EY fights fires on three audit cases that threaten its global reputation
Accountant’s role with Dubai gold company, NMC Health and Wirecard put its controls under scrutiny
Amjad Rihan was more than 3,000 miles away from EY’s imposing Dubai skyscraper office when his lawyer called to say he had finally won a seven-year fight against his former employer.
One of the few people to ever take on a prominent accounting firm in court, Mr Rihan had sued EY for forcing him out after he exposed a string of alleged illegal activities by a Dubai gold company and a subsequent cover-up by its auditors.
“I never set out to be a whistleblower but turning a blind eye was not an option,” he said, speaking from the house in Warwick where he eventually landed after fleeing the Middle East.
“Most of the wealth in the world is audited by the ‘Big Four’ accountants. It is not always in the interest of the powerful to point out when something goes wrong.”
It is the first time he has reflected publicly on his story since an English High Court judge ordered EY to pay him $11m in April.
The court accepted claims that EY had participated in accounting misconduct that reached its senior ranks. According to the judgment, the firm colluded with Kaloti Jewellery International to hide illicit exports and helped obscure audit findings that included suspected money laundering.
The accounting firm is attempting to appeal the judge’s decision. It claimed Mr Rihan, who became one of EY’s youngest partners aged 36, was a “liar and opportunist”, according to the judge’s summary, and that the allegations were “completely without merit”.
For EY, which made $36bn in revenues last year, the battle to reverse the court order carries considerably more reputational risk than financial.
The Kaloti saga is one of three fires the group is fighting on multiple continents. They have drawn scrutiny to whether the central controls that guard the behaviour of its auditors around the world are failing.
EY is facing a regulatory investigation into its oversight of NMC Health, a collapsed London-listed hospital group headquartered in Abu Dhabi, which looks set to become one of the largest scandals of the FTSE 100. Questions are also mounting about its audits of Wirecard, a Dax 30 fintech business at the centre of what threatens to become one of the largest accounting scandals in German postwar history.
EY’s involvement in these controversies risks straining its influential lobbying spot in British politics just as legislators consider aggressive proposals to break-up big accounting firms to improve the governance and quality of their audits.
Its UK chief, Steve Varley, is the government’s business ambassador for the professional services industry and sits on a Treasury council that informs policies for how businesses operate.
They are also an unpleasant distraction while EY’s UK firm overhauls its leadership and as its international board braces for a significant hit to profits during the coronavirus crisis.
“To get wrapped up in one scandal may be regarded as misfortune, two looks like carelessness. Three, well, it just looks bad doesn’t it,” said a senior lawyer involved in investigations into NMC Health.
Quality control in question
Mr Rihan sued four EY entities, including its global and European businesses, in the English courts because he did not believe that responsibility for the Dubai scandal could be contained to the region.
A person close to EY said: “They cannot say it was cultural or isolated, everything is central.”
The ability to maintain quality control at sprawling professional services firms, which operate as a combination of partnerships and franchises, has long been a subject of debate in the sector.
EY has a “global code of conduct”, which purports to manage ethics and behaviour for its 280,000 employees at 700 offices in 150 countries.
The benefit of having an exhaustive international network is that clients can be referred to member firms around the world, keeping fees inside the group. The badge of a large global accounting or law firm lends credibility to a small office in a country not known for its regulatory controls. Often firms gather fees on a global scale when the work is good, but shirk liability when a scandal occurs, blaming the governance of the individual office.
“We market ourselves as a global solution and then when a problem crops up we throw in as many firebreaks as possible to put distance between it and the rest of the firm,” admitted a board member of one of the big accounting firms.
Some recent incidents have questioned the efficacy of the model: KPMG’s brand suffered globally when clients and staff deserted the firm in South Africa over its involvement in a corruption scandal, while PwC is being investigated in the UK for alleged misconduct by its Italian office on audit work for telecoms company BT.
Battling three crises
For EY, the multinational framework has complicated the three audit crises. All four entities that Mr Rihan sued claimed in court that they were not responsible for how he was treated. The judge rejected the idea. “I agree with the claimant's submission that EY Dubai and the other locally based EY organisations were subordinate to EY Global,” the ruling said.
EY said after the ruling was handed down that it was “surprised and disappointed”.
“It was the work of an EY Dubai assurance team that uncovered serious irregularities and reported them to the proper authorities,” it said.
Kaloti has previously denied any wrongdoing and said that it conducted all appropriate anti-money laundering checks.
On NMC, EY’s audit was signed off in London, despite the bulk of the company’s trading and assets being in the Middle East. Accounts from 2012 and 2013 show that NMC paid more than half of the audit fees to EY’s United Arab Emirates firm, suggesting that a group of staff in the region took on a significant chunk of the work even after it listed on the London Stock Exchange.
The UK accounting watchdog announced an investigation into EY’s 2018 audit of NMC last month. At the end of last year, hedge fund Muddy Waters questioned the relationship between EY and NMC, pointing out that the board included former partners of the Big Four firm. It said NMC’s margins were “too good to be true” and that it believed a “cosy relationship” between EY and its client meant there was a “lack of rigour” in its audits.
Now liquidators to the company at the London offices of Alvarez & Marsal and lawyers advising NMC’s board will pull apart years of trading to discover how $4bn of undisclosed debts went undetected. It could expose EY, which earned around £14m for its audits over seven years, to potential allegations of negligence.
EY said it would fully co-operate with the FRC’s inquiry and that it would be inappropriate to comment further on NMC Health.
On Wirecard, the audit work was carried out by EY partners in Germany, who were also responsible for monitoring the group’s operations in Dubai that are at the core of accusations about fraudulent profits.
Wolfgang Schirp, who is preparing a lawsuit aimed at EY on behalf of Wirecard investors, said a recent independent report into its accounts was “truly devastating”. Special auditors at KPMG said they were unable to verify that tens of billions of euros worth of transactions supposedly routed through Dubai, Dublin and Munich actually took place, casting fresh doubt on at least three years of accounts that were given the green light by EY.
“Our audit of Wirecard’s 2019 accounts is ongoing,” EY said. “We have not formed an audit opinion and cannot confirm any conclusions.” Wirecard told investors in May that EY’s work so far had not raised “any material findings. However, not all audit procedures have yet been completed.”
‘Not a dollar lost’
EY told the FT that it understands “our vital role in serving the public interest and fostering trust and confidence in capital markets.
“Audit quality is critical to this and we continuously seek to be globally consistent in delivering high quality audits through investing in technology, training for our people and improving our processes.”
The firm launched a programme in 2015 to improve management and communication for its audit teams. “There is still more to do, and EY is ready to accept that challenge,” said Felice Persico, global chair for assurance, in the firm’s latest report into audit quality.
So far the fallout for the firm has been negligible, despite publicity around Mr Rihan’s case, including a BBC Panorama investigation into “gold, drug money and a major auditor’s ‘cover-up’”.
EY audits 30 per cent of Fortune 500 companies and around 25 per cent of the FTSE 100. It continues to advise governments, with its mandates only growing as the public sector rapidly outsources logistical support to combat the pandemic.
“I don’t think EY has lost a single dollar of business from this,” said an observer.
One former EY partner added: “In terms of the potential damage, the reality is that they will keep going, life for the big accountants just moves on. The financial impact on companies of this scale is only ever petty cash. Their ego may take a hit, but only regulatory change will have any tangible impact.”
EY fights fires on three audit cases that threaten its global reputation
Accountant’s role with Dubai gold company, NMC Health and Wirecard put its controls under scrutiny
Amjad Rihan was more than 3,000 miles away from EY’s imposing Dubai skyscraper office when his lawyer called to say he had finally won a seven-year fight against his former employer.
One of the few people to ever take on a prominent accounting firm in court, Mr Rihan had sued EY for forcing him out after he exposed a string of alleged illegal activities by a Dubai gold company and a subsequent cover-up by its auditors.
“I never set out to be a whistleblower but turning a blind eye was not an option,” he said, speaking from the house in Warwick where he eventually landed after fleeing the Middle East.
“Most of the wealth in the world is audited by the ‘Big Four’ accountants. It is not always in the interest of the powerful to point out when something goes wrong.”
It is the first time he has reflected publicly on his story since an English High Court judge ordered EY to pay him $11m in April.
The court accepted claims that EY had participated in accounting misconduct that reached its senior ranks. According to the judgment, the firm colluded with Kaloti Jewellery International to hide illicit exports and helped obscure audit findings that included suspected money laundering.
The accounting firm is attempting to appeal the judge’s decision. It claimed Mr Rihan, who became one of EY’s youngest partners aged 36, was a “liar and opportunist”, according to the judge’s summary, and that the allegations were “completely without merit”.
For EY, which made $36bn in revenues last year, the battle to reverse the court order carries considerably more reputational risk than financial.
The Kaloti saga is one of three fires the group is fighting on multiple continents. They have drawn scrutiny to whether the central controls that guard the behaviour of its auditors around the world are failing.
EY is facing a regulatory investigation into its oversight of NMC Health, a collapsed London-listed hospital group headquartered in Abu Dhabi, which looks set to become one of the largest scandals of the FTSE 100. Questions are also mounting about its audits of Wirecard, a Dax 30 fintech business at the centre of what threatens to become one of the largest accounting scandals in German postwar history.
EY’s involvement in these controversies risks straining its influential lobbying spot in British politics just as legislators consider aggressive proposals to break-up big accounting firms to improve the governance and quality of their audits.
Its UK chief, Steve Varley, is the government’s business ambassador for the professional services industry and sits on a Treasury council that informs policies for how businesses operate.
They are also an unpleasant distraction while EY’s UK firm overhauls its leadership and as its international board braces for a significant hit to profits during the coronavirus crisis.
“To get wrapped up in one scandal may be regarded as misfortune, two looks like carelessness. Three, well, it just looks bad doesn’t it,” said a senior lawyer involved in investigations into NMC Health.
Quality control in question
Mr Rihan sued four EY entities, including its global and European businesses, in the English courts because he did not believe that responsibility for the Dubai scandal could be contained to the region.
A person close to EY said: “They cannot say it was cultural or isolated, everything is central.”
The ability to maintain quality control at sprawling professional services firms, which operate as a combination of partnerships and franchises, has long been a subject of debate in the sector.
EY has a “global code of conduct”, which purports to manage ethics and behaviour for its 280,000 employees at 700 offices in 150 countries.
The benefit of having an exhaustive international network is that clients can be referred to member firms around the world, keeping fees inside the group. The badge of a large global accounting or law firm lends credibility to a small office in a country not known for its regulatory controls. Often firms gather fees on a global scale when the work is good, but shirk liability when a scandal occurs, blaming the governance of the individual office.
“We market ourselves as a global solution and then when a problem crops up we throw in as many firebreaks as possible to put distance between it and the rest of the firm,” admitted a board member of one of the big accounting firms.
Some recent incidents have questioned the efficacy of the model: KPMG’s brand suffered globally when clients and staff deserted the firm in South Africa over its involvement in a corruption scandal, while PwC is being investigated in the UK for alleged misconduct by its Italian office on audit work for telecoms company BT.
Battling three crises
For EY, the multinational framework has complicated the three audit crises. All four entities that Mr Rihan sued claimed in court that they were not responsible for how he was treated. The judge rejected the idea. “I agree with the claimant's submission that EY Dubai and the other locally based EY organisations were subordinate to EY Global,” the ruling said.
EY said after the ruling was handed down that it was “surprised and disappointed”.
“It was the work of an EY Dubai assurance team that uncovered serious irregularities and reported them to the proper authorities,” it said.
Kaloti has previously denied any wrongdoing and said that it conducted all appropriate anti-money laundering checks.
On NMC, EY’s audit was signed off in London, despite the bulk of the company’s trading and assets being in the Middle East. Accounts from 2012 and 2013 show that NMC paid more than half of the audit fees to EY’s United Arab Emirates firm, suggesting that a group of staff in the region took on a significant chunk of the work even after it listed on the London Stock Exchange.
The UK accounting watchdog announced an investigation into EY’s 2018 audit of NMC last month. At the end of last year, hedge fund Muddy Waters questioned the relationship between EY and NMC, pointing out that the board included former partners of the Big Four firm. It said NMC’s margins were “too good to be true” and that it believed a “cosy relationship” between EY and its client meant there was a “lack of rigour” in its audits.
Now liquidators to the company at the London offices of Alvarez & Marsal and lawyers advising NMC’s board will pull apart years of trading to discover how $4bn of undisclosed debts went undetected. It could expose EY, which earned around £14m for its audits over seven years, to potential allegations of negligence.
EY said it would fully co-operate with the FRC’s inquiry and that it would be inappropriate to comment further on NMC Health.
On Wirecard, the audit work was carried out by EY partners in Germany, who were also responsible for monitoring the group’s operations in Dubai that are at the core of accusations about fraudulent profits.
Wolfgang Schirp, who is preparing a lawsuit aimed at EY on behalf of Wirecard investors, said a recent independent report into its accounts was “truly devastating”. Special auditors at KPMG said they were unable to verify that tens of billions of euros worth of transactions supposedly routed through Dubai, Dublin and Munich actually took place, casting fresh doubt on at least three years of accounts that were given the green light by EY.
“Our audit of Wirecard’s 2019 accounts is ongoing,” EY said. “We have not formed an audit opinion and cannot confirm any conclusions.” Wirecard told investors in May that EY’s work so far had not raised “any material findings. However, not all audit procedures have yet been completed.”
‘Not a dollar lost’
EY told the FT that it understands “our vital role in serving the public interest and fostering trust and confidence in capital markets.
“Audit quality is critical to this and we continuously seek to be globally consistent in delivering high quality audits through investing in technology, training for our people and improving our processes.”
The firm launched a programme in 2015 to improve management and communication for its audit teams. “There is still more to do, and EY is ready to accept that challenge,” said Felice Persico, global chair for assurance, in the firm’s latest report into audit quality.
So far the fallout for the firm has been negligible, despite publicity around Mr Rihan’s case, including a BBC Panorama investigation into “gold, drug money and a major auditor’s ‘cover-up’”.
EY audits 30 per cent of Fortune 500 companies and around 25 per cent of the FTSE 100. It continues to advise governments, with its mandates only growing as the public sector rapidly outsources logistical support to combat the pandemic.
“I don’t think EY has lost a single dollar of business from this,” said an observer.
One former EY partner added: “In terms of the potential damage, the reality is that they will keep going, life for the big accountants just moves on. The financial impact on companies of this scale is only ever petty cash. Their ego may take a hit, but only regulatory change will have any tangible impact.”
BNP has Goldman in its sights after beefing up hedge fund business
French bank aims to join prime broking’s top 3 following acquisition of Deutsche unit last year
BNP Paribas is seeking to displace Goldman Sachs as one of the top three global prime brokers to hedge funds, and surpass Barclays as the dominant European player after acquiring Deutsche Bank’s business last year.
France’s largest investment bank swooped on the German lender’s global prime finance unit and electronic equities business last summer as Deutsche scaled back its ambitions.
BNP is one of the few European banks still committing resources to prime finance, the lucrative but tech-heavy and risky business of lending money as well as handling trades for hedge funds and asset managers.
“Our combination could be the largest prime broker in Europe and be considered in the top four in the world,” said Olivier Osty, head of global markets at BNP. “This has to be seen, but that is the objective and we will make it . . . We would be trying to compete with Goldman for the third or fourth spot.”
“There is a good opportunity for us to take leadership in Europe on investment banking and global markets,” Mr Osty told the Financial Times. “US banks are retrenching a lot and BNP is stepping up.”
However, the bank faces significant hurdles in disrupting the established hierarchy. Along with JPMorgan and Morgan Stanley, Goldman has dominated the prime brokerage business for years, followed by Bank of America and Barclays.
By contrast, BNP ranked 11th last year and Deutsche has historically been placed seventh to ninth in league tables, according to data provider Coalition. To oust Goldman from the top three, the newly combined entity would have to increase its market share to more than 12 per cent, Coalition estimates.
“We have been taking market share for the last year and a half and this increased in the first quarter,” said Mr Osty. “Are we there yet? No, but the trend is definitely positive and the [coronavirus] crisis will probably strengthen us” as smaller players withdraw.
JPMorgan’s prime business handled more than $500bn in client assets at the end of September and the heads of the unit wrote “Next stop, $1 trillion!” in an internal memo at the time.
When all client transfers from Deutsche are completed in early 2021, BNP’s prime brokerage business is expected to have more than $300bn of assets — as much as $200bn of that coming from Deutsche — and revenue in the hundreds of millions a year. Mr Osty declined to be more specific on financial targets.
Around 125 staff out of a potential 800 have already moved across from Deutsche, including senior figures such as Brian Fagen, head of Americas execution services, and Andy West, global head of prime technology, according to Ashley Wilson, co-head of the German bank’s prime finance unit, who is himself transferring next year.
While there had been concerns that several large clients were snubbing BNP for bigger rivals, Mr Osty claims that many have been persuaded to stay. This is partly to counterbalance Wall Street’s increasing dominance of global investment banking but also because Deutsche’s system, branded “autobahn”, is seen as one of the better platforms in the industry.
“The combination of Deutsche’s technology and BNP Paribas’s balance sheet and long-term commitment to this business is compelling,” said Supurna VedBrat, global head of trading at BlackRock, which has remained a client.
“The asset management industry needs European-based global prime brokers, those with a strong balance sheet and support from the senior management of the bank,” she added.
New clients for the unified business include Melqart, a UK event-driven hedge fund that manages $1.5bn and Mint Tower, a $500m Dutch hedge fund.
“The feedback we are getting is that counterparties definitely want a strong European bank to provide competition to the Americans,” said Mr Wilson. We have been able to send “a very robust message” since the deal with BNP, he added, admitting that management’s commitment to the business was always in doubt at Deutsche.
“There are around 200 clients to move,” he added. Only 10 had transferred so far, because Deutsche’s has a “quant-heavy client base” and the technological integration needed to service them at BNP will not be ready until next year.
Although the market turmoil unleashed by the coronavirus crisis had led clients to cut back the leverage on trades in March, their appetite had rebounded as markets recovered, the two executives said.
At the peak of the historic market turmoil in March, execution volumes tripled and the two banks’ systems held up, dispelling lingering fears over the platform’s stability.
“We are on track, which to be honest is surprising, because we could have been expected to slow down during three months of Covid,” Mr Otsy said. “Working from home did not have any impact on the integration. We have been able to continue to transfer the technology and people from Deutsche to BNP even more than we were expecting.”
Don’t Lose the Thread. The Economy Is Experiencing an Epic Collapse of Demand.
A rip in the fabric of the economy won’t be healed easily, and denial of the severity of the crisis won’t solve it.
Despite it all — a nation on edge, with an untamed pandemic and convulsive protests over police brutality — for the first time in three months there is a scent of economic optimism in the air.
Employers added millions of jobs to their payrolls in May, and the jobless rate fell, a big surprise to forecasters who expected further losses. Businesses are reopening, and the rate of coronavirus deaths has edged down. The Trump administration has begun pointing to what are likely to be impressive growth numbers as the economy starts to pull out of its deep hole.
All of that is good news, and far better than the alternative of a continuing collapse in economic activity. But it also creates a risk: distraction and complacency.
You can already sense in the public debate over the economy that people are starting to lose the thread — viewing the slight rebound from epic collapse as a sign that a crisis has been averted. That certainly is the kind of optimism evident in the stock market, which is now down a mere 1.1 percent for the year.
But there are clear signs that the collapse of economic activity has set in motion problems that will play out over many months, or maybe many years. If not contained, they could cause human misery on a mass scale and create lasting scars for families.
The fabric of the economy has been ripped, with damage done to millions of interconnections — between workers and employers, companies and their suppliers, borrowers and lenders. Both the historical evidence from severe economic crises and the data available today point to enormous delayed effects.
“There’s a lot of denial here, as there was in the 1930s,” said Eric Rauchway, a historian at the University of California, Davis, who has written extensively about the Great Depression. “At the beginning of the Depression, nobody wanted to admit that it was a crisis. The actions the government took were not adequate to the scope of the problem, yet they were very quick to say there had been a turnaround.”
Though it may not attract the attention that reopening beaches and a soaring stock market might, the evidence is everywhere if you look closely.
Consider those seemingly great new employment numbers. It is clear that many workers who were temporarily laid off in March and April returned to work in May, such as employees at once-closed restaurants that opened up, or construction workers who returned to job sites.
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But it still left the economy with 19.55 million fewer jobs than existed in February. And the rebound came in part thanks to more than $500 billion in federal aid to small businesses offered on the condition that workers be retained, under the Paycheck Protection Program.
Other data points to a severe but slower-moving crisis of collapsing demand that will affect many more corners of the economy than those that were forced to close because of the pandemic.
New orders for manufactured goods, for example, remained in starkly negative territory in May, according to the Institute for Supply Management; its index came in at 31.8, far below the level of 50 that is the line between expansion and contraction.
And despite the net gain in employment in May, there have been many announced layoffs at companies outside sectors directly affected by the pandemic. This suggests that the forced shutdown of travel, restaurant and related industries is rippling out into a broad-based shortage of demand in the economy.
Consider just a partial list of large well-known companies unaffected by the direct first-round effects of pandemic-induced shutdowns, but which have since announced layoffs: Chevron, I.B.M. and Office Depot.
Last week, the Congressional Budget Office tried to put a number on the aggregate economic activity that will be lost over the next decade compared with what was projected at the start of the year. That number is $15.7 trillion, reflecting both less economic activity and deflationary forces that reduce prices.
That is 5.3 percent less “nominal” output, meaning not adjusted for inflation, than had been forecast. For comparison, from 2008 to 2018, total nominal output came in 6 percent below the level the C.B.O. had forecast at the start of 2008.
We know how miserable that economic crisis and sluggish recovery were, with long-term costs to earnings and well-being. The C.B.O. is now forecasting that the next decade will be nearly as bad — but emphasizes that policy choices will shape how things actually evolve.
The economy is a gigantic machine in which one person’s consumption spending generates someone else’s income. The pandemic began by crushing the economy’s productive capacity — a shock to the supply side of the economy, as many types of business activity were shut down for public health concerns.
In normal times, when there is a negative supply shock (say, a year of drought that reduces agricultural crops, or new tariffs that make imports more expensive), the pain can be intense for people in sectors directly affected, yet the economy as a whole adjusts.
But this crisis is so large and so sudden that the usual adjustment mechanisms aren’t working very well.
The people losing their jobs because of shutdowns cannot easily find new ones, because so much of the economy is shuttered at the same time. The businesses in danger of closing have cut every possible expense: A hotel isn’t going to invest in new furniture or new reservation software right now. And consumer demand for some seemingly safe goods falls because those goods are complements to the sectors that are shut down.
“Hotels are locked down, so people buy fewer cars because they don’t need to travel as much,” said Veronica Guerrieri, an economist at the University of Chicago Booth School of Business. “Restaurants are locked down, so people don’t need fancy clothes because they don’t want to go out as much.”
The result is that what started as a disruption to the supply side of the economy has metastasized into a collapse of the demand side, she and co-authors say in a recent working paper. They call it a Keynesian supply shock: an inversion of the demand-driven crisis of the Great Depression described by the great economist of that era, John Maynard Keynes.
“Demand is interrelated with supply,” said Iván Werning, an M.I.T. economist and a co-author of the paper. “It’s not a separate concept.”
The demand shock, with lagged effects, is only beginning to hurt major segments of the economy, like sellers of capital goods that are experiencing plunging sales; state and local governments that are seeing tax revenues crater; and landlords who are seeing rent payments dry up.
The government can’t wave a wand and bring back industries that are semi-permanently shuttered. That original supply shock can be fixed only as public health conditions allow sports arenas and the like to reopen.
But the government can act — and has acted — to try to keep demand for goods and services at pre-crisis levels. That, in turn, can smooth the path for other sectors to grow so that there is not a prolonged depression of jobs, income and investment, with a resulting reduction in the economy’s long-term potential.
In the early phase of the crisis, Congress expanded unemployment benefits, funneled hundreds of billions of dollars toward small businesses to keep workers on their payrolls, and supported state governments, among other steps. But much of this help is scheduled to expire this summer, absent further action — and the positive jobs numbers Friday led many Republicans on Capitol Hill allied with the Trump administration to suggest that they were reluctant to do more.
It is against his backdrop that some of the most influential — and fiscally conservative — voices in economic policy are saying that further aggressive spending is needed to prevent this shock from causing long-lasting damage to the economy.
“This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible,” Jerome Powell, the Federal Reserve chair and a longtime fiscal hawk, said at a news conference in late April.
“Please, spend wisely, but spend as much as you can!” Kristalina Georgieva, the managing director of the International Monetary Fund, implored the world’s governments at an event in May. “And then, spend a bit more for your doctors, for your nurses, for the vulnerable people in your society.”
Both the Fed and the I.M.F. more typically act as brakes on fiscal profligacy. For Mr. Powell and Ms. Georgieva to effectively beg elected officials to stop a spiraling crisis reflects the unusual circumstances of this moment and the extraordinary risk they see if government action is inadequate to the job. Their comments are the equivalent of a normally debt-averse financial adviser urging a family to borrow more money to ride out a period of illness without suffering long-term financial damage.
When the crisis we now know as the Great Depression began in 1929, President Herbert Hoover started with denial, then tried blaming other countries, then argued that there was nothing the government could really do to contain the damage.
Eventually, the Hoover administration took more aggressive action, creating a large federal program of mass employment. “He gave a speech and said that 700,000 Americans were at work on federal public works, and it was bigger than anything that had done before,” Mr. Rauchway said. “And that was true, but it was at a time when more than seven million people were out of work.”
That crisis showed how when there are profound rips in the economic fabric, repairing them isn’t a simple job, it isn’t quick, and even what seems like a huge response often isn’t enough.
It’s great that the economy is ticking up from its shutdown of March and April. And the world right now is confusing and chaotic. But that makes it all the more important not to lose focus on fundamental forces that risk holding back the economy and that, if unchecked, could mean a second lost decade in this young century.
Tropical Storm Cristobal Draws Closer to U.S. Gulf Coast
After spawning a tornado in Florida, forecasters don’t expect the storm to grow into a hurricane
NEW ORLEANS—Tropical Storm Cristobal continued its advance toward the U.S. Gulf Coast early Sunday, having spawned a tornado in Florida.
Forecasters said it would arrive on U.S. soil late Sunday but wasn’t expected to grow into a hurricane.
Squalls with tropical-force winds reached the mouth of the Mississippi River by Sunday morning and conditions were expected to deteriorate. the National Hurricane Center in Miami said. Cristobal’s maximum sustained winds remained at 50 miles an hour and it was moving north at 12 mph, centered around 75 miles south-southwest of the mouth of the Mississippi River.
But the storm already made its presence felt Saturday evening with a tornado that touched down near downtown Orlando, the National Weather Service said. The twister just missed a group of protesters at Lake Eola at around 7:30 p.m. There appeared to be no injuries, but tree limbs were knocked down, and there were reports of power outages.
“Yes, it is related to the tropical storm that is well to our west,” said Scott Kelly, a meteorologist with the National Weather Service in Melbourne, Fla. “But the tropical storm provided a lot of low level shear and that has allowed for some tornadoes to form over Central Florida.”
The Hurricane Center said the storm could cause heavy rains from East Texas to Florida this weekend and into early next week. A tropical storm warning was posted for the northern Gulf of Mexico coast from Intracoastal City, La., to the Alabama-Florida border. Storm surge warnings and watches were in effect in Louisiana and Mississippi, with flooding up to 5 feet expected in some places.
Forecasters said the storm’s center will move inland across Louisiana late Sunday through early Monday and then head north across Arkansas and Missouri on Monday afternoon and into Tuesday.
In Louisiana, Gov. John Bel Edwards has declared a state of emergency to prepare for the storm’s possible arrival.
“Now is the time to make your plans, which should include the traditional emergency items along with masks and hand sanitizer as we continue to battle the coronavirus pandemic,” Mr. Edwards said in a statement released Thursday.
On Friday, he asked President Trump to declare a pre-landfall emergency for the state due to the storm’s threat.
“We are confident that there will be widespread, heavy rainfall and coastal flooding,” Mr. Edwards said in a letter to the White House. “I anticipate the need for emergency protective measures, evacuations, and sheltering for the high-risk areas. The length of possible inundation is unknown and will likely require post-flood activities.”
Jefferson Parish, a suburb of New Orleans, called for voluntary evacuations Saturday of Jean Lafitte, Lower Lafitte, Crown Point and Barataria because of the threat of storm surge, high tides and heavy rain. Residents were urged to move vehicles, boats and campers to higher ground.
“We want to make sure residents are safe as this storm approaches so we are taking all the necessary precautions to be fully prepared,” Jean Lafitte Mayor Tim Kerner Jr. told The Times-Picayune/The New Orleans Advocate.
A similar order was issued Saturday for several Plaquemines Parish communities, including Happy Jack, Grand Bayou, Myrtle Grove, Lake Hertiage, Harlem and Monsecour. The parish’s president, Kirk Lepine, said the order was issued as a precaution.
“We need to ensure residents are protected as this storm draws near, so we are taking all the necessary precautions to be completely prepared,” he said.
Airlines Got $25 Billion in Stimulus; Industry Still Expected to Shrink
U.S. carriers are planning to operate smaller companies with fewer flights and employees
Federal stimulus money for airlines is keeping them afloat through the coronavirus pandemic, but it’s not proving to be enough to sustain the industry at its pre-pandemic size.
Carriers say they will have to shrink, with fewer planes flying, fewer flights and fewer employees come Oct. 1, after restrictions related to their stimulus money expire. Airlines will likely need to park 20% of their planes and cut their pilot workforces in equal measure, Cowen analyst Helane Becker estimated in a recent research note.
The coming job losses are a sign of how the government’s broad efforts earlier this year to support industries and preserve jobs as the economy shut down have been overwhelmed in some instances by the financial devastation the Covid-19 pandemic has generated.
Federal stimulus money for airlines is keeping them afloat through the coronavirus pandemic, but it’s not proving to be enough to sustain the industry at its pre-pandemic size.
Carriers say they will have to shrink, with fewer planes flying, fewer flights and fewer employees come Oct. 1, after restrictions related to their stimulus money expire. Airlines will likely need to park 20% of their planes and cut their pilot workforces in equal measure, Cowen analyst Helane Becker estimated in a recent research note.
The coming job losses are a sign of how the government’s broad efforts earlier this year to support industries and preserve jobs as the economy shut down have been overwhelmed in some instances by the financial devastation the Covid-19 pandemic has generated.
Airline officials and lobbyists say there haven’t been formal discussions about additional aid, though some labor unions are hoping that the funds to cover worker salaries could be extended. Airlines are also eligible for an additional $25 billion in government loans to fund operations, but such loans are expected to have tougher terms and some airlines have said they will wait to decide whether to tap those funds.
The funds were never meant to be a cure-all, but to keep workers in their jobs so that airlines could be viable when demand returns, a senior Treasury Department official said.
“We can’t create demand for flights, and that’s not the intention of the statute,” the official said. “We had to get them through a period of months where there would be very low demand for travel.”
Some economists believe it’s better to keep workers tethered to their companies rather than going on unemployment, and that other industries should have got the same deal.
“We should have done it for everybody,” said Robert Gordon, a Northwestern University economist. “It’s much more humane, and it would have simplified the restart of the economy.”
Others argue that for airlines, government aid has only delayed inevitable cuts, insulating investors and creditors. “Airlines go bankrupt all the time,” said John Cochrane, senior fellow at Stanford University’s conservative-leaning Hoover Institution.
Funds could have been better spent allowing the airlines to make cuts and then providing direct support for workers or financing for continuing operations during bankruptcy, some economists suggested.
Airline and labor leaders say that without government intervention, the consequences could have been much worse, with hundreds of thousands of employees abruptly let go and cut off from their pay and health benefits at the height of the pandemic.
“The airline industry was going to completely collapse,” said Sara Nelson, international president of the Association of Flight Attendants-CWA, who was one of the main advocates for aid that was directly tied to keeping workers in their jobs. Air service would have been slashed, and deliveries of essential goods and medical personnel would have been disrupted, she said.
“It would have been chaotic,”she said.
All four of the largest U.S. carriers are now assessing how deeply to cut as they offer buyouts and early-retirement packages to encourage employees to leave on their own and reduce the number they have to force out. United Airlines Holdings Inc. UAL 8.45% and American Airlines Group Inc. AAL 11.18% are planning to slash their management and administrative ranks by 30%—about 8,500 jobs between the two.
Airlines’ ranks had swelled by around 20% in the past decade, nearly recovering from declines in the wake of 9/11 and the financial crisis, according to the Bureau of Transportation Statistics. Delta Air Lines Inc. DAL 5.50% had planned to hire 1,000 new pilots by this summer just to keep pace, and United in February announced it was buying a flight-training school to ensure a steady stream of new pilots.
Delta last month outlined a buyout package that includes cash severance and travel benefits for many of its employees, and said it hopes to get enough volunteers to avoid involuntary cuts.
“We’re trying to take that $5 billion we received and stretch it for as long as we can,” Delta Chief Executive Ed Bastian said Wednesday, adding that it could take two to three years for the industry to recover fully.
Gary Kelly, chief executive of Southwest Airlines Co., said last week that the company will try to protect jobs but that survival is the priority. “Given our planned smaller schedule and network, we are overstaffed and may continue to be overstaffed for the next several years,” he wrote in a memo to employees.
American Chief Executive Doug Parker said during an investor conference last month: “I think we’re all building our airlines in a way that doesn’t anticipate having 2019 revenues in 2021.”
President Trump threatens auto tariff on EU if it doesn't lower its lobster tariffs
- Trump notes the EU charges US seafood tariffs that it does not charge Canada
- Threatens China tariffs over levies on Lobster as well
- Trump signs commercial fishing proclamation to allow commercial fishing in marine conservation area off the coast of New England
Weekend Papers Summary
NEW YORK TIMES
Saturday
• The job market halted its pandemic-induced collapse in May as employers brought back millions of workers and the unemployment rate unexpectedly declined, with manufacturing, health care, and professional services adding jobs in a sign the economic damage wasn’t as deep as many feared.
• The White House, universally recognized symbol of American democracy, increasingly looks like a fortress under siege as the Trump administration builds out a security perimeter in response to protests against police brutality.
• Mexico is gradually reopening after a quarantine that hammered its economy, but many residents, including medical experts, are worried the move has come too early, and will lead to more illness and death under a pandemic that has not been brought under control.
• Long after most nations urged their citizens to wear masks to reduce coronavirus transmission and after months of hand-wringing about the quality of the evidence available, the World Health Organization has finally endorsed the use of face masks by the public.
• As subways and roads emptied out because of the coronavirus, transportation agencies in New York and across the country were able to fast-track major repairs and upgrades without having to worry about triggering huge disruptions and traffic backups.
• The pandemic is reordering the global economy in ways that have led some analysts to question whether a Brexit agreement with the European Union even makes sense for the UK government anymore.
• In an interview, Claudio Del Vecchio, the 63-year-old Italian industrialist who owns Brooks Brothers, talks for the first time about the decision to divest from the vertical made-in-America supply chain in order to keep the company thriving post-Covid-19.
• Mortgage rates may be appealingly low, but people shopping for a new home this spring face a challenging market—high demand and a dearth of homes for sale are keeping prices up and setting off bidding wars in some areas as states continue to reopen for business. Sunday
• “Demonstrations across America that began as spontaneous eruptions of outrage over police violence appeared to have cohered by Saturday into a national mass protest movement against systemic racism, marked more by organization and determination than by street fury.”
• A growing number of prominent Republicans, including former president George W. Bush and former secretary of state Colin Powell, say they won’t back Trump’s re-election—or might even vote for Joe Biden, the Democratic nominee—following Trump’s “incendiary response to protests.”
• A Times analysis of coronavirus infections, official layoff notices, and federal unemployment data highlights the sharp disconnect between extreme economic pain and limited health impact from the pandemic in many parts of the country.
• Brazilian president Jair Bolsonaro has enabled the razing of the Amazon rainforest—illegal loggers, miners, and land grabbers have cleared vast areas with impunity in recent months as law enforcement efforts were hobbled by the coronavirus pandemic.
• People around the world have turned out in solidarity with American protesters calling for justice in the death of George Floyd at the hands of the police in Minneapolis, but the crowds have some officials worried about the risk of spreading Covid-19.
• Democrats in Congress plan to unveil expansive legislation Monday to make it easier to prosecute police misconduct and recover damages from officers who violate civilians’ constitutional rights, and will pressure the Justice Department to address systemic racial discrimination by law enforcement.
• “There are clear signs that the collapse of economic activity has set in motion problems that will play out over many months, or maybe many years, which if not contained could cause human misery on a mass scale and create lasting scars for families,” says the Upshot column.
WALL STREET JOURNAL
Weekend
• The Justice Department is deepening federal antitrust scrutiny of the $213B US meat industry, following complaints from farmers and meat buyers about pricing practices, and recently issued subpoenas to JBS USA Holdings, TSN, Cargill, and National Beef Packing.
• The pandemic forced schools into a crash course in online education, but remote learning efforts have faced a host of problems, including lack of access to technology and trouble keeping students and teachers connected.
• “Recent data suggesting that social-distancing measures cost jobs doesn’t mean they are mistakes, especially faced with the need to save lives, but lockdown orders do present trade-offs for policy makers to reckon with.”
• Trump signed into law a bill giving companies more time and flexibility to spend funds from the federal aid program to help small businesses during the coronavirus pandemic.
• In a move that will reshape Washington’s military position in Europe and ties with Germany, Trump directed the Pentagon to remove 9,500 American service members from Germany—where 34,500 troops are permanently assigned—by September.
• The federal government sent nearly a half-million doses of Covid-19 drug remdesivir to states last month, but the supplies weren’t enough to treat the tens of thousands of hospitalized patients, according to Wall Street Journal analysis.
• UK Researchers testing whether the antimalaria drug hydroxychloroquine helped hospitalized Covid-19 patients said they halted the study after a preliminary analysis showed the drug provided no benefit.
• Trump is shifting his focus away from the coronavirus—the White House task force is meeting less frequently, infectious disease expert Anthony Fauci gets little face time with Trump, and the administration’s virus-testing coordinator is returning to his previous job.
• Democrats leading the effort to draw up the party’s 2020 policy platform say they will push for it to include new criminal justice measures in response to protests following the killing of George Floyd in police custody.
• China could beat the US—home to the world’s biggest pharmaceutical companies—in the race to develop a vaccine for Covid-19, a feat that would change the dynamics of the fight against the virus and add to the geopolitical competition between Washington and Beijing.
• The International Atomic Energy Agency is expressing concern about Tehran’s failure to let inspectors access two sites or to answer questions about possible undeclared material, and it reported another big jump in Iran’s nuclear-fuel stockpile.
• + Huawei: Story says founder Ren Zhengfei is “taking off the gloves in the fight against the US”—internal communication show how the Chinese telecom giant pivoted to counter Washington’s charges with lawsuits and reorganization.
• American stock exchanges won a legal battle with the SEC on Friday when the US Court of Appeals for the District of Columbia Circuit ruled some fee increases can’t be challenged by the government after they have taken effect.
• Several companies badly hit by the pandemic are set to be ejected from blue-chip stock indexes in Europe, a demotion that will prompt funds managing billions of dollars of investments to sell their shares.
• H.O.T.S.: American universities—a business bigger than Bit Tech—“needs to adapt as student numbers drop and learning from home exposes poor value for money”; ZM set a high bar for tech companies such as WORK that are benefiting from the pandemic’s work-from-home surge; There are reasons to doubt the accuracy of Friday’s employment report—but its underlying message that the job market may have passed its nadir shouldn’t be ignored.
FINANCIAL TIMES
Weekend
• OPEC and Russia agreed to extend their record oil production cuts for a further month as crude recovers to $40 a barrel, but while Riyadh and Moscow agreed to take the bulk of the nearly 10M barrels a day in cuts, they called for greater compliance by other members.
• Better-than-expected jobs data is reviving hopes that the US might experience a quicker and stronger rebound from the coronavirus shock than many experts assumed, though it doesn’t mean the economy is in the clear.
• The Prado in Spain, one of the world’s great museums, will re-open its doors after its longest closure since the Spanish civil war more than 80 years ago, but only a fifth of the paintings will be on display, ticket sales will be reduced, and strict health guidelines will be implemented.
• The French military said its forces killed Abdelmalek Droukdel, a senior al-Qaeda leader in Africa and one of the architects of a diffuse terror network that has killed thousands of people and displaced millions across the western Sahel.
• Lex Column: Long before the coronavirus, solitary living had become widespread, and it is rising fast in poorer countries as people move from the countryside to cities.
• Comment: American business leaders must respond to the George Floyd protests, says Brian Offutt—“Finally, America is being forced to confront the truth and deal with it.”
NEW YORK POST
Saturday
• Four of every five US workers favor switching to a four-day workweek as the pandemic forces them to renegotiate their relationships with their jobs, according to a new Harris Poll survey, and 71 percent of those workers think the switch would make them more productive. Sunday
• New York City mayor Bill de Blasio lifted the city’s controversial curfew on Sunday, saying that looting and violent protests had let up and that the city needed to focus on Phase 1 of its plan to end the coronavirus lockdown.
• Story reports that using Instagram celebrities and other “influencers” to boost brands may not be as sustainable and powerful a marketing model as many businesses thought.