JPMorgan to sell commodities business for $3.5bn

JPMorgan has announced that its commodities wing will be sold to Geneva-based Mercuria for a cash-only deal of $3.5bn. Traditionally one of the most powerful commodities desks on Wall Street, the acquisition is a coup for Mercuria, who is still somewhat unknown outside its industry. After the sale is completed Mercuria will be able to stand shoulder-to-shoulder with other commodities giants such as Vitol, Glencore Xstrata and Trafigura. JPMorgan was looking to complete a deal under mounting regulations and rising political pressure.

JPMorgan had valued its commodity business at $3.3bn, with an annual income of around $750m. Although exact terms are yet to emerge, it is believed that the deal will be completed in the third quarter. Mercuria had to beat several rivals to complete the deal, including Macquarie Group Ltd, the Australian bank, and private-equity firm Blackstone Group. JPMorgan had created its commodities arm after a flurry of rapid acquisitions around 2009 and 2010.

[T]he acquisition is a coup for Mercuria, who is still somewhat unknown outside its industry

The sale follows several other high profile moves away from the commodities trading industry. Last year Morgan Stanley agreed to sell its oil trading division to growing Russian oil giant OAO Rosneft. Deutsche Bank also announced its intention to withdraw themselves from the market in December. In January the Federal Reserve announced it would consider whether new rules were required to limit financial institutions from participating in commodities trading because of “risks that physical commodity activities could pose to the safety and soundness of financial holding companies and to financial stability more broadly”. Trading houses like Mercuria, who is not subject to the same regulations, have reaped the rewards of this mass retreat from the industry.

Speaking to Reuters, Mercuria co-founder Marco Dunand said that the acquisition would help Mercuria focus on long term goals: “We want to be fast growing in an ever changing world. Our model is very much between a traditional trading company and a bank.” Dunand also said, however, that the company had no plans of following fellow commodities giant Glencore in going public.

Yellen signals interest rates could rise sooner than expected

Following the Fed’s decision to taper its stimulus package by a further $10bn – bringing the monthly total to $55bn – the new chair made what many consider to be her first mistake by signalling a sooner than expected rise in interest rates.

Despite reaching its 2012 target of 6.5 percent unemployment, the Fed looks to continue with its stimulus efforts, having decided to take into account a much broader array of economic indicators. “We know we’re not close to full employment, not close to an employment level consistent with our mandate,” she told reporters in a news conference shortly after. “Unless inflation were a significant concern, we wouldn’t dream of raising the federal funds rate target,” she said.

[Yellen’s] answer came in stark contrast to the Fed’s vague stance on the issue

Nonetheless, if the Fed continues to reduce its bond-buying programme at quite the same rate it has done these past few months, it should come to an end as soon as this Autumn, leading many to ask the next question of when exactly it will push up its rock bottom interest rates.

Since December 2008, interest rates have ranged from zero to 0.25 percent, with the FOMC stating only that: “It likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase programme ends.”

However, in Yellen’s first news conference since taking charge, she proceeded to put a rough timeframe on the rise and spook financial markets, which expected the hike to come at a much later date. “I, you know, this is the kind of term it’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing,” said Yellen. “But, you know, it depends – what the statement is saying is it depends what conditions are like.”

The answer came in stark contrast to the Fed’s vague stance on the issue, leading some to speculate over whether or not her “around six months” prediction was an unintended slip on her part. Yellen did, however, go on to stress that the rate rise would not be immediate, and would come as per a series of measured steps.

Mariana Gheorghe on corporate governance in Romania | OMV Petrom | Video

OMV Petrom is the largest oil and gas group in south eastern Europe, with activities in exploration and production, gas and power, and refining and marketing. CEO Mariana Gheorghe talks about OMV Petrom’s potential for further oil exploration in Romania, and how corporate governance is shaping the country’s private sector.

World Finance: Well Mariana, Romania is of course the largest producer of oil and gas in eastern Europe. But how much potential is there still in this region and how are you capitalising on this?

Mariana Gheorghe: Romania has been producing oil and gas for more than 100 years. It’s a matter of size, but a same nature of the business, specific to the business is that we have quite a large basin, 250 fields, but they are quite small. Our objective is twofold. One is to increase the recovery rate of the existing field, and on the other hand we tried to enter into exploration. And the results are there, i.e. we have already established a production, and in 2013 we actually recorded for the first time in the last 10 years an increase of 1000 barrels per day.

As for the larger potential, we need indeed to see the results of the exploration. In 2012, out of the joint venture with ExxonMobil we have made a first discovery, Domino is the name. We hope there are many more to follow. But, in a nutshell, the potential is there, and we need a lot of investments in order to get out and to capture that potential.

World Finance: Well looking more at the company now, and how is OMV Petrom structured?

Mariana Gheorghe: It’s starting with the two-value chain: oil and gas. On the oil side, 100 percent of the production we produce in Romania. For example, it’s processed in a refinery, Petrobrazi, and then all of this is distributed via our own retail network, which is not only in Romania but also in the neighbouring markets.

World Finance: Well in the last 9 years you’ve invested €10bn in your modernisation and efficiency process. How has this revolutionised OMV Petrom?

Everybody talks about CSR, particularly in a country which has started with
the communists

Mariana Gheorghe: From an old asset base, bureaucracy, political interference, over-staffed organisation, to a modern, flexible and agile organisation which has profitable business, which has succeeded to become very efficient based on it’s €10bn investment. But also it has created a sold foundation for the future. The people who have come from an organisation where there were no investments, so the future was quite unclear, and an organisation in which people were not supported in training to upgrade their skills for what is needed in the marketplace they have entered to, to a community of people who are very motivated, who have skills which make them now very competitive on any European labour market.

And the last pillar of this revolution is the relationship with the stakeholders, and that’s where we talk about a totally different approach to the sustainability concept. We started with CSR. Everybody talks about corporate social sesponsibility, particularly in a country which has started with the communists, where everybody was a producer and owner of the assets in that country, it was a revolution when everything has come now in private hands. And that has created a barrier to the way people are thinking, and sustainability has become now part of our strategy, and sustainability means the way you relate, not only with your own employees, which is one key stakeholder, but with all the other stakeholders, how you relate with clients, with suppliers, with government authorities, on pure commercial principles, with a view to reduce your impact on the environment on the one hand, or to increase positive impact on society.

World Finance: Well let’s focus on corporate governance now, and how developed is this in eastern Europe?

Clearly the corporate world in Romania had to understand and then
adjust to it

Mariana Gheorghe: Clearly the corporate world in Romania had to understand and then adjust to it. Romania’s stock exchange, which has been established in the 2000s, has established certain rules at the beginning, and then has also put a corporate governance code. OMV Petrom is a listed company on Romania’s stock exchange, and as such is the blue chip of the Romanian stock exchange. And therefore, we have been driving this agenda of high corporate standards.

World Finance: So what would you say the major challenges are that OMV Petrom faces when it comes to corporate governance?

Mariana Gheorghe: It’s actually to incorporate all these corporate governance principles, as well as all the issues related to the sustainability, in their own strategy, in their activities, and that’s something which we are working on. For that purpose, the stakeholders are a key part of all this process.

World Finance: And looking to the future now, what’s next with OMV Petrom?

Mariana Gheorghe: We are going to consolidate and maximise the value of our portfolio in the upstream, and moreover, we are going to grow in the Black Sea. That’s one area in the western of the Black Sea, it’s one where together with our partner ExxonMobil, we are looking forward to growth opportunities.

And this growth will be supported by the downstream/midstream where we actually monetise our upstream production, and in that direction, what we are focusing in mid and downstream is optimising, creating value added by working with the markets and the clients we have. Doing that is to stay the leading integrated oil and gas company.

Generating profits is going to be challenging, because we depend a lot on what the market offers, be it international markets, where will be the international oil and gas prices, but also in terms of demand both in the country and in the neighbouring markets which are our targeted markets.

World Finance: Mariana, thank you.

Mariana Gheorghe: Thank you very much.

High frequency trading ‘threat to public confidence’

New York’s Attorney General has announced a crackdown on high-frequency trading, as his office said that it will be taking a closer look at vendors who provide services for high frequency traders.

In a speech given at the New York Law School, Eric T Schneiderman called for reforms that would eliminate “unfair advantages” for high-frequency trading firms.

Often such traders get faster access to data than the public would, through services offered by exchanges and other providers. This includes allowing HFT’s to locate their computer servers within trading venues themselves; providing extra network bandwidth to high-frequency traders; and attaching ultra-fast connection cables and special high-speed switches to their servers, the AG’s office said in a statement.

The practice of co-location has grown in popularity in recent years, but it has also come under scrutiny as concerns about its market influence have grown

“In the hands of predatory high-frequency traders, those services distort our markets,” Schneiderman explained. “Each of these services offers clients a timing advantage – often in milliseconds – that allows high-frequency traders to make rapid and often risk-free trades before the rest of the market can react.”

In high frequency trading, firms create computer platforms to buy and sell stocks in milliseconds. It is common practice for trading firms to place their systems in the same data centres as the exchanges, allowing them to directly plug in their companies’ servers and shave crucial time off transactions. The practice of co-location has grown in popularity in recent years, but it has also come under scrutiny as concerns about its market influence have grown.

“We call it Insider Trading 2.0, and it is one of the greatest threats to public confidence in the markets. Rather than curbing the worst threats posed by high-frequency traders, our markets are becoming too focused on catering to them,” Schneiderman said of the HFTs.

The attorney general will be focusing on practices, which provide traders with information that allows them to take positions in the market at an unfair advantage. The announcement follows a similar probe last year, where Thomson Reuters agreed to discontinue its practice of selling high-frequency traders a two-second sneak peek of consumer survey results that could impact markets.

As of late, regulators have put the spotlight on high frequency trading. In February 2014, the US Commodities Futures Trading Commission said it would also be looking into regulating trading practices at firms, once the findings from a report on the industry have been published in September this year.

US oil boom means trade deficit drops to four-year low

In November 2013 the US trade deficit reached its lowest point in four years. According to the US Commerce Department the November trade gap was the smallest monthly deficit since October 2009, dropping 12.9 percent to $34.3bn. The narrowing deficit was the result of a recent oil boom in conjunction with the increased export of US-made machinery, leading to the country’s increased attractiveness as trading partner.

Exports rose 0.9 percent, reaching an all time high at $194.9bn. This was in large part due to rising petroleum sales – itself a result of new drilling techniques – and an abundance of crude oil production. In the first 11 months of 2013, oil exports saw a 10.8 percent rise, in comparison to the same period in 2012.

Imports fell 1.4 percent from October 2013 to $229.1bn, further shrinking the deficit. These figures are largely attributed to the decreased need for foreign oil imports, which fell 10.6 percent to $21.4bn in November. Total US exports were up three percent to $2.08trn, while imports remained at $2.51trn. Such narrowing of the deficit was not originally anticipated by economists, and consequently estimates for the last quarter of 2013 increased by as much as 3.3 percent.

Surveying 68 economists, Bloomberg calculated the median estimate for the US deficit to be $40bn. Despite an annual growth rate of 4.1 percent in the third quarter of last year, it was posited that businesses’ inventory surplus would slow GDP growth (see Fig. 1). As part of the continuing trend in 2013, total US imports reached $194.9bn in November from $193.1bn in October. Views as to whether this trend will continue vary; some assert that increased imports consequent of consumer spending will widen the deficit, while others believe spending will be offset by declining oil imports.

US-GDP-and-import-figures

Economic Outlook Group’s Chief Global Economist, Bernard Baumohl, believes that the foundations of the US economy have become better, as a whole. “Clearly, the fundamentals that underpin the US economy have improved,” Baumohl wrote in the company’s economic summary outlook for 2014. “Leading the charge will be consumer spending, followed by a rebound in business capital expenditures and finally a marked improvement in net exports.”

Exports and imports
Although the oil industry was the driving force behind narrowing the deficit, the increased export of aircrafts, engines, industrial supplies, chemicals and automotive machinery reflect stronger global demand for US-made products. In November, US food and consumer goods shipments dropped, and despite a three-year low in the import of industrial materials, auto and capital goods imports reached record highs.

This was all offset by the fall in demand for foreign oil, in conjunction with rising oil production and the falling dollar, which have increased the attractiveness of US goods in the global market. The increase in exports has revitalised manufacturing and production in the country, with higher export orders bringing overseas production back to the US (see Fig. 2). This increase in factory output has also created jobs, leading to greater spending.

US manufacturing payrolls increased in the fourth quarter last year and consumer spending could offset a lower inventory growth drag. The accumulation of business stockpiles also demonstrates the economy’s strength. With production being brought back to the US from China, the Chinese government has allowed its currency to appreciate. The deficit with China dropped 6.7 percent to $26.9bn in November 2013, the widest gap of any country.

It is on track to set another record this year. The US deficit with Japan dropped 8.4 percent to $5.8bn, corresponding with an increase in exports. Similarly, with greater exports to Germany, the US deficit with the EU dropped to £10.1bn, nearly 30 percent. This is due to an abrupt reduction in imports from the region. By November, the trade deficits with Saudi Arabia and other OPEC nations totalled $64.1bn.

The lowering of the trade deficit is directly linked to new drilling techniques in Texas and North Dakota. Advances in horizontal drilling and hydraulic fracturing have led to the increased production of shale oil. In one of the last days of 2013, US crude oil production increased to 8.12 million barrels – the highest in 25 years according to the Energy Information Administration (EIA). In its 2015 forecast, the EIA predicted that oil output could reach 9.6 million barrels per day – matching the record high in 1970.

Petroleum shipments rose 5.5 percent to $13.3bn in November, bringing down the petroleum deficit to $15.2bn, the lowest since May 2009. In 2013, crude oil imports dropped to 7.7 million barrels a day, the lowest number in 17 years. Purchases of crude oil fell to $28.5bn, which is the lowest point since November 2010. These prices have been falling, reaching an average of $94.69 per barrel in November from a peak of $102 two months earlier.

Energy independence in sight
This crude oil production brings the country closer to energy independence, which the Paris-based International Energy Agency (IEA) estimates could be in as early as 20 years. The IEA also expects the US to become the world’s top producer of oil producer in 2015, overtaking Russia and Saudi Arabia. “The trend toward more domestic fuel production is on-going and it’s only going to get better,” Chris Low of FTN Financial told Bloomberg.

US-Top-five-export-destinations

However, this new abundance of resources is marred by oil export restrictions that were established in the 1970s. Washington has urged the Obama administration to relax these regulations, which contradict the existing and self-imposed goal to double exports by 2015 (set by the White House in 2010).

At the same time oil and gas representatives have applied pressure on the government, highlighting their industry’s contributions to narrowing the trade deficit. Previously, the ban helped to stabilise domestic oil prices, at the great benefit of those refineries that can trade in the world market. “Some of these prohibitions, or policies, are vestiges of the past,” President of the American Petroleum Institute, Jack Gerard, told the FT. “We need to get our mind set away from scarcity.”

Although the oil boom does not create as many jobs as the manufacturing industry, its benefits still extend past its own parameters. Being one of the top consumers of natural gas, the chemical industry also stands to gain from increased oil production. Atlanta-based Axiall is just one of the companies that intend to harness the success of the oil industry, planning to build an ethylene plant in Louisiana.

These technological developments in crude oil extraction not only help to narrow the deficit, but indirectly fuel various aspects of the country’s economy, helping to reshore production, create jobs and increase the attractiveness of the US as a trading partner.

Could cloud be the silver lining to Oracle’s share slump?

One of the most dominant computing companies for the last 30 years, Oracle’s recent difficulties continued with news that its earnings and revenues were worse than expected.

The company reported revenues of $9.3bn for the third quarter of last year, up four percent on the previous year’s figure, but short of analysts’ predictions of $93.7bn. Net profits were also below expectations, falling to $2.56bn. Shortly after the news, Oracle’s share price slumped by five percent in after-hours trading.

The database management and enterprise software specialist has struggled to keep up with many upstart new Silicon Valley firms in recent years, despite it underpinning many corporate IT departments’ operations.

Oracle has slowly been catching up, investing heavily in a number of cloud based services

Oracle has a rich history dating back to 1977, and has grown to become one of the leading technology companies in the world, with total assets of $81.8bn last year.

In an earnings call to analysts, CEO and founder Larry Ellison said that the company was experiencing a challenging period as a result of many new competitors. “We have a new set of competitors, and we need a specialist sales team that’s used to competing with Amazon. We’re lining up against all our new competitors and making sure we have sales capacity as well as a new set of products.”

However, the company did highlight the success of its new cloud operations. Many of its rivals, such as Amazon, have seen a lot of success from offering similar storage and database services to Oracle’s, but based entirely in the cloud. Oracle has slowly been catching up, investing heavily in a number of cloud based services.

President and CFO Safra Catz said in a statement that cloud subscriptions had grown significantly in recent months. “In constant currency, our Cloud Software Subscriptions revenues grew 25 percent and our Engineered Systems revenue grew more than 30 percent in the quarter.

“Oracle Cloud Applications and Engineered Systems are both rapidly growing, billion dollar run-rate businesses. Those two high-growth businesses helped us deliver record year-to-date operating cash flow, and a record $15bn of operating cash flow over the past twelve months.”

The blues are back: emerging markets take a nosedive

How quickly emerging markets’ fortunes have turned. Not long ago, they were touted as the salvation of the world economy – the dynamic engines of growth that would take over as the economies of the US and Europe sputtered. Economists at Citigroup, McKinsey, PricewaterhouseCoopers, and elsewhere were predicting an era of broad and sustained growth from Asia to Africa.

But now the emerging market blues are back. The beating that these countries’ currencies have taken as the US Federal Reserve begins to tighten monetary policy is just the start; everywhere one looks, it seems, there are deep-seated problems.

Argentina and Venezuela have run out of heterodox policy tricks. Brazil and India need new growth models. Turkey and Thailand are mired in political crises that reflect long-simmering domestic conflicts. In Africa, concern is mounting about the lack of structural change and industrialisation. And the main question concerning China is whether its economic slowdown will take the form of a soft or hard landing.

This is not the first time that developing countries have been hit hard by abrupt mood swings in global financial markets. The surprise is that we are surprised. Economists, in particular, should have learned a few fundamental lessons long ago. First, emerging market hype is just that. Economic miracles rarely occur, and for good reason.

Governments that can intervene massively to restructure and diversify the economy, while preventing the state from becoming a mechanism of corruption and rent-seeking, are the exception. China and (in their heyday) South Korea, Taiwan, Japan, and a few others had such governments; but the rapid industrialisation that they engineered has eluded most of Latin America, the Middle East, Africa, and South Asia.

Extenuating circumstances
Instead, emerging markets’ growth over the last two decades was based on a fortuitous (and temporary) set of external circumstances: high commodity prices, low interest rates, and seemingly endless buckets of foreign finance. Improved macroeconomic policy and overall governance helped, too, but these are growth enablers, not growth triggers. Second, financial globalisation has been greatly oversold. Openness to capital flows was supposed to boost domestic investment and reduce macroeconomic volatility. Instead, it has accomplished pretty much the opposite.

This is not the first time that developing countries have been hit hard by abrupt mood swings in global financial markets

We have long known that portfolio and short-term inflows fuel consumption booms and real-estate bubbles, with disastrous consequences when market sentiment inevitably sours and finance dries up. Governments that enjoyed the rollercoaster ride on the way up should not have been surprised by the plunge that inevitably follows.

Third, floating exchange rates are flawed shock absorbers. In theory, market-determined currency values are supposed to isolate the domestic economy from the vagaries of international finance, rising when money floods in and falling when the flows are reversed. In reality, few economies can bear the requisite currency alignments without pain.

Sharp currency revaluations wreak havoc on a country’s international competitiveness. And rapid depreciations are a central bank’s nightmare, given the inflationary consequences. Floating exchange rates may moderate the adjustment difficulties, but they do not eliminate them.

Fourth, faith in global economic-policy coordination is misplaced. America’s fiscal and monetary policies, for example, will always be driven by domestic considerations first (if not second and third as well). European countries can also barely look after their own common interests, let alone the world’s. It is naïve for emerging market governments to expect major financial centres to adjust their policies in response to economic conditions elsewhere. For the most part, that is not a bad thing.

Step-by-step recovery
The Fed’s huge monthly purchases of long-term assets – so-called quantitative easing (QE) – have benefited the world as a whole by propping up demand and economic activity in the US. Without QE, which the Fed is now gradually tapering, world trade would have taken a much bigger hit. Similarly, the rest of the world will benefit when Europeans are able to get their policies right and boost their economies.

The rest is in the hands of officials in the developing world. They must resist the temptation to binge on foreign finance when it is cheap and plentiful. In the midst of a foreign-capital bonanza, stagnant levels of private investment in tradable goods are a particularly powerful danger signal that no amount of government mythmaking should be allowed to override.

Officials face a simple choice: maintain strong prudential controls on capital flows, or be prepared to invest a large share of resources in self-insurance by accumulating large foreign reserves.

The deeper problem lies with the excessive financialisation of the global economy since the 1990s. The policy dilemmas that have resulted – rising inequality and reduced room to manage the real economy – will continue to preoccupy policymakers in the decades ahead. It is true, but unhelpful, to say that governments have only themselves to blame for having recklessly rushed into this wild ride. It is now time to think about how the world can create a saner balance between finance and the real economy.

(c) Project Syndicate, 2014

Dubai Islamic Bank eyes strong global presence

Globally the Islamic finance industry is worth close to $2.3trn and is expected to grow to $3trn by 2015. Dubai has long nurtured a desire to become the international hub for sharia-compliant banking, and recently an official mandate has been issued to that effect to position the emirate as the global capital of the Islamic economy.

Since it was established in 1975, Dubai Islamic Bank (DIB) has been trailblazing through the industry, setting new standards in the area of Islamic finance and paving the way to further the progress of this sector, which is fast gaining global acceptance. Recognised for its rich heritage and vintage, DIB is seen as a school of Islamic banking and finance, having received various accolades for innovation and advancements in this arena, giving a modern face to the industry over the last forty years.

Dr Adnan Chilwan, DIB’s CEO, is keen to capitalise on the bank’s four-decade-strong position in the industry. Appointed to the post in July 2013, Chilwan has immediately actioned the second phase of a two-pronged strategy of consolidation and growth. The first phase of consolidation was initiated in late 2008 with the aim to build a robust balance sheet and platform that would allow the springboard when the market and the economy rebounded.

With Dubai and the UAE economy clearly back on track, the bank is now moving on a clearly defined growth agenda, which not only focuses on the domestic market, but also on expansion into other parts of the Middle East, Asia and East Africa. Over the coming years, the UAE – and Dubai in particular – will be hosting a number of international events of considerable prominence and the Islamic finance sector is well established to play a key role in this development. Chilwan has spoken to World Finance exclusively about the challenges and opportunities ahead for Dubai and DIB.

Why is Dubai emerging as the global capital of Islamic finance?
Dubai is uniquely positioned, especially when you consider it from the perspective of banking and finance. Located right at the centre of the east and the west, Dubai has huge potential to provide continuity to financial entities across time zones as the markets open and close around the world.

With DIB pioneering Islamic banking here in Dubai in 1975, there can be no doubt of the ability of the emirate of Dubai to establish itself as the global capital of the Islamic economy. The achievements of Dubai and the UAE are now being recognised across the world.

Tourism, hospitality, transportation, trade and infrastructure are the backbone of this thriving nation, and today the residents enjoy possibly some of the best quality of life anywhere in the world. With the way the Islamic economy is progressing, I see this as an opportunity as well as a responsibility of leading players like DIB to support this ambition.

Over the last decade, the UAE as a nation has made huge advances in the Islamic finance industry, making the sector an integral part of general economic activity. Innovation in products and offerings coupled with the development of the necessary legal and regulatory framework across all financial sectors from banking, capital markets, and insurance has positioned us at its forefront.

The government itself has been a strong advocate of promoting and growing not just the Islamic financial sector but also the Islamic economy including the halal food industry, family-friendly travel and tourism, fashion and clothing, cosmetics and personal care, pharmaceuticals, and media and recreation. These different sectors that have developed and grown over the years are helping to establish Dubai as a major Islamic hub.

With regards to Expo 2020 in particular, how will future events change infrastructure investment in the region?
Dubai is fast becoming not just an event hub for the region, but is in a position to compete head-to-head with major cities around the world. Though the infrastructure to host such events successfully is already in place, the Expo2020 will give a further boost to civil works and development, tourism, transportation and logistics, technology and even alternative energy sectors adding to the already world class setup existing in Dubai.

UAE-GDP-and-total-investment

Local and international investment – both financial and intellectual – will have a positive effect on trade, investment, technology, construction and other related sectors, not just in Dubai but in the UAE as a whole. Bank of America Merrill Lynch estimates Expo 2020 could boost GDP by $23bn or 24.4 percent between 2015 and 2021 (see Fig. 1) with an additional growth of 0.5 percent between 2016 and 2019, and two percent by 2021.

It is expected that around 300,000 new jobs will be created during this period, particularly in the area of construction, hospitality, transportation, logistics, retail and services. The already growing Dubai brand value will also get a significant boost, and is expected to grow by $8bn to $257bn, according to Brand Finance.

To what extent has the advent of Islamic finance helped boost the growth of SMEs in the region?
While Islamic jurisprudence encourages entrepreneurship to vitalise the economy, Islamic banks still lack offerings to actually support start-ups, especially small and medium size businesses. This is also due to the fact that Islamic banks could not finance start-ups in certain situations where assets are not available.

Islamic banking needs structured products such as quasi capital or hybrid structures for start up finance in order to limit the risk while simultaneously supporting ventures to flourish without mounting serious pressure on the venture itself. That said, DIB is committed to promoting this key sector of the economy and has recently launched a focused need-based SME solution based on the liquidity management and working capital finance requirements of this segment. We will continue to further refine our products and services to this sector, which we believe is key to the growth of any economy in the world.

How has Dubai Islamic Bank evolved during the recent boom in Islamic finance?
Given the impact of the global financial meltdown since 2008, we established a two-phase strategy spanning a period of eight years. The first five years (2009 to 2013) focused on consolidation, where the aim was to ensure that the fundamentals of the bank were strengthened from within as it navigated the turbulent markets during this period.

The key objectives of this phase revolved around strengthening the balance sheet, enhancing capitalisation, ensuring robust liquidity, arresting NPL growth and improving asset quality. Though, at the time, we were unable to predict the depth and tenor of the crisis, we had faith in the bank and Dubai, that both would rebound strongly when the markets improved. We executed the consolidation strategy like clockwork and this has now allowed us to initiate the second phase, which is growth.

We have established a strong franchise, particularly on the consumer front, which has helped to diversify our exposure significantly while continuing to maintain probably the best liquidity in the banking sector. This, combined with strong capitalisation, provides us with a robust platform to take advantage of the greatly improved and positive market conditions and trends.

DIB is a pioneer of Islamic banking and as the world’s first fully-fledged Islamic bank, we have nearly four decades of experience. Over the consolidation period, we have greatly expanded our product suite, enhanced our core systems utilising the latest technology and totally revamped our customer service platform. Innovation is at the centre of everything we do and will continue to play a key role in our drive to be the most progressive Islamic financial institution in the world.

What are the bank’s local and international expansionary plans?
Going forward, DIB is looking to expand its franchise not only in the UAE but also across some select and identified international markets. Locally, we will continue to enhance our consumer and wholesale business focusing on key sectors like SME, tourism, hospitality, trade and infrastructure development – all of which are expected to see a boost with Dubai’s EXPO 2020 win.

While we will be reviewing and rationalising our existing international presence in Pakistan, Sudan, Jordan, Bosnia and Turkey, we have already identified new geographies in Far East, Middle East, East Africa and the Indian subcontinent where we are looking to enter with an individually tailored strategy for each country.

JPMorgan and Madoff’s epic Ponzi scheme

In the summer of 2009, a freshly convicted Bernie Madoff cut a forlorn shape on the courtroom floor, as he was finally held accountable for crimes that, in his own words, would leave a “legacy of shame” for those bearing his name. “I am embarrassed and ashamed,” read a statement from his unsuspecting wife. “Like everyone else, I feel betrayed and confused. The man who committed this horrible fraud is not the man whom I have known for all these years.”

At no point during his trial did the former Wall Street executive meet the unceasing stares of his victims, who proceeded to express their disdain for the fraudster. “This jail should become his coffin,” said Michael Schwart, a 33-year-old victim whose life was profoundly affected by Madoff’s scheme. The ruling judge Denny Chin then revealed that not a single friend or family member had sent a letter attesting to his character, saying that Madoff’s crimes were “extraordinarily evil” and “took a staggering human toll” on those affected. After the 71-year-old’s 150-year sentence was read out, the courtroom welcomed it with applause.

Madoff and JPMorgan
The Ponzi scheme that saw Madoff defraud his clients of $65bn is commonly considered to be the largest single financial fraud case in US history; however, the involvement of America’s largest bank has only recently come to light. “JPMorgan – as an institution – failed and failed miserably,” said Preet Bharara, US Attorney for the Southern District of New York, immediately after he announced criminal charges against the bank.

“JPMorgan – as an institution – failed and failed miserably”

The extent to which JPMorgan was complicit in Madoff’s crimes has been contested for some time now, namely by Madoff himself. “They had to know… But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know,’” he told the New York Times in 2011. Nonetheless, it has taken until this January to reveal the scale of JPMorgan’s involvement, which in turn has brought to the fore an awareness of the scheme, otherwise known as the ‘702 Account’, that stretches back just shy of three decades.

Documents filed in the Manhattan Federal Court trace the fraudulent link between Madoff and JPMorgan back to 1986, at which time the schemer selected the bank as the primary vehicle by which he would run his Ponzi scheme. Investigations have since unearthed a series of warning signs that went unchecked through the decades, despite numerous individuals at the bank becoming suspicious of the now infamous 702 Account.

Suspicious behaviour
In the mid-1990s JPMorgan, along with a client of JPMorgan’s Private Bank, clocked on to a series of cheque-kiting transactions, as weighty sums of money were being lofted back and forth between Madoff’s accounts for no discernible reason. These actions were enough to prompt suspicions on the part of JPMorgan’s client Norman Levy, who lodged a Suspicious Activity Report (SAR) against Madoff and closed off his account as a consequence. However, JPMorgan stopped short of these measures and chose instead to foster the transactions for another decade, failing to file a single SAR or notify its anti-money laundering compliance group at any time, and allowing the transactions to reach $6.8bn.

These circumstances marked only the first in a series of misdemeanours which, through 1986 to 2008, saw approximately $150bn fed in and out of Madoff’s accounts – none of it being used to purchase or sell securities, as was claimed at the time.

Questions were later asked by the bank of Madoff’s ability to consistently yield returns of 20 to 30 percent year-on-year, leading one JPMorgan banker to suspect that he “might… have been smoothing out returns.” An internal bank document obtained by authorities questioned how Madoff was able to secure high returns through stints of market volatility, and in 1998 a bank fund manager conceded that his performance was quite possibly “too good to be true,” in light of there being “too many red flags.”

The bank even went so far as to invest a significant sum of its own money in Madoff’s funds, regardless of ongoing reservations about their legality. However, when in 2007 the returns were believed to “be part of a Ponzi scheme” and Madoff had a “well-known cloud over” his head, the bank reduced its exposure so as to escape any associations with the schemer himself, pulling out $275m of its own money.

On December 11, 2008 Madoff’s crimes were finally revealed to the rest of the world, and the bank could not help but accept certain responsibilities for its failure to make public Madoff’s misdemeanours at an earlier date. “In this case, JPMorgan connected the dots when it mattered to its own profit, but was not so diligent otherwise,” said Bharara at a press conference after the charges were filed.

Criminal charges
“JPMorgan failed to carry out its legal obligations while Bernard Madoff built his massive house of cards,” added the FBI Assistant Director-in-Charge George Venizelos. “In order to avoid these types of disasters in the future, we all need to be invested in making our markets safer and more equitable. The FBI can’t do it alone. Traders, compliance officers, analysts, bankers, and executives are the gatekeepers of the financial industry. We need their help protecting our markets.”

The bank even went so far as to invest a significant sum of its own money in Madoff’s funds

As a consequence of having facilitated Madoff’s Ponzi scheme, JPMorgan faces a forfeiture of $1.7bn made payable to the scheme’s victims, as well as two felony counts for violating the Bank Secrecy Act. “Institutions, not just individuals, have an obligation to follow the law and to police themselves. They must exercise due care not only with their own money but with other people’s money also,” said Bharara on January 7. “The bank has accepted responsibility and agreed to continue reforming its anti-money laundering practices. Most importantly, the victims of Bernie Madoff’s epic fraud are $1.7bn closer to being made whole.”

The investigation culminated in a deferred prosecution agreement between JPMorgan and the authorities, which, alongside a strict financial penalty, will see the bank make good on its promise to reform its internal controls in place of a criminal prosecution. The agreement is certainly an uncommon action to take against a financial institution; however, authorities clearly believe the penalties and promised reforms to be preferable to a prosecution.

The sum imposed by the Department of Justice will also come accompanied with a further $350m for the Office of the Comptroller of the Currency, $325m for Madoff’s bankruptcy trustee Irving Picard, and $218m for plaintiffs in class-action lawsuits, bringing the total payment to $2.6bn. If the bank succeeds in fulfilling both parts of the bargain then the case will be dropped in two years time.

Leniency precedent
The charges are reminiscent of those brought against HSBC last year, after the UK bank violated the Bank Secrecy Act on two counts. Similarly to JPMorgan, HSBC was left with charges equating to near $2bn and an agreement that promised to improve on its reporting procedures. However, unlike JPMorgan, HSBC’s term is set to span five years and is subject to scrutiny by an independent party, whereas JPMorgan is monitored only by the US Attorney’s office, with any details of the changes hidden from the public eye.

Regardless of the seemingly lenient charges, the Madoff case has succeeded in damaging JPMorgan’s earnings in a way that previous scandals have failed to do. Over the past year, the bank has paid around $20bn to regulatory authorities as a consequence of various misgivings pertaining to the financial crisis and beyond, among them the Libor and ‘London Whale’ scandals. Figures released by the bank in January showed that overall earnings clocked in at $5.28bn, representing a 7.3 percent shortfall on the previous year and falling somewhat short of analysts’ expectations.

Olympics catalyst for Rio redevelopment

Like most other cities that have hosted important international events over the years, Rio de Janeiro is hoping to cash in on its skyrocketing profile. The Cidade Maravilhosa has been working tirelessly to shed its party-town image and emerge on the other side of the 2016 Olympic Games as a credible cultural and business centre. Museums designed by ‘starchitects’ have been commissioned, poor neighbourhoods are being redesigned, and a multi-billion dollar commercial centre development has been announced.

Perhaps inspired by the success of London’s Canary Wharf business district, Rio policymakers have revealed plans to redevelop the currently derelict port zone into a luxury business district complete with mirrored skyscrapers and its very own Norman Foster creation.

Revellers march through the port district in Rio. It is hoped the redevelopment can help shed the area’s party-town image
Revellers march through the port district in Rio. It is hoped the redevelopment can help shed the
area’s party-town image

According to Rio’s Mayor’s Office, the project consists of the “reurbanisation” of five million square metres, including the construction of four tunnels, 17km of cycle-ways, three sewage treatment facilities, and the refurbishment of 70km of sidewalks.

Works have already started in what is being dubbed the Porto Maravilha (Marvellous Port) development. The Museu do Amanhã, a cutting-edge museum designed by lauded Spanish architect Santiago Calatrava, has already broken ground. Another cultural space, the Museu de Arte do Rio (MAR), a gallery dedicated to the art and history of the city, opened its doors to the public in 2013. Public squares are being spruced up and there is a plan to plant over 15,000 new trees in the area. But the project remains years away from actual completion.

A pivotal aspect of the urban regeneration proposal was the demolition of a four-kilometre-long suspended road known as the Perimetral. Opened in the 1960s, it ran along the shore of the Guanabara bay offering drivers riding on it phenomenal views, but rendering the area underneath it a wasteland of abandoned buildings and dangerous streets. In January, the Perimetral was finally torn down, in preparation for the real work to begin.

From the ground up
To describe Rio’s port region as a pleasant place would be to stretch the truth to breaking point. It is true that the area – like much of the rest of Rio – has been blessed with natural assets and is surrounded by spectacular forested mountains in the background, and the placid bay stretching before it. But decades of neglect and mismanagement by successive administrations mean that to rehabilitate the region, it is cheaper to tear everything down and start again.

But decades of neglect and mismanagement by successive administrations mean that to rehabilitate the region, it is cheaper to tear everything down and start again

This scorched-earth policy, favoured by the current mayor Eduardo Paes, offers plenty of opportunity. The port region is adjacent to the city’s already established downtown and the business district. It is a piece of prime real estate, with sweeping views over the bay and the mountains, and it makes sense for the mayor to want to tear it to the ground and start again – preferably by flogging the land to business developers at sky-high prices. And that is where the Marvellous Port project was born.

According to the Marvellous Port website, the whole regeneration project is scheduled for completion by 2016, at which point construction will begin on the many luxurious skyscrapers. The Brazilian media has reported that over the next eight years, the region will gain close to one million square meters of real estate, worth BRL 8bn (approximately $4bn).

This is only one of the key projects planned for the area, though, and is being led by Westfield, the company behind the vast majority of developments connected to the London Olympics. Westfield is working with Related, an American real estate developer, and BNCORP, a Brazilian developer.

Locals have been trumped
The plan is to build a mega-complex that will include a luxury shopping centre, high-spec business towers, hotels and apartment blocks, collectively known as Porto Cidade (Port City).

“We were looking for an opening in Rio, and the Marvellous Port fit, as it is both an extension to the downtown area and is gaining new infrastructure,” Daniel Citron, President of Related for Brazil, told the O Globo.

“The complex will be located where all new transportation converges, including the new VLT (trams). It is a region that was previously unviable because it was not properly integrated [with the rest of the city].”

The Mario Filho (Maracana) stadium in Rio de Janeiro. It will host the upcoming Confederations Cup, the 2014 World Cup and the 2016 Summer Olympics
The Mario Filho (Maracana) stadium in Rio de Janeiro. It will host the upcoming Confederations Cup, the 2014 World Cup and the 2016 Summer Olympics

Construction is expected to begin in 2014 and will be completed in phases, finishing in 2022. Not far from Porto Cidade, Brazil will gain its very first Trump Towers complex. Consisting of five AAA skyscrapers, 150m tall and boasting 38 floors of office space each, Trump Towers Rio will occupy 450,000 square metres along the Avenida Francisco Bicalho, a traditional – and pivotal – traffic artery that connects downtown Rio to the suburbs and to Ipanema and Leblon – the luxury residential neighbourhoods.

Work on the Trump complex is not expected to begin until after the 2016 Olympics, by which time several tram lines connecting the Marvellous Port area to the rest of Rio will already be complete, making the complex’s location very desirable indeed.

“There is a tremendous need for a project of this size and calibre as Rio de Janeiro has one of the lowest office vacancy rates in the world,” Donald Trump Jr told Bloomberg Newsweek. “With extensive research conducted by our leasing agent, Cushman and Wakefield, we are pleased to confirm that Trump Towers Rio is currently the largest [planned] urban office complex in the BRIC countries.”

Far from inclusive
But all of this development comes at a cost, and not just in terms of capital investment. The port region is the rightful birthplace of the city, and has always been densely populated. Furthermore, some of the buildings that have been allowed to fall into disrepair through lack of investment from the city, are some of the oldest and most beautiful in all of Rio, and also of extreme historical significance.

The majority of the colonial buildings, factories and old farm mansions in the area are scheduled for demolition to make room not only for infrastructure developments but for the likes of the Trump Towers and the Porto Cidade.

One of the most oft-cited complaints is the lack of room for affordable housing to be developed in the area; current residents would be moved on and their dwellings torn down.

“The fact is that this is a central area, historically occupied by low income families,” explains Lilian Amaral de Sampaio, a local architect and urbanist. “Very little of the Porto Maravilha proposal was designated for social and lower-income housing or for residential developments in general.”

Children in front of a building which houses 82 families in the port district of Rio. Residents will be relocated to new housing ahead of the 2014 World Cup
Children in front of a building which houses 82 families in the port district of Rio. Residents will be relocated to new housing ahead of the 2014 World Cup

There are also questions about how the project was de facto developed, and with what interests in mind. “In London, before the re-urbanisation of the Docklands was initiated, a number of studies were carried out that sought to define the guidelines for the use of the space,” explains Roberto Anderson M Magalhães, an architect with the Rio de Janeiro State administration.

“In Rio de Janeiro, the project for the re-urbanisation of the port zone, was concerned exclusively with transport ways and constructive indices. There is not a single study that identifies the lines of dominance in the landscape of the area, nor what should be preserved.”

For Anderson, the development is a waste of the last opportunity to build a mix income neighbourhood in a city that already suffers from overcrowding. For him and many other critics the project will simply push the current, poor, inhabitants further into the suburbs, speeding up the process of gentrification in an unhealthy way.

The original plan for the urban regeneration of the region proposed a redevelopment of the region not as an extension of the nearby business district, but as a mixed model neighbourhood with commercial, corporative and residential properties as well as refurbished public infrastructure. That has since been replaced with the current model, and not everyone is pleased with that.

“This development is part of a larger trend in which cities compete with each other in global market,” hoping to attract business and tourism explains Amaral de Sampaio. New York, London and Barcelona, have all gone through similar processes with varying degrees of success.

Amaral de Sampaio is not holding her breath. “The real question that remains is whether or not Rio has the robust business health that will create the demand for all of that converted corporate space.”

Eight great heads of the Fed

Dec 1913

A painting of 10 stiff-necked politicians and bankers, all grouped around president Woodrow Wilson (pictured), commemorates the founding of the US Federal Reserve 100 years ago. Pen in hand, Wilson sits at a large desk poised to sign into reality America’s first central bank. The inaugural chairman is Charles Sumner Hamlin, first and last lawyer to head the organisation. The creation of the Fed was largely a reaction to financial uncertainties of the time.

Sep 1930

Eugene-MeyerAs Wall Street collapses and factories shut down, Eugene Meyer (pictured, right) takes control of the Fed. A financier and newspaper publisher, he’s decidedly the wrong man for the job. Resisting the advice of economists, he allows banks to fail in their thousands, taking the savings of ordinary people down with them. When his tenure ends in 1933, he buys The Washington Post, where he would prove to be a great deal more successful.

Feb 1951

William McChesney Martin

William McChesney Martin (pictured) begins a still-unmatched 19-year stint. Martin serves five presidents, developing policies to protect the almighty greenback from multiple threats including Vietnam War-induced inflation. Once described as ‘the happy Puritan’, Martin did not hesitate to tighten money when he saw fit. His most famous saying was: “We are the people who take away the punch bowl just when the party is getting good.”

Mar 1978

William-MillerThe brief and turbulent term of William Miller (pictured) was the last time a president appointed a businessman to head the Fed. Former boss of industrial conglomerate Textron, Miller inherits fast-rising inflation – and allows it to go even higher on the much-criticised grounds that it’s not a problem. The dollar plummets in value and has to be rescued with the help of the IMF. Remembered mainly for trying to ban smoking at Fed meetings, he lasts less than two years.

Jun 1979

Paul-VolckerPresident Jimmy Carter appoints the six foot seven inch Paul Volcker (pictured) to an embattled Fed. ‘Stagflation’ – a new term at the time – has bedevilled the US for most of the decade. ‘Tall Paul’ decides drastic measures are necessary and he lifts the federal funds rate to an unprecedented 20 percent. The prime inter-bank rate rockets to a sky-high 31.5 percent amid general fury, but Volcker stands firm. Within two hectic years, the economy returns to health.

Sep 1987

Alan-GreenspanTwo months after taking office, Alan Greenspan (pictured) faces a baptism of fire in the form of the 1987 stock market crash. He goes on to guide the economy through the bursting of the equities bubble, a credit crunch, the massive Russian default and the aftermath of the attacks of September 11, 2001. America would enjoy the longest peacetime economic expansion in its history. Only the 2008 crisis, which happened after his watch, would hurt his reputation.

Feb 2006

Ben-BernankeHanded a booming and prosperous America, Ben Bernanke (pictured) has a rude awakening with the onset of the 2008 financial crisis. Working on several fronts at once, he keeps the money flowing at the Fed’s discount window while printing money furiously under his quantitative easing programme. Although some critics fault him for not printing more money, he plays a major role in stabilising and restoring to health a distressed economy.

Feb 2014

Janet-YellenJanet Yellen (pictured) is sworn in as the first woman to head the Fed. Touted as a potential leader in the past, only to be denied when President Barack Obama decided to reinstate Bernanke in 2009, she ascends to the top job at a time when the US economy seems to be on much firmer ground, albeit with only hints of an overall recovery. Now Yellen has to figure out what to do with the $3trn in bonds in the Fed’s vaults and its legacy of quantitative easing.

The 5 biggest settlements on interbank rate rigging

1. UBS

A logo of Swiss banking giant UBS is seen on a building in Zurich

UBS is by far the bank that has paid the biggest fine for interbank rate rigging, since the first investigation into Libor manipulation began in 2011. On December 19, 2012, the Swiss bank agreed to pay regulators $1.52bn ($500m to the US Department of Justice, $700m to the US Commodity Futures Trading Commission (CFTC), $259m to the UK Financial Services Authority (FSA) and $64m to the Swiss Financial Market Supervisory Authority) after investigations revealed that UBS traders had conspired to manipulate the Libor rate as well as the Japanese Yen Libor, in addition to colluding with other panel banks.

2. RBS

RBS

Over two settlements in February and December 2013, Scottish banking group RBS was fined a total of $1.14bn for successfully manipulating the Euribor, Libor, Yen Libor, and the Swiss franc Libor. The bank paid $530.6m to the European Commission, $137m to the UK FSA, $325m to the US CFTC and $150m to the US Department of Justice after pleading guilty to felony wire fraud, colluding with other banks to manipulate the interest rates, as well as continuing misconduct after a CFTC probe into the matter.

3. Rabobank

Rabobank

Utrecht-headquartered Rabobank settled a $1.07bn fine in October 2013 after UK regulator, the FSA, said it had found more than 500 instances of attempted Libor manipulation. The US CFTC also said that the bank had lacked internal controls and ignored conflicts of interest amongst traders. As such, the bank paid $475m to the CFTC, $325m to the US Justice Department, $170m to the FSA and $96m to the Dutch public prosecutor’s office.

4. Deutsche Bank

Deutsche-Bank

In December 2013, Deutsche Bank was ordered to pay a fine of $984m to the European Commission, for colluding to manipulate the Euribor and Libor interest rates. Recently, the US Federal Deposit Insurance Corporation has sued Deutsche Bank along with 15 other banking groups for manipulation, which the regulator said caused “substantial losses” to 38 US banks, which became insolvent during and after the 2008 financial crisis.

5. Societe Generale

Societe-Generale

The fifth greatest interbank rate rigging fine belongs to France’s Societe Generale after it admitted to manipulating the Euribor and paid $604.7m to the European Commission in December 2013. SocGen is also among the 16 banks sued by the FDIC. So far, financial institutions have paid about $6bn to resolve criminal and civil claims in the US and Europe that they manipulated benchmark interest rates.

Will unconditional basic income solve Europe’s problems?

Unemployment is high on the agendas of ruling governments the world over, yet the sad fact remains that jobless rates in many jurisdictions are spiralling out of control, and will continue to do so for as long as glaring structural inefficiencies remain. Nowhere else on Earth can this be better seen than in Europe (see Fig. 1), where last year’s news of the continent’s barely perceptible recovery is threatening to stifle an appetite for much-needed structural reforms.

Austerity has loomed large over many of the region’s leading players, though it would appear the cuts of recent years are beginning to pay dividends. But whatever the prospects may be of a full-fledged recovery, there is still a great deal to be done about Europe’s hordes of under and unemployed – typically those in the youth bracket – who continue to suffer as a consequence of labour market inflexibilities.

Based on this year’s World Economic Forum, it would appear that leading industry names, politicians and economists alike are inclined to agree. Harvard’s Professor of Economics, Kenneth Rogoff, described the region’s employment situation as “horrific” and those seated alongside him on the panel made no secret of having the same opinion.

Among them was Eni’s Chairman, Giuseppe Recchi, who said, “It is difficult for a company to hire a 30-year-old person without work experience,” offering an insight into the challenges facing employers, as well as those affecting 30-something stuck-at-home jobseekers.

One of the most prominent issues to have surfaced out of Europe’s lacklustre jobs market is income inequality, given that candidates, no matter how skilled, are being forced to concede lowly pay rates or else face joblessness. It’s an ultimatum that not only serves to underline the current system’s structural inefficiencies, but one that threatens to inch otherwise well equipped candidates towards the brink of poverty.

What is the alternative?
The issue has riled the masses to such an extent that the Swiss populace last year attempted to redress the imbalance by taking a number of related proposals to referendum. First came the 1:12 initiative, which sought to stop monthly executive pay at no more than 12 times what the lowest paid staff member earns in a year – which could have given rise to quite considerable changes given that Roche, Nestlé and ABB’s CEO-to-worker pay ratios stand at 261, 238 and 225 respectively. The campaign failed to bear fruit, however, when in November Swiss voters overwhelmingly rejected the cap. The result was surprising to some, considering that the same electorate voted in favour of strict executive pay laws as recently as March.

Unemployment-in-Europe
Source: Eurostat

Last year’s most well-supported Swiss initiative was the proposal for an unconditional basic income to be brought into being, which would see every Swiss national given a CHF 2,500 ($2,756) monthly pay cheque, no matter their circumstances. “The benefit of a basic income is that it provides all members of a society [with] the means with which to be truly free,” claims Almaz Zelleke, Secretary-Treasurer for the Basic Income Earth Initiative (BIEN), whose confidence in the system’s capacity to bring about positive change and close the inequality gap is unshakeable.

Although the proposal is unlikely to pass, the very fact that the initiative has gotten this far is not only a credit to Switzerland’s democratic system, but a startling indication of the lengths to which Europe’s citizens are willing to go in order to instruct systematic change in the jobs market.

Basic income
The debate on basic income is far from exclusive to Switzerland, however, with a great many around the world positing it as a legitimate solution to the unemployment issues that have surfaced on European shores. “A basic income provides the means to meet one’s basic needs, but also a floor on which one can build with other sources of income,” says Zelleke.

The European Citizens’ Initiative (ECI) for an Unconditional Basic Income, an organisation seeking to bring the system to ballot, writes, “As a result of current employment patterns and inadequate income maintenance systems (conditional, means-tested, not high enough), we regard the introduction of the unconditional basic income… in order to guarantee fundamental rights, especially a life in dignity, as set forth in the Charter of Fundamental Rights of the European Union.

“Above all, the unconditional basic income will help to prevent poverty and grant freedom to each individual, to determine his or her own life, and strengthen the participation of all in society.”

Critics have been quick to point out the various pitfalls of implementing such a system, namely with regard to financial feasibility and work disincentivisation. However, both issues are ones that have been addressed at length by the policy’s proponents and dismissed out of hand. The Citizens Income Trust, which has studied basic income for 30 years, claims the full integration of the tax and benefits system would make possible a payment to every UK citizen equivalent to that of the current tax threshold, while numerous others argue that proceeds from VAT could do much the same.

Although the proposal is unlikely to pass, the very fact that the initiative has gotten this far is not only a credit to Switzerland’s democratic system

As far as disincentivisation goes, various trial runs of the system have revealed nothing of the sort. The so-called Mincome Programme of 1974-79 saw the system implemented in Dauphin, Manitoba, in order to ascertain whether or not guaranteed income would inhibit productivity. The results showed that only two groups were affected negatively, these being new mothers, who spent more time with their children, and teenagers, who largely dedicated more time to studies and further education.

“Basic income would support the vital unpaid work most people already do in terms of care for families, volunteering in communities, creation of internet content. If basic income were instituted throughout Europe, it would slow down, if not stop, migration due to economic distress from poorer to wealthier countries within Europe. It would relieve the social tensions caused by income inequalities. It would support consumer demand in times of recession,” argues Barb Jacobson of the ECI.

What can be said with a reasonable degree of certainty is that Europe’s labour markets are failing in the face of ever changing conditions, whether this be on an economic or technological basis, which in turn is strangling the potential of Europe’s millions upon millions of under and unemployed. Moreover, there exists a glut of university graduates whose skills are too often laid to waste in dead-end jobs and seemingly endless spates of joblessness, many of whom could well possess the skills necessary to boost the continent’s recovery.

Out of date
One preoccupation inhibiting Europe’s leaders from instating structural change, however, is the enduring memory of a post-WWII economic boom, where economic growth was then largely reliant on labour. Skip forward to the present day and this is certainly no longer the case. “Since the 1970s, we’ve seen repeated economic crises as obstacles on the road back to that kind of post-war growth. The reality is that economic growth is now less dependent on labour, and more dependent on technological innovations,” says Jacobson. “This is a wonderful thing for society as a whole, but if the gains are to be shared by all we need to decouple income and labour.

“The recent attention to inequality, from the street-level activism of the Occupy movement to the academic work of scholars like Thomas Piketty and Emmanuel Saez, has made us more receptive to once-radical ideas, because it’s clear the old solutions don’t work anymore. There is more attention in rich nations, like Switzerland and Germany, which clearly can afford a basic income, but also in developing nations, like Kenya (Give Directly) and India (SEWA’s basic income pilot in Madhya Pradesh), where the idea of giving money directly to individuals and bypassing corrupt governments has great appeal.”

The continent’s unemployment deficiencies are due not to a skills shortage, but to regimes that fail to accommodate willing workers to a satisfactory degree. As such, the benefit of a basic income above all else is that it frees up workers to do whatever they please with whatever skills they have, without the financial pressures that come with the age-old and inflexible markets of today.

Obama’s minimum wage increases will jeopardise American economy

‘Workers need a McLiving Wage – not lovin’ it,’ read a printout placard late on last year, as hundreds of America’s $7.25 per hour earners grouped outside their respective retail outlets and fast food chains, buoyed by the President’s stated intent to bump up the federal minimum to as much as $10.10.

Talk of the minimum wage and how raising it could well lift millions out of poverty has gathered momentum for some time now (see Fig. 1), with many keen to make clear their thoughts on the matter and the various ways in which the world’s largest economy could benefit as a result. The issue is one that has most certainly divided opinion between Liberals and Conservatives, with both sides equipped with reams of research to back up their respective claims.

Proponents claim a wage hike would lift millions of Americans out of poverty and close the widening income inequality gap; a sentiment that is echoed by those receiving the sum, who represent 2.8 percent of the nation’s workforce. “Evidence suggests that raising the federal minimum wage from its current level would not destroy many if any jobs and would benefit low-paid workers who are struggling to maintain their living standards,” says Alan Manning, Professor of labour economics at the London School of Economics.

“The rise in wage costs are, to some extent, offset by a likely fall in turnover and absenteeism costs as work becomes more attractive.” However, critics argue that raising the minimum wage could well prompt employers to cut staff numbers, increase costs and illegally skirt additional expenses. “It’s difficult to see how forcing businesses to increase their labour costs would be good for them,” says Jonathan Meer, economist and research fellow for the National Bureau of Economic Research. “There’s no free lunch: someone has to pay the increase in labour costs.”

Costs of doing business
“Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9 an hour,” said President Obama last year in the State of the Union Address.

History of California minimum wage

While it’s easy to theorise about how a raise could well afford unskilled workers a better standard of living, this school of thought is but to ignore the consequences for business. “Any government action that jacks up costs is negative for business,” says Bill Poole, senior fellow at the Cato Institute, Senior Advisor to Merk Investments and, as of fall 2008, Distinguished Scholar in Residence at the University of Delaware. “Businesses that employ a lot of minimum wage labour will be disadvantaged relative to other businesses.”

Critics argue that doing away with this advantage could have wider consequences for labour markets, as was very much the case in the early 1900s, when the US minimum wage was first introduced and rendered certain candidates unemployable, destroying both jobs and businesses in the process.

Even so, proposals to raise the minimum wage have received support not just from low-paid employees but also from small business owners themselves, according to a survey of 600 published by Wells Fargo and Gallup. The results show that 47 percent of respondents are backing the raise; despite 60 percent claiming the hike would hinder the majority of small businesses, which only serves to illustrate the complexity of the issue at hand here.

The implications of a raise, far from confined to employees, extend to employers, as those without the finances to accommodate change are likely to fall by the wayside, these being smaller businesses that are unable to compete on quite the same scale as larger more established firms.

In the near term, firms employing a lot of low-paid workers could pass on prices to consumers, reduce employment opportunities or take a profit hit, whereas long-term they might outsource work or mechanise labour intensive processes. “Everything depends on the level at which the minimum is set – if it is set too high it will destroy jobs as well as profits,” says Manning, who emphasises above all that the repercussions are dependent on the amount by which the minimum is raised.

“During an adjustment period, profits may well suffer. Some marginal firms will have to close, such as fast-food restaurants in poor locations. It is also worth noting that many non-profit businesses hire minimum wage labour. For example, some inner-city day care centres may be forced to close because the families they serve cannot or will not afford the higher fees,” says Poole. While fierce proponents of the hike may argue that those affected largely equate to economic deadwood, the importance of small businesses as an economic driver should not be underestimated in the current climate.

Another likely consequence of the rise is that those illegally undercutting the federal minimum could benefit from the hike, while those abiding by the legal amount will be forced to concede higher costs and cut staff numbers. “Businesses paying the minimum may be undermined by competition,” says Len Shackleton, Professor of Economics at Buckingham University and author of Should We Mind the Gap?

“Another more serious problem arises if legitimate minimum-paying businesses are undermined by competition from the ‘shadow economy’ where employers avoid taxes and the minimum wage. In most countries construction and house repair are areas where this happens to a degree.”

Who works for minimum wage anyway?
With US labour markets in the fragile state they are right now, the country can ill afford to stymie the prospects of a population still reeling from financial crisis. “Right now about 20 percent of young workers are unemployed, as are about 10 percent of the least-skilled adult workers. Raising the minimum wage raises the cost of hiring these workers, and it seems to me that in a labour market as weak as ours that is an unwise thing to do,” said Michael Pratt, economist and resident scholar at the American Enterprise Institute.

Granted, the arguments on both sides are underpinned by sound economic theory, however the real world consequences are highly uncertain no the matter the decision. While discussions of minimum wage are so often accompanied by talk of income equality, there is evidence to suggest that those on the rate are far from those worst affected by poverty. “I don’t regard the minimum wage as an effective anti-poverty device as most of the people it benefits are not in poverty,” says Shackleton.

[C]ritics argue that raising the minimum wage could well prompt employers to cut staff numbers, increase costs and illegally skirt additional expenses

“Many are students and young labour market entrants who need experience if they are to progress. To the extent that it reduces demand for labour, with fewer jobs and/or less hours offered, these groups lose out. There is some evidence that minorities in particular lose out.”

Heritage Foundation calculations gathered from the US Census Bureau data reveal that just over half of the country’s minimum wage earners fall between the ages of 16 and 24, and that most are not under threat of falling below the poverty line whatsoever. Of the 16-24 sample, 79 percent worked part-time jobs and 62 percent were enrolled in school during non-summer months.

For this reason, further consideration should be paid to who exactly would be affected by the rise, and whether reeling a select few out of poverty is worth the potential consequences of raising unemployment and reducing the ease of doing business. “The effect on employment is unambiguously negative,” says Poole. “How large the effect will be depends on how large the increase in the minimum is,” with the scholar here making reference to an opinion held by some, claiming a small hike in wages would have little to no impact on unemployment.

For instance, the efficiency wage hypothesis theorises that employee productivity will gain alongside wages, as higher pay somewhat reduces the chances of unionisation and increases efficiency.

Many remain unconvinced by this textbook style of economics, however, Poole among them, who argues, “Why would the effect of a small increase be literally zero when the effect of a $50 minimum would obviously be large? Large increase, large effect; small increase, small effect, it’s Just that simple.”

Ultimately, the consequences of a raise will align with the extent by which the minimum is changed – if at all. Having said this, regardless of whether the affects are nominal or not, it’s important that a more thorough understanding is ascertained as to the actual repercussions, before the federal minimum is changed at the expense of American business and unemployment

Post-Lehman: are derivatives still a risky business?

For every action there is a corresponding reaction and if the world’s major banks – collectively in the dock for having blown up the global economy in the late noughties – could be sure of one thing, post-Lehman Brothers, it was that the ‘business as usual’ approach, in terms of how they conduct their OTC (over-the-counter) derivatives operations, was never going to be a serious runner – legislators and regulators on both sides of the Atlantic are seeing to that.

Politicians haven’t taken their eyes off the ball entirely, however, and some of the measures now being put in place build on pre-Lehman legislation. Yet in their quest to accelerate what amounts to a significant clampdown on the derivatives industry, the net has not only been cast wide, as legislators attempt to snare the major banking fish, it is also potentially scooping up lesser players along the way, such as industrial and trading companies. Even if the latter can subsequently gain exemptions from the various emerging regulatory frameworks, they are still going to incur additional costs for their troubles.

Core to the new post-Lehman approach has been implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) in the US, along with the EMIR (European Market Infrastructure Regulation) and MiFID II (Markets in Financial Instruments Directive) initiatives being rolled out across Europe.

MiFID II, which is likely to come into full effect in 2016, is designed, from a trading standpoint, to ensure specified OTC derivatives contracts are migrated onto recognised exchanges.

[The DFA] was seen by many outside the financial industry as a necessary evil that would not only improve the
monitoring of risk

EMIR, meanwhile, is focusing on the clearing and reporting aspects of trading, while in the US, exchange trading, clearing and reporting are contained within Title VII of the DFA.

Risk monitoring
When the DFA was signed into law in July 2010, it was seen by many outside the financial industry as a necessary evil that would not only improve the monitoring of risk within the financial system, as well as the transparency of OTC products, but also provide greater consumer protection more generally. The requirements for central clearing, an increase in capital adequacy requirements and greater regulation of the major banks, were also seen as positive developments for an industry long viewed as being out of control.

Historically, derivatives have allowed users to protect themselves against everything from moves in interest rates to the cost of raw materials. However, more complex derivative products such as swaps have generally been traded away from exchanges. Under the new regime, derivatives must be traded either on open, regulated exchanges, or via similar systems known as swap execution facilities.

Trades, in what amounts to a $600trn market, will be publicly recorded and backed (in most cases) by clearing houses who will ensure traders post money as a cushion against losses – and take fees in the process to ensure trades go ahead. Clearinghouse members will similarly be required to set aside sufficient capital to share the risk.

In part a response to claims that the clearinghouses themselves could end up becoming the next set of ‘too big to fail’ institutions, the US government has provided clearinghouses the guarantee of emergency access to Federal Reserve borrowing if required.

Trades not going through this system will be those by (non-financial) companies that have earned exemptions having proved they’re only involved in hedging risk related to their main business activity. The issue is still shrouded in uncertainty, though – for example, it is still not entirely clear whether companies running commercial leasing operations will be exempt. Of far greater certainty, however, is the likelihood of major institutions passing the increased costs involved down the food chain to customers. Institutions will not only need to spend money to determine how and if they’ll be impacted by the new legislation, they could also incur higher costs in their everyday trading activities, whether they’ve been granted exemptions or not. In addition, if the credit rating agencies opt to re-rate companies due to changed circumstances, any downgrade (if given) will likely impact in the form of higher borrowing costs (to those companies) in the wholesale markets.

In its note Dodd-Frank’s Title VII – OTC derivatives reform – Important answers for board members as companies begin the road to reform, EY argues that the new regulatory requirements will have a substantial impact on the front-to-back transaction work flow for many market participants. Tellingly, the exceptions that may apply to non-financial companies aren’t free passes either, because it will still cost money to determine whether the said exemptions do actually apply or not.

Under the new regime, derivatives must be traded either on open, regulated exchanges, or via similar systems known as swap execution facilities

It adds that while end users may be exempted from clearing and trading requirements for certain transactions, Title VII’s provisions will require modifications to their derivative-related policies and procedures and may have an impact on their working capital and liquidity. For example, the posting, by end users, of collateral under a ‘credit support arrangement’ for their uncleared trades, would require both new documentation and new operational procedures for many. ‘New record-keeping requirements still apply and some end users may need to report the terms of certain trades to ‘swap data repositories’ on a trade-by-trade basis,’ it adds.

EY further notes that while companies must meet certain criteria in order to qualify for available exemptions, they will also need to be aware of any activities that could preclude them from qualifying for these exemptions in the future.

In short, policies and procedures will need to be updated to reflect compliance with the new regulatory requirements, while new tasks will need to be completed on an ongoing, periodic basis that will incur additional costs.

The derivative landscape
At the coalface itself, latest (Q3 2013) available data in the US from the Office of the Comptroller of the Currency showed a total of 1,417 insured US commercial banks and savings associations reporting derivatives activities during the period, an increase of 17 from the previous quarter.

Derivatives activity in the US financial system continues to be dominated by a small group of major institutions – the four large commercial banks (JP Morgan, Citibank, Bank of America and Goldman Sachs) representing 93 percent of the total banking industry notional amounts and 81 percent of industry net current credit exposure.

Meanwhile, notional derivatives increased $6.2trn, or three percent, to $240trn during the period and have now increased for three consecutive quarters (see Fig. 1), after a decline in five of the previous six quarters.

Derivative contracts remain concentrated in interest rate products, which comprise 81 percent of total derivative notional amounts. Credit derivatives, meanwhile, which represent five percent of total derivatives notionals, decreased four percent from the second quarter to $12.8trn.

Derivatives-traded-on-organised-exchanges

If the banking industry looms large in the US, its importance was underscored in October when it won a temporary political victory of sorts after the House of Representatives approved a bill allowing banks to trade certain derivatives.

Critics quickly charged that it represented a rollback of the Dodd-Frank legislation because it undermined the so-called swaps push-out rule that had required banks with access to deposit insurance or the Fed’s discount window to move their derivatives operations to separately capitalised businesses. The rollback would impact equity, some commodity and non-cleared credit derivatives. However, asset-based derivatives – chiefly to blame for the banking system implosion in 2008 – would still be banned.

Indeed, far from reducing risk it would theoretically increase it, given banks would be able to move their derivatives operations to units less subject to regulation, which in turn would impact customers further down the chain, such as farmers. Subsequently, a senate version of the House Bill has failed to advance (though may yet be revisited) and the Federal Reserve has pressed on by completing a rule giving foreign banks the chance to delay having to erect barriers between derivatives trades and their US branches.

The rule, effective January 31, treats uninsured US branches of foreign banks in the same manner as branches that have government backing, including deposit insurance.

In 2013, foreign banks, such as Standard Chartered and Société Générale, had been granted a two-year delay (until July 2015) to implement the rule. US banks, meanwhile, were given a two-year transition period to move their derivatives trading operations out of deposit-taking units.

Like Dodd-Frank, EMIR (European Market Infrastructure Regulation) brings in new requirements aimed at improving transparency and reducing the risks associated with the derivatives markets. It also imposes requirements on all types and sizes of entities that enter into any form of derivative contract, including those not involved in financial services, as well as applying indirectly to non-EU firms trading with EU firms.

EMIR brings in new requirements aimed at improving transparency and reducing the risks associated with the derivatives markets

While EMIR entered into force in August 2012, most of its provisions will only apply once technical standards go live. The new regulation requires entities entering into any form of derivative contract – including interest rate, foreign exchange, equity, credit and commodity derivatives – to report each contract to a trade repository. It also calls for new risk management standards, including operational processes and margining.

All standardised OTC derivatives contracts must be cleared through central counterparties (CCP). However, it is up to ESMA (the European Securities and Markets Authority) – with input from national regulators – to determine which contracts should be defined as ‘standardised’ and therefore subject to the clearing obligation. Meanwhile, non-standardised contracts, i.e. contracts that are not cleared centrally, will be subject to higher capital requirements in order to reduce risk. While much of EMIR’s timetable will be complete by December 1 2015, it does stretch out until December 2019 in the case of margining requirements, for example.

Investor protection
The other major piece of the EU’s regulatory jigsaw, MiFID II (Markets in Financial Instruments Directive), builds on the original MiFID, which came into effect in November 2007, and which had the primary objectives of increasing competition, improving investor protection and allowing for the EU passporting of financial products. Although it pre-dates the Lehman Brothers meltdown, like the FDA and EMIR, the updated MiFID takes account of the post-Lehman landscape by introducing a range of measures, such as improving investor protection.

It also takes account of commitments made by the G20 to improve the transparency and regulation of more opaque markets, such as derivatives. For example, MiFID II grants the authorities the right to demand information from any person regarding positions held in derivative instruments; intervene at any stage during the life of a derivative contract; take action that a position be reduced; and limit the ability of any person or class of persons from entering into a derivative contract in relation to a commodity.

In a further boost to transparency, EU member states will be required to make public a weekly report detailing the aggregate positions held by the different categories of traders for the different financial instruments traded on their platforms.

These transparency requirements will be calibrated for various types of instruments, notably equity, bonds, and derivatives and apply above specific thresholds.

While these limits and restrictions, aimed at targeting excess speculation, will be determined by ESMA and applied on a net position basis, they won’t be imposed on those positions built for hedging purposes by non-financial services firms. However, these exempted firms could still be significantly impacted due to an overall decrease in demand and supply for commodity derivatives as a result of the position limits.

EU member states will be required to make public a weekly report detailing the aggregate positions held by the different categories
of traders

If implementation of MiFID II is on a slower trajectory than EMIR, for example, it will eventually serve as a significant buttress for it.

Business as usual?
The larger question, though, is the degree to which banks on both sides of the Atlantic will be thwarted in their attempts to carry on ‘business as usual’ when it comes to derivatives trading. Given the banks’ propensity for financial innovation, the jury is still out on this, despite the attempted clampdown by regulators.

In theory, the migration of trading to regulated markets, along with increased transparency requirements, should boost competition, cut spreads and foster a higher volume, lower margin, more commoditised market. In the meantime, institutions will continue to absorb additional (and ongoing) compliance costs. It remains to be seen whether these costs will be shunted down the food chain.

However, as EY points out, greater transparency could lead to some investment banks not even bothering to make quotes, thereby driving liquidity away from the market and concentrating the business on a smaller number of pricemakers, which in turn would be less beneficial for buy-side customers. Only time will tell.