Tag: FINANCE

IT IS not easy to feel pity for Goldman Sachs. Its alumni lord it in pivotal government positions around the world; from every prestigious business school, applicants queue in hope of a job; its senior executives earn eye-watering amounts; and it has a presence, it seems, in every corner of the global economy. Yet these are troubling times for the bank. It is facing fundamental questions about its business model.

Its investors are particularly worried by a precipitous decline in the fortunes of its core fixed-income, currencies and commodities unit (FICC). That is the business from which Goldman’s current leadership graduated. The bank’s president, Harvey Schwartz, used a conference on September 12th to give an unusually detailed account of how it is changing. He outlined plans for igniting growth in an apparently stagnant business, and for preserving profitability despite that stagnation.

One factor in Goldman’s problems has been a change in its staff structure. In the hunt…Continue reading

NOT everybody—or every business—travels well. Retailers from Walmart to Tesco have faltered in forays into foreign lands. Banks, too, often fancy that success at home can be reproduced abroad. In meeting the needs of big companies, they are often right. Global corporations seem to want global banks. But in retail banking, serving households and small businesses, they are usually mistaken.

Or so concludes a report by Lorraine Quoirez and her colleagues at UBS, examining the performance of seven international banks (BBVA, Citigroup, HSBC, ING, Santander, Société Générale and Standard Chartered). For several measures, such as net interest margins and returns on equity, the Swiss bank’s analysts constructed benchmarks for each firm. The benchmarks are the averages for all banks in countries where the seven are active, weighted by the importance of each market in each bank’s loan book.

Most of the banks fall short on most measures. For example, UBS expects…Continue reading

NINE years ago, in the autumn of 2008, the Federal Reserve was fighting a financial collapse. To stave off disaster, it lent aggressively—to banks, to money-market funds, even to other central banks. As a result, its balance-sheet ballooned. At the start of September 2008, the month when Lehman Brothers collapsed, the Fed’s assets totalled $905bn (at the time, about 6% of GDP). By December they had more than doubled in size, to $2.1trn. That was only the start. As its emergency lending unwound, the Fed began purchasing government debt and mortgage-backed securities (MBSs), in an attempt to support the real economy. Three volleys of so-called “quantitative easing” (QE) eventually swelled the balance-sheet to $4.5trn by 2015.

On September 20th the Fed will probably announce that it is putting QE into reverse. It does not intend to sell its assets. Rather, as its securities mature, it will stop reinvesting all of the proceeds. The permitted monthly “run-off” will gradually rise…Continue reading

IN 2004 Stanley Fischer described the wonder he felt as an economics student in the 1960s. “You had a set of equations”, he said, “that meant you could control the economy.” Technocracy—the dream of scientific government by a caste of wise men—arose in the 20th century, as rapid change rendered the world unfathomably complex; in economics, it came of age in the Keynesian revolution of the 1930s. On September 6th, after a remarkably distinguished career in public service, Mr Fischer, an intellectual heir to Keynes, announced his imminent retirement as the vice-chairman of the Federal Reserve. It is tempting to see in his departure the end of the era and the ideal of technocracy.

A century ago, as physicists unlocked the secrets of the atom and biochemists probed the molecular basis of life, economists sought to systematise their own field. But the growing complexity of their work created a problem: laymen could not make head or tail of it. Government consultation with experts,…Continue reading

ON SEPTEMBER 8th 2016, Wells Fargo’s reputation plummeted abruptly from that of America’s finest bank to that of yet another dodgy company. It was revealed to have opened an enormous number of potentially unauthorised retail deposit, current (checking) and credit-card accounts. A year on, two questions have yet to be put to rest. How much harm did Wells do to its customers? And how much did the scandal hurt the bank itself?

Wells has not been passive in its response. It has produced report after report on its misdeeds and submitted to investigations by two federal regulators, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency. It has purged its chief executive and the head of its retail bank, clawed back executive bonuses, transformed its board and simplified its formerly decentralised structure. It has created a comprehensive process for restitution and settled a class-action suit.

Yet it cannot put the scandal behind it. In July it…Continue reading

THOSE who live on America’s coasts know to prepare for wrathful hurricanes in late summer—nailing plywood to their windows as the storm approaches. America’s property insurers and reinsurers are ready, too, using sophisticated models to track storms and estimate potential losses. But wind is not the only danger from hurricanes. Ask Houstonians who saw their homes inundated by Hurricane Harvey’s 52 inches (132cm) of rain in the six days to August 30th. Or those in tthe path of Hurricane Irma, which, as The Economist went to press, was wreaking havoc across the Caribbean. But whereas wind damage is covered under most standard insurance policies in America, flood insurance is a government-run add-on that far from all homeowners buy. As a result, of over $30bn in property losses in Texas, only 40% may be insured.

The National Flood Insurance Program (NFIP) was set up in 1968, after a series of large losses led private insurers to pull back. Those living within a…Continue reading

STICKLERS for value have plenty of reasons to frown at financial markets. Much feels out of whack, from squashed bond yields to pricey stockmarkets. Yet currency markets, at least, seem to have shifted in line with fundamentals this year. Take the euro, for instance. Since the start of 2017 it has risen by almost 15% against the dollar, to $1.19 (see chart). That has taken it much closer to fair value by benchmarks such as purchasing-power parity (PPP), the exchange rate at which a basket of goods is worth the same in different countries. The OECD puts the euro’s PPP at $1.33. That is quite a stretch from $1.04 in January. “The elastic had to snap back,” says Kit Juckes of Société Générale, a French bank.

Of course, the euro’s revival is a result of more than its being cheap. The anxiety that elections in Europe might bring to power anti-euro populists, such as Marine Le Pen in France, has dissipated. The euro-zone economy has further strengthened, raising the prospect that monetary…Continue reading

GOVERNMENTS do not always make the best budget managers. Assuming it avoids an accidental debt default, America will run a bigger budget deficit this year than the last, despite a booming economy. Germany runs a surplus—but scrimps on critical investments and annoys its euro-area neighbours in the process. Japan, cowering under a mammoth public-debt pile, is weighing raising its consumption tax, though the last rise strangled a tenuous economic recovery. It is awkward, therefore, that the role of fiscal policy as a recession-fighting tool is only growing. The next downturn will be a painful and dangerous learning experience for many politicians.

When that comes, at some point in the next few years, the initial policy response is easily foreseeable. Central banks, nimbler than parliaments, will again move first. But markets reckon that two years from now the Fed’s benchmark rate will remain below 2%, the Bank of England’s below 1% and the European Central Bank’s close to zero. Rates can only go so negative before people abandon the banking system for cash. So cuts to interest rates will be limited. By contrast, in the relatively mild recession of 2001 the Fed cut rates by more than six percentage points. Central-bank asset purchases will follow, assuming they are not already happening, as they might well still be in Europe and Japan. Their effects will be less…Continue reading

A giant leap for impact investing

INVESTORS might be expected to run a mile from a deal on offer in a conflict-torn part of Africa. At best, it will pay an annual return of 7%; at worst, 40% of the original investment is lost. But a dozen social investors have pooled SFr26m ($27m) to finance the world’s first “humanitarian impact bond”, issued by the International Committee of the Red Cross (ICRC). It will pay for three rehabilitation centres to be built and run in the Democratic Republic of Congo, Mali and Nigeria.

The ICRC’s obligations are backed by “outcome funders”, ie, donors, mostly governments. The bond is an example of “impact investing”, in which private investors seek out social and financial returns, and of “blended finance”, in which public funds help them to do so. Variants have included a bond aimed at educating girls in India and a World Bank-led initiative to raise money to respond to pandemics. The novelty in the ICRC’s…Continue reading

A ROGUE state has tested what may be a hydrogen bomb and has sent a missile over the territory of a neighbouring country. The American president has promised “fire and fury” if threats continue. The Security Council of the United Nations has been locked in debate. This sounds like the plot of a Hollywood thriller or a paperback potboiler in which the world is heading for conflagration.

But international investors are not thrilled, and seem barely disconcerted, by the crisis on the Korean peninsula. Gold has risen a bit, the yield on Treasury bonds has dropped and the MSCI World equity index has fallen since the start of August. However, the moves have not been huge. Even the South Korean stockmarket, surely the most sensitive gauge of war risk, is well above its level at the start of the year.

What explains this remarkable insouciance? One possibility is that the markets may simply not be very good at assessing political risk. After all, investors failed to foresee either the…Continue reading