Behind Your Business

A BIG but digestible mistake by a financial institution with abundant profits and capital should normally be viewed as the market equivalent of an electric shock, a jolt that leads to smarter behaviour. The response to JPMorgan Chase’s $2 billion (and rising) loss on a position taken by its chief investment office could not have been more highly charged.The loss has reinforced the political appeal of bashing banks, no matter what the facts. Barack Obama went on a TV chat show on May 14th and responded to questions about the loss by implying it would have been blocked under the Volcker rule banning proprietary trading. Given the proposed wording of the rule and the apparent nature of the trade, which seems to have started out as an attempt to hedge risk, that assertion is at best a stretch.Elizabeth Warren, a senatorial candidate in Massachusetts, also jumped on the bandwagon. “Wall Street isn’t going to change its ways until Washington gets serious about strong oversight and real accountability,” ran a campaign ad. Yet JPM is already among the most heavily regulated institutions in America, if not the world. Supervisors have employees climbing all over the bank; they routinely review its credit and business practices. Perhaps to pre-empt criticisms of inept oversight, a string of regulators has nonetheless announced investigations into the trade.Competing financial firms...

A RARE slip-up by lawyers has helped shed some light on a high-profile legal battle, the details of which some of the largest Wall Street firms have been fighting to keep under wraps. The case concerns allegations of illegal “naked” short selling, where the rules have been tightened several times over the past seven years.In 2007 Overstock sued 11 brokers, alleging that they had caused its share price to fall by helping their clients to naked-short the Utah-based retailer. In a normal short sale, shares are borrowed (or at least “located”) with a broker’s help before being sold. In the naked version, there is no attempt to borrow or locate the stock. This can create “fails to deliver”, where the trade is not settled when it should be, and messes with the laws of supply and demand, allowing shorting to take place beyond the natural limits set by the number of borrowable shares.As the pre-trial discovery period proceeded, Overstock narrowed its focus to two firms, Goldman Sachs and Merrill Lynch, now part of Bank of America. Before the case was set to go to trial in California, however, the judge dismissed it on jurisdictional grounds, ruling that not enough of the alleged wrongdoing had taken place in the state. Overstock appealed and pushed for all of the evidence to be unsealed. The defendants objected. Four media groups, including The Economist,...

The programme in West Bengal evaluated by Esther Duflo (Free Exchange, May 12th 2012) was implemented by Bandhan, not BRAC. BRAC devised the original scheme on which Bandhan's was based. In the same issue ("Frontier mentality"), we inadvertently relocated Lebanon to Africa. Sorry. These have both been corrected online.

IN 1900 America had around 500 carmakers; by 1908 it had 200. In 1960 Britain had 16 banks; ten years later it had just six. In both cases, this rapid consolidation came about because of a flurry of mergers. From soft drinks to steelworks, plenty of other industries have seen similar patterns. Mergers happen in waves, so the number of firms collapses suddenly rather than dwindling over time. And the next one may soon crest.

The first merger wave in America peaked in 1899. During that wave, which lasted for five years, 700 mining and milling companies disappeared, along with 500 food retailers. The next four waves in America occurred in the 1920s and 1960s and again in the late 1980s and 1990s (see left-hand chart). Other countries have experienced the same phenomenon.Research suggests that shocks start merger waves. Some firms are quicker than others to respond to the disruption, or suffer less damage. This divergence allows the strong to mop up the weak. As far back as 1937 Ronald Coase, an economist, proposed that technological shifts like the telephone and the telegraph would lead to fewer, larger firms...

THERE are two, potentially overlapping, ways in which Asia’s export-driven economies could suffer from the euro crisis. One is from the slowdown in trade to Europe. The other is the drying up of finance, from trade credit to syndicated loans, extended by euro-zone banks. On neither score is Asia as vulnerable as it was after the collapse of Lehman Brothers in 2008, argued Iwan Azis of the Asian Development Bank, at The Economist’s Bellwether conference in Tokyo on May 16th. One of the reasons is that Japan’s mega-banks have lumbered off their home territory to pick up some of the slack left by the departing Europeans (see chart).This is good news not just for Asia’s exporters. It also shows a rare stroke of boldness by Japan’s big three, Mitsubishi UFJ Group (MUFG), Sumitomo Mitsui, and Mizuho. After pulling back from lending to Asia following the 1998 financial crisis, and then suffering more than a decade of deleveraging by their deflation-sapped customers at home, they can almost smell the predicament of their European peers. Ken Takamiya of Nomura Securities says that in Australia, for...