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Wall Street’s new sheriff is on a mission

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Financial markets may soon have a new regulatory sheriff. President-elect Joe Biden, who will be inaugurated on Wednesday, is expected to pick the former head of the US Commodity Futures Trading Commission, Gary Gensler, to run the Securities and Exchange Commission. Given that US capital markets are the broadest and deepest in the world, the chair of the SEC is not only the most important market regulator for America but also, arguably, for the wider world. The good news is that Mr Gensler is exactly the right man for the job. 

As a former Goldman Sachs partner who also served in the Treasury department during the Clinton administration, he is a powerful choice in part because he’s a “born-again” regulator.

After 18 years at the US bank, including time in the risk arbitrage unit, Mr Gensler began his regulatory career working with his former boss Robert Rubin, who had been appointed US Treasury secretary. He then became an under-secretary to Mr Rubin’s successor, Larry Summers, who passed the Commodity Futures Modernisation Act. This was the law that exempted credit default swaps, which exploded the global economy during the financial crisis of 2008, from regulation.

But later, as chair of the CFTC under President Obama, Mr Gensler spent a large portion of his time cleaning up the mess that such lack of oversight created. He passed dozens of new rules to increase transparency and reduce risk in the swaps and futures markets — moving faster and further on financial regulation than any of his peers.

Indeed, Mr Gensler almost seemed to see it as his own personal mission of penance. As he told me in a 2012 interview, “Knowing what we know now, those of us who served in the 1990s should have done more [to protect] the derivatives market.”

Democrats usually decry the revolving door between Goldman Sachs and Washington. But Mr Gensler is both beloved of financial reform types and feared on the Street in large part because of his status as a former insider.

“Gary can’t be intimidated, and he’s usually smarter than you are,” says Dennis Kelleher, president and CEO of Better Markets, a non-profit financial reform organisation. “He’d call baloney on arguments that didn’t withstand scrutiny,” Mr Kelleher adds — recalling Mr Gensler’s tenure at the CFTC, when financial executives would lobby for or against various rules.

Since stepping down from the CFTC, maths-whizz Mr Gensler has been at MIT, studying and teaching on the next big things in finance: blockchain and cryptocurrency. That background will make him even more useful as a regulator at a time when the largest tech platform companies — from Google and Facebook to Amazon and Apple — are moving into the financial industry.

Mr Gensler has so far lauded the convenience and low cost of retail financial services apps while cautioning against the use of decentralised technologies for financial speculation. In a November 2020 MIT paper, he and co-author Lily Bailey discussed the “significant opportunities for efficiency, financial inclusion, and risk mitigation from AI and big data in the financial sector, but also the possibility of ‘regulatory gaps’ that might lead to ‘financial system fragility and economy-wide risks’.” Translation? In a Gensler-led SEC, fintech will be under greater scrutiny.

But he will also have to address past failings. For some years, the SEC has been criticised for not being tough enough on corporate America and not adequately protecting investors. Indeed, scams and fraud have been on the rise during the Trump administration, according to the SEC’s Office of Investor Education and Advocacy.

As head of the SEC, Mr Gensler would therefore have to balance two jobs. First and foremost would be restoring trust in the agency’s ability to accomplish its core mission of protection, financial stability and penalising violations. In addition, though, as a longtime Democratic politico, he would want to help facilitate the Biden administration’s priorities, such as addressing income inequality, racial injustice and climate change.

On the former, progressives will look to the next SEC chair to acknowledge that it is not banks that break laws, but individual bankers. By appointing a tough director of the enforcement division — perhaps a former prosecutor or a consumer advocate — the chair could send a message: there will be no more sweetheart deals for individual executives while organisations write-off their regulatory fines as a cost of doing business. The chair could also revisit Trump-era deregulation, and toughen rules around whistleblower protections, pay clawbacks for illegal gains, and limits on executive pay for high-risk activities.

On the broader Biden agenda, the SEC could meanwhile play a big role in increasing transparency and disclosure around hidden fees, predatory lending and unseen risks from factors such as climate. Imagine, for example, if companies had to disclose their potential litigation risk around lending to the fossil fuel industry or developing waterfront property. This, combined with opening up the black box of algorithmic finance, could go a long way towards mitigating risk at a delicate time for the global economy. 

With a new administration and a new “born again” SEC director, markets may soon get regulatory religion too.

rana.foroohar@ft.com



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Wall Street stocks waver as traders weigh stimulus progress

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Wall Street’s main stock indices wavered within a tight range on Monday, steadying after large swings last week, as traders weighed the Senate’s passage of Joe Biden’s $1.9tn stimulus bill.

The blue-chip S&P 500 index gained 0.6 per cent at lunchtime in New York while the Nasdaq Composite slipped 0.2 per cent, following a turbulent spell of trading that pushed the tech-focused index down 2 per cent last week.

The recent market volatility has come as rising expectations for economic growth and inflation have sparked a sharp sell-off in US government debt. The selling continued on Monday, with the yield on the benchmark 10-year Treasury rising 0.05 percentage points to 1.6 per cent — close to its highest level in a year after starting 2021 near 0.9 per cent.

Higher borrowing costs are typically considered to be bearish for expensive portions of the equity market because they reduce the value of future cash flows. This has had a particularly sharp effect on the biggest gainers since the trough last March as many now trade at elevated levels compared with their earnings and revenues expectations.

Monday’s bond market decline comes after the Senate at the weekend passed the US president’s huge stimulus package, which includes $1,400 payments to many Americans. The measures put through by the upper chamber represented slightly more than 8 per cent of US economic output, according to Goldman Sachs.

“If it does make it through the House relatively unscathed then you may see another round of US growth upgrades and probably more concerns about yields and inflation,” said Jim Reid, research strategist at Deutsche Bank. “The battle royale will continue.”

In Europe, the region-wide Stoxx 600 index closed up 2.1 per cent, London’s FTSE 100 added 1.3 per cent and Frankfurt’s Xetra Dax climbed 3.3 per cent to a record high. But in China stocks tumbled, pushing the CSI 300 into “correction” territory after the index of Shanghai and Shenzhen-listed shares closed down 3.5 per cent. Hong Kong’s Hang Seng sank 1.9 per cent.

Closely watched data from the European Central Bank showed it had added €11.9bn of bonds to its holdings under the pandemic emergency purchase programme in the week to last Wednesday — down from €12bn the previous week and below the €18.1bn weekly average since the programme started last March.

Antoine Bouvet, senior rates strategist at ING, said the data would “come as another disappointment to the market”, which has been looking for signs that the ECB would take action to combat rising bond yields.

The low headline figure, coupled with an ECB statement about the report’s artificially small number owing to temporary factors, would “confuse the market over the degree of urgency” from policymakers, he added. 

Market reaction to the PEPP data was muted as traders awaited more details on the ECB’s stance at Thursday’s monetary policy meeting. The yield on the benchmark 10-year German Bund was little changed at minus 0.28 per cent after the release.

Elsewhere, the price of commodities continued to rise after a main Saudi Arabian oil site was attacked over the weekend.

US marker West Texas Intermediate rose 1.6 per cent earlier to $67.17 a barrel, but later stabilised at $65.18. International benchmark Brent traded higher than $70 for the first time since the market tumult following the start of the pandemic, but pared back its gains to $68.37.



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Oil price jumps above $70 after attacks aimed at Saudi oil facilities

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Oil prices jumped above $70 a barrel for the first time in 14 months after Saudi Arabia, the world’s top oil exporter, said its energy facilities had been attacked on Sunday, targeting “the security and stability” of global supplies.

A drone attack from the sea on a petroleum storage tank at Ras Tanura, one of the largest oil shipping ports in the world, took place on Sunday morning, the kingdom said.

In the evening, shrapnel from a ballistic missile fell in Dhahran, where state oil company Saudi Aramco has its headquarters and near where thousands of employees and their families live.

While Saudi Arabia’s ministry of energy said the attacks “did not result in any injury or loss of life or property”, and a person familiar with the matter said no production had been affected, the attacks have still unsettled oil markets that have rebounded strongly in recent months.

Brent crude, the international benchmark, rose 2 per cent to a high of $71.16 a barrel while West Texas Intermediate, the US benchmark, rose by a similar amount to a high of $67.86 a barrel.

Yemen’s Iran-allied Houthi fighters claimed responsibility for the attacks and said they had also focused on military targets in the Saudi cities of Dammam, Asir and Jazan.

A Houthi military spokesperson said the group had fired 14 bomb-laden drones and eight ballistic missiles in a “wide operation in the heart of Saudi Arabia”.

Amrita Sen at Energy Aspects emphasised that while a direct hit on oil supplies appeared to have been avoided, the threat to the market would still be taken seriously by oil traders.

“The oil price was already on a strong footing after Saudi Arabia and Opec’s decision last week to keep restricting production,” she said.

Brent crude, the international oil benchmark, has risen close to $70 a barrel since the cartel and allies outside the group, including Russia, decided not to unleash a flood of crude on to the market.

Amid uncertainty about the oil market outlook as the coronavirus crisis continues to have an impact on crude demand, the group decided against raising production by 1.5m barrels a day from April.

Given the supply curbs, while the kingdom has the extra production capacity to tap into, “geopolitical threats to supply will add a premium to the price”, Sen added.

The kingdom’s state media outlet said earlier in the day that the Saudi-led military coalition confronting the Houthis had intercepted missiles and drones aimed at “civilian targets” without indicating their location.

The Eastern Province, where Dhahran is located, is where much of Saudi Aramco’s oil facilities are located. The attack is the most severe since September 2019.

At that time the kingdom was rocked by missile and drone fire that hit an important processing facility and two oilfields, temporarily shutting off more than half of the country’s crude output.

The Houthis have ramped up assaults on Saudi Arabia through airborne attacks and explosive-laden boats and mines in the Red Sea, laying bare the vulnerability of the country’s energy infrastructure despite the kingdom’s production prowess and its hold over the oil market.

“The frequency of these attacks is rising, even if the impact on energy infrastructure appears limited,” said Bill Farren-Price, a director at research company Enverus. “We know the capacity to cause serious damage exists, so this will boost the risk premium for oil.”



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Rio Tinto set to start negotiations over Mongolian mine

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Rio Tinto is set to start face-to-face negotiations with the government of Mongolia as its seeks to complete the $6.75bn expansion of a huge copper project in the Gobi desert. 

The Anglo-Australian group is sending a team of senior executives to the capital Ulaanbaatar to try and hammer out a new financing agreement so that the development timeline can be maintained and underground caving operations can start later this year.

The discussions will focus on a number of issues including tax, a new power agreement and benefit sharing, according to people with knowledge of the situation.

Some government officials want Rio to pay more than $300m of withholding taxes on income it has received from Oyu Tolgoi LLC, the Mongolian holding company that owns the mine. 

Rio receives a management service fee for running Oyu Tolgoi’s existing open pit and the underground project as well as interest on money it has lent the government to fund its share of the development costs.

However, the officials say it is “very difficult, if not impossible” to engage constructively on the issue because the payments are the subject of arbitration in London.

For its part, Rio believes the issue of withholding taxes is dealt with in the separate investment and shareholder agreements that cover its operations in the country.

The underground expansion of Oyu Tolgoi ranks as Rio’s most important growth project. At peak production it will be one of the world’s biggest copper mines, producing almost 500,000 tonnes a year.

Although Rio runs the existing operations and is in charge of the underground expansion project it does not have a direct stake in the mine.

It’s exposure comes through a 51 per cent stake in Turquoise Hill Resources, a Toronto-listed company. TRQ in turns owns 66 per cent of Oyu Tolgoi LLC, with the rest controlled by the government of Mongolia. 

The project has been beset by difficulties and is already two years late and $1.5bn over budget. The government said earlier this year that if the expansion is not economically beneficial to the country it would be necessary to “review and evaluate” whether it can proceed.

To that end the ruling Mongolian People’s party and its new prime minister Luvsannamsrain Oyun-Erdene are trying to replace the Underground Development Plan with an improved agreement.

Signed in 2015, this sets out the fees that Rio receives for managing the project as well as the interest rates on the cash Mongolia has borrowed to finance its share of construction costs.

However, it was never approved by Mongolia’s parliament and has become a focal point for critics who say the country should receive a greater share of the financial benefits.

Rio, which recently appointed a new chief executive, has told the government it is prepared to “explore” a reduction of its project management fees and loan interest rates as well as discuss tax.

However, analysts are sceptical that the two sides will be able to put a new agreement in place by June when a decision on whether to start caving operations must be taken if Oyu Tolgoi is to meet a new target for first production in October 2022.

Rio is also at loggerheads with TRQ on how to fund the cost overruns at Oyu Tolgoi. Last week, TRQ’s chief executive resigned after Rio said it planned to vote against his re-election at its annual shareholders’ meeting.

In a statement, Rio said it was committed to working with TRQ and the government of Mongolia to enable the successful delivery of the Oyu Tolgoi Project

“Aligning and co-ordinating our joint efforts to resolve the concerns of the Government . . . going forward is of the highest priority,” it said.



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