Renminbi strengthens further despite gains by dollar

The renminbi on track for a fourth day of firming against the dollar on Wednesday after China’s central bank once again pushed the currency’s trading band (marginally) stronger. The onshore exchange rate (CNY) for the reniminbi was 0.28 per cent stronger at Rmb6.8855 in afternoon trade, bringing it 0.53 per cent firmer since it last […]

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Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

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RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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Archive | Financial

PZU closes in on UniCredit’s Polish lender

Posted on 28 August 2016 by

A woman rides a bicycle in front of the PZU headquarters in Warsaw March 30, 2015. The head of Poland's biggest insurer, PZU, said on Monday his firm will look into the planned sale of the country's No.7 bank Raiffeisen Polbank, which was put on sale by its Austrian owner Raiffeisen Bank International. REUTERS/Kacper Pempel - RTR4VHFC©Reuters

Poland’s PZU is confident about reaching a deal to acquire UniCredit’s Polish lender Bank Pekao by the end of October after talks between the two companies’ managements.

State-controlled insurer PZU and Italy’s largest bank are haggling over a price for the deal, three people close to the situation told the Financial Times, with the Poles unwilling to pay more than €3bn for UniCredit’s stake in the bank and the Italians pushing for closer to €3.5bn.

    UniCredit’s 40.1 per cent stake in Pekao, Poland’s second-largest lender, is worth about 13.3bn Polish zlotys (€3.1bn) on Warsaw’s stock exchange.

    PZU chief executive Michal Krupinski met UniCredit executives in Milan last week to discuss their offer, which will be supported by capital from the Polish Development Fund through a special purpose vehicle, two people with knowledge of the talks told the FT.

    PZU has about 9bn zlotys in excess capital to spend and ruled out issuing new debt or equity for any acquisition.

    One person with knowledge of the discussions said UniCredit’s new chief executive, Jean-Pierre Mustier, was keen to finalise the deal before the unveiling of a new strategic plan in November. Italy’s only globally important bank needs to fill a capital shortfall estimated at as much as €9bn.

    Mr Mustier became chief in June after former boss Federico Ghizzoni left after months of investor dissatisfaction over the bank’s collapsing share price.

    The former Société Générale banker raised €1.1bn from selling stakes in Pekao and online bank Fineco in his first week in the job.

    The Big Read

    UniCredit: Too big to thrive?

    UniCredit fell 4.7 per cent

    Investors are not sold on the plan to reinvigorate Italy’s largest bank. Managers may need to be more radical

    Mr Mustier is under pressure to bolster UniCredit’s capital strength — it had a capital ratio of 10.33 per cent at the end of June, down from 10.5 per cent in March.

    Bankers said Mr Mustier is also keen to get UniCredit on a firmer capital footing ahead of a constitutional referendum in late November, which analysts consider a political and economic risk for Italy if the reformist government of Matteo Renzi fails to win.

    “Pekao is one of the easiest assets to dispose of,” said a person involved in the talks. “The deal is moving forwards.” A PZU representative declined to comment. A UniCredit spokesman also declined to comment.

    PZU has appointed Deutsche Bank as an adviser to the deal while UniCredit is being advised by UBS and Morgan Stanley, two of the people said.

    The bid is part of a push by Poland’s government to increase domestic control over the country’s banking industry.

    Warsaw owns a controlling stake of 35 per cent in PZU, which bought Alior Bank in 2015 and helped its subsidiary purchase GE Capital’s Polish bank earlier this year.

    Carlyle weighs withdrawal from hedge funds

    Posted on 28 August 2016 by

    Carlyle Founders' Stakes Valued at $1 Billion Post-IPO...The Carlyle Group LP logo is displayed on the exterior of the Nasdaq MarketSite in New York, U.S., on Thursday, May 3, 2012. Carlyle sold 30.5 million shares at $22 apiece, below the initial public offering's proposed $23 to $25 range, according to a statement yesterday. The price cut reflects the hesitancy of investors who have seen the value of other buyout firms fall after their IPOs. Photographer: Scott Eells/Bloomberg©Bloomberg

    Carlyle is weighing whether to withdraw from its hedge fund activities, as the private equity group struggles with its offerings and as one of its remaining vehicles has shrunk by almost 90 per cent in two years.

    One of the hedge funds majority owned by Carlyle, Emerging Sovereign Group, told investors this month that Carlyle was selling its stake back to ESG’s partners. Assets in another Carlyle hedge fund, Claren Road, have fallen to less than $1bn, from $8.5bn two years ago.

      Another Carlyle hedge fund, Vermillion, was reconfigured last year. It has been renamed Carlyle Commodity Management and lumped into the group’s other commodities business. In February, Carlyle shut its fund of funds business, Diversified Global Asset Management, and three months later the head of the Global Market Strategies unit, Mitch Petrick, stepped down to start his own investment management company.

      “We’ve been disappointed with kind of where we’ve been, but the broader piece of this business is still doing well,” Curt Buser, Carlyle’s chief financial officer, said of the GMS unit last month. “This is the business segment where our performance did not meet our or our investors’ expectations.”

      Claren Road, Vermillion, and other commodities products have generated losses, and the unit will probably cause Carlyle to fall short of its profitability targets, he said. “We’re thinking through kind of what the next steps are there.”

      When Carlyle made its ESG purchase five years ago, Carlyle’s Global Market Strategies business had 39 funds which oversaw $20.6bn. It now manages $35bn, across 70 funds with strategies including direct lending, energy mezzanine, collateralised loan obligations, and distressed debt.

      The commodities-focused Vermillion was dismantled and reshuffled after sharp losses in 2014 helped shrink its flagship fund from almost $3bn to less than $50m. Its founders departed in June 2015, three years after selling a majority equity stake to Carlyle.

      This year, a former trader from Vermillion sued Carlyle, alleging the private equity group and the hedge fund’s managers had fired him after he warned of an “Enron-like situation” in which Vermillion’s founders hid big losses from investors. Carlyle called the claims “baseless and frivolous”.

      Carlyle has not had much luck with hedge funds. In 2008 it shut down Carlyle-Blue Wave Partners Management when it was just over a year old.

      Its competitors have been more fortunate. Blackstone’s hedge fund of funds and staking businesses are flourishing. Last year it started its own multi-strategy fund, Senfina, though after a strong start it is now suffering from losses.

      Week in Review, August 27

      Posted on 27 August 2016 by

      Week in Review

      A round-up of some of the week’s most significant corporate events and news stories.

      UBS leads dash to develop new form of digital cash

      Four of the world’s biggest banks this week announced that they had teamed up to develop a new form of digital cash that they believe will become an industry standard to clear and settle financial trades over blockchain, the technology underpinning bitcoin, writes Martin Arnold.

      Golden coin with Bitcoin symbol in electronic cyberspace. 3D rendered image. Dreamstime©Dreamstime

      UBS, the Swiss bank, pioneered the “utility settlement coin” and has now joined with Deutsche Bank, Santander and BNY Mellon — as well as the broker ICAP — to pitch the idea to central banks, aiming for its commercial launch by 2018.

      Analysis and comment

      Blockchain PICN

      Suits join the hoodies with blockchain push

      Cost savings and low returns drive lenders into working with system underpinning bitcoin

      Blockchain offers banks the chance to rehabilitate their image

      The big appeal is that the technology should save financial companies money

      The move is a concrete example of banks co-operating on a specific blockchain technology to harness the power of decentralised computer networks.

      “Today trading between banks and institutions is difficult, time-consuming and costly, which is why we all have big back offices,” said Julio Faura, head of R&D and innovation at Santander. “This is about making it more efficient.”

      Blockchain technology is a complex set of algorithms that allows so-called cryptocurrencies — including bitcoin — to be traded and verified electronically over a network of computers without a central ledger.

      Having initially been sceptical because of worries over fraud, banks are now exploring how they can exploit the technology to speed up back-office settlement systems and free billions in capital tied up supporting trades on global markets.

      The total cost to the fina­nce industry of clearing and settling trades is estimated at $65bn-$80bn a year, according to a report last year by consultants Oliver Wyman.

      Jawbone falls at legal hurdle in fight against rival Fitbit

      In the early days of the wearable-technology market — which is to say, three or four years ago — Fitbit and Jawbone were arch rivals, writes Tim Bradshaw. But while Fitbit has gone on to become the market leader in fitness trackers after listing on the New York Stock Exchange last year, Jawbone has struggled to keep up even as competition grew from Apple and Samsung as well as traditional watch makers such as Fossil.

      Jawbone UP24 for Business Life

      Jawbone, which saw its valuation cut in half in a financing round in January, argues that Fitbit’s success is ill-gotten. The maker of UP wristbands and Jambox wireless speakers sued Fitbit last year for poaching employees, who it alleges took Jawbone’s trade secrets with them when they left, and for infringing its patents.

      The Top Line

      SEC must keep bearing down on private equity

      Brooke Masters

      Public pension fund investors should heed regulator’s findings on hidden fees, writes Brooke Masters.

      It has taken its case to both the US International Trade Commission, which has the power to ban offending products from sale, and to the California courts, where it hopes a jury might hand over “hundreds of millions of dollars” in damages.

      Jawbone’s offensive has not had a great start. First, the ITC threw out both Jawbone’s patent case and Fitbit’s countersuit. Then this week, an ITC judge ruled that “no party has been shown to have misappropriated any trade secret”.

      Fitbit chief James Park said the ruling showed the allegations were “nothing more than a desperate attempt by Jawbone to disrupt Fitbit’s momentum to compensate for their own lack of success in the market”. Jawbone said it would appeal for a review at the ITC and will press ahead with its California case.

      ● Related Lex note: Fitbit — bearable wearable

      VW pays CarTrim €13m after suppliers join forces

      Volkswagen has resolved a bitter dispute with two small suppliers that had brought production of Golfs and Passats to a halt by withholding deliveries of parts, writes Patrick McGee.

      An employee polishes the bodywork of a Volkswagen e-Golf electric automobile inside the Volkswagen AG (VW) factory in Wolfsburg, Germany, on Friday, May 20, 2016. Volkswagen AG agreed to raise German workers' pay after labor leaders vowed that employees wont foot the multi-billion-euro bill to resolve its diesel-emissions scandal. Photographer: Krisztian Bocsi/Bloomberg©Bloomberg

      The dispute comes as VW tries to slash costs and lift profitability following a €1.6bn net loss last year from the diesel emissions scandal.

      CarTrim and ES Automobilguss halted deliveries of seat parts and gearbox components this month over a cancelled project.

      In June VW pulled out of a €500m order for parts from CarTrim, which demanded €58m in compensation.

      Corporate Person in the News: Alan Joyce

      epa05508298 (FILE) A file picture dated 26 February 2015 shows Qantas Chief Executive Officer Alan Joyce delivering the company's half year results during a media briefing in Sydney, New South Wales, Australia. Australia's flag carrier airline Qantas announced on 24 August 2016, a gross profit of 1.08 billion US dollar in the financial year that ended on 30 June, the company's best-ever result till date. EPA/DEAN LEWINS AUSTRALIA AND NEW ZEALAND OUT

      Chief executive of Qantas leads previously troubled Australian airline to record earnings

      After weeks of negotiations VW was still refusing to pay the desired amount, so CarTrim and its sister supplier stopped sending their products.

      Interruptions followed at six German plants and after intense negotiations, according to a person briefed on the issue, VW agreed to pay CarTrim €13m.

      On Thursday a US judge ordered VW’s lawyers to negotiate a “plan B” in case 85,000 3-litre cars in the US could not be brought up to environmental standards.

      Last month Judge Charles Breyer gave preliminary approval to a $15bn settlement involving 0.5m 2-litre cars, which VW agreed to buy back or fix.

      VW has always said fixing the bigger cars will be straightforward.

      Progress with environmental regulators has been slow, however, so the judge wants a contingency plan ready.

      VW also reached an agreement-in-principle — to be presented to the court next month — with US dealers that had sued it for fraud.

      Miners promote prudence as China’s economy slows

      The world’s biggest mining companies have embraced an age of austerity. That was the message from results this week, as executives lined up to renounce their debt-fuelled expansions of the previous decade and instead laud their ability to cut costs, raise funds and pay down loans, writes David Sheppard.

      With China’s economy slowing just as hundreds of billions of mining investments started churning out more copper, coal and iron ore it was not surprising
      Glencore, South 32 and Fortescue all wanted to present leaner, more disciplined companies.

      For Glencore’s Ivan Glasenberg the conversion has been particularly stark.

      Mr Glasenberg said this week he did not even know what mines were up for sale, such was his dedication to reduce a debt pile that had swung Glencore close to the precipice last year.

      The miner was now trying to reduce net debt to as low as $16.5bn by the end of the year from almost $30bn 12 months ago, having sold assets, raised capital and cut dividends. Its underlying earnings slipped 13 per cent to $4bn for the first six months but it generated strong cash flows.


      Glencore meanders back to life

      Jonathan Guthrie

      Quiet success for public market stewardship, writes Jonathan Guthrie.

      Next year the dividend may be reinstated.

      For South32, the manganese and coal miner spun out of BHP Billiton last year, there was a similar message even as chief executive Graham Kerr said it may consider smaller deals.

      By cutting headcount, the company had preserved cash and was considering a bid for Anglo American’s 40 per cent stake in their manganese joint venture.

      “[But] we’re not talking about large-scale M&A where we’re going to lose our credit rating and blow out our balance sheet,” Mr Kerr said.

      Australian iron ore miner Fortescue demonstrated why austerity was in fashion. Having cut net debt by more than a quarter to $5.2bn and squeezed costs, it reported full-year net post-tax profits more than doubled to $985m.

      Nev Power, chief executive, said they had managed to “more than offset the impact of falling iron ore prices”.

      ● Related Lex note: Glencore — feather in his cap
      ● Lex note: South32 — low roller

      Sports Direct faces call to launch independent review

      Pressure mounted on Sports Direct this week to launch an independent review of its business and overhaul its board as investors criticised Mike Ashley, the founder of the scandal-hit UK retailer, writes David Oakley.

      Sports Direct agency worker conditions...Staff in the warehouse during a tour of the Sports Direct headquarters in Shirebrook, Derbyshire. PRESS ASSOCIATION Photo. Picture date: Monday March 21, 2016. See PA story INDUSTRY SportsDirect. Photo credit should read: Joe Giddens/PA Wire©PA

      The FTSE 250 group was urged to launch the review at its annual meeting in Derbyshire next month by the Investor Forum, a corporate governance body that represents asset managers controlling £14.5tn worldwide.

      The intervention came in the week the Financial Times revealed that Sports Direct is paying some takings from website customers outside the UK to Barlin, a little-known delivery broker owned by John Ashley. He is the brother of Mike Ashley, who owns 55 per cent of Sports Direct and is deputy executive chairman.

      Sports Direct said it had wanted a company outside the group to manage the “complexity” of its international delivery operations and it chose Barlin to take charge of organising deliveries and assume responsibility for certain risks.

      Mike Ashley©PA

      Mike Ashley

      The leading critics of the company and Mike Ashley include four UK asset management groups that together own 8.7 per cent of Sports Direct’s shares.

      Standard Life, Aviva Investors, Fidelity International and Legal & General are among Sports Direct’s 12 biggest shareholders, according to Bloomberg.

      Sacha Sadan, director of corporate governance at L&G’s asset management arm, said: “We will be voting against the re-election of all non-executive directors to ensure the business is run in the interest of shareholders.”

      ● Related Lombard column: Sports Direct’s choice — reform or a red card.

      SEC must keep bearing down on private equity

      Posted on 26 August 2016 by

      A view of the Securities and Exchange Commission headquarters May 3, 2013 in Washington, DC. AFP PHOTO/Brendan SMIALOWSKI (Photo credit should read BRENDAN SMIALOWSKI/AFP/Getty Images)©AFP

      Over at the US Securities and Exchange Commission, the wheels of justice grind slowly, but in the case of private equity, they are indeed grinding quite fine.

      Back in 2014, the SEC put the industry on notice. Using new powers granted by the Dodd-Frank financial reform act, its compliance office conducted a major sweep of private equity groups, looking at how they managed conflicts of interest and treated their clients.

        The results were “remarkable”, the watchdog said. Remarkably depressing. The SEC inspected 112 companies and found “violations of law or material weaknesses in controls” at half of them.

        The $4tn sector has long had a reputation for opaque contracts and slapping on charges wherever possible. But the SEC warned that it would take a hard line against groups that charged “hidden fees” or cherry-picked valuation methods to improve reported returns.

        It has taken some time but the SEC has been as good as its word. The regulator has now brought 10 enforcement cases totalling more than $150m against some of the industry’s biggest names, including KKR and Blackstone.

        This week, Apollo Global Management paid the biggest settlement to date, $52.7m, and WL Ross, founded by Wilbur Ross, coughed up $14.1m.

        The facts in each case are slightly different, but the general picture is clear. The SEC says that some of the biggest private equity houses have been systematically charging customers fees that were not fully or clearly disclosed. Others allegedly have found ways to charge clients for expenses the SEC says should have been picked up by the firms. The watchdog alleged WL Ross overcharged investors by $10.4m over 10 years by failing to follow an agreed upon formula for allocating transaction fees.

        Pensions’ shift into private equity ignores risks

        Doubts are being raised over whether buyout funds can still deliver strong returns

        In the Apollo case, the private equity group told clients it was charging portfolio companies “monitoring” fees for the privilege of being owned and watched over by the firm. But the SEC says Apollo did not properly disclose that when it sold the companies it also charged a lump sum to cover the fact that the company would not be paying for more monitoring. (I wish I could charge my former bosses for not employing me any more.) An Apollo senior partner also improperly charged personal expenses to the group’s funds and portfolio companies.

        Apollo, which neither admitted nor denied wrongdoing, said it followed “common industry practice” and had already improved disclosure.

        So far, the SEC has not sought to ban any of these dubious practices. It is simply insisting that they be properly disclosed. So the onus is on investors to read about the allegations and demand better treatment.

        Perhaps that will be enough. Historically, private equity clients have been highly sophisticated. So they are either well placed to decipher complex investment contracts or rich enough not to quibble about extra fees.

        But that is changing. Public pension funds are shifting more and more of their money into private equity as they chase higher yields. Pension fund managers are far less experienced with the sector: Calpers, the big California fund, admitted last year it could not track the private equity fees it was paying. And their ultimate clients — teachers, government workers and police officers — are in a different wealth bracket entirely.

        Disclosure is a great tool, as far as it goes, but SEC enforcers should keep bearing down.

        BHS pensions package takes shape

        Posted on 26 August 2016 by

        GA593E Pedestrians walk past the BHS department store in Oxford Street, London, Britain June30, 2016. Copyright photograph John Voos©Alamy

          Sir Philip Green would pay less than half the £700m demanded by politicians to close the BHS pension fund deficit under proposals that have won tentative support from the Pensions Regulator.

          The retail tycoon, who has promised to “sort” the shortfall, sold the retailer last year for £1, offloading responsibility for its pension scheme on to the new owners, headed by former bankrupt Dominic Chappell. The chain’s collapse 13 months later threatened the retirement incomes of more than 20,000 BHS scheme members, leading MPs to brand the affair “the unacceptable face of capitalism”.

          Sir Philip’s representatives have been in talks with trustees and regulators since June, when he pledged action to try to quell a growing clamour against him.

          The package under discussion falls far short of politicians’ demands that Sir Philip plug the deficit in full by handing over a chunk of his personal fortune.

          But such demands go well beyond what anyone involved considers realistic or reasonable, said six people who either attended the talks or are close colleagues of participants. The final sum was set to be less than £350m — perhaps far less, they said.

          Frank Field, the Labour MP who chairs the parliamentary work and pensions committee, said in May that Sir Philip should hand over £571m, the then estimated size of the deficit, as the price of keeping his knighthood. The figure has since swelled as bond yields have fallen.

          “Now the number seems to be £700m,” said one person not connected to Sir Philip. “That is nowhere near what anyone is talking about in the room. They’re in a completely different ballpark.”

          Insiders describe the latest outline proposal as “incomplete” and “a work in progress”. But, in a sign of momentum, the Pensions Regulator last week broadened the circle of outsiders it has asked to comment on the deal.

          The Pensions Regulator is, meanwhile, investigating whether it could use the law to force the billionaire to help meet the BHS pension liabilities, and expects to reach a preliminary view by Christmas. Officials can agree to a deal only if it promises a better outcome than they could obtain using their statutory powers.

          Sir Philip Green, Owner Of Arcadia Group Ltd Interview...Sir Phillip Green, owner of U.K. retailer Arcadia Group Ltd, speaks during a television interview in London, U.K., on Thursday, May 20, 2010. Photographer: Chris Ratcliffe/Bloomberg *** Local Caption *** Phillip Green©Bloomberg

          Sir Philip Green

          FT Series

          Pensions:low yields, high stress

          A demographic crisis for pension saving, driven by lengthening life expectancy and declining birth rates, has now become critical thanks to historic low bond yields across the world

          In 2012, the Pensions Regulator instructed ITV to contribute to the pensions costs of Boxclever, a failed television rentals business, without any finding of wrongdoing on the part of the broadcaster.

          Still, officials may see a negotiated settlement that meets their criteria as preferable to a long and uncertain legal battle. The ITV case is still working its way through the courts, 13 years after the failure of the pensioners’ former employer.

          Pensions experts say Sir Philip could argue that a significant part of the pension problem at BHS predated his acquisition of the company in 2000. Most agree that the regulator could force Sir Philip to pay only a fraction of the £571m that Mr Field demanded in May.

          US housing: Long way from home

          Posted on 26 August 2016 by

          Neighborhoods in Las Vegas, Tuesday, September 22, 2009. Photographer: Jacob Kepler/Bloomberg News.©Bloomberg

          The decreasing volatility in the US housing market is prompting homeowners to trade up and millennials to get on the housing ladder

          Erika Lawhon had hoped to have bought her first home years ago. The 31-year-old, who works as an engineer in an aluminium factory, reckoned there were bargains in the immediate aftermath of the market crash, but then there was the need to come up with a downpayment.

          Like many others her age, she held off — until recently. She and her partner, a finance director at a car dealership, pulled together enough for a deposit on a $234,000, three-bedroom home in Sherman, Texas, and she calls being a homeowner “a comfortable feeling”.

            “We have a garden we’ve started in the back yard, and we like to hunt and do a lot of outdoor activities, so we have set up a little target range outside. The land we are on used to be a golf course. Maybe in a few years they will reopen the course, and that will improve the appraisal value.”

            There are signs that more members of Ms Lawhon’s generation might be in a position to make the same choice. The US saw a 31 per cent surge in the sale of newly built homes in July compared with a year ago — the highest level in nine years — and despite the rise in demand, the median price of a new property was actually down from June. Some see this as a signal that more modest homes are finally being built, allowing first-time buyers to get on a housing ladder that looked like it had been pulled away.

            A reduction in the level of home ownership in the US was once hailed as a necessary cleansing following the excesses of the subprime bubble. But it has continued to slide and is now at a level not seen since the administration of Lyndon Johnson 50 years ago. Today it looks to many like evidence of the death of the American dream and fuel for the angry populism in US politics.

            Increasing the number of affordable homes is a necessary but not sufficient condition for reversing the decline in ownership; politicians still need to take stock of the dramatic changes in the plumbing of the mortgage markets, which sharply reduced the availability of credit.

            The US housing market, once a growth motor of the world’s largest consumer economy and then the epicentre of a global financial crisis, has been on a steadily improving, if slower than expected, trajectory when it comes to prices, sales activity and new construction. The question is whether it will enter a new phase that can bring in a younger generation of buyers who so far have been frozen out of the recovery.

            To Lynn Fisher, vice-president of research and economics at the Mortgage Bankers Association, the market still feels a lot like 2002 or 2003, when the country was hauling itself out of the recession that followed the bursting of the dotcom bubble.

            Interior designer Julya Grundberg shows off a a fully furnished 325-square-foot studio apartment during an exhibit displaying a transformable "micro-unit" at the Museum of the City of New York January 23, 2013 during the opening of a new exhibition, "Making Room: New Housing for New Yorkers". New York City mayor Michael Bloomberg unveiled yesterday New York City’s first “micro-unit” building will have apartments as small as 250 square feet. AFP PHOTO / TIMOTHY A. CLARY (Photo credit should read TIMOTHY A. CLARY/AFP/Getty Images)©AFP

            A studio apartment designed by Julya Grundberg to show how ‘micro-units’ might help ease the housing crisis in New York

            “Wage growth is doing better, employment growth is doing better, indicators of underlying demand are up and we have soaked up a lot of the extra inventory that has been available,” she says, adding that she also sees hints that more affordable housing stock is being built.

            The latest data corroborate information from housing starts, which have shown increased construction of apartments and town houses, of the kind that urban-inclined millennials are more likely to covet. It chimes with the most recent results from homebuilders such as DR Horton, the largest builder in the US by volume, whose Express line of affordable homes is providing its fastest growth.

            “Even if they are not being built directly for first-time buyers, existing homeowners who move up are freeing up properties for new buyers,” Ms Fisher says.

            “The math is starting to make sense for construction to go back up, but it will not happen immediately. The industry has lost all its skilled labour, it has not been accumulating permitted land in as great a quantity, and all its relationships with lenders and building suppliers have to be built back up.”

            US housing chart

            Surveys suggest that millennials expect to wait longer than their parents did to buy their first home, but they also suggest that their desire for home ownership is no less strong. They have a more cautious approach to credit — almost two-thirds of adults under the age of 30 do not have a credit card, according to — but the impediments to buying are more practical than psychological.

            With student debt that has doubled in a decade to $1.3tn nationally, and greater numbers in freelance or part-time work, gaining access to an affordable mortgage would be hard even without the broader credit clampdown. Yet their motivations sound little different to generations before.

            Victoria Raemy, who has started house hunting in Los Angeles, says she is “not just all happy days-y” about buying her first home. “I am scared, too. I know people who lost everything in the crisis. My parents’ house was one of the few in my community not foreclosed on. I have friends who had to leave their house. I saw the destruction and it left its scars — but I’ve done my budget and I know what I can afford on a monthly basis, even if I stopped working for six months.”

            Ms Raemy is unusual for her youth. At 21, she is a microbiology student but also a model who has amassed enough in earnings for a downpayment and to get approval for a $300,000 mortgage. Central LA is beyond her price range, but further-out areas such as North Inglewood appear to have some suitable town homes, she says.

            “I have friends who say it is silly to buy something so expensive and not be in your ideal home in your ideal location. But property is a solid investment. I have to live somewhere,” she says.

            Priming the market

            Different measures of US house prices show them near their pre-crisis peak, after a slow climb back. Sales performance tends to reflect the diversity of regional economies. According to the S&P Case-Shiller index, Portland and Seattle in the north-west continued to record double-digit percentage growth in June; New York, where bankers’ bonuses fell sharply in 2016, grew at only 2 per cent from a year earlier. The average price appreciation was 5 per cent, year on year.

            The fundamentals of the housing market mirror the slowly improving economy, says Keith Gumbinger, vice-president of HSH, a mortgage research company. “People who may have been unemployed will now have had their job for a while and can document a few years of income,” he says.

            Yet few are predicting a strong rebound in home ownership. “We are not going to go back to where we were before,” says Kevin Logan, chief US economist at HSBC. “Incomes are not growing fast enough, the desire to own a home is less strong, people realise the risk and understand that you can get tied down. House prices are already going up a lot faster than the overall economy and I don’t see it doing a lot more.”


            Portland and Seattle in the Pacific north-west saw double-digit growth in housing prices in June

            There is a big variable, however, and that is the availability of credit. Banks have pulled back sharply from the mortgage market amid regulatory changes, and even with non-bank lenders, including aggressive new entrants such as Quicken Loans, accounting for half of the market today, new mortgage credit is less than half what it was before the crisis. Outside of so-called jumbo loans on top-end properties, there is little appetite from investors to take the risk on bundles of securitised mortgages.

            Instead, underwriting standards are largely dictated by the US government, which guarantees most mortgages. To stimulate the market, Fannie Mae and Freddie Mac, the nationalised mortgage guarantors, have started accepting mortgages with loan to value ratios of up to 97 per cent, in order to cut the necessary downpayment to 3 per cent from the standard 20 per cent and encourage first-time buyers. And last year, the Federal Housing Administration cut its mortgage insurance fee so as to save borrowers up to $900 a year.

            “By bringing our premiums down, we’re helping folks lift themselves up,” Julian Castro, the housing and urban development secretary, said at the time.

            The industry is hoping that the FHA will cut its fee again this autumn. Beyond that, the levers of housing policy will pass to the next administration and the victors of November’s elections, whose in-tray includes the unresolved question of how to reform Fannie and Freddie. Behind that debate is the bigger one: what level of credit availability — and by extension, what level of home ownership — is optimal to achieve a healthy housing market, a sustainable economy and an equitable society.

            For first-time buyers, the hope is that prices do not rise too quickly to outstrip any extra access to credit. Having a wider choice of affordable properties will be crucial to this.

            Mr Gumbinger says builders will ultimately respond to demand, and predicts the market will continue its steady thaw. “It is difficult to find something you love at a price you can afford in a place that you want to live, but that has always been difficult,” he says. “These are the housing compromises that people are having to relearn, or are learning for the first time.”

            PwC settles $5.5bn fraud detection lawsuit

            Posted on 26 August 2016 by

            $250 Fee for use 9th August 2016 8/9/16- Miami- Steven Thomas, Thomas Alexander & Forrester in Venice, California, representing Taylor Bean Whitaker in trial, with judge Jaqueline Hogan Scola in background. Taylor Bean Whitaker v. PricewaterhouseCoopers (PWC) trial in Judge Jaqueline Hogan Scola courtroom, Miami-Dade County Courthouse.©J Albert Diaz/ALM

            LA lawyer Steven Thomas makes a statement in the Miami-Dade County courthouse earlier this month

            PwC has settled a lawsuit brought against it over one of the biggest bank collapses in US history, in a landmark case that shone a light on the responsibility of auditors to detect fraud.

            The world’s biggest professional services firm by annual revenues had been accused of failing to catch a multibillion-dollar conspiracy between executives at Taylor, Bean & Whitaker, a defunct mortgage lender, and counterparts at Colonial Bank, an Alabama-based lender that supplied TBW with loans.

              PwC gave the bank’s parent, Colonial BancGroup, a clean audit opinion for six years until it collapsed in 2009, when it emerged that huge chunks of its loans to TBW were secured against assets that did not exist. The plaintiff, the bankruptcy trustee of TBW, had been seeking $5.5bn plus punitive damages, in the biggest accounting negligence lawsuit ever to go to trial.

              The decision to settle — for a confidential sum — came four weeks into proceedings in a state court in Miami.

              “The case was settled to the mutual satisfaction of the parties,” said PwC.

              Steven Thomas, lead trial lawyer for the plaintiff, declined to comment on Friday’s settlement. But speaking broadly, he told the Financial Times: “The history that has happened here over the last few years, and the fallout of the Great Recession, has shown that what auditors do, matters. Auditors owe ultimate allegiance to the investing public; I think that is becoming more and more clear.”

              A separate lawsuit filed against PwC by the Federal Deposit Insurance Corporation, the regulator, and Colonial’s bankruptcy trustee is pending in Alabama federal court.

              Mr Thomas’ team had claimed that PwC was in a position to catch and stop the fraud but missed multiple red flags. In its opening statements, PwC countered that no auditor can reasonably be expected to catch a well-organised and determined fraud.

              Mr Thomas had raked over what he had described as “the worst audit” he had ever seen, grilling the former lead audit partner at PwC over what he claimed were a series of lapses. Last week he produced a 2006 document in which a PwC representative — an intern — assigned to identify assets pledged as collateral for loans, reported back that she “felt” the collateral was “adequate”. The same report the following year, signed off by more senior staff, contained an identical paragraph.

              On Wednesday, Lynn Turner, a former chief accountant for the US Securities and Exchange Commission, opened up a new flank of vulnerability for PwC by saying that the firm had violated auditor independence standards that he himself had helped to craft.

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              The logo of PricewaterhouseCoopers is seen in front of the local offices building of the company in Luxembourg, April 26, 2016. REUTERS/Vincent Kessler - RTX2BPUS

              The PwC case shows the auditing oligopoly requires an overhaul

              Called as the third and final expert witness for the plaintiffs, Mr Turner said he believed that PwC should not have continued to audit Colonial in 2005 and 2006, after a senior manager who worked on those audits was hired by Colonial in a top financial oversight position. Mr Turner, who helped draft the Sarbanes-Oxley Act of 2002 after a wave of corporate scandals, said that PwC should not have cited an “emergency” exemption to standards banning accounting firms from auditing a company for a year after it makes such a hire.

              The ending of the trial does not end PwC’s legal challenges. The firm’s Brazilian unit is the target of an action in New York brought by the Bill and Melinda Gates Foundation, alleging that corruption at Petrobras, the state-run oil company, was “wilfully ignored” by its auditor.

              Back in the US, PwC is facing trial over its role in the collapse of MF Global, the futures brokerage, after a federal judge this month gave the go-ahead to a $1bn lawsuit over how it accounted for the European sovereign debt that tipped it into bankruptcy.

              Nader Tavakoli, MF Global’s lead director, said the decision to allow the suit sent “a strong message concerning the need for responsibility and accountability”, and that he hoped to secure “a substantial recovery” for the estate.

              Last year, PwC agreed to pay $65m to settle a separate lawsuit claiming it failed to properly audit MF Global’s internal controls before its collapse.

              US pensions walk trillion-dollar tightrope

              Posted on 26 August 2016 by

              The governor’s office for Illinois, a state with notoriously weak finances, this week issued a stark warning about what might happen if it reduced the assumed rate of return for its Teachers’ Retirement System.

              “If the board were to approve a lower assumed rate of return taxpayers will be automatically and immediately on the hook for potentially hundreds of millions of dollars in higher taxes or reduced services,” the state’s senior adviser for revenue and pensions wrote in a memo.

                Unlike corporate pensions, US public pensions discount their liabilities using the rate of return they expect to generate on their investments. Some experts complain that these rates have been set unrealistically high. Lower return expectations would push up the cost of liabilities on their balance sheet, and force Illinois to make higher contributions. If costs to the pension were to increase by $250m it would nearly equal an entire year’s appropriation for six universities.

                Illinois highlights one of the most hotly debated issues facing state and local governments in the US: how to value pension liabilities and, in turn, what is the true nature of the deficits they face. As governments are already cash-strapped, these questions are now highly politicised.

                Raising taxes and scaling back pension benefits are painful and difficult measures. It leads to a third issue: to justify these high expected rates of return plans are taking on more risk with money they are obliged to pay out.

                ”The attractiveness of assuming a high discount rate is that you tell the taxpayers, unions and the public that the liabilities are lower, but the only way to maintain that kind of discount rate is to have risky assets” says Don Boyd, a fellow at the Nelson A Rockefeller Institute of Government.

                He estimates that extent to which high rates of return keep contributions lower is well over $100bn a year in the US.

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                Shift into private equity ignores risks

                On average US pension plans are assuming 7.6 per cent rates of return, according to the National Association of State Retirement Administrators. That is down from 8 per cent before the financial crisis, but many observers argue that it is still way too high given the persistently low level of interest rates and the outlook for investment returns.

                In effect, the fear is that the maths mean plans are saying something costs $1 when it really costs $2 or $3. Corporate pensions value liabilities using a rate drawn from bond yields, which are far lower.

                Joshua Rauh, a finance professor at Stanford University, has led the call for public pensions to use different discount rates. He argues for US Treasuries (currently yielding less than 2 per cent) since there is no guarantee that a plan will achieve the expected rate of return while the pension is a guaranteed promise. What is more, in the few municipal bankruptcies that have occurred to date pensioners have headed the queue even before bondholders.

                Based on that he estimates that unfunded liabilities are $5tn-$6tn, including the latest downdraft in market rates post-Brexit vote, compared with the $1tn-$2tn figure based on the plans’ targeted rates of return.

                Critics of the current accounting worry about “a day of reckoning” when US public pensions run out of money or their cost becomes so great that it cannibalises the money for public services and prompts tax increases to the extent that people leave the most troubled spots.

                Others say concerns are vastly overblown except perhaps in the most extreme of cases. Troubled pensions played a role in Detroit’s bankruptcy and the debt crisis in Puerto Rico, two of the biggest blow-ups in US public finance in recent years. Chicago is another area that is grappling with particularly severe pension woes.

                Keith Brainard, Nasra’s research director, says the rationale for using expected long-term rates of return to value pensions comes from the concept of “intergenerational equity” — each generation pays for the cost of services it receives — and that linking to current interest rates increases the chance of separating the cost of the service from the generation receiving that service.


                Pensions’ painful arithmetic

                Bond mathematics and the scale of pension deficits explained

                And while the recent performance of public pension funds in the aggregate has been bleak — just 0.5 per cent for the year ended June 30, according to Callan Investments Institute, a research group — the idea is to reflect a long-term outcome.

                “All those day of reckoning stories report unfunded liabilities assuming the plans will receive no benefit or reward from taking investment risk. That type of reporting can be misleading and make pension costs look a lot bigger than expected. That reporting, by itself, is not informative,” says Matt Smith, Washington state’s actuary. “On the flip side, if you only report the expected cost of a pension system assuming a long-term rate of return, that does not tell the entire story of the cost and risk of running a pension system. The truth is probably between those two points of view.”

                Either way, the high return assumptions have prompted plans to move into riskier assets over the years with allocations to hedge funds, private equity and real estate.

                “As they get into these potentially very volatile risk investments, they may get lucky, but it may just get a lot worse,” says Mr Boyd. “If we get a 20 per cent down year, with $3.6tn under investment, if they lose 20 per cent that is almost three quarters of a trillion dollars.”

                Some plans are beginning to consider lower return expectations and the risk associated with alternative types of investing.

                Calpers, the largest US pension fund, a few years ago decided to stop investing in hedge funds as part of a long-term plan to lower the risk, cost and complexity of the investment portfolio. More recently, it also embarked on a 30-year plan to reduce the discount rate from 7.5 per cent to 6.5 per cent.

                The idea has traction elsewhere. Just this week, Connecticut’s treasurer, Denise Nappier, argued for lower investment return assumptions.

                “Markets have largely recovered from the troughs seen in the Great Recession, but are susceptible to downside surprises stemming from changes to the global economic outlook,” she said. “If return assumptions are set at levels unlikely to be attained, it will be difficult to achieve them without pursuing high risk investment strategies. It is far more prudent to structure the portfolio based on what is achievable, rather than what is desirable.”

                But any such changes will come with a cost, too.

                GPIF blames Brexit for $52bn loss

                Posted on 26 August 2016 by

                People walk past a signboard of Government Pension Investment Fund outside the entrance of GPIF in Tokyo...People walk past a signboard of Government Pension Investment Fund (GPIF) outside the entrance of GPIF in Tokyo September 29, 2014. Japan's $1.2 trillion public pension fund, the world's largest, will delay a highly anticipated decision on shifting its portfolio allocations to November or later, people familiar with the process said on October 7, 2014. Picture taken September 29, 2014. REUTERS/Yuya Shino (JAPAN - Tags: BUSINESS) - RTR496GK©Reuters

                The world’s largest pension fund has blamed a $52bn quarterly investment loss on the UK’s surprise Brexit vote in June to leave the European Union.

                The massive paper losses suffered by Japan’s Government Pension Investment Fund (GPIF) in the April to June quarter of 2016 almost matched the $50bn losses it recorded in the 2015-16 financial year — its worst year since the global financial crisis.

                  The GPIF said that its investment losses for the three months to June 30 were -3.88 per cent — a drop that took the total value of the fund below ¥130tn ($1.3tn). The drop, which followed a -3.52 per cent quarterly investment loss between January and March 31 this year, represented the group’s first back-to-back quarterly loss since 2008.

                  The most recent quarterly slump, which primarily arose from turmoil in domestic and international stock markets, effectively wipes out all the gains that the GPIF has made since it revised its investment strategy in October 2014 to place a heavier weighting on equities.

                  Norihiro Takahashi, the GPIF’s president, said that markets during the quarter had seen the dollar-yen exchange rate “developing without a clear sense of direction”. In June, he said, two main factors produced especially high market volatility that strengthened the yen and caused stocks to tumble.

                  One of these, he said, was the fact that the result of the British referendum on the EU had been different from market expectations — a shock that saw the yen soar against all major international currencies as investors turned to it as a safe haven.

                  The surging yen, whose rate against the dollar is correlated with the Japanese stock market, produced a 7 per cent plunge in the Topix Index on the session immediately after the June 23 referendum results emerged.

                  The GPIF president also cited US May employment data, which came in lower than market forecasts, as a source of uncertainty during the quarter.

                  Mr Takahashi sought to head-off a public backlash over the most recent results, saying in a statement: “Even if market prices fluctuate in the short term, it will not harm the pension beneficiaries…we invest from a long-term viewpoint.”

                  The GPIF’s move into equities, which was controversial in a society where individuals are not themselves heavily invested in the stock market, was touted as a key strut of the “Abenomics” revival programme.

                  Under its new weightings as it has shifted out of domestic bonds, the GPIF now holds about 21 per cent of its investments in domestic equities, the same proportion in foreign equities, and 39 per cent in domestic bonds. Its plan intends to continue with its plan to increase allocations of domestic and foreign equities to 25 per cent apiece of the overall portfolio.

                  Efforts by the administration of Prime Minister Shinzo Abe to rid Japan of deflation and establish sustainable economic growth have included broad efforts to convince households to convert part of their massive bank savings into investment.

                  Pensions’ shift into private equity ignores risks

                  Posted on 26 August 2016 by

                  ©FT; Dreamstime

                  The City of Philadelphia pension fund is looking to increase its private equity allocation as many US funds reduce their investments in hedge funds

                  The US’s big public pension plans have lost their faith. When New Jersey’s $72bn plan cut its investments in hedge funds by half earlier this month it was the latest significant fund to head for the exit from an industry that had built its reputation by employing the smartest people to deliver the best returns.

                  Disappointment over performance and hefty fees from hedge funds have stirred anger, prompting Letitia James, the public advocate for New York City, to call for managers to “sell their summer homes and jets” in April, as the city divested from hedge funds.

                    However, the ire of pension funds does not extend to all the alternative investments that they have pushed into in the quest for juicier returns.

                    New Jersey left its $7bn private equity portfolio untouched, with one member of its investment council even suggesting some of the allocation taken from hedge funds should be handed to private equity.

                    “We’ve seen redemptions from the hedge fund industry at levels this year we haven’t seen since the financial crisis,” says Peter Laurelli at research group eVestment. Investors are adding the most to private equity, he adds.

                    Unlike hedge funds, whose average performance has been disappointing since the financial crisis, private equity remains one of the best-performing asset classes for pension schemes.

                    This year’s decline in bond yields is the latest challenge for public pension funds, whose ability to keep their promises to retirees is being challenged by lengthening life expectancy. And as pressure grows on pensions to diversify away from low-yielding bonds and equities — their two traditional bedrocks — private equity is considered a big part of the answer.

                    The City of Philadelphia’s $4.4bn scheme, for example, plans to beef up its allocation. The average US public pension has 7 per cent of its assets invested in private equity, still lower than its peers’ average target of 8.3 per cent, according to research provider Preqin. Pensions make up a quarter of all private-equity capital in North America.

                    Even for investors with long time horizons, such as pension funds, resisting the assumption that current performance of respective asset classes will last is hard. Right now, that is putting hedge funds on the back foot against their private equity rivals.

                    Of investors surveyed by Preqin at the start of the year, 94 per cent said their private equity portfolios had met or exceeded their expectations in the previous 12 months. Most, in turn, expect private equity to generate returns north of 10 or 12 per cent.


                    Pensions’ painful arithmetic

                    Bond mathematics and the scale of pension deficits explained

                    The pension and private equity industries have been acquainted since the 1980s, with pioneers such as Henry Kravis, co-founder of KKR, looking to attract retirement savings from the early days. But as the poor performance of hedge funds forces pension funds to reassess which alternative investments to pursue, there is concern that the private equity industry will find fatter returns harder to come by.

                    More than 4,000 private equity companies are battling to buy out companies, with competition growing from sovereign wealth funds and even Canadian pension funds.

                    Leon Black, chairman of private equity firm Apollo, and Bill Conway, a co-founder of The Carlyle Group, have both lamented the competition driving valuations too high.

                    For almost all the vintage years for the private equity industry before 2006, the median private equity buyout fund beat public equity markets, but returns have since proven harder to find, according to the study “How Do Private Equity Investments Perform Compared to Public Equity?” which was published in June.

                    But pensions “continue to be lulled into thinking that these investments will provide strong returns”, according to the study for the Center for Economic and Policy Research.

                    Chart: Global private equity performance

                    “Despite poor performance and excessive fees, pension funds and other investors continue to pour money into private equity funds.”

                    If private equity holds the upper hand now in the fight for retirees’ savings, the industry is drawing more scrutiny from pension fund trustees.

                    Many are rethinking how they track fees they pay to private equity, which are less transparent than for hedge funds.

                    More from the FT pensions series

                    An elderly lady sits with a walking stick in Eastbourne, U.K., on Tuesday, April 1, 2014. Pensioners and savers have seen returns on their money shrink since the financial crisis drove interest rates to a record low. Photographer: Chris Ratcliffe/Bloomberg

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                    Pensions crunch drives desire for gilts

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                    Pensions and bonds: the problem explained
                    Bond mathematics and the scale of pension deficits

                    California-based Calpers, the largest public pension fund in the US, admitted last year it could not track the fees it was paying and had to ask its private equity managers for the information.

                    It revealed in November it had paid $3.4bn in incentive fees for $24.2bn of net gains between 1990 and last year, prompting Californian politicians to try to mandate disclosure of fees
                    and expenses before a public fund can invest in alternative assets such as private equity.

                    Regulators are also taking a keener interest in fees levied by private equity, hitting Blackstone, KKR and Apollo with fines of more than $120m since June last year.

                    The US Securities and Exchange Commission found “violations of law or material weaknesses in controls” in the collection of fees and allocation of expenses at more than half of the 112 private equity managers it inspected.

                    What is more, private equity is helped by how funds measure performance over time. The starting gun for gauging an “internal rate of return” in private equity only starts when the investment idea has been found and funds are then put to use.

                    By contrast, hedge funds are always on the clock. This gives private equity a much more generous timeframe over which to make the investments work.

                    “I would say that the economics of private equity will never be as great as it was 20 years ago,” cautioned David Rubenstein, another co-founder of The Carlyle Group, last December. But with deficits growing, pension funds are not, for now, paying that much attention.