FT : Lebanon gripped by prime minister’s feud with bank governor

Lebanon gripped by prime minister’s feud with bank governor
International financial support at risk as leading figures fight over economic crisis

A public fight between Lebanon’s new prime minister and its once untouchable central bank governor is jeopardising the state’s efforts to secure badly needed international financial support as it grapples with the worst economic crisis in decades.

The dispute came to a head this week after prime minister Hassan Diab, a former computer science professor, had lambasted governor Riad Salame’s handling of the country’s monetary crisis. Mr Salame, the dominant figure in Lebanon’s finance sector since its civil war, hit back on Wednesday, implying that there was a political campaign to undermine him.

In an hour-long speech, Mr Salame argued that the central bank had for years propped up the government to buy time for reforms, which never came. Accusations that he was solely to blame for any monetary policy mistakes were part of a targeted “campaign” against him, Mr Salame said.

Lebanon is at a critical juncture, having defaulted on about $90bn of debt in March, and the government and the central bank need to be working together to renegotiate with bondholders and ease the crisis, economists said.

Instead, the country’s two most important men are at loggerheads, exposing the factionalism and personal animosities that have dogged Lebanese politics and blocked reform for decades. Neither responded when the Financial Times sought comment.

“I am watching . . . the whole system, throwing fireballs like in Harry Potter,” said Roy Badaro, a Lebanese economist. “I don’t know who is Harry Potter and who is Voldemort.”

On the parallel market, the value of the Lebanese pound against the dollar has fallen almost 50 per cent since late January and food prices have doubled since October. Protests have reignited and rioters torched dozens of banks earlier this week.

“[Mr Diab and Mr Salame] should be working hand in hand to do the maximum possible to salvage the country,” said Sibylle Rizk, public policy director of Kulluna Irada, a Lebanese lobby group. “But clearly the governor of the central bank is not on the same wavelength as the government."

>>> US Close Dow -2.55% S&P -2.81% Nasdaq -3.20% Russell -3.83%

Closing Stock Market Summary

The S&P 500 declined 2.8% on Friday, as investors increased profit-taking efforts after Amazon (AMZN 2286.04, -187.96, -7.6%) underwhelmed investors with its earnings report and U.S.-China tensions appeared to escalate. The Dow Jones Industrial Average lost 2.6%, the Nasdaq Composite lost 3.2%, and the Russell 2000 lost 3.8%. 

Amazon warned that coronavirus-related expenses would likely wipe out its expected $4 billion operating income in Q2, providing investors a good excuse to take some profits after a 50% rally off its March low. The notion that stocks have come too far, too fast was bluntly put by Tesla (TSLA 701.32, -80.56, -10.3%) CEO Elon Musk tweeting that Tesla's stock price is too high. 

As for the broader market, investors had to contend with President Trump threatening new tariffs on China for its handling of the coronavirus outbreak, as well as the ISM Manufacturing Index for April declining to its lowest level since 2009 with a 41.5% reading (Briefing.com consensus 39.0%). The latter wasn't too shocking for investors. 

All 11 S&P 500 sectors opened and closed in negative territory. The energy (-6.0%) and consumer discretionary (-4.6%) sectors took the biggest hits, while the consumer staples sector (-1.2%) declined the least.  

Aside from Amazon, Apple (AAPL 289.07, -4.73, -1.6%), Exxon Mobil (XOM 43.14, -33.33, -7.2%), Chevron (CVX 89.44, -2.56, -2.8%), and Visa (V 175.57, -3.15, -1.8%) also succumbed to losses after reporting earnings. Note, Apple shares still rose 2.1% this week. 

Separately, the FDA approved Gilead Sciences' (GILD 79.95, -4.05, -4.8%) remdesivir for emergency use in treating COVID-19. Shares recouped some losses after the news. 

U.S. Treasuries saw modest selling pressure despite the weakness in equities. The 2-yr yield and the 10-yr yield increased two basis points each to 0.20% and 0.64%, respectively. The U.S. Dollar Index finished little changed at 99.03. WTI crude increased 6.4%, or $1.19, to $19.77/bbl. 

Reviewing Friday's economic data, which featured the ISM Manufacturing Index for April:

  • The ISM Manufacturing index for April registered a 41.5% reading ( consensus 39.0%), marking the lowest level since April 2009. The headline number was better than expected, but when you look within the report, it was mostly bad.
    • The key takeaway from the report is that the better-than-expected reading was a function of a sizable uptick in the index for supplier deliveries (to 76.0% from 65.0%) that is the result of supply chain disruptions and an uptick in the index for inventories (to 49.7% from 46.9%), which is really an indication of weak demand as inventory is sitting around longer because of weak demand.
  • Total construction spending increased 0.9% m/m in March (consensus -3.5%) on the heels of a downwardly revised 2.5% decline (from -1.3%) in February. Residential spending was up 2.3% m/m while nonresidential spending declined 0.1% m/m.
    • The key takeaway from the report is that it is dated. It's nice to see that things held up reasonably well in March, but the enthusiasm for the increase in construction spending should be mitigated by the expectation that it is unlikely to be repeated in April.

Looking ahead, investors will receive Factory Orders for March on Monday.

  • Nasdaq Composite -4.1% YTD
  • S&P 500 -12.4% YTD
  • Dow Jones Industrial Average -16.9% YTD
  • Russell 2000 -24.5% YTD

FT : Apollo reveals $2.3bn loss as coronavirus takes toll

Apollo reveals $2.3bn loss as coronavirus takes toll
Private equity firm says staff would have had to hand back $390m in performance-related pay if portfolio had been liquidated in March

Apollo Global Management has calculated that its partners and employees would have been on the hook to hand back $390m in performance-related pay if its portfolio had been liquidated in late March, as financial markets reeled from the coronavirus pandemic.

The calculation, unveiled as Apollo disclosed a $2.3bn net loss for the first quarter, underscores the huge financial burden that a sustained market downturn could inflict on senior Apollo executives.

It comes a month after the firm’s billionaire founder, Marc Rowan, emailed senior White House adviser Jared Kushner to urge an expansion of the US Federal Reserve’s purchases of securitised debt in order to unfreeze the capital markets, according to people familiar with the matter.

While the Fed has launched unprecedented interventions in credit markets since then, Apollo has said the central bank’s actions did match those it suggested, and that it received “minimal — if any — benefit from any of the announced Fed programmes”.

Apollo manages $316bn of assets for institutional investors, including a large credit portfolio that has made it a vital source of funding for businesses that range from local hospitals and dental practices to multinational corporations including United Airlines.

The firm has a long record of spotting attractive investments in moments of financial turmoil, and recorded gross asset purchases of $41bn in the first three months of the year.

But many of Apollo’s holdings lost value in March, forcing the firm into writedowns that ranged from 22 per cent in private equity to 15 per cent in structured credit and 5 per cent in its heartland “direct lending business”.

Like other private capital firms, Apollo receives a management fee representing a fixed percentage of the funds it manages, as well as a share of the proceeds when investments are sold at a profit.

These profit shares are typically paid out soon after the underlying assets are sold, but if subsequent investment losses impair the performance of a fund or push it into loss, executives — even those who have subsequently left the firm — can be forced to pay them back.

Any “clawbacks” that Apollo may eventually face as a result of the market turmoil would probably be shared between hundreds of partners and employees. They will not have to hand over any cash unless the paper losses crystallise into asset sales — something that is not likely to happen for at least many months.

The liability will disappear altogether if investment values recover sufficiently, and the picture is already likely to have improved since March 31. Markets rebounded in April in response to a $2tn stimulus, and a dramatically expanded programme of bond-buying by the US Federal Reserve.

Executives assessing the impact on a $16bn private equity fund that Apollo raised in 2013 have calculated that a modest appreciation from the March 31 valuation would suffice to eliminate the clawback obligation for that fund, according to a person familiar with the calculations.

The S&P 500 index has posted gains of 13 per cent since the end of March.