TheChek News Flow

Chinese tech giant’s phones run on Google’s Android operating system

Google is halting some services for smartphones made by Huawei Technologies Co., according to people familiar with the matter, in a sign that the U.S. decision to deny the Chinese tech giant access to U.S. technology will bite into its booming consumer-device business.

Huawei, which recently surpassed Apple Inc. as the world’s No. 2 supplier of smartphones—it now trails only Samsung Electronics Co.—relies on Google’s Android operating system to run its devices. Though existing phones are expected to keep functioning largely as usual, users could lose some functions, according to a person familiar with the matter.

Separately, San Diego-based Qualcomm Inc. QCOM -1.58% has suspended shipments to Huawei of its chips, and its employees have been told not to communicate with the Huawei side, according to a separate person familiar with the matter. Qualcomm chipsets are used in certain Huawei smartphone models. Huawei also designs a large number of its own chips for higher-end phones.

Last week the U.S. Commerce Department said it was adding Huawei to its “Entity List” on national-security grounds, requiring companies that export U.S. technology to the Chinese company to apply for a license. The department has indicated applications are likely to be denied, which would cut off Huawei from a range of crucial American suppliers.

Huawei, the world’s biggest maker of telecommunications gear, draws upon suppliers from around the world, but it relies on American companies to supply certain components that go into its smartphones, cellular base stations and other products.

Huawei’s founder and CEO, Ren Zhengfei, told reporters Saturday that the impact on smartphone production would be limited even if Huawei cannot import chips, according to a spokeswoman who confirmed his remarks.

A Huawei spokesman said the company will continue providing security updates and after-sales services to existing Huawei smartphone and tablets, “covering those that have been sold and that are still in stock globally.”

“As one of Android’s key global partners, we have worked closely with their open-source platform to develop an ecosystem that has benefitted both users and the industry,” the spokesman said.

A person familiar with the matter said Huawei will only be able to use the public version of Android and will not have access to proprietary apps and services from Google.

A Google spokesman said the company is “complying with the order and reviewing the implications.” The spokesman added that many Android functions will continue running as normal, including access to the Google Play app-store service and security protections from Google Play Protect. Reuters first reported the halt by Google.

Google’s standard suite of apps, like Google Maps and Gmail, will continue to function normally, according to a person familiar with the matter. However, Huawei phones may lose other Google services as part of U.S. government action, this person said. Proprietary apps and services such as some artificial-intelligence capabilities that connect to Google infrastructure may cease to function, according to this person.

Huawei’s global smartphone shipments rose 50% in the first quarter, bucking an industrywide decline of 6.7%, according to research firm International Data Corp. The consumer-business group last year became the biggest source of revenue for the Shenzhen-based technology giant, outpacing revenue from its carrier customers for the first time. Last year, consumer sales including smartphones, laptops and other gadgets accounted for 48% of Huawei’s $107 billion in revenue.

Qualcomm didn’t immediately respond to a request for comment.

Huawei has been stockpiling inventory and has developed its own operating system to protect against a supply disruption. However, it isn’t clear when or if Huawei can easily switch operating systems on existing smartphones.

Uber Technologies Inc. UBER -2.53% grew to be the nation’s most valuable startup thanks to support from some of the biggest investors around. That support became a liability when the ride-hailing giant made its stock-market debut this month.

Some pre-IPO Uber shareholders including BlackRock Inc., BLK -1.27% the world’s largest money manager, and prominent tech investor Tiger Global Management took a pass on buying more shares in the listing, content that they already owned plenty, people familiar with the matter said. Instead, they tried to sell stock before or as part of the initial public offering.

The investors’ stance is emblematic of a wider lack of enthusiasm for the stock that has plagued Uber since it went public just over a week ago. After debuting below earlier expectations at $45 apiece, the shares fell sharply in their first two trading days and have yet to fully recover. They closed Friday at $41.91.

The much-hyped IPO, the biggest in five years, has so far been one of the most disappointing—and has the rare distinction of falling in its first day of trading.

The market’s tepid response stems in part from the fact that Uber was the most richly funded private tech company, raising about $20 billion in equity and debt. This meant many investors that companies typically count on to buy shares in their IPOs sat out Uber’s because they already had plenty of exposure to the company.

Uber’s stumble points up what could be a kink in the red-hot IPO market. Silicon Valley companies have been waiting longer and raising more before going public. That could mean some are past their prime in terms of growth and that investors like BlackRock that are increasingly investing before IPOs have more limited interest in buying new shares.

One concern flagged by some prospective investors in Uber, which was founded 10 years ago: While its revenue growth has stalled in recent quarters, its losses keep mounting, and came in at more than $3.7 billion in the 12 months ended in March.

Uber’s shaky entrance onto the public stage is an unfortunate development for the company and its underwriting team led by Morgan Stanley , MS -0.90% even as some people close to the offering argue that broader market skittishness played a big role, and as that recedes the stock should rebound.

Excitement about Uber’s IPO had been building for years. Bankers raced to help the company raise capital with the expectation of multimillion-dollar IPO fees down the road. But leading up to the offering there were warning signs.

Smaller rival Lyft Inc.’s March debut soured quickly, and its shares were trading down by around 20% by the time it was Uber’s turn. The weekend before Uber’s IPO, President Trump tweeted a threat of higher tariffs on Chinese goods that he later followed up on, roiling stock markets around the world.

Still, the company and its underwriters didn’t fully appreciate the extent to which investors were cool to the offering until hours after they showed up at the New York Stock Exchange to kick off trading May 10. In a surprise to those who believed the stock had been priced conservatively, it opened three dollars below the $45 IPO price set the night before. By the end of the following Monday, Uber, which last year was told by bankers at Morgan Stanley and Goldman Sachs Group Inc. that it could achieve a valuation of as much as $120 billion in an IPO, had a fully diluted market capitalization of about $68 billion.

Lack of support from key institutional shareholders like BlackRock loomed large, people close to the process said.

Multiple BlackRock funds had participated in a fundraising for Uber at a much lower valuation, and the firm decided it didn’t need to buy more in the IPO, according to people familiar with the matter. BlackRock held about 9.8 million Uber shares, according to a regulatory filing, now worth about $410 million. Weeks before the IPO, when Uber was still discussing a valuation of $90 billion to $100 billion, BlackRock added its name to the list of potential sellers as part of the overallotment option, called a green shoe. This is an option intended to give bankers extra stock for ammunition to provide stability in the early days of trading. It aimed to sell 414,000 shares, according to the filing.

Another big investor that was trying to decrease its stake was Tiger Global, which offered up a slug of its Uber shares several weeks before the IPO, people familiar with the matter said. Tiger sold about 30% of its $400 million stake for $53 a share—less than what the company was then expected to fetch. Tiger indicated to potential buyers that it was willing to take a big haircut to get some liquidity, the people said.

Despite the ominous signs, the mood was celebratory at a breakfast at the New York Stock Exchange for Uber’s board and employees the day of the IPO. The group then descended to the floor of the exchange, where they rang the opening bell and awaited the stock’s open.

The mood soon darkened. As orders came in, traders at Citadel Securities, Uber’s designated market maker, and the team at Morgan Stanley tasked with stabilizing the stock on behalf of the underwriters realized they didn’t have enough demand to open at $45 or higher. Just before noon, they opened the stock at $42 in an initial trade of more than 30 million shares. To help get to that level, Morgan Stanley had to buy stock right off the bat, people familiar with the matter said.

As part of the green shoe, the bank had discretion to sell 15% of the total offering size short, meaning it could borrow that stock to sell in the open market. If the shares dropped in the early days or weeks of trading the bank could buy them back to try to prop up the price. Any stock it didn’t buy back it would purchase at the IPO price from shareholders including BlackRock.

As the day progressed, the stock’s decline accelerated, even as the broader market turned positive. The stock ended its first trading day near session lows at $41.57. That night, Uber Chief Executive Dara Khosrowshahi and Chief Financial Officer Nelson Chai joined other executives, investors and employees gathered on the floor of the exchange. They were served McDonald’s hamburgers in Uber Eats trays as well as other food and drinks. Mr. Khosrowshahi, clearly tired from the week, gave a brief speech congratulating the team and reminding them that the IPO day was simply the beginning of a new phase in the company’s journey.

They are among the four U.S. companies set to give up their shares for more than $4 billion under a refinancing plan

TOKYO— Apple Inc., AAPL -0.57% Dell Technologies Inc. DELL -0.53% and two other U.S. technology companies are set to give up their preferred shares in Japanese chip maker Toshiba Memory Holdings Corp. for more than $4 billion under a refinancing plan, according to people familiar with the plan.

The U.S. companies, which are customers for Toshiba TOSYY -0.30% Memory’s semiconductors, helped a Bain Capital-led consortium take over the chip maker from former parent Toshiba Corp. in June, preventing Western Digital Corp. WDC -1.02% from taking control of its memory joint venture with Toshiba. A takeover by Western Digital might have further consolidated a market in which Samsung Electronics Co. has already established a dominant presence.

A package of ¥1.3 trillion ($11.8 billion) in financing to be in place soon from Japanese banks would enable Toshiba Memory to buy out the preferred shares from the four American companies, according to the people. A simplified capital structure would also make it easier for Toshiba Memory to list itself, one of the people said. The listing would allow the capital-intensive chip business to access funds from the public-equity market.

Apple, Dell, Kingston Technology Co. and Seagate Technology PLC are set to sell their preferred shares back to Toshiba Memory for about ¥500 billion yen ($4.5 billion) by the end of May, according to the people familiar with the plan. Together those companies made a few hundred million dollars on their investments, one of the people said. Apple and Kingston declined to comment. Dell and Seagate didn’t respond to requests for comment.

Toshiba Memory aims for a listing in Tokyo near the end of the year or at the beginning of next year, according to one person involved with the planning, with the timing dependent on market conditions for semiconductors and public equities. Some bankers have said the listing would take place this year.

A recent slump in chip prices means now wouldn’t be the best timing for a listing, the person said.

Under the refinancing plan, three major Japanese banks would lend ¥1 trillion, and the government-owned Development Bank of Japan Inc. would invest in preferred shares worth ¥300 billion, replacing existing bank loans and the preferred shares owned by the four American companies, according to the people familiar with the plan.

The refinancing doesn’t change the ratio of voting rights: 49.9% for Bain Capital; 40.2% for Toshiba; and the remaining 9.9% for Japanese optical product maker Hoya Corp.

Sudden rise in non-performing loans comes despite low rates and strong growth

The quality of big US banks’ commercial lending portfolios is deteriorating for the first time in nearly three years, leaving investors to wonder whether there is worse to come should the ebullient economy slow.

Non-performing loans at the 10 largest commercial lenders rose 20 per cent, or $1.6bn, in the first quarter, according to an analysis by the Financial Times. That reversed a steady improvement in credit quality dating back to 2016, when a wave of borrowers fell into default after oil prices crashed.

The level of sour loans remains historically low relative to banks’ balance sheets. JPMorgan Chase’s $1.9bn of commercial non-performing loans, for example, is part of a $442bn portfolio. But the sudden increase in problem credit is raising concerns, given low interest rates and strong economic growth.

“What does it look like when the economy actually slows?” asks Brian Foran, a bank analyst at Autonomous Research. “It is a notable enough change [in credit quality] that people have taken notice.”

Unlike the energy crunch a few years ago, there is not a single industry coming under pressure. “There hasn’t been a clear theme,” said Mr Foran. “Some banks have mentioned lingering energy problems, and a couple of nice categories like fast casual restaurants and rural hospitals.”

Commercial lending has grown rapidly since the crisis. US banks have $2.3tn in commercial loans, according to the Federal Reserve, almost double the level of 2011 and easily outpacing the growth in overall bank lending.

Loans categorised as “criticised” — a broad regulatory category that captures loans that are or are threatening to become impaired — rose 8 per cent in the first quarter at the 20 regional banks Mr Foran covers, the first quarterly increase he has seen in three years. The increase in criticised loans at the big banks was 5 per cent.

It is not certain how much the industry figures have been affected by the January bankruptcy filing of PG&E, the California utility facing liabilities associated with its role in the state’s wildfires. Among large banks, Bank of America, JPMorgan Chase and Wells Fargo were all listed as lenders on the utility’s $3bn credit facility, according to S&P global intelligence.

Speaking at an industry conference on Tuesday, the chief financial officer of M&T Bank, which has a $23bn commercial portfolio, said that while its delinquency rates remained at multiyear lows, the bank is seeing “management shortfalls” at some companies: “Taking on too much leverage to do a deal that they weren’t capable of pulling off, not managing expenses properly, in some cases not having the right controls in place and getting themselves in trouble.”

One reason corporate borrowers are feeling the strain now is the withdrawal of liquidity by the Federal Reserve. As the central bank turns from pushing money into the system by buying bonds to absorbing it by selling them, loans become harder to refinance or roll over. In April, according to Fed data, total commercial credit at banks did not grow from the month before for the first time since the end of 2017.

“Liquidity has been the driver of asset prices for the past decade and will be the cause of deflation of asset prices in the coming years,” said Charles Peabody of Portales Partners. “Corporations, particularly small and middle market businesses, have been living day-to-day based on their access to liquidity.”

Another contributor to the rapid recent growth of commercial debt, and a potential source of risk, is nonbank lending. Some banks provide financing to nonbank lenders from fintech companies or to the loan funds run by big private equity houses such as Blackstone. All of this is classified as commercial lending on banks’ balance sheets.

GreenSky, a fintech that provides consumer and business loans over the internet, said on Wednesday that one of its lenders, Regions Bank of Alabama, said it had decided not to renew its funding commitment at the end of this year. Its shares fell 11 per cent on the news.

A related worry involves smaller banks that have been aggressively buying syndicated loans originated and packaged by other banks or fund managers. One commercial banker said: “If they are buying from nonbank financial sponsors, there might be issues.”

Anton Schutz, a veteran bank investor at Mendon Capital, added: “What you are seeing for the first time since the crisis is the normalisation of credit. You are supposed to lose some money in lending. That’s why you get paid a spread.”

JACKSONVILLE, Fla. — Anti-money laundering specialists at Deutsche Bank recommended in 2016 and 2017 that multiple transactions involving legal entities controlled by Donald J. Trump and his son-in-law, Jared Kushner, be reported to a federal financial-crimes watchdog.

The transactions, some of which involved Mr. Trump’s now-defunct foundation, set off alerts in a computer system designed to detect illicit activity, according to five current and former bank employees. Compliance staff members who then reviewed the transactions prepared so-called suspicious activity reports that they believed should be sent to a unit of the Treasury Department that polices financial crimes.

But executives at Deutsche Bank, which has lent billions of dollars to the Trump and Kushner companies, rejected their employees’ advice. The reports were never filed with the government.

The nature of the transactions was not clear. At least some of them involved money flowing back and forth with overseas entities or individuals, which bank employees considered suspicious.

Real estate developers like Mr. Trump and Mr. Kushner sometimes do large, all-cash deals, including with people outside the United States, any of which can prompt anti-money laundering reviews. The red flags raised by employees do not necessarily mean the transactions were improper. Banks sometimes opt not to file suspicious activity reports if they conclude their employees’ concerns are unwarranted.

But former Deutsche Bank employees said the decision not to report the Trump and Kushner transactions reflected the bank’s generally lax approach to money laundering laws. The employees — most of whom spoke on the condition of anonymity to preserve their ability to work in the industry — said it was part of a pattern of the bank’s executives rejecting valid reports to protect relationships with lucrative clients.

“You present them with everything, and you give them a recommendation, and nothing happens,” said Tammy McFadden, a former Deutsche Bank anti-money laundering specialist who reviewed some of the transactions. “It’s the D.B. way. They are prone to discounting everything.”

Ms. McFadden said she was terminated last year after she raised concerns about the bank’s practices. Since then, she has filed complaints with the Securities and Exchange Commission and other regulators about the bank’s anti-money-laundering enforcement.

Kerrie McHugh, a Deutsche Bank spokeswoman, said the company had intensified its efforts to combat financial crime. An effective anti-money laundering program, she said, “requires sophisticated transaction screening technology as well as a trained group of individuals who can analyze the alerts generated by that technology both thoroughly and efficiently.”

“At no time was an investigator prevented from escalating activity identified as potentially suspicious,” she added. “Furthermore, the suggestion that anyone was reassigned or fired in an effort to quash concerns relating to any client is categorically false.”

Amanda Miller, a spokeswoman for the Trump Organization, the umbrella company for the Trump family’s many business interests, said: “We have no knowledge of any ‘flagged’ transactions with Deutsche Bank.” She said the Trump Organization currently has “no operating accounts with Deutsche Bank.” She did not respond when asked if other Trump entities had accounts.

Karen Zabarsky, a spokeswoman for Kushner Companies, said: “Any allegations regarding Deutsche Bank’s relationship with Kushner Companies which involved money laundering is completely made up and totally false. The New York Times continues to create dots that just don’t connect.”

Deutsche Bank’s decision not to report the transactions is the latest twist in Mr. Trump’s long, complicated relationship with the German bank — the only mainstream financial institution consistently willing to do business with the real estate developer.

Congressional and state authorities are investigating that relationship and have demanded the bank’s records related to the president, his family and their companies. Subpoenas from two House committees seek, among other things, documents related to any suspicious activities detected in Mr. Trump’s personal and business bank accounts since 2010, according to a copy of a subpoena included in a federal court filing.

Mr. Trump and his family sued Deutsche Bank in April, seeking to block it from complying with the congressional subpoenas. The president’s lawyers described the subpoenas as politically motivated.

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Suspicious activity reports are at the heart of the federal government’s efforts to identify criminal activity like money laundering and sanctions violations. But government regulations give banks leeway in selecting which transactions to report to the Treasury Department’s Financial Crimes Enforcement Network.

Lenders typically use a layered approach to detect improper activity. The first step is filtering thousands of transactions using computer programs, which send the ones considered potentially suspicious to midlevel employees for a detailed review. Those employees can decide whether to draft a suspicious activity report, but a final ruling on whether to submit it to the Treasury Department is often made by more senior managers.

In the summer of 2016, Deutsche Bank’s software flagged a series of transactions involving the real estate company of Mr. Kushner, now a senior White House adviser.

Ms. McFadden, a longtime anti-money laundering specialist in Deutsche Bank’s Jacksonville office, said she had reviewed the transactions and found that money had moved from Kushner Companies to Russian individuals. She concluded that the transactions should be reported to the government — in part because federal regulators had ordered Deutsche Bank, which had been caught laundering billions of dollars for Russians, to toughen its scrutiny of potentially illegal transactions.

Ms. McFadden drafted a suspicious activity report and compiled a small bundle of documents to back up her decision.

Typically, such a report would be reviewed by a team of anti-money laundering experts who are independent of the business line in which the transactions originated — in this case, the private-banking division — according to Ms. McFadden and two former Deutsche Bank managers.

That did not happen with this report. It went to managers in New York who were part of the private bank, which caters to the ultrawealthy. They felt Ms. McFadden’s concerns were unfounded and opted not to submit the report to the government, the employees said.

Ms. McFadden and some of her colleagues said they believed the report had been killed to maintain the private-banking division’s strong relationship with Mr. Kushner.

After Mr. Trump became president, transactions involving him and his companies were reviewed by an anti-financial crime team at the bank called the Special Investigations Unit. That team, based in Jacksonville, produced multiple suspicious activity reports involving different entities that Mr. Trump owned or controlled, according to three former Deutsche Bank employees who saw the reports in an internal computer system.

Some of those reports involved Mr. Trump’s limited liability companies. At least one was related to transactions involving the Donald J. Trump Foundation, two employees said.

Deutsche Bank ultimately chose not to file those suspicious activity reports with the Treasury Department, either, according to three former employees. They said it was unusual for the bank to reject a series of reports involving the same high-profile client.

Mr. Trump’s relationship with Deutsche Bank spans two decades. During a period when most Wall Street banks had stopped doing business with him after his repeated defaults, Deutsche Bank lent Mr. Trump and his companies a total of more than $2.5 billion. Projects financed through the private-banking division include Mr. Trump’s Doral golf resort near Miami and his transformation of Washington’s Old Post Office Building into a luxury hotel.

When he became president, he owed Deutsche Bank well over $300 million. That made the German institution Mr. Trump’s biggest creditor — and put the bank in a bind.

Senior executives worried that if they took a tough stance with Mr. Trump’s accounts — for example, by demanding payment of a delinquent loan — they could provoke the president’s wrath. On the other hand, if they didn’t do anything, the bank could be perceived as cutting a lucrative break for Mr. Trump, whose administration wields regulatory and law enforcement power over the bank.

In the past few years, United States and European authorities have punished Deutsche Bank for helping clients, including wealthy Russians, launder funds and for moving money into countries like Iran in violation of American sanctions. The bank has paid hundreds of millions of dollars in penalties and is operating under a Federal Reserve order that requires it to do more to stop illicit activities.

On two palm-tree-lined campuses in Jacksonville, Deutsche Bank has thousands of employees who vet customers and transactions. Six current and former bank employees there said the operations were deeply troubled.

Anti-money laundering workers were pressured to quickly sift through transactions to assess whether they were suspicious, the employees said. As a result, they often erred on the side of not flagging transactions.

Two former employees said that they had raised concerns about transactions involving companies linked to prominent Russians, but that managers had told them not to file suspicious activity reports. The employees were under the impression that the bank did not want to upset important clients.

Several employees said they had complained about the bank’s anti-money laundering processes to Joshua Blazer, the head of Deutsche Bank’s financial crimes investigations division in Jacksonville, and had then been criticized for having a negative attitude. One employee said she resigned last summer over concerns about the bank’s ethics.

Mr. Blazer, hired by Deutsche Bank in 2017 to strengthen the bank’s financial crime-fighting apparatus, declined to comment.

Ms. McFadden’s job at Deutsche Bank was to inspect clients and transactions in the company’s private-banking division — the unit that lent money to Mr. Trump. She joined the bank in 2008, after working for Bank of America, also in Jacksonville.

Ms. McFadden had left Bank of America in 2005, and later sued for racial discrimination and wrongful termination. According to court records, her lawsuit was settled on confidential terms the same year she joined Deutsche Bank, where she went on to win multiple performance awards.

Around the time she flagged the Kushner Companies’ transactions, Ms. McFadden said, she also complained about how the bank was scrutinizing the accounts of high-profile customers, such as those in public office. Those customers — known as politically exposed persons — are regarded as at heightened risk of being involved in corruption. As a result, their accounts are subject to extra vetting.

Ms. McFadden said she had told her superiors that dozens of politically exposed clients of the private-banking division, including Mr. Trump and members of his family, were not receiving that added attention. Her superiors told her to stop raising questions, according to Ms. McFadden and the two former managers.

After taking her complaint to the human resources department, Ms. McFadden was transferred to another division. She was terminated in April 2018. The bank told her that she was not processing enough transactions.

Ms. McFadden disputed that. She said her superiors had reduced the number of transactions she was assigned to review after she voiced her concerns. She and the two former managers said they perceived her termination as an act of retaliation.

“They attempted to try to silence me,” she said. “I’m at peace because I know that I did the right thing.”