A new lawsuit by the Libya Investment Authority (LIA) accuses French banking giant Société Générale of paying in excesses of £58m in bribes in order to secure contracts for business worth over £2bn, in the final years of Muamar Gaddafi’s regime.
LIA has brought the case to London, claiming restitution of money lost pertaining to deals completed with Soc Gen between 2007 and 2009. The French institution stands accused of defrauding its Libyan partner by setting up a series of complex derivative schemes that were unprofitable for the LIA, according to court documents seen by the Wall Street Journal.
Allegations of bribery involving foreign banks’ activities in Libya have been circulating since 2011, and a series of reports by the WSJ led to the US Securities and Exchange Commission to open an inquest into Soc Gen’s and Goldman Sachs’ activities in Libya at the end of the 2000s, as a number of international institutions rushed into the country to exploit its financial markets.
Allegations of bribery involving foreign banks’ activities in Libya have been circulating since 2011
With the new lawsuit in London, LIA are attempting to nullify deals with Soc Gen originally worth $1.8bn, that have since lost over half of their value after the political revolution toppled Gaddafi’s regime in 2011.
In court documents, LIA alleges that Soc Gen paid $58.5m to Leinada Inc, a company owned by Libyan Businessman Walid Giamhi in Panama. Giamhi is said to be a personal friend of the Gaddafi family, though his lawyer in Dubai, where he is based, told the WSJ that bribery allegations were “completely false”.
The money paid by Soc Gen to Leinada was ostensibly for advisory services relating to derivative trades the French bank undertook with LIA, the sovereign-fund claims in their court filings. IT further alleges that Leinada could not have provided the type of expertise required to assist on those deals. LIA claims that as a consequence, it suffered heavy losses in deals involving Soc Gen, and is now seeking to have the deal voided in order to recoup money paid to Leinada, as well as damages for Soc Gen’s alleged fraud.
“This claim, together with the one against Goldman Sachs that was initiated in January 2014, reflects the desire of the LIA’s new board of directors to redress previous wrongs and seek the recovery of these substantial funds as it seeks to invest and generate wealth for the people of Libya,” AbdulMagid Breish, chairman of the LIA told the FT.
“The former Libyan regime left behind many challenges in its wake. The LIA is resolved to address these challenges, and to develop a new strategy for the future. The board has embarked on a short to medium-term transformation program to strengthen the LIA and to enhance its corporate governance in accordance with best practices, enabling the institution to invest wisely for the future.”
Soc Gen has refuted any allegations of wrongdoing. “Société Générale contests the unfounded allegations in the LIA’s complaint,” a spokeswoman for the bank said in an emailed statement to Reuters.
Anglo-Swiss mining giant Glencore Xstrata has agreed a preliminary contract for access to Mauritanian railways and ports, according to reports. The move underlines the company’s desire to expand into the massive iron ore trade.
State-controlled mining company Société Nationale Industrielle et Minière, which has had a monopoly on iron ore exports from Mauritania for the last 50 years, was initially unwilling to provide access. After two years of negotiation, both sides have reached a preliminary deal worth an estimated $1bn. Talks to finalise the deal are expected to be extensive – the FT reports that tax negotiations alone could take months, because of the Mauritanian government’s involvement.
The move underlines the company’s desire to expand into the massive iron
ore trade
Almost a quarter of Mauritania’s $4bn economy comes from iron ore, and the country is eager to boost production. Mauritania is rich in resources but the presence of the Sahara desert makes access difficult to much of the country. The Mauritanian government has enacted a series of economic reforms in recent years in an attempt to attract foreign investment to update ailing infrastructure and allow the country to exploit resources deeper into the Sahara.
Glencore is seeking to build a mine in the remote region of Askaf. The access deal represents the first step towards construction, but progress will be slow in what is still an extremely underdeveloped part of the continent. Rival projects by Rio Tinto and Vale in Guinea have had similar setbacks because of the lack of infrastructure to support a massive mining operation.
The price of iron ore has slumped recently, mostly because of reduced demand from China, by far the biggest importer of iron ore. Tightening of credit in the country has meant that steel mills have not been able to buy ore in large volumes. The price of the ore hit an 18-month low earlier this month at $104.7 per tonne, reflecting a lack of worldwide demand.
Last year Glencore reported a 68 percent rise in export volumes of iron ore, for a yearly total of 33.2m mt. The company is still a relatively new player to the trade and will seek to capitalise on renewed demand as the global recovery begins to stimulate the need for steel.
BlackBerry’s recently released end of year results reveal revenue to have fallen 64 percent year-on-year and annual losses to have reached some $5.9bn, as the Canadian company still struggles to instigate a return to once impressive form. Nonetheless, BlackBerry’s results are not without a select few pockets of opportunity, and new chief executive John Chen is confident of there being emboldened financial results in the months ahead.
“The company anticipates maintaining its strong cash position and continuing to look for opportunities to streamline operations,” reads the company’s end of year financial report. “The Company is targeting break even cash flow results by the end of fiscal 2015.”
Nonetheless, BlackBerry’s results are not without a select few pockets
of opportunity
BlackBerry’s bold change of strategy under Chen has seen the ailing smartphone maker depart from its once successful hardware business and focus more so on software and services; however, the shift has not come without its sacrifices. As a result, the company has been forced to lay off thousands of staff and sell a great deal of its most impressive real estate, not least of which being its US headquarters in Irving, Texas.
The company has focused operations on its services business, with its hardware having lost ground to Apple and Android powered systems in recent years. Perhaps the biggest of BlackBerry’s stumbling blocks this past financial year was that with regards to its underwhelming Z10 sales, which are reported to have lost the company $934m in total.
Although the company’s revenue has plummeted, $976m from $2.68bn, it would appear that its prospects are beginning to improve somewhat. The company’s fourth quarter losses, ending March 1, came to $423m, a much lesser sum than many expected and a hugely positive development for the company.
Provided that BlackBerry continues on with its aggressive cost-cutting regime and extensive restructuring programme under Chen, many analysts believe that the long-suffering firm could break even or even turn a profit a year on from now.
Interest in Mexico’s natural gas has increased substantially over the last five years, due to the price increase of other traditional hydrocarbon fuels. As a result, methods of delivery have also increased. Fernando Calvillo and Manuel Calvillo from Fermaca, an established company in the country’s energy and construction sector, discuss the logistics of transporting natural gas in Mexico.
World Finance: Well Fernando, if I might start with you, Fermaca of course leads the way in terms of the transportation of natural gas, but why is this infrastructure so important for Mexico?
Fernando Calvillo: Today, if you see Mexico, it’s population is growing. We have 115m people, and we have more than 4000 km of border with the most important consumer in the world, which is the US. Obviously, the commercial relationship between out two countries is extremely important, and that way we need to obviously offer energy in order to be competitive.
So building infrastructure today and having access to the cheapest gas in the world, which is in the United States, helps us in order that we can be extremely competitive. If you see Mexico today, the population who runs the country is between 18 and 40 years, so we have an economy that is growing, and having the infrastructure behind the industrialisation of the country, the name of the game obviously is to build infrastructure, and mostly pipelines which natural gas today is the cheapest fuel on earth.
World Finance: You provide transportation to one of the key urban industrial areas in central Mexico, and you’re also building a pipeline in the north with interconnections to the United States. What’s the significance of this for the Mexican oil and gas sector?
Fernando Calvillo: One of the things is that we provide to the second largest industrial market, which is the city of Toluca, state of Mexico, and that project was in operation since 13 years ago. It was our first natural gas project as an operators and owners. The second project that we had, that actually we have now in operations, which is the Tarahumara pipeline can move up to 20 percent of the consumption of the gas of the country.
So this asset is extremely important because, in the north part of Mexico, there’s an important hub of productions of electricity, which we will be able to supply, and we have the flexibility to go and interconnect our system with very liquid hubs of natural gas with a very cheap price. So as we are an independent pipeline company, we can be importers of gas, and we can take advantage of being in that competitive fuel to Mexico.
World Finance: Well what sort of challenges did you have to overcome for this project?
We had to league with seven banks, and it was the first pipeline project to be financed by this type after the Lehman Brothers crisis
Fernando Calvillo: Putting together the financing, we did in house all the financing. We had to league with seven banks, and it was the first pipeline project to be financed by this type after the Lehman Brothers crisis. So it was a challenge to the acquisition of the rights of way, the logistics of the project, and obviously due to the security, we have problems with the security of the border of Mexico, to take care of our people. So I think those were the four challenges that we faced but, even though that happened, we had zero accidents, zero incidents, and the pipeline was in service one day before it was request our client.
World Finance: Well Manuel, Fermaca guarantees an uninterrupted supply of natural gas, how do you ensure this?
Manuel Calvillo: You know that it’s on our service, the pipeline has a reliability of 99.97 percent, so actually how we do it is that we run a state of the art operation, we have our automatisation system, which is called a SCADA system. Basically we are the only pipeline company I would say within Mexico that we have our own satellite signal, so we don’t rent from a third party. So we ensure that, by having 24/7, 365 operators in Mexico, which they are reading in front of computers all the time, we run the system live so we can know parameters like pressure, temperature, humidity of the gas, in real-time. And by doing that, we can ensure 100 percent of reliability on our systems.
World Finance: Well Fernando, of course there is rising demand for oil and power in the region, so how do you manage things like prices and shortages?
Fernando Calvillo: Unfortunately, the production of oil and gas in Mexico has been declining because our main sources of productions, obviously, they’re going down. I think our current President, President Peña Nieto, has been extremely smart, and he’s built bridges in order to pass the energy reform, which today that’s quite the name of the game, because Mexico was very close to private investment on the production of oil and gas.
Right now, the government is working on the secondary loss in order to see how this going to work, but in the case of natural gas I think we will be very eager to build different structures around the US so we can have access precisely to gas, and make our corridor an important utility for the production of electricity as my brother said, and as well what we want is to develop a set of industries all around so we can make an important industrial hub around these 400 km of pipeline that we have.
China has broken international rules on exports of rare earth materials said the World Trade Organization after it ruled in favour of the US, Europe and Japan in a dispute over China’s export restrictions on rare earth.
China imposed strict rare earth export quotas in 2010, which effectively cut exports by 40 percent to just over 30,000 tons, supposedly to curb illegal mining and reduce environmental damage. However, with the Chinese rare earth industry responsible for almost 90 percent of global output, as well as being dominated by three main producers, prices have soared as a result of the monopoly.
“China’s decision to promote its own industry and discriminate against US companies has caused US manufacturers to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths,” said US Trade Rep. Michael Froman in a statement.
As such, the WTO panel found that the export taxes, quotas and bureaucracy imposed on overseas sales of the minerals artificially raised prices and created shortages for foreign buyers.
China has demonstrated the damage caused by the production of rare minerals, from mining and refining the metals to disposing of the waste
“China’s export quotas were designed to achieve industrial policy goals,” the panel said in stark comparison to Beijing’s claims that the restrictions were imposed to protect its environment.
The 17 rare earth elements in question are typically used in a variety of industries including green technology, defence systems and consumer electronics.
Throughout the case, China has demonstrated the damage caused by the production of rare minerals, from mining and refining the metals to disposing of the waste. Beijing has also shut down some of the worst offending producers, which have left large areas of soil scarred and un-usable by concentrated acids.
But the US, EU and Japan together argued that the restrictions were inconsistent with international trade law, because they distorted the market in favour of China’s domestic industry. This was apparent when the plaintiffs suggested that China had created a cost advantage for companies operating within its borders by lowering the price for domestic users, thereby inducing foreign companies to base operations in China in order to be competitive.
Whether Beijing will appeal the decision is still unclear, after a statement noted that Chinese officials are “assessing the panel report and will follow the WTO dispute settlement procedures to settle this dispute.” China now has two months to appeal the case.
In the lawsuit, filed in US District Court for the Western District of Arkansas, where Walmart is headquartered, the firm claims that Visa charged the retailer with excessive swipe fees over nearly nine years between January 2004 and November 2012. Swipe fees must be paid by the retailer to the card issuer every time a customer pays by debit or credit card.
The move follows a recent settlement between retailers, Mastercard, and Visa in December. The case drew outrage because of the sum of money the companies agreed to pay out – $5.7bn – which some retailers say is simply not enough to compensate for the damages caused. The case was also controversial because the settlement included a clause that made retailers give up their right to sue the companies in the future.
Several high-profile retailers opted out of the settlement, including Walmart, stating that the settlement did not prohibit the card networks from upping the prices in the future.
In the lawsuit Walmart asserts that Visa colluded with banks to artificially inflate the fees and that they had to raise prices to compensate for the higher charges.
“The anticompetitive conduct of Visa and the banks forced Walmart to raise retail prices paid by its customers… as a means of offsetting some of the artificially inflated interchange fees,” reads court documents, as reported by Reuters.
Retailers claim that the fees are so high because of the lack of competition between the two card network giants
Retailers claim that the fees are so high because of the lack of competition between the two card network giants. Banks must negotiate with either Visa or Mastercard to become part of the networks, and a fee is then agreed to charge retailers to process the transaction. Some of this fee then goes to the bank, but a larger portion ends up in Visa and Mastercard’s pockets.
Meanwhile, Walmart suffered in the last months of the year as bad weather helped to cut store sales by 0.4 percent. For the 2014 fiscal year, which ended at the end of January, the company reported a disappointing net income of $17bn, down six percent on the year before. More and more shoppers are buying online; Walmart says web sales grew 30 percent in 2013 to over $10bn.
Walmart has over 4,000 stores in the US but warns that some may have to close if the poor figures continue. Furthermore, the company has been streamlining their international business; in October last year Walmart closed 50 stores in Brazil and China after sluggish performances.
The Bahrain stock exchange, now the Bahrain Bourse, opened in 1989 with just under 30 listed companies. Now the exchange lists around 50 companies, and that number is on the increase. World Finance interviews Fouad Rashid, Director of Bahrain Bourse, to find out exactly what the stock exchange is, how it performed in 2013, and what future trading initiatives are being implemented
World Finance: Well Fouad, in brief, what exactly is the Bahrain Bourse?
Fouad Rashid: Bahrain Bourse is regulatory organisation, supervised by the central bank of Bahrain. There are several instruments that are listed on the exchange, including equities, we have around 45 companies that are Bahraini, and five companies non-Bahraini. On the bonds and Sukuk, we have several bonds and Sukuk, and their total size is around $3bn, plus mutual funds are listed on the exchange as well.
[T]he market is open for foreign ownership up to 100 percent, as well as there are no taxes imposed on the development, nor on capital gains
World Finance: What do you think is the value proposition of the Bahrain Bourse?
Fouad Rashid: Bahrain is known to have a solid regulatory framework. On the other hand, the market is open for foreign ownership up to 100 percent, as well as there are no taxes imposed on the development, nor on capital gains. There are several custodians, international and regional, operating in Bahrain, such as HSBC, Citi, and Standard Chartered.
World Finance: Well like many bourses in emerging markets, trading can be light, which might in turn discourage investors. How do you address this?
Fouad Rashid: Bahrain Bourse is an institutional development market. More than 40 percent of the shares listed on the exchange are owned by non-Bahrainis. We have adapted a comprehensive strategy, two years ago, to develop the exchange, all aspects of work in the exchange, and liquidity was one of the issues we had. Now since then we have implemented several initiatives, we are meant to introduce an online incentive program, specifically for retail investors to participate using the online services, and at the same time we have extended the length of the trading hours. Not only this, we are very soon going also to allow foreign brokers to become our members, provided they are licensed by their juristic bodies. They can trade remotely without having a physical presence in Bahrain.
World Finance: So how are you going about boosting listings?
Fouad Rashid: We have just reached the finalised drafting the new listing rules for small to medium size companies and once this is launched, we will expect that to happen this year, we are planning to have an extensive marketing and produce in Bahrain in the region this year, to promote the new listing and to encourage the companies to be listed on our exchange.
I can say that we have seen a pickup in the
trading activity
World Finance: Well at the end of 2013 you rolled out two initiatives to raise transaction levels, including increasing trading hours, how successful has this been?
Fouad Rashid: It’s only three months since we applied this extension, and I can say that we have seen a pickup in the trading activity. We are going to evaluate more and see what benefits that extension had on the market to take further actions.
World Finance: So how did the Bahrain Bourse perform in 2013, and what are your expectations for the new year ahead?
Fouad Rashid: Last year was a good year for us, and in all aspects of it. First the Bahrain oil share index was up by 17 percent, the value of transactions increased by 100 percent, and the value of transactions also were up by around 200 percent. This year, for the first two months, our index is up further by 10 percent, and also we are seeing more of a pickup in the trading activities.
World Finance: So finally, what other initiatives were implemented?
Fouad Rashid: On the technical side, we have signed a contract with NASDAQ OMX to replace the current trading systems to another system called X-stream, a more sophisticated trading system. On the awareness side, we have a joint annual program on investor relations. Also the last year we have introduced a program called TradeQuest. Now this program is for university students to increase their awareness on the operations of exchanges, Sukuk market, as well as providing the virtual trading. On the corporate governance aspect, we have established and implemented a comprehensive corporate governance policy. Bahrain Bourse promotes corporate governance within listed companies.
World Finance: Mark, what was your initial reaction when you heard about this scandal?
Mark Taylor: It was not a surprise! I think it’s been known for some time that there have been efforts to, not rig, but certainly affect, the 4pm fix, which is the main reference rate in the foreign exchange market, that this investigation is centred on. And as a former foreign exchange trader myself, it is part of the folklore of the market that traders do try to affect the reference rate. And in one way I suppose there is some surprise that it’s taken the Bank of England so long to investigate it.
World Finance: So how much of the blame should the BoE shoulder?
Mark Taylor: The Bank of England does have oversight of the financial markets; the London financial market is the most important foreign exchange market in the world. Most foreign exchange transactions are booked through that market. It does share some responsibility, I think that’s true.
World Finance: Let’s focus on governor Carney’s decisions of late. He’s said he’s appointing new deputy governors to the bank, he’s promised to bolster internal regulations; but do you think those changes go far enough?
Mark Taylor: I think they do in some sense, but obviously there has been a culture in the foreign exchange market and in the bank of not being forensic enough about the way the foreign exchange market conducts its business. So, letting people push through big trades just 30 seconds or 20 seconds before the reference rate is fixed in order to affect that rate, and create a situation where they can take an unfair profit from their clients? Even if there’s a whiff of that, it should have been looked at some time ago.
Mark Carney? This didn’t happen on his watch. He’s trying to change the culture of the BoE
Mark Carney has brought in two very very experienced new deputy governors: Ben Broadbent and Nemat Shafik from the International Monetary Fund, with responsibility for conducting a root and branch review of the way the bank uses market intelligence and investigates these issues. So that is a very very important issue I think, and it’s an important step forward.
It depends what will come out of that. To my mind it’s not really so much regulating the market that’s important. It’s actually taking away the incentives for people to cheat in that market. And therefore, there are one or two ways in which the 4pm reference rate is fixed, is calculated, that I would like to see change in order to take away that incentive for big traders in the market to try to influence that, and have an unfair advantage over their clients.
Mark Carney? This didn’t happen on his watch. He’s trying to change the culture of the Bank of England, so bringing in two very senior deputy governors in order to deal with that is an important step forward.
World Finance: Regulatory action is what he’s calling for, but do you think a criminal investigation against the traders who’ve been suspended is also needed?
Mark Taylor: Well I suppose one has to go back and examine exactly what are the allegations, what is it that’s being alleged? Now, there is a reference rate in the market which goes for all the major exchange rates: dollar-sterling, dollar-euro, dollar-yen. At 4pm there’s a rate that’s calculated every day by WM Reuters, a private company. And it’s calculated by taking the average exchange rate for transactions recorded by Reuters for 30 seconds before 4pm, and 30 seconds after 4pm. And that average is then called the 4pm fix.
Why that’s important is that many big institutional investors, many big clients of banks, may have lots of foreign exchange transactions going through, and they’ll just say to their bank, well, just do them at the 4pm fix. Just do them at that reference rate. So if the bank is able to affect that rate, and push it up artificially high, just for a minute or so around 4pm – they can then charge their customers a higher rate than is actually the true rate in the market.
You can put through, you know a big trade, a couple of billion dollars, 20 seconds before 4pm. That in itself is not illegal. If somebody said, why did you put through that big trade, they could say, well it’s not illegal to trade, obviously! But what is illegal is colluding. If there is evidence that banks got together, senior traders from some of the big banks got together and said you know, I’m going to put through this billion dollar trade, dollar-sterling, I’m going to buy dollars against sterling 10 seconds before 4pm. Why don’t you do the same thing, and we can both together affect the market rate?
That would certainly trigger a criminal investigation, possibly criminal charges. And that’s why important evidence to examine here is the chatroom evidence. There is some suggestion that some of these traders may have spoken to each other online in textroom chats, chatrooms at Bloomberg and Reuters. And if there is evidence recorded there of collusion deliberately to affect the market, then that is a criminal offence.
World Finance: When speaking before parliament’s treasury select committee, Carney said he had no information that suggests that anyone at the BoE condoned manipulation of the market, facilitated, or participated, in market manipulation. He also went on to to say that we have to protect the integrity of the market. But if we have the belief that traders colluded, what does that do to general market stability?
Mark Taylor: I’m sure it’s true that no one at the bank did participate or condone. I’d be very surprised if that was the case. I suppose it’s more a matter of culture. The bank should have been aware that if, you know. If you just look at the behaviour of exchange rates. Just look at what happens around 4pm: they tend to spike, or they have historically tended to jump up for 30 seconds or so around that time. So the question is then, that in itself is kind of prima facie evidence that people are trying to affect that rate.
I’m sure it’s true that no one at the bank did participate or condone. I’d be very surprised if that was the case
And I think Paul Fisher, when he was examined with governor Carney at the treasury select committee, did say something like, well it’s not the bank’s business to go out hunting down forex market riggers. Well, maybe it is. Maybe they should, where there is at least prima facie evidence of that. Where it’s part of the folklore, in a sense, of the market, that everyone knows that people are doing this. They should perhaps have investigated it, rather than seeing it as part of the culture of the market.
World Finance: How do we avoid this becoming a second Libor affair?
Mark Taylor: The Libor scandal was very important. It did strike at the perceived integrity of the financial system. And this does so similarly, it is very very worrying.
Remember the banks will be taking a profit from their institutional clients, but who are those institutional clients? They’re largely pension funds. So insofar as property is taken from pension funds, it’s taken from every one of us who have an investment, either direct or indirect, in a pension fund. And we’ll have less money to spend in our retirement! So it is vitally important to all of us.
I think just regulating the market and saying ‘you shouldn’t do this’ is very difficult, because financial markets are by their very nature large and opaque. The foreign exchange market is by definition an international global market. A $5trn a day market.
So, very very hard to regulate, because the markets will tend to find ways of circumventing that regulation. I mean, one simple way of dealing with it, or one way I personally think should be investigated, is the way the 4pm fix is conducted.
The problem with the 4pm fix is that you only have to move the exchange rate a small amount for a small period in order to affect it. So, if you can affect the average rate by a fraction of a percentage point, then that can represent millions of dollars of profit on a billion dollar trade.
I think [Carney’s] doing actually very well out of this. It depends what comes out of that investigation: the external legal investigation
Now, one simple way that ought to be investigated perhaps, is to calculate the average rate over a whole hour, rather than one minute. Because it would be very difficult in a $5trn a day financial market to affect that average over a whole hour, rather than just a minute.
Another alternative would be, if you wanted to take a short interval, you could take a minute interval, but take it a random one minute interval between 30 minutes before 4pm and 30 minutes after.
So that would then take away the incentive or the opportunity for traders to try and front-run or affect the 4pm fix. And I think that would be far more effective than just regulating against it.
World Finance: How likely do you think it is for the BoE to take your suggestion?
Mark Taylor: I don’t know; I mean they haven’t spoken to me about it. But I’m open to conversations about it, certainly!
World Finance: Now let’s talk about legacy concerns. Of course when governor Carney came into his position there was a lot of expectation placed on him. What does this whole scandal do to that expectation, and his legacy?
Mark Taylor: In a sense it wasn’t… well not in a sense, this absolutely didn’t happen on his watch. So it’s not something that, you know, he’s to be blamed for. He’s called in an external law company to investigate this, he’s appointed two new deputy governors of very very high standing in the international financial community. One ex-Goldman Sachs, one ex-International Monetary Fund, to investigate this. So I think those are very very strong and bold moves.
I think he’s doing actually very well out of this. It depends what comes out of that investigation: the external legal investigation. It depends what comes out of the internal root and branch review that Nemat Shafik will conduct. And the new measures put in place, both to shift the culture of the bank, and in order to put in place new ways of calculating the 4pm fix.
World Finance: Well I’ll be watching, thank you so much.
The tightening financial regulations engulfing Wall Street’s biggest investment banks has led to yet more leading executives to jump ship towards more niche institutions. On March 25 it was announced that Michael J Cavanagh would be departing JPMorgan Chase to take up a new role as co-chief operating officer at private equity firm the Carlyle Group.
Cavanagh, who has been JPMorgan’s co-head of investment banking for the last decade, had for a long time been seen as a likely successor to CEO Jamie Dimon. It comes just a few days after one of the company’s leading Chinese executives, vice-chairman Fang Fang, announced he would be stepping down.
While Fang’s departure was thought to be as a result of an SEC investigation into the company’s hiring practices, Cavanagh’s is thought to be due to the tighter regulatory constraints being placed on large investment banks. Last year JPMorgan was forced to pay around $20bn in settlements for a number of investigations into its practices leading up to 2008’s financial crisis.
Investment banks have also seen a number of regulations designed to curb excessive risk taking, as well as calls to restrict high levels of executive pay. In contrast, private equity firms and hedge funds are able to offer highly attractive salaries alongside far greater regulatory flexibility.
Cavanagh…had for a long time been seen as a likely successor to CEO
Jamie Dimon
Announcing the news, Cavanagh said opportunity to join a leading private equity group at a time when the industry was too good to turn down. “This is a rare opportunity to join a premier global investment firm during a time of swift change for the industry. We accomplished an immense amount at JPMorgan and I am grateful to my colleagues, especially Jamie Dimon, for their friendship, support and confidence. Carlyle is an established innovator and I look forward to partnering with Glenn and the rest of the Carlyle team to help take the firm to the next level of success.”
Responding to the news, Dimon said the firm had hoped Cavanagh would stay, but accepted his decision to move on. “I have worked with Mike Cavanagh for more than 20 years. He’s a highly talented executive and has been an integral part of our management team, as our CFO for six years and as co-CEO of the corporate and investment bank. He’s also a special person and we wish him well in his choice to take on a new challenge. While we would prefer he stay at the firm, we are glad he’s going to a valued client in Carlyle. I know the whole operating committee joins me in thanking him for his years of service to our firm.”
Facebook has unveiled its plans to acquire Oculus VR for approximately $2bn, in an effort to preempt the various ways in which social engagement will evolve over the coming years and gain a precious foothold in the emerging virtual reality (VR) market. Facebook’s statement says “The transaction is expected to close in the second quarter of 2014.”
“Mobile is the platform of today, and now we’re also getting ready for the platforms of tomorrow,” said the Facebook founder and CEO, Mark Zuckerberg in a blog post. “Oculus has the chance to create the most social platform ever, and change the way we work, play and communicate.”
[N]ow we’re also getting ready for the platforms
of tomorrow
The California-based firm is best known for its virtual reality Rift headsets, which have been generating hype in the gaming world for some time now, with various developers having already signed on to play a part in the revolutionary project.
However, following the announcement of Facebook’s involvement, a fair few associated parties proceeded to express their concerns, with some developers going so far as to remove themselves entirely from the Rift project. “We were in talks about maybe bringing a version of Minecraft to Oculus,” tweeted Markus Persson, the mind behind the hugely successful sandbox indie game. “I just cancelled that deal. Facebook creeps me out.”
With its roots as a humble Kickstarter campaign, Oculus’ 9,522 backers will no doubt be wondering where exactly the 18-month-old company will be headed now that their combined $2,437,429 in pledges have yielded a multi-million dollar return for the project’s founders. Crucially, many more will be left wondering as to the extent by which Facebook’s ethos aligns with that of the initial Kickstarter campaign.
“Facebook was founded with the vision of making the world a more connected place,” wrote the Oculus’ founder Palmer Luckey on Reddit, in an attempt to allay the fears of disillusioned supporters. “Facebook is run in an open way that’s aligned with Oculus’ culture. Over the last decade, Mark and Facebook have been champions of open software and hardware, pushing the envelope of innovation for the entire tech industry.”
World Finance is soon hosting a round table discussion on unconditional basic income. The debate will include economists, including Liam Halligan, and Guy Standing, proponent of basic income in Europe. To put forth a question to the panel, tweet @JournalistJenny
Unconditional basic income: the key to alleviating Europe’s alarming unemployment levels, or misdirected socialist macroeconomics? World Finance talks to Barbara Jacobson, one of the organisers of the European Citizens’ Initiative for an Unconditional Basic Income, about the implications of such a system for Europe: what it might mean for unskilled jobs, inflation, and the British economy.
World Finance: Well Barbara, a basic income paid to everyone. That’s the theory, but what exactly is this, and who will benefit?
Barbara Jacobson: Well we hope everyone will benefit from it, actually. The main concern is the people who are very poor at the moment in Europe, and the way the economies in Europe have been going down very quickly. We feel that basic income would support demand, and also be a fairer way of allocating money within the economy. The other thing it will do is simplify the benefits system dramatically.
World Finance: Well is this just the benefits system repackaged?
Barbara Jacobson: No, we hope it will be liberating for everyone. First of all, small businesses depend a lot on a lot of unpaid work, both by the entrepreneurs themselves, and usually their families and friends. Or with the ageing population, we need some kind of support system for people to be able to look after their relatives. It’s not that we’re against the services that are available, but many families would rather look after their elderly in their homes. And at the moment if they do that then they risk becoming very poor themselves.
World Finance: So how do you expect this to be funded?
Barbara Jacobson: The Citizens’ Income Trust reckons that it could pay a £10,000 income for everybody. There’s also an increasing divergence in the difference between tax on people who are earning versus tax on people who are on income that is unearned – so for example rents, share dividends, financial speculation tax, that sort of thing. Which would actually increase the amount of money significantly.
World Finance: Well critics might argue that this sounds frightfully socialist, if you like. And won’t this deter people from full-time employment?
We feel that basic income would support demand, and also be a fairer way of allocating money within the economy
Barbara Jacobson: The pilot studies around the world say no! There was a very interesting experiment in Canada called the Mincome done for about four years in the 1970s, which showed that actually the only people who really stopped working were young mothers of small children before school, teenagers who were trying to get into college and who were studying, and people who were close to the age of retirement anyway.
World Finance: Well do you think there could be a question of culture there? Because maybe in Canada people want to work more, whereas if you go somewhere else maybe they’ll be more work-shy?
Barbara Jacobson: What people have to understand about most means-tested benefit systems is that they are actually the cause of people being so-called ‘work-shy’. If you work on top of benefits – say if you’re in the tax credit system, or if you claim housing benefit in this country – the effective tax rate is 85 percent, which is a huge disincentive to work. If we had a citizens’ or a basic income, people would be able to keep the income that they get from that, they would be taxed on the income which they earn on top of that, and we just feel that would be a much fairer system.
World Finance: Well if this did come into practice, what would you think would happen in terms of people entering the country? Would they also be eligible for the same unconditional basic income?
Barbara Jacobson: What we’re saying is that anybody who is eligible for child benefit, so anyone who has the right to remain in this country. We also feel that if it were a European initiative, if it were Europe-wide, I think that would mean a lot of people wouldn’t have to move in order to feed their children.
World Finance: Well not to ask the awkward questions, but what do you think would happen to sort of, unskilled jobs then, that really rely on low wages? Because if they’re getting an unconditional basic income then perhaps they’d be less likely to do these sort of jobs?
Barbara Jacobson: Or they would be demanding higher wages! It’s a very strange thing at the moment, that work seems to be remunerated in inverse proportion to its social usefulness. Say for example, if all the nurses went on strike tomorrow there would be a disaster; if all the bankers went on strike, who would notice?
World Finance: Well assuming we do give everyone money, surely this will have severe inflation implications?
Barbara Jacobson: Well considering how indebted the economy is at the moment, I don’t think that’s too much of a problem. There would be a lot of people who would be paying down their debts with this, probably.
World Finance: In effect it’s really a fiscal stimulus; wouldn’t it be better to just invest in a policy that supports a long-term economic approach that creates jobs?
Barbara Jacobson: Well we feel this would create jobs, because people would be employing themselves. Or you know, they could pool their citizens’ or basic income to set up community projects or even business projects in their area.
World Finance: How do you think this will impact the British economy if it did come into practice, realistically?
Barbara Jacobson: The more money you give to poorer people, the more they actually proportionally spend into the economy. That’s what people seem to forget you know? Money seems to be trickling up as opposed to trickling down. In poorer areas, when people are spending money, that’s where the multiplier effect is. That’s where every pound spent actually creates another five or six pounds in that local economy.
What we would hope is that in very hard-pressed areas like the north, people would be able to stay there as opposed to coming down to London, and rebuild their own economies there.
A plan by investment group Hutchison Whampoa to publicly list retail business AS Watson has been halted after its owner struck a deal with Singapore’s Temasek Holdings for almost $6bn. The announcement saw shares in the Hong Kong-based investment firm drop by 5.1 percent, the largest fall for the company in over two years.
Many had predicted that Hutchison Whampoa would list its retail arm on the London and Hong Kong stock markets. It comes after a six-month strategic review into its retail business that began last October. The review was intended to look at how best to publicly list AS Watson – a company that has become the largest health and beauty retailer in both Asia and Europe – but that’s now unlikely to happen for a couple more years.
It is thought that his plans for the business will see a partial retreat in Asia, as the company expands in North America and Europe
In a statement, Hutchison Whampoa announced that it would be selling almost 25 percent of AS Watson to Singapore investment firm Temasek, describing it as a strategic alliance. Group Managing Director Canning Fok said, “We are pleased to have Temasek, a renowned international investor, as our long-term partner. This demonstrates their confidence in the growth opportunities and prospects of our retail businesses. AS Watson has grown to become the largest international health and beauty retailer in Asia and Europe with 10,500 tores, of which 657 are here in Hong Kong.”
Li Ka-shing, Hutchison Whampoa’s owner and Asia’s richest man, had been considering a dual listening for many months, and analysts believed it would represent one of the year’s largest IPOs. He has recently been divesting a number of his assets through IPOs, including Hong Kong Electrics Investments in January for around $3.1bn. It is thought that his plans for the business will see a partial retreat in Asia, as the company expands in North America and Europe.
Temasek’s head of investment, Chia Song Hwee, added that the deal would aid its long-term growth strategy. “The consumer retail sector is a good proxy to growing middle income populations and transforming economies. We continue to believe in the growth opportunities and long term prospects of Asia, particularly China, and a recovering Europe.”
Independent financial advisors around the world are often caught between a rock and a hard place. Not only are they expected to fully understand the needs and goals of each and every one of their clients, they are also expected to know about every product on the market, from insurance, regular savings plans, income protection, lump sum investments or pensions. As more products hit the market, an IFA must continually familiarise themselves with the best options at hand, tailor-making portfolios from a wealth of alternatives.
That alone can be a minefield. But then once the most appropriate plan is chosen for clients, the advisor then often has the rather arduous and mind boggling task of selecting the right investment funds to match their attitude to risk and growth expectations. Not only do many people expect their financial advisors to be market experts and know everything about the financial markets, they are also presumed to be skilled fund analysts who have thoroughly investigated every paragraph of every investment prospectus for any fund that has ever come across their desk.
If the markets go down, it is the advisor’s fault. If the fund has issues, it is the advisor’s fault. It can be a tough job.
The truth is, there are some very good independent financial advisors in this world, but they simply don’t have the time, knowledge or expertise to be able to accomplish these tasks when it comes to investing, and that is why they place a heavy reliance on the information provided to them by the investment houses themselves. This is often presented and explained by the fund representatives that take the time to visit them and discuss or promote the investment funds they represent.
Acorn International Fund Distribution, has been established in order to create a new breed of investment management
Problems arise, however, when it comes to retail fund sales and their representatives on an international level. There are so many investment funds to choose from, and if financial advisors are placing emphasis of selecting client investments on the information given by the fund representatives that come and visit them, how do they know they are choosing the best investment for their client?
Asset managers may have sales people pushing for institutional sales, but when it comes to a retail level, they simply don’t have the capacity. There seem to be two types of retail fund sales representatives actively ‘on the ground’ across the globe and seeing IFAs. The first group belong to the huge blue chip multi billion-dollar asset managers with many different fund offerings that can afford to have a substantial international retail sales team. The second is the more boutique fund houses that pay for their sales team, although the cost of it can hugely eat into the gross performances of the funds themselves. More and more research is showing that the best performing investment funds today are often neither of these. The asset managers really making a mark, those that are top quartile performing funds in their sectors year in year out, are those that still run hundreds of millions of dollars AUM, but just don’t have that level to afford an international retail sales team, and, are concerned about keeping their expense capital low to maximise performance and profitability of the funds they manage.
So how do advisors become aware of these funds? Chances are if they are residing in the country where the asset manager is based and they have the time to scroll through the weekly publications, they may have heard of them.
There are some third party marketing companies, and a new sales and marketing company, Acorn International Fund Distribution, has been established in order to create a new breed of investment management. A spokesperson for the firm outlined the marketplace in which they’ve identified a requirement. “We only work with funds and asset managers that have an impeccable reputation, long track record of strong performance, a credible investment team behind them, are in a regulated structure such as UCITs or SICAV, but simply aren’t at that multi billion dollar level where they can afford a huge international sales team. People often talk about ‘win-win situations’ in business, we wanted to create a ‘win-win-win-win’ situation: the asset manager gets to promote their retail funds around the world – where regulation permits – we get to work with asset managers and investment funds we truly believe in, the financial advisor gets informed about the better performing funds and regulated funds that are available to them, and the investors, should it fit their risk profile and match their investment needs, get to invest in what we consider to be some of the consistently top performing and better quality funds that they previously did not have an opportunity to do so, so everyone benefits all at once’.”
Asset managers have the ability to promote their investment funds on a retail level across the globe without having to pay a higher cost for their own international sales force. Established by two members with substantial experience of selling on international, Acorn further aims to promote responsible investing by donating five percent of annual net profits to a charity selected by the IFAs they work with. Fostering education and awareness, the company aims to build a reputation for integrity and longevity.
With its Sharia quality rating of AA reaffirmed, Jordan Islamic Bank is going from strength to strength. CEO, Vice Chairman & GM Musa Shihadeh talks about being a “pioneer in Islamic banking” and the importance of social responsibility.
World Finance: Musa, let’s start talking about the continuous growth your bank has seen in assets, deposits, as well as financing and profits. What has been your key to success?
Musa Shihadeh: The key for that is that we are keeping our services to our customers on the latest technology, we train our staff, and we introduce always new products and services for the customers, to satisfy their needs.
World Finance: The banking sector is a very competitive marketplace, what sort of unique products or services do you offer?
Musa Shihadeh: We stick to the Sharia application, and we continue giving the services, whatever the customer asks for, and we have good relations with international and national banks, and people we deal with. We make their satisfaction our main goal in order to continue having this success.
World Finance: How do you look after your shareholders?
Musa Shihadeh: As for the shareholders, they are satisfied. We are the highest bank in the country that gives the shareholders return on their equity. The shareholder equity return this year, for example, was 18.7 after tax. Last year it was 16.7. It is the highest in the country between conventional and Islamic banks as well. So they are very satisfied with this return.
World Finance: Jordan Islamic Bank is known for being a pioneer in Islamic banking. Why do you think that is?
We are one of the oldest banks in Islamic banking in the world
Musa Shihadeh: Because we are one of the oldest banks in Islamic banking in the world. We started our business, as I mentioned, in 1979, and developed the system for Islamic banking. We started training our staff, we always get the latest technology to be applied in our services to our customers. We always give new products to satisfy the needs of our customers, and we connect our customers with other places and countries as well, so we are the best serviced, a fast service, to reach whatever they think the need and ask for.
World Finance: A big part of Sharia compliant banking is social responsibility. What sort of services do you offer?
Musa Shihadeh: Social responsibility, we are a pioneer in this as well, because we have a committee for social responsibility, from the board of directors as well as from the management. As a committee, we offer a lot of services, and we finance SMEs, small micro-financing. We give financing for the craftsmen, and engineers, doctors, whatever they need, and we always do the business which has helped the country as well, for example last year we were the first bank to introduce a solar energy system.
World Finance: And what’s next for Jordan Islamic Bank?
Musa Shihadeh: We always review our strategies yearly, in order to make sure that we are doing our business according to the satisfaction of all stakeholders, because we take care of all stakeholders, shareholders, staff. We train our staff to be a pioneer in the knowledge. We always apply new technology, and we give services to our customers, and we look forward to always to have this latest technology applied in the country, by having a company and staff do programs we need to apply Islamic banking.
When Manmohan Singh was inaugurated as Prime Minister of India in 2004, the world expected him to oversee a period of rapid transformation, fuelled by breath-taking economic growth. Here was a man renowned for his economic acumen, clean from the corruption that had beset many of his predecessors, and with previous experience of running the country’s finances. Coupled with the vast potential India had and hopes that Singh would shred much of the country’s labyrinthine bureaucracy, many observers predicted the country would position itself as a more democratic rival to China and as one of the economic powerhouses of the world.
Fast-forward 10 years, however, and the impending departure of Singh is being greeted with many of the same calls for reform that were heard before his selection. While India has moved forward, the lacklustre pace at which it has happened has led to Singh being dubbed a disappointment of a leader who struggled to implement any meaningful change.
Now, as India heads to the polls once again, many people are hoping that voters will select a government with serious ambitions to radically overhaul the country’s economy. The signs are, if state elections are anything to go by, that Singh’s incumbent Congress Party could take a hefty drubbing at the hands of the right-leaning, pro-business, Hindu nationalist the Bharatiya Janata Party (BJP).
Recent opinion polls also suggest that the BJP, led by the charismatic Chief Minister of Gujarat Narendra Modi, are set to emerge as the country’s biggest party in May’s general election. However, the announcement of Singh’s intention to step down after the election has been seen as a sign that Congress know they need to do something radical to remain in power. Singh’s appointment of the young and dashing Rahul Gandhi, who just so happens to be a member of the prestigious Gandhi family that has dominated Indian politics since independence, suggests that Congress are looking to install some youthful vigour into the party.
The great-grandson of the country’s first Prime Minister Jawaharlal Nehru, the 43-year-old Gandhi is known for his reticence when it comes to interviews. As part of his election campaign, however, he has started to appear before the media, something that many observers feel he’d do better to avoid. An awkward television debate with confrontational interviewer Arnab Goswani saw Gandhi come across vague and evasive, and disappointed his legions of supporters who expected him to capture the general public’s imagination with a charismatic performance. Others have accused him of being superficial and heavily reliant on his family history.
Divisive option
Modi, on the other hand, has successfully positioned himself as the candidate most likely to get the economy powering forward. International investors seem keen for a Modi-led BJP government emerging from the election, and ratings agency Moody’s predicts that such an outcome would see the economy improve on the estimated five percent GDP growth seen last year. Legendary US investor Jim Rogers has also backed him, telling Indian daily The Economic Times he could “make a difference”. “I hope Narendrah Modi brings some positive change in India. People like him can make a difference, and there might be a big stock market rally. But, in the last few decades, no Indian politician has made things better. The Indian currency is not fully convertible, and it is very difficult for foreigners to invest in Indian financial markets.” CLSA chief strategist Chris Wood also described Modi’s emergence as a candidate “the Indian stock market’s greatest hope”.
Congress know they need to do something radical to remain in power
While the world of international business may be eager to see a Modi victory, many Indians are vehemently opposed to the prospect of such an outcome. A hugely divisive figure on social and religious issues, Modi has been accused of wilfully allowing violence in the aftermath of Hindu pilgrims being burnt alive by a Muslim mob in 2002. Not a popular figure with Congress, Singh has said that the potential election of Modi as Prime Minister “would be disastrous for India.”
Cutting red tape
India’s economy is expected to have expanded around five percent over the last six months, remaining flat after 2012’s figures. The problems facing any new government will be how to cut the country’s famously prohibitive bureaucracy while halting the overflowing levels of corruption throughout society. It is also hoped that more will be done to encourage foreign investment, as well as solving the problem of soaring inflation.
The priority of any new government is to stabilise the rupee, while also making it easier for businesses to grow. The country desperately needs to do something to encourage foreign investment, something that it has been reluctant to accept for many years. In order to do so, however, it must seriously crack down on the rampant corruption throughout the country’s political and business communities, such as favourable contracts being given to family members that have little or no experience on the relevant projects.
Slashing the red tape that binds and trips up businesses throughout India is also essential. Singh’s government has started to do this with its recent backing of the Indian Financial Code that will simplify financial law, but this is merely the first step in a much bigger journey towards a business-friendly legal system.
There is also an urgent need for India to invest in its infrastructure – as there has been for decades. For all the talk of grand, transformative schemes, little has actually been done to bring the country up to speed with the rest of the world.
While five percent GDP growth is nothing to be sniffed at, in the context of what is expected of an economy with such potential, it is somewhat disappointing. Years of dithering by Manmohan Singh’s government may not have lost India a decade, but the country has certainly missed a huge opportunity over the last ten years to establish itself as an economic superpower. It is not too late, however, for the world’s largest democracy to sit amongst the world’s largest economies.
