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The world’s largest-ever tech deal now depends on Qualcomm

Hock Tan hones the art of the deal

VALENTINE’S DAY might seem like a good time to discuss a proposal. But whether it brought luck to Broadcom’s attempt to woo its rival chipmaker, Qualcomm, is still unclear. As The Economist went to press, a meeting between the boards of both firms to discuss Broadcom’s bid of $146bn (including debt) proved inconclusive. Having rejected an initial approach in November, Qualcomm’s board will soon meet to discuss next steps.

Should the board reject Broadcom’s offer, the fate of the largest-ever tech acquisition would then lie with Qualcomm’s shareholders. The deal could still proceed if they elect a majority of Broadcom’s nominees to the board at Qualcomm’s annual investor meeting on March 6th. But it would have a complicated course to run.

Neither firm may be a household name like Intel or Samsung, but a merger would create the world’s third-largest chipmaker. Scale is critical in an…Continue reading

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ApprovedBusiness and financeFINANCEFinance and economics

The markets still have plenty to fret about

BULL markets always climb a wall of worry, or so the saying goes. For much of 2017, the main concerns were political and the markets seemed to surmount them as easily as a robot dog opens doors (the latest internet sensation).

But February has shown that the market is still vulnerable. The immediate trigger seems to have been the fear that inflationary pressures would cause bond yields to rise and central banks to push up interest rates; this week’s surprisingly high American inflation numbers will only add to the worries. In a narrow sense, that makes bonds look cheaper, compared with equities. In a broader sense, it increases the discount rate investors apply to future profits, lowering the present value of shares. (A caveat is needed: if higher rates reflect stronger growth, then estimates of future profits should rise, offsetting the discount-rate effect.)

The immediate effect has been to create uncertainty for investors about the direction of central-bank policy, after many years in which it could reliably be assumed that rates would stay low. This translates into a more volatile market, as illustrated by the sharp jump in the Vix, or volatility index, in early February.

The danger is that many investors seem to have treated volatility as an asset class, and have organised their portfolios accordingly. Eric Lonergan of M&G, a…Continue reading

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ApprovedBusinessBusiness and finance

Opportunities are opening for electrified commercial vehicles

Pulls a heavy weight of expectation

ELECTRIC commercial vehicles were once a common sight in Britain’s towns and cities. A fleet of 25,000 battery-powered milk floats roved the early-morning streets delivering a crucial part of the nation’s breakfast. Short ranges and low top speed were unimportant for a milk round but near-silent running meant customers could sleep. Their demise came as supermarkets expanded, but electrification of business vehicles is gathering pace anew.

Just as better battery technology is bringing down the cost and boosting the range of passenger electric vehicles (EVs), those advances are making electrification of commercial vehicles more appealing. The purchase price is still far higher than a comparable vehicle with an internal combustion engine (ICE). But businesses are more focused than ordinary motorists on the total costs of ownership, and on other reasons to shift to electric power.

Much attention has been paid to…Continue reading

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Google embraces ad-blocking via Chrome

FROM quantum computing and smartphones to self-driving cars, home thermostats and delivering the internet by balloon, Google or, technically, Alphabet, the holding company that the firm established in 2015, has its fingers in many pies. But the company’s main business, which pays for all of its dabblings elsewhere, is digital advertising, which in 2017 accounted for more than 86% of its $111bn revenue. It may seem odd, then, that Google’s latest move is to aid ad-blocking. On February 15th Chrome, its web browser, which has a 59% market share, switched on code to block certain online advertisements. 9

In doing so it joins an established trend. By last year around 27% of American internet users had installed ad-blockers, according to eMarketer, a research firm (see chart). Third-party ad-blocking software is available already for Chrome but only for its desktop version. As well as being built in and thus on by default, the new blocker will work on smartphones.

Web publishers will not…Continue reading

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Japanese businesses are struggling to keep up standards

KUMIKO HIRANO has noticed a disquieting change when she goes to her neighbourhood konbini, one of Japan’s ubiquitous convenience stores. “No one is around and I have to use a loud voice to get someone to serve me,” says the 48-year-old worker in Tokyo. “It irritates me.”

This might not seem a big problem, but Japan prides itself on the standard of customer service, which approaches the level of bespoke attention elsewhere. Taxi drivers, who often wear white gloves, sometimes get out to bow when they drop off a passenger. Staff in shops and restaurants are unfailingly polite. Shoppers can order on Amazon and take delivery reliably the same day. Now Japanese are having slowly to adapt to levels of service long suffered by the rest of the world.

The human touch is becoming rarer. Lawson, another konbini chain, is automating payment during the small hours at selected stores. Some restaurants and supermarkets are following suit….Continue reading

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The best—and worst—places to be a working woman

“PRESS for progress” is the theme of this year’s International Women’s Day on March 8th. As our sixth glass-ceiling index shows, disparity between countries remains wide. But women have made some progress towards equality in the workplace in the past year.

The index ranks the best and worst countries to be a working woman. Each score is based on average performance in ten indicators: educational attainment, labour-market attachment, pay, child-care costs, maternity and paternity rights, business-school applications and representation in senior jobs (in managerial positions, on company boards and in parliament).

Equality-conscious Nordics typically do well while workplace parity for women in Japan, South Korea and Turkey still lags badly. America under President Donald Trump rose from 20th to 19th place thanks in part to a higher female labour-force participation rate. This year Sweden ranks first, scoring well in female labour-force participation, which is over 80%, and the share of…Continue reading

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Ten years on from the first quota for women on corporate boards

THE centrepiece of the opening-bell ritual at the London Stock Exchange on February 2nd was a roll call to honour 27 global investors. They were lauded for pledging allegiance to the “30% Club”, a group which campaigns for precisely that proportion of women on corporate boards globally. Membership is a hot ticket, judging by the club’s expansion. Behemoths including BlackRock, J.P. Morgan Asset Management and Standard Life have joined, and are voting against boards that fail to appoint more women.

In much of western Europe, such efforts follow a decade-long push by governments. In 2008 Norway obliged listed companies to reserve at least 40% of their director seats for women on pain of dissolution. In the following five years more than a dozen countries set similar quotas at 30% to 40%. In Belgium, France and Italy, too, firms that fail to comply can be fined, dissolved or banned from paying existing directors. Germany, Spain and the Netherlands prefer soft-law quotas, with no sanctions….Continue reading

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Going out need no longer be a headache for teetotallers

BARS and pubs have not usually been the non-drinker’s friend. Knocking back pint after pint of juice or fizzy drink quickly gets boring. But beverage manufacturers are now showing more sympathy for their plight. Many companies regard non-alcoholic drinks as the “biggest opportunity in the market”, says Frank Lampen, who runs Distill Ventures, which helps small producers with investment and advice, and is backed by Diageo, a British drinks giant.

One of the fund’s recent investments, for example, is in Seedlip, a British firm that makes distilled, non-alcoholic “spirits” flavoured with botanicals, and which last year launched in America. Low-alcohol beer, once maligned for its paucity of flavour, is also in fashion. Technological advances mean alcohol can be filtered out of the beer without ruining its taste; other breweries use “lazy” yeast, which produces less alcohol to start with. Over the past couple of years, non-alcoholic craft breweries, such as Nirvana Brewery in London, or…Continue reading

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Indian teaching startups make work for idle thumbs

TO ANY outsider it looks as if the children have been hypnotised by yet another smartphone game. As the spying elders in a TV ad try to break the spell, the sprogs flash a grin at their screens. “It’s maths, dad,” giggles a fifth-grader to her father. The company behind the ad, Byju’s, sells an educational smartphone app which has been downloaded 14m times since its launch in 2015.

Byju’s is one of many education technology (or “edtech”) startups that have emerged in India in the past few years. Their target is vast—some 260m pupils in schools and over 30m graduates who train in order to pass entrance tests for a seat in medical, engineering and elite management institutes. KPMG, a consultancy, reckons the industry will grow eightfold to be worth around $2bn by 2021.

Much of the expected growth is due to India’s woeful record in primary-school education, where teachers are scarce, infrastructure crumbling and the culture one of rote learning. Almost half of…Continue reading

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ApprovedBusiness and financeFINANCEFinance and economics

China’s stockmarket plunge: this time it’s different

A CHINESE new-year message from the American embassy in Beijing looked innocuous. It welcomed the Year of the Dog on Weibo, a microblog, with photos of the embassy staff’s pooches and a video greeting from the ambassador and his wife, each with a dog in hand. But it soon attracted 10,000 angry responses. The post had become an unlikely lightning rod for public discontent about the stockmarket.

A plunge on February 9th had left Chinese shares down by 10% on the week, their steepest fall in two years. Some punters found solace in blaming the American embassy for the rout, which started on Wall Street. For others it was a matter of convenience, because their real target, the Chinese securities regulator, knew to disable comments on its Weibo account on such a grim day for stocks.

Even so, their protests seem to have been heard. Before the market reopened this week, Chinese officials urged big shareholders to buy stocks to restore confidence. The Shanghai Stock Exchange warned…Continue reading

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Will Comcast try to outbid Disney for Fox?

WHEN Disney struck a deal just before Christmas to buy much of 21st Century Fox for $66bn, it was a career-defining moment for the two firms’ bosses, Bob Iger and Rupert Murdoch. A third media mogul, Brian Roberts of Comcast, was left out in the cold. Having tried and failed last autumn to get Mr Murdoch to take a higher offer, Mr Roberts may now be preparing a still richer bid to upend the deal.

It is not hard to understand his motivation. Comcast is in an awkward position at a time when the media landscape is shifting. With millions of consumers dropping pay-TV for the likes of Netflix, media companies have suddenly become either buyers, to achieve scale, or sellers, to exit. Mr Roberts has always been a buyer, building the cable business his father started into a diversified empire through acquisitions, including AT&T’s broadband business in 2002 and NBC Universal in 2011. Comcast now has heft in a number of businesses—broadband and cable, television networks, a film studio…Continue reading

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ApprovedBusiness and financeFINANCEFinance and economics

Recent tax reforms in America will hurt charities

DESPITE its oft-professed pro-market orthodoxy, America has always had an unusually large non-profit sector. Americans gave $390bn to charity in 2016, with the bulk of contributions coming from individual donors. Historically, revenues at non-profits tend to track GDP growth. The recent tax reforms imply that despite strong economic growth, charitable contributions in America are poised to fall for the first time since the financial crisis.

The most significant threat to charities comes from changes to income tax. American taxpayers can choose either to “itemise” specific expenses, such as charitable gifts or mortgage payments, or take a “standard deduction”. In an effort both to simplify the tax code and to lower overall tax rates, the Republican-led Congress almost doubled the standard deduction to $12,000 for individuals and $24,000 for married couples. This will make filing taxes a lot easier for many. But it also means that far fewer Americans will have a financial incentive…Continue reading

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Business and financeGulliver

How to ensure Ryanair foots the bill for flight delays

THERE is little doubt that Ryanair takes umbrage at EU261, a piece of European law that guarantees passengers compensation in the event of most flight delays and cancellations. Michael O’Leary, the low-cost carrier’s boss, insists that he complies with the “ridiculous” piece of legislation. But many say otherwise. Indeed, Mr O’Leary seems to revel in refusing to give out compensation; he once told a customer who dared to ask for one “you’re not getting a refund so fuck off”. Last year, when a pilot-rostering mishap grounded thousands of Ryanair flights, Britain’s Civil Aviation Authority (CAA) accused it of “persistently misleading” customers about their rights. Which?, a British consumer group, agreed that Ryanair fell “woefully short” of its obligations. Media reports exposing poor treatment of passengers abounded. Yet, in the past five months, Gulliver has received two EU261 pay-outs from Ryanair. The circumstances surrounding them…Continue reading

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Business and financeButtonwood's notebook

Those Brexit clichés explained

EVER since February 2016, when David Cameron, the British prime minister, called a referendum on the UK leaving the EU, the debate has been clouded by catchphrases, similes and confusing metaphors. If you haven’t followed the debate religiously, or you are unfamiliar with British idioms, these may be mysterious. So as the negotiations reach a critical stage, here is your cut-out-and-keep guide to some of the most notable.

Project Fear

This was how the Leave campaign dubbed the economic forecasts made by the Treasury and bodies like the OECD and IMF about the potential adverse impact of a Brexit vote. George Osborne, the chancellor, certainly went over the top with his threats of a “punishment Budget” after a Leave vote. So far, the UK has not fallen into recession, a fact that Brexiters cite when pooh-poohing negative forecasts of the longer-term impact. But the UK’s growth rate has…Continue reading

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Business and financeGulliver

A hamster is the latest victim in the row over emotional-support animals

THE roster of emotional-support animals that are and are not allowed onto flights in America can sound, at times, like a retelling of the story of Noah’s Ark. Although the number allowed on for nothing has grown in recent years, airlines—which believe that the loophole is being abused by those not wanting to pay to transport their pets—are fighting back. Only last month a peacock was barred from a United Airlines flight for bending the rules, and for not even being the right size for a normal plane seat. But the debate has now taken a deadly twist. The victim is a hamster.

Belen Aldecosea, a college student, booked a flight on Spirit Airlines, a low-cost carrier, from Baltimore to her home in Florida in November for medical treatment, according to the Miami Herald, a local paper. Concern about a growth on her neck had led her to buy a hamster, whom she named Pebbles, for comfort. She called Spirit to ask if she could bring Pebbles on…Continue reading

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The next generation of wireless technology is ready for take-off

NORTH KOREAN athletes will not be the only unusual participants at the winter Olympics in Pyeongchang in South Korea, which begin on February 9th. Anyone can take part, at least virtually. Many contestants will be watched by 360-degree video cameras, able to stream footage via a wireless network. At certain venues around the country sports fans will be able to don virtual-reality, head-mounted displays to get right into the action. Flying alongside a ski jumper, for instance, will offer an adrenalin rush without any risk of a hard landing.

These virtual experiences will be offered by KT, South Korea’s largest telecoms firm. They are meant to showcase the latest generation of wireless technology, known as “5G”. But just as ski jumpers never know exactly how far they will leap after leaving the ramp, it is unclear where 5G will land.

On paper, the new technology should go far. The International Telecommunication Union (ITU), a UN body which helps develop technical standards, has…Continue reading

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Mining firms are dismayed by a new Congolese mining law

ROBERT Friedland, the boss of Ivanhoe Mines, a large Canadian firm that digs out copper and zinc in Africa, is not one for pessimism. In his speech to an annual mining industry jamboree, Mining Indaba, in Cape Town, his promises about the potential of the business were as copious as the ore bodies his firm mines. But amid the hyperbole about electric cars, Chinese consumers and the “most disruptive copper discovery in the world” there was a note of panic. Money, he warned, is “a coward”, and may be about to flee.

The cause of fear is a new mining code that was passed by parliament in the Democratic Republic of Congo on January 24th. Congo is Africa’s biggest copper producer; its reserves, mostly in the southern copper belt, are among the world’s richest. As important, it has emerged recently as the world’s leading producer of cobalt, a by-product of copper smelting that is used in batteries for electric cars. It also produces gold, zinc, tin and diamonds.

The new law, which has yet to be signed by Joseph Kabila, the…Continue reading

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Airbus executives get swept away by a corruption investigation

 

“THE success of Airbus is intimately linked to the success of John,” says Eric Schulz, successor to John Leahy, who has been chief salesman for the planemaker since 1994. Mr Leahy’s aggressive strategy to gain orders expanded Airbus’s market share for civil jets from 18% in 1994 to over 50%. Salesmen at Boeing, Airbus’s rival, say they wish their bosses were as good. But this year’s Singapore Airshow, which began on February 6th, will be Mr Leahy’s last before retirement.

That is in itself a big change for Airbus, but staff turnover does not stop there. In December the firm said Tom Enders, its German-born chief executive, would step down in 2019; his French second-in-command, Fabrice Brégier, will leave this month. These changes follow the news that several countries, including Britain, France and America, are investigating allegations that in the past Airbus bribed officials to win contracts. That created divisions between French and German executives over how to respond.

The recent troubles began in 2014, when an internal review of supplier payments at Airbus exposed irregularities. It ended up reporting itself to Britain’s Serious Fraud Office and to France’s equivalent body for lying to export-credit agencies about bribes given by third-party consultants to secure sales. In October Airbus said it may have violated…Continue reading

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Creditors call time on China’s HNA

THE ascent of HNA, an aviation-to-financing giant, began on six wings and a prayer. It started out as Hainan Airlines, set up on China’s southern palm-fringed island in 1993 with three planes, in a joint venture between a Buddhist businessman, Chen Feng, and the local government of Hainan. In 2000 the firm became HNA Group and, from a Buddha-shaped headquarters, Mr Chen built his enterprise into an empire with more than $150bn in assets. Foreign trophies came next. The firm borrowed heavily to finance deals worth $50bn since 2015 over six continents, including a 25% stake in the Hilton hotel group and 9.92% of Deutsche Bank.

In recent weeks it has become clear that its gorging—which had continued apace even after HNA was among those firms singled out for scrutiny by China’s banking regulator last June for their risky debt-fuelled purchases—is over. In January HNA told creditors that it would face a probable cash shortfall of at least 15bn yuan ($2.4bn) in the first quarter of this year.

HNA has assured investors that this…Continue reading

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What Natarajan Chandrasekaran must do next at Tata

FACED with complexity humans often resort to a heuristic, a rough mental template that gets the job done. That could come in handy at Tata Group, India’s largest business, whose dizzying mix of scale, palace politics and sense of moral purpose defy any categorisation. Tata’s boss, Natarajan Chandrasekaran, known as Chandra, has been in the job for a year. He spent 2017 pepping up morale and extinguishing fires. Now he must squeeze Tata into a new strategic framework that clarifies its structure and purpose.

Is it a 150-year-old national monument, a philanthropic vehicle or a conglomerate? In Schumpeter’s view Tata should instead be positioned as a holding company—like Berkshire Hathaway but minus the personality cult and with Indian characteristics.

Tata is a handful. It has 695,000 staff and is active in 17 industries. Its family of firms has a market value of $155bn. It mixes virtue with profits; Tata’s leaders are expected to exude decency and probity. The group was an…Continue reading

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How a brothel owner created the world’s biggest industrial park

Lance Gilman, tech-titan whisperer

PAST the neon lights of Reno and the cookie-cutter homes of neighbouring Sparks, the I-80 highway winds through a thinly populated expanse of arid hills and lunar valleys in Storey County. On one side of the road flows the Truckee River; on the other bands of wild horses forage for parched grass. Signs of civilisation are restricted to electricity pylons and the odd rundown farmhouse. The Wild Horse Saloon, a dark and smoky room connected to a legal brothel, is the only sit-down restaurant for miles. It is not an area that immediately seems conducive to hosting a business park. Yet Storey County in Nevada is home to the world’s largest by some measures: the Reno Tahoe Industrial Centre (TRI). The park spans 104,000 acres in total—three times the size of San Francisco.

Near its eastern border hulks Tesla’s “gigafactory”, a gargantuan white structure where the company hopes to produce batteries for 500,000 electric cars a year….Continue reading

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ApprovedBusiness and financeFINANCEFinance and economics

Insider trading has been rife on Wall Street, academics conclude

The joy of knowledge

INSIDER-TRADING prosecutions have netted plenty of small fry. But many grumble that the big fish swim off unharmed. That nagging fear has some new academic backing, from three studies. One argues that well-connected insiders profited even from the financial crisis.* The others go further still, suggesting the entire share-trading system is rigged.**

What is known about insider trading tends to come from prosecutions. But these require fortuitous tip-offs and extensive, expensive investigations, involving the examination of complex evidence from phone calls, e-mails or informants wired with recorders. The resulting haze of numbers may befuddle a jury unless they are leavened with a few spicy details—exotic code words, say, or (even better) suitcases filled with cash.

The papers make imaginative use of pattern analysis from data to find that insider trading is probably pervasive. The approach reflects a new way of analysing conduct in the…Continue reading

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Bitcoin and its rivals offer no shelter from the storm

THE “biggest bubble in human history comes down crashing,” tweeted Nouriel Roubini, an economist, gleefully. After an exhilarating ride skywards in 2017, investors in crypto-currencies have been rudely reminded that prices can plunge earthwards, too. In mid-December the price of bitcoin was just shy of $20,000; by February 6th, it had fallen to $6,000, before recovering a little (see chart).

And bitcoin is not the only digital currency to have fallen. Figures from CoinMarketCap, a website, show that the total market capitalisation of crypto-currencies has fallen by more than half this year, to under $400bn. This slide has taken place amid a flurry of hacks, fraud allegations and a growing regulatory backlash.

Perhaps the most damaging allegations surround Tether, a company that issues a virtual currency of the same name. Tether allows users to move money across exchanges and crypto-currencies without converting it back into “fiat” (central-bank-backed) money first. In theory, each…Continue reading

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ApprovedBusiness and financeFINANCEFinance and economics

South-to-South investment is rising sharply

AT A meeting in Namibia last month Zimbabwe’s finance minister, Patrick Chinamasa, made a pitch to lure African investors to an economy ruined by Robert Mugabe. That he did so first in Windhoek, not London or New York, is telling. Although flows through tax havens muddy the data, 28% of new foreign direct investment (FDI) globally in 2016 was from firms in emerging markets—up from just 8% in 2000.

Chinese FDI, a big chunk of this, shrank in 2017 as Beijing restricted outflows and America and Europe screened acquisitions by foreigners more closely. But the trend of outbound investment is widespread. Almost all developing countries have companies with overseas affiliates. Most of their investment goes to the West. But in two-fifths of developing countries they make up at least half of incoming FDI. In 2015-16 the ten leading foreign investors in Africa, by number of new projects, included China, India, Kenya and South Africa.

A World Bank survey of more than 750 firms with FDI in developing countries found that those from…Continue reading

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ApprovedBusiness and financeFINANCEFinance and economics

Passive funds tracking an index lose out when its make-up changes

IS THERE hope for fund managers after all? Conventional “active” managers, who try to pick stocks that will beat the market, have been losing ground to “passive” funds, which simply own all assets in a given sector in proportion to their market value. The main advantage of the latter group is that they charge a lot less.

William Sharpe, a Nobel prizewinning economist, argued in 1991 that the “arithmetic of active management” means that the average fund manager is doomed to underperform. To understand why, assume that there are equal numbers of active and passive managers and, between them, they own all the market. The market returns 10%. How much will the passive managers earn? The answer must be 10%, before costs. The active managers own that bit of the market the passive managers don’t. But that proportion of the market must, thanks to simple arithmetic, also return 10%, before costs. Since the costs of active investors are higher, the average active manager must underperform. These…Continue reading

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Wells Fargo suffers a rare punishment—a cap on assets

ON HER way out, Janet Yellen, who stood down as the Federal Reserve’s chair on February 2nd, paused to add yet another sanction to those already imposed on Wells Fargo for foisting unwanted insurance and banking products on clients. The latest punishment is a highly unusual one. Wells will be blocked from adding assets to the $2trn held on its balance-sheet at the end of 2017. Two other regulators had already imposed fines and penalties soon after the shenanigans began emerging in 2016. The bank has gone through a big reorganisation. The Fed’s belated response presumably took into account not only the errant conduct but also the political fallout. The government, as well as the bank, had been embarrassed.

At first glance, Wells is an odd target for such treatment. During the financial crisis it proved itself the best of the big banks, with relatively high underwriting standards and manageable losses. The scandal was huge—millions of clients were pushed into unwanted products. But the financial costs…Continue reading

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The release of Samsung’s boss leaves South Koreans exasperated

He backed the wrong horse

“INNOCENT if rich, guilty if poor” is a well-known adage in South Korea. It has been trending anew on social media since February 5th, when Lee Jae-yong, the vice-chairman of Samsung Electronics, was released from prison. The 49-year-old heir to South Korea’s biggest chaebol, or family-run conglomerate, had been found guilty of bribing a former president, Park Geun-hye, and her confidante, Choi Soon-sil. But Mr Lee’s initial five-year prison sentence was cut in half and suspended by an appeals court, allowing him to walk free after 353 days in jail. Other executives were also released on suspended sentences.

The ruling largely upheld Mr Lee’s insistence that he had been coerced by Ms Park into handing over the bribe. Prosecutors had charged him with paying 43bn won ($38m), which included buying horses for Ms Choi’s daughter and various donations to her sports foundations. In the end, only use of the horses was recognised as bribery, slashing the sum to 3.6bn won. Although Mr Lee…Continue reading

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Business and financeFINANCEFinance and economicsIncoming

The markets deliver a shock to complacent investors

EVERY good horror-film director knows the secret of the “jump scare”. Just when the hero or heroine feels safe, the monster appears from nowhere to startle them. The latest stockmarket shock could have been directed by Alfred Hitchcock. The sharp falls that took place on February 2nd and 5th followed a long period where the only direction for share prices appeared to be upwards.

In fact the American market had risen so far, so fast that the decline only took share prices back to where they were at the start of the year (see chart). And although a 1,175-point fall in the Dow Jones Industrial Average on February 5th was the biggest ever in absolute terms, it was still smallish beer in proportionate terms, at just 4.6%. The 508-point fall in the Dow in October 1987 knocked nearly 23% off the market.

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Bets on low market volatility went spectacularly wrong

THE Cboe Volatility Index, or Vix, known as the “fear gauge”, spikes when markets are most jittery. When Sandy Rattray, now at Man Group, an asset manager, worked on the Vix in the early 2000s, he and his team considered launching an exchange-traded product (ETP) linked to it, but concluded that it would be a “horror show” because of poor returns. Now, however, Vix-linked ETPs are a big industry, with around $8bn in assets. Formerly niche investments, they served vastly to exacerbate this week’s market turmoil, which saw the Vix’s largest ever one-day move, when it more than doubled on February 5th.

The Vix was always intended as a basis for financial products as well as a gauge. Vix futures were launched in 2004 and options in 2006. “Long” Vix products, which Mr Rattray looked into, seek to mirror the index . The problem is that this means buying futures contracts, with buyers having to pay a constant premium over spot prices. So these ETPs tend to lose money over time, punctuated (but not fully made up for) by gains when the Vix spikes. The largest “long” fund, VXX, issued by Barclays, has lost over 99.9% since its launch in 2009.

So other ETPs were developed to “short”—ie, bet against—the Vix index. Until this week, they were doing handsomely. Amid a long spell of subdued volatility, investors piled in. In January, assets in…Continue reading

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