European banks need cost-cutting not cross-border M&A
Jamming large struggling banks together will not fix the sector’s problems
The calls for cross-border European banking deals are mounting again. Not for the first time, we are being told that consolidation of international banking groups will “fix” the problems faced by the industry, this time those caused by the pandemic.
Over the years, various combinations of UniCredit, Société Générale or Commerzbank have been touted, as well as tie-ups between banks from the same country, such as Deutsche Bank and Commerzbank or UBS and Credit Suisse. Yet nothing tangible ever seems to come from these discussions. And with good reason. It is hard to see who would benefit from such deals, other than the mergers and acquisitions advisers involved in the transactions.
While the industry is in desperate need of consolidation, this would be the wrong way to go about it. Here’s why. Despite years of effort to integrate European banking, we are still a long way off from a true single market. The European Central Bank has overall supervisory responsibility, but too much leeway still exists at the national level.
The work of the Single Resolution Board, which has EU-wide authority to supervise the orderly resolution of failing banks, is a prime example. The SRB was an important step towards banking union, yet its power has been structurally compromised by inclusion of national governments in the winding-up process.
Resolution remains one of the biggest stumbling blocks for cross-border deals. What national authority would let a local bank acquire a large, complex foreign institution when its taxpayers would be on the hook if it failed?
The lack of a strong resolution authority has contributed to the generally unfinished business of cleansing the European banking system. There are still too many undercapitalised, unprofitable and uncompetitive institutions. Some are large institutions waiting for a revenue rebound to bail them out of their predicament. Merging two big, struggling banks will not create a thriving national champion, no matter what advocates say.
Measures intended to support the economy have also provided life support for struggling banks. We have ended up with a valuation gap between winners and losers that is far tighter than it should be. This further stymies the needed cleansing.
What is the solution? A sound financial system must begin with robustly capitalised, well-managed institutions capable of sustained profitability. Revenue growth headwinds are likely to be with us for years to come, so radical cost-cutting must be the key. This means leaving businesses that management teams have clung to in the vain hope of cyclical rebounds.
The sector does need M&A, but not the type that is so regularly floated. We require consolidation not across borders or between bloated giants, but domestically to reduce fragmentation and eliminate the subscale players. Barely profitable, they are not capable of making the required technology investments.
Regulators have an important part to play. They must pressure weaker players (and the governments covering for them) to have a plan or face resolution. Their oversight should reward successful banks, so that they can play the leadership role in the industry. Blanket application of rules, such as dividend bans, only serves to stifle success and protect the weak. Regulators must differentiate more than they have.
The result would be a smaller number of healthier, more profitable institutions better able to invest and adapt to a new, more digital future. At that point, as pan-European regulation continues to evolve towards a more tangible single market, cross-border consolidation would start to make sense. Only then will we see the end, once and for all, of the rolling financial crisis that has been with us since 2010.
The writer, a former chief operating officer of Barclays, is the founder of Copper Street Capital
Countryside Properties, the £2bn London-listed company, is facing demands from activist hedge fund Browning West
US hedge fund Browning West has told Countryside's board to sell its housebuilding arm, Sky News learns.
One of Britain's biggest listed property groups is facing demands from an American hedge fund to break itself up and hand over a board seat in the latest example of shareholder activism targeting a major UK company.
Sky News has learnt that Countryside Properties, which has a market capitalisation of over £2bn, has been told by Browning West to sell its housebuilding arm - one of its two main operating divisions.
Browning West has also written to Countryside to request a board seat, according to insiders.
The hedge fund's request was made several weeks ago, and is expected to be followed by further dialogue before the end of the year, they added.
News of Browning West's demands comes less than two months after it took a 5% stake in Countryside.
It has since increased its shareholding to 8%.
It emerged in September that Countryside was one of four housebuilders facing enforcement action from the competition watchdog for ripping off leaseholders by charging them excessive ground rent payments.
The company's housebuilding operations account for roughly 40% of total group revenues, with Countryside's faster-growing partnerships business - which works with local authorities and housing associations to provide affordable and private rented sector homes - making up the majority of its sales.
In July, it raised £250m from a share placing, making it one of hundreds of listed companies to tap investors for new capital during the coronavirus pandemic.
It said at the time that it wanted to grow operating profit from its partnerships business to 75% of group operating profit, but has shown no sign of wanting to dispose of a housebuilding arm which is one of the largest in southeast England.
Browning West's push for a break-up will put pressure on David Howell, the former travel industry executive who chairs Countryside, to marshal a robust defence of the company's strategy.
The hedge fund has been a vocal investor in Domino's Pizza Group, where its founder, Usman Nabi, now holds a board seat.
A Countryside spokesperson said: "We have engaged in extensive private dialogue with Browning West as we do with all of our shareholders.
"We have a clear strategy to accelerate the growth of our Partnerships division which we are focused on executing.
"It is the job of Countryside's Board and management team to do what is best for the Company and to create value for all shareholders.
"Browning West has raised matters which the board and management have previously considered and we will continue to engage with Browning West and our other investors in that context."
A source close to Countryside said its shares had risen by almost 85% since its flotation in February 2016.
Browning West declined to comment.
A number of prominent London-listed companies have been targeted in recent months by activist investors, the latest example of which was St James's Place, the wealth manager.
Others which remain in activists' cross-hairs include Barclays and Pearson.
Weekend Papers Summary
NEW YORK TIMES
Saturday
• Long lines and escalating demand for testing underscore how a second wave of the coronavirus is threatening New York City, and they come as the entire country confronts record numbers of new cases—more than 181,000 nationally on Friday.
• Trump suffered multiple legal setbacks in three key swing states—Pennsylvania, Arizona, and Michigan—on Friday, choking off many of his last-ditch efforts to use the courts to delay or block president-elect Joe Biden’s victory.
• The Biden administration has promised to drastically increase resources for public schools, expand civil rights advocacy for marginalized students, and reassert leadership in policymaking—undoing education secretary Betsy DuVos’ attempts to bolster private schools at the expense of public ones.
• As the pandemic engulfs the nation, recent recommendations from the CDC are hewing more closely to scientific evidence, often contradicting the positions of the Trump administration in areas such as urging people to wear masks and avoid large gatherings.
• After days of silence, China on Friday congratulated Joe Biden on his election as US president, signaling a start to its relations with the incoming administration after years of hostility and distrust under Trump.
• Justice Department prosecutors pushed back this week against a memo from attorney general William Barr that called for politically charged election fraud investigations, saying Barr had thrust the department into politics and falsely overstated the threat of voter fraud.
• In the waning days of his term, Trump is scrambling to fulfill his promise to withdraw US troops from Afghanistan, aided by conservative antiwar forces who see it not only as good policy but also as a linchpin to any future he may seek in politics.
• In California, the beginnings of a hydrogen economy may finally be dawning after many false starts—dozens of hydrogen buses are working on city streets, and fueling stations are appearing from San Diego to San Francisco, financed by the state and federal governments.
Sunday
• More than 1,000 Americans are dying of the coronavirus every day on average, a 50 percent increase in the last month—Iowa, Minnesota, New Mexico, Tennessee, and Wisconsin have recorded more deaths over the last seven days than in any other week of the pandemic.
• With a coronavirus vaccine potentially available as soon as next month, states and cities are warning that distributing the shots could be hindered by inadequate technology, severe funding shortfalls, and a lack of trained personnel.
• Iran’s Foreign Ministry denied a report that Israeli agents had fatally shot Al Qaeda’s second-ranking leader on the streets of Tehran, likening it to a “Hollywood” scenario manufactured by “American and Zionist” officials.
• “The nine months of the pandemic have shown that in a modern state, capitalism can save the day—but only when the government exercises its power to guide the economy and act as the ultimate absorber of risk. The lesson of Covid capitalism is that big business needs big government, and vice versa,” says Upshot columnist Neil Irwin.
WALL STREET JOURNAL
Weekend
• Front page story reports US school districts “are fighting a wave of increasingly aggressive hackers, who are publicly posting sensitive student information to get schools to pay up—the data can aid identity theft or be highly embarrassing for vulnerable young people.”
• Increasing numbers of green-card holders are becoming naturalized US citizens—last year, 843,593 immigrants took the oath, the highest number in 11 years according to the Department of Homeland Security Office of Immigration Statistics.
• The Small Business Administration won a temporary stay of a federal judge’s ruling that required the agency to release detailed information on Paycheck Protection Program borrowers, including names and specific loan amounts.
• A revived Trump administration rule to end the rebates drugmakers give to middlemen in Medicare—an executive order said the rule can’t increase premiums or federal spending—is awaiting approval from the Office of Management and Budget, and a final version could be imminent.
• From 1980 through 2016, 19 of the nation’s more than 3,000 counties voted for the eventual president in every election—but only one of them, Washington state’s Clallam County, backed Biden’s White House bid.
• China and 14 other Asia-Pacific nations will sign a trade deal that will knit their economies closer together—the second pact covering large swaths of the region whose signatories don’t include the US.
• Covid-19 is wreaking havoc on the market for risky municipal bonds, and investors desperate for tax-exempt yield are still piling in—fixed-income returns that come with a tax break have become so precious to affluent households that they are willing to overlook potential problems.
• H.O.T.S.: Retail titans WMT and KR can capitalize on the pandemic-driven surge in e-commerce by revving up their online-advertising plans; The pandemic has curbed indoor dining at restaurants across the globe and been a boon for the food-delivery industry, but the trend may not last; Vaccines from PFE and MRNA are essential to end the coronavirus pandemic, but investors should remain cautious about the long term business opportunity.
FINANCIAL TIMES
Weekend
• Even as Donald Trump refuses to concede his loss in the presidential election and ignore the coronavirus crisis, Joe Biden is laying the groundwork to address the pandemic when the takes office, including the formation of a dedicated task force.
• GOOGL chief executive Sundar Pichai apologized to Thierry Breton, Europe’s internal market commissioner, after an internal company document laid out a plan to “increase pushback” on the Frenchman in an attempt to weaken support for EU regulatory proposals.
• Many European politicians have hailed Biden as the winner of the US presidential election, but some have refrained from doing so, endorsing Trump’s unfounded claim that he lost because of ballot fraud.
• Big Read piece says that while BNTX has developed a vaccine that offers humanity a pathway out of the coronavirus pandemic, Ugur asahin and Ozlem Tureci, the husband and wife team behind the German company, believe their technology can transform all of medicine.
• Lex Column: BP chief Bernard Looney may want to keep his options open in Russia, but the company’s commitment to Rosneft makes less sense every year; GS’s aspirations are supposed to center on a shift to a broader business mix, but part of that will require bringing more representatives of those areas into its partnership structure; Reducing US pension investment in supposedly risky Chinese companies is a bipartisan cause—but Trump’s executive order banning US investors from holding shares in companies tied to China’s military only ratchets up the problem.
• Comment: Between the partisan rhetoric in the US and Australia over global warming, climate action is becoming less divisive as markets work to carry out change, and despite Trump’s best efforts, the coal industry is shrinking, even in Republican states.
NEW YORK POST
Saturday
• Warner Bros. may consider releasing “Wonder Woman 1984,” the only big-budget movie set to be shown in theaters this year, on the HBO Max streaming service soon after its theatrical release.
Sunday
• More than two dozen CEOs of major US corporations took part in a video conference earlier this month to discuss what to do if Trump refuses to leave office or takes other steps to stay in power beyond Joe Biden’s inauguration in January.
• + Nintendo: The looming release of SNE’s PlayStation 5 and MSFT’s Xbox Series X didn’t put a damper on Switch sales last month, with Nintendo’s flagship console delivering the second-strongest October sales performance ever.
Lawsuit tracker: where and how is Donald Trump fighting the result?
President launches flurry of legal action but experts say he will struggle to overturn outcome
Taxing of private equity needs a rethink
UK proposals to reform capital gains tax are belated and necessary
The tax treatment of private equity is an issue that has bedevilled politicians on both sides of the Atlantic for decades. Despite numerous attempts to address the way the industry is taxed, governments have failed to dismantle a system that has allowed huge wealth to be amassed by the industry’s largest players for very little personal risk. Covid-19 is an opportunity to tackle the issue once and for all. Governments everywhere are already looking at changes to their taxation systems to help pay for the economic damage wrought by the pandemic.
In the UK, a government-commissioned review of capital gains tax has proposed bringing its rates closer into line with those of income tax. Such a move could hit private equity groups, which fear they will face a higher tax rate. In the US, the industry faces a similar threat under Democratic president-elect Joe Biden, whose tax plans would significantly increase the burden on buyout groups.
At the centre of how private equity is taxed is the treatment of “carried interest”, or “carry”. The jargon simply means a share of profits and is the way partners in buyout groups can make most of their money. This is currently taxed as capital gains rather than ordinary income. In the UK, the rate is 28 per cent rather than the 45 per cent top rate of income tax. In the US, such capital gains are taxed at just 20 per cent. In some parts of Europe, rates are even lower. The result has been to foster a generation of buyout billionaires who have paid lower tax rates than their cleaners.
Industry executives on both sides of the Atlantic have been quick to warn that any tax rises would be bad for business. In the UK, they have suggested they would be a body blow to the country’s start-up scene and penalise entrepreneurship. The argument has some validity, but as it relates to private equity, it is tangential at best. It is in a nation’s interest to foster entrepreneurship — but carried interest is not entrepreneurship.
The industry has long argued that carried interest should be taxed as a capital gain as it reflects long-term risky investments. This would hold water if buyout executives were investing large amounts of their own cash — yet most comes not from them, but from clients. While the potential for profit is large, the potential personal capital loss is normally minimal. It is true that the income that general partners receive is uncertain and fluctuates, but this is also true of other risk-taking earners, from start-up founders to authors. Yet the latter’s royalties are treated as income. It is only right that similar incomes are taxed in similar ways.
Whether or not the general rate of capital gains is increased in the UK on the back of the recent review, or in the US under the new president, carried interest should be taxed as the income that it is. Meaningful change, however, will require concerted global action. In the US, the Democratic push to impose higher taxes on buyout barons is likely to face significant headwinds in a deadlocked Senate. The lobbying power of the industry is substantial; politicians from both sides of the political divide have pledged change on this front for years and not succeeded.
The UK, however, has a chance to send a powerful message that change is in the air. Politicians should make clear that this is not a deliberate attack on private equity and that the industry, which is flush with cash, has a meaningful role to play in the post-Covid economic recovery. But reforming this tax anomaly is overdue.
Tensions flare between Trump supporters and opponents at DC protests
Tensions flared after dark Saturday — and one person was stabbed — as pro- and anti-Trump factions clashed in Washington D.C. — hours after the president himself made a drive-by appearance at a recount rally attended by thousands of his supporters.
One person was left with critical injuries in the stabbing, which occurred during a fight between two large groups at 10th Street and New York Avenue NW around 8:30 p.m., NBC 4 Washington reported, citing a spokesperson for D.C. Fire and EMS.
The victim was taken to a trauma center, according to the spokesperson.
The fight was related to the ongoing protests, officials told the outlet. No information on a suspect was immediately available.
In two separate tweets, Trump said “Antifa scum” were responsible for the violence.
“ANTIFA SCUM ran for the hills today when they tried attacking the people at the Trump Rally, because those people aggressively fought back,” the president wrote.
“Antifa waited until tonight, when 99% were gone, to attack innocent #MAGA People. DC Police, get going — do your job and don’t hold back!!!”
“Radical Left ANTIFA SCUM was easily rebuffed today by the big D.C. MAGA Rally crowd, only to return at night, after 99% of the crowd had left, to assault elderly people and families,” he later posted.
“Police got there, but late. Mayor is not doing her job!”
Videos showing Trump supporters getting cursed at and shoved by counter-protesters have flooded social media.
Counter-demonstrators hurled eggs and water bottles at MAGA supporters, in several caught-on-video instances stealing Trump flags and hats and setting them on fire.
In one incident, three Trump supporters were eating at a restaurant two blocks from the White House when someone set off fireworks in their direction, NBC 4 Washington reporter Shomari Stone tweeted.
Dramatic video captures the moment the projectiles zoomed over tables as some ducked or ran out of harm’s way.
Many Trump supporters fled to the Capital Hilton hotel after the incident, according to ABC 7 in Washington.
Officers from the Metropolitan Police Department lined up outside the hotel Saturday night in an effort to prevent demonstrators from following other people inside, the outlet reported.
Another clip captures a group of counter protesters trailing two men — identified by a photojournalist as Trump supporters — on the sidewalk — yelling “Get the f–k out of here” and throwing water from a bottle at one of them.
Footage posted by ABC 7 in Washington also captures a biker being pushed to the ground and doused with water.
After he stood up, he raised two middle fingers at the people around him.
In yet another video, a group pummeled a man and beat him over the head with a flag pole.
The poster, the host of a conservative web series, claimed the victim was a Trump supporter and his assailants were members of Black Lives Matter and Antifa.
Another clip, taken before dark, shows a man shoving and pushing another man who yelled, “Get the f–k out!” over a bullhorn.
In return, a crowd surrounded him, shoving and punching him until he face-planted on the street.
He was left dazed, bloody and barely able to stand, a separate video shows.
In total, 20 people were arrested during the protests — four for firearms violations, two for simple assault, one for assaulting a police officer, two people for acting disorderly, and one for what the Metropolitan Police Department described as “no permit,” the local NBC station reported.
It was unclear if those arrested were Trump supporters or counter protesters.
Police told the network they have responded to multiple reports of fights between protesters downtown.
German auditors fight tighter regulation after Wirecard scandal
Berlin accused of ‘knee-jerk reaction’ which would create ‘unpredictable risks’ for the profession
Germany’s auditing industry is seeking to water down government plans to tighten financial regulation laws in the wake of the Wirecard scandal — one of the biggest cases of accounting fraud in the country’s postwar history.
Wirecard, once a high-flying German electronic payments start-up, crashed into insolvency in June after disclosing that €1.9bn in corporate cash did not exist. Wirecard’s auditor, EY, had given the firm unqualified audits for almost a decade.
The Wirecard debacle, which according to Europe's financial regulator Esma exposed “deficiencies in the supervision and enforcement of Wirecard’s financial reporting”, prompted Berlin to work on a far-reaching overhaul of the auditing industry’s regulation.
“It is hard to understand why [Wirecard’s auditor] did not succeed in uncovering [the accounting manipulations],” Germany’s finance minister Olaf Scholz told parliament in September.
But Germany’s auditing industry is not going down without a fight. It has reacted with dismay to the draft bill published last month which outlines plans to make auditors more accountable and independent. “The government plans are a knee-jerk reaction which isn't properly thought out and would be a catastrophe,” Klaus-Peter Naumann, the chief executive of IDW, Germany's association of accountants, told the Financial Times.
Among other measures, the government wants to force companies to switch auditors once every decade. It also wants to significantly limit a firm’s ability to sell consulting services to auditing clients.
Under the plans, the German financial regulator BaFin will be given more powers to launch investigations into suspected accounting fraud.
The German Chamber of Public Accountants, WPK, argues that the proposed regulatory changes would not prevent a second Wirecard case but create “various unpredictable risks” for the profession.
A crucial concern for the industry is the government's plans to extend liability for professional blunders. So far, auditors in Germany only face an unlimited liability for intentional breaches of duty while damages for other types of mistakes are capped at €4m.
The government wants to abolish the cap for gross negligence altogether and is planning to lift it to €20m for ordinary negligence.
Joachim Hennrichs, professor for accounting law at Cologne University, warns that insurance companies will not offer protection against claims of gross negligence. “This is an uninsurable risk. In combination with an unlimited liability, this creates the risk that the next Wirecard scandal could actually sink the involved auditing firm.” As the market concentration was already too high, this would be highly problematic, Mr Hennrichs argues.
At the moment, the Big Four auditors PwC, KPMG, EY and Deloitte control half of the Germany’s auditing market, according to data by Lünendonk and Hossenfelder, a consultancy.
Another worry in the auditing industry is that smaller accounting firms would be hit particularly hard by the increased liability. Mr Naumann argues that the average fees earned with smaller clients stand between €150,000 and €450,000.
“With a liability cap of €20m, smaller auditors will be on the hook for 50 times the fees, which is excessive,” he argues. As a consequence, he predicts that smaller auditing firms might entirely withdraw from the market. “It is not an unrealistic scenario that some companies may actually struggle to find an auditor at all,” he warns.
Moreover, under the draft bill, individual auditors could be sent to jail more easily, and would face longer prison terms. Ulrich Störk, the head of PwC Germany, warns that these punishments would make it much harder to recruit new staff, which was a problem already. “Increased personal liability risk would lead to a shortage of young talent in the auditing provision,” he said.
Deloitte told the FT it supported the IDW position. EY, which is facing an avalanche of investor's lawsuits over its work for Wirecard, and KPMG, which harshly criticised EY's work in a confidential appendix to its special audit into the company's accounting, both declined to comment on the draft bill.
The IDW and PwC are also taking issue with the government's plans to force companies to change auditors at least every 10 years – compared to a maximum term of up to 24 years at the moment.
“We know that a change in auditors temporarily tends to lead to a drop in auditing quality,” said Mr Naumann, as it takes time for a new auditor to come to grips with the intricacies of a new client. He also points to evidence that many clients who are forced to switch auditors tend to turn to a larger one.
The head of the IDW also stresses that the new rule would not have changed anything with regard to Wirecard as the company had not been an EY client for more than 10 years.
Mr Naumann argues that the whole focus of audit reforms after the Wirecard debacle is misguided. “We have the suspicion that organised crime is at the core of the Wirecard scandal. No auditor will ever be able to uncover that, as they don’t have investigative powers. This will always be a job for the law enforcement agencies.”
Denmark’s mink massacre is also killing one of the country’s largest fur sellers.
The breeder-owned cooperative Kopenhagen Fur says it will shut down over the next two to three years because of the Danish government’s drastic efforts to contain a coronavirus outbreak there.
Officials announced plans last week to slaughter all 15 million of Denmark’s farmed mink after a new strain of COVID-19 emerged among the furry critters — a move that has put fur farmers “in an extreme and unusually difficult situation,” according to Kopenhagen Fur CEO Jesper Lauge.
“Unfortunately, even the strongest community cannot survive the consequences of the decisions that have now been made,” Lauge said in a Thursday statement, adding that he had informed the company’s more than 300 employees about the decision to wind down the business.
Kopenhagen Fur, which calls itself the world’s largest fur auction house, sells furs produced by the 1,500 Danish farmers who also own it. They’re part of a major industry in Denmark that raises more than 16 million mink annually and accounts for the country’s biggest export commodity to China and Hong Kong, according to the company.
It’s unclear what the massive mink culling will mean for the rest of the Danish fur industry, whose farms employ about 6,000 people. The government has pledged to compensate farmers for the killing.
But People for the Ethical Treatment of Animals celebrated Kopenhagen Fur’s impending shutdown, saying “virtual champagne corks are popping” over the news.
“Since the public and almost every designer around the globe now shuns fur, it’s not surprising that two of the world’s biggest fur companies — in Canada and Denmark — have collapsed,” PETA President Ingrid Newkirk said in a statement. “Fur is well and truly dead.”
Denmark’s planned slaughter was announced after Danish officials discovered several people had been infected with a coronavirus mutation that had also been found in mink. It’s unclear how exactly the animals became infected.
Kopenhagen Fur said it would forge ahead with its planned season of four auctions next year and continue to hold sales in 2022 and 2023. It said it expects to receive about 5 to 6 million skins from “healthy farms outside the restricted zones” over the next few weeks.
More than 2,000 minks are also set to be killed in Greece, where several coronavirus cases have been detected among the animals and breeders. But the country has not indicated that it will kill off its entire mink population like Denmark.