TheChek News Flow

Railroad saw its best financial year ever but still faces lawmakers skeptical of its profitability-focused strategy

For a company coming off its best year ever, Amtrak faces a strange challenge in 2020: convincing its owner, the federal government, that the railroad is running in the right direction.

The national passenger railroad reported an adjusted operating loss of $29.8 million in the fiscal year ended Sept. 30, the best financial performance in Amtrak’s nearly 50-year history. While the railroad still faces a backlog of capital investment worth billions of dollars, the earnings show it moving closer to the goal of Chief Executive Richard Anderson : breaking even in the typically unprofitable business of moving passengers by rail.

Skeptical lawmakers say Amtrak’s pursuit of profitability has caused its overall service to suffer. And the railroad’s financial strategy will face scrutiny this year as Congress takes up a new multiyear highway bill, which includes reauthorization of the federal grant programs that subsidize Amtrak.

Some on Capitol Hill have objected to Mr. Anderson’s goals of maximizing ridership and revenues on shorter routes between population centers—while seeking to rein in costs by reducing service on money-losing long-distance train routes in rural parts of the country.

Rep. Peter DeFazio (D., Ore.), the chairman of the House Transportation Committee, has questioned Mr. Anderson’s profit-focused philosophy altogether, arguing that is more appropriate to the private sector than to a government-owned company like Amtrak.

“I think part of the problem we’re dealing with is the original mandate from Congress, which said that this is supposed to be run as a for-profit corporation,” Mr. DeFazio said. “I think they should think about efficiency but not profit…Amtrak is a service, and it can be a better service.”

The railroad’s leaders reject that notion.

“Amtrak wants to grow and do more for the nation,” Anthony Coscia, chairman of its board of directors, said. “The single best way to do that is to run the company well—and we have been doing that.”

Amtrak’s steadying financials have helped it make passenger improvements, like renovating the interiors of passenger cars and replacing aging track and the overhead catenary wire system to improve train speeds on the Northeast Corridor line.

Amtrak is also planning to bolster service along its busiest and most profitable corridor with the procurement of new passenger cars to replace the Amfleet I, the workhorse steel carriages that have run on the corridor and adjacent routes since the late 1970s.

Mr. Anderson and Mr. Coscia say their stewardship of Amtrak’s annual federal subsidy, which totaled $2.2 billion last year, gives the company credibility when it seeks funding for large capital projects, like new tunnels at two critical chokepoints in the Northeast, one beneath downtown Baltimore and the other under the Hudson River between New Jersey and New York.

Potentially adding to Amtrak’s uncertainty in the coming year is the possible departure of Mr. Anderson, the former CEO of Delta Air Lines Inc. who has run the railroad since 2017. While there has been no public announcement, some at the railroad are bracing for his exit.

Mr. Coscia didn’t comment on that possibility but said Amtrak “takes succession planning very seriously, and its ability to attract world-class CEOs also brings with it the responsibility to assure there’s continued leadership at that level.”

Also unknown is how Washington politics might shape Amtrak’s future. Mr. DeFazio’s committee is one of two House panels that will begin work on the reauthorization bill to replace the FAST Act, a five-year surface transportation bill to fund road, rail and transit programs, which expires in 2020. Some doubt Congress will manage to craft and pass the bill in an election year, especially since its funding will turn on an unpleasant question: whether lawmakers will raise the federal gas tax, the primary funding source for highway grants, for the first time since 1993.

In recent weeks, Congress has shown it intends to intervene in some fiscal decisions that have driven Mr. Anderson’s push to profitability. In the nearly $1.4 trillion budget deal approved by Congress in December, lawmakers barred Amtrak from moving ahead with a plan to reorganize the railroad’s police, which unions said would mean shrinking the workforce.

Lawmakers from Western states have already blocked Mr. Anderson’s effort to cut a long-distance train route, the Southwest Chief from Chicago to Los Angeles, into two parts, replacing a middle section with bus service.

But the budget deal also helped Amtrak by explicitly allowing local governments to use funds borrowed from federal loan programs to count as the local share of a project funded by federal transportation grants.

Railroad leaders have defended their approach. Their goal, they say, is to run more trains more frequently in areas of the country that are dense and growing—effectively replicating the model of the Northeast Corridor between pairs of cities where Amtrak is underused but could compete with flying and driving. The railroad says it could serve millions more riders a year and could continue to boost profits if it converted sections of the national network to handle more-frequent train service between city pairs a few hundred miles apart.

“What we’re after here is the person who lives in Atlanta or Charlotte, who doesn’t have train service,” Mr. Coscia said. “The person who has to wake up at 3 in the morning in Cleveland to take a train.”

There are signs that vision will continue to advance. Virginia Gov. Ralph Northam, a Democrat, announced in December a $3.7 billion deal with freight carrier CSX Corp. to build a bridge across the Potomac River from Washington, D.C., and to transfer hundreds of miles of freight track and right of way to the state, for use in passenger service.

The result will fit Amtrak’s corridor strategy exactly—doubling the number of trains operating daily through Virginia, including regular service between the population hubs of Washington and Richmond, with new connections to add more service to North Carolina and into the Southeast.

Virginia officials said the program, to be completed by 2027, could shift 5 million cars and 1 million trucks a year off highways in the state. Amtrak has committed to kicking in $944 million over 10 years toward the project’s cost.

Corrections & Amplifications

Virginia officials said a railroad program could shift 5 million cars and 1 million trucks a year off highways in the state by 2027. An earlier version of this story erroneously said the program could shift 5 million cars and 1 million trucks a day off highways. (Jan. 1, 2020)

Japanese carmaker’s operating issues are no laughing matter

Rumours that former Nissan Motor chairman Carlos Ghosn escaped Tokyo for Lebanon in a musical instrument case might make a good movie twist. It does nothing to alter the plotline for Nissan. For the Japanese automaker, it is far from the end for its reputational and financial issues. Mr Ghosn’s absence matters less than what he left behind, a collection of ineffective corporate alliances.

More madcap comedy than epic thriller, Mr Ghosn gave the Japanese prosecutors and police the slip at the year end. Some will also smirk at local regulators who fined Nissan a mere $22m for allegedly knowingly understating Mr Ghosn’s pay. But its operational issues are no laughing matter. Nissan has cut its operating profit forecast for the year ending March by more than a half and revised down sales forecasts in the US, its biggest market, by more than a tenth. 

Already profitability is at a decade low. Third-quarter operating margins fell to 1.1 per cent. Only its auto leasing unit has offset the losses made from cars this year. Margins at home, which have historically been the highest, dropped more than 7 percentage points in the most recent quarter. Analysts do not expect Nissan to have positive free cash flow much before March 2022. All this will stretch the company’s balance sheet. 

Within a consolidating auto industry, Nissan and alliance partner Renault of France chastely huddle together, keeping one foot on the floor. Renault’s newish chairman Jean-Dominique Senard, wants no more dramas with Nissan. He will not press for a merger.

Markets have booed. Share prices of the three partners in the Renault-Nissan-Mitsubishi alliance are down about a quarter in the past year. All have issued profit warnings in the past few months. In a scale-dependent business undergoing a shift towards electrification, Mr Senard and his opposite number at Nissan, Makoto Uchida, should consider all options.

Some of this bad news is priced in. Nissan trades at less than half its net asset value, the cheapest it has been since 2008. This, along with a dividend yield over 6 per cent - well above the industry average - seems to show the shares are good value. Yet a lack of free cash flow suggests a dividend cut may be in the offing.

Without an extradition treaty between Japan and Lebanon, the case against Mr Ghosn could well collapse. Unless the partners fully consummate their relationship, the denouement for Nissan’s three-way alliance may be equally messy.

A precarious platform is also a springboard for a penetrating study of resilience

Yoann Bourgeois could be forgiven for looking back on the decade just gone with a sense of satisfaction. The French choreographer’s explorations of balance — in which performers’ efforts to keep their footing on precarious structures acquire an existential charge — have drawn audiences around the world. In 2016, he became the first circus-trained artist to be appointed co-director (with Rachid Ouramdane) of a National Choreographic Centre, in Grenoble.

Knowing about this subsequent success, there is a special pleasure to be had in returning to one of Bourgeois’ earliest hits, 2014’s Celui qui tombe, currently presented at the Centquatre in Paris. It has become known in English as He Who Falls, but The One Who Falls would be a more appropriate translation, since its cast of three men and three women are equal partners.

When they appear on a large wooden platform that is slowly lowered by cables, they look like they’re sleeping. As the structure tilts, they slide around it, then attempt to stand and walk, like hikers on a treacherous slope. Once it is horizontal again, the platform starts spinning. After stumbling around, the group adapts, huddling and leaning forward or backwards at impossible-looking angles to compensate for the centrifugal force.

It sounds chaotic on paper, but in Celui qui tombe it isn’t. The pace is deliberate, and while Bourgeois’ performers generally have a background in circus, he strips their craft of its usual demonstrativeness. They take their time reacting and adjusting to the changes in their environment, and look for all the world like regular people as they do so.

And they all depend on each other, in a remarkably simple metaphor of community. When one performer decides to stride to a corner of the platform, the others are forced to scramble to create a counterweight, lest they all fall off. To Frank Sinatra’s “My Way”, individuals run to stay in place, fleetingly form couples, then are forced to jump over the others’ bodies as they each fall to the ground — a life cycle flashing before our eyes.

“It’s Survivor,” an audience member whispered behind me near the end. It is and it isn’t. Like the reality show, Celui qui tombe does subject its cast to hostile circumstances, but its story is one of quiet, undramatic resilience, and all the more penetrating for it.

US central bank averted a year-end cash crunch, but stepping back is now a challenge

When a crucial US financing market went haywire in September, the Federal Reserve resolved to do everything in its power to avoid a repeat at the end of the year.

On the final day of 2019 — often a fraught time for the “repo” market, where cash is borrowed in exchange for high-quality collateral such as Treasuries — the central bank’s actions proved successful.

By injecting tens of billions of dollars into the financial system in the intervening months, in the form of daily and longer-term repo loans and outright purchases of Treasury bills, the Fed ensured there was enough cash swilling around to prevent market rates from spiking higher.

Now, investors and policymakers alike are eager for a longer-term fix: one that brings some normality back to funding markets without requiring heavy-handed interventions by the Fed.

“I really think they hope to be in a place where they get the money markets operating in a way that they don’t have to frequently intervene and inject liquidity,” said Nathan Sheets, a former US Treasury official who is chief economist at PGIM Fixed Income, which manages $838bn in assets.

The question is how the Fed can remove that support. “The market doesn’t have clarity there and really wants it,” says Mark Cabana, an interest rate strategist at Bank of America.

Crucial to any plan is the level of bank reserves, which is indicative of the available cash in the financial system that could be supplied to other bank investors in the repo market. It is widely thought that September’s cash crunch coincided with reserves dropping too low.

The Fed has since intervened by buying short-term Treasury bills. As the Fed buys securities, more cash enters the financial system, boosting banks’ reserves. Once reserves have increased to a level able to withstand short-term shocks to money markets, the thinking goes, the Fed will be able to step back from its current repo operations.

Last month Fed chairman Jay Powell said that once reserves reach a sufficient level, “it will be appropriate for overnight and term repo [operations] to gradually decline”. But that level remains unspecified. Banks currently hold $1.5tn in cash reserves at the Fed — up from $1.3tn in September when funding markets seized up.

Moreover, Mr Powell has opened the door to expanding beyond the Fed’s current bill-buying programme and purchasing other short-term securities to bolster banks’ reserves.

Investors have begun to consider what kind of impact such purchases could have on asset prices, given the parallels to the “quantitative easing” programme of the post-crisis recovery.

Buying Treasuries pushes their prices higher, lowering the yields on offer to investors and potentially encouraging them to seek out riskier assets — such as stocks and corporate bonds — to boost returns. This effect is more pronounced if the Fed increases the maturity of the government debt it buys, say investors. “As you move out the curve, at some point it becomes operationally equivalent to QE,” said Mr Sheets of PGIM.

Kathy Bostjancic, chief US financial economist at Oxford Economics, said the best option is for the Fed to remain involved in the market. She favours a standing repo facility: a permanent programme allowing institutions to exchange their Treasury holdings for cash at a set interest rate.

“If banks feel at any given time they could swap Treasuries for cash reserves, that should eliminate any hoarding of reserves,” she said.

The Fed discussed this option during its policy-setting meeting in June, raising concerns over how it would determine who can access the facility and at what rate of interest. Half a year later, it does not appear the central bank is any closer to making real progress. “I think the standing repo facility is something that’ll take some time to evaluate . . . and put into place,” said Mr Powell last month.

Bank executives have seized on the recent repo stress to pressure regulators to ease liquidity requirements put in place following the financial crisis. They argue that these rules have dissuaded banks from lending into short-term funding markets despite being flush with cash.

Regulations have reduced “flexibility” at financial institutions, said Dan Ivascyn, group chief investment officer at Pimco, which manages nearly $1.9tn in assets. “You can’t rely on risk to be transferred as seamlessly as . . . in the past.”

Fed officials have tentatively engaged with questions like this, but investors are sceptical there will be any immediate change given political resistance from the likes of Democratic presidential candidate Elizabeth Warren. The senator from Massachusetts has cautioned against using the repo flare-up as an “excuse” to weaken banking rules.

Whatever direction the Fed ultimately takes, investors are keen for it to act quickly.

“The plumbing of the financial system is critically important to the functioning of markets and the broader economy,” said Ashish Shah, co-chief investment officer of fixed income at Goldman Sachs Asset Management.

Former Nissan chief flew from Japan to Beirut via Istanbul’s Ataturk airport

Turkish police detained seven airport staff and pilots in Istanbul on Thursday and prosecutors raided Carlos Ghosn’s former house in Tokyo as authorities looked for clues to explain the former Nissan chairman’s escape from Japan to Lebanon.

Meanwhile Lebanon’s justice ministry said it had now received a request from Interpol for Mr Ghosn’s arrest — a so-called “red notice” that asks the country’s law enforcement to locate and “provisionally arrest” someone. Lebanon is under no obligation to comply with the request.

Mr Ghosn, who was facing trial in Tokyo for financial misconduct, landed in Beirut on Monday. He appears to have transited via Turkey after jumping bail and flying out of Osaka airport on a private jet.

The Turkish authorities are investigating whether the detainees, including four pilots, helped Mr Ghosn escape, according to Anadolu agency. Turkish media also reported that the detentions were part of an investigation by the interior ministry into Mr Ghosn’s transit, given neither his entry nor exit were registered.

Turkish media said investigators were focusing on the pilots and a brief period of just under an hour during which a private jet carrying Mr Ghosn from Japan landed at Istanbul’s Ataturk airport.

Two airport staff and the trade and operations manager of a cargo company were also detained by Turkish police, according to local media. A Turkish aviation official confirmed reports that Mr Ghosn had transited via Ataturk airport.

The airport was closed to commercial passengers last year and now only deals with cargo planes and private jets. Publicly available flight records show that a private jet travelling from Osaka’s Kansai airport landed in Istanbul on December 29 at 5.26am, having departed Japan at 11.10pm the previous night.

Mr Ghosn, who was arrested in late 2018, had been awaiting trial in Tokyo on charges of financial misconduct — accusations he has consistently denied and which he claims were trumped-up as part of an attempt to remove him from his position as chairman of Nissan. 

For the past seven months he had been living in a large house — a former embassy building — in the heart of Tokyo under strict bail conditions and what was thought to be the watertight scrutiny of Japanese prosecutors. 

Before the Tokyo District Court granted Mr Ghosn bail — for which he handed over almost $14m — prosecutors warned that a man of his wealth and global connections was a clear flight risk.

Mr Ghosn’s escape had been planned with the help of private security operatives since October, according to people familiar with the situation.

It has exposed loopholes: although three of his passports — Lebanese, Brazilian and French — remain under lock and key with his Japanese lawyers, he has carried another French passport with him in Tokyo since his release on bail, to fulfil Japanese requirements that foreigners carry formal identification. It is not unusual for executives who travel a lot to hold two passports from the same country.

Lebanon on Monday said there were no grounds to arrest Mr Ghosn, who entered his home country with his French passport and Lebanese ID. There is no extradition agreement between Lebanon and Japan. France’s junior economy minister Agnès Pannier-Runacher said on Thursday morning that if Mr Ghosn was to travel back to France he would not be extradited “because France never extradites its citizens”.

Meanwhile, Japanese prosecutors searched Mr Ghosn’s house in Tokyo for more than four hours. About a dozen prosecutors were seen leaving the house with their briefcases.

The Japanese prosecutors have started an investigation over allegations that the former chairman breached the country’s immigration control law when he fled to Lebanon without leaving any record of departing Japan, according to NHK. The Ministry of Justice and the Tokyo District Public Prosecutors Office could not immediately be reached for comment during an extended national holiday in Japan.

Persistent negative interest rates are undermining their safe haven role

They say no one rings a bell at the top of the market. Major shifts in investment patterns are typically easy to identify in hindsight but hard to see happening in real time.

The current profound shift in thinking about bonds — their direction and function in portfolios — may be an exception. For many fund managers and wealth advisers, the precise point for a rethink arrived on September 13, 2019, when the German tabloid Bild doctored an image of Mario Draghi — then the president of the European Central Bank — to represent him as a vampire. The front-page image of the fanged “Count Draghila” suggested the central bank was sucking the blood out of German savers’ bank accounts with its new package of easing measures.

The broader message was pretty typical of the abrasive German tabloid press. But this image of a sinister-looking Mr Draghi felt more personal, angry and urgent. If you ask a fund manager when they started seriously to worry that negative interest rates had really gone too far, this is often the answer.

Tremors were there before that, such as when Swiss bank UBS started to charge wealthy customers for deposits, or when Denmark’s Jyske Bank started paying customers to take out mortgages. But something about the vampiric Mr Draghi rather sticks in the throat, if you will pardon the pun.

Didier Saint-Georges, a managing director at French fund house Carmignac, described the imagery as “obscene”. But it has also proven to be one reason to think more carefully about what supposedly safe bonds really do for an investment portfolio when support from central banks sweeps prices so uncomfortably high.

Feasting on bonds made sense while central bankers were still slashing rates and effectively promising consistent monetary support, he said. Now, though, policymakers are calling more loudly for fiscal help and a public backlash is building. “Historically, especially in the past 10 years, if you had a balanced portfolio of equities and bonds, bonds were a terrific part of your portfolio construction because, not only were they doing well, but they were also a hedge to equity risk,” he said.

Now, the assumption that interest rates can keep falling in pursuit of higher inflation, pulling up bond prices with them, is crumbling. Relatively small pullbacks in prices can be painful and the capacity for further gains in bonds in the event of a wobble in stocks is seen as limited.

Mr Saint-Georges predicts that “2020 is not necessarily going to be a binary thing — crisis or not crisis”. But he believes it will bring a profound reshuffle in how people think about the right portfolio construction. Good quality emerging-market debt, emerging-market currencies and gold could come more into favour as hedges for when stock markets turn sour, he said.

The New-York based fund group BlackRock also said in November that it has been forced to reconsider the role that maxed-out government bonds play as “ballast” in portfolios. The see-saw relationship between stocks and bonds that has become familiar over the past two decades is at risk of breaking down. With their super-skinny or even negative yields, European and Japanese government bond markets are likely to play a “diminished role”, it added.

At BlueBay Asset Management, chief investment strategist David Riley also said flows over the past year suggest a cooling towards European government bonds and a greater weighting towards good quality corporate debt. Yields are hardly spectacular, but they are at least positive. US government bonds could still rally if equities hit the skids or an unexpected recession arrived, he said. “But it’s a bigger issue in Europe. How much more negative can Bunds go?”

Mr Saint-Georges, who is a keen climber, acknowledges that stepping back from core government bonds too aggressively or too early could be painful. But, he said, “it’s one thing we know in the mountains. The coldest part of the day is just before the dawn. [Central banks are] not throwing in the towel yet. Nothing is obvious, nothing is for sure, but we don’t want to be late because the stakes are rising.”

This may not be the time to pounce, but it is the time to think. Expect more of this from fund managers in 2020.

The quality of care at hospitals acquired during a recent wave of deal making got worse or stayed the same, new research found

The quality of care at hospitals acquired during a recent wave of deal making got worse or stayed the same, new research found, a blow to a frequently cited rationale for tie-ups.

Hospital merger-and-acquisition activity has surged in recent years, with executives involved in transactions making the case that greater size will boost quality with new investments and yield other improvements as deal makers benefit from each others’ strengths.

The new research, published in the New England Journal of Medicine, looked for evidence of quality gains using four widely used measures of performance at nearly 250 hospitals acquired in deals between 2009 and 2013. The analysis didn’t find it, said the study’s authors.

“Quality didn’t improve,” said Harvard University research associate Nancy Beaulieu, lead author of the study.

The study is one of the first large-scale efforts to examine whether hospital combinations deliver benefits to offset higher prices associated with the sector’s consolidation, said health-policy experts not involved in the research.

“For the first time there is good science,” said Susan Haas, a visiting scientist at Brigham and Women’s Hospital and the Harvard T.H. Chan School of Public Health’s innovation center Ariadne Labs, who studies risk of harm to patients from health-care transactions. For regulators, the research offers new grounds to challenge deal makers who assert better quality will follow their transaction. Regulators can now say, “Prove it to me,” Dr. Haas said.

American Hospital Association general counsel Melinda Hatton in a statement cited research the trade group sponsored by Charles River Associates that found quality improved and revenue for each admission declined in the first year after hospital transactions. Admissions reflect inpatient and outpatient care.

The question of impact has become increasingly pressing as hospital deal making soared in the past decade. Hospitals announced 90 deals in 2018, a dip from the recent high of 117 transactions the prior year, but up 80% from 50 deals in 2009, according to data from Kaufman Hall, a health-care consulting firm. Figures include joint ventures and deals for minority interest.

Prior studies have found higher prices follow mergers. Prices increased 6% after nearby hospitals merged, according to one analysis published by the Quarterly Journal of Economics in 2018. Another 2017 study found acquisitions raised prices 6% to 7% when competitors became rivals in new markets as deals expanded their geographic footprint.

Prices in the $1 trillion hospital sector face heightened scrutiny amid rising health-care costs and reports of aggressive billing practices. Anticompetitive risks from hospital merger-and-acquisition activity are also raising alarms in Washington.

“I am concerned about the increasing consolidation in local markets,” Alex Azar, secretary of Health and Human Services, said in an October interview. New proposals from the Trump administration would force more price transparency from hospitals and private insurers.

Kate Bundorf, an associate professor of health policy at Stanford University who wasn’t involved in the new research, said experts have questioned the benefits of deals without enough research to provide answers. “We know they have harms. We know prices go up. We don’t really know what’s happening to quality.”

In the latest study, researchers looked at four measures of performance collected by the Centers for Medicare and Medicaid Services: patient satisfaction; deaths within a month of entering the hospital; return trips to the hospital within a month of leaving; and how often some heart, pneumonia and surgery patients got recommended care.

The study examined the average results for acquired hospitals, looking three years before and up to four years after each transaction. Researchers also compared findings to an analysis of select hospitals not involved in transactions or nearby. Combined, these methods seek to ensure results aren’t skewed by other factors, such as changes in the economy, health-care policy or local patients.

The study found patient-satisfaction scores worsened at acquired hospitals, on average. The scores measure whether patients give hospitals a top rating and would give them a good recommendation. Results, which are based on patient surveys tied to payment by Medicare, also reflect if doctors and nurses communicated well and how often patients got help when they wanted it.

The drop in patient satisfaction was largely concentrated among hospitals snapped up by acquirers that already had lower patient-satisfaction scores compared with other acquirers.

Consolidation could explain the decline if deal making leaves patients with fewer options and hospitals face less pressure to compete for their business, though the study didn’t measure local changes in market power post-deals, said Michael McWilliams, a Harvard University professor of health-care policy and one of the study authors.

Other results found no signs of worsening performance among local competitors of newly acquired hospitals, but also no signs of improvement.

Rates of death and return trips to the hospital remained the same at acquired hospitals before and after deals, the study found.

Results were inconclusive for the study’s measure of how often patients got recommended medical care, such as whether heart-attack patients got aspirin when leaving the hospital. Performance improved at acquired hospitals—during the three-year premerger period of study. Quality didn’t change after deals.