Posts Tagged ‘UBS Group’

China Can’t Meet ‘Draconian’ U.S. Demands, Says Ex-Goldman Exec

January 7, 2019

“China has proven it can build infrastructure very quickly and there are merits to this model,” he said. Meanwhile “the U.S. government can be shut down over a wall.”

Photographer: Bloomberg/Bloomberg

China has moved quickly to meet “reasonable demands” from the U.S. to help end the ongoing trade war but shouldn’t dismantle its governance model as some in U.S. President Donald Trump’s administration want, former Goldman Sachs China chairman Fred Hu said Monday.

Lower taxes on automobile imports and a new law banning forced technology transfers were sincere efforts by Beijing to resolve a U.S.-China trade conflict that has roiled markets for almost a year, Hu said at an annual conference on Greater China organized by UBS Group AG. Hu, founder of the investment firm Primavera Capital Group, is also on the board of UBS.

Trade officials from the two nations will meet in Beijing this week for the first face-to-face negotiations since the U.S. President Trump and Chinese President Xi Jinping agreed in December to a 90-day truce. The standoff has led to factories seeing orders slump in both countries. American farmers are hurting as is Apple Inc., while Chinese markets ended 2018 with the world’s worst stock rout.

While China has made taken some steps, it cannot and should not meet “aggressive and draconian” demands from some of the more hawkish Trump advisers such as dismantling the entire Chinese model of state-led capitalism, according to Hu. He added that instances of forced technology transfer were “very rare” in his multi-decade experience in advising overseas companies operating in the Asian country.

The Chinese style of state-led development has proved effective in reducing poverty and building public infrastructure, said Hu. “China has proven it can build infrastructure very quickly and there are merits to this model,” he said. Meanwhile “the U.S. government can be shut down over a wall.”


Huawei Executive’s Arrest Stirs Fears About Corporate Travel

December 8, 2018

China could retaliate by targeting U.S. executives, analysts say; ‘Do you want to be the one that tests it?’



The arrest of a prominent Chinese technology executive traveling overseas sparked concerns that American executives may be vulnerable to retaliation, with some experts advising a reconsideration of travel plans.

Canadian authorities on Dec. 1 arrested Meng Wanzhou, the chief financial officer of Huawei Technologies Co. and daughter of the cellular-technology giant’s founder, at the request of U.S. officials following her arrival at a Vancouver airport. Canada is one of more than 100 countries that have extradition treaties with the U.S.

Huawei said it isn’t aware of any wrongdoing by Ms. Meng and that the company complies with laws and regulations everywhere it operates.

Some diplomats, policy experts and lawyers in both China and the U.S. said the arrest could add a confrontational and personalized dimension to bilateral tensions and raised the possibility that the Chinese would retaliate.

“Do you want to be the one that tests it?” said James Lewis, a senior fellow at the Center for Strategic and International Studies, a Washington think tank.

Rather than target American executives, China could choose to take a different tack. As the Trump administration has escalated its trade fight this year, Beijing has sought to portray itself as more fair, rule-abiding and business-friendly than the U.S.

In response to questions about possible retaliation, a Chinese Foreign Ministry spokesman, Geng Shuang, said in a regular briefing Friday that “China always protects the legitimate rights and interests of foreigners in China according to the law, but I believe certainly they should abide by Chinese laws and regulations.”

Chinese authorities in recent years have arrested and prosecuted foreign business executives in high-profile cases involving the pharmaceutical, commodity, gaming and financial industries—some arising amid tense bilateral relations with the home country of the executives’ companies. Authorities have also used travel bans to prevent foreigners involved in disputes or investigations from leaving the country.

In October, authorities in Beijing barred a wealth manager for UBS Group AG from leaving under circumstances the woman, the Swiss bank and local officials have declined to discuss. At the time, UBS advised certain bankers to postpone all but essential travel to China.

Huawei’s importance to China’s technology sector has sparked concern that employees of U.S. tech companies could be especially vulnerable if tensions escalate. A senior executive at a large U.S. tech company said it was premature to speculate on whether his company would change its travel policies.

“It’s really important that people in the U.S. government think about this four steps ahead, and not just one move at a time,” he said. “If we see a world where people are not just arresting tech executives but seeking their extradition from third countries, you could create a lot of uncertainty for the ability of business leaders to travel around the world.”

Huawei has figured prominently into friction between Washington and Beijing, with the U.S. claiming the company and its equipment could be used by China for spying—an allegation Huawei officials have consistently dismissed.

The U.S. has alleged that Ms. Meng lied to banks about the Chinese company’s ties to a subsidiary that did business in Iran. An attorney representing Ms. Meng at a bail hearing in Vancouver Friday told a court “there is no evidence” that the business, Skycom Tech, was a subsidiary of Huawei during the period in question. The attorney said the idea that Ms. Meng engaged in fraud will be “hotly contested.”

Julian Ku, a professor at Hofstra University School of Law who studies Chinese legal issues, said that, even if the arrest isn’t political, “the concern I have is China won’t see it that way and they’ll trump up some political thing they just came up with this week to punish an executive there.”

Going after a high-profile target like Apple Inc., he said, would be a risky strategy. “They could really scare off foreign companies,” he said. “It would be dramatic, but also costly.”

An Apple spokesperson declined to comment on the company’s travel policy for China.

The State Department issued a travel advisory earlier this year urging Americans to exercise increased caution in China “due to the arbitrary enforcement of local laws.” The alert said that U.S. citizens visiting and residing in China have faced arbitrary interrogation or detention on grounds of “state security.”

Around the world, a number of prominent executives have been detained at airports in recent months. In November, Japanese authorities arrested auto-industry titan Carlos Ghosn at a Tokyo airport on suspicions of financial misconduct. Mr. Ghosn remains in custody, but he hasn’t been charged, and, according to Japanese broadcaster NHK, has denied wrongdoing.

In January 2017, Federal Bureau of Investigation agents arrested Oliver Schmidt, a Volkswagen AG executive, at Miami International Airport as he prepared to fly home to Germany. He was later sentenced to seven years in prison and ordered to pay a $400,000 fine for participating in the German auto maker’s emissions fraud.

Victor Shih, associate professor at University of California, San Diego’s School of Global Policy and Strategy, said executives traveling to China “should always be somewhat concerned.” He said Ms. Meng’s arrest should further put executives on their guard. “Until this gets resolved,” he said, “it’s an additional risk.”

Write to Te-Ping Chen at


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Stock Market Bulls Re-Emerge After Bruising Selloff

November 9, 2018

Analysts warn recent turbulence is likely to continue despite cheaper valuations and expectations for further profit growth



Money managers are doubling down on stocks after a brutal October selloff, as cheaper valuations and the potential for continued profit gains help support a rebound among equities.

UBS Group AG said Thursday it was increasing its exposure to stocks, including in the U.S. and emerging markets, while asset-management giant BlackRock Inc., BMO Global Asset Management and QMA, the $128 billion quant-equity arm of PGIM, Prudential Financial ’sinvestment-management business, all recently reiterated their preference for stocks.

The pronouncements come as many investors are still trying to determine where major indexes are headed after stocks around the world lost about $4.5 trillion in value last month. For many, the selloff was swift and jarring as companies were in the midst of reporting another quarter of robust profit growth.

But cheaper valuations and expectations that profits will continue to grow in 2019, even without the benefit of a massive corporate tax cut, have supported asset managers’ moves to increase exposure to stocks.

The outlook has contributed the S&P 500’s 3.5% gain so far in November, bringing the broad index up nearly 5% for the year as it continues to work on recouping its October losses.

“Although we are mindful of the potential risks of adding to stocks against such a backdrop, we believe the scale of the selloff has been disproportionate,” UBS’s investment strategists wrote in their note, saying they would increase exposure to stocks after paring back their position in July.

“Even if we use our own relatively cautious estimates on earnings for 2019, which include the expected impact of tariffs in the U.S. and Asia and a modest slowdown in headline economic growth, valuations still look favorable,” the bank added.

The S&P 500 is trading near its lowest average valuation of the year. The broad index is currently trading at 16 times forward earnings, down from 17 times at the end of the September, according to FactSet. Meanwhile, the risk premium among U.S. shares stands at 4.6%, above the long-term average of 3.2%, UBS added.

“With solid corp earnings, valuations have become more attractive given the selloff over the last month, removing a potential headwind,” said Jon Adams, an investment strategist at BMO, which is overweight U.S. equities.

In emerging markets, equities are now trading at 11 times future earnings, a discount to the 30-year average of 13 times, according to UBS. European stocks are trading at 12 times future earnings, versus a long-term average of 16 times.

Still, analysts warn that the recent turbulence among stocks is likely to continue. Trade negotiations are ongoing and investors expect further volatility ahead of and during the Group of 20 summit later this month in Argentina, where President Trump and Chinese President Xi Jinping are expected to meet.

Expectations for political gridlock in the U.S. with a divided Congress could also send shockwaves through the stock market in the near term, several analysts said.

Despite those issues, UBS said “the value offered by global stocks justifies tolerating the potential for higher volatility, and we expect markets to move higher.”

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Write to Michael Wursthorn at

iPhones and Children Are a Toxic Pair, Say Two Big Apple Investors

January 8, 2018

Two activist shareholders want Apple to develop tools and research effects on young people of smartphone overuse and addiction

Teens took a group selfie with a smartphone in New York’s Times Square on Dec. 1.
Teens took a group selfie with a smartphone in New York’s Times Square on Dec. 1. PHOTO: DREW ANGERER/GETTY IMAGES

The iPhone has made Apple Inc. and Wall Street hundreds of billions of dollars. Now some big shareholders are asking at what cost, in an unusual campaign to make the company more socially responsible.

A leading activist investor and a pension fund are saying the smartphone maker needs to respond to what some see as a growing public-health crisis of youth phone addiction.

Jana Partners LLC and the California State Teachers’ Retirement System, or Calstrs, which control about $2 billion of Apple shares, sent a letter to Apple on Saturday urging it to develop new software tools that would help parents control and limit phone use more easily and to study the impact of overuse on mental health.

The Apple push is a preamble to a new several-billion-dollar fund Jana is seeking to raise this year to target companies it believes can be better corporate citizens. It is the first instance of a big Wall Street activist seeking to profit from the kind of social-responsibility campaign typically associated with a small fringe of investors.

Adding splash, rock star Sting and his wife, Trudie Styler, will be on an advisory board along with Sister Patricia A. Daly, a nun who successfully fought Exxon Mobil Corp. over environmental disclosures, and Robert Eccles, an expert on sustainable investing.

The Apple campaign would be unusual for an activist like Jana, which normally urges companies to make financial changes. But the investors believe that Apple’s highflying stock could be hurt in coming decades if it faces a backlash and that proactive moves could generate goodwill and keep consumers loyal to Apple brands.

“Apple can play a defining role in signaling to the industry that paying special attention to the health and development of the next generation is both good business and the right thing to do,” the shareholders wrote in the letter, a copy of which was reviewed by The Wall Street Journal. “There is a developing consensus around the world including Silicon Valley that the potential long-term consequences of new technologies need to be factored in at the outset, and no company can outsource that responsibility.”

Obsessive teenage smartphone usage has sparked a debate among academics, parents and even the people who helped create the iPhone.

Two teenage boys use smartphones in Vail, Colo., in June 2017.
Two teenage boys use smartphones in Vail, Colo., in June 2017. PHOTO: ROBERT ALEXANDER/GETTY IMAGES

Some have raised concerns about increased rates in teen depression and suicide and worry that phones are replacing old-fashioned human interaction. It is part of a broader re-evaluation of the effects on society of technology companies such as Google and Inc. and social-media companies like Facebook Inc. and Snap chat owner Snap Inc., which are facing questions about their reach into everyday life.

Apple hasn’t offered any public guidance to parents on how to manage children’s smartphone use or taken a position on at what age they should begin using iPhones.

Apple and its rivals point to features that give parents some measure of control. Apple, for instance, gives parents the ability to choose which apps, content and services their children can access.

The basic idea behind socially responsible investing is that good corporate citizenship can also be good business. Big investors and banks, including TPG, UBS Group AG and Goldman Sachs Group Inc. are making bets on socially responsible companies, boosting what they see as good actors and avoiding bad ones.

Big-name activists increasingly view bad environmental, social or governance policies as red flags. Jana plans to go further, putting its typical tools to work to drive change that may not immediately pay off.

Apple is an ambitious first target: The combined Jana-Calstrs stake is relatively small given Apple’s nearly $900 billion market value. Still, in recent years Apple has twice faced activists demanding it pare its cash holdings, and both times the company ceded some ground.

Chief Executive Tim Cook has led Apple’s efforts to be a more socially responsible company, for instance on environmental and immigration issues, and said in an interview with the New York Times last year that Apple has a “moral responsibility” to help the U.S. economy.

Apple has shown willingness to use software to address potentially negative consequences of phone usage. Amid rising concerns about distracted driving, the company last year updated its software with a “do not disturb while driving” feature, which enables the iPhone to detect when someone is behind the wheel and automatically silence notifications.

The iPhone is the backbone of a business that generated $48.35 billion in profit in fiscal 2017. It helped turn Apple into the world’s largest publicly listed company by market value, and anticipation of strong sales of its latest model, the iPhone X, helped its stock rise 50% in the past year. Apple phones made up 43% of U.S. smartphones in use in 2016, according to comScore , and an estimated 86 million Americans over age 13 own an iPhone.

Jana and Calstrs are working with Jean M. Twenge of San Diego State University, who chronicled the problem of what she has dubbed the “iGen” in a book that was previewed in a widely discussed article in the Atlantic magazine last fall, and with Michael Rich of Harvard Medical School and Boston Children’s Hospital, known as “the mediatrician” for his work on the impact of media on children.

The investors believe both the content and the amount of time spent on phones need to be tailored to youths, and they are raising concern about the public-health effects of failing to act. They point to research from Ms. Twenge and others about a “growing body of evidence” of “unintentional negative side effects,” including studies showing concerns from teachers. That is one reason Calstrs was eager to support the campaign, according to the letter.

The group wants Apple to help find solutions to questions like what is optimal usage and to be at the forefront of the industry’s response—before regulators or consumers potentially force it to act.

The investors say Apple should make it easier and more intuitive for parents to set up usage limits, which could head off any future moves to proscribe smartphones.

The question is “How can we apply the same kind of public-health science to this that we do to, say, nutrition?” Dr. Rich said in an interview. “We aren’t going to tell you never go to Mickey D’s, but we are going to tell you what a Big Mac will do and what broccoli will do.”

Write to David Benoit at

Appeared in the January 8, 2018, print edition as ‘Investors Prod Apple On Child iPhone Use.’

Takeovers Roar to Life as Companies Hear Footsteps From Tech Giants

November 20, 2017

Corporate deals hit a near-record $200 billion this month as CEOs battle Amazon, Facebook, Google and others

Investment bankers have gotten used to being asked by worried retail-industry chief executives to pitch takeover ideas aimed at fending off Inc.

Now the fear has spread to media, health care and many other sectors, where CEOs dread the breathtaking competitive advancements made by not just Amazon but also Facebook Inc., Alphabet Inc.’s Google and Netflix Inc.

The result is an explosion of mergers and acquisitions. So far this month, about $200 billion of deals have been announced in the U.S., according to Dealogic. November is on pace to be the second-biggest deal-making month since the firm began tracking them in 1995.

Three recent deals, either under discussion or awaiting approval, show in especially dramatic fashion the impact of Amazon and other technology giants on M&A activity.

CVS Health Corp. could reach a definitive agreement by the end of November to buy Aetna Inc. for more than $66 billion, uniting two businesses with little operational overlap, according to people familiar with the timing.

The possibility that Amazon could enter the pharmacy business jolted CVS executives toward buying a health insurer, which could help CVS make better use of its retail space, people familiar with the matter said. The drugstore operator could sell insurance, draw blood and provide other services that Amazon can’t easily replicate.

Image result for cvs signs, photos

AT&T Inc.’s planned purchase of Time Warner Inc. for about $85 billion would combine a huge but slowing mobile-phone business and the DirecTV satellite-television operation with a content machine that includes Time Warner, the owner of CNN and HBO.

Randall Stephenson, AT&T’s chief executive, said the point of the AT&T-Time Warner deal is to create a bulwark against Facebook and Google, which have built “incredibly strong” positions in the advertising market. “That’s what this is about,” he said at an event sponsored by the New York Times.

In a statement to The Wall Street Journal, he added: “Tech companies are spending billions creating content and distributing it directly to consumers.” AT&T’s planned purchase “gives Time Warner the opportunity to do the same, across multiple platforms and with ad-supported models that cost consumers less.”

Here comes Netflix

Walt Disney Co.’s expression of interest in a big chunk of 21st Century Fox Inc.’s assets was prompted in part by the success of Netflix, the fast-growing streaming video company, according to people familiar with the situation. Fox has a stock-market value of about $57 billion.

Disney’s cable channels are under pressure from cord-cutting. In August, the company announced it will launch two online subscription streaming services with sports, movies and TV programming directly to consumers. Disney said it would yank its future movies from Netflix.

In the fall, Disney approached Fox about a potential deal that would provide Disney with more content and distribution assets to better compete against Netflix. (Fox and News Corp, the Journal’s parent, share common ownership.)

“Our goal here is to be a viable player in the direct-to-consumer space, space that we all know is a very, very compelling space to be in,” Disney Chairman and CEO Robert Iger told analysts and investors this month.

The Disney-Fox talks stalled, but they appear to have unleashed a wider auction for Fox assets, including its movie studio and international unit. Those assets have drawn interest from Comcast Corp., Verizon Communications Inc., Sony Corp. and possibly other potential buyers, according to people close to the discussions.

Every M&A cycle looks different. The boom that crested in 2015 was largely defined by deals between direct competitors trying to gain scale and cut costs. Some firms wanted to lower their taxes by moving their headquarters outside the U.S. as part of a deal.

The number of deals that were agreed to and valued in the double-digit billions of dollars broke records. The signature deal of that era was the megamerger, such as Pfizer Inc.’s agreement to buy Allergan PLC for about $150 billion. The Obama administration later blocked the deal between the two drugmakers.

Before the financial crisis, leveraged buyouts dominated the deal environment. During the turn-of-the-century tech surge, companies rushed to make deals that were seen as offensive moves to launch them into new lines of business, like the ill-fated merger of AOL and Time Warner.

So far this year, the dollar volume of U.S. mergers totals $1.22 trillion, down 18% from the same period in 2016, according to Dealogic. Investment bankers attribute the decline largely to uncertainty surrounding federal antitrust and tax policy.

Big and bigger

The recent surge is a sign that other drivers of deal activity are now in control. Debt remains readily available and cheap, and high stock prices often go hand-in-hand with mergers and acquisitions. Shareholders have rewarded buyers in a number of recent deals, which tends to encourage more and is reminiscent of 2015.

The biggest deals in the current crop are every bit as big as those from the last boom. Earlier this month, Broadcom Ltd. launched an unsolicited offer for rival chip maker Qualcomm Inc. valued at $105 billion. It would be the biggest technology takeover ever. Qualcomm rejected the offer and said it undervalued the company.

It’s still hard for many companies to agree to a merger or takeover, let alone win approval from shareholders and regulators. Sprint Corp. and T-Mobile US Inc. recently abandoned their monthslong effort to combine the third- and fourth-largest wireless carriers in the U.S. Disagreements over control and other issues doomed the talks.

Time Warner shares have tumbled since the Journal reported that the Justice Department could sue to block the AT&T deal.

Still, interest in deal-making is strong and growing at many companies where competition from technology giants such as Amazon looms.

Those tech giants have done few big deals themselves lately, with the exception of Amazon’s purchase of Whole Foods Market Inc. in August for roughly $13 billion.

Containers of fresh pineapple sit on display at a Whole Foods Market February 22, 2007 in San Francisco, California. Whole Foods Market Inc. announced that it plans to purchase Wild Oats Market Inc. for an estimated $565 million in hopes of competing with larger food chains that have started to introduce organic and prepared foods to their inventories.

Investment bankers who advise grocery chains say they were flooded with phone calls after the Whole Foods deal was announced. Amazon’s ability to essentially enter the business overnight sent shivers through an industry already plagued by razor-thin profit margins. CEOs in other sectors wondered if theirs would be next. An Amazon spokesman declined to comment.

“I see it across nearly every industry,” says Steven Baronoff, Bank of America Merrill Lynch’s chairman of global M&A. “These companies are causing CEOs to realize that maybe their stand-alone, status-quo option is not as viable.”

Few analysts or investors saw it coming when the Journal reported in October that CVS was in talks to buy Aetna.

CVS has a vast network that includes more than 9,700 retail locations, more than 1,100 walk-in medical clinics and a pharmacy-benefit operation that serves as a middleman between drug companies and insurers. Aetna is one of the largest health insurers in the U.S.

Amazon looms

Fear of increasing competition from Amazon helped spur CVS to look far afield for a merger partner, according to people familiar with the matter.

Amazon wasn’t the only impetus. CVS sees Aetna as a way to reshape the retailer amid a broader shake-up of the health-care industry and bolster the combined company’s leverage in negotiations with drugmakers while giving it a precious stockpile of health data.

CVS had begun weighing a possible transaction with Aetna before a CNBC report suggested in May that Amazon was considering entering the pharmacy business, people familiar with the matter said.

As more shopping moves to Amazon and other online retailers, CVS already was wrestling with what to do with its stores. The possibility that Amazon could become a rival in CVS’s main business increased its desire for a deal that would diversify the company further and help repurpose its drugstores, the people said.

CVS’s board told management to size up the potential effect of Amazon’s entry into the pharmacy business and devise a counterattack, people familiar with the matter said. Separately, CVS’s marketing department and outside advisers considered whether a partnership with Amazon would make sense. That analysis concluded that an alliance was unlikely due to Amazon’s historical resistance to such deals.

Other parts of the health-care industry are feeling the heat from Amazon, too. Health-care services companies long thought they were largely immune to threats from Amazon, but the e-commerce company began adding such supplies to its website a few years ago.

Tongue depressors

After starting with low-margin surgical gloves, tongue depressors and other items, Amazon now sells the top 20 basics that every doctor or dentist needs, says Jim Forbes, vice chairman in investment banking at UBS Group AG.

He says some health-care services companies have begun to explore ways to diversify into different lines of business, including M&A deals, as a result of pressure from Amazon.

Carl’s Jr. has a cheeky, if-you-can’t-beat-them-join-them attitude about Amazon. The fast-food chain, owned by CKE Restaurants Holdings Inc., tweeted last month: “HEY @Amazon BUY US. Srsly. For real. Let’s do this. Let’s change the future of eating!! #AmazonBuyUs.”

There are no signs that Amazon is interested in acquiring Carl’s Jr.

–Sharon Terlep and Drew FitzGerald contributed to this article.

Image result for Carl's Jr., photos

‘Project Scalpel’: Behind Big Banks’ Plan to Save $2 Billion

March 27, 2017

Wall Street firms discuss joint venture to process transactions

Banks’ hope is that ‘Project Scalpel’ eventually would trim at least $2 billion from their annual spending.

Big banks have cut more than $40 billion of costs since the financial crisis.

They aren’t done.

While prospects for revenue growth at banks have brightened since the election, a handful of the biggest firms are considering ways to slash still more from their back-office budgets. One effort, dubbed “Project Scalpel,” is aimed at cutting the administrative and operational costs involved with processing stock and bond transactions after a trade is struck, according to people familiar with the discussions.

Talks around this effort are at an early stage but so far have included a number of banks, such as Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp., the people said. If the idea materializes, it could create a joint venture that allows banks to share trade processes and technology.

The hope is this would be widely used by the industry and eventually trim at least $2 billion from the banks’ annual spending, the people said. In the past, banks viewed their ability to efficiently process trades, and handle transfers of ownership and associated activities like dividend and interest payments, as a competitive advantage.

Now, the processes and systems around these functions have become commoditized. Competing banks have redundant systems handling the same functions.

A joint system would eliminate the duplication, spread the cost burden and make it simpler to upgrade technology, according to the people familiar with the discussions. It also would free up resources for revenue-generating investments, they said.

There are plenty of obstacles. These include questions around data privacy and ownership stakes in the venture, and whether to use existing technology systems or build a new one. Some bankers also fear a for-profit service provider could eventually grow too powerful and boost fees.

Despite the hurdles, banks for decades have cooperated in other areas such as creating transaction venues and building clearinghouses. The recent discussions represent a possible extension of that cooperation and underscore that banks remain obsessively focused on keeping expenses in check.

The six biggest U.S. banks have eliminated more than 100,000 jobs since 2009, while shedding less-profitable business lines and trimming compensation.

This is the result of a relatively fallow period on Wall Street in which banks’ returns on equity have been held down by a combination of more-stringent capital requirements, lackluster economic growth, superlow interest rates, and more subdued trading.

On cost-cutting, “much of the easy stuff is done,” said Mark Alexander, a former senior technology and operations executive at Bank of America. “Banks now need to think about doing something different and transformational.”

European banks including Barclays PLC and Société Générale SA have said they are working with technology providers to outsource and share some trading back-office operations in Europe.

Financial-services firms spend as much as $24 billion annually on post-trade operations, or what is known in the industry as activity that occurs “south of the trade blotter,” according to a study by technology firm Broadridge Financial Solutions Inc.

A shared-processing venture would potentially allow banks to cut or reassign thousands of back-office workers. Each firm would keep scores of risk managers, programmers and traders focused on making trades happen.

Joint ventures involving rival banks are complex, though. A couple of years ago, about 10 banks tried to create just such a post-trade with clearinghouses including the Depository Trust & Clearing Corp. Those talks foundered because there were too many different views about what the finished product would do and the technology that would underpin it.

The latest idea is to narrow the group. The Scalpel discussions also involve a recently formed investment firm called Motive Partners, the people familiar with the matter said. Motive is led by bank-technology veterans including Morgan Stanley and Goldman alum Stephen Daffron,  and former Fidelity National Information Services Inc. executives Rob Heyvaert and Michael Hayford.

Banks have previously collaborated on combining back-office functions. In the 1970s, securities firms created a clearinghouse to reduce and then computerize mountains of paper trading tickets. The result was the DTCC, which handles trillions of dollars of securities transactions daily.

Over the past two years, collaboration has accelerated again. Banks recently created joint utilities for things like anti-money-laundering compliance procedures and sharing basic underlying information about stocks and bonds.

“The banking industry must find ways to structurally lower costs,” UBS Group AG Chief Executive Sergio Ermotti told analysts last year. He says the way to achieve it is “closer collaboration between financial institutions.”

JPMorgan settles bribery case for US$264 million after probe into Chinese hires

November 18, 2016

The US investment bank ran a programme known internally as ‘Sons & Daughters’ that hired 100 children and relatives of influential Chinese officials and businesspeople over a seven-year period

By Alun John and Nectar Gan
South China Morning Post

Friday, November 18, 2016, 12:39 p.m.

JPMorgan Chase & Co will pay US$264 million to the US government to settle allegations that it had hired the children and relatives of influential Chinese policymakers or officials in the hope of winning their business, the US Securities & Exchange Commission said in a statement on Thursday.

The settlement ends a three-year investigation into whether the hiring practice at the New York-based bank had breached US anti-bribery laws. At issue was whether JPMorgan was systematically targeting to hire the relatives of China’s most influential officials, policymakers and business leaders to curry favour with the country’s decision makers.

JPMorgan will pay the SEC US$130 million. It is also expected to pay US$72 million to the Justice Department and US$61.9 million to the Federal Reserve Board of Governors, according to the SEC statement.

“JPMorgan engaged in a systematic bribery scheme by hiring children of government officials and other favoured referrals who were typically unqualified for the positions on their own merit,” Andrew Ceresney, director of the SEC Enforcement Division said in the statement. “JPMorgan employees knew the firm was potentially violating the Foreign Corrupt Practices Act (FCPA), yet persisted with the improper hiring programme because the business rewards and new deals were deemed too lucrative.”

A pedestrian walks past the Shanghai office of J.P. Morgan Chase in China.
A pedestrian walks past the Shanghai office of J.P. Morgan Chase in China.PHOTO: ZUMA PRESS

The regulator said JPMorgan’s Asia unit created a hiring programme that allowed clients and influential government officials to recommend potential job candidates. Those referred under the programme bypassed the firm’s normal hiring practises and received “well-paying, career-building JPMorgan employment,” the SEC said.

About 100 interns and full-time employees were hired over a seven-year period. JPMorgan won or retained business resulting in more than US$100 million in revenues because of the programme, the SEC said.

“We’re pleased that our cooperation was acknowledged in resolving these investigations,” JPMorgan’s spokesman Brian Marchiony said in an emailed statement. “The conduct was unacceptable. We stopped the hiring program in 2013 and took action against the individuals involved. We have also made improvements to our hiring procedures, and reinforced the high standards of conduct expected of our people.”

JPMorgan hired the friends and family members of executives at three-quarters of the major Chinese companies that it took public in Hong Kong, The Wall Street Journalreported in December 2015, citing the bank’s document compiled as part of the US government investigation.

The programme lasted from 2004 to 2013 and was known internally as “Sons & Daughters”, according to the Journal report.

US investigations into JPMorgan have claimed the jobs of at least two senior bankers. Todd Marin, vice chairman of Asia-Pacific investment banking, and Catherine Leung, vice chairwoman of Asia investment banking, left the bank in February 2015, Dow Jones Newswires reported.

No individual JP Morgan employees were named in the SEC statement, nor did the US authorities announce any criminal charges against either the bank or its employees.

The Chinese officials whose children or relatives are tied to JPMorgan’s hiring programme read like a Who’s Who of China’s policymaking and businesses.

Gao Jue, son of commerce minister Gao Hucheng, got a job at the bank. Tang Xiaoning, son of the China Everbright Group’s president Tang Shuangning, also worked at the bank, in addition to also having worked at Goldman Sachs and Citigroup.

Some officials also referred relatives or their friends’ children to intern at the bank.

Peter Pang, deputy chief executive of the Hong Kong Monetary Authority, referred his son to JPMorgan for an internship in 2006.

Charles Li, current chief executive of the Hong Kong Stock Exchange, referred the daughter of former China Securities Regulatory Commission’s official Huang Hongyuan to an internship while he was chairman of the bank’s China business from 2003 to 2009.

JPMorgan wasn’t the sole bank to be investigated. HSBC, Goldman Sachs & Co., Credit Suisse, Deutsche Bank and UBS have all been queried about their hiring practices.

“In financial services, if you have relationships and you can use those to get business, that’s part and parcel of investment banking, particularly in the current difficult business environment,” said John Mullally, director of Hong Kong & Shenzhen financial services at Robert Walters. “China is not particularly different from what happens elsewhere in the world.”

Earlier this year, Libya’s sovereign wealth fund alleged that Goldman Sachs tried to influence the fund’s then-deputy chief into purchasing some derivatives from the bank by granting an internship to his younger brother. However, a London judge ruled in October that the offer did not have a material impact on the Libyan Investment Authority’s decision to enter into the trades.

China’s Communist Party, which has been cracking down on corruption since President Xi Jinping took the reins of power, doesn’t bar cadres’ children from seeking jobs in foreign banks.

“These children are not public servants themselves, and can have full freedom when it comes to employment,” said Zhuang Deshui, an anti-corruption expert at Peking University. “But the officials are required to fill in where their spouses and children work in the reports about their personal information that they hand to the party.”

Related on Peace and Freedom:

Former Chinese Premier Wen Jiabao’s extended family has controlled assets worth at least $2.7 billion, the New York Times reported, citing corporate and regulatory records and unidentified people familiar with the family’s investments.


Xi Jinping “Furious” with China’s Internet Media Bosses After Embarrassing Mistakes Go Global on the Internet — Expect Harsher Censorship in China

The Associated Press
August 19, 2016

BEIJING (AP) — The Chinese government is holding chief editors of news websites personally liable for content, months after several portals posted material that was seen as embarrassing to President Xi Jinping.

State media reported Thursday that the new rules placed responsibility squarely on head editors, saying news sites must monitor their content 24 hours a day to ensure “correct orientation, factual accuracy and appropriate sourcing.” The new rules were discussed at a meeting in Beijing this week convened by the government’s Cyberspace Administration of China (CAC) and involving 60 media executives and industry scholars, according to the official Xinhua News Agency.

The rules reflect the Xi administration’s efforts to ratchet up control over Chinese media and cyberspace, which has touched both traditional state propaganda outlets and private sector media companies.

In this April 29, 2015 photo, a woman uses her smartphone near a booth for the Chinese Internet company Tencent at the Global Mobile Internet Conference in B...

In this April 29, 2015 photo, a woman uses her smartphone near a booth for the Chinese Internet company Tencent at the Global Mobile Internet Conference in Beijing. Chinese state media reported Thursday, Aug. 18, 2016, that new rules hold chief editors of news websites personally liable for content, months after several portals posted material that was seen as embarrassing to President Xi Jinping. Tencent, one of China’s most popular websites, fired its top editor after a July headline mistakenly said Xi delivered a “furious” – instead of “important” – speech commemorating a Communist Party anniversary. (AP Photo/Mark Schiefelbein)


Although efforts by Chinese internet censors to purge sensational rumors, unwanted political content and pornography are nothing new, a series of high-profile gaffes in recent months have intensified scrutiny of news portals, which are seen by the majority of the 700 million Chinese internet users.

Tencent, one of China’s most popular websites, fired its top editor after a July headline mistakenly said Xi delivered a “furious” — instead of “important” — speech commemorating a Communist Party anniversary. The two words are similar in the Chinese spelling system.

In March, an online portal called Wujie published — inadvertently apparently — a letter calling for Xi’s resignation and warning of dangers to his personal safety. The post garnered widespread attention among Chinese political observers and led to the detention of several writers and editors.

The Chinese leader made a high-profile tour of state media outlets in February to demand closer adherence to the Communist Party line, while the CAC, the country’s internet censor, investigated the editorial operations of eight web companies several months later.

Chinese web companies are permitted only to republish content produced by closely regulated traditional media outlets under longstanding, though loosely enforced, media laws. But many private digital firms, including Tencent and Sina — internet companies publicly listed on the Shenzhen Stock Exchange and the Nasdaq, respectively — have formed teams of journalists that pursue original reporting and operate with a degree of relative freedom.

Participants at this week’s meeting with regulators were told to avoid publishing to “attract eyeballs” and operate their portals with “responsibility and restraint” to avoid spreading disorder and potentially endangering national security, according to Xinhua.

Regulators also directed the company executives to study Xi’s recent remarks calling for closer online information management.


Peace and Freedom Comment: By tightly controlling the media, China tries to hide its poor performance on rule of law, torture, human rights, public safety, government corruption and the freedoms now enjoyed by much of the rest of the world. By constantly demanding closer adherence to the Communist Party line, more people have taken an interest in what is really going on in China. Xi Jinping, as powerful as he may be, is encouraging free thought which will likely eventually destroy him.


President Xi Jinping of China, center, was applauded when he visited the newsroom of People’s Daily in Beijing. Credit Lan Hongguang/Xinhua, via Associated Press


Britain’s Queen Elizabeth speaks to Commander Lucy D’Orsi during a garden party at Buckingham Palace in London on May 10, 2016. PHOTO by REUTERS

China’s state run media seems to be attacking other nations with renewed energy lately….


Bookseller Lam Wing-kee (C) takes part in a protest march with pro-democracy lawmakers and supporters in Hong Kong, China June 18, 2016.

China blocks VPN services that let users get round its ‘Great Firewall’ during big political gatherings in Beijing

 (Contains many  links to articles on the Chinese human rights lawyers)

JP Morgan Chase to pay $374m to settle China bribe scandal — Much More Is Known About China, The Practice of Hiring ‘Princelings,’ Global Systemically Important Banks (GSIBs)

November 18, 2016


J.P. Morgan Settlement Lays Bare the Practice of Hiring ‘Princelings’

So-called Sons and Daughters program in Asia sought to hire well-connected offspring to win business

A pedestrian walks past the Shanghai office of J.P. Morgan Chase in China.
A pedestrian walks past the Shanghai office of J.P. Morgan Chase in China. PHOTO: ZUMA PRESS

A decade ago, a J.P. Morgan Chase & Co. managing director in Asia sent an email to the investment-banking team: “As you know, the firm does not condone the hiring of the children or other relatives of clients or potential clients…In fact, the firm’s policies expressly forbid this,” the director wrote.

Within two years, however, the team had begun orchestrating the hiring of dozens of relatives of powerful government officials in Asia with the express purpose of winning business, U.S. authorities said Thursday. The bank had created a separate channel to get unqualified applicants through the hiring process, and it later began tracking profits from any subsequent business awarded because of the hires, they said.

One candidate was described in an email as “the worst [business analyst] candidate they had ever see[n].” Another had a “napping habit” that would be an “eye-opening experience” for New York colleagues. In both instances, the candidates were hired, according to criminal and civil settlements the bank reached with the Justice Department, the Securities and Exchange Commission and the Federal Reserve.

All told, the bank hired around 100 applicants referred by government officials at Chinese state-owned firms, and earned at least $35 million as the result of a “corrupt scheme,” according to the settlement documents. The agreement ends a multiyear, high-profile investigation that had called into question whether the U.S. government was threatening to criminalize standard business practices in some countries.

J.P. Morgan agreed to pay $264 million and admitted it violated the Foreign Corrupt Practices Act—which bars U.S. firms from paying bribes to officials of foreign government in an effort to win business—through its hiring of so-called princelings. The Wall Street Journal had reported the outlines of the settlement in July. The 75 pages of settlement documents released on Thursday lay bare how the bank had set up a formal structure—dubbed the Sons and Daughters program—to leverage internships and win hundreds of millions of dollars in deals.

Between December 2010 and March 2011, one Asia-based employee maintained a spreadsheet that linked hires to specific clients, and tracked revenue attributable to those hires, the documents show.

“Some have argued that employment of a child, friend or relative could not possibly induce a foreign official to take action. Today’s action demonstrates the falsity of that assertion,” SEC enforcement director Andrew Ceresney told reporters.

“The so-called Sons and Daughters Program was nothing more than bribery by another name,” said Leslie Caldwell, the head of the Justice Department’s criminal division.

J.P. Morgan spokesman Brian Marchiony said in a statement the bank is “pleased that our cooperation was acknowledged in resolving these investigations” and that the conduct was “unacceptable.” Mr. Marchiony said the bank stopped the hiring program in 2013 and “took action against the individuals involved.” He added that the bank is still committed to the Asia-Pacific region. The agreement said more than two dozen employees had been let go or disciplined in connection with the investigation.

Several other banks are also under investigation for similar hiring practices, including Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc.,HSBC Holdings PLC, Morgan Stanley and UBS Group AG, according to regulatory filings. The banks declined to comment. Mr. Ceresney said he expected additional cases to follow the J.P. Morgan settlement.

The settlement documents cite emails in which J.P. Morgan officials discuss similar tactics they believed other banks were using.

In 2011, one employee asked for a hire to be switched into a permanent job, despite the person’s “undeniable underperformance” because the “deal is large enough [and] we are pregnant enough with this person, that we’d be crazy not to accommodate her father’s wants,” according to an email cited in the agreement.

Also in 2011, one employee asked whether one hire did substantive work. “We get real [investment banking] productivity from [the referral hire] or is she a photocopier[?]” “Photocopier,” was the response.

The agreements also show executives questioning why the bank wasn’t doing a better job of leveraging hires.

“We have more [lines of business] in China therefore in theory we can accommodate more ‘powerful’ sons and daughters that could benefit the entire platform,” one of the bank’s managing directors in Asia said in 2009.

In a 2008 exchange, one executive responded when asked about a prospective hire related to a potential client preparing for an IPO: “A couple of points…to discuss and agree prior to any offer being made to her: how do you get the best quid pro quo from the relationship upon confirmation of the offer?”

Write to Aruna Viswanatha at


JP Morgan Chase has agreed to pay US$264 million (S$374 million) to settle a foreign bribery case dubbed the “princelings case”

“JPMorgan executives belong in jail, but instead shareholders will foot the bill for what one government official described as ‘systemic bribery'”


WASHINGTON (AFP) – JP Morgan Chase has agreed to pay US$264 million (S$374 million) to settle a foreign bribery case dubbed the “princelings case” in which the bank gave prized jobs to friends and relatives of Chinese officials, US officials announced on Thursday.

The multinational bank, now the world’s largest by market capitalisation, admitted to taking in more than US$100 million after hiring candidates referred by clients, including by senior Chinese officials in positions to steer business to the bank.

Despite the announcement, shares in the JP Morgan were trading higher on Thursday afternoon, up 0.6 per cent shortly after 2000 GMT (4am Singapore time) in New York

“Awarding prestigious employment opportunities to unqualified individuals in order to influence government officials is corruption, plain and simple,” Mr Leslie Caldwell, chief of the US Justice Department’s criminal division, said in a statement.

The case drew attention for its focus on the use of hiring as a form of bribery.

Over a seven-year period, between 2006 and 2013, JP Morgan Chase hired nearly 100 employees and interns referred by government officials at 20 different state-owned businesses in China, officials said.

Despite the large settlement, Mr Bart Naylor of policy watchdog group Public Citizen, complained that the bank “has escaped true accountability”.

“JPMorgan executives belong in jail, but instead shareholders will foot the bill for what one government official described as ‘systemic bribery’,” he said in a statement.

Officials at a regional subsidiary in Hong Kong created a client job referral programme sometimes known internally as the ‘Sons and Daughters Program’ to hire candidates of strategic value to the bank, according to the Justice Department.

By 2009, senior executives had refined the programme to seek candidates with “directly attributable linkage to business opportunity”, federal prosecutors said, citing internal JP Morgan Chase records.

In one example, JP Morgan won a leading role in the initial public offering for an unnamed state-owned Chinese company after hiring a candidate who bank executives knew was unqualified, for a job in New York.

The candidate had been referred in 2009 by a senior Chinese official who promised the business in return for the hire.

Candidates hired in this programme typically received salaries equivalent to entry-level investment bankers despite performing mainly minor tasks such as proof-reading, according to the Justice Department.

Authorities brought no criminal charges against the bank as part of the settlement and took no enforcement action against individuals. However, a JP Morgan Chase subsidiary in Hong Kong fired six employees and disciplined 23 others for their roles in the misconduct, the Justice Department said.

In the settlement, JP Morgan Chase agreed to pay US$134 million in fines to the Justice Department and Federal Reserve, as well as another US$130 million in to the Securities and Exchange Commission.

Since 1977, the United States has criminalised the practice bribing foreign officials to win business under a Watergate-era statute known as the Foreign Corrupt Practices Act.

Other countries have adopted similar laws but none enforces it as aggressively as the United States.

US enforcement of the law has broadened in recent years, with authorities in Washington extending their reach to more industries and scrutinising a greater range of business practices for corruption.


JPMorgan fined for hiring kids of China’s elite to win business


The Simple Reason JPMorgan Chase Could Soon Make a Lot More Money

If the incoming Trump administration follows through on its promise to “dismantle” the Dodd-Frank Act, it could translate into substantially higher profits for JPMorgan Chase.

Nov 16, 2016 at 2:44PM


It’s still too early to know exactly what the incoming Trump administration will mean for the nation’s biggest banks, but if it follows through on its designs to deregulate the financial industry, then JPMorgan Chase (NYSE:JPM) could be on the verge of making a lot more money. There are a number of reasons for this, but the biggest all of could come from changes to bank capital requirements.

The regulatory pendulum

In the wake of the financial crisis, regulators scaled up the type and amount of capital that banks have to hold against the assets on their balance sheets. It was believed that by doing so, banks could survive the next crisis without needing to be bailed out by the government.

Not only would banks have to hold more capital than they did previously, but the quality of the capital would need to be better. No longer would debt instruments and even certain types of preferred stock count as loss-absorbing capital. That role could now only be filled by common equity.

The impact was particularly severe for the nation’s biggest banks — those like JPMorgan Chase, Bank of America, and Citigroup. Because these banks are now designated as global systemically important banks, or GSIBs, they’re obligated to hold even more capital than their smaller, simpler peers in the regional banking space.

JPMorgan Chase must maintain a so-called GSIB surcharge of an added 3.5 percentage points’ worth of high-quality capital relative to its risk-weighted assets. Bank of America and Citigroup’s surcharges come out to 3.0 percentage points above non-systematically important banks.

The net result is that capital requirements have more than doubled for large banks. Going into the crisis, JPMorgan Chase faced a Tier 1 capital ratio of 4%. Now, after all the current rules are phased in, that figure is 10.5%.


JPMorgan Chase alone holds so much capital now that it could absorb the combined losses of America’s 31 largest banks under the most extreme version of the Federal Reserve’s latest stress test. As CNN noted earlier this year:

The Federal Reserve’s stress tests estimate that JPMorgan alone would lose $55 billion in a worst-case economic situation. But the government has forced big banks to stock up on lots of capital. JPMorgan now has $350 billion of loss-absorbing resources. That means the banking giant actually has enough capital to swallow the losses of the next 30 banks, which is estimated at $167 billion.

Because this reduces the amount of leverage banks like JPMorgan Chase, Bank of America, and Citigroup can use, it weighs directly on their bottom lines. It’s one of the main reasons that banks are struggling nowadays to earn their costs of capital by generating returns on equity above 10%.

Higher liquidity requirements, too

To make matters worse, regulators also now require banks to keep a larger share of their assets in high-quality liquid assets than they did before the 2008 crisis. The thought process is that these assets can be readily converted to cash in the event of a bank run, similar to what brought down Bear Stearns and Washington Mutual in 2008.

At the end of the third quarter, JPMorgan Chase had $539 billion worth of high-quality liquid assets. To put that in perspective, that’s only slightly less than the $587 billion market cap of Apple, the largest company by market cap in the United States.

The problem is that highly liquid assets yield less than loans. The $409 billion that JPMorgan Chase kept as an average balance in deposits at other banks last quarter yielded only 0.44% on an annualized basis. Meanwhile, its average loan yielded 4.23%.

This means that for every $100 billion that JPMorgan Chase allocates to highly liquid assets as opposed to loans, it forgoes almost $1 billion worth of interest income each quarter. That’s a lot of money when you consider that the New York-based bank tends to earn around $6 billion on a quarterly basis.

Dismantling Dodd-Frank

The good news for JPMorgan Chase is that all of this could change under a Trump administration, which has promised to “dismantle” the provisions of the Dodd-Frank Act that empowered regulators to raise both capital and liquidity requirements.

Trump’s camp has been notoriously scant with details about possible changes to financial regulations (or, for that matter, anything), but we can get a sense for their thinking by looking at the Financial CHOICE Act proposed by Republican Representative Jeb Hensarling, who’s purportedly being considered for Treasury Secretary in the incoming administration.

The central component of the proposed legislation would be to exempt banks from many of the heightened capital and liquidity requirements so long as they maintain a base level of capital. One could argue that this would reduce the soundness of the banking sector, as it almost certainly would, but there’s little doubt that it’d serve as a potent stimulant to banks’ bottom lines, and few more so than JPMorgan Chase.

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Deutsche Bank’s Settlement with U.S. Justice Department Could Strain Bank’s Capital, Lead to Rights Issue

September 16, 2016

Even an amount significantly smaller than the $14 billion demanded could cause problems

The twin tower skyscraper headquarter offices of Deutsche Bank in Frankfurt. The U.S. Department of Justice has proposed the bank pay $14 billion to settle various probes into mortgage securities it sold during the financial crisis.
The twin tower skyscraper headquarter offices of Deutsche Bank in Frankfurt. The U.S. Department of Justice has proposed the bank pay $14 billion to settle various probes into mortgage securities it sold during the financial crisis. PHOTO: MARTIN LEISSL/BLOOMBERG NEWS

Sept. 16, 2016 11:01 a.m. ET

A legal settlement half the size of the U.S. Justice Department’s $14 billion opening bid in a high-stakes mortgage-securities case would exceed Deutsche Bank AG’s provisions for all legal matters and strain its already thin capital cushion.

Even a $4 billion settlement “would put questions around capital position,” J.P. Morgan Chase & Co. analyst Kian Abouhossein said in a research note earlier this week.

That was before The Wall Street Journal reported Thursday that the Justice Department recently opened settlement negotiations with Deutsche Bank asking for $14 billion to resolve claims stemming from the German lender’s precrisis sales of residential mortgage-backed securities.
Late on Thursday, in response to the Journal report, Deutsche Bank confirmed the government’s $14 billion settlement proposal. The bank has “no intent” to pay the Justice Department claims “anywhere near the number cited,” it said in a statement. “The negotiations are only just beginning,” it said, adding that the lender expects an outcome in line with previous settlements at “materially lower amounts.”

Analysts and investors likewise expect an eventual settlement, if there is one, to be significantly lower than the Justice Department’s opening bid. Shareholders were rattled nonetheless. Deutsche Bank’s shares fell more than 8% as of Friday afternoon, and European bank stocks broadly declined.

Based on its roughly $18.9 billion market value, Deutsche Bank would be coughing up more than one-fifth of its current market cap if it were to pay a $4 billion Justice Department settlement.

Deutsche Bank held $6.2 billion in litigation reserves as of June 30. Analysts had been estimating a Justice Department settlement somewhere between $2 billion and $5 billion, while acknowledging that they don’t have much transparency into the process. Previous deals that banks have struck in parallel mortgage-backed securities probes aren’t necessarily a reliable indicator, lawyers say.

RBC Capital Markets banking analyst Fiona Swaffield had estimated a $4 billion settlement for Deutsche Bank. Should it end up being higher, she wrote Friday, Deutsche Bank’s capital targets would appear increasingly unrealistic.

According to Ms. Swaffield’s estimates, every additional $1 billion in surprise legal costs would whittle 0.24% off of Deutsche Bank’s common equity tier one capital ratio, a key measure of financial strength.

Deutsche Bank is aiming to boost its tier-one capital ratio to at least 12.5% by 2018, from 10.8% as of mid-year. That’s a tough task for the lender, already beset by sagging profits and economic headwinds, without billions of dollars in unexpected legal costs.

J.P. Morgan’s Mr. Abouhossein in a follow-up note Friday said a settlement higher than $4 billion would pressure Deutsche Bank to beef up its reserves for other outstanding legal matters, “thus putting capital at risk.”

But Deutsche Bank’s success navigating its thorny field of challenges—including deep cost-cutting and asset sales—depends not just on meeting financial targets, but also on market perception, Mr. Abouhossein said.

“The ultimate issue you have to take into account is the confidence that clients and other banks have in Deutsche Bank,” he said. “I think the market at the moment is quite rational. There’s no broken confidence.”

A key reason, in his view, is that Deutsche Bank could raise $10 billion in a rights issue, a move that would be painful to shareholders but possible, were it necessary.

Deutsche Bank executives have said this year they have no plans to raise capital anytime soon. They have emphasized efforts to put longstanding legal issues behind the bank, which investors say would remove uncertainties around capital.

Write to Jenny Strasburg at


The Wall Street Journal
Updated Sept. 16, 2016 9:07 a.m. ET

The U.S. Justice Department proposed that Deutsche Bank AG pay $14 billion to settle a set of high-profile mortgage-securities probes stemming from the financial crisis, according to people familiar with the matter, a number that would rank among the largest of what other banks have paid to resolve similar claims and is well above what investors have been expecting.

The figure is described by people close to the negotiations between Deutsche Bank and the government as preliminary, and they said it came up in discussions between the bank and government lawyers in recent days. It hasn’t been previously disclosed. Deutsche Bank is expected to push back strongly against it, the people said, and it is far from clear what the final outcome will be.

Shares in the bank fell 8% Friday morning.

It is also unclear how much of that amount is proposed to be paid in cash, and how much could be in consumer relief, as past deals have been structured.

The Justice Department routinely opens high-stakes civil settlement talks with a tough posture, posing higher numbers than it might expect eventually to win, even from banks eager to close long-running probes, lawyers involved in current and similar negotiations say.

After the publication of this story by The Wall Street Journal, Deutsche Bank confirmed in a statement that the Justice Department’s opening bid is $14 billion and that the bank has been invited to submit a counterproposal.


“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited,” the bank said. “The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.”

Deutsche Bank hasn’t said what it has set aside in anticipation of a settlement. The bank held €5.5 billion ($6.2 billion) in total litigation reserves as of June 30, and said it expected to set aside more before the end of the year.

Privately, Deutsche Bank lawyers have suggested that the bank views between $2 billion and $3 billion as a reasonable cost to close out the Justice Department’s mortgage-related probe quickly, according to people familiar with internal bank discussions and signals communicated to investors. One factor in Deutsche Bank executives’ thinking is that the lender already paid $1.9 billion in 2013 to settle some U.S. claims tied to mortgage-backed securities, some of the people said.
A hefty settlement would be bad news for a clutch of big European lenders who also face potential penalties or litigation in connection with a U.S. crackdown on the selling and packaging of residential mortgage-backed securities before 2008.

“The point with coming in with a number like that is to set expectations, to express the seriousness of the conduct from the department’s perspective, and to signal that, in order for negotiations to continue, the financial institution is going to have to put a significant amount of money on the table as a counter,” said a former Justice Department official who was involved in previous mortgage-securities settlement negotiations. The former official also said the final number could be less than half the opening bid.
Big U.S. banks have paid multibillion-dollar settlements for allegedly misleading investors about the quality of such securities.

The largest so far has been $16.65 billion paid by Bank of America Corp. in 2014. Goldman Sachs Group Inc. agreed in April to a $5 billion deal that included a $2.4 billion cash penalty plus a pledge of $1.8 billion to help struggling borrowers and communities hard hit by the 2008 collapse in home prices.

The banks have been accused of bundling poorly-underwritten home loans and selling them as safer securities than they knew them to be, ultimately helping to fuel a bubble in rising home prices and exacerbating the consequences of the subsequent collapse.

Citigroup Inc., J.P. Morgan Chase & Co. and Morgan Stanley together paid more than $23 billion in penalties and consumer help to settle claims.

In all of these settlements, the banks acknowledged improper behavior.

The European banks that remain under investigation and could face penalties besides Deutsche Bank, include Barclays PLC, Credit Suisse Group AG, UBS Group AG and Royal Bank of Scotland Group PLC, according to bank disclosures and people familiar with the matter.

The banks haven’t commented on any potential settlements other than to say they are cooperating with the investigations. Some have set aside money for mortgage investigations as part of their broader legal provisions, without specifying allocations, according to company filings.

Lawyers working with various banks say they consider Deutsche Bank a test case in this next round of anticipated settlements, which come at a sensitive time for European banks already thin on capital and slogging through job cuts and restructuring. Lawyers for both Deutsche Bank and Barclays have met or are meeting with Justice Department officials this month to discuss a potential pact, according to people familiar with the talks. Some lawyers involved have expressed a desire to reach a deal by the November presidential election, the people said.

Barclays CEO Jes Staley and Deutsche Bank CEO John Cryan have both said they are eager to put big-ticket legal matters behind them.

The apparent gulf between figures viewed as palatable to the bank and those posed by Justice Department officials suggests negotiations could still have a long way to go, and could ultimately lead to court battles, the people said.

Government negotiators, for instance, first suggested a $20 billion price tag to both J.P. Morgan and Bank of America before settling on $13 billion for J.P. Morgan and $17 billion for Bank of America.

Analysts have estimated Deutsche Bank alone might pay between $2 billion and $5 billion, based on previous settlements with banks including Goldman Sachs and Morgan Stanley, and Deutsche Bank’s relative size in the precrisis market for packaging and selling residential-mortgage-backed securities.

In June, Barclays banking analyst Jeremy Sigee estimated Deutsche Bank might pay $4.5 billion, and Credit Suisse and UBS might each pay $2 billion. He and other analysts have said settlements ultimately could push Deutsche Bank and Credit Suisse toward capital hikes.

Past settlements haven’t always been tied directly to the size of the business targeted. Citigroup, for example, paid a larger penalty than expected based on its size in the market for residential-mortgage securities. Officials said at the time it was commensurate with the strength of evidence against the bank. Goldman Sachs, Morgan Stanley and Citigroup declined to comment.

U.S.-listed shares of Deutsche Bank fell 5% in after-hours trading after the publication of this story by the Journal.

Write to Aruna Viswanatha at, Jenny Strasburg at and Eyk Henning at


A rights issue is a dividend of subscription rights to buy additional securities in a company made to the company’s existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a non-dilutive pro rata way to raise capital. Rights issues are typically sold via a prospectus or prospectus supplement. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the issuer at a specified price within a subscription period. In a public company, a rights issue is a form of public offering (different from most other types of public offering, where shares are issued to the general public).

Rights issues may be particularly useful for all publicly traded companies as opposed to other more dilutive financing options. As equity issues are generally preferable to debt issues from the company’s viewpoint, companies usually opt for a rights issue in order to minimize dilution and maximize the useful life of tax loss carryforwards. Since in a rights offering there is a No Sale Theory and no change of control, companies are more able to preserve tax loss carry-forwards than via Follow On offerings or other more dilutive financings.

Global Stocks Fall on Oil Price Weakness — Worry grows for the health of the global economy

February 2, 2016

Renewed decline in oil prices triggers a slide in energy shares


An oil pump in Bahrain. The price of oil continues to fall as hopes for a deal on production cuts fade. Photo: Associated Press

Stocks around the world fell Tuesday as sliding oil prices added to concerns about the health of the global economy.

Brent crude oil was down 3.1% at $33.19 a barrel and West Texas Intermediate fell below the $31 mark as hopes for a deal on production cuts faded.

Stocks in Europe and Asia moved lower, while futures pointed to a 0.7% opening loss for the S&P 500. Changes in futures don’t necessarily reflect market moves after the opening bell.

Steep declines in the oil price have hit equity markets hard this year as investors fear it might signal slack in demand from the world’s largest energy consumers.

While low oil prices should boost consumer spending and help companies save on costs, the underlying concern among investors is whether the decline in oil prices and economic weakness in China foreshadow a global recession, said David Donabedian, chief investment officer at Atlantic Trust Private Wealth Management.

While Mr. Donabedian doesn’t believe a global recession is imminent, he expects stocks to struggle to regain traction in the coming weeks given the persistent headwinds around China, oil, and the corporate earnings season.

The Stoxx Europe 600 fell 1.5% halfway through the session, with losses concentrated in the energy and banking sectors.

Adding to the downbeat tone, BP reported a sharp quarterly loss, sending shares in the company down 7.9%, while UBS Group also reported a fall in fourth-quarter net profit.

“People are nervous about global growth,” said Stephen Macklow-Smith, head of European equities strategy at J.P. Morgan Asset Management, noting many of the emerging markets that have struggled this year are also large producers of raw materials.

Falling oil prices recently prompted Nigeria to request emergency funding from the World Bank, while the Russian ruble fell to its weakest ever level against the dollar this year.

Stock markets are likely to continue to move in tandem with the oil price “until clearer direction emerges on the underlying health of the economy,” said Mr. Macklow-Smith.

Earlier, stocks in Asia ended mostly lower. Japan’s Nikkei Stock Average closed down 0.6%, while the commodity-heavy S&P ASX ASX -3.23 % 200 fell 1% after the Reserve Bank of Australia held interest rates steady as expected.

The Shanghai Composite Index, however, climbed 2.3% after China’s central bank injected more liquidity into the financial system ahead of the weeklong Lunar New Year holiday.

Tuesday’s moves followed a flat finish on Wall Street, as falling oil prices cut into Friday’s gains.

After U.S. markets closed, Alphabet reported a surge in profitability at its main Google Internet businesses last year. Shares gained in after-hours trading, helping Alphabet surpass Apple as the most valuable publicly traded company in the world.

In currencies, the dollar was down 0.1% against the yen at ¥120.8230, while the euro was up 0.1% against the dollar at $1.0916 after data showed the eurozone’s unemployment rate continued to edge down.

In metals, spot gold in London was down 0.5% at $1,124.38 an ounce, while the London Metal Exchange’s three-month copper contract was up 0.8% at $4600 a metric ton.

Write to Riva Gold at