Category Archives: Banking

Lebanon’s public debt default

By Ilias Bantekas – The nature and causes of sovereign debt differ from one country to another. Yet, the popular or engineered narrative of debt usually conceals its true origin or cause.

In the case of Lebanon, currently facing a financial and economic crisis ranked by the World Bank as possibly among the top three most severe global crises episodes since the mid-19th-century, one of the key lessons from the Greek experience is the importance of understanding the cause. The truth about how and why Lebanon reached the current debt crisis, including its suspension of a $1.2 billion Eurobond payment in March 2020, must precede any step toward recovery and restructuring under current solvency conditions.

A look at the Greek experience

At the time of Greece’s sovereign debt crisis, the popular narrative was that successive Greek governments had augmented the public sector and had exceeded their finances. This further supports the popular myth that people in the south of Europe are lazy, take long siestas, aspire to be civil servants, and that their governments are corrupt. Even so, an independent parliamentary committee set up in 2015 disproved this narrative.

The committee’s extensive findings clearly showed that the Greek public sector was the lowest spender among its then 27 European Union counterparts (apart from defense-related expenditures). In fact, until the beginning of the global financial crisis in 2008, Greece’s debt-to-GDP ratio was one of the lowest in Europe and certainly sustainable. So, why did it shoot through the roof the following year? This is because Greek banks had accumulated private debt (in the form of loans) to the tune of about €100 billion.

At the time, Greek banks had largely been acquired by French and German banks and hence the private (and now unsustainable) debt of Greek banks was about to become a Franco-German problem. Instead of this happening, the then-Greek prime minister was ‘convinced’ to nationalize Greek banks and thus transform a purely private debt into a public one. By so doing, it was now the Greek taxpayer that was saddled with the debt and the ensuing austerity this entailed, while Greek banks were restructured (effectively re-financed) and France and Germany were relieved. more>

Updates from McKinsey

Buy now, pay later: Five business models to compete
Financing at the point of sale may be a small share of unsecured lending in the United States today, but it’s growing fast. Banks seeking long-term growth should explore market entry, and merchants should reassess their financing offers.
By Puneet Dikshit, Diana Goldshtein, Blazej Karwowski, Udai Kaura, and Felicia Tan – Point-of-sale (POS) financing services in the United States have grown significantly over the past 24 months, especially since the onset of COVID-19. Trends fueling growth include digitization, rising merchant adoption, increasing repeat usage among younger consumers, and an expanding set of players targeting lending at point of sale, a service also known as “buy now, pay later.”

Thus far, fintechs have taken the lead, to the point of diverting $8 billion to $10 billion in annual revenues away from banks, according to McKinsey’s Consumer Lending Pools data. In our view, only a few banks are responding fast enough and boldly enough to compete. Banks that underestimate the threat may see continued loss in share and could lose out on participating in a growing value pool and gaining share among younger and new-to-credit customers, as banks in Australia and China did when facing a similar situation. To avoid that outcome, US banks need to understand the landscape for POS financing and choose from among the emerging models.

This article seeks to give POS financing players as well as merchants the necessary insights to refine their strategies in the POS-financing arena. It provides an overview of the market, details key trends and factors influencing growth, and offers ideas for market entry for banks and partnerships for merchants. The insights are based on McKinsey research, including McKinsey Consumer Lending Pools (a proprietary database covering granular market size and growth trends), the McKinsey POS Financing Consumer Survey and POS Financing Merchant Survey, and our recent experience with banks and merchants. more>

Germany’s renewable electric plan gets green light from EU

New scheme lifts some important barriers for the use of electrolysers in order to produce hydrogen
By Kostis Geropoulos – The European Commission has approved, under EU State aid rules, the prolongation and modification of a German scheme to support the production of electricity from renewable energy sources and from mine gas, as well as reductions of charges to fund support for electricity from renewable sources, the EU’s competition chief said.

The German Renewable Energy Act (Erneuerbare Energien Gesetz – EEG) 2021 scheme will provide important support to the environmentally-friendly production of electricity, in line with EU rules, European Commission Executive Vice-President in charge of competition policy Margrethe Vestager said.

“Thanks to this measure, a higher share of electricity in Germany will be produced through renewable energy sources, contributing to further reductions in greenhouse gas emissions and supporting the objectives of the Green Deal,” she said. “The scheme introduces new features to ensure that aid is kept to the minimum and electricity production occurs in line with market signals, while at the same time ensuring the competitiveness of energy-intensive companies and reducing pollution caused by ships in harbour. In this way, the scheme provides the best value for taxpayers’ money, while minimizing possible distortions of competition,” Vestager added.

The scheme also introduces small modifications to the German EEG surcharge reductions for energy intensive companies, a dedicated rule for surcharge reductions for hydrogen for energy intensive companies, as well as EEG surcharge reductions to promote the use of shore-side electricity by ships while at berth in ports.

Hydrogen Europe Secretary General Jorgo Chatzimarkakis told New Europe on April 30 the new scheme lifts some important barriers for the use of electrolysers in order to produce hydrogen. “This is good news and important signal for investments in the sector of ‘HydroGenewables,’” he said. more>

Updates from Chicago Booth

How to forge relationships with the ‘enemy’
By Alice G. Walton – When it comes to seemingly insurmountable conflicts, the one between Israelis and Palestinians ranks high.

But a Maine summer camp program called Seeds of Peace, which brings together Jewish Israeli and Palestinian teens, has been overwhelmingly successful at facilitating not just tolerance but close, positive relationships, suggests research by Facebook’s Shannon White and University of California at Berkeley’s Juliana Schroeder (both graduates of Chicago Booth’s PhD Program), along with Booth’s Jane L. Risen.

The work grew out of previous research by Schroeder and Risen, who in 2014 studied the program and found that campers’ attitudes toward people of the other nationality (in the “outgroup”) became significantly less negative after completing the program, particularly for campers who said they’d formed a close relationship with someone from the outgroup.

Why was that the case? To find out, White, Schroeder, and Risen analyzed data from surveys they collected of more than 500 participants who attended one of the Seeds of Peace summer camps between 2011 and 2017. Schroeder and Risen surveyed the teens before their camp stay began, including how positive, sympathetic, and anxious they felt toward or about members of the other group. more>

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Tesla Sold Some Bitcoins

Also the deli, the first law of tax, a JPMorgan Bitcoin fund and Dogecoin vs. lottery tickets.
By Matt Levine – Tesla pulled a new lever to juice earnings in the quarter, generating $101 million in income from selling about 10% of its Bitcoin holdings.

Profit from the cryptocurrency and the sale of regulatory credits and tax benefits contributed about 25 cents to Tesla’s adjusted earnings of 93 cents a share, allowing the carmaker to beat Wall Street’s 80-cent average estimate, Dan Levy, an analyst with Credit Suisse, wrote in a note Monday.

That’s wonderful, my sincere congratulations to them. People want to be mad about this? There is a vague sense out there that it is somehow fraud to buy a thing, say you like it, and then sell some of it. For instance Dave Portnoy, who I guess is an investment celebrity now, used the words “pumps” and “dumps” to describe Tesla’s actions on Twitter, prompting Musk to reply that “Tesla sold 10% of its holdings essentially to prove liquidity of Bitcoin as an alternative to holding cash on balance sheet.” (Tesla’s “Master of Coin,” Chief Financial Officer Zachary Kirkhorn, also talked a lot about liquidity on the earnings call; Tesla decided to put a chunk of its corporate cash into Bitcoin and I guess needed to make sure that its money wasn’t trapped. A reasonable concern! “We’ve been quite pleased with how much liquidity there is in the Bitcoin market,” said Kirkhorn.) more>

Updates from Chicago Booth

Do we need a Chapter 11 for banks?
By Emily Lambert – When the retailer Sears filed for Chapter 11 bankruptcy in 2018, it came as little surprise to those who watched its long decline—including investors who put heat on CEO Eddie Lampert.

But contrast this failure, of a well-known chain, with the failure of financial institutions such as the 2008 collapse of Bear Stearns. When banks fail, it’s often more of a shock, even to the people with money at stake.

Chicago Booth’s Yueran Ma and Columbia’s José A. Scheinkman find that creditors monitor financial institutions less closely than they do other types of companies. Banks get less oversight, in large part because there’s no mechanism investors can use to discipline management if they need to, the researchers argue. This amounts to a significant weakness for the entire financial system.

Banks, in their simplest of forms, take in monetary deposits and lend out the funds at a profit. But modern banks also raise money from nondeposit funding sources such as capital markets, and the amounts can be substantial. At JPMorgan Chase and Bank of America, the researchers write, nondeposit sources represent 35 percent of the banks’ liabilities.

In principle, investors who have stakes in banks would watch their investments just as much as they do any others. After all, even if some standard metrics used to analyze companies don’t apply—such as EBITDA (earnings before interest, taxes, depreciation, and amortization)—there are other ways, such as capital ratios and liquidity ratios, to measure and analyze the performance of financial institutions. Yet the researchers find that investors’ oversight of financial institutions is weaker, at banks both big and small. more>

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Lurking in the shadows – the source of the next financial crisis?

By Justin Urquhart Stewart – In 2008 the collapse of Lehman Brothers was the start of the banking crisis. For those close to it, the issues had been lurking below the surface of the financial world for some time. The secondary banking crisis and the sub-prime mortgage fiasco were all in effect warning quakes for the “big one” to follow. However, even then no one really appreciated just how deep this disaster was going to be.

Other banks were supported either by shareholders or, more drastically, governments bailing them out as they teetered on the edge of collapse. For those of us watching there was fear over just how far this could go and how dangerous was the contagion of bad money poisoning good. There was also a feeling of just desserts for those arrogant and overpaid financial pseudo-aristocrats who had lorded it over their apparent domains. Not only had these people paid themselves astonishing sums of money, but then had the gall to turn to the citizens, through their governments, to bail them out, with little or no personal pain to themselves – for most at any rate. The real pain was felt by the taxpayers, the ordinary shareholders and the greater economy who bore the brunt of this.

Today’s issue is not just banking, be it commercial or investment, but rather something far more elusive – and that is the world of “shadow banking”. In essence, shadow banking is the provision of financial services but not through the usual banking outlets and companies. This may not seem to be such an issue until you consider issues such as regulation, compliance and risk management. In effect you now have new beasts on the wild financial savanna, but ones that previously you had not realized might be dangerous. Quite rightly, I will be wary of lions but don’t expect a nasty nibble from a wildebeest. more>

To Tackle Inequality, We Need to Start Talking About Where Wealth Comes From

Thatcherite narrative on wealth creation has gone unchallenged for decades.
By Laurie Macfarlane – Do people in Britain resent the rich? According to two new studies published this week, the answer to this question is: not really.

The studies, one commissioned by Trust for London and another by Tax Justice UK, explore public attitudes towards wealth based on focus groups held across England. Both found that most people are relatively content with people getting rich, and that attacks on the wealthy are often viewed negatively.

This presents a dilemma for progressives. In recent years left-wing leaders on both sides of the Atlantic have taken a more confrontational approach towards the super-rich. In Britain, the Labour Party’s war cry under the leadership of Jeremy Corbyn has been ‘For the many, not the few’, while in the US Bernie Sanders has made no secret of his contempt for billionaires.

But what if it turns out that ordinary people don’t agree? One response to this dilemma, as outlined by Sonia Sodha in the Observer, is to accept that “the belief that Britain is a meritocracy is ingrained in our collective psyche”, and adjust policies and narratives accordingly. This would mean ditching the class-war rhetoric and instead putting forward solutions designed to appeal to a meritocratic worldview. This might include, for example, closing tax loopholes and increasing particular taxes on grounds of fairness and efficiency.

Sodha is right to point out that this strategy is more likely to chime with people’s existing attitudes towards wealth. As the authors of the Tax Justice UK report note: “The participants in our focus groups largely believe in meritocracy. Those with wealth were seen as having acquired it through hard work.” Participants in the Trust for London research expressed similar views.

But does this mean that progressives should accept the way things are and move on? Not necessarily. As a well-known philosopher once said: “The philosophers have only interpreted the world in various ways; the point, however, is to change it.”

People’s views aren’t formed in a vacuum: they are shaped by social and political forces that evolve over time. Margaret Thatcher’s neoliberal revolution wasn’t just successful because it reorganized the economy – it was successful because it embedded a particular narrative about how wealth is created and distributed in society. This is a world where, so long as there is sufficient competition and free markets, every individual will receive their just rewards in relation to their true contribution to society. There is, in Milton Friedman’s famous terms, “no such thing as a free lunch”. It’s a world where businesses are the “wealth creators” who create jobs and drive innovation, and business owners are entitled to the financial rewards of success – regardless of how enormous they are.

The problem, of course, is that it bears little resemblance to how the economy actually works. While it is true that working hard will generally help you earn more money, this causality doesn’t hold in reverse: not all wealth has been attained through hard work. In practice, the distribution of wealth has little to do with contribution, and everything to do with politics and power. more>

Updates from Chicago Booth

India’s economic recovery from its COVID-19 lockdown
By Chuck Burke – In response to COVID-19’s rise, India ordered most of the country’s 1.3 billion residents to stop working and remain indoors starting in March 2020—the world’s largest lockdown. The government began relaxing restrictions in June, and research finds that while India’s economy improved rapidly in the following months, the outlook for a return to prelockdown levels remained unclear.

In a report for Chicago Booth’s Rustandy Center for Social Sector Innovation, Booth’s Marianne Bertrand and Rebecca Dizon-Ross, Centre for Monitoring Indian Economy’s Kaushik Krishnan, and University of Pennsylvania’s Heather Schofield examined household-level survey data to establish a more comprehensive view of India’s initial recovery than national economic indicators could provide. These charts and maps highlight a selection of their main findings. more>

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Updates from Chicago Booth

Could the US raise $1 trillion by hiking capital gains rates?
By Natasha Sarin, Lawrence H. Summers, Owen Zidar, Eric Zwick – Capital gains taxes are a perennial issue in US tax-reform debates. Some people maintain that preferential rates on capital gains encourage entrepreneurship and capital formation, while others question whether these benefits are worth the costs.

What are those costs, exactly? It’s clear in terms of direct fairness costs: the wealthiest 1 percent of US households accounted for two-thirds of capital gains realizations in the Federal Reserve’s 2019 Survey of Consumer Finances. However, the fiscal costs, which are estimated by the Joint Committee on Taxation, are far less clear. In the parlance of policy makers, the JCT is considered the official “scorekeeper” that decides how tax legislation “scores” if implemented. The prevailing wisdom in the taxation-scorekeeping community appears to be that the revenue-maximizing rate for capital gains is about 30 percent, which is well below both current top marginal tax rates on other income and top rates currently under debate. But in a simple exercise, we estimate that increasing capital gains rates to match the ordinary income level could raise more than $1 trillion over a decade. This illustrates the need to rethink scorekeeping in the debate.

The prototypical example of a capital gain is a share of corporate stock. An individual who bought an $18 share of Amazon when it went public could sell that share today and pay taxes on more than $3,100 of appreciation.

If the revenue-maximizing rate is 30 percent, setting a rate too far above this level will actually reduce the total amount of revenue collected, as the gains expected will fail to materialize because the dynamic response of taxpayers will dramatically shrink the tax base.

Such a response could take the form of an investor retiming a stock sale to avoid realizing a capital gain event. This certainly happens, but we suspect that in most instances the investor doesn’t avoid paying taxes on that gain entirely, just immediately. The tax is simply postponed, in which case these behavioral effects are overstated, resulting in a potentially severe underestimate of the revenue at play. more>

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