Behind Your Business » Economics

Japanese banks: Quietly does it

admin — Thu, 02 Feb 2012 16:03:13 +0000

THE first round of Japanese investment into America, during the 1980s and 1990s, was notable for being so emotive. Extraordinary prices were paid to buy up supposedly gilt-edged assets including golf courses, investment firms and a large part of New York’s Rockefeller Centre. Sellers were delighted; the public horrified. The real victims were the Japanese buyers themselves, who suffered huge losses.Not every deal flopped. In particular, a minority investment in Goldman Sachs by Sumitomo Bank that was initially seen as an embarrassment in Japan (Sumitomo thought the stake was to be a partnership rather than a spigot for cash) turned out to deliver good returns. The lessons of that approach—a discreet profile, a minority stake, a focus on finance—may characterise the next wave of Japanese investment.Western banks need to raise equity capital to meet new regulatory hurdles. Other financial assets are being sold off as part of post-crisis restructurings. Japanese banks are relatively healthy, have high capital ratios and are deeply sceptical about their own ability to grow in Japan. That has led them once again to look outward, and not just to the Asian backyard.On January 18th Sumitomo Mitsui Financial Group, Japan’s second-largest financial institution and the current incarnation of the old Sumitomo Bank, paid $93m for a 5% stake in Moelis & Company, a niche investment...

Weather derivatives: Come rain or shine

admin — Thu, 02 Feb 2012 16:03:13 +0000

Perfect weather for wind-up merchants

WEARING lots of layers and a decent waterproof coat is one way to guard against changeable weather. Firms facing losses because of a big freeze or baking sun do not have that option. Insurance companies have long offered cover against flooding, hurricanes and other catastrophes. For less calamitous changes in the weather, derivatives are a better option.This is still a “niche market”, says Tim Andriesen of CME Group, the exchange where most weather contracts are traded. According to the Weather Risk Management Association, an industry body, the value of trades in the year to March 2011 totalled $11.8 billion, nearly 20% up on the previous year, though far below the peak reached before the financial crisis took the steam out of the business. In 2005-06 the value of contracts had hit $45 billion.Weather derivatives had an inauspicious start: the first trade was done by Enron in 1997. The instruments were initially used by American energy companies to hedge against the effect that unseasonal temperatures could have on gas sales. But abundant shale gas...

Investment banking: Bonfire of the bankers

admin — Thu, 02 Feb 2012 16:03:13 +0000

“IT SUCKED,” says the head of investment banking at one of Europe’s biggest banks, reviewing the fourth quarter of 2011. That succinct assessment will take few by surprise. The sale and trading of bonds and shares slowed to a trickle last year. Analysts at Credit Suisse reckon that investment-banking revenues among the big American banks slumped by a quarter in 2011. Trading bonds, currencies and commodities (activities known as FICC) is the industry’s bread and butter: FICC revenues fell by about 15% in America. Things are even worse in Europe. Credit Suisse reckons that European investment banks will post a 43% drop in revenue for 2011. On February 2nd Deutsche Bank announced a fourth-quarter loss for its investment bank.The first few weeks of this year also look dire. Markets have recovered relative to December, but there has not been the usual January leap. Analysts at Citigroup gloomily predict a further 10% fall in FICC revenues in Europe this year.The question dogging the industry is whether these falls are temporary or permanent. “Trading goes up, trading goes down,” Jamie Dimon, the boss of JPMorgan Chase, told journalists in January. “When things come back these numbers will boom again and we’ll be geniuses, and it won’t be because we did anything, it will be because we stayed in the game.”

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Correction: BBVA

admin — Thu, 02 Feb 2012 16:03:13 +0000

In "By hook or by crook" (January 14th 2012) we mistakenly said that write-downs had boosted BBVA's capital by €400 billion. We were a little out: the bank's capital rose by €400m. Sorry.

China and rare earths: Of metals and market forces

admin — Thu, 02 Feb 2012 16:03:13 +0000

ALL that glisters is not gadolinium. Even so, that mineral and its 16 “rare earth” cousins—found in everything from batteries to catalytic converters—do help make the modern world go round. And, as the world’s manufacturers of such products have been reminded recently, China has a chokehold on their production.China’s grip on rare earths first made headlines in 2010, when it suddenly cut exports to Japan. But it had been squeezing the market for years. In 2000 it exported some 47,000 tonnes of the stuff; by 2010 it exported only about 30,000 tonnes. This decline appeared to be the result of unfair export taxes and quotas.

Mine, all mine

Western powers have threatened to take the case to the World Trade Organisation (WTO). This week they seemed to get a boost when that body ruled against China on a related case. On January 30th an appellate body of the WTO ruled that China’s policies to restrict exports of several metals, like bauxite and magnesium, violated its WTO obligations. American and European officials cheered, arguing that China’s rare-earth policy must now also be...

The Reserve Bank of India: Pulling every lever

admin — Thu, 02 Feb 2012 16:03:12 +0000

ONE of the perks of being governor of the Reserve Bank of India (RBI) is the use of a colonial bungalow on Carmichael Road, a posh street that weaves along a ridge in south Mumbai. On one side live some of India’s richest industrialists, modern-day pharaohs with flashy architectural tastes. On the other, a stone’s throw down a cliff, is a small slum—a monument to desperation and government failure. Both sets of neighbours are part of the 1.2 billion population that India’s central bank must look out for. In normal times this is a task that would furrow the brow; now that the country’s boom is faltering, it risks causing a blinding headache.

Judging by the numbers, the RBI is among the world’s best central banks. Its record on balancing growth and inflation is decent enough (see chart 1). Since 1995 wholesale prices have risen by an average of 6% a...

Buttonwood: The war on finance

admin — Thu, 02 Feb 2012 16:03:12 +0000

THE man who the polls suggest will be the next French president, François Hollande, claims that finance is his “real adversary” in the coming election. Britain has just stripped the former chief executive of the Royal Bank of Scotland of his knighthood. Even Newt Gingrich is attacking the “vulture capitalists” in the private-equity industry. Perhaps the West is set for a “war on finance” along the lines of the “war on terror”, with similar uncertainty about how to define victory.Politicians seem to have three main beefs with the financial sector. The first is that bankers earn too much. The second is that banks take reckless risks and then need rescuing by governments. And the third complaint is that investors in financial markets have undue influence over an economy through their ability to affect bond yields and equity prices.The first two problems are really related. People do not worry too much about footballers’ high pay. The problem with bankers is the extent to which they are subsidised by explicit and implicit taxpayer support. (Of course, you might worry about income inequality in general but...

Free exchange: The silent bazooka

admin — Thu, 02 Feb 2012 16:03:12 +0000

THE European Central Bank (ECB) tends to take the long way around. When in 2009 the Federal Reserve and the Bank of England slashed interest rates towards zero and started quantitative easing (buying government bonds with central-bank money), the ECB was more circumspect. It was reluctant to cut its main rate below 1% and loth to buy government bonds directly.Instead it adopted its own non-standard measures. It offered unlimited loans to commercial banks for up to a year against a broad range of collateral. The ECB’s oblique approach had much the same effect as the route taken by the Fed and others. A flood of liquidity from a €442 billion ($611 billion) auction of one-year ECB loans in June 2009 pushed short-term interest rates close to levels in America and Britain. Banks used much of the cash to buy government bonds, driving down long-term interest rates.

More than two years on, and in far more trying circumstances, the ECB seems to have repeated the trick. Faced with renewed recession, a bank-funding crisis and investor revulsion against all but the safest euro-zone government bonds, the ECB said on December 8th that it would...

Malaysia’s central bank: Serene but surprising

admin — Thu, 02 Feb 2012 16:03:12 +0000

Steady Zeti

MALAYSIA’S central bank, Bank Negara Malaysia (BNM), is the least predictable in the region, according to Robert Prior-Wandesforde of Credit Suisse. Its rate-setting decisions surprise analysts 26% of the time. That is not because it is erratic or antsy. Far from it. In the past seven years it has changed its policy rate only ten times, never cutting it below 2% or raising it above 3.5%. On January 31st it sat on its hands again.This serenity is overseen by Zeti Akhtar Aziz, the bank’s governor since 2000. She is not bothered by Mr Prior-Wandesforde’s finding. Predictability is prized by the advocates of inflation-targeting, who believe central banks can mould people’s expectations of prices. But the BNM never embraced inflation-targeting, even when it was fashionable.The bank surprised analysts by not raising rates in mid-2008, when the removal of fuel subsidies contributed to inflation of over 8%. “We were condemned by everyone, everyone,” Ms Zeti says. The bank then caught analysts out again by raising rates in March 2010, when the global financial crisis was...

Greece and the euro: An economy crumbles

admin — Thu, 26 Jan 2012 16:02:59 +0000

THE banners at the entrance to the Bank of Greece museum in Athens promise a “fascinating journey through Greece’s modern economic and monetary history”. How could any passer-by resist? Inside the museum ranks of glass cases enclose an array of coins and old bank notes, as well as the paraphernalia used to make them. The bills range from 5 drachma up to 100m drachma, a reminder that Greece has had problems with inflation in the past. The end of history, at least for this exhibition, is 2001 when Greece adopted the euro. But the country’s present troubles suggest an important chapter to the story of Greek money is still to be written. Some reckon the drachma may roll off the presses again.This is no longer just a fantasy of diehard sceptics about the euro in Britain and Germany. Even Greeks concede that the big problem afflicting the economy, now in its fifth year of recession, is the uncertainty about whether Greece can stay in the euro and get its act together. Savers are anxious that their cash might be forcibly converted to a new Greek currency. By November the Greek banking system had lost a quarter of the...