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FT SPECIAL REPORT The FT’s Year in Finance

Tuesday December 11 2012 www.ft.com/reports | twitter.com/ftreports

Survivors in the post-crisis world Inside » Law of the jungle Lex in Depth looked at the A turbulent year led to heated debates about the future of the eurozone and of capitalism itself, writes Sarah Gordon valuation of online retailer n the world of finance, the great though, was not the word to describe Page 2 survivor of 2012 is undoubtedly some of the losses caused by financial the , some would say against misbehaviour. UK banks racked the odds. Last January, the Finan- huge provisions – £10bn and counting Fighting back cial Times asked 83 leading econ- – for their misselling of personal pro- Iomists whether they thought the cur- tection insurance. JP Morgan was hit from obscurity rency would survive 2012 “broadly by a $6bn loss due to unauthorised Richard Waters on intact”. Only 43 answered “yes”. Yet, trading by the so-called “ as the end of the year approaches, and whale”. , who lost his tech giants’ fight even if the present calm proves tem- employer UBS $2.3bn, was sentenced for survival porary, the worst of the eurozone to seven years. storm appears to have passed. In the US, the probe into insider Page 2 If the eurozone had broken up, it trading claimed more scalps. Rajat would not have been for want of Gupta, once head of McKinsey, was champions trying to hold it together. sentenced to two years and a $5m fine US cliff­dancing The year has been marked by support- for passing confidential information ive policies – ranging from €1tn in to Galleon Group’s Raj Rajaratnam, loans to the region’s financial system although Mr Gupta remains free pend- assesses the fiscal from the to ing appeal. HSBC, meanwhile, was bailouts of Spain’s wobbling banks, fined $700m for money laundering in challenges facing not to mention repeated last-minute Mexico. But the most far-reaching agreements on Greece’s pro- financial scandal of 2012 was the reve- gramme and the establishment (in lation that Barclays, and other banks, Page 3 principle but not, so far, in practice) had rigged market interest rates, of a -wide banking union. including , the London interbank A turning point was reached in July offered rate, for financial gain. Bar- In defence of when , ECB president, clays’ involvement led not only to a pledged to do “whatever it takes” to large fine but to the departure of its the banks save the euro. The frequent all-night- chief executive, Bob Diamond, and its Regulation can halt ers in Brussels, as well as develop- chairman, Marcus Agius. ments around the region, were cov- This special report gives a flavour progress, says ered by our correspondents and ana- of the FT’s coverage of the continuing Patrick Jenkins lysed by influential commentators upheavals in global financial markets, from inside and outside the FT. of the attempts by politicians and Page 3 Beyond the eurozone, the wider regulators to address it, and of those

discussion over the shape and nature David Bromley contributing to it. There is much of the post-crisis financial world more we could have included – the Libor: aiming remained heated. fol- slowdown in ’s economy; lowed the FT’s series on Capitalism in voted down the remuneration package of Xstrata. The deal had a difficult factor in the failure of another of the Apple’s rise to become the world’s for a fix Crisis with his suggestions for seven of Sir , and Aviva’s gestation; ’s final offer was a year’s proposed deals – the £36bn most valuable company; and commen- Doubts at the ways to fix capitalism, kicking off a Andrew Moss and David Brennan of result of talks brokered by , tie-up of EADS and BAE Systems. tary from the world of academia as fierce debate on the letters pages. AstraZeneca both stepped down, the former UK prime minister, and Bogged down in wrangling between well as business. For those who want of the Fierce debate also characterised partly in response to investors’ ire almost came unstuck over Xstrata’s its shareholders, the deal finally fell more than we can fit on the printed lending indutsry many annual meetings, as sharehold- over their pay. Executive pay was also proposal to pay £170m in retention apart because the German govern- page both and in 2013, it can be ers across the globe flexed their mus- a big factor in the year’s most news- payments to key staff. Pay was per- ment wanted the merged company to found at www.ft.com. Page 4 cles. In the UK, WPP shareholders worthy deal, the takeover by Glencore haps the only issue that was not a be headquartered in . Petty, Sarah Gordon is Companies Editor. Bitter fallout looms as Merkel seeks a change in relations

public anger. Spain is views of the dominant the European level might hoping for a €100bn bailout partner: Germany. Germany accept any of its banks but, alas, one According to a translation further losses of national that benefits the creditors have received from the sovereignty. of banks at the expense of German embassy, Angela These positions raise big the creditworthiness of the Merkel, Germany’s questions. Is there time government. cautious chancellor, told available to impose these Martin Wolf At current rates of the Bundestag last week new rules and procedures, interest, it is only a matter that she wishes to say to given the huge internal of time before Spain “all those who . . . are imbalances, wide “Marry in haste; repent at requires a fiscal rescue. intent on persuading divergences in leisure.” Full of impetuous That would exhaust the Germany that we need competitiveness and severe ardour, Germany’s partners available resources of the eurobonds, stability funds, fiscal pressures? Moreover, seduced – some might say eurozone. It also risks a European deposit does Germany have any blackmailed – the turning a proud country guarantee scheme, many flexibility over positions continent’s most powerful into a dependency, with more billions and much that are partly prudential, economy into sacrificing frightening results for more: yes, Germany is partly constitutional and monetary independence stability. strong”. partly moral? My guess is two decades ago. But, as ’s fiscal deficits are Moreover: “We’re the answer to these the prince in Giuseppe di far smaller than Spain’s, convinced that Europe is questions is: No. Lampedusa’s Leopard but its rollover problem is our destiny and our future Yet whatever the remarked of his own bigger. According to the . . . But we’re also aware answers might be, it is indissoluble union: “Fire International Monetary that Germany’s strength evident that Germany’s and flames for a year; Fund’s Fiscal Monitor, isn’t infinite.” approach guarantees ashes for thirty.” Now is Italy needs new financing Furthermore: “Quite continued strong austerity the eurozone’s time of equal to 28.7 per cent of apart from the fact that in the vulnerable countries ashes. gross domestic product these seemingly simple and, in all probability, Heads of government of this year, far above proposals . . . are unfeasible mediocre growth in the the group of 20 leading Spain’s 20.9 per cent. in constitutional terms, eurozone. That, in turn, countries who do not come Moreover, what follows the ensures the recurrence of from the eurozone must government of Mario political and economic feel like marriage Monti, due to leave office crises, even if the eurozone counsellors trying to next year, is an ‘They would make survives. If the marriage reconcile partners far too enigma. mediocrity the counsellors wonder why different in character and To this, one must add they must endure all this, values to live happily the divergence of views on yardstick for the answer is clear: this together. The careless economic policy between time, Germany intends to lending before 2007 and Germany. Europe’ secure the behaviour it aggravated the danger. François Hollande’s , wants from its That carelessness, parliamentary victory will Germany’s chancellor partners. exacerbated by the notion add to the stress. The I can envisage five that the marriage made coming debate over what outcomes: first, a happy all equal, has made the a growth strategy means, they are completely marriage, on Germany’s crisis far worse. while necessary, risks counterproductive. They terms, albeit after a painful Those whom borrowing becoming quite heated. would make mediocrity the period of adjustment; afforded a standard of Why, then, does anybody yardstick for Europe. We second, a miserable living above what they imagine that this difficult would thus be forced to marriage, which endures could afford are being marriage can endure? One abandon our goal of because a break-up is too forced to accept a plunge answer is that most maintaining prosperity in costly; third, a degree of into poverty. citizens of the eurozone the face of international mutual accommodation, in Not surprisingly, they wish it to do so. The most competition.” which the north becomes resent the change. powerful, however, is that To all this she added: more southern and the The Greeks, unhappiest people are (rightly) “The fiscal compact is a south more northern; of all, have apparently terrified of the first step towards fourth, a partial break-up, chosen a government of consequences of a combining greater unity with the remaining parties slightly less break-up. with greater control at the members moving into one unenthusiastic about the As time passes, finance European level. And it’s of the three previous agreed programme than is becoming more national. going to be vital that categories; and, finally, the others. Antonis But economies remain national powers only be total break-up. What is Samaras was an highly integrated. Not relinquished when it is certain is that Germany opportunistic opponent of least, today’s EU has been clear that this will will not get the eurozone it austerity in opposition, built around the euro. It involve independent wants easily or swiftly. If while his party, New cannot be assumed that supervision of the partial or total break-up is Democracy, bears a full the integration would European institutions.” In avoided, the period of share of responsibility for survive a break-up. It sum, she made three difficulty will be long and the pre-crisis would certainly represent crucial points: first, painful. The crisis of the mismanagement. a violation of treaty Germany is not about to eurozone is likely to be a Much trouble lies ahead: commitments. stump up more money; very long-running soap of , The marriage may have second, everybody in the opera – if it does not end the far-left party, has 27 been foolish. But a divorce eurozone must become like in tragedy. per cent of the vote would be terrifying. It Germany; third, when and already. He will be only is against this background only when strong rules and This article appeared on too happy to exploit rising that we must assess the credible controls exist at June 20 2 ★ TUESDAY DECEMBER 11 2012 The FT’s Year in Finance Amazon and law of the jungle

Lex in Depth The share price looks high in spite of a fast-changing industry and heavy investment. By Robert Armstrong and Stuart Kirk

roceed to checkout, review from this constraint, the company can your order, click, done. Buy- add to its network and increase its ing stuff on Amazon is easy. lead in how quickly it can deliver It is a wonder, however, that goods. As universal same-day or next- investors ever find the nerve day delivery comes closer, the range Pto hit the place-your-order button for of goods it would make sense to buy Amazon stock. That is because the from Amazon increases. Toothpaste online retailer’s shares are expensive could be ordered the morning it runs – basket-bustingly so. Yet “buy inves- out and appear that evening. tors” do. So what are the justifica- Low prices are also coming under tions for owning Amazon at these lev- increasing attack from Amazon’s sup- els? Can its valuation possibly make pliers. Book publishers may or may sense? not have colluded, as the US justice department alleges, when they Introducing Walmazon demanded that Amazon must not dis- To see the reason for owning Amazon count titles below levels they set. In in 2012, start by thinking about Wal- many of Amazon’s key product lines, mart in 1991. The big-box retailer sold from digital media to electronics to $44bn worth of merchandise that year, fashion, suppliers see price and value and had already changed the way as linked, and will threaten to stop Americans shop, using its sheer size shipments if they see Amazon’s bar- to take costs out of its supply chain gains as tarnishing their brands. and pass the savings along to custom- Already, and Samsung have ers. Over the prior 10 years, Wal- moved towards a “universal pricing mart’s average annual sales growth policy”, insisting that all distributors had been 34 per cent. respect certain minimum prices. Similarly, Amazon’s sales reached $48bn last year, topping off a decade A pricey piece of the future in which sales growth averaged 31 per Trying to assess the value of a com- cent. It too has changed the way pany that is as complex, innovative many people in America (and to a and fast-growing as Amazon is difii- somewhat lesser extent Europe and cult. But there are two well-defined Japan) shop for books (paper and dig- questions that potential buyers at the ital), electronics, nappies, shoes – current share price must answer with almost everything that can be deliv- a confident yes. Can the company ered in a cardboard box or streamed shift its sales mix, and rein in spend- over an internet connection. ing, enough to sustainably expand In 1991, as it turns out, margins? And can Amazon maintain was just getting started. Since then, sales growth in spite of upward pres- the company’s annual sales have sure on its prices from an eroding tax grown 10-fold to $450bn. It has advantage and dissenting suppliers? increased its share of US retail from On the first question, there is at less than 4 per cent to more than 10 least one good reason for hesitation. per cent, and built a $126bn interna- In its low-margin core retail business, tional business from scratch. And like Amazon shipping Amazon competes with relatively Amazon’s today, Walmart’s shares did losses have been Revenues and revenue growth Walmart, 1981-2011* Operating margin fragmented traditional retailers that not look like a bargain in 1991; at the rising and now Amazon, 2000-11 Per cent are generally struggling to form Revenue growth (annual % change) end of that year they were fetching amount to more Revenues ($bn) coherent online strategies. But in more than 40 times earnings. Yet it is than 5 per cent of 50 500 10 higher-margin web services and elec- hard to argue that buyers overpaid. revenue tronic media, it competes with aggres- Walmart, 1981-2011* Walmart, 1981-2011* They have enjoyed a 500 per cent sive and deep-pocketed companies return since. that have staked their futures on 40 The comparison is far from perfect, 400 media and cloud services: Apple, of course, and it pays to consider the and Microsoft. Even if Amazon places where it does not fit. One need 0 prevails, it will be an ugly fight. not understand the operational differ- 30 300 On the price question, it is hard to ences between bricks and mortar and gauge how the demands of price and internet retail to see the contrast. convenience balance out for the aver- Just look at the difference in growth 20 200 age customer on the average Amazon and profitability. -10 item. The burden of proof is squarely Amazon, on those who think that upward pres- The bottom line 2000-2011 sure on selling prices will not hamper In 1992, Walmart’s growth, while still 10 100 top-line growth. high, was decelerating. Amazon’s What is more, there is a third, much growth was as high as ever last year. Amazon, 2000-2011 less defined question relating to valua- It takes an ever bigger slice of a pie – 0 0 -20 tion. In fast-changing industries such internet retail – that is itself expand- 1981 84 86 88 90 92 94 96 98200002 04 06 08 10 12 1981 84 86 88 90 92 94 96 98200002 04 06 08 10 12 as internet retail, cloud services or ing at a solidly double-digit pace in 2000 02 04 06 08 11 2000 02 04 0608 11 digital media, how much faith should the US, and is expanding into other be put in the dominance of the early businesses. But whereas Walmart has Sources: company data; S&P IQ * Years ending Jan leader? In other words, investors know delivered operating margins between Amazon is spending heavily to protect 6 and 8 per cent for three decades, its position; but is it spending enough? Amazon’s margins peaked at 6 per in recent years. And this working cap- Indeed, in the first quarter of 2012, The potential leverage from reduced Valuations must include a thick mar- cent in 2004, dropped several points ital benefit will decline when Ama- service revenues (mostly made of investment is striking. For example, if gin for error to reflect the risk of a for the following five years, and then, zon’s growth slows. Working capital third-party commissions and Amazon capital expenditures over the past 12 competitor landing a big blow. in 2011, dropped to around 2 per cent. will not be a significant source of cash Web Services) rose by two-thirds months had stayed at the level rela- This last point must – given Ama- Part of the decline stems from Ama- flow for ever. from the year before, and represents tive to sales of two years ago, free zon’s heady share price – be decisive. zon’s practice of subsidising delivery; 15 per cent of total revenue. These cash flow would have been almost Consider again the Walmart of two shipping losses have been rising and A prime valuation fast-growing and higher margin busi- double the reported number. decades ago: its seemingly unlimited now amount to more than 5 per cent Here the bulls will interrupt again. It nesses should offset another trend potential also came at a high valua- of revenue. This company will cut could be that in the coming years that hurts profitability – the shift Cheap questions tion. That potential was fulfilled in profits to the bone to attract custom- Amazon will deliver much higher away from high-margin media to low- There is, however, a big problem to spades, and investors did well. But ers. margins than it ever has, for four rea- er-margin electronics and general solve before any of these bullish returns were not nearly as extraordi- Amazon bulls will object that oper- sons. First, its electronic media busi- merchandise. During the first quarter, scenarios can be realised. One of nary as the company’s operational ating margin is not the right metric. nesses – from ebooks to online video – in fact, gross margins (the proportion Amazon’s crucial advantages – low performance. Yes, the intervening two Because Amazon pays its suppliers are intrinsically high margin, have no of sales left after the cost of goods prices – is coming under pressure. decades have given Walmart investors much more slowly than it is paid by associated delivery costs, and are set sold is deducted, but before overhead Until recently, Amazon has enjoyed a sixfold return; but so has the S&P its customers, in 2011 it averaged 90 to keep growing. Second, margins costs) expanded by 110 basis points the advantage that most of its custom- consumer staples index. Even days’ worth of sales in payables have room to improve as the company year-over-year, Amazon’s biggest-ever ers do not pay sales tax, even if they the plain old S&P 500 has returned (money due to be paid out) versus 16 develops its services to third-parties. expansion. live in one of the 45 US states that Can it shift 400 per cent. days in receivables (money due to Amazon receives highly profitable Finally, bulls insist, Amazon’s lack charge it, at rates of 4 and 9 per cent. its sales mix It is impossible not to admire what come in). Good inventory manage- commissions as other retailers use the of profitability merely reflects that This represents a discount for Ama- Amazon has achieved so far or not to ment also frees up cash. Over the past company’s internet storefront and dis- the company is in the middle of an zon customers, but it is ending. Ama- and rein in feel excited about what it could five years, these benefits (known as tribution centres to move their own investment phase. Spending on tech- zon is already collecting sales tax in achieve in the next 20 years. negative working capital) have goods. Third, the Amazon Web Serv- nology and content (rights to music six states; the rest are likely to follow. spending But investing is not about excite- accounted for almost a third of Ama- ices businesses, which supplies com- and video as well as research and A shift in what customers pay may enough to ment. It is about balancing risk and zon’s free cash flow. panies with computing power and development), marketing (as it pushes steer some of them back to traditional reward and knowing what is predicta- So operating profit does not reflect cloud storage, could generate $2.2bn Kindle devices) and capital expendi- retailers, crimping growth. expand ble and what is not. Wait for a the company’s cash profitability. Fair in revenue this year, esti- tures (18m square feet of offices and That said, Amazon would reap one margins reduced valuation before clicking enough. Bear in mind two things, mates. Its closest -play competi- distribution and data centres were benefit from this change. Tradition- “buy”. though. Free cash flow has declined tor, Rackspace, boasts 12 per cent added in 2011) has expanded much ally it has put distribution centres sustainably? alongside Amazon’s operating profits operating margins. faster than sales this year. only in states without sales tax. Freed This article appeared on July 12. Lessons in how to come back from the brink of irrelevance

train, the latest batch of Business School. By the succeed in identifying the world-leading position in says Columbia Business its full corporate weight IBM and Xerox, by con- Technology troubles is a sombre remind- time they saw the need to mortal threat posed by a organic chemistry; a spe- School’s Ms McGrath. behind the PC business in trast, turned in their er that the longevity of a overhaul their product future technological disrup- cialist manufacturing capa- The vested interests the early-1980s. Yet it was moment of crisis to their Stripping out failed seemingly entrenched busi- line-up – a move that even- tion, however, it has proved bility learnt in the film inside corporations arrayed only IBM’s eventual deci- core businesses, looking for strategies and ness is far from assured. tually forced them into an remarkably hard for many business; and one of the top against disruptive change sion to retreat from PCs ways to reinforce their Yet the shortening life acquisition to buy a suita- tech concerns to adapt. global consumer brands. can be powerful. Sony, for that signalled it had learnt value to their customers by finding new ways to cycles of tech powers are ble new mobile software “The evolving digital Kodak followed the logic instance, has struggled to the strategic lesson: to stick enhancing what they had excite customers can not inevitable. As compa- platform – it was too late. technologies had been obvi- of this analysis into mar- overcome the entrenched to its high-margin IT busi- always done best. nies as different as Apple RIM has fallen foul of ous to us since the late kets as diverse as blood interests of its powerful ness with the addition of “Too many companies revive a group’s and IBM have shown, it is some of the biggest forces ’70s,” says Larry Matteson, tests, photocopying and product divisions, leaving it software and services. focus on their products and possible to come back from to shape technology mar- a former Kodak executive pharmaceuticals. None vulnerable to the sort of dis- Kodak made a similar not what the products are fortunes, writes the brink of irrelevance. kets. One is the “consumeri- who was once in charge of proved to be the foundation ruptive new products that strategic mistake. Two dec- solving for the customer,” Richard Waters Microsoft, frequently writ- sation” that has turned 23,000 people in the com- often cross internal corpo- ades ago, seeking a new says Ms McGrath. “Xerox ten off as a relic of the fad- parts of the once slow-mov- pany’s manufacturing divi- rate boundaries, like the direction, it brought in a finally figured out that cus- ing PC age, has also been ing corporate technology sion. That foresight did not combination of Apple’s iPod rising star from Motorola, tomers don’t want copies, laying the groundwork for a business into fashion-driven prevent a long slide that Winner-takes-all and iTunes store. George Fisher, to help lead they want workflows that From troubled BlackBerry broader repositioning of its markets demanding new resulted in a filing for bank- nature of platform Despite often being the a move into digital cam- allow them to get the right maker Research In Motion business, though its success skills. RIM hardly believed ruptcy protection earlier product of recent innova- eras. “They were thinking information to the right to fading internet power is still unproven. that its BlackBerry users, this month. shifts can quickly tive thinking, tech compa- about taking a business place for the right reasons, Yahoo and bankrupt East- Given the sort of rapid tied to their corporate email Kodak played it by the nies may be worse suited to with 60-80 per cent [profit] cost-effectively.” man Kodak, the business shifts that can afflict tech- systems, would so quickly management textbook: it leave leaders out the challenge than other margins and going into con- As Steve Jobs proved headlines this year have nology companies, being cut the tie. identified its sustainable in the cold types of company, Ms sumer electronics, where 5 after returning to a near- told a familiar story: the alert to the danger is the Another is the winner- competitive advantages and McGrath adds. The hubris per cent is pretty good,” bankrupt Apple in 1997, fortunes of once-dominant most important quality takes-all nature of technol- sought to use these as a from their success is still says University of Roches- stripping away failed prod- technology powers can fade needed for survival. That ogy platform shifts that can basis for diversification into for a big new business and strong, and they often lack ter’s Mr Matteson. uct strategies of the past with unnerving severity. makes RIM, once comforta- quickly leave former indus- new markets that would all were later spun off. broad management skills. Failing to make a go of it and finding new ways to Disruptive shifts in tech- ble in its role as the pioneer try leaders out in the cold. make up for an expected This sequence of failures The other lesson is that in digital photography, excite customers is the sur- nology platforms and busi- of mobile email, Exhibit A With software developers erosion of its film business. points to two of the main strategic choices still count. Kodak compounded its est way to revival. ness models have become in corporate denial. switching their attention to Those strengths, accord- lessons from failed attempts Simply trying to change error by switching course For other executives an unpleasant fact of life for Asked about the threat to the new Apple and Google ing to Mr Matteson, now a by tech companies to adapt. course and copy a disrup- into another challenging struggling against the tech companies and their BlackBerry from the launch mobile software platforms, professor at the Simon One is that it is not tive new technology is often market: ink-jet printers. apparent inevitability of investors alike. As Face- of the iPhone, the Canadian RIM now faces an uphill Graduate School of Busi- enough to dabble in new the wrong path to take. That has left it struggling tech-company decline, it is book gears up to make its company’s leaders brushed battle in putting itself back ness at the University of technologies. “Innovation IBM, seeing the threat to its against the likes of Hewlett- a high mark to match. regulatory filing as early as aside any danger, points out at the centre of the mobile Rochester, included a pow- needs to be treated as mate- mainframe computing busi- Packard, Lexmark and Wednesday that will set its Rita McGrath, an associate technology ecosystem. erful research and develop- rial and systematic, not an ness from the rise of the Canon, which dominate the This article appeared on in professor at Columbia Even when they do ment base, particularly a on-again-off-again process,” “client-server” era, threw consumer market. January 31. FINANCIAL TIMES TUESDAY DECEMBER 11 2012 ★ 3 The FT’s Year in Finance

for debate, and that will accelerate the Bank for International the negotiation process. Settlements observed in a recent Thirdly: dozens of American speech, credit booms and busts occur business leaders are now – belatedly on multi-decade cycles, and require Prepare for era – speaking up, along with the equally long-term policies; however, Federal Reserve, and pushing for a the effective US political cycle is two grand fiscal deal, be that via the years. “The economic developments Simpson-Bowles plan or something that really matter now take much similar. That should also raise the longer to unfold – economic time has of US political chance that Mr Obama will deliver a slowed down relative to calendar grand bargain. Or so the argument time – and yet the planning horizons goes. of economic agents have shortened.” But those reasons for hope are also This is pernicious. Any package offset by at least three concerns. One, that truly works will need two immediate doubt is whether crucial elements: clearly articulated, cliff-dancing Republicans will co-operate in serious proactive long-term fiscal trade-offs, talks. For though John Boehner, and an intelligent sequencing of House Speaker, has indicated in the policies (say, some stimulus followed phase: an era of political past 24 hours that he is willing to by austerity). Delivering this will be brinkmanship. In the aftermath of discuss tax increases, he faces hard. President Barack Obama’s victory, strident opposition from his party to None of this is a reason to despair. there is intense speculation among this. Secondly, even if business The “good” news is that investors investors about whether America leaders are raising pressure for a have had plenty of chance to get will fall off a fiscal cliff at the end of grand fiscal deal, there is still no used to cliff dancing in the past year the year, as it hits the trifecta of a dramatic external event that could – on both sides of the Atlantic. debt ceiling, the expiry of Bush-era shock both political camps into Dramatic headlines about disaster tax cuts and pre-planned spending compromise. might sap confidence, but they do at cuts, which could reduce gross This matters. Congress only agreed least cause less shock than a decade Gillian Tett domestic product by 4 per cent. to back the financial rescue ago, and thus may spark less sudden But what probably looms now is not programme in 2008 after the markets market reaction. But then again, a simple, binary “fall” – or a crashed. But now the markets are precisely because markets have decade ago, economists grandiose bargain to avert that blow – extraordinarily quiet, partly due to become more wearily blasé about sometimes like to say, the but a series of rolling showdowns. In Close to the edge: Barack Obama has less incentive to appease voters the Federal Reserve’s policies; indeed, brinkmanship, it may be that much west was experiencing an the coming months, politicians may the 10-year Treasury yield has harder to create the sense of drama era of “Great Moderation”; tiptoe to the brink of the cliff; they actually dropped this week. And dire to force an early bipartisan political at least, in the sense that may even spark some mini-crises, by strongly reject this scenario. After been arguing about fiscal issues for warnings from rating agencies – or deal. Ainflation was tame, central bankers failing to cut a deal before, say, the all, they argue, the results from more than two years, which means even the International Monetary Fund Unless, of course, Mr Obama finds looked wise and economic growth debt ceiling expires, or tax rises loom. Tuesday’s election should give the the terms have been laid out. – have lost some of their ability to the capacity to spring another bold assured. Then, when the financial But I suspect they will then tiptoe president confidence to force a grand Thus there is no need to fret about shock. Unless America does fall off surprise, or politicians and investors crisis erupted, moderation was back from disaster, with delaying fiscal deal, particularly since he has the President’s failure to back the that “cliff”, the sense of drama may alike finally – belatedly – lose replaced by an Age of Turbulence (to mechanisms, before embarking on yet less incentive to appease voters in 2010 Simpson-Bowles bipartisan plan stay distinctly muted. patience, and that Age of Turbulence use the ironically apt title of Alan more brinkmanship. This game of his second (final) term and the for tax rises and spending cuts, There is also a more subtle, once again takes hold. Greenspan’s memoir). cliff-dancing could last a long time. Republicans are on the back foot. optimists insist; what matters is that structural problem: a mismatch in But now we have entered a third Some senior Obama officials Second, since politicians have now this scheme exists as a starting point time horizons. As Claudio Borio of This article appeared on November 8. Regulation can prolong misery

to go. Prime minister David Cameron and chancellor were said to be delighted. This is not the way banks should be regulated. If transgressions are serious enough, regulators (in the UK, that is the Financial Inside Business Services Authority) should PATRICK JENKINS remove a chief executive. Otherwise, if there is any At the risk of being ousting to be done, it lynched, I am about to should be at the hands of come to the defence of the board, not the some well-paid bankers. government or the central These are men who, their bank. The tale of critics would say, StanChart also has two epitomise the worst aspects sides. While the bank of capitalism, breaching clearly breached US laws willy-nilly and sanctions on Iran, there is exploiting profit an almost comic gulf opportunities with no between the $250bn of moral compass. But both wilful abuses that Mr Peter Sands and Bob Lawsky alleges and the Diamond have been hard $14m of clerical errors that done by – and dangerously StanChart has talked so. A few weeks ago, Mr about. It is impossible to Sands, chief executive of know what the real figure Standard Chartered, was is. But the unusual accused by one US strength of Mr Sands’ regulator of running a rebuttal of the DFS’s initial “rogue institution”, which complaint is noteworthy – “carefully planned its evidence, to the bank’s deception” of US critics, of its consummate authorities over financing arrogance; proof, to those Iranian operations. Sounds suspicious of Mr Lawsky’s like a pretty bad man. On motives, the scope of the Friday, Mr Sands duly complaint was overdone. sealed an expensive The truth is that settlement with Benjamin StanChart – whatever the Lawsky of New York morals of doing business state’s Department of with Iran – was stymied by Financial Services (DFS), US rules designed to make paying $340m to make the country look like it amends for the bank’s was barring Iranian transgressions. A little business dealings while at earlier in the summer, Mr the same time retaining Diamond, the former head valuable petrodollar trade. of Barclays, was tarred and The mechanism to achieve feathered. that – the so-called U-turn One of Britain’s best paid rule – facilitated dollar bankers until he resigned trade, as long as deals did in July, Mr Diamond had not originate or end up been accused by the UK with a US counterparty. authorities of using StanChart was caught aggressive, complex between that complexity structures to get around and the evident political rules on capital and tax. ambitions of Mr Lawsky – He had also been a former sidekick of implicated in a period of Andrew Cuomo, the former now infamous abuse of the New York attorney-general, process used to set the now New York governor. Libor interbank borrowing Given that Mr Lawsky had rates. It is perhaps the power to revoke the understandable that the bank’s New York operating mood of the establishment licence, $340m to settle the has become enmeshed in dispute was a small price the public’s anti-banker to pay – even if only $14m sentiment. But it is of transactions were particularly worrying how genuinely in breach of the politicised the supervision rules. Losing that licence of our banks – at least in would have jeopardised as the UK and US – appears much as $200bn of trading to have become. a day – disastrous for the Consider Mr Diamond’s bank and its investors. fate. Whatever your For a bank whose perspective on the man – business is spread across brilliant trader, inspiring emerging markets, some of manager, arrogant them beset by political schmoozer, or all of the instability and volatile above – the important fact economies, it is ironic that was, even after regulators the biggest risk to hit concluded their assessment StanChart for some time of Barclays’ Libor has come from the misdemeanours, they supposedly stable US. considered Mr Diamond Banks and bankers are the still to be a “fit and proper bogeymen of governments person” to run the bank. around the world. But, as Barclays’ expensive global long as economies are settlement, which saw it structured as they are, pay £290m to regulators in they will need banks to the UK, US and elsewhere, help them rebound. If even was supposed to draw a the US and UK are policed line under the issue. It by unpredictable forces, only took a few days, investors will stay away, though, for the bank’s and that can only prolong chairman Marcus Agius to the misery. be summoned before Sir Mervyn King at the Bank Patrick Jenkins is the FT’s of (which is not banking editor. Barclays’ regulator) and This article appeared on told that Mr Diamond had September 24. 4 ★ FINANCIAL TIMES TUESDAY DECEMBER 11 2012 The FT’s Year in Finance Interest rates: Libor – a benchmark to fix

Investigation How financial reference points are set has cast doubt on a process at the heart of the lending industry, write FT Reporters

“At what rate could you from one another in dollars, abuse of the rate-setting HSBC to make yen Libor borrow funds, were you to , yen and other cur- process by current and submissions consistent with do so by asking for and rencies for set lengths of former employees. Last his wishes”, according to an then accepting interbank time, ranging from over- July, the group revealed it affidavit sworn on May 18 offers in a reasonable night to 12 months. was co-operating with regu- 2011 by Brian Elliott, a market size, just prior to The rate-setting process, lators in the US and Japan Canadian law officer. 11am?” largely unchanged for 26 in exchange for partial UBS is not identified in years, offers a crucial indi- immunity over the poten- that lawsuit but three peo- very day, employ- cator of the overall health tial manipulation of yen ple with direct knowledge ees at the world’s of the financial system. A Libor and Tibor. As the of the case say it is the leading banks are jump in Libor can signal investigation has widened, institution that provided asked an in- that banks are increasingly UBS has suspended some of information about the elegantly worded reluctant to lend to each its most senior traders in attempted manipulation of Equestion used to calculate other – one of the contribut- Zurich. Recently filed docu- yen Libor. UBS and other the benchmark rates that ing factors in the credit cri- ments in the Ontario Supe- banks named in the case help determine the price of sis. Libor also serves as the rior Court by the Canadian declined to comment. mortgages, the cost of cor- underlying reference for the Competition Bureau, which Lawyers and regulatory porate lending and the interest paid on scores of is looking at whether Cana- officials involved with the interest added to credit card everyday financial prod- dian consumers were case warn that the scheme bills. ucts. The average US harmed by the alleged rig- detailed in the Canadian Their answers are now at adjustable rate mortgage, ging of benchmark borrow- court documents is just one the heart of a sprawling for example, is indexed to ing rates, provide the most part of a wide-ranging regulatory investigation Libor, with a premium of detailed roadmap yet as to investigation and is not the into possible manipulation 2-3 percentage points tacked how traders and interdealer core focus of enforcement of the London interbank on. Because the rates are brokers may have worked agencies in other jurisdic- offered rate, one of the most based on banks’ own esti- together to manipulate yen tions. Traders and brokers important reference points mates as opposed to actual Libor. According to a sworn who have been suspended of the global financial sys- loan data, critics have long affidavit from one of the or named in various filings tem. argued that at times of lead investigators in that may be “people of interest” At least 10 enforcement financial stress, lenders case, employees at an – those who may have seen agencies in the US, Canada, have an incentive to “low- unnamed bank “were able rather than participated in Europe and Japan are ball” their submission in to move yen Libor rates to any sort of rate fixing – examining whether bankers order to appear healthier. the overall net benefit by who can help elucidate the and brokers colluded to rig The Libor investigation the participants” by work- scale of the alleged prob- Libor – the index interest has attracted attention in ing with interdealer brokers lem, those people say. “We rate used for $350tn worth part because it upends a and traders at rival banks could,” admits one UK law- of financial products – and basic assumption of how in London including HSBC, yer working on the case, other widely watched rates the market functions. Bank- Citi from UBS, Mr Hayes a former trader to influence crisis to crisis in recent Probe: the City , RBS, “be just at the tip of the to boost profits from their ers argue that even if indi- was billed as a star hire the bank’s rate setters for years, including an alleged of London was JPMorgan Chase and Citi. i c e b e r g . ” in-house trading positions. vidual traders try to co-ordi- who would transform Citi’s Tibor and yen Libor from $2.3bn rogue-trading scan- under the In one instance, an For 18 months, officials nate their quotes, the algo- fortunes in Japan following 2007 onwards. While the dal, was the first bank to spotlight over employee identified as Reporting team: Megan have been scrutinising rithm used to calculate the a series of clashes with trader is referred to only as disclose the existence of a Libor “Trader A” told an interest Murphy, Caroline Binham, whether some banks, rate should make it impos- local regulators. “Trader A’’ in those docu- global Libor probe in March jasonhawkes.com rates trader at HSBC “his Michiyo Nakamoto, Cynthia through electronic bids sible for them to succeed in Hired by Christopher ments, six people familiar 2011. It was also the first to trading positions, his desire O’Murchu and Kara processed in London, sub- moving the benchmark Cecere, the former head of with the case said it was Mr come forward to several for a certain movement in Scannell. mitted artificially low Libor index enough to profit from rates trading for developed Hayes. The Swiss banking regulators with detailed yen Libor, and instructions This article appeared on numbers to mask their own it. Regulators are piecing countries in Asia, Mr Hayes group, having lurched from information about potential for the HSBC trader to get March 11. mounting financial difficul- together a mosaic of infor- had been a big money- ties as a worldwide credit mation about how Libor maker for UBS, according crisis deepened in late 2007 and other rates may have to people familiar with his and 2008. The probe, in been targeted. No individ- employment. Within less which investigators are still ual has been charged with than a year, however, both sorting through allegations wrongdoing, and officials Mr Hayes and Mr Cecere of criminal intent and regu- involved with the case in had left Citi after they were latory shortfalls, has threat- different countries caution accused in an internal ened the best efforts of the that fines or other penalties investigation of attempting banking industry to draw a are not imminent. In some to influence yen Libor or line under the crisis, which areas, multiple enforcement the separate Tokyo inter- led to taxpayers bailing out agencies are co-operating, bank offered rate (Tibor), the financial system. such as the US Department according to current and Proved manipulation of of Justice, the Federal former Citi executives with index rates could expose Bureau of Investigation and direct knowledge of the banks to a legal and regula- the Commodity Futures investigation. tory bonanza, from big fines Trading Commission. Instead of attracting big to class action lawsuits, Several lawyers repre- profits, the two men’s trad- several of which have senting individuals ing positions were unwound already been filed. involved say, however, that at a more than $50m loss “Any confirmed manipu- the inquiry is neither as after they left. At the time, lation of these interest rates advanced nor as globally Citi executives say, the would imply a very signifi- orchestrated as some sug- trading irregularities cant cost to the European gest. “As far as I can see, seemed both isolated and economy,’’ Joaquín you have two or three regu- unusual. One former senior Almunia, lators floundering around banker at the US group who competition commissioner, with no co-ordination,” says was briefed at the time said last month. one UK-based lawyer. about Mr Hayes’ and Mr Three of the world’s big- Some banks have been co- Cecere’s actions said col- gest banks – UBS, Citigroup operating with regulators – leagues were mystified at and Barclays – have volun- in effect blowing the whis- what appeared to be an tarily approached regula- tle on their own employees attempt to influence the tors with information about in the hope of securing leni- rate: “It seemed an incredi- possible abuse of the rate- ency from future enforce- bly dumb thing to do.” Mr setting process by current ment actions. Their state- Hayes has not responded to and former staff. More than ments, found in court docu- repeated attempts by the a dozen employees at other ments and releases, have Financial Times to contact institutions, including helped flesh out some of the him directly and through JPMorgan Chase, Deutsche contours of the multi- his lawyer. Mr Cecere, who Bank, Royal Bank of Scot- pronged investigation. now works for the hedge land, HSBC and the inter- fund Brevan Howard in dealer brokers Icap and RP Geneva, has told the FT Martin, have been fired, that he was never ques- suspended or placed on ‘Any confirmed tioned by regulators and administrative leave in manipulation . . . left the bank in good stand- recent months as the inves- ing. tigation gathers pace. would imply a very Japanese regulators In Canada, court filings barred Citi in December by local competition offi- significant cost last year from conducting cials have publicly docu- to the European derivatives transactions mented a scheme allegedly related to Tibor and yen used to rig a Libor rate, economy’ Libor for 13 days over its masterminded by a small failure to prevent the inap- group of traders. In Tokyo, propriate approaches to Japanese financial regula- Barclays, for example, rate-setting staff. tors have taken action came forward to the Euro- In an official finding by against UBS and Citi over pean Commission and the Japan’s Securities and attempts by former employ- UK’s Financial Services Exchange Surveillance ees to “influence” bench- Authority after uncovering Commission, the regulator mark rates, while in a Sin- internal communications said an employee known as gapore court case, a former that suggested former “Trader B” had begun tar- trader at Royal Bank of employees may have geting Citi staff who sub- Scotland has claimed that breached internal “Chinese mitted yen Libor quotes requests for certain Libor walls” barring information- beginning in December rates were “regularly sharing between traders 2009, repeatedly asking made” by employees in and the bank’s rate-setters them to change the figures. recent years to maximise for Euribor, say two people By April 2010, an executive profit. with direct knowledge of known as “Director A” had As investigators probe to the case. Philippe Mory- been “continuously con- see whether a process oussef, a derivatives trader ducting” similar approaches designed to be impervious who left the bank in 2007 to Citi employees who sub- to manipulation has been and now works at Nomura mitted the bank’s quotes for purposefully subverted, the in Singapore, is one of the Tibor, the SESC found. British Bankers’ Associa- former employees being The agency has declined tion, a trade group that investigated, those people to identify the two men sponsors Libor, last week said. He did not respond to publicly. But six people launched a comprehensive requests for comment. with direct knowledge of review, acknowledging that On Friday, Barclays the case have confirmed to the way the rate is set may revealed in its annual the FT that “Trader B” is need updating. “We are report that it had been Mr Hayes and “Director A” committed to the continu- informed by unnamed is Mr Cecere. ing and ongoing evolution authorities that it may face When staff in Tokyo of Libor as appropriate,” regulatory action relating rebuffed the traders’ says Angela Knight, the to the probe, and that it approaches, Mr Hayes and BBA’s chief executive. was “engaged in discussion Mr Cecere contacted rate Prior to the current with those authorities setters in London, accord- inquiry, the relatively old- about potential resolution’’. ing to people familiar with fashioned mechanism used A separate but similar the case. London employees to fix Libor and other development came in the reported their approaches benchmark interest rates summer of 2010 at Citi- to internal compliance was of interest only to mar- group’s London office. supervisors, those people ket practitioners and a Employees raised concerns say. Regulators are scruti- small cadre of critics, who about what they saw as nising Mr Hayes’ activities argued that it was a poor attempts by Thomas Hayes, at UBS before his move to gauge of banks’ actual bor- a senior trader in Tokyo, to Citi in 2009, according to rowing behaviour. alter the bank’s daily bids public filings and people At their simplest level, for yen-denominated Libor, familiar with the investiga- Libor, Tibor and Euribor, as according to six people tion. the main rates are known, familiar with the case who Like Citi, UBS was sub- are supposed to be daily asked not to be named, cit- ject to official action by measures of how much ing the sensitivity of the Japanese regulators in banks are paying to borrow case. Having recently joined December over attempts by