Author: Helen

Deutsche Bank’s troubles deepen as hedge funds move their business elsewhere

Posted on by Helen

German banking giant Deutsche Bank has been sent spiralling into crisis as several of its hedge funds have begun to pull their business from the lender. With concerns over Deutsche Bank’s future mounting, around 10 funds have already sought to reduce their position with the bank by moving some of their listed derivatives holdings to other firms, according to a report by Bloomberg News.

The move serves to further fuel Deutsche’s current financial turbulence. Shares at the investment bank plummeted to a 33-year low this week, sending shockwaves around the wider US banking market and causing banking stocks to fall by 1.6 percent. In the wake of its clients’ decision to move their assets elsewhere, Deutsche Bank shares plunged below €10 for the first time in its 146 years of business.

“In any given week, we experience ebbs and inflows”, Deutsche Bank’s Chairman of Hedge Funds, Barry Bausano, was reported as saying by Bloomberg. “This week is no different; it goes on all the time.”

Deutsche Bank shares have plunged below €10 for the first time in its 146 years
of business

Recent volatility has caused some industry experts to suggest the German Government could be called upon to rescue the bank, although strict EU legislation makes it difficult for countries to inject state funds into struggling financial institutions. Such a bailout may just prove necessary, however, if the bank were to continue on its downward spiral.

In June, the IMF said the German giant is the world’s most dangerous bank in terms of its contribution to systemic risk. According to the IMF, financial ruin at Deutsche Bank would have a catastrophic effect on the global economy.

In addition to the bank’s new hedge fund woes, the lender is also embroiled in a costly legal dispute with the US Department of Justice. Last week, the regulator hit Deutsche with a $14bn fine after finding the bank guilty of mis-selling mortgage-backed securities in the years leading up to the global financial crisis. While the bank believes its ongoing negotiations with the Department of Justice will result in a substantially smaller settlement, the high-profile probe has reignited investor fears over the financial health of Europe’s biggest investment bank.

Responding to these pressing concerns, the move by Deutsche Bank’s clients is proving to be something of a catalyst for a further share price slide. If more clients follow this lead and pull their business from the lender, Deutsche Bank could well buckle under this mounting financial pressure.

The collapse of Hanjin Shipping makes waves in South Korea’s business culture

Posted on by Helen

Ever since South Korea’s Hanjin Shipping filed for bankruptcy protection on August 31, there has been trouble at sea. Currently, around 85 Hanjin vessels remain in maritime limbo, turned away from global ports due to their inability to make charter payments. As a result, more than $14bn in cargo is stranded at sea, while crews aboard the marooned ships are forced to watch their food and water supplies dwindle.

Over the past month, as Hanjin floundered, the wider shipping industry has also been battling against rough waters. The demise of the world’s seventh biggest container carrier has understandably had a grave impact on the sector, sending freight rates skyrocketing and prompting a flurry of shipment re-bookings. In the wake of this crisis, some experts have even suggested that Hanjin is to shipping in 2016 as Lehman Brothers was to finance in 2008.

Chaebol culture
Just as Lehman Brothers was thought to be ‘too big to fail’, Hanjin had previously been deemed too economically viable to ever fall into bankruptcy. However, struggling to remain profitable in the midst of a global shipping downturn, the indebted firm turned to the South Korean Government for financial aid earlier this year.

Eager to rescue a crisis-stricken Hanjin, the state-run Korea Development Bank invested a substantial KRW 1trn ($910m) in the shipping line. It soon became all too apparent, however, that this sum would fail to save Hanjin, as the troubled conglomerate began to crumble under the weight of its KRW 5.6trn ($5bn) debts. Faced with this reality, the South Korean Government quickly adopted a hard line with the firm, terminating its financial support with immediate effect.

Chaebols continue to dominate South Korea’s economy. Samsung alone is responsible for around 20 percent of South Korea’s GDP

This new tough stance towards Hanjin marks something of an unusual political move. Seoul has a long history of providing financial support to the nation’s largest conglomerates, with this close relationship between politics and big business having emerged as a hallmark of South Korean economics. By suddenly severing ties with one of the nation’s most powerful ‘chaebols’ (large family-run business conglomerates), the government may be set to shake up a decades-old business culture.

Chaebols first rose to prominence in the early 1960s, when the South Korean Government began to collaborate closely with corporations in order to modernise a stagnant post-war economy. “Everyone is familiar with the economic rise of South Korea and the Miracle on the Han River”, said Kyle Ferrier, Director of Academic Affairs and Research at the Korea Economic Institute of America, referring to the nation’s period of remarkable economic growth following the Korean War.

Ferrier continued: “It simply couldn’t have been done without these conglomerates. These chaebols helped to pool resources and develop Korea from an agrarian economy to a low-tech manufacturing economy, and finally to the high-tech heavy industry economy it is today.”

After decades of receiving state-sponsored credit and assistance, chaebols emerged as economic heavyweights by the 1980s, turning the nation’s 1985 trade deficit into a trade surplus by 1986. By the time the East Asian financial crisis gripped South Korea in 1997, many firms had grown so exponentially that their collapse would have threatened to topple the entire South Korean economy.

While several smaller conglomerates buckled under the strain of the financial crash, the largest chaebols emerged from the crisis with their economic power consolidated and strengthened, thanks to the elimination of their weaker rivals.

In the years since, these sprawling family-run conglomerates – including global brands such as Samsung, Hyundai and LG – have continued to dominate South Korea’s economy. Currently, Samsung alone is responsible for around 20 percent of South Korea’s GDP, while its closest rival Hyundai Group accounts for a further 12 percent. Meanwhile, those at the helm of these vast dynasties enjoy unprecedented political sway, often moving freely between top government jobs and high-ranking corporate positions.

While this unique business structure has until now allowed conglomerates to thrive, chaebol culture could well be under threat as the government watches Hanjin slowly sink.

A sinking ship
The demise of Hanjin unquestionably proves that chaebols are not too big to fail, as perhaps previously thought. In refusing to offer the struggling shipping line a financial life raft, the government is sending others a clear message: a transitional South Korean economy is prepared to withstand the loss of such a huge business empire.

As a government-funded financial safety net is no longer guaranteed for chaebols, Hanjin’s collapse may serve as something of a warning for South Korea’s business giants

As a government-funded financial safety net is no longer guaranteed for chaebols, Hanjin’s collapse may serve as something of a warning for South Korea’s business giants. Ferrier explained: “It signals to other chaebols that just because they’ve had such a long-standing importance to the Korean economy, that doesn’t mean that they will necessarily receive special treatment from the government.”

In recent months, two of the nation’s biggest conglomerates have also been rocked by crises: in late August, the Vice President of Lotte was found dead in an apparent suicide, just hours before he was due to be questioned over corruption allegations. Samsung, meanwhile, had $14bn wiped off its shares in early September, following a botched global recall of its erratically explosive Galaxy Note 7 smartphone.

To add to Samsung’s financial woes, a vast supply of its goods and parts – to the value of around $38m – is currently stranded on Hanjin’s ill-fated ships. Furthermore, a rescue operation for this cargo would cost the company a further $8.8m in alternative transport fees. As Samsung’s marooned shipment ironically goes to show, the oft-interconnected fates of chaebols mean that the financial ruin of one conglomerate can easily spell trouble for another.

This spate of misfortunes befalling South Korea’s all-powerful conglomerates has led some experts to once more reassess the role they play in the nation’s economy. For some time now, a somewhat chaebol-sceptic President Park Geun-Hye has put economic democratisation at the top of her political agenda. Understanding all too well the dangers of monopolies, the Park-Geun-Hye administration is attempting to diversify the economy and encourage competition – and taking centre stage are SMEs, which account for 99 percent of South Korean businesses.

“The government has been trying to create a stronger domestic economy by pushing these SMEs”, Ferrier told World Finance. “In January this year, it also created a $66bn fund for establishing a new Korean Silicon Valley, to encourage tech start-ups and innovation.”

Despite government initiatives to foster a more competitive, creative economy, true reform of chaebol culture will require a shift in cultural attitudes. “In South Korea, working for a chaebol is seen as a sign of stability – a sign of economic and personal success for an individual”, explained Ferrier. Quite simply, there is a level of prestige attached to working for a chaebol that gives them the cultural edge over SMEs.

As the shockwaves from Hanjin’s collapse begin to reverberate around the South Korean economy, public scrutiny of chaebol culture will be unavoidable. An increasing hostility towards the nation’s once-revered conglomerates has been growing of late, especially as multinational chaebols continue to move operations overseas, employing ever-fewer domestic workers. Now, with the government-backed rise of SMEs promising an alternative to absolute chaebol dominance, the tide might slowly be turning for South Korean business culture.

OPEC agrees to reduce oil output

Posted on by Helen

After sustained pressure from the global oil market, the Organisation of the Petroleum Exporting Countries (OPEC) has agreed to introduce a modest reduction in its oil production. The cut is the first since 2008, and represents a softening of Saudi Arabia’s position on the issue.

“OPEC made an exceptional decision today”, said Iranian Oil Minister Bijan Zanganeh. “After two and a half years, OPEC reached consensus to manage the market regarding the decision.” Currently OPEC estimates its overall output to be approximately 33.2 million barrels per day (BPD), but has agreed to cut production by 700,000 BPD to between 32.5 million and 33 million BPD, according to the BBC.

OPEC has agreed to cut production by 700,000 barrels per day, to between 32.5 million and 33 million

The decision represents a significant shift in position from the oil-producing body. Longstanding disagreements between rivals Saudi Arabia and Iran have prevented any previous efforts to curb production, while Saudi Arabia has previously stated it would only reduce output if every other OPEC and non-OPEC producer followed suit.

Iran, on the other hand, has been keen to increase production following the lifting of international sanctions at the beginning of this year. As per this agreement, Iran will be allowed to increase production, with cuts being spread across other producers. While a ceiling has now been put in place, how exactly the cuts will be distributed will be decided at OPEC’s next formal meeting in December

Price slump
Both Iran’s and Saudi Arabia’s economies have struggled as a result of the prolonged slump in the price of oil, but Iran is generally seen as being in a stronger position due to the removal of international sanctions, which should open up new opportunities for growth.

Despite OPEC’s cuts, the world’s other oil producers are continuing with high production rates. As reported by Bloomberg, Russia has increased its production by as much as 400,000 BPD, setting itself on target to break post-Soviet production records. The increase in production has come from the opening of new fields in the country’s north.

In the US, crude oil stocks have fallen along with imports, according to a press release from the US Energy Information Administration. As reported by Reuters, the continued drop in inventories has surprised some analysts, since stocks were expected to rebound after a significant storm impacted inventories in September.

Yellen defends financial regulations and low interest rates

Posted on by Helen

Speaking to the House Financial Services Committee in her semi-annual testimony, Federal Reserve Chair Janet Yellen gave a positive overall assessment of the US financial industry. She noted that post-2008 financial regulations had placed US banks in a better position, and that regulators were continuing to monitor their effectiveness and look out for new risks.

Yellen faced tough questioning from committee members over the practices of big banks and the potential need for them to be broken up. Many committee members also questioned whether banks were still ‘too big to fail’. The concern is that the size of many banks could present a systemic risk to the US economy should they fall into trouble similar to that experienced in 2008. Yellen, however, argued that new regulations had significantly reduced the risk of banks one day requiring a bailout.

Yellen argued that new regulations had significantly reduced the risk of banks one day requiring a bailout

Some Democratic members of the committee argued the recent Wells Fargo scandal showed that the large size of many banks made them too hard to manage, thereby encouraging wrongful doing. Stephen Lynch, a congressman from Massachusetts, argued that the practices of Wells Fargo were unlikely to be limited to just the one bank, and that Yellen should “make their life hell”. Democratic Congressman Brad Sherman of California argued that “Wells Fargo has identified two additional reasons to break these institutions up”.

In response, Yellen noted that the Fed has launched a review of compliance regimes for large financial institutions: “We are undertaking a look comprehensively, not only in the consumer area, but compliance generally, because there have been a very disturbing pattern of violations.”

Although it was intended for her testimony to focus on banking regulation and supervision, Yellen also touched on interest rates when questioned. She shot back at previous claims from US presidential candidate Donald Trump that the Fed was holding interest rates low for political purposes at the behest of the Obama administration. She also affirmed the Fed’s political independence, telling the House Financial Services Committee that political partisanship played no role in rate setting.

Following the Federal Reserve’s decision in September to hold the federal funds rate at between 0.25 percent and 0.5 percent, she noted that continued job growth had strengthened the potential for a rate rise in December.

With the pace of employment growth continuing, not removing the Fed’s monetary accommodation risked pushing inflation above the two percent target. However, she noted that there was no “fixed timetable” when it came to raising interest rates.

How Fides Treasury Services is protecting its clients’ assets from cybercrime

Posted on by Helen

The internet is one of the greatest inventions of our time. It spreads information at the speed of light, brings people together from opposite sides of the globe in an instant, and has instigated a whole new era for business and banking.

With so much good, inevitably there is some bad as well, and the biggest downside of the internet must of course be the looming security issues that now threaten organisations, both big and small. To make matters worse, the methods of cybercriminals are becoming increasingly sophisticated and at an alarming rate; these groups and individuals are constantly finding new and ingenious ways to hack systems.

With so much at stake – from pledges made to customers, to a company’s reputation, not to mention the integrity of capital and assets – security is now at the top of every organisation’s agenda. Implementing the measures needed to ensure maximum safety, however, is no mean feat, which is why more and more companies are turning to third parties to bridge the gap.

Against the background of this growing trend, World Finance had the chance to speak to Andreas Lutz, Chief Marketing Officer at Fides Treasury Services, to discuss both the challenges and opportunities facing corporate treasurers in such a rapidly evolving landscape.

The issues of technology and security have become a very hot topic lately, making them a top priority on the agenda of corporate treasurers everywhere

What are some of the challenges facing treasurers today?
The majority of corporate treasurers today note that their biggest challenges continue to be managing risk effectively, in addition to improving cash visibility and predictability. It has become crucial that more treasurers move to centralised decision-making in order to improve efficiency and visibility, particularly for cash management, operations, funding and hedging.

Moreover, as a result of various highly publicised malware and cyber-attacks, the issues of technology and security have become a very hot topic lately, making them a top priority on the agenda of corporate treasurers everywhere.

How is the issue of technology both a challenge and an opportunity for treasurers?
New tools and technologies present numerous exciting opportunities, especially in the area of payments. However, since automation is not yet complete, many treasurers are still struggling with the traditional challenges for payments. For instance, file formats often differ – even now, with the existence and widespread adoption of ISO 20022, the finance industry’s international standard for electronic data exchanges. Consequently, mass-payments are still relatively slow.

Furthermore, many treasurers still have to work very closely with, and rely on the help of, their IT departments in order to develop end-to-end automation. In my opinion, one of the biggest challenges therefore is working out how to successfully integrate a treasury management system or connectivity provider.

To your mind, what are the biggest security risks facing treasurers?
I think they actually vary from company to company; they also depend on the sector that they are in. That being said, what all treasury departments have in common is the need for communicating with their banks, whether this is via a sophisticated treasury management system (TMS) or through a simple e-banking platform. This being the case, companies need to think about how they can protect information exchange between external systems. For example, a company can engage with the TMS via a service bureau, such as Fides Treasury Services, which then transmits information safely and securely to the bank on their behalf.

For what reasons have security risks increased recently?
Security risks – or, in other words, the number of cybersecurity incidents detected – have increased continuously throughout the last few years; in fact, they have risen by almost 50 percent over the last two to three years alone. I think there are various reasons behind this rapid surge, but some of the obvious ones are, for example, legalities – because most companies still do not involve the law when cybercrimes are carried out by insiders, which means that other organisations become vulnerable themselves when they go on to hire those people in the future.

Secondly, cybercriminals are getting better and better at what they do. Importantly, their targeting has become far shrewder; they know who to go after, which is more often than not SMEs, as they typically have weaker security systems in place.

Finally, I have to say that the connectivity of today’s world, with its massive network that interconnects information within a matter of seconds, makes it far easier for any kind of cybercrime to be committed.

How might outsourcing treasury connectivity services to a third party reduce some of these security risks?
From my point of view, outsourcing provides a logical safeguard and ensures the risk is mitigated. Today, as corporate treasurers rationalise their business models and seek to further automate any processes within the treasury, outsourcing – in regards to further automating, such as bank communications – is an opportunity that is attracting growing examination and consideration.

This is especially the case because a corporation would otherwise have to set up a full-technology infrastructure, which includes establishing business connectivity, transaction management, regular security patches and a great deal more.

Yet, with the use of today’s TMSes and a connectivity provider such as Fides Treasury Services, outsourcing and automating can reduce security risks effectively and efficiently.

How does Fides Treasury Services help streamline this process and ward off security risks?
Maintaining your own infrastructure from a connectivity perspective is no small task: not only is a sizeable investment into state-of-the-art hardware required, but there is also the ongoing challenge of carrying out necessary and frequent security patches in order to improve performance and usability.

We at Fides Treasury Services are specialists in helping our clients build up secure connections to us, and therefore to their entire banking landscapes. In addition to continuously investing in the newest technology and infrastructure, we have implemented as many additional precautions as possible. For example, we carry out comprehensive monitoring of critical systems and automated notifications in the case of any irregularities, and we also perform regular upgrades of network hardware and patching of internet-facing appliances.

Finally, and of crucial importance, we employ the best and brightest trained specialists to assess situations quickly and then act professionally should the need arise. With this and more, our clients can rest assured that their data enjoys the maximum security and confidentiality at any point in time.

How is it that the company differs to competitors?
With our foundations having been laid in 1910, Fides Treasury Services can look back on more than a century of experience in servicing satisfied clients. In addition, being part of the Credit Suisse Group, we are committed to the highest quality and security standards, while also being a specialised multi-banking service provider.

Our solutions are flexible, cost efficient and can be connected with a TMS or enterprise resource planning system. If you don’t have your own system in place, then you can take advantage of our proprietary solutions. These enable you, for example, to have an overview of liquidity at a keystroke, while they also allow you to summarise account information, such as balances from your banking partners around the world. Furthermore, the worldwide transmission of single and bulk payments to your banks is summarised on just one easy to use portal.

Finally, I would like to stress that no matter how you wish to use what we offer, everything we do comes with a wide range of conversion and validation services, as well as the very highest security standards.

What plans do you have for the future?
Fides Treasury Services has been dedicated to providing multi-banking access to both the corporate and financial sectors since 1985, connecting and servicing more than 3,000 clients globally through SWIFT, EBICS, as well as other networks. Our aim is to continue growing, expand globally and further develop our products based on market and client expectations, while also identifying and captivating new business opportunities as soon as they arise.

World trade set to grow at slowest rate since the global financial crash

Posted on by Helen

On September 27, the World Trade Organisation (WTO) announced it was cutting its global trade growth forecast to just 1.7 percent, down from its previous estimate of 2.8 percent in April. This revised forecast marks the slowest anticipated rate of trade and output growth since the global financial crisis of 2008.

The trade body has revealed that the downturn marks the first time in 15 years that international trade has lagged behind global GDP. While trade has typically grown 1.5 times faster than GDP, this growth rate has now shifted, leaving trade growth languishing behind its 1990s peak, when globalisation gained significant momentum. The revised projection reflects an economic slowdown in China and Brazil, as well as lower-than-expected levels of imports to the US.

The downturn marks the first time in 15 years that international trade has lagged behind global GDP

“The dramatic slowing of trade growth is serious and should serve as a wake-up call”, WTO Director-General Roberto Azevêdo said in the trade outlook report. “It is particularly concerning in the context of growing anti-globalisation sentiment. We need to make sure that this does not translate into misguided policies that could make the situation much worse, not only from the perspective of trade but also for job creation and economic growth and development, which are so closely linked to an open trading system.”

The report points to government trade policies as a significant factor behind the recent downturn in growth, highlighting “creeping protectionism” as a threat to international trade and output. As economic isolationism becomes more common on the global political stage, trade is anticipated to grow at only 80 percent of the rate of the economy this year, in the first reversal of globalisation since 2001.

This shift in trade patterns and policy will make it increasingly difficult for the WTO to predict future trade growth. For the first time in the organisation’s history, it is unable to give specific figures for the year to come, and has instead envisioned a range of potential forecast scenarios for 2017. A number of uncertainties are set to affect 2017’s trade growth, including a possible wave of anti-trade sentiment stemming from the UK’s recent decision to leave the EU.

“This is a moment to heed the lessons of history and re-commit to openness in trade, which can help to spur economic growth”, Azevêdo advised. Only time will tell if the WTO’s warning will succeed in curbing the anti-globalisation rhetoric that currently dominates international politics.

Monsanto pulls new GM seed from Indian market

Posted on by Helen

On August 25, the US agribusiness giant Monsanto announced that it was withdrawing an application seeking approval for its next generation of pest-resistant cotton seeds in India.

The application was scrapped due to “regulatory uncertainties and ongoing discussions”, a spokesperson for Monsanto confirmed. The move underlines the agrochemical company’s refusal to comply with Indian Government proposals that would force Monsanto to share its technology with local seed companies.

Millions of farmers are set to suffer from Monsanto’s decision to pull the new GM seed

The dispute was ignited back in March, when a small group of local seed-makers began refusing to pay royalties for using Monsanto’s GM technology to produce cotton seeds. Indian Prime Minister Narendra Modi quickly responded to this local protest by cutting the royalties paid to Monsanto by 70 percent. The move caused the company to warn that it would “re-evaluate every aspect of our position in India”.

The Indian Government has since refused to reverse the price cut, despite mounting pressure from Monsanto, which has prompted the company to take the unprecedented decision to pull their new strand of GM seeds from the nation. The move could see further losses for the company, as they may be forced to shelve their new cotton seed, Bollgard III, for several years.

Since introducing its first generation of genetically modified seeds to India in 2002, Monsanto’s biotech crop technology has completely transformed India’s agricultural industry, with around seven million cotton farmers now reliant on the company’s pest-resistant seeds. As a result, millions of farmers are set to suffer from Monsanto’s decision to pull the new GM seed, as they will be forced to depend on an older strain of cotton seed, which experts fear is beginning to lose its efficiency.

The latest move in this royalties row is also a blow to Modi, who wants to attract more foreign investors to India in order to boost the nation’s economic growth.

As this bitter Monsanto dispute will further fuel anxieties over the treatment of foreign companies in India, securing new international investment may prove to be something of a real challenge for Modi.

US Treasury Department criticises European Commission’s Apple tax probe

Posted on by Helen

The US Treasury Department has issued a sharp criticism of the European Commission (EC) ahead of the release of its findings into Apple’s corporate tax payments in Ireland.

In a white paper released by the US Treasury Department, the body warned that Brussels was becoming a “supranational tax authority” that is threatening international agreements on tax reform. It stated the Directorate-General for Competition is expanding its designated role of the enforcement of competition and state aid law.

“The cases cited by the commission do not give taxpayers prior notice that the commission would interpret its powers in this way or that selectivity would no longer be a meaningful precondition to a finding of state aid”, the report read. Earlier this year, the Obama administration also argued publically that the EC was unfairly targeting US companies with its investigations.

JPMorgan has estimated that in a worst-case scenario, Apple’s unpaid tax bill could be as high as $19bn

The criticisms come ahead of the EC finalising its investigations of an alleged ‘sweetheart’ tax deal between Apple and Ireland, the Financial Times reported. The probe began in 2013 and is focusing on the practice of ‘transfer pricing’, where a company moves its profits to low-tax jurisdictions via internal transactions.

The EC accused Irish authorities of offering Apple a special deal to reduce its tax bill, one that was not made available to other companies and was therefore potentially a breach of EU state aid rules. The US Senate has criticised Apple in the past for paying a two percent tax rate – a significant decrease of the headline 12.5 percent rate. Apple and the Irish finance ministry have denied any wrongdoing.

The EC is scheduled to release its findings next month. JPMorgan has estimated that in a worst-case scenario, Apple’s unpaid tax bill could be as high as $19bn.

Apple isn’t the only US firm that has fallen between the crosshairs of the EU. Last year it ruled Starbucks was given a sweetheart tax deal in the Netherlands, stating the company avoided paying between €20m and €30m ($22.6-$33.9m) in taxes.

Investors pull £5.7bn out of UK post-Brexit

Posted on by Helen

The latest market figures reveal that the outcome of the EU referendum prompted investors to pull out a total £5.7bn ($7.54bn) from equity funds domiciled in the UK. While June saw withdrawals to the value of £2.27bn ($3bn), in July a further £3.55bn ($4.7bn) of redemptions were made, making it the worst month for UK funds in the last three years.

According to data provider Morningstar, £438m ($579m) was also pulled from UK property funds. Some investors chose to move their capital to less risky funds in the country, such as government and corporate bonds, while others looked to markets elsewhere.

As such, Morningstar’s data revealed that in July investors poured €15.8bn ($17.82bn) into mutual funds that are domiciled in the Europe, thus indicating a marked increase in appetite for the European fund market.

Some investors chose to move their capital to less risky funds in the country, while others looked to markets elsewhere

“UK investors were selling funds quite heavily in July. [They] sold equity funds and flocked to money market funds”, said Ali Masarwah, Morningstar’s Editorial Director for Europe, Middle East and Africa. “It is typical to buy into money market funds when you see risks. It is basically shifting money into cash.”

Consequently, across June and July, outflows from UK funds were experienced by around two thirds of asset managers. According to the Financial Times, Columbia Threadneedle suffered the biggest hit, with investors pulling out £662m ($875m). Fundsmith, Jupiter and Aviva Investors, on the other hand, saw inflows of over £90m ($119m) each.

Although such figures may cause grave concern for asset managers working with UK-based investment and property funds, withdrawals have since begun to settle, while sales have also started to increase. As such, it seems the activity witnessed in June and July may have indeed just been the initial reaction to Brexit, with many expecting a return to normality in the coming months.

What does remain a concern, however, is whether the UK’s property market can withstand the aftermath of Brexit without being hit with too big a blow to both sales and value. Only time will tell.

Former Fannie Mae CEO reaches $100,000 settlement with the SEC

Posted on by Helen

On August 22, former Fannie Mae Chief Executive Daniel Mudd reached a settlement with US regulators, ending a bitter five-year battle with the Securities and Exchange Commission (SEC). In December 2011, Mudd was accused of misleading investors in the months leading up to the financial crisis by downplaying the risks of subprime mortgages.

As the former CEO of mortgage funding giant Fannie Mae, Mudd was one of the most senior executives sued by the SEC over his role in bringing about the 2008 banking crisis.

Under the terms of the settlement, Fannie Mae will contribute $100,000 on Mudd’s behalf to the US treasury, which sees the former CEO escape paying any personal fine for his financial malfeasance.

Under the terms of the settlement, Fannie Mae will contribute $100,000 on Mudd’s behalf to the
US treasury

Following the multi-billion dollar bailout of Fannie Mae and its sister company, Freddie Mac, in September 2008, Mudd was one of six top former executives sued by the SEC on securities fraud charges. Each of the other five cases ended in equally modest settlements, with Mudd’s case concluding the SEC’s investigation of Fannie Mae.

Reuters reported that Mudd said of the settlement: “I appreciate Fannie May and the current leadership of the SEC stepping in to end a case that never should have been brought.” Over the course of the five-year case, Mudd has consistently denied any wrongdoing.

With Mudd at the helm, Fannie Mae reported in 2007 that risky subprime mortgages accounted for just 0.2 percent of its loans, when the true figure was over 10 times higher. When the US housing bubble finally burst in 2008, Fannie Mae and Freddie Mac were bailed out for a record $187bn – over half of the total budget allocated to bank rescues by the US government. Despite reporting losses of over $400bn in the years following the 2008 crisis, Fannie Mae started reporting profits again in 2012.

For more in-depth analysis of the world of Wall Street banking regulations, look out for World Finance’s upcoming report on the topic

Viacom CEO to step down, ending fight for control of the company

Posted on by Helen

Media giant Viacom has announced that its Chief Executive Officer, Philippe Dauman, has resigned, ending a battle for control of the company that has dragged on for months.

Viacom’s current Chief Operating Officer, Thomas Dooley, will temporarily replace Dauman. Dooley will be acting as interim CEO until September 30, when the board will decide on a permanent replacement.

Dauman’s resignation is part of a settlement that ends a prolonged battle for control of the company between himself and majority shareholder Sumner Redstone.

Dauman’s resignation is part of a settlement that ends a prolonged battle for control of the company

Redstone’s National Amusements controls 80 percent of voting shares in Viacom. The battle for control started in May, when Redstone removed Dauman and Director George Abrams from the board of the National Amusements Trust. Redstone was reportedly unhappy with the poor performance of the company and Dauman’s plan for Viacom to sell a portion of its stake in Paramount Pictures.

Dauman and Abrams responded by issuing a lawsuit against Redstone, arguing he was being manipulated by his daughter Shari Redstone and was unfit to make a sound decision. Ms Redstone said the accusation was “absurd”.

Under the settlement Dauman will be staying on as Non-Executive Chairman of the company until September 13, giving him the opportunity to present Viacom’s board with the plan for the Paramount Pictures sale. As reported by Reuters, Dauman will also receive a $72m pay out.

Viacom is also appointing five new board members, as suggested by National Amusements.

Viacom has been struggling for some time to compete with other Hollywood studios and generate hit series on its TV networks, which include MTV and Comedy Central. The Los Angeles Times reported Viacom’s net income fell 27 percent in its most recent quarterly earnings report.

National Amusements blasted the results in a statement at the time: “In recent years, the company’s senior management has overseen a steep erosion of revenue growth, earnings, operating performance, financial capacity and shareholder returns – with Viacom ranking at or near the very bottom of industry peers across many of these critical metrics.”

Urjit Patel appointed as Governor of the Reserve Bank of India

Posted on by Helen

Two months after the surprise resignation of Raghuram Rajan as Governor for the Reserve Bank of India (RBI), the Narendra Modi regime has appointed Deputy Governor Urjit Patel to the post. Patel will step up to his new role following the official end to Rajan’s term on September 4.

Since Rajan’s announcement in mid-June, there has been much speculation about his successor, along with growing concerns regarding India’s monetary policy looking forward. Many feared that Modi might name someone that would take greater risks in a bid to further accelerate India’s economic growth; promoting Patel, however, marks a clear indication of continuity for the RBI.

“He is a very orthodox economist”, Jahangir Aziz, Head of JPMorgan’s Emerging Market Economics department, told the Financial Times. “He is not going to be the one who says, ‘let me sacrifice a little bit of macroeconomic stability to get a little bit of growth’.”

By electing a new governor who is known for his steady approach, it is clear that macroeconomic stability remains a top priority

Having completed a PhD in economics at Yale University, Patel started his career at the IMF, where he soon climbed the ranks to become the organisation’s Deputy Resident Representative in New Delhi. Then, following some years working as a consultant to the Finance Ministry, Patel went on to head India’s leading infrastructure financier for 10 years. He was appointed as the Deputy Governor of the RBI in 2013.

While serving as Deputy Governor, Patel created the country’s new monetary policy for inflation targets, thereby ending India’s controversial framework for motive-driven interest rate decision-making. The new policy has ultimately made India’s inflation rate more manageable.

By electing a new governor who is known for his steady approach, it is clear that macroeconomic stability remains a top priority for Modi. The decision has also eased any market concerns that arose in the months following Rajan’s announcement.

What remains to be seen, however, is how Patel will handle the clearing of bad debts and whether he will stick to Rajan’s plan to recognise all bad loans by 2017.

Patel will head the institution at a pivotal point in its history, given that interest rates will soon be decided by a monetary policy committee. Previously, this had been the sole responsibility of the governor.

As demonstrated by Modi’s rule thus far, he is especially keen to push forward India’s economic development, while also creating a new role for the country within the global economy. Although pushing growth is important for Modi’s plans to instate India’s new economic status, stability remains key, which thus explains his decision to focus on continuity and stability for the RBI.

US to begin closure of privately owned prisons

Posted on by Helen

On August 18, the Obama administration announced that 14 privately owned prisons across the US are set to close within the next five years. Currently housing around 22,000 inmates, the private correctional facilities will not have their contracts renewed by the US Department of Justice.

Deputy Attorney General Sally Yates announced the decision in a memo to the Federal Bureau of Prisons, highlighting safety and security issues within private institutions.

“Private prisons served an important role during a difficult period, but time has shown that they compare poorly to our own Bureau facilities”, Yates explained. She went on to add that private institutions “do not maintain the same level of safety and security” as state-run facilities.

Private prisons have often come under fire for both their treatment of inmates and profits made from the long sentences of those incarcerated

The decision follows last week’s release of a damaging report on private prisons, which revealed that contract prisons are significantly more dangerous than their state-run counterparts. Investigators determined that inmate-on-inmate assaults were 28 percent higher in private prisons, while assaults on staff were nearly twice as frequent.

Reporters also found that there were more than fives times as many complete lockdowns occurring at contract prisons, with private institutions also experiencing a higher number of weapons confiscations per capita. Furthermore, inmates at private correctional facilities were found to be more likely to make complaints regarding treatment by staff, medical care and food standards.

On Wall Street, the momentous announcement delivered a significant blow to the stocks of private prison companies. Corrections Corporation of America (CCA), the largest private prisons operator in the US, saw its stocks plummet by 52 per cent within hours of the news. By midday, trading of stocks of CCA and its competitor, the GEO Group, had to be temporarily halted due to their volatility.

Contact prisons have been heavily scrutinised over their 10-year history in the US. Introduced over a decade ago as a means of dealing with soaring prison populations, private prisons have often come under fire for both their treatment of inmates and profits made from the long sentences of those incarcerated.

While the phasing out of private facilities will only affect a small percentage of the nation’s prison population, it may mark the beginning of a much wider effort by the US Department of Justice to overhaul the country’s troubled justice system.

Harley-Davidson pays $12m to US authorities to settle emissions dispute

Posted on by Helen

Motorcycle manufacturer Harley-Davidson will make a payment of $12m to US authorities to end a dispute relating to the emission levels of its bikes. In spite of the payment, Harley-Davidson insists it has done nothing wrong.

The allegation relates to the sale of the Screamin’ Eagle Pro super tuner. This after-market part allows a motorcycle to generate more power, but in the process causes it to produce more emissions. US authorities claim Harley-Davidson has sold 340,000 of the devices since 2008.

Harley-Davidson maintains it has done nothing wrong, insisting the devices were sold only for use in off-road or closed course racing competitions and not public roads. According to the BBC, Harley-Davidson described the settlement as “a good faith compromise”.

Ed Moreland, Harley-Davidson’s Government Affairs Director, said: “For more than two decades, we have sold this product under an accepted regulatory approach that permitted the sale of competition-only parts. In our view, it is and was legal to use in race conditions in the US.”

Harley-Davidson will also destroy its remaining stock of super tuners, and plans to sell a version of the product that complies with clean air regulations.

The US Justice Department also ordered Harley-Davidson to pay an additional $3m to local environmental projects, with the Justice Department’s Assistant Attorney General John Cruden describing the settlement as a significant step towards the goal of stopping the sale of illegal parts.

The settlement comes a little under a year after vehicle emissions were thrown into the spotlight by the revelation Volkswagen (VW) had been cheating on its emission tests. Over 11 million diesel vehicles worldwide were affected by the revelation, and the German carmaker has so far struggled to recover from the revelation, with legal proceedings continuing to drag on. To date, it has set aside over €16bn to cover the cost of the scandal.

VW’s supplier Bosch has also been accused of being a “knowing and active participant” in the fraud, according to lawyers representing US VW owners, Fortune reported. VW is yet to comment on the filing.

Fed declines to raise interest rates

Posted on by Helen

The US Federal Reserve has released the minutes from its July FOMC meeting, in which participants declined to raise interest rates. Members of the FOMC expressed familiar sentiments and concerns. While participants were generally positive about the outlook for the US economy, global concerns and sluggish inflation dampened the possibility of domestic optimism leading to a rate rise.

As the minutes noted: “Members judged that the information received since the committee met in June indicated that the labour market had strengthened and that economic activity had been expanding at a moderate rate.” It was noted that job growth was strong in June, following March’s disappointing results, with many members noting that the labour market remained “solid, and slack had continued to diminish”. While business investment was seen to have softened, all agreed that household spending had picked up.

Two key concerns still persisted: low inflation and the outlook of the global economy

However, two key concerns still persisted: low inflation and the outlook of the global economy. While members judged that near-term risks to the domestic outlook had diminished, “some noted that the UK vote, along with other developments abroad, still imparted significant uncertainty to the medium- to longer-term outlook for foreign economies, with possible consequences for the US outlook”.

At the same time, inflation has continued to run below the Fed’s target of two percent. According to the minutes: “Members continued to expect inflation to remain low in the near term.” Although there was some expectation of a potential raise in inflation in the medium term, “in light of the current shortfall of inflation from two percent, members agreed that they would continue to carefully monitor actual and expected progress toward the Committee’s inflation goal”.

It was concluded that after “assessing the outlook for economic activity, the labour market, and inflation, as well as the risks around that outlook, members decided to maintain the target range for the federal funds rate at 0.25 to 0.5 percent at this meeting”.

The Fed seems to be stuck on a loop. While it recognises a continuously improving US domestic outlook – particularly when it comes to employment – the persistence of low inflation and global risks to the US economy means that it is reluctant to risk a rate rise.