April 17, 2024

Fair Game: After a Financial Flood, Pipes Are Still Broken

Many of the nation’s bankers, lawmakers and regulators might well say yes, arguing that safeguards have been put in place to protect against another cataclysm. The voluminous Dodd-Frank law, with its hundreds of rules and new regulatory regimes, was the centerpiece of these efforts.

And yet, for all the new regulations governing derivatives, mortgages and bank holding companies, a crucial vulnerability remains. It’s found in our vast and opaque securities financing system, known as the repurchase obligation or repo market. Now $4.6 trillion in size, it is where almost every financial crisis since the 1980s has begun. Little has been done, however, to reduce its risks.

The repo market, also known as the wholesale funding market, is the plumbing of the financial system. Without it, money could not flow freely, and banks, brokerage firms and asset managers would not be able to conduct their trades and open for business each day.

When institutions sell securities in this market, they do so with the promise that they can be repurchased the next day — hence the “repo market” name. By using this market, banks can finance their securities holdings relatively cheaply, money market funds can invest cash productively and institutions can borrow securities so they can sell them short or deliver them in other types of trades.

Among the biggest participants that provide funding in this market are the money market mutual funds; they lend their cash to banks and other institutions, accepting collateral like mortgage securities in exchange. The money market funds accept a small amount of interest on these overnight loans in exchange for being able to unwind the transactions daily, if need be.

When markets are operating smoothly, most wholesale funding trades are not unwound the next day. Instead, they are rolled over, with both parties agreeing to renew the transaction. But if a participant decides not to renew because of concerns about a trading partner’s potential failure, trouble can arise.

In other words, this is a $4.6 trillion arena operating on trust, which can disappear in an instant.

Both Bear Stearns and Lehman Brothers collapsed after their trading partners in the repo market became nervous and stopped lending them money. For decades, the firms had financed their holdings of illiquid and long-term assets — like mortgage securities and real estate — in the overnight repo markets. Not only was the repo borrowing low-cost, it also allowed them to leverage their operations. Best of all, accounting rules let repo participants set aside little in the way of capital against the trades.

“It was a very unstable form of funding during the crisis and it is still a problem,” said Sheila Bair, former head of the Federal Deposit Insurance Corporation, and chairwoman of the Systemic Risk Council, a nonpartisan group that advocates financial reforms, in an interview. “The repo market is also highly interconnected because the trades are done between financial institutions.”

Some government officials have also voiced concerns recently about risks in the repo market. William C. Dudley, president of the Federal Reserve Bank of New York, referred to the issue in a February speech and Ben S. Bernanke, the Fed chairman, discussed the problems with wholesale funding in a speech in May. The Securities and Exchange Commission published a bulletin in July on the vulnerabilities in the repo market as they relate to money market funds.

Another problem in this market is that only two banks — Bank of New York Mellon and, to a lesser degree, JPMorgan Chase — dominate the business. There used to be a number of clearing banks, as the banks that stand in the middle of the trades are known, but the ranks have dwindled because of industry consolidation.

Unfortunately, these weaknesses remain. “A lot of things have been done to address a lot of specific problems but it doesn’t seem like anything has been done to address the overall problem of institutions losing access to financing,” said Scott Skyrm, a repo market veteran and author of “The Money Noose — Jon Corzine and the Collapse of MF Global.”

Mr. Skyrm said regulators appeared to be tackling the problem through a back door involving capital requirements. For example, new leverage ratios proposed by the international Basel Committee and United States financial regulators would require banks for the first time to set aside capital against the assets they finance in the repo markets. A recent report from J.P. Morgan estimates that under the Basel proposal, the eight largest domestic banks would have to raise $28 billion to $34 billion in capital relating to their repo business.

Banks are likely to consider an alternative: shrinking their repo operations. But the liquidity in this titanic market is essential for the government’s financing of its debt. As the J.P. Morgan report noted, trading volumes in the United States government bond market are closely linked to the amount of repos outstanding. So any contraction in the arena may reduce liquidity in the Treasury market.

SOME experts think that the answer to the repo problem lies in creating a central clearing platform that would allow all participants, not just the banks, to trade directly. Similar platforms have been mandated for derivatives under Dodd-Frank and could be constructed to support the wholesale funding market.

While such an entity would be a too-big-to-fail institution, so are the two banks now serving as intermediaries. And a central clearing platform could be set up as a utility, with officials monitoring transactions and requiring margin payments to finance bailouts in the event of a participant’s default.

Peter Nowicki, the former head of several large bank repo desks, is an advocate of this idea. “Repo is the last over-the-counter market that’s not headed toward central clearing and the Fed should mandate a change,” he said. “Should a large dealer have a problem or the clearing banks have an issue, the repo market could shut down.”

And that, five years after the Lehman collapse, would be an unconscionable failure.

Article source: http://www.nytimes.com/2013/09/15/business/after-a-financial-flood-pipes-are-still-broken.html?partner=rss&emc=rss

European Lawmakers Expand Power of Central Bank

BRUSSELS — European Union legislators on Thursday overwhelmingly approved a law that puts about 150 of the euro zone’s largest banks under the scrutiny of the European Central Bank.

The vote on the legislation, which contains provisions that would give the European Parliament greater oversight of the E.C.B. when the bank assumes its newly won authority, is an important but not final step in a winding process that began in early 2012, during one of the most fevered periods in the euro zone financial crisis.

On the heels of the approval, the so-called Single Supervisory Mechanism is expected to start work during the autumn of 2014 after the European Central Bank conducts a “stress test” on the lenders coming under its aegis. European Union governments still must give the law one final approval though that is expected to be a formality.

The idea is that the central bank would do a better job than national supervisors of nipping financial problems in the bud so that governments do not need to resort to bank bailouts that destabilize the euro and penalize taxpayers.

The approval also was the first step in a multistage process toward a broader, pan-European vision of banking being referred to as a banking union. The next stage of that effort — creation of a single system for shutting down or restructuring banks — is under way. But progress has been slowed by the reluctance of Germany to commit to a unified banking system that could lead to euro zone member nations being responsible for one another’s debts.

Even so, Thursday’s approval was among the “most important votes of this parliamentary term,” Michel Barnier, the European Union commissioner overseeing financial services, told lawmakers after the vote. The law will help to “improve and restore confidence our citizens have in our system, as well as the confidence of the rest of the world in our system,” he said.

Lawmakers had delayed the vote, originally scheduled for Tuesday, amid demands for more power to oversee the central bank.

The approval came only after the president of the Parliament, Martin Schulz, told members that Mario Draghi, the president of the European Central Bank, had agreed to “strong parliamentary oversight” resulting in “a high degree of accountability.”

The Parliament said the central bank had agreed to share detailed records of meetings of the bank supervisory board.

The European Parliament also would share power with European Union governments over the selection of the head and the deputy head of the supervisory board. And the Parliament’s influential economic and monetary affairs committee would have the right to summon the supervisory board’s head for hearings.

The demands by the Parliament, the democratically elected arm of the European Union, were signs of its growing assertiveness.

The new Single Supervisory Mechanism will be compulsory for banks operating in the euro area. European Union countries that are not part of the single currency bloc can still opt to put their banks under the system.

The lawmakers, meeting in Strasbourg, France, voted 559 in favor of making the central bank the single supervisor. Sixty-two members voted against the measure and 19 abstained.

In a separate development on Thursday, a senior European Union court official said in an opinion that one of the rules devised by E.U. officials to stem the euro crisis should be rolled back.

Niilo Jaaskinen, an advocate-general at the European Court of Justice in Luxembourg, said the agency based in Paris that oversees the European Union’s financial markets should not be allowed to ban short-selling in any member state. The British government had challenged the rules, saying they went beyond the jurisdiction of the European Securities and Markets Authority.

Opinions handed down by advocates-general are not binding on judges. But judges do follow the advice in a majority of cases when they make a definitive ruling several months later.

Article source: http://www.nytimes.com/2013/09/13/business/global/european-lawmakers-expand-power-of-central-bank.html?partner=rss&emc=rss

Europe Still Wrangling Over Online Privacy Rules

But because of intense lobbying by Silicon Valley companies and other powerful groups in Brussels, several proposals have been softened, no agreement is in sight and governments are openly sparring with one another over how far to go in protecting privacy.

On Thursday, justice ministers from the European Union’s 27 member states agreed to a business-friendly proposal that what companies do with personal data would be scrutinized by regulators only if there were “risks” to individuals, including identity theft or discrimination.

The ministers debated a proposal that would no longer require companies to obtain “explicit” consent from users whose personal data they collect and process, instead of “unambiguous” consent, which is considered to be a lower legal threshold. And they discussed a proposal on balancing an individual’s right to data protection with other rights, including the freedom to do business.

The ministers deferred discussion of the other most fractious provision, the so-called right to be forgotten. But in recent weeks, public comments by lawmakers and draft language suggested a softening of approach.

“The right to be forgotten has been softened, made more palatable,” said Viktor Mayer-Schönberger, professor of Internet governance at the University of Oxford. “But it is by no means dead.”

Although a final version of the legislation is not expected to be completed for many months, and maybe not until next year, the developments on Thursday are an early signal that the technology industry’s lobbying efforts are gaining some traction.

The lobbying has been “exceptional” and legislators in Europe need “to guard against undue pressure from industry and third countries to lower the level of data protection that currently exists,” said Peter Hustinx, the European data protection supervisor, referring to countries outside of the European Union.

“The benefits for industry should not and do not need to be at the expense of our fundamental rights to privacy and data protection,” Mr. Hustinx warned in e-mailed comments.

In the last year, American technology companies have dispatched representatives to Brussels and issued white papers through industry associations arguing that stringent privacy regulations would hamstring businesses, already suffering from the recession in Europe.

United States government officials have also made trips across the Atlantic to press policy makers like Viviane Reding, the union’s justice commissioner, who drafted the original, strict measures, to press for a less restrictive approach to data privacy.

The industry’s arguments have found a ready audience among some European governments. They include Ireland and Britain, where there are acute worries that the European Union is failing to take advantage of growth opportunities from Internet businesses that might help revive the economy. Apple, Facebook and Google all have European headquarters in Dublin.

“Europe is not sleepwalking into unworkable regulations,” said Richard Allan, Facebook’s director of policy for Europe, echoing a cautious optimism among industry officials about the data privacy law. “What’s positive is that over the last year, the debate has broadened out. There are other voices in the debate, who are saying: ‘Hang on a minute. What about the economic crisis?’ ”

The proposed law would affect most companies that deal in personal information — including pictures posted on social networks or information on what people buy on retail sites or look for using a search engine.

Whatever is enacted would serve as the privacy law in every country in the European Union and potentially have a bearing on other countries drafting data protection laws of their own.

The ministers took up their version of the law on Thursday; another version is under discussion by the European Parliament.

James Kanter reported from Brussels and Somini Sengupta from San Francisco.

Article source: http://www.nytimes.com/2013/06/07/technology/europe-still-wrangling-over-online-privacy-rules.html?partner=rss&emc=rss

Eurogroup Chief Takes Some Blame for Cyprus Crisis

The Dutch finance minister, who announced a tax on Cypriot depositors, almost suggested as much on Thursday. Under a barrage of questions from puzzled and profile-seeking lawmakers in the European Parliament, he accepted blame for agreeing to the controversial tax.

The decision to impose the levy on small depositors “was not stopped by me because it was a compromise which brought together the different interests and the different goals that we share,” said Jeroen Dijsselbloem, president of the group of 17 euro zone finance ministers. “As the Eurogroup president, I will take responsibility.” But he added that the levy was the result of “a joint decision.”

“Whether we are incompetent or not, I’ll leave up to you to judge,” he told lawmakers in a scheduled hearing that turned into an accounting for the turmoil after the announcement last weekend, which spooked savers by taxing their deposits and ignited new doubts about the viability of the euro currency.

Mr. Dijsselbloem conceded that he should have “communicated more right from the start” on why the levy — particularly on deposits under €100,000, or $130,000 — should not be seen as a threat to savers across Europe, and he insisted that there had not been “a huge loss of confidence” in a Union-wide rule that guarantees deposits up to €100,000.

As the Cypriot Parliament, which rejected the weekend bailout package on Tuesday night, prepared to vote on fresh proposals Thursday, Mr. Dijsselbloem said that a levy on deposits was “inevitable” in order to help cover the costs of a bailout, but that a revised arrangement should put a far greater burden on wealthier depositors.

Mr. Dijsselbloem, 46, took over just two months ago as chair of the euro zone group from Jean-Claude Juncker, the Luxembourg prime minister and a seasoned player of European politics, who had held the post since 2005. He cuts a youthful figure among the graying cadres who keep the machinery of the European Union ticking over.

Dutch officials characterize Mr. Dijsselbloem as a gutsy and gracious politician, and he remained consistently cool under sustained attack on Thursday. But he has little experience at top levels of government or European affairs, having assumed the finance portfolio, his first Dutch cabinet post, late last year.

Mr. Dijsselbloem, whose Eurogroup term lasts two and a half years, immediately brought a speedier metabolism to the group by announcing meetings on his Twitter account and calling ministers to Brussels earlier in the day with the goal of ending meetings earlier.

So far, the results are mixed.

The decision on the levy was announced after what participants characterized as a rancorous and chaotic 10-hour meeting that also involved the European Central Bank and International Monetary Fund — two members of the so-called troika that includes the European Commission and helps determine the terms of euro zone bailouts.

Sharon Bowles, a Briton who leads the Economic and Monetary Committee at the European Parliament and introduced Mr. Dijsselbloem on Thursday, said she didn’t want to go “too much on a witch hunt,” but demanded to know how plans to sting small depositors had gotten so far.

“I know that you can get around it calling it a wealth tax or a levy or whatever,” said Ms. Bowles. But many citizens across the Union now had “a lot of concern” and wanted to know, “Is this a new tool in the tool box, are they safe, and what is to be expected?”

Ms. Bowles suggested that Mr. Dijsselbloem’s presentation had been ham-fisted and should have included “more sensitivity” to concerns about whether the €100,000 deposit guarantee was still valid. She noted that Mr. Dijsselbloem waited two days to issue a second, clarifying statement.

Mr. Dijsselbloem conceded errors.

“Of course we should have spent more time, more wording, right from the start, on the distinction between a one-off wealth tax, a contribution, etc., which is a completely different thing” from the Union-wide deposit guarantee system, he said.

Mr. Dijsselbloem’s first challenge has been one of the hardest imaginable.

In seeking a solution for Cyprus, he has butted up against the reluctance of North European nations, including his own, to fork out money to a divided island in the Eastern Mediterranean and to save a banking system that has long benefited Russian investors whom many lawmakers, particularly in Germany, suspect of involvement in money laundering.

The Cypriots have stoked concerns by seeking to protect a banking sector that José Manuel Barroso, head of the European Commission, noted on Thursday was based on “an unsustainable financial system that is basically eight times bigger than” the island’s G.D.P.

Further complicating matters, Nicos Anastasiades, the newly elected Cypriot president, involved in some negotiations on Friday night, flatly refused a proposal to lower the tax on ordinary Cypriot deposit holders, fearing that a higher tax on bigger depositors would see them flee and hollow out the island’s vital financial services sector.

Derk Jan Eppink, a Dutchman elected to the European Parliament from Belgium, needled Mr. Dijsselbloem over allowing the Russians to help decide Cyprus’s fate.

There are tens of thousands of Russian citizens living on Cyprus, and Moscow has a strategic interest in the island because of its proximity to its ally, Syria, and because of newly discovered offshore gas reserves.

The danger now is that “Putin is going to keep you dangling,” Mr. Eppink said, referring to the Russian president, who denounced the weekend bailout proposal. Now, the lawmaker warned, “Russia will exert influence over Cyprus.”

Article source: http://www.nytimes.com/2013/03/22/business/global/eurogroup-chief-takes-some-blame-for-cyprus-crisis.html?partner=rss&emc=rss

Dow Ends 10-Day Climb as JPMorgan Leads Dip

A decline in shares of JPMorgan Chase after the bank was hit by a one-two punch of bad news weighed on the market.

The Dow snapped its 10-day winning streak, when it racked up a series of nominal highs, which are unadjusted for inflation. Stocks have rallied since the start of the year on signs of an improving economy and support for the recovery from the Federal Reserve.

On Thursday, the S. P. 500 ended within 2 points of the closing price of 1,565.15 it hit in October 2007. On Friday, the benchmark index ended the session about 5 points away. For the week, the S. P. 500 rose 0.6 percent. It is up 9.43 percent this year.

Investors could use the pause to consolidate bets before pushing the market higher again, said Clayton M. Albright III, director of asset allocation at Wilmington Trust Investment Advisors in Wilmington, Del.

“I don’t think that one or two days’ movement is really going to change the underlying momentum of this market, which I still think is pretty strong at this point,” Mr. Albright said.

JPMorgan Chase was the biggest drag on the S. P. 500 and one of the biggest weights on the Dow, falling 98 cents, or 1.92 percent, to $50.02.

The Fed told JPMorgan and Goldman Sachs that they must fix flaws in how they determine capital payouts to shareholders, though the central bank still approved their plans for share buybacks and dividends.

A Senate report made public Thursday after the markets had closed also contended that JPMorgan had ignored risks, misled investors, fought with regulators and tried to work around rules as it dealt with mushrooming losses in a derivatives portfolio. A former top JPMorgan official told lawmakers on Friday that she was not to blame for the losses.

Goldman shares, however, recovered from early weakness to gain 82 cents, or 0.53 percent, to $154.84. Shares of rival Bank of America rose 3.8 percent, to $12.57.

The Dow Jones industrial average slipped 25.03 points, or 0.17 percent, to 14,514.11. The S. P. 500 lost 2.53 points, or 0.16 percent, to 1,560.70. The Nasdaq composite index dropped 9.86 points, or 0.30 percent, to 3,249.07.

For the week, the Dow rose 0.8 percent and the Nasdaq gained 0.14 percent. The Dow is up 10.76 percent this year and the Nasdaq is up 7.6 percent.

Supporting the Nasdaq, shares of Apple rose 2.58 percent, to $443.66.

Data from the Lipper service of Thomson Reuters showed investors poured $11.26 billion of new cash into stock funds in the latest week, the most since January.

The benchmark 10-year Treasury note rose 13/32, to 100 3/32, and its yield fell to 1.99 percent, from 2.04 percent late Thursday.

Article source: http://www.nytimes.com/2013/03/16/business/daily-stock-market-activity.html?partner=rss&emc=rss

News Analysis: Euro Zone Plan to Limit Bonuses Rattles Bankers

Europe is pushing to cap bankers’ bonuses, but the bankers, once again, may be a step or two ahead of the rule makers.

Like a thunderclap, the European proposal to limit bonuses is reverberating across the global financial industry. Many bankers say, predictably, that such a step would be disastrous. Europe’s sharpest financial minds, the argument goes, will decamp to New York or Hong Kong at the very moment they are needed to help restart Europe’s economy.

Despite the outcry, which is particularly loud in London, the regulations that are being proposed may not turn out to be onerous at all. Bankers are already talking about ways to get around them. And, in any case, big banks have already been retooling pay practices and trying to keep a lid on compensation. Why? To bolster their profits and share prices.

As is often the case with financial regulation that follows a crisis, the risk is that the new rules, while sensible on paper, will be too late. What is more, they could have some adverse, unintended consequences.

The proposal, reached early Thursday under an agreement by European Union lawmakers and government officials, could mean that, starting next year, the coveted bonuses that many bankers across the 27 countries in the bloc receive will be capped at the level of their annual salaries.

Financial firms would be able to hand out payments that amount to double the salaries with the approval of a majority of shareholders. If bonuses exceed salaries, then a quarter of that additional payout must be deferred for at least five years. European officials say that the proposal is not yet final.

The rule’s rationale is to limit the high-reward, high-risk behavior by bankers that contributed to the global financial crisis. And given the high level of government support that banks receive, the argument goes, a bigger say in corporate governance could help prevent another disaster.

European bankers say the rules will prompt top talent to flee to less restrictive regions. Others indicate they will simply find some ways around the rules.

For example, some analysts say lower bonuses will be offset by higher fixed salaries, which could end up placing even heavier financial burdens on banks and their shareholders than bonuses do, because bonuses are easier to adjust from year to year.

Experts also point out that with higher fixed salaries, it will be harder to claw back bonuses from employees whose trades go bad or who violate laws or regulations. That is because most bonuses now are deferred, and are often paid in the form of stock, so they can easily be retracted.

Big banks, like JPMorgan Chase, Royal Bank of Scotland and Barclays, have used clawbacks in this way. And bankers say that this threat has itself become a powerful deterrent to risky or unethical behavior.

But the restrictions may only further solidify the changing world of banker pay, rather than shake up compensation practices.

Big financial firms once had a lot of leeway over how much they paid their employees, but — on paper, at least — that changed considerably after the financial crisis of 2008. With the industry reeling, the Group of 20 countries set up a framework for regulating pay.

One of the top principles was the tying of bankers’ pay to the amount of risk they took when doing trades. Bankers are typically rewarded compensation for one year’s performance, but they receive the cash or the shares that make up that reward over several years.

In theory, that gives banks the ability to cancel that pay if trades do not meet preset targets. This approach does not necessarily focus on the overall level of pay, however.

Raising base salaries could run straight into the framework that linked pay to the financial performance of trades. By promising to pay an employee a large sum upfront, the bank would essentially loosen the link between compensation and risk.

Connecting the two is the main principle at the heart of regulators’ new approach. If traders make a bad bet, it would be harder for bosses to punish them through their paycheck.

Michael J. de la Merced and Peter Eavis contributed reporting from New York.

Article source: http://www.nytimes.com/2013/03/01/business/global/prospect-of-bonus-caps-rattles-uk-bankers.html?partner=rss&emc=rss

European Leaders Gather for a Trillion-Euro Budget Debate

BRUSSELS — European Union leaders are arriving here Thursday afternoon for the start of a two-day summit where they hope to hammer out a nearly €1 trillion budget to support farming, transportation and other infrastructure, as well as big research projects for the 27-nation bloc.

The budget, negotiated every seven years, represents only about 1 percent of the Union’s total economic output and around 2 percent of total public spending. But it still involves furious horse-trading as leaders focus on getting the best deal for their own countries’ citizens, rather than putting pan-European considerations first.

An attempt to reach an agreement in November failed, creating need for the leaders to take up the budget again now.

Enda Kenny, the prime minister of Ireland, which holds the rotating presidency of the Union, warned Irish lawmakers on Wednesday that the talks in Brussels would probably “continue into the night” and be “long and difficult.”

One of the complications in the current round of negotiations have been calls for budgetary rigor from leaders like Prime Minister David Cameron of Britain, who says the European Union should tighten its belt at a time when many European governments have been compelled to impose stringent budget cuts.

That approach has been met with suspicion, and even hostility, in other parts of the Union.

This week President François Hollande of France said he was willing to make cuts in the Union’s budget, but he pointedly warned Mr. Cameron against cutting too deeply into funds that could generate jobs.

“Why should one country be able to decide in the place of 26 others?” Mr. Hollande said, referring to Britain, as he took questions from lawmakers at the European Parliament.

Mr. Cameron, for his part, prepared for the meeting with a series of telephone discussions, seeking to forge an alliance with other leaders likely to support his aim of curbing the budget.

On Wednesday Mr. Cameron spoke to the German chancellor, Angela Merkel, and the Swedish prime minister, Fredrik Reinfeldt, and followed those discussions with phone conversations Thursday morning with the Dutch prime minister, Mark Rutte, and with Herman van Rompuy, president of the European Council who will be chairman of the summit.

“There are like-minded countries among the 27 and we are going to work with our allies to try to reach agreement,” said a spokeswoman to Mr. Cameron who, in line with British government policy, could not be identified by name. Those allies include the Netherlands, Denmark and Germany, she said, adding that Mr. Cameron was expecting to have further bilateral discussions with leaders including those from Sweden, the Netherlands and Denmark.

But others say that separate phone conversations that Chancellor Merkel has held this week with Union leaders could prove more influential.

After the failure to reach a budget agreement in November, another impasse this time would be a severe embarrassment for the Union’s leaders who have already spent years bickering over how to save the euro. Another failure also would force the Union to use provisional annual budgets costing more and could delay any further chance of a long-term agreement to 2015.

To avoid that, leaders are expected to meet into the early hours of Friday morning to hash out a deal that would limit the cash that governments give the Union a total of about €905 billion, but leave the door open to projects requiring an additional €55 billion.

That formula could be enough to satisfy net contributor countries like Britain, which have been fighting most vigorously to freeze E.U. spending, while also accommodating the demands of countries like France to maintain generous payments for agriculture.

The pressure will be on Mr. Van Rompuy, president of the European Council, the body that organizes summits. to present a blueprint for the budget that leaders can use as a basis for their discussions. Mr. Van Rompuy will invite the leaders to make clear their complaints in a roundtable session rather than be allowed to break into small groups.

This article has been revised to reflect the following correction:

Correction: February 7, 2013

An earlier version of this article misspelled the surname of Martin Schulz, the president of the European Parliament.

Article source: http://www.nytimes.com/2013/02/08/business/global/european-leaders-gather-for-a-trillion-euro-budget-debate.html?partner=rss&emc=rss

Inside Europe: Britain’s Plan to Rework Its Ties to Europe Is Risky

LONDON — Prime Minister David Cameron is leading Britain into a minefield by seeking to renegotiate its terms of membership in the European Union. His gamble could easily end in a bust.

Mr. Cameron postponed a landmark speech on Europe while in Amsterdam last Friday because of the hostage crisis in Algeria, but he had already disclosed the thrust of his plan to try to change London’s relationship with the Union.

Extracts from the undelivered speech, released by his office, show he planned to say that Britain would “drift towards the exit” unless the European Union faced a need for change. That sounded reminiscent of a 1930 British newspaper headline: “Fog in Channel: Continent Cut Off.”

The excerpts did not mention a referendum, which Mr. Cameron has indicated he would schedule for some time this decade after negotiating a “new settlement” with Europe.

His strategy is bound to open a prolonged period of uncertainty in which events could put his preferred option — a looser version of full British membership — out of reach.

First, all of Britain’s 26 European partners must be willing to enter negotiations on Mr. Cameron’s agenda, which despite some expressions of good will is by no means a given.

The countries that use the euro may prefer to press ahead with closer integration without reopening the E.U. treaties, for instance, or they may refuse to unravel past agreements.

Second, to justify significant concessions, they would have to be confident in Mr. Cameron’s ability to win support in a national vote and make an agreement stick over the long term. But many E.U. officials are not convinced that Mr. Cameron’s Conservatives will win a general election in 2015. There is no incentive to give him more than polite sympathy until then.

Third, Britain’s E.U. partners would have to be able to win the consent of their own voters or lawmakers for any special deal with Britain that could involve watering down European social and employment rights and giving London a lock on financial services legislation.

Many are worried that an à la carte Europe would lead other countries to demand ways to opt out.

Finally, the whole process must proceed free from the kind of unpredictable clashes, political accidents or media scares that have dogged London’s ties with the Union for decades.

No rational gambler would bet on all those stars staying aligned.

Britain has renegotiated its terms twice since it joined the European Economic Community in 1973, yet it remains a reluctant, semidetached and often obstructive member.

Prime Minister Harold Wilson won some cosmetic trade concessions that were endorsed in a 1975 referendum on whether to stay in that community. Margaret Thatcher secured a large, permanent annual rebate on London’s budget contribution in 1984, which remains a source of resentment for many E.U. states to this day.

Despite Britain opting out of the single currency and the Schengen zone of passport-free travel, the British public and Conservative politicians have turned ever more hostile to the Union, which is often depicted in the British news media as a malevolent, meddling foreign bureaucracy.

With the exception of several short-lived honeymoons during the construction of the European single market in the mid-1980s and the beginning of a European security and defense policy in the late 1990s, relations have always been fraught.

We are far from Britain’s position 15 years ago, when Prime Minister Tony Blair publicly proclaimed his intention to lead Britain to join the euro zone as soon as economic conditions were right.

For the most part, successive British governments have fought tooth and nail to thwart or slow moves toward “ever closer union,” the goal enshrined in European unity treaties since 1957.

It is no wonder that, despite their leaders’ pledges of support for keeping Britain in the Union, many European officials and diplomats privately wonder if it would be more united and free to advance if Britain could be managed out.

Article source: http://www.nytimes.com/2013/01/22/business/global/britains-plan-to-rework-its-ties-to-europe-is-risky.html?partner=rss&emc=rss

Illinois Governor Seeks Fast Vote on State’s Long-Troubled Pension Systems

Over the years, leaders here have fretted over the shortfall even as they watched it grow and grow, now reaching, by some estimates, $96 billion. Mr. Quinn, a Democrat, has come to describe the situation as the state’s “rendezvous with reality” and Illinois’s own “fiscal cliff.” He has tried — to somewhat mixed results and at least a degree of mocking — to stir up public concern by releasing videos, including one featuring an orange cartoon snake named Squeezy the Pension Python.

“We’re trying to do fundamental pension reform that has confounded 12 governors, 13 speakers of the House and 13 Senate presidents over the last 70 years,” Mr. Quinn said in a recent interview, adding that despite that troubled history, he believed that a meaningful overhaul of the state’s pension systems could be passed through the current legislature in a single week — after lawmakers begin returning to Springfield on Wednesday and wrapping up before newly elected lawmakers are sworn in at noon on Jan. 9.

“We have come to the moment,” Mr. Quinn said.

But whether the calls by Mr. Quinn and other leaders here — not to mention dire warnings from financial ratings agencies — will now suddenly make a difference remains uncertain.

Cartoon snakes aside, the task of shoring up the pension systems is legally and politically vexing, pitting a state legislature that is controlled by Democrats against the wishes of one of the party’s staunchest support blocs, public sector unions. The showdown is certain to ignite regional tensions over the way the pensions of public schoolteachers outside of Chicago are paid for, and could run up against legal barriers with a state Constitution that limits how pensions can be changed in the first place.

Mr. Quinn urged action on an overhaul last year with little success. The sudden push now comes, in part, because of the practical advantages these few days in January offer. More than 30 departing members of the State House and Senate are seen as having little to lose in casting politically difficult votes in their final days in office, and passage now would need only simple majorities rather than larger margins needed at some other points of the legislative calendar.

Still, those same advantages are prompting advocates for a long list of often-divisive causes — same-sex marriage, driver’s licenses for illegal immigrants, the expansion of gambling — to push for votes on their issues before the next legislature is sworn in.

Numerous ideas being weighed in Springfield to lower the pension shortfall would affect state workers, university employees, judges and others; such proposals include cutting cost-of-living increases in retirees’ paychecks and increasing the retirement age for workers and employee contributions to their pensions. Some lawmakers have also called for pension costs for teachers outside of Chicago — traditionally financed by the state — to gradually become the responsibility of local school districts.

Labor leaders have objected to two formal proposals being considered, questioning whether they violate a provision of the state Constitution barring pensions from being diminished or impaired. “Very simply put, all of them are unconstitutional,” Cinda Klickna, president of the Illinois Education Association, said of the proposals.

In recent weeks, a coalition of labor groups said that workers would be willing to increase contributions to their pensions if the state pledged to always make its pension payments, and it suggested closing corporate tax loopholes as a way to raise revenue. Some labor leaders wondered why workers should pay a penalty for the failure of state leaders to properly finance the systems for decades, and complained that in the scramble to pass a bill in a week, they were not being included in the discussions.

“There’s no reason to rush into this, and on the contrary, you want to be deliberate,” said Henry Bayer, executive director of the American Federation of State, County and Municipal Employees Council 31 here.

Among Mr. Quinn’s explicit wishes for a pension systems overhaul is that it have bipartisan support, a notion that may reflect the only practical way such a shift in public sector workers’ pensions could survive in Springfield.

“We should do it in a bipartisan manner — it really needs to get done,” said Tom Cross, the Republican leader in the House. “But they can do it by themselves, you know,” he said of the Democrats, who hold majorities in both chambers. “At the end of the day, they don’t want to irritate the unions.”

And few here seemed willing to say whether Mr. Quinn’s vision of an overhaul by next week is truly realistic. “I don’t think he or I would venture a guess on that,” said Steve Brown, a spokesman for Michael J. Madigan, a Democrat and the longtime speaker of the State House.

Article source: http://www.nytimes.com/2013/01/02/us/illinois-governor-seeks-fast-vote-on-states-long-troubled-pension-systems.html?partner=rss&emc=rss

DealBook: JPMorgan Quarterly Profit Rises 34%

Jamie Dimon, the chief of JPMorgan Chase.Yuri Gripas/ReutersJamie Dimon, the chief of JPMorgan Chase.

JPMorgan Chase on Friday reported a third-quarter profit of $5.7 billion, up 34 percent from a year ago, as the bank showed signs of strength in consumer and corporate lending.

The bank surpassed expectations with earnings of $1.40 a share, compared with $1.02 a year earlier. JPMorgan’s revenue rose to $25.9 billion, up 6 percent from 2011.

As the nation’s largest bank, JPMorgan is often considered a barometer of how rival institutions and the greater economy will fare. With growth across virtually all the bank’s core businesses, the earnings could bode well for the rest of the industry.

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In particular, JPMorgan’s earnings were buoyed by the mortgage business, which is benefiting from a variety of government initiatives. The company originated $47 billion of new home loans and refinancing, up 29 percent from the same period a year earlier. Earnings in the mortgage unit increased by 57 percent.

“We believe the housing market has turned the corner,” said Jamie Dimon, the bank’s chief executive, in a release.

Still, Mr. Dimon tempered expectations for the market. While emphasizing the growth in the bank’s mortgage business, he warned that defaults could continue, along with foreclosures. Mr. Dimon, who has been an outspoken critic of overreaching regulation from Washington, also noted that the housing market could rebound more quickly if lawmakers made certain moves.

“I would hope for America’s sake we start to fix the things that make the mortgage underwriting too tight,” Mr. Dimon said on a conference call with reporters.

Throughout its core lending businesses, JPMorgan showed signs of strength. The commercial banking group reported record revenue. The volume of credit card sales jumped 11 percent over the previous year, bolstering the broader unit. The card services and auto business posted profits of $954 million, up 12 percent.

With the improving credit environment, JPMorgan set aside less money to cover potential losses. In the mortgage banking business, the bank cut the amount of reserves by $900 million. Across the bank, JPMorgan set aside $1.79 billion of such funds, compared with $2.41 billion a year earlier.

JPMorgan is also cleaning up a bungled trade, which has been the focus of investors and regulators for months. The bank disclosed in May that its chief investment office in London had lost billions of dollars in a bet on credit derivatives.

In the second quarter, the bank transferred the remaining credit bets in the chief investment office to its investment banking unit. On Friday, JPMorgan said it “effectively closed” out its derivative position, which was made by the so-called London Whale. With its $449 million loss on the portfolio, the total tally of losses on the trade are around $6.25 billion.

During the conference call, Mr. Dimon played down the prospect of continued losses on its bad bets. “Synthetic credit is a sideshow,” Mr. Dimon said.

Since announcing the loss in May, JPMorgan has been dogged by questions related to the losses, and several high-profile employees have lost their jobs. In the latest challenge for the bank, federal authorities are building criminal cases related to the trading loss, examining calls where JPMorgan employees talked about how to value the bets. The Securities and Exchange Commission is also investigating the trading losses.

In its bid to reassure skittish investors, the bank has broadly reshuffled its executive ranks. For example, Douglas Braunstein, the bank’s chief financial officer since 2010, is expected to give up his position, but remain at the company.

EARNINGS CALENDAR A boom in mortgages is expected to benefit banks’ third quarter profits.

Article source: http://dealbook.nytimes.com/2012/10/12/jpmorgan-quarterly-profit-rises-34/?partner=rss&emc=rss