BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Archive | November, 2016

Pension injections fight to trim shortfalls

Posted on 30 September 2012 by

Britain’s largest employers have poured roughly £175bn into their underfunded pension schemes over the past decade, according to a new report, but have made only a modest dent in shortfalls because liabilities are rising so much faster than asset values.

The report to be released Monday from consultant Mercer found that, despite this flood of new contributions from employers of FTSE 350 companies, the aggregate shortfall of that group narrowed only slightly from £75bn at the end of December 2002 to £73bn today.

    The reason that the huge contributions made so little difference is because even though assets had risen, the value of liabilities have risen much faster.

    While total liabilities were £357bn at the end of 2002, that had mushroomed to £574bn by the middle of 2012.

    The sharp rise in liabilities has been driven by an equally sharp fall in interest rates. The two move in inverse relation to each other.

    Adrian Hartshorn, consultant at Mercer, said part of the rise in liabilities has been the unexpectedly rapid rise in life expectancy at older ages. This, he said, accounts for about £50bn of the rise.

    But it also may reflect some misplaced confidence that relative returns of equities and gilts markets would maintain the same relationship that they had over the previous two or three decades – when rates were high and stock markets entered their longest bull run in history.

    Had schemes invested in index-linked gilts, these would have risen in value by as roughly much as liabilities over the decade to 2012.

    However, while investing heavily in equities produced outsized returns in some years over the 2002-2012 period, they have not, on balance, outperformed enough to offset the surge in liabilities.

    In recent years, pension scheme weightings in equities have fallen and those in bonds have risen.

    However, only some of that reflects investment decisions. Part of it reflects market movements.

    For decades, employers have been able to count on investment returns to cover a significant portion of the cost of pension promises.

    During the 1980s and 1990s, these were sufficiently high to allow many employers to avoid making contributions at all. But since the bursting of the dotcom bubble, that has changed.

    “Companies can chose to operate their plans in a very low risk way but there will be a very large upfront cost,” Mr Hartshorn added. “As it’s turned out, companies have chosen not to hedge the risk and that has cost them a lot of money.”

    He noted that, even in the 1990s, yields on risk-free gilts were as high as 5 or 6 per cent.

    When index-linked gilts were producing real yields of 2 per cent, they appeared to be poor value.

    “People got used to relatively high equity returns and perhaps expected that to continue relative to government bonds,” he said. “Until people have actually lived through the downturn, they may be discounting it.”

    Private equity managers fear tax hit

    Posted on 30 September 2012 by

    Private equity fund managers are so worried about changes to the way their income is taxed in the US that some are trying to rewrite agreements with investors to protect themselves against any cut in take-home remuneration.

    The fears result, partly, from increased scrutiny of the private equity industry, sparked by Mitt Romney’s bid for the White House. Barack Obama’s campaign has tried to portray the Republican candidate’s work at Bain Capital as “vulture” capitalism.

      Many private equity fund managers – general partners, in industry jargon – fear that there could be changes to the tax code if Mr Obama is re-elected.

      However, limited partners, the investors in private equity funds, are fighting back.

      “Wouldn’t we all like to have a sugar daddy who protects us from bad taxes?” asked one limited partner who invests in funds for wealthy individuals. “That’s what some of the GPs are asking for.”

      General partners earn income from deals through “carried interest”, usually worth about 20 per cent of the fund’s annual profit, in addition to charging management fees.

      Carried interest is taxed at the 15 per cent rate for all capital gains but the Obama administration has proposed changes that would see carried interest charged at the same rate as income, typically 35 per cent.

      Spurred by the possibility of a change in taxation, five LPs told the Financial Times that many GPs were introducing general clauses into partnership agreements that would give them power to change the terms if there was any change in the tax regime.

      The clauses are usually general, giving reasons why partnership agreements can be changed without the consent of limited partners, rather than mentioning carried interest specifically.

      In its offer memo before listing this year, Carlyle warned potential investors that if such taxes were implemented, the business might come up with arrangements to compensate its executives, with those arrangements then cutting into returns for investors.

      “GPs are trying to put in changes that are in their self-interest but LPs are having them amended so everyone has a say,” said one LP who manages public sector pension savings, adding that they were settling on clauses that would give all parties a chance to renegotiate contracts.

      The LPs spoke on condition of anonymity to avoid angering GPs or drawing attention to their own investors.

      Kathy Jeramaz-Larson, executive director of the Institutional Limited Partners Association, said it was impossible to negotiate on hypotheticals. “LPs are not interested in negotiating today what might happen tomorrow,” she said.

      General partners said their investors had shown little interest in their tax rate and have generally declined requests to stand up for the industry when it comes to the tax break, which benefits buyout groups.

      In depth

      US elections 2012

      staff fixes the presidential seal before US President Barack Obama gives a press conference

      Republican candidate Mitt Romney takes on President Barack Obama in the race for the White House

      One, who said his firm had not made any changes to its fund documents, said he would be surprised if such changes got past large institutional investors. “We have found that our LPs are unsupportive on the issue.”

      But industry groups express concern about the scrutiny that Mr Romney’s candidacy had brought to private equity.

      “The political rhetoric surrounding the presidential election certainly brought attention to many aspects of the tax code including carried interest,” said Steve Judge, president of the Private Equity Growth Capital Council.

      “The idea that capital gains treatment should only be available to those with money to invest would advance a policy that puts a higher value on financial contributions than vision, hard work and other forms of sweat equity.”

      A lawyer who specialises in private equity funds said the desire to change contracts was not new.

      “We’ve certainly seen it in a lot of fund documents for more than a year,” he said, adding that efforts to alter contracts followed attempts to change the treatment of carried interest and such clauses give the general partners the right to change the document should the federal tax code change.

      However, he said while such potential changes remain ambiguous, “in no way would it be materially adverse”.

      The only way that the underlying economics for a limited partner could change would be by a vote of all the limited partners, he said. The lawyer was also sceptical that private equity groups would be able to avoid new laws designed specifically to end a highly preferential tax break.

      “Our tax guys would shrug their shoulders, the only way is to raise the carry,” he said.

      Additional reporting by Henny Sender

      Samaras vows to fight Greek corruption

      Posted on 30 September 2012 by

      Antonis Samaras, New Democracy party leader, smiles at supporters in central Athens after his party came first in the national Greek election©Getty

      Antonis Samaras

      The Greek prime minister on Sunday called for “zero tolerance” of corruption after reports surfaced for the first time of named politicians being investigated on suspicion of taking kickbacks and evading taxes while in office.

      In an interview marking his first 100 days at the head of a cross-party coalition, Antonis Samaras referred to the publication on Friday of a list of more than 30 names of former and present politicians under investigation by SDOE, the financial police. “There will be full transparency, with everything out in the open immediately, and the whole truth to be revealed,” Mr Samaras told To Vima newspaper.

        A senior finance ministry official confirmed to the FT that investigations were taking place but that no firm evidence of wrongdoing had yet emerged.

        A separate revelation that a CD containing the names of almost 2,000 Greeks with deposits in an HSBC branch in Geneva had “disappeared” from its archive has caused SDOE further embarrassment.

        George Papaconstantinou, a former finance minister who launched Greece’s first fiscal and structural adjustment programme in return for a €110bn international bailout, confirmed that he received the CD in 2010 after requesting it from Christine Lagarde, then French finance minister.

        The names of French, Spanish and German depositors at the same HSBC branch in Geneva had already been made available to the respective governments. “I noted the biggest amounts and sent the names to SDOE for checking . . . I was told that preliminary findings showed problems with (their) tax declarations, so I gave SDOE the whole list to pursue,” Mr Papaconstantinou told the FT.

        The leaked list of politicians under investigation by the SDOE [that was published in the Greek press on Friday] included Panos Kammenos, leader of a rightwing political party, Nikitas Kaklamanis, a former conservative mayor of Athens and Yannos Papantoniou, a former socialist finance minister. All deny any wrongdoing.

        Michalis Karchimakis, a former socialist lawmaker named in the list, who was responsible while in office for promoting transparency in the then-governing Panhellenic Socialist Movement (Pasok), dismissed it as “a fake . . . part of a dirty political game”.

        Many of the accusations focus on the “illegal enrichment” of politicians through acquisitions of high-end properties, often through offshore companies, at below-market prices, according to a former SDOE official.

        Mr Samaras warned in his interview: “We have to be quite clear about what is ‘rumour’ and what is true . . . Don’t forget, the best way of concealing a scandal is to find a fake one and focus public opinion on that.”

        Greece has often been criticised by the EU and International Monetary Fund for failing to crack down on widespread tax evasion, including money-laundering through offshore companies and transfers of capital by wealthy individuals to Switzerland and other international financial centres.

        The Sunday editions of Greek newspapers carried details of MPs supposedly enjoying high-rolling lifestyles in suburban Athens villas equipped with indoor swimming pools – and, in one reported instance, a mini-football pitch – and at luxury vacation homes on fashionable Aegean Islands.

        The newspaper articles play to mounting popular anger over “lamogia” – alleged scams carried out in the 2000s by politicians in collusion with businesspeople to avoid paying taxes and make money for themselves while failing to prevent Greece’s financial collapse.

        The campaign’s only victim so far has been Evangelos Meimarakis, speaker of parliament, who stood down last week after he and two former cabinet colleagues were accused in a newspaper article of involvement in a €10.2bn money-laundering operation in collusion with two Athens real estate brokers.

        Mr Meimarakis denied the accusations, saying he was stepping down temporarily until his name was cleared.

        Yannis Stournaras, the finance minister, told the FT on Sunday that he would pursue the issue of the missing CD with Greek depositors names “as a priority”.

        “I first learnt of its existence last week from the newspapers . . . but if SDOE can’t track it down, then we’ll ask our European partners for another copy,” Mr Stournaras said.

        The finance ministry last month signed an information-sharing agreement with Swiss authorities on deposits held by Greeks in Swiss-based banks. Two previous governments started similar procedures but failed to complete them because of pressure from politicians and senior businesspeople, a finance ministry official said.

        Greece is under pressure from the EU and IMF to set up a special department at the finance ministry to handle tax evasion in line with its bailout commitment.

        Two former directors of SDOE who served under Mr Papaconstantinou said at the weekend they had never seen the CD with the list of names. Nikos Lekkas, its current director, told Proto Thema newspaper: “We have checked every protocol number (for incoming material) and found no reference to this diskette.”

        Only one Greek politician has recently been taken into custody and is awaiting trial on corruption charges. Akis Tsochatzopoulos, a socialist former defence minister, was detained to prevent his possible flight abroad while being investigated on charges of taking millions of euros in kickbacks while in office. No date for his trial has been set. He denies the charges.

        China’s bond market – jury still out

        Posted on 30 September 2012 by

          Many regions across China are struggling financially. The south-east manufacturing city of Dongguan is near bankruptcy, researchers at Sun Yat-sen university reckon. Yet local governments all over China still have big infrastructure plans. And deteriorating asset quality means that banks are reluctant to extend loans. How is China plugging the gap? Cue its corporate bond market.

          China’s nascent corporate bond market has ballooned this year. Chinese companies, state-owned enterprises and local government financing vehicles issued a record Rmb1.3tn of bonds in the first eight months, up 90 per cent from a year earlier. A more efficient approval system has helped. As has pricing. For “quality” borrowers, the financial cost each year of issuing bonds of about five years is close to – or even lower than – the one-year benchmark lending rate of 6 per cent. Corporate bonds also provide much-needed long-term funding as China’s banks shy away from longer-term lending.

          In theory, that should be a healthy development. After all, China’s financial system needs to move away from an overreliance on bank credit. The problem, however, is that the buyers are largely banks – 80 per cent of new issuance of corporate bonds and trading turnover this year was via the interbank market, according to Credit Suisse. And while trading in the secondary market is picking up, the lack of independent investors to drive liquidity is hardly conducive to realistic pricing.

          But then China’s credit rating system is still nascent. There is also little expectation of default, because the types of issuers – largely state-owned enterprises and local government financing vehicles that fund infrastructure projects – have the backing of their local governments. It might take a default to shift that perception. But the US proves that even access to deep and liquid bond markets does not stop local governments being profligate.

          Turkey in push to attract Arab investors

          Posted on 30 September 2012 by

          At the centre of a Turkish bid to get hundreds of millions of dollars from the Gulf is a mound of reddish brown earth, bordered by Istanbul’s financial district, a forest, and a military range.

          Agaoglu, the construction group developing the site, claims its plan to build 5,000 apartments in the area, with accompanying facilities, amounts to the biggest real estate project in the country’s history, with a TL5bn ($2.8bn) price tag.

            But the 322,000 square metre development, named Maslak 1453, after the year Constantinople fell to the Ottomans, is more than that. It is also squarely aimed at attracting large-scale investment from the Gulf, in line with a general push in Turkey to increase business, political and economic ties with the region.

            The pitch will be refined on Wednesday at a gala dinner in Dubai featuring Tarkan, a Turkish pop megastar. The goal is to win over more corporate investment into the as-yet unbuilt project.

            Ali Agaoglu, the developer who together with the Turkish government is behind Maslak 1453, has come a long way since the 1970s, when he says he and others in the sector used low-grade sand for buildings in earthquake prone Istanbul. Today he has a fortune Forbes estimates at $2.1bn and the Turkish construction sector, which often depends on cash from sales to finish building, is booming.

            Although not a single apartment in Maslak 1453 has yet been built – the project is planned to be completed by the end of 2016 – Mr Agaoglu says it has already netted $400m from Gulf investors even before this week’s glitzy dinner.

            The move that made the investment possible was a reform of property law this year that is speeding the way for purchasers from the Gulf.

            “They have so much money and they want to spend money, Europe is not doing well and Turkey is cheap,” says Serhat Cesmeci, the project’s sales manager, explaining the focus on Arab investors. “We are Muslim, they are Muslim, they trust us.”

            He added that last week one Saudi businessman had bought 12 flats as an investment and convinced a friend to buy a thirteenth and that a Saudi company had bought 80 flats at the same time.

            Nor is Maslak 1453 an isolated case.

            When Amin El Kholy, managing director of asset management at Arqaam Capital, a Dubai-based investment bank, last visited Istanbul in August, he saw desks set up in the lobby of his hotel, hawking real estate to Arab investors.

            He did not buy an apartment but sees the benefit of investing in Turkey, not least because the country’s status as a large-scale energy importer makes it a hedge for funds exposed to the oil-rich economies of the Gulf.

            But Mustafa Abdel-Wadood, chief executive of Abraaj Capital, one of the only Gulf-based private equity groups to have profitably exited from Turkey, cautions that few deals with the Gulf are actually getting done.

            “Everybody talks, but very few people have done anything,” he says. “When a market is to a certain extent flavour of the month people’s view of their own assets can be a little inflated.”

            Other private equity investors also complain that valuation levels are high in Turkey, where the economy boomed in 2010 and 2011.

            Fadi Arbid, chief executive of Amwal al-Khaleej, the Riyadh-based private equity group, says the country remains an alien market for many Arab investors, adding that Egypt or North Africa are easier targets for Gulf private equity groups.

            Indeed, over the last decade, the Middle East has accounted for just under 10 per cent of $91bn in foreign direct investment in Turkey.

            “We have been waiting for this capital from the Middle East for the last six or seven years,” says Ozgur Altug at BGC Partners in Istanbul. He dismisses predictions that the liberalised laws will unleash $5bn in real estate sales to foreigners a year. But he expects Gulf investment to rise in Turkey all the same – just rather less rapidly than some enthusiasts would suggest.

            Leftists march in Paris against austerity

            Posted on 30 September 2012 by

            Demonstration against European budgetary treaty in Paris©AP

            Thousands of leftists marched through Paris on Sunday demanding a referendum on the EU’s new fiscal discipline treaty in the latest of a series of anti-austerity protests in countries hit by the eurozone crisis.

            The demonstration, the biggest political rally in France since May elections brought Socialist president François Hollande to power, followed protests on the streets of Madrid and Lisbon on Saturday.

              The communist-backed Left Front and 60 other organisations backing the Paris march said tens of thousands of supporters turned out for the protest, timed to coincide with the opening this week of a parliamentary debate on ratification of the fiscal treaty, which Mr Hollande had originally vowed to renegotiate.

              Jean-Luc Mélenchon, the Left Front leader, said austerity policies were “dangerous for all the people of Europe”. Demanding a vote on the treaty, he added: “Democracy is sicker than we thought.”

              The government’s 2013 budget, unveiled on Friday, piled most of the burden of its €30bn savings on big companies and the wealthy, avoiding the severe cuts imposed on the broader population in Spain, Portugal, Greece and elsewhere.

              But Mr Hollande’s government is keen to contain public anxiety over rising unemployment, now at a 13-year high, and a spate of big industrial redundancy programmes.

              Likewise, analysts worry that the recent upsurge in political unrest in Portugal, Spain and Greece – where the neo-Nazi Golden Dawn party has risen to third in national surveys – could be a sign of more trouble ahead as repeated rounds of austerity bite even further into daily lives.

              “The cracks are showing in Spain’s social and economic fabric,” said Nicholas Spiro, a London-based sovereign risk consultant. “The risk is that in seeking to retain as much domestic ownership of the terms attached to any [EU rescue] programme, the government [of prime minister Mariano Rajoy] overdoes it and sparks an even more intense social and political backlash.”

              On Saturday several thousand protesters demonstrated outside Spain’s parliament, the third protest in central Madrid in the last week against a new round of spending cuts. Unlike protests held last year when tens of thousands occupied the central squares of Madrid, Barcelona and other cities, recent demonstrations have seen isolated but violent clashes with police.

              In Portugal, tens of thousands of trade unionists turned out in Lisbon’s central square for a peaceful protest against terms of the country’s €78bn EU-IMF bailout.

              Greek unions have also vowed to hold big protests if the government moves forward with a new €13.5bn austerity programme agreed last week by the coalition government.

              The recent upheavals in Portugal – where there had been widespread bipartisan support for the bailout since it was launched 16 months ago – has come as a particular shock to eurozone leaders, forcing Lisbon to reverse a rise in social security taxes designed to hit mandated budget targets.

              Although a number of dissidents in Mr Hollande’s Socialist party and his Green allies in government are likely to rebel against the EU treaty, it is set to pass comfortably when it comes to a vote later in October in the National Assembly and Senate as it is backed by a big majority of socialist parliamentarians and the centre-right UMP party of former president Nicolas Sarkozy.

              Ireland’s emigration highest for 25 years

              Posted on 30 September 2012 by

              Outside Croke Park stadium in the centre of Dublin a day before the all-Ireland hurling final, young people are queueing up to get inside. They aren’t seeking tickets, however. Instead, they are attending a jobs expo, where most hope to secure a position with a foreign company and leave the country.

              “Virtually all my friends have left to find work. Some are in New York, Toronto, Australia and London,” says Tommy Flynn, a 24-year-old civil engineering graduate who can’t find a job at home.

                “I sent out about 60 CVs in Ireland and got very few replies. I may try Canada,” he says.

                The latest emigration data provide a stark reflection of the economic crisis facing Ireland. A record 87,000 people left the country in the year to April, up from 80,600 a year earlier.

                Young people aged between 15 and 29 are worst affected with 182,900 in this age group leaving to live abroad since the crisis struck in 2008.

                Almost a third of 15 to 24 year olds, who grew up during Ireland’s Celtic Tiger boom when highly paid jobs were plentiful, are out of work and even those with jobs have seen their wages slashed.

                “People are voting with their feet either because they can’t find work or the only jobs they can get are precarious and there are better opportunities abroad,” says Brid O’Brien, head of policy at the Irish National Organisation of the Unemployed.

                For 25 to 40 year olds, huge mortgages and negative equity are a poisonous legacy of the property crash. Money problems are forcing adult children to move back into the family home with 91,000 of those over the age of 30 living with their parents.

                “Everything that could go wrong is going wrong. The public sector is cutting jobs when the private sector is pulling back investment and small businesses face a credit crunch,” says Ms O’Brien.

                Dublin implemented a recruitment embargo in 2010 covering most parts of the public sector in an effort to tackle a budget deficit, which in 2011 was the highest in the EU at 13 per cent. It plans to cut the number of people working in the public sector by 37,500 to 282,500 by 2015 to meet targets in its international bailout.

                “Almost no new graduate will land a permanent teaching job this year. The average wait for a permanent job after qualifying is eight or more years,” says Art McCarrick, a 25-year-old graduate living in County Cavan who qualified in June as a history and geography teacher.

                He is critical of
                an agreement reached between the government and trade unions in 2010 that promised no mandatory redundancies or extra pay cuts in the public sector in return for industrial peace and changes to work practices until 2014. This is creating a two-tier system in teaching and other parts of the public service, says Mr McCarrick.

                The agreement is credited with preventing strikes and public unrest during a period when Dublin has hiked taxes and cut services. But it has meant young people entering the public sector (teachers and some other professions are exempt from the recruitment moratorium) have had their pay and conditions slashed while existing workers are protected.

                “The current crop of teachers are the best trained in the history of the state yet we will be paid 30 per cent less than others who are older doing the exact same job down the hallway,” says Mr McCarrick, who is now considering moving to the UK to find work as a teacher.

                Several commentators have labelled Ireland “no country for young men”, pointing to the government’s refusal to cut pensions and tackle high public sector wages, while it continues to target people entering the workforce.

                Dublin said this week it would use its presidency of the EU beginning in January to advance plans for a “youth guarantee” scheme to ensure young people are directed into employment, education or training. But with a further €3.5bn in austerity measures planned in December’s budget there is very little funding available for new initiatives.

                “We really need to see more energy from government. From the work we have done talking to a lot of the young people who are emigrating many are very frustrated and disillusioned,” says James Doorley, assistant director of the National Youth Council of Ireland.

                “Some say they have lost faith in Ireland and won’t be back,” he says.

                Banks braced for trading activities review

                Posted on 30 September 2012 by

                Europe’s big banks are braced for a long-awaited review that will propose ringfencing their trading activities as Brussels embarks on EU-wide reforms to the structure of banking.

                The trading ringfence is set to be the central recommendation on Monday of the Liikanen Group, established nearly a year ago by Michel Barnier, the EU commissioner responsible for financial services, to help de-risk Europe’s big banks.

                  The idea draws on the UK’s Vickers Commission, which last year recommended that banks’ retail operations should be ringfenced, and the US Volcker rule, limiting proprietary trading.

                  At a final meeting last week, the group, which comprises a mix of policy makers and former banking industry executives chaired by Finnish central bank chief Erkki Liikanen, reached an agreement on its conclusions, which are now under consideration by Mr Barnier.

                  Banks were caught off-guard by leaks from the Liikanen Group deliberations, first reported in the Financial Times early last month, which indicated the recommendations would be much more radical than first envisaged.

                  Since then, industry nerves have been somewhat soothed by Mr Barnier, who has privately stressed that the report is independent and that a top priority for him will be ensuring lending is not choked off.

                  Before embarking on any legislative proposals based on Liikanen, Mr Barnier is likely to launch a wide-ranging consultation and order a full impact assessment, which will consider the interaction with existing reforms to make banking safer. “There is a long way to travel,” said one senior EU official.

                  Banks will also be heartened that, according to people close to the process, the Liikanen Group will not recommend the capital levels appropriate for the ringfenced operations, giving scope to minimise the impact of any structural reform. “It is not up to the group to set the details of prudential rules,” said one.

                  It is not clear whether a threshold will be set for the maximum volume of trading activities as a proportion of total assets before a ringfence must be created. Some of Europe’s biggest banks had indicated that if the threshold were kept as low as 5 per cent, as was earlier proposed, that would be punitive. Banks have lobbied for any threshold to be set at 10 per cent or higher, and for client trading – as opposed to proprietary business – to be excluded.

                  Mr Barnier’s own views on reform remain something of a mystery to both members of the Liikanen panel and the industry.

                  Some bankers have taken comfort from the fact that the commissioner is a long-standing champion of the universal banking model prevalent in France and expect the reforms to be less drastic in execution than that implied in the hard-hitting report.

                  At the same time, Mr Barnier has kept closely abreast of the panel’s deliberations and the far-reaching implications of the conclusions, which could potentially fit with the calls for structural banking reforms promised by President François Hollande of France.

                  Christian Clausen, president of the European Banking Federation and chief executive of Nordea Group, warned against trying to “ringfence our way out” of this crisis or trying to ban specific activities.

                  “There is a limit to the cost you can impose on the financial sector where it stops making money. We are maybe not there but we are approaching,” he said.

                  If Mr Barnier opts for a pan-EU solution, one potential flashpoint will be with the UK’s implementation of the Vickers reforms. Any proposal is unlikely to override Vickers, but the additional layer will anger UK investment banks, potentially exacerbating friction between London and Brussels.

                  JPMorgan snaps up Europe mortgage bonds

                  Posted on 30 September 2012 by

                  JPMorgan has snapped up three quarters of the first European commercial mortgage bond launched since the financial crisis in a deal that heralds the return of a vital source of funding for the continent’s cash-starved property market

                  The bank acquired €565m of the notes in a commercial mortgage-backed security supported by 30,000 residential rental properties in Germany, in a deal that closed on Friday. The balance of the bonds, which are priced at just under 4 per cent, were purchased by long-term investment funds, including M&G.

                    The issuance is the first European property-backed bond to be issued since 2007 and the start of the financial crisis.

                    The return of CMBS to the European property market marks an important moment for the sector, which is struggling from a lack of bank lending. The market peaked in 2006 with €67bn of issuance, before grinding to a halt in 2009.

                    However, it is the role of JPMorgan – one of the most active players in the property-backed debt market during the boom – that is likely to be seen as particularly significant.

                    Through its chief investment office, which suffered a $5.8bn loss this year, the US bank has been the largest investor in UK residential mortgage-backed property at a time when this market was standing almost still.

                    It aims to revive the continental European market in a similar manner.

                    One person close to the deal said JPMorgan was keen to play a pivotal role in this market. “This is the sort of super-stable and high-quality investment that the CIO was initially set up to do.”

                    “This transaction represents another important step in re-establishing CMBS and the capital markets as a funding source for European real estate,” said Nassar Hussain, managing partner at Brookland Partners, a real estate investment company.

                    The debt is secured against a portfolio of apartments and family homes scattered across north and west Germany, called the Vitus portfolio. As well as the properties, nearly all of which were formally government owned, the debt is secured against 7,124 parking spaces.

                    The Vitus portfolio is managed and co-owned by Round Hill Capital, a pan-European investor specialising in student housing and German residential property. The London-based company recently acquired a £266m portfolio of student housing from Blackstone, the US private equity group.

                    The rented German residential property market has become one of the most sought-after real estate assets during the downturn. The combination of low vacancy rates and stable rents and income streams has attracted pension funds, insurers and other long-term investors.

                    Round Hill and JPMorgan declined to comment on the process.

                    Centerbridge to return $500m to investors

                    Posted on 30 September 2012 by

                    Centerbridge Partners, the $20bn hedge fund and private equity investment firm, is returning $500m to investors in its Credit Partners hedge fund, in an illustration of the double-edged effect that easy money policies are having on the debt market.

                    Alternative investment firms like Centerbridge have been among the biggest beneficiaries of the Federal Reserve’s quantitative easing policies. Cheap debt courtesy of the Fed has allowed Centerbridge to make much of its money by investing in the debt of over-levered companies.

                      However, such over-levered companies are also benefiting from the Fed’s policies. With the easy availability of money, some of even the most troubled have been able to restructure their debt and buy time. The result is a recovery in their debt, which now trade at over 90 cents on the dollar when once they were heavily discounted.

                      This, and the fact that Centerbridge received large amounts of cash from special situations like the bankruptcies of Capmark and Lehman Brothers, means that Centerbridge Credit Partners now has about 20 to 25 per cent of its $8.3bn net asset value sitting in cash. That cash is earning virtually nothing as a result of that same monetary policy, which has depressed interest rates.

                      “Absolute yields are in our view strikingly low,” the firm said in a notice to investors that went out on Friday. “The market currently feels frothy. Should the markets continue on this upward trajectory, the fund will continue to raise cash and distribute it.”

                      “While we have been selectively adding to new positions in the US and particularly in Europe, we continue to generate substantial amounts of cash,” the notice stated. “Consequently, we have decided to return a portion to investors.”

                      Like many other alternative investment firms, Centerbridge has been sending some of its most senior people to Europe in the expectation that there will be significant opportunity there as banks are forced to sell assets and shrink their balance sheets. The investor notice added that “if global uncertainty drives increased volatility and cheaper prices, we want to ensure we have adequate capital on hand to be active buyers.”

                      Jeff Aronson, co-founder of Centerbridge and manager of the credit fund since it was established at the end of 2007, has a history of returning money to investors at a time when almost all other investment firms are obsessed with growing their assets under management. He and his partners have always told their investors that there is a trade-off between size and performance for alternative investors.