Author Archives: Blanco

The US economy is strong. Three signs it won’t last

29 Nov 18
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By Lydia DePillis



Economic expansions never go on forever. As the United States’ long, slow recovery from the Great Recession stretches past the decade mark, regulators and economists are starting to get a little jumpy.

So where’s the bubble that will trigger the next downturn? Housing, like the last time? Corporations up to their gills in debt? Or something else economists haven’t even spotted yet?
Certain indicators already show softening, from capital expenditures to to manufacturing sentiment to residential construction. The question is whether that’s just a cooling off — or the beginning of a steeper slide.
A paper published this month by researchers at the International Monetary Fund found that forecasters typically have a hard time predicting serious downturns until they’re well underway. But it is possible to spot weaknesses that could snowball into crises if unforeseen events — from a trade war to a real war to a cybersecurity meltdown — knock the economy off its glide path.
On Wednesday, the Federal Reserve will release its first-ever report on the nation’s financial stability, which might begin to answer some of these questions. Here are three that Fed watchers already have their eye on.

1. Risky corporate borrowing

Historically, peaks in corporate borrowing have been followed by recessions.In the first quarter of 2018, US companies held a total of $29.6 trillion in debt, more than ever before. More importantly, that figure as a share of the economy is only slightly off its all-time peak in the last quarter of 2017.
For almost the past decade, that debt has been essentially free, as the Federal Reserve kept interest rates near zero to spur growth. Companies used the money to invest in equipment and research, as well as to gobble up other companies and buy back their own stock.
Now, however, interest rates are on the rise again, which could mean that owing lots of money will get more expensive. And it’s not just the quantity of the debt outstanding — it’s also the quality.
In 2017, according to a recent note by Citibank, $1.6 trillion in new debt issued in the United States went to borrowers with less-than-stellar credit ratings. That’s the highest since the years leading up to the 2008 financial crisis, and 2018 is on track to almost match it.
Those leveraged loans have floating interest rates, and risky corporate borrowers could have a hard time making payments if rates rise too fast. That raises the prospect of larger and more widespread bankruptcies if there’s an economic shock — and research shows that companies that hold more debt end up laying off more people during recessions.
That’s why everyone from Senator Elizabeth Warren to the IMF has raised the alarm about the rise of leveraged lending, likening it to the deterioration in mortgage underwriting standards that preceded the last financial crisis.
“The regulators have not taken preventive action to prevent the buildup of risk,” says Richard Berner, who until last year ran the Treasury Department’s Office of Financial Research. “So they have to think about what they do when bad things happen.”

2. The return of ‘buying more house than you can afford’

In the years following the financial crisis, banks became extremely careful about mortgage lending, often to the point where even credit-worthy borrowers had a hard time getting loans. Gradually, those standards have eased up — but it’s not clear whether they’ve gone too far.
One worrying indicator: The average debt-to-income ratio for mortgages insured by the Federal Housing
Administration, which makes up about 22% of the housing market, is now at its highest level ever.
Much of the increase is driven by the fact that limited inventory has made housing in general much more expensive, while wages haven’t kept up.
“Owning a home and having a high debt-to-income ratio makes a lot of sense if the alternative is renting and having all your income go towards rent,” says Ed Golding, a former head of the FHA who is now a fellow at the Urban Institute.
This isn’t necessarily a problem as long as borrowers are on a sound financial footing, which lenders now have to confirm by verifying that applicants have sufficient collateral and a stable income stream. So far, those fundamentals continue to look strong, and default rates remain very low.
“If you look at requirements they have from an assets perspective, back in the day, in 2006 and 2007, you could write it on a napkin and get a mortgage loan,” says Leo Loomie, senior vice president with the mortgage monitoring and compliance firm Digital Risk. “You cannot do that anymore. There’s a ton of data control that wasn’t in place 10,
12 years ago.”
But there are potential red flags in the FHA’s annual report, including a dramatic rise in cash-out refinances that allow homeowners to tap the equity in their homes for money — essentially, the return of homeowners using their properties as ATMs as home values rise. The FHA also voiced concern about the proliferation of down payment assistance programs, which are associated with higher rates of delinquency.
And housing isn’t the only reason consumers are taking on debt. Total credit, including student and auto loans, has risen far above its pre-recession peak, according to the Federal Reserve Bank of New York — creating a problem if the job market softens.
“The American public is more leveraged than I would like,” says Golding.

3. Unemployment is lower than it’s supposed to be

The near 50-year low in the US unemployment rate, which stood at 3.7% in October, is a great thing for many reasons. It’s finally starting to fuel wage increases. It creates opportunities for workers who might otherwise be passed over by prospective employers, such as disabled people and those with criminal records. It means that the consequences of being laid off, which happens even in the best economies, might not be as dire.
But if history is any guide, the United States can’t sustain the current level of unemployment for very long. Right now, it’s well below what economists call the “natural rate” of unemployment, which is a level that accounts for workers moving between jobs.

Unilever CEO Paul Polman retires after 10 years

29 Nov 18
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By Charles Riley


Unilever CEO Paul Polman is retiring at the end of the year after a decade in charge of one of the world’s biggest consumer goods businesses.

Polman is stepping down after losing a bruising fight with shareholders over his plan to move the Anglo-Dutch company’s headquarters out of the United Kingdom.
Unilever (UL) , which owns brands including Dove, Lipton and Ben & Jerry’s, had argued that switching to a single head office in Amsterdam would simplify its structure and give it more flexibility to buy or sell brands.
But some big investors objected and the plan was dropped.
The decision to ditch the relocation was viewed as a blow to executives including Polman, who initiated the review of the company’s structure last year after brushing off a takeover attempt from Kraft Heinz (KHC).
Unilever touted the success the company has enjoyed under Polman’s leadership, saying it had delivered total shareholder returns of 290% during his tenure as CEO.
Andrew Wood, an analyst at Bernstein, said Polman deserved credit for introducing changes that made Unilever highly competitive.
“Polman has been an exceptionally good CEO of Unilever,” Wood wrote in a research note. “It is sometimes worthwhile taking time to remember just how poorly managed and perceived Unilever was in 2008.”
But the CEO had alienated some investors by focusing on sustainable living in recent years, he added. In 2016, Polman argued in an opinion piece for CNN that companies should make sustainable development part of their core mission.
Polman will be succeeded by Alan Jope, the current head of the group’s beauty and personal care business.
Jope is a Unilever (UL) veteran, having joined its marketing department in 1985.
He previously ran the company’s north Asia business, and served as president of its operations in Russia, Africa and the Middle East. He also spent a decade in senior roles in the United States.
Bernstein’s Wood said that Jope had been considered the favorite to take over from Polman.
“Jope is a high quality internal candidate who should be capable of continuing on with Polman’s good work,” he added.

Deutsche Bank headquarters raided in Panama Papers probe

29 Nov 18
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By Ivana Kottasová



Deutsche Bank’s head office and other locations in Frankfurt were raided by 170 police officers and tax investigators on Thursday as part of a money laundering probe.

Prosecutors said the raids targeted two Deutsche Bank employees, and others who have not yet been identified.
The German bank is suspected of helping clients to set up offshore companies in tax havens, prosecutors said in a statement. Investigators are also looking at whether Deutsche Bank failed to report suspicious transactions.
Both the lender and prosecutors said the probe is related to the Panama Papers, a 2016 investigation into money laundering networks and shell companies set up by Panama-based law firm Mossack Fonseca.
Frankfurt prosecutors said that a subsidiary of Deutsche Bank in the British Virgin Islands had served more than 900 customers, doing €311 million ($353 million) worth of business in 2016 alone.
Deutsche Bank said it was cooperating with authorities and would release more details in due course.
“As far as we are concerned, we have already provided the authorities with all the relevant information regarding [the] Panama Papers,” it said in a statement. “Of course, we will cooperate closely with the public prosecutor’s office in Frankfurt, as it is in our interest as well to clarify the facts.”
Germany’s biggest bank employs roughly 95,000 workers and has assets worth €1.4 trillion ($1.6 trillion). It’s one of 29 lenders designated by the Bank for International Settlements as playing a significant role in the global financial system.
The investigation is yet another headache for Deutsche Bank, which has struggled in recent years to turn a profit amid questions about its business strategy and direction, and the heavy financial burden of past misconduct.
The lender struck a $7.2 billion deal with the US government in January 2017 to settle claims that it packaged and sold toxic mortgages.It was fined $630 million the same month over a Russian money laundering scheme.
In September, Deutsche Bank was ordered by German regulators to tighten its controls to prevent money laundering and terrorist financing.
Shares in Deutsche Bank (DB) slumped more than 3% on Thursday. The stock has tumbled 47% so far this year.
Christian Sewing, a retail banking veteran who took over as CEO in April, has tried to accelerate an overhaul of the bank, which has already closed hundreds of branches, cut thousands of jobs and slashed costs.

A European problem

Other European lenders have also come under scrutiny for potential money laundering. HSBC (HBCYF) and ING (ING) have both settled money-laundering allegations in recent years.
Danske Bank (DNKEY), the largest bank in Denmark, said in September that an internal investigation had uncovered a large number of suspicious accounts and transactions at its branch in Estonia.
Jimmy Gurulé, professor at Notre Dame Law School and former US Treasury official, said that stronger deterrents are needed.
“Even in the most egregious cases, banks are often only required to pay a monetary penalty for engaging in criminal activity, which is merely the cost of doing business,” he said.