Business News

Short-selling litigation: An enlightening mistake

Thu, 17 May 2012 15:05:41 +0000

A RARE slip-up by lawyers has helped shed some light on a high-profile legal battle, the details of which some of the largest Wall Street firms have been fighting to keep under wraps. The case concerns allegations of illegal “naked” short selling, where the rules have been tightened several times over the past seven years.In 2007 Overstock sued 11 brokers, alleging that they had caused its share price to fall by helping their clients to naked-short the Utah-based retailer. In a normal short sale, shares are borrowed (or at least “located”) with a broker’s help before being sold. In the naked version, there is no attempt to borrow or locate the stock. This can create “fails to deliver”, where the trade is not settled when it should be, and messes with the laws of supply and demand, allowing shorting to take place beyond the natural limits set by the number of borrowable shares.As the pre-trial discovery period proceeded, Overstock narrowed its focus to two firms, Goldman Sachs and Merrill Lynch, now part of Bank of America. Before the case was set to go to trial in California, however, the judge dismissed it on jurisdictional grounds, ruling that not enough of the alleged wrongdoing had taken place in the state. Overstock appealed and pushed for all of the evidence to be unsealed. The defendants objected. Four media groups, including The Economist,…

Original post by The Economist: Business

JPMorgan Chase: Dimon in the rough

Thu, 17 May 2012 15:05:41 +0000

A BIG but digestible mistake by a financial institution with abundant profits and capital should normally be viewed as the market equivalent of an electric shock, a jolt that leads to smarter behaviour. The response to JPMorgan Chase’s $2 billion (and rising) loss on a position taken by its chief investment office could not have been more highly charged.The loss has reinforced the political appeal of bashing banks, no matter what the facts. Barack Obama went on a TV chat show on May 14th and responded to questions about the loss by implying it would have been blocked under the Volcker rule banning proprietary trading. Given the proposed wording of the rule and the apparent nature of the trade, which seems to have started out as an attempt to hedge risk, that assertion is at best a stretch.Elizabeth Warren, a senatorial candidate in Massachusetts, also jumped on the bandwagon. “Wall Street isn’t going to change its ways until Washington gets serious about strong oversight and real accountability,” ran a campaign ad. Yet JPM is already among the most heavily regulated institutions in America, if not the world. Supervisors have employees climbing all over the bank; they routinely review its credit and business practices. Perhaps to pre-empt criticisms of inept oversight, a string of regulators has nonetheless announced investigations into the trade.Competing financial firms…

Original post by The Economist: Business

Correction: Free exchange

Thu, 17 May 2012 15:05:40 +0000

The programme in West Bengal evaluated by Esther Duflo (Free Exchange, May 12th 2012) was implemented by Bandhan, not BRAC. BRAC devised the original scheme on which Bandhan’s was based. In the same issue („Frontier mentality„), we inadvertently relocated Lebanon to Africa. Sorry. These have both been corrected online.

Original post by The Economist: Business

Japanese banks in Asia: Lending a hand

Thu, 17 May 2012 15:05:40 +0000

THERE are two, potentially overlapping, ways in which Asia’s export-driven economies could suffer from the euro crisis. One is from the slowdown in trade to Europe. The other is the drying up of finance, from trade credit to syndicated loans, extended by euro-zone banks. On neither score is Asia as vulnerable as it was after the collapse of Lehman Brothers in 2008, argued Iwan Azis of the Asian Development Bank, at The Economist’s Bellwether conference in Tokyo on May 16th. One of the reasons is that Japan’s mega-banks have lumbered off their home territory to pick up some of the slack left by the departing Europeans (see chart).This is good news not just for Asia’s exporters. It also shows a rare stroke of boldness by Japan’s big three, Mitsubishi UFJ Group (MUFG), Sumitomo Mitsui, and Mizuho. After pulling back from lending to Asia following the 1998 financial crisis, and then suffering more than a decade of deleveraging by their deflation-sapped customers at home, they can almost smell the predicament of their European peers. Ken Takamiya of Nomura Securities says that in Australia, for…

Original post by The Economist: Business

Accounting in China: Internal controls

Thu, 17 May 2012 15:05:40 +0000

THE big global accounting firms are not having an easy time of it in China. They have been caught up in the accounting scandals that have engulfed many Chinese firms that listed on America’s stock exchanges: on May 9th, for example, America’s Securities and Exchange Commission (SEC) took legal action against Deloitte’s Shanghai arm in a case involving an unnamed Chinese client. The next day Chinese officials unveiled details of a plan that will force foreign partners to hand control of the “Big Four” firms—Deloitte, Ernst & Young, KPMG and PwC—to Chinese colleagues by the end of 2017.At first blush, the SEC seems to be overreaching by pursuing auditors based in China which are already regulated by local authorities. And the localisation scheme appears to be yet another example of the pitch being queered for foreign firms by an overweening Chinese state. But the snap judgments are misleading.The American regulatory mandate abroad arises because many Chinese firms choose to list on America’s exchanges while still using auditors based in China. One such example is Longtop, a Chinese business-software firm that…

Original post by The Economist: Business

Free exchange: Surf’s up

Thu, 17 May 2012 15:05:40 +0000

IN 1900 America had around 500 carmakers; by 1908 it had 200. In 1960 Britain had 16 banks; ten years later it had just six. In both cases, this rapid consolidation came about because of a flurry of mergers. From soft drinks to steelworks, plenty of other industries have seen similar patterns. Mergers happen in waves, so the number of firms collapses suddenly rather than dwindling over time. And the next one may soon crest.

The first merger wave in America peaked in 1899. During that wave, which lasted for five years, 700 mining and milling companies disappeared, along with 500 food retailers. The next four waves in America occurred in the 1920s and 1960s and again in the late 1980s and 1990s (see left-hand chart). Other countries have experienced the same phenomenon.Research suggests that shocks start merger waves. Some firms are quicker than others to respond to the disruption, or suffer less damage. This divergence allows the strong to mop up the weak. As far back as 1937 Ronald Coase, an economist, proposed that technological shifts like the telephone and the telegraph would lead to fewer, larger firms…

Original post by The Economist: Business

Foreign firms in India: Travellers checked

Thu, 17 May 2012 15:05:40 +0000

BEFORE foreign investors came to India, its finance minister remarked recently, “we did not eat lizards.” For all the grumbles one hears about India’s economy, there is hardly a sense of desperation. Those foreign investors keep coming: on May 1st Vodafone’s boss met the government. Despite a corruption scandal, a price war, a huge retroactive tax claim and wildly unpredictable regulations, the mobile-phone firm is committed to its $18.6 billion investment in India, even though its value has fallen by perhaps a third since it was made in 2007.The boss of IKEA is also reported to be meeting the government soon, despite the shabby way the Swedish furniture chain has been treated. Last year the government said it would open India to foreign retailers but then changed its mind. Politicians still fear an onslaught of Ektorp sofas. Walmart scares them even more.Foreign bosses are persistent because India is important. In the year to March 2012 foreign direct investment (FDI) was about $50 billion, a record, said Anand Sharma, the commerce minister, on May 7th. Proof, he said, that India is one of the world’s best places for foreign firms.Whether he is right matters. India aims to fund its current-account deficit mainly by attracting sticky flows of FDI. Unless oil prices slump, the deficit this fiscal year may balloon to $75 billion, a hefty 4% of GDP. Already the rupee has…

Original post by The Economist: Business

Airlines in ex-Yugoslavia: Balkan unity?

Thu, 17 May 2012 15:05:40 +0000

EASTERN EUROPEAN airlines are sick. Fuel is dear, their markets are small and budget airlines are poaching their passengers. Most eastern European airlines lose money. Malev, Hungary’s flag carrier, went bankrupt in February. To avoid a similar fate, four Balkan airlines are considering a novel strategy: flying together.The idea is not officially on the agenda when the bosses of Croatia Airlines, Montenegro Airlines, Serbia’s Jat and Slovenia’s Adria meet in Montenegro on May 19th. But it will be discussed behind closed doors. All are in debt and losing money, but between them they have many profitable routes. Serving the scattered Balkan diasporas ought to be lucrative.Zoran Djurisic, the boss of Montenegro, says that before Yugoslavia collapsed, it represented a market of 10m passengers a year, of which 7m flew with JAT or Adria. Now, 11m people fly to or from the seven ex-Yugoslav states each year, but only 4m use the four carriers meeting in Montenegro. Bosnia’s B&H airlines has only one functioning plane. Kosovo, with a large diaspora, has no domestic airline. And Macedonia’s MAT went bust in 2010.Mr Djurisic, who called the summit, says that in the short run the four airlines must co-operate to cut costs. He hopes that, in five to eight years, they might create “a single airline for this whole area, including Bosnia, Macedonia and Kosovo”. Vladimir Ognjenovic, the…

Original post by The Economist: Business

Mediaset: End of an era

Thu, 17 May 2012 15:05:40 +0000

BABEL TV, a niche channel on Sky Italia, a pay-TV platform owned by Rupert Murdoch, airs worthy programming for immigrants. Recent shows include “Invitation to Dinner”, a reality show where an immigrant cooks for a native Italian. Such serious fare may become more common. Silvio Berlusconi is no longer prime minister and Mediaset, his cleavage-flaunting media group, may be fading.Mediaset’s three main free-to-air channels currently attract 36% of total television viewership. (RAI, a state broadcaster, has another 40%.) Mediaset’s dominance of television advertising is even more striking. It wins 62% of the €4.3 billion ($5.5 billion) spent on television ads each year, a far higher portion than leading broadcasters in other big European markets.Scantily clad showgirls, Mediaset’s speciality, may not be the only reason. Rivals contend that Mr Berlusconi’s political clout helps Mediaset. Sky Italia, its main competitor, has long complained about regulatory and political decisions that have gone against it. In recent years pay television has been hit with a sharp tax increase and restricted in the amount of advertising it can carry. The changes hurt Mediaset far less than Sky, since Mediaset operates mainly in free-to-air television.Stockpickers have noticed that Mr Berlusconi is no longer in power. Mediaset’s shares have fallen by nearly half since late October last year, when…

Original post by The Economist: Business

Love, Korean-style: Two’s company

Thu, 17 May 2012 15:05:40 +0000

Let’s swap emoticons

SOUTH KOREANS take romance seriously. Lovers are expected to swap sweet nothings many times a day and woe betide the clod who forgets a “100-day anniversary”. Some pairs dress in “couple style”, in the same garish red sweater and blue jeans combo, for instance. Small wonder that a Korean firm has created a social network for couples.VCNC’s app is called “Between”. It creates a private space for two people, in which they can share photographs and special memories, chat in real time and exchange any number of cute “emoticons”: smiley faces, winks, hearts and so on. Though revolting to singles, Between is a hit. Since its launch in November, more than 560,000 Koreans have fallen for it. This comes despite VCNC spending virtually nothing on marketing. Park Jae-uk, the firm’s boss, claims another 200,000 users abroad, divided between China, Japan and North America.Between is part of a trend towards intimacy in social networking. Some Facebook users are fed up with the torrent of “friend” requests from people they barely know. Others resent being tagged in embarrassing…

Original post by The Economist: Business