacturers will be outed.  Ford already made a deal with the government.

If we take the time to make rules and laws, shouldn’t we try hard to enforce them?   Slowly people like Senators Warren and Sherrod Brown are calling the public’s attention to banking irregularities that tear down economies.  Cars will be next.

Libor on Wheels

 

Tarnished: Made in Germany

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The Volkswagen emissions scandal has rocked Germany’s business and political establishment and analysts warn the crisis at the car maker could develop into the biggest threat to Europe’s largest economy.

Volkswagen is the biggest of Germany’s car makers and one of the country’s largest employers, with more than 270,000 jobs in its home country and even more working for suppliers.

Volkswagen Chief Executive Martin Winterkorn paid the price for the scandal over rigged emissions tests when he resigned on Wednesday and economists are now assessing its impact on a previously healthy economy.

“All of a sudden, Volkswagen has become a bigger downside risk for the German economythan the Greek debt crisis,” ING chief economist Carsten Brzeski told Reuters.

“If Volkswagen’s sales were to plunge in North America in the coming months, this would not only have an impact on the company, but on the German economy as a whole,” he added.

Volkswagen sold nearly 600,000 cars in the United States last year, around 6 percent of its 9.5 million global sales.

The U.S. Environmental Protection Agency said the company could face penalties of up to $18 billion, more than its entire operating profit for last year.

Although such a fine would be more than covered by the 21 billion euros ($24 billion) the company now holds in cash, the scandal has raised fears of major job cuts.

The broader concern for the German government is that other car makers such as Daimler (DAIGn.DE) and BMW (BMWG.DE) could suffer fallout from the Volkswagen disaster. There is no indication of wrongdoing on the part of either company and some analysts said the wider impact would be limited.

The German government said on Wednesday that the auto industry would remain an “important pillar” for the economy despite the deepening crisis surrounding Volkswagen.

“It is a highly innovative and very successful industry for Germany, with lots of jobs,” a spokeswoman for the economy ministry said.

But analysts warn that it is exactly this dependency on the automobile sector that could become a threat to an economy forecast to grow at 1.8 percent this year. Germany is already having to face up to the slowdown in the Chinese economy.

“Should automobile sales go down, this could also hit suppliers and with them the wholeeconomy,” industry expert Martin Gornig from the Berlin-based DIW think tank told Reuters.

In 2014, roughly 775,000 people worked in the German automobile sector. This is nearly two percent of the whole workforce.

In addition, automobiles and car parts are Germany’s most successful export — the sector sold goods worth more than 200 billion euros ($225 billion) to customers abroad in 2014, accounting for nearly a fifth of total German exports.

The German BGA trade association also tried to calm the public by saying there were no signs that customers abroad were starting to doubt quality and reliability of German companies.

But he acknowledges there is a degree of concern among German companies that the scandal over cheating on U.S. diesel emission could have a domino effect on their businesses, eroding the cherished ‘Made in Germany’ label.

VW Emissions Deceit