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Germany’s regulator bans short-selling in Wirecard

Thu, 02/21/2019 - 15:49

THOSE WHO profit from the misery of others are not often popular. Short-sellers, who try to make money by selling borrowed shares and buying them back later at a lower price, have long been viewed with suspicion. They are blamed for exacerbating price falls so that they can reap bigger returns. In times of market stress authorities often ban them. In 1610 regulators in Amsterdam forbade short-selling, blaming it for a fall in the value of the Dutch East India Company. Two centuries later Napoleon prohibited it as an act of treason.

On February 18th BaFin, Germany’s financial regulator, banned investors from taking new net short positions in Wirecard, a German digital-payments firm, after its share price fell by over 40% in under three weeks. The crash marked a swift change in its fortunes. In 2018 Wirecard displaced Commerzbank, a 149-year-old lender, in the DAX 30, an index of Germany’s biggest firms.

Wirecard was worth €20.7bn ($23.6bn) on January 29th, just before the Financial Times reported that Edo Kurniawan, a senior executive in the company’s Singapore office, was suspected of using fraudulent accounting techniques to inflate reported revenues. The share price slid. On February 1st it fell further when the same newspaper reported that Rajah & Tann, a law firm commissioned by Wirecard...

A new book argues weakened communities threaten liberal democracy

Tue, 02/19/2019 - 16:21

UNTIL RECENTLY, economists’ prescription for struggling places was bloodless: let them die. “Some towns cannot be preserved”, this newspaper argued in 2013, attracting a larger-than-usual volume of correspondence from dissenting readers. But the electoral successes of Donald Trump and the campaign to yank Britain out of the European Union (EU) have shaken the dismal science. Prominent economists have begun to consider what an efficient response to geographic inequality might look like. In a paper published in 2018, for example, Benjamin Austin, Edward Glaeser and Lawrence Summers of Harvard University argued for employment subsidies targeted at struggling places.

The reconsideration of place-based policies can often seem grudging—something to be tolerated, in order to keep those on the losing end of regional inequality from embracing populism or killing themselves with drugs. Economists’ reluctance is understandable: efforts to help struggling communities might well deter people from moving when they would otherwise have relocated to more promising places. But it is also short-sighted, argues Raghuram Rajan, an economist at the University of Chicago and the former head of India’s central bank. In a compelling new book, “The Third Pillar: How Markets and the State Leave the Community Behind”, he argues that communities are...

The biggest bank merger since the crisis may herald more

Thu, 02/14/2019 - 15:43

GIANT BANKS are made, not born. Today’s American behemoths were formed by a dizzying series of deals in the decade before the financial crisis. NationsBank and BankAmerica became Bank of America. Wells Fargo joined with Norwest. J.P. Morgan and Chase melded, and then bought Bank One. The crisis brought more mergers, but out of necessity as much as ambition: JPMorgan Chase took on Washington Mutual; Wells, Wachovia. But since the crisis hook-ups have been smaller. The very biggest banks are barred from retail acquisitions on competition grounds. Supervisors have become quicker at approving tie-ups between tiddlers.

On February 7th the big-deal drought ended. BB&T, based in Winston-Salem, North Carolina, and SunTrust, of Atlanta, Georgia, said that they would merge. The new, unnamed entity, valued at $66bn, will be far smaller than America’s biggest but far bigger than anything created since the crisis. It will be...

When trouble strikes, where should you hide? The case for gold

Thu, 02/14/2019 - 15:43

IMAGINE YOU have an assignation in New York. You have not been told where you should meet the other person and she has not been told where to meet you. You have no understanding of where to find her or where she might usually be found. She is as ignorant of you. You cannot communicate. You must somehow guess how to find each other and make those guesses coincide. Where should you go? And at what time of day?

A good answer is Grand Central Station at noon. That was the response of the majority asked by Thomas Schelling, a game theorist and Nobel prizewinner in economics, in experiments reported “The Strategy of Conflict”, published in 1960. People are often able to act tacitly in concert if they know that others are trying to do the same, said Schelling. Most situations throw up a clue, a “focal point”, around which to co-ordinate, even if it takes imagination as much as logic to find it.

Now imagine...

Men still pick “blue” jobs and women “pink” jobs

Thu, 02/14/2019 - 15:43

Fighting fires, they’re all orange

EVERY YEAR a few women become the first of their sex to hold a particular job. The stars of 2018 include Tennessee’s first female senator and the first female head of the New York Stock Exchange. There is the occasional male first, too: in 2018 the first men graduated from Norland College, which trains nannies for rich British families. Each year also sees a few occupations abandon sex-based hiring restrictions: in October Britain’s Special Air Service decided to admit women for the first time.

Fifty years ago this would have been unimaginable. “The hilarity of the notion that all jobs should be open to both sexes spawned a running joke,” writes Gillian Thomas in “Because of Sex”, her book on the impact of Title VII of America’s 1964 Civil Rights Act. Officials liked to quip that the law had created a “Bunny problem”: men would have to be considered for employment as...

Bill and Melinda Gates publish their annual letter

Thu, 02/14/2019 - 15:43

Always something to be mad about

GETTING KILLED in a video game, receiving unfair treatment from a teacher, seeing a relative go to jail: the teenagers taking part in Chicago’s Becoming a Man (BAM) initiative admit to a variety of frustrations, some trivial, some tragic, that can stir their anger. The initiative, which teaches young men how to regulate their emotions, aims to lower crime rates and improve graduation rates. Recently one BAM group invited an unusual guest into their counselling circle: Bill Gates, the second-richest man in the world. So what pushes his buttons?

Mr Gates answers that question in his latest annual letter, written with his wife Melinda, describing the work of the $50bn charitable foundation they oversee. He admits to being “pretty harsh” with his parents as a child and “tough” on people at Microsoft. (“Over the decades I’ve mellowed out on that,” he says.) He also remembers...

Finland’s basic-income trial did not much affect work incentives

Thu, 02/14/2019 - 15:43

AMONG THE adherents of universal basic income (UBI) are the Italian government, India’s opposition party and Alexandria Ocasio-Cortez, a Democratic congresswoman in America. Boosters argue that a minimum income would be a safety-net for people in precarious jobs—eg, those at risk of being displaced by automation. Others see a way of eliminating complex, even corrupt, social-security bureaucracies.

Naysayers, horrified by the potential cost of UBI, fret that state handouts will put recipients off work. Early results from Finland’s basic-income experiment, released on February 8th, suggest that such fears are overdone, but don’t resolve much else.

Researchers randomly chose 2,000 people on the dole to receive for two years a monthly payment of €560 ($634) instead, whether or not they sought or started work. After a year, recipients were no less likely to be working than those on the dole. On average, both...

Signs of progress in China-US trade talks, but gaps remain big

Wed, 02/13/2019 - 18:35

LAST YEAR, when American officials visited Beijing for trade negotiations, they spent more time fighting among themselves than against China. They could not agree on who should lead the talks or what their goal should be. Seeing such amateurism, their Chinese interlocutors reckoned that they had little to worry about.

Many of the same Americans have been back in Beijing for more talks in recent days. But this time they had an undisputed leader—Robert Lighthizer, the hard-nosed United States Trade Representative—and a clear set of demands. Their Chinese counterparts, having seen President Donald Trump’s zeal for tariffs, knew that they had something to worry about after all.

America has set a deadline of March 1st for an agreement. If it is missed, tariffs on $200bn-worth of imports from China are due to rise from 10% to 25%, inflicting more pain on a slowing Chinese economy. That would invite a sharper backlash from China. Its ability...

What would happen if Facebook was turned off?

Tue, 02/12/2019 - 16:28

THERE HAS never been such an agglomeration of humanity as Facebook. Some 2.3bn people, 30% of the world’s population, engage with the network each month. Economists reckon it may yield trillions of dollars’ worth of value for its users. But Facebook is also blamed for all sorts of social horrors: from addiction and bullying to the erosion of fact-based political discourse and the enabling of genocide. New research—and there is more all the time—suggests such accusations are not entirely without merit. It may be time to consider what life without Facebook would be like.

To begin to imagine such a world, suppose that researchers could kick a sample of people off Facebook and observe the results. In fact, several teams of scholars have done just that. In January Hunt Allcott, of New York University, and Luca Braghieri, Sarah Eichmeyer and Matthew Gentzkow, of Stanford University, published results of the largest such experiment yet. They recruited...

America’s public pension plans make over-optimistic return assumptions

Thu, 02/07/2019 - 15:53

PROMISING A PENSION is a long-term and expensive business, especially if the payout is linked to earnings. But whether the employer is private or public, the cost ought to be the same in the long run and so, you might assume, would be the investment approach. Until 2008 that was true for American pension plans: private and public-sector schemes had roughly the same asset allocation.

But a new report by Jean-Pierre Aubry and Caroline Crawford of the Centre for Retirement Research (CRR) at Boston College shows that things have changed. Public plans have 72% of their portfolios in risky assets (equities and alternatives such as hedge funds), and private plans just 62%. Since private plans have more scheme members who are retired, they should have a less risky approach, because they must focus on paying benefits immediately rather than on long-term growth. However, even allowing for this and other factors such as plan...

Malaysia’s former prime minister faces trial in the 1MDB scandal

Thu, 02/07/2019 - 15:53

Mr Najib awaits his day in court

ACCORDING TO America’s Department of Justice, between 2009 and 2015 $4.5bn disappeared from 1 Malaysia Development Berhad (1MDB), a Malaysian state development fund set up a decade ago by Najib Razak, then the prime minister. The money passed through a maze of institutions and accounts in the Middle East, the Caribbean and the Seychelles. It was frittered away on property, parties, gems, art, private jets and a superyacht. It helped fund a film on scamming, “The Wolf of Wall Street”. The mastermind behind the fraud is allegedly Jho Low, a Malaysian financier. But more than $600m ended up in Mr Najib’s personal bank accounts.

Mr Najib denies wrongdoing and says the money was a gift, since returned, from an unnamed Saudi royal. His claims of innocence in one of the biggest financial scandals ever are about to be put to the test. On February 12th he is due to...

What happens when your bitcoin banker dies?

Thu, 02/07/2019 - 15:53

BITCOIN WAS introduced to the world in August 2008, in the aftermath of the financial crisis. According to its techno-libertarian fan-base, one of its main attractions was the promise that users could avoid dealing with the hated banks. But after a decade of amateurism, scams and billions of dollars of lost or stolen money, it is clear that many of the ramshackle institutions that play the role of banks in the cryptocurrency world make even their most reckless conventional counterparts look like paragons of good management.

The latest example is QuadrigaCX, a Canadian cryptocurrency exchange that was granted protection from its creditors on February 5th. The problem, according to the firm, is not that it has lost its customers’ money, but that it cannot get to it. It says that Gerald Cotten, its boss, died unexpectedly in India in December.

Few banks would be brought to ruin by the death of a single member of staff...

Some fights about the Tax Cuts and Jobs Act seem over

Thu, 02/07/2019 - 15:53

HURRIED THROUGH Congress in late 2017, the Tax Cuts and Jobs Act (TCJA) was the biggest overhaul to America’s tax system in more than 30 years. Boosters claimed it would turbocharge investment and growth, generating so much extra taxable income that it would pay for itself. Critics claimed it would shower the rich with tax breaks, and that balancing the books would mean the costs were ultimately born by the poor. Over a year later, beliefs on neither side have been shaken.

The law’s complexity makes its impact hard to assess. It sprawls across individual and corporate taxation, and affects individuals’ health insurance, too. Some changes are temporary, others permanent. It redraws the basis for taxing multinationals, which are expert at finding loopholes.

Though it has been clear all along that the tax cuts go mainly to richer Americans, there is disagreement over just how regressive they are. Alan...

The benefits of better credit-risk models will be spread unevenly

Thu, 02/07/2019 - 15:53

IN “PLAYER PIANO”, a novel by Kurt Vonnegut, society is divided into a workless majority and an elite who tend all-powerful machines. A character tells how her husband lost his status as a writer when his novel fails to hit the “readability quotient”. She turns to sex work after he refuses the public-relations job he is assigned. “I’m proud to say that he’s one of the few men on earth with a little self-respect left,” she says.

The novel, published in 1952, anticipates present-day fears about the social impact of automation. Clever algorithms already make finely graded distinctions about the price each consumer pays for an air ticket, or which advertisements or news he sees. They will soon decide who gets credit, and on what terms. Vonnegut touches on a deeper worry. The husband fails to reach the mark because his book is anti-machine. It is easy to imagine credit being similarly denied for reasons other than credit risk—such as...

Germany’s long expansion comes under threat

Thu, 02/07/2019 - 10:18

GERMANY’S EXPORTING prowess is so impressive that other countries seek to import even its policies. France recently passed labour reforms inspired by its neighbour to the east. British politicians periodically try to copy its vocational-training system. Governments far and near have sought to emulate the Mittelstand, its small and mid-size producers. Germany’s knack for producing goods desired by emerging economies, notably a booming China, helped it recover rapidly from the financial crisis of 2007-08, and cushioned the impact of the sovereign-debt crisis that subsequently engulfed the euro zone.

Now Germany is propelling the currency bloc into a slowdown. The economy shrank in the third quarter of 2018 and probably grew only slightly in the fourth. Over the year as a whole, GDP grew by 1.5%, down from 2.2% in 2017 and below the euro-zone average (see chart 1). New emissions tests...

A commission of inquiry reaches a damning verdict on Australia’s banks

Wed, 02/06/2019 - 15:45

IF A HEALTHY banking system is dull, then Australia’s must be sick to the core. A royal commission with a broad remit to investigate abuses by the country’s financial institutions has found many troubling practices. Hearings revealed that for years banks had hidden fees, charged money for non-existent services and docked charges from the dead. Financial advisers earned bonuses for channelling clients’ cash towards underperforming funds. Insurance companies flogged junk schemes to the poor or mentally disabled.

Australia’s four biggest lenders saw their market capitalisation fall by an average of 16.3% while the commission was sitting, knocking A$66bn ($47.1bn) off their combined value. In April the country’s biggest asset manager, AMP, sacked its chief executive and chairman after the inquiry heard that it had not only charged customers for advice that was never provided, but had lied to the regulators about it....

Bill Gross, the king of the bond market, abdicates

Tue, 02/05/2019 - 19:57

OUTSIZE RETURNS are hard to come by in the bond market: the approach pioneered by Jack Bogle at Vanguard of matching a benchmark while minimising transaction fees is tough to beat. There was one person, however, that even Vanguard’s fixed-income team considered in a class of his own and thus worth paying for: Bill Gross, who co-founded Pacific Investment Management Company (PIMCO) in 1971 after a conventional career in finance and risk, plus a brief professional foray onto the blackjack tables of Las Vegas. On February 4th Mr Gross and Janus Henderson, his employer for the past few years, announced that he was retiring.

For decades Mr Gross displayed extraordinary acumen, not only in evaluating securities but also in structuring the duration, or time-frame, of his portfolio. He displayed uncanny judgment about when to push maturities just a bit longer or shorter than average. His calls were amplified by his...

A bold new plan to tackle climate change ignores economic orthodoxy

Tue, 02/05/2019 - 17:42

AS DEALS GO, the New one was a big one. Franklin Roosevelt’s plan to yank America out of depression permanently altered the contours of the country’s economy and politics. Proponents of a “Green New Deal” harbour similar ambitions. Though still nebulous the proposal, championed most loudly by Alexandria Ocasio-Cortez, a new congresswoman from New York, has been met with surprising enthusiasm in Washington. It is an outright rejection of the orthodox economic approach to climate change.

In economics, climate change is a big but straightforward example of a market failure, with a correspondingly straightforward solution. People take environmentally harmful decisions because the private benefits of doing so (using a car to get to work, say) outweigh the private costs (the price of the petrol to run the car). But emission-producing activities also impose social costs—deaths from pollution and collisions, the contribution...

Puerto Rico’s biggest bank came out of Hurricane Maria stronger

Thu, 01/31/2019 - 15:43

PUERTO RICO was never the most financially stable of places. After years of trouble its government defaulted in 2016. Then, in 2017, Hurricane Maria roared in. The island took close to a year to restore electricity fully, and financial restructuring continues. Manufacturers decamped during the power cuts; many did not return. Banco Popular, the biggest financial institution, which had already been buffeted by a wave of bad loans, was hit by another. Its failure would have been no surprise.

Prepare to be astonished, then: Popular is in pretty decent shape. Part of that is due to the island’s tentative recovery. Sales of cement and cars have been strong; tourism is starting to pick up. But even so, Popular’s performance is striking. The KBW index, a broad measure of American banking stocks, has fallen by 16% in the past year; Popular’s shares are up by a third. Over the past five years the KBW index rose by 46%; Popular’s shares...

Conflicts in the credit-derivatives market threaten to undermine it

Thu, 01/31/2019 - 15:43

SHAKESPEARE WAS a fan of the quibble. His plots often hinge on the gap between word and intended meaning. Macbeth was supposed to be invincible because he could be harmed by “none of woman born”—but his killer, Macduff, was delivered by Caesarean section. In “The Merchant of Venice” Portia saves Antonio by arguing that though he agreed to forfeit a pound of flesh to Shylock if he defaulted on a loan, he did not agree to lose blood.

Traders in credit-derivative markets are keen on quibbles, too. Credit-default swaps (CDSs) are insurance-like derivatives designed to compensate lenders when a company goes bust. A simple enough aim, you might think, but there are plenty of devilish details. A company can go bust in many ways: it can close and have its assets sold off, or restructure its debt and keep operating. And CDS contracts pay out the difference between a bond’s face value and the price of the cheapest bond available, even though the underlying...