From: research@oscargruss.com At: 01/10/20 12:58:32
To: Laurent Chekroun (MAKOR SECURITIES LO ) Subject: DERM/LLY Merger Agreement Quick Summary
DISCLAIMER This information represents neither an offer to buy or sell any security nor, because it does not take into account the differing needs of individual clients, investment advice. Those seeking investment advice specific to their financial profiles and goals should contact their Oscar Gruss & Son Incorporated sales representative. Oscar Gruss & Son Incorporated believes this information to be reliable, but no representation is made as to accuracy or completeness. This information does not analyze every material fact concerning a company, industry, or security. Oscar Gruss & Son Incorporated assumes that this information will be read in conjunction with other publicly available data. Matters discussed here are subject to change without notice. There can be no assurance that reliance on the information contained here will produce profitable results. A security denominated in a foreign currency is subject to fluctuations in currency exchange rates, which may have an adverse effect on the value of the security upon the conversion into local currency of dividends, interest, or sales proceeds. The value of securities and depositary receipts of foreign issuers that are denominated in United States dollars are also influenced by fluctuations in currency exchange rates. © 2019 Oscar Gruss & Son Incorporated. All rights reserved.https://www.sec.gov/Archives/edgar/data/1557883/000156459020000689/0001564590-20-000689-index.htm
Agreement Announced: 1/10/20
Agreement Dated: 1/10/20
Tender Commencement: 13 business days (1/30/20)
Minimum Condition: majority of outstanding
Tender/Support Agreement: ~13%
each of Bay City Capital Fund V, L.P., Bay City Capital Fund V Co-Investment Fund, L.P., Bay City Capital, LLC, New Enterprise Associates 13, L.P. and NEA Ventures 2011, Limited Partnership (collectively, the “BCC and NEA Stockholders”), in each case in its capacity as a stockholder of the Company and who, collectively, beneficially own approximately 13% of the outstanding Shares, entered into a Tender and Support Agreement (collectively, the “Tender and Support Agreements”) with Parent and Merger Sub. The Tender and Support Agreements provide, among other things, that each of the BCC and NEA Stockholders will tender all of the Shares held by it in the Offer.
Close: no later than 2nd business
Confidentiality Agreement: 9/10/19
Termination Date: 7/10/20
Termination Fee:
Company: $40M
Regulatory:
HSR (10 business days) (1/27/20) – only HSR mention as condition in Annex A
Foreign Antitrust (promptly)
A “business day” means any day on which the principal offices of the SEC in Washington, D.C., are open to accept filings or, in the case of determining a date when any payment is due, any day on which banks are not required or authorized by Law to close in New York, New York.
Best Efforts:
(c)Parent and Merger Sub agree to take promptly any and all steps necessary to avoid, eliminate or resolve each and every impediment and obtain all clearances, consents, approvals and waivers under the HSR Act or any Foreign Antitrust Law that may be required by any Governmental Entity, so as to enable the parties to close the Transactions as promptly as practicable (and in any event by or before the Outside Date); provided, however that nothing in this Section 6.02 and notwithstanding anything to the contrary in this Agreement, neither Parent nor Merger Sub shall have any obligation to (or to cause any of their respective subsidiaries or affiliates or the Company or the Company Subsidiary to): (i) sell, license, divest or dispose of or hold separate the assets, Intellectual Property or businesses of any entity, (ii) terminate, amend or assign any existing relationships or contractual rights or obligations of any entity, (iii) change or modify any course of conduct regarding future operations of any entity, (iv) otherwise take any action that would limit the freedom of action with respect to, or the ability to retain, one or more businesses, assets or rights of any entity or interests therein or (v) commit to take any such action in the foregoing clause (i), (ii), (iii) or (iv); provided, however that Parent and Merger Sub shall take the actions in the foregoing clause (i), (ii), (iii) or (iv) with respect to the Company or the Company Subsidiary (including, after the Effective Time, the Surviving Corporation) if such action (A) is necessary to obtain required clearances or waiting period expirations or terminations as may be required under the HSR Act or any Foreign Antitrust Law by or before the Outside Date and (B) would not, individually or in the aggregate, reasonably be expected to be materially detrimental to the benefits to be derived by Parent and its affiliates as a result of the Transactions. In addition, the Company shall not offer or commit to take any of the actions referred to in clause (i), (ii), (iii) or (iv) of the immediately preceding sentence without Parent’s prior written consent. For the avoidance of doubt, Parent shall not require the Company to, and the Company shall not be required to, take any action with respect to any Judgment or any applicable Law that binds the Company prior to the Effective Time.
Governing Law: DE
Superior Proposal Notice: 4 business days ( 2 business days for changes)
“Company Material Adverse Effect” means any change, event, condition, development, circumstance, state of facts, effect or occurrence that (i) has a material adverse effect on the business, assets, financial condition or results of operations of the Company and the Company Subsidiary, taken as a whole, or (ii) prevents the ability of the Company to consummate the Transactions on or before the Outside Date; provided that, for purposes of clause (i), none of the following, and no change, event, condition, development, circumstance, state of facts, effect or occurrence that results from or arises in connection with the following, either alone or in combination, shall be deemed to constitute a Company Material Adverse Effect and none of the following shall be taken into account in determining whether there has been a Company Material Adverse Effect: any change, event, condition, development, circumstance, state of facts, effect or occurrence to the extent resulting from or arising in connection with (A) general conditions (or changes therein) in the industries in which the Company and the Company Subsidiary operate, (B) general economic or regulatory, legislative or political conditions (or changes therein), including any actual or potential stoppage, shutdown, default or similar event or occurrence affecting a national or federal government, or securities, credit, financial or other capital markets conditions (including changes generally in prevailing interest rates, currency exchange rates, credit markets or equity price levels or trading volumes), in each case in the United States, the European Union or elsewhere in the world, (C) any change or prospective change in applicable Law or GAAP (or the authoritative interpretation or enforcement thereof), (D) geopolitical conditions, the outbreak or escalation of hostilities, any acts or threats of war (whether or not declared), sabotage, cyber-intrusion, terrorism or any epidemics, or any escalation or worsening of any such acts or threat of war (whether or not declared), sabotage, cyber-intrusion, terrorism or any epidemics, (E) any hurricane, tornado, flood, fire, volcano, earthquake or other natural or man-made disaster or any other national or international calamity, crisis or disaster, (F) the failure, in and of itself, of the Company to meet any internal or external projections, forecasts, estimates or predictions in respect of revenues, earnings or other financial or operating metrics before, on or after the date of this Agreement, or changes in the market price or trading volume of the Company Common Stock or the credit rating of the Company (it being understood that the underlying facts giving rise or contributing to such failure or change may be taken into account in determining whether there has been a Company Material Adverse Effect if such facts are not otherwise excluded under this definition), (G) the announcement, pendency or performance of any of the Transactions, including any stockholder Proceeding (direct or derivative) in respect of this Agreement or any of the Transactions and any loss of or change in relationship, contractual or otherwise, with any customer, Governmental Entity, supplier, vendor, service provider, collaboration partner, licensor, licensee or any other party having business dealings with the Company (including the exercise, or prospective exercise, by any party of any rights that arise upon a change of control), or departure of any employee or officer, of the Company, (H) the compliance with the express covenants contained in this Agreement (excluding the requirement that the Company operate in the ordinary course of business), (I) any action taken by the Company at Parent’s written request or with Parent’s written consent,
(J) any conditions or events that occur in connection with the Company’s, or its competitors’ or potential competitors’, preclinical or clinical studies (including regulatory changes that may affect such studies and/or the market for any particular product) or the results of, or data derived from, such studies or announcements thereof or in connection therewith,
(K) the identity of, or any facts or circumstances relating to, Parent, Merger Sub or their respective affiliates,
(L) the effects or consequences of any matter set forth on the Company Disclosure Letter, to the extent such effects or consequences were known or reasonably foreseeable by Parent,
(M) the determination by, or the delay of a determination by, a non-U.S. Governmental Entity in connection with any filing, designation, approval or clearance applied for, prosecuted or sought by any licensee of the Company with respect to any Company Products,
(N) approval by the FDA or any other Governmental Entity (or other preclinical or clinical or regulatory developments), market entry or threatened market entry of any product competitive with or related to any of the Company’s products or product candidates or
(O) any recommendations, statements, decisions or other pronouncements made, published or proposed by professional medical organizations or payors, or any Governmental Entity or representative thereof, or any panel or advisory body empowered or appointed by any of the foregoing, relating to any products or product candidates of the Company or of any competitors or potential competitors of the Company, or the pricing, reimbursement or insurance coverage thereof, except (x) in the case of clause (A), (B), (C), (D) or (E), to the extent that the Company and the Company Subsidiary, taken as a whole, are disproportionately affected thereby as compared with other participants in the industries in which the Company and the Company Subsidiary operate (in which case the incremental disproportionate impact or impacts may be taken into account in determining whether there has been a Company Material Adverse Effect) and (y) in the case of clauses (J), (M) and (O), to the extent such condition or event results from (1) fraud by the Company or (2) any order issued by the FDA to the Company causing it to suspend its ongoing clinical trial relating to Lebrikizumab (in which case such condition or event, to the extent resulting from fraud by the Company or such order issued by the FDA may be taken into account in determining whether there has been a Company Material Adverse Effect)
“Company Products” means, together, QBREXZA (glycopyrronium) cloth and Lebrikizumab.
Boeing Employees Mocked F.A.A. and ‘Clowns’ Who Designed 737 Max
The company expressed regret at the embarrassing communications it sent to investigators on Thursday, which included a comment that “this airplane is designed by clowns, who are in turn supervised by monkeys.”
Boeing employees mocked federal rules, talked about deceiving regulators and joked about potential flaws in the 737 Max as it was being developed, according to over a hundred pages of internal messages delivered Thursday to congressional investigators.
“I still haven’t been forgiven by God for the covering up I did last year,” one of the employees said in messages from 2018, apparently in reference to interactions with the Federal Aviation Administration.
The most damaging messages included conversations among Boeing pilots and other employees about software issues and other problems with flight simulators for the Max, a plane later involved in two accidents, in late 2018 and early 2019, that killed 346 people and threw the company into chaos.
The employees appear to discuss instances in which the company concealed such problems from the F.A.A. during the regulator’s certification of the simulators, which were used in the development of the Max, as well as in training for pilots who had not previously flown a 737.
“Would you put your family on a Max simulator trained aircraft? I wouldn’t,” one employee said to a colleague in another exchange from 2018, before the first crash. “No,” the colleague responded.
In another set of messages, employees questioned the design of the Max and even denigrated their own colleagues. “This airplane is designed by clowns, who are in turn supervised by monkeys,” an employee wrote in an exchange from 2017.
The release of the communications — both emails and instant messages — is the latest embarrassing episode for Boeing in a crisis that has cost the company billions of dollars and wreaked havoc on the aviation industry across the globe. The Max has been grounded for nearly 10 months, after the two deadly crashes. A software system developed for the plane was found to have played a role in both accidents, and since then the company has been working to update the system.
There is still no indication when the Max might be cleared to fly again, as the company and regulators continue to discover new potential flaws with the plane.
The messages threaten to further complicate Boeing’s tense relationship with the F.A.A. Both the company and agency indicated Thursday that the messages raised no new safety concerns, but they echoed troubling internal communications among Boeing employees that were previously made public.
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In several instances, Boeing employees insulted the F.A.A. officials reviewing the plane.
In an exchange from 2015, a Boeing employee said that a presentation the company gave to the F.A.A. was so complicated that, for the agency officials and even himself, “it was like dogs watching TV.”
Several employees seemed consumed with limiting training for airline crews to fly the plane, a significant victory for Boeing that would benefit the company financially. In the development of the Max, Boeing had promised to offer Southwest a discount of $1 million per plane if regulators required simulator training.
In an email from August 2016, a marketing employee at the company cheered the news that regulators had approved a short computer-based training for pilots who have flown the 737 NG, the predecessor to the Max, instead of requiring simulator training.
“You can be away from an NG for 30 years and still be able to jump into a MAX? LOVE IT!!” the employee says, following up later with an email noting: “This is a big part of the operating cost structure in our marketing decks.”
Requiring simulator training can be costly for airlines and even after the crashes, Boeing told the F.A.A. it was not necessary. It was not until Tuesday that Boeing said it would recommend simulator training for pilots who fly the Max.
Boeing on Thursday expressed regret over the messages. “These communications contain provocative language, and, in certain instances, raise questions about Boeing’s interactions with the F.A.A. in connection with the simulator qualification process,” the company said in a statement to Congress. “Having carefully reviewed the issue, we are confident that all of Boeing’s Max simulators are functioning effectively.”
“We regret the content of these communications, and apologize to the F.A.A., Congress, our airline customers and to the flying public for them,” Boeing added. “The language used in these communications, and some of the sentiments they express, are inconsistent with Boeing values, and the company is taking appropriate action in response. This will ultimately include disciplinary or other personnel action, once the necessary reviews are completed.”
The messages outraged several lawmakers, who saw a disregard for safety and broader problems with the culture at the company.
Senator Richard Blumenthal, Democrat of Connecticut, said in an interview that he would push for new congressional hearings to question Boeing leadership about the “astonishing and appalling” messages.
Boeing said that it notified the F.A.A. about the documents in December and that it had “not found any instances of misrepresentations to the F.A.A. with its simulator qualification activities,” despite the employee’s comment about “covering up” issues with the simulator.
Lynn Lunsford, a spokesman for the F.A.A., said in a statement that the messages did not reveal any new safety risks.
“Upon reviewing the records for the specific simulator mentioned in the documents, the agency determined that piece of equipment has been evaluated and qualified three times in the last six months,” Mr. Lunsford said. “Any potential safety deficiencies identified in the documents have been addressed.”
Mr. Lunsford added that, “while the tone and content of some of the language contained in the documents is disappointing, the F.A.A. remains focused on following a thorough process for returning the Boeing 737 Max to passenger service.”
The relationship between Boeing and the F.A.A. has been a complicating factor for the company as it works to persuade international regulators that the Max is ready to fly. Last month, Boeing fired its chief executive, Dennis A. Muilenburg, whose optimistic projections about the plane’s return to service created a rift with the regulator.
Stephen Dickson, the new chief of the F.A.A., has struck a more assertive tone in public comments about the Max, urging his employees to ignore outside pressure to quickly lift the plane’s grounding and telling Boeing that there is no set timetable for the Max to return.
In a meeting with Mr. Muilenburg last month, Mr. Dickson told the company not to make any requests of the regulator and to instead focus on completing the paperwork necessary for regulators to evaluate the update.
Last year, Boeing disclosed internal messages from 2016, in which a top pilot working on the plane told a colleague that he was experiencing trouble controlling the Max in a flight simulator and believed that he had misled the F.A.A.
“I basically lied to the regulators (unknowingly),” the pilot, Mark Forkner, said to his colleague, Patrik Gustavsson.
Boeing did not inform the F.A.A. about the messages when the company first discovered them, waiting until about two weeks before Mr. Muilenburg was set to testify in front of Congress to send them to lawmakers. The conversation, which took place before the Max was approved to fly, angered key F.A.A. officials, who felt misled by the company, according to three people familiar with the matter.
After the congressional hearings, Boeing moved Mr. Gustavsson out of his role working on the certification of new planes
On Thursday, Representative Peter DeFazio, a Democrat from Oregon who is leading the House investigation into the development of the 737 Max, called the newly released messages “incredibly damning.”
“They paint a deeply disturbing picture of the lengths Boeing was apparently willing to go to in order to evade scrutiny from regulators, flight crews and the flying public,” he added, “even as its own employees were sounding alarms internally.”
Why the fate of the ozone layer should give us hope on climate change
Douglas Coupland on why we need to fight ‘noptimism’
Recently I read an article online saying that the ozone hole will be completely fixed by about 2030. But wait — was this the same ozone hole that made me lose sleep for decades and was going to destroy all life on earth? Yes, it was: the ozone hole, quietly fixed, its repair meriting a single article in a Monday science section.
I thought back to the early 1980s when acid rain was the bogeyman, murdering Germany’s forests while triggering mass extinctions and dissolving Rome’s Coliseum. I thought, “Hmmm — whatever happened to acid rain? I haven’t even thought of it in at least a decade.” The answer? It was fixed.
A few weeks later I was at a large dinner in California where I ventured this idea: “We fixed the ozone hole and acid rain. I think we might actually be able to fix global warming.” Never have I endured such a shitstorm as quickly as what happened there.
Allow me to paraphrase: “How dare you try and say that global warming can be fixed. Who the hell do you think you are?” “People like you make me sick. Global warming can never be fixed.” “Your supercilious attitude is loathsome. The moment you start thinking global warming can be fixed is the moment it can never be fixed.”
OK, I wasn’t expecting this.
The dinner guests were expressing a new form of ecological logic: “We can only have hope if we have no hope,” or, “The moment we have hope, we’ll let our guards down and then we really will lose the war.” But wait, you already decided in advance the war was unwinnable to begin with. I don’t think this phenomenon has a name yet. Let’s call it noptimism.
My noptimistic inquisition took place in November 2019, the same month and year in which the 1982 film Blade Runner was set — the jewel in the crown of dystopian cinematic futures: dark, perpetually raining and plagued with androids.
And yet there we were in November 2019 and . . . if nothing else, 2019 was definitely not the mess it was once supposed to have been. The sky is still blue and people have more access to information than ever. Engines are running. Wheat fields aren’t growing thin. It’s a decreasingly nuclear era — and yet there’s all of this harsh noptimism going on
This got me to wondering, why does everyone shit on optimists? You can do or say anything you want to optimists without any repercussion, and that seems really screwed up. An optimist’s sole crime is that they possess hope.
In November I had not one, but three people younger than myself by a few decades email to ask if I’d go out for a coffee with them. They were, all of them, at that magic age when it dawns on you that the life you have is the only life you’re going to get.
Each of them had a slight variation on a common theme: what is happening to us, where is it going, and how can I feel less afraid for myself and my family?
But what I really noticed was the way that each of these individuals was being way too emotionally charged about the world in a way I don’t remember people being when I was their age.
Part of my advice to them was that 1) Things are going to be fine; 2) They really are going to be fine; 3) Negativity is a stupid person’s way of trying to look smart without actually being smart; 4) In my lifetime I’ve seen acid rain and the ozone hole fixed and so I truly believe we can and will fix global warming; 5) Stop spending so much time online. The new global economy isn’t about data — it’s about who can hijack your emotions and how they can profit from that; 6) The next time you feel you’re getting pissed off or verklempt about something, stop. Pull back. Be honest and be critical and try and determine who did this to you and why. Forget data; emotional manipulation is our new cultural currency, and hyperpolarisation is merely a subset of hyperemotion. This isn’t a new idea, but it does seem to be increasingly evident with each day.
To bring this all back to global warming and the dinner party, someone tried to “OK boomer” me, to which I said: “I detested my allotted generation so much that I invented one of my own. So, I’m definitely on your side, but if you can’t imagine hope, then why not just go jump off a cliff with all the other noptimists?”
To be a noptimist means that someone’s calculatedly frightened you and owned you in the process. Go to war, but do so knowing you can eventually win. There’s nothing wrong with that.
Internal Boeing Documents Show Cavalier Attitude to Safety
‘Would you put your family on a MAX simulator trained aircraft? I wouldn’t’
Boeing Co. BA 1.50% released internal communications that show employees displaying a cavalier attitude toward safety, ridiculing regulators and some airline officials.
The messages revealed how employees persuaded—and in some cases tried to trick—airline and government officials to conclude that flight simulator training wasn’t necessary for the 737 MAX.
Most of the 150 pages of documents were turned over to federal prosecutors months ago, according to industry and government officials, and Boeing subsequently sent them to the Federal Aviation Administration and to House and Senate committees starting just before Christmas.
The FAA said nothing in the messages pointed to any new safety risks that hadn’t been identified.
Many documents date from 2017 and 2018 when Boeing was working on 737 MAX flight simulators. Some exchanges go back as far as 2013, when the plane was in development.
The material was made public Thursday, two days after Boeing said it would recommend additional simulator training for pilots when regulators clear the MAX to fly again, reversing its prior position that computer-based learning would suffice. The names of pilots were redacted, but some titles were included, in the documents released late Thursday.
In 2018, as the company was contending with problems in its MAX flight simulators, some employees were concerned about whether regulators would sign off on the simulators. Some employees complained that they had not been given enough time to resolve the issues.
“Would you put your family on a MAX simulator trained aircraft? I wouldn’t,” one employee wrote in a February 2018 message.
Also that year, one Boeing management pilot told a fellow employee he was worried about fallout from some of his previous work that, he seemed to suggest as part of the exchange, resulted in hiding potential safety issues. “I still haven’t been forgiven by god for the covering up I did last year,” the pilot wrote. “Can’t do it one more time. Pearly gates will be closed.”
Ridicule of regulators is peppered throughout the documents. After mentioning unnamed “morons” who decided to put certain kinds of instrument displays on the MAX, one employee added that India’s top aviation regulator “is apparently even stupider.”
The bravado and ridicule also extended to fellow Boeing employees. “This airplane is designed by clowns, who in turn are supervised by monkeys,” another email declared.
The contents, mainly exchanges between company pilots and staff involved in the MAX simulator, are likely to ratchet up further criticism of Boeing.
The material comes in the wake of months of escalating congressional criticism of Boeing’s initial design of the MAX, which has been grounded world-wide since March following a pair of deadly plane crashes in Indonesia and Ethiopia.
A smaller batch of similar messages, some involving the same Boeing staff, were released in October and prompted angry responses from lawmakers, who argued it pointed to major lapses in the plane maker’s safety culture.
Lawmakers focused many of their comments on Mark Forkner, then chief technical pilot for the 737 MAX, who in the messages released earlier described “Jedi mind tricking” regulators and said he had unknowingly lied to the FAA.
Among the messages released Thursday were some in which Mr. Forkner communicated with several carriers that were considering requirements for extra simulator training for pilots before flying the MAX.
In the messages, he tried to dissuade airlines from simulator-training mandates, arguing that they would be costly and unnecessary. In related communications with colleagues, Mr. Forkner described the immense pressure he was under to prevent regulators from requiring simulator training, saying failure would be “thrown squarely on my shoulders” and cost Boeing “tens of millions of dollars.”
Mr. Forkner’s name was redacted from the messages, but his title, 737 chief technical pilot, wasn’t. People familiar with the messages’ content said Mr. Forkner was the sender.
A lawyer for Mr. Forkner played down the messages’ significance and said they shouldn’t be taken out of context.
“Many people blew off steam in the ups and downs of their jobs,” attorney David Gerger said. “The fact is: military vets like Mark flew the MAX; they believed the plane was safe; the problem they saw was in the simulator.”
Mr. Gerger made the statement last month, after a House committee disclosed that it had obtained additional internal Boeing messages, but before the messages were made public on Thursday night. He couldn’t be immediately reached for comment.
The belated release of those earlier documents to the FAA riled U.S. regulators. Boeing’s deteriorating relationship with the FAA contributed to the ouster of then-Chief Executive Dennis Muilenburg late last year.
Senior FAA officials were concerned that the latest batch of messages implied that some Boeing employees were willing to sacrifice safety features to avoid simulator training. Those officials decided against releasing the messages earlier because the agency is considering potential enforcement actions against some of the individuals named in the documents, according to people familiar with the matter.
“While the tone and content of some of the language contained in the documents is disappointing, the FAA remains focused on following a thorough process for returning the Boeing 737 MAX to passenger service,” the agency said.
Several messages relate to problems with Boeing’s MAX simulators in 2017 and 2018 and use “provocative language.” They raise questions about Boeing’s interactions with the FAA in connection with the simulator-qualification process. The company said its simulators have been looked at several times since the messages were written and that it is confident they are working correctly.
“These communications do not reflect the company we are and need to be, and they are completely unacceptable,” the company said. “We regret the content of these communications, and apologize to the FAA, Congress, our airline customers, and to the flying public for them.”
Boeing said it hadn’t covered up anything and that it was confident that all MAX simulators are functioning effectively.
Boeing said it released the documents at the urging of Congressional leaders.
Rep. Peter DeFazio (D., Ore.), chairman of the House Transportation Committee, described the newly released emails as “incredibly damning.”
“They paint a deeply disturbing picture of the lengths Boeing was apparently willing to go to in order to evade scrutiny from regulators, flight crews, and the flying public, even as its own employees were sounding alarms internally.”
Some of the communications stretching back to 2013—when Boeing engineers were firming up design of the MAX—show pilots emphasizing that helping airlines avoid costly and time-consuming simulator sessions for crews trumped safety improvements. The messages were intended to be confidential.
A feature designed to provide pilots with reliable airspeed in the event certain sensors malfunction shouldn’t be made standard, one of the messages noted, because “it would likely jeopardize the Program directive” to avoid extra simulator training for the MAX.
Venting their frustrations with how the simulator problems were handled, some employees pointed to what they described as broader failures of Boeing’s leadership.
“I don’t know how to fix these things…it’s systemic. It’s culture. It’s the fact that we have a senior leadership team that understand very little about the business and yet are driving us to certain objectives,” one wrote in June of 2018.
Shrinking Europe
No fewer than 10 member states saw falling populations in 2018, with the biggest declines recorded in Latvia, Bulgaria, Croatia, Romania and Lithuania
Europe’s combustible immigration debate is taking on an extra dimension as the bloc starts to confront its unenviable demographics.
Andrej Plenkovic, the Croatian prime minister, has decided to elevate population decline to the top of his agenda as Zagreb assumes the EU's rotating presidency.
The topic is, as he told the FT in December, an existential one for many EU member states — especially those in the east and south-east of the bloc that are grappling with low birth rates and emigration to wealthier countries assisted by freedom of movement.
No fewer than 10 member states saw falling populations in 2018, with the biggest declines recorded in Latvia, Bulgaria, Croatia, Romania and Lithuania, according to Eurostat, and EU states are at the top of the list for population declines by 2050 according to the UN.
Croatia, which on Thursday night formally launched its presidency in front of invited journalists and European Commission bigwigs, wants the EU to study mechanisms to reverse this trend. The potential policy responses contain political landmines.
Liam Patuzzi, an analyst at the Migration Policy Institute, says countries confronting shrinking populations need to consider immigration as a way of plugging skills gaps and boosting tax revenues. He points for example to Poland, which has permitted a surge in arrivals from neighbours led by Ukraine, making it the world's leading destination for temporary work migration in 2017.
This is, needless to say, a politically hazardous path to walk in the context of rising populism and the unresolved battle over asylum policy. Indeed, when it comes to immigration, Mr Plenkovic appears considerably more eager to focus on his tough border security measures and efforts to drive down unlawful crossings from countries such as neighbouring Bosnia Herzegovina.
In Hungary, Viktor Orban on Thursday said he is designating fertility clinics a “strategic” sector as he seeks to lift birth rates without boosting immigration.
Immigration by no means represents a panacea when tackling structural problems such as a declining birth rate, Mr Patuzzi stresses.
For central and eastern Europe, EU cohesion funds could lift economic performance and deter younger residents from heading west, but here too the political landscape is unforgiving given recent proposals to slash cohesion spending by 12 per cent in the forthcoming seven-year budget.
Croatia is asking the EU to weigh up a host of family-friendly policies, including more generous parental support, as it seeks ways of reversing dismal birth rates.
When it comes to the brain drain faced by many member states, the departure of the UK from the EU will raise barriers to at least one possible destination.
But for young citizens in the EU's poorer countries, it will remain relatively easy to decamp to richer western countries — further damaging tax bases and worsening ratios between the working and retired population.
“This risks becoming a spiral,” says Mr Patuzzi.
Basel derivative rules point to more pain for fund managers
Attempts at preventing ‘another Lehman’ will have limited upside for taxpayers
Only a few days into the decade and finance people are being forced to confront another year of regulatory deadlines that will be impossible to achieve, in particular those imposed by Brexit, the Basel Committee on Banking Supervision and the International Organization of Securities Commissions.
How about finding a way of not doing this to ourselves?
On Brexit, we can only hope that each side is exhausted enough to abandon fantasies of a wealthy pirate ship or the bureaucratic destruction of London. Europeans need each other too much to indulge in revenge and domination.
The Basel regulation mess should be easier to deal with than Brexit, as there seems to be less cultural and geopolitical noise intruding. But the post-financial crisis regulation has created a swamp of self-serving professionals masked as honest brokers, “fintech start-ups” and in-house profit centres. They do not want a solution for financial instability. They want career success for themselves. These are not the same thing.
There is a point in bureaucratic negotiations, as in war, where participants should realise that their maximalist demands and victory fantasies are pointless and destructive. For the Basel process, that would be now.
For the first years after the financial crisis, the global regulatory process was able to make real progress on reducing risk in banking and securities dealing. The rulemaking concentrated on major banks and dealers, as well as key pieces of financial market infrastructure. This made sense: those are the institutions that the public would be forced to bail out to save its own interest come the next crisis.
Also, the big banks, along with infrastructure bits such as the clearing houses, have the compliance bureaucracy and quasi-monopoly status that comes with their licensing. Top management of big banks can be reasonably expected to spend much of its time going to Basel, or mini-Basel, meetings on how banks should be regulated.
But as the Basel regulatory process reached into asset management and operating companies, it has become self-defeating. By trying to turn every participant in the capital markets into a bank, Basel risks freezing up capital flows and creating an unintended systemic disaster.
I am thinking in particular of the uncleared margin rules (UMR) for derivatives transactions that are set to be imposed by next year on several thousand capital markets participants, most of them non-bank asset managers. The idea, easy to sell to the world’s politicians, is that we can avoid “another Lehman” by requiring a large number of investors to put up high quality liquid assets against their exposure to financial derivatives.
Sounds good. Until you look at the details. Lehman was one of about a dozen key New York dealers, a bad apple at the centre of the dollar system. The Lehmans of the world are already covered by the Basel requirements intended to avoid another systemic disaster in derivatives markets. According to the International Swaps and Derivatives Association (ISDA), the major institutions covered by the first phases of the UMR had already posted $170bn in two-way regulatory margin by the end of 2018. That margin comes in the form of high quality liquid assets that are segregated and unavailable for other purposes.
But the planned extension of the UMR will cover not just top banks with taxpayer guarantees and a lot of staff, but many of their customers. BNY Mellon, the custodial bank, estimates the remaining phases of the Basel margin requirements will cover at least 640 institutions with more than 9,000 interconnecting relationships in the market. Based on my discussions with asset managers, there could be thousands of asset managers and companies that will be shocked to find out how many government bonds they have to put up as sterilised capital if they are to comply with the rules.
Regulators already know this, as the UMR were originally intended to be in place by this September. Last July they were postponed until September of 2021. But that does not offer much relief, as counterparty banks and dealers will insist that a compliance process must be in place at least a year in advance.
The Basel compliance process favours banks and large dealers over asset managers and investors. For example, the mathematical model that ISDA endorses to calculate initial margin runs to 29 pages of equations. One of the effects of the “simplified” model, by the way, is to make it easier for banks to reduce the initial margin requirements that might otherwise burden their illiquid assets.
In other words, the Basel regulatory process has been partly captured by those it was intended to regulate. Asset managers and capital markets, which have taken away some of the banks’ capital allocation function, will now be burdened by higher technology and staff costs, and prospectively required to buy trillions of dollars in government debt.
This is not going to happen. Stop postponing initial margin rules — rethink the process in a realistic manner for non-banks. The benefits are going to consultants, lawyers and therapists, not the tax paying public.