>>> US Close Dow+1.82% S&P+1.63% Nasdaq+2.46% Russell+1.48%

Closing Market Summary: Technology Sector Leads Stocks Higher

The stock market snapped its two-day skid on Wednesday with the Nasdaq Composite leading the advance. The tech-heavy index climbed 2.5% while the Dow (+1.8%) and S&P 500 (+1.8%) registered slimmer gains.

Although the market ended the midweek session on a higher note, the advance did not feature the characteristics of a sharp bounce. Instead, stocks traded in sideways fashion before spiking to new highs during the final 30 minutes of the day. Despite today's higher close, the S&P 500 remains lower by 2.0% for the week with all ten sectors showing week-to-date losses.

Today, however, nine sectors posted gains while the utilities space (UNCH) underperformed amid higher Treasury yields. To that point, the 10-yr note slumped in the morning, briefly retraced its loss during the session, and fell back to lows into the close. As a result, the 10-yr yield increased three basis points to 2.19%.

On the upside, the top-weighted technology sector (+2.6%) outperformed throughout the session, which kept the market afloat during the morning pullback that saw the S&P 500 trade within five points of its flat line. Large cap tech names like Apple (AAPL 112.34, +4.62), Facebook (FB 89.89, +2.66), Google (GOOGL 644.91, +15.35), and Microsoft (MSFT 43.36, +1.54) gained between 2.4% and 4.3% while high-beta chipmakers also fared better than the market with the PHLX Semiconductor Index climbing 2.3%.

Elsewhere among influential sectors, health care settled in-line with the market while biotechnology outperformed, contributing to the relative strength in the Nasdaq as iShares Nasdaq Biotechnology ETF (IBB 346.23, +12.89) spiked 3.9%.

Also of note, the heavily-weighted financial sector (+1.5%) began the day among the leaders, but the group slipped behind the broader market during intraday action after finishing yesterday's session well behind the market.

With the exception of the final 30 minutes of the day, the Wednesday action in equities was fairly subdued, but the same could not be said for crude oil as the energy component remained volatile, ending the pit session higher by 1.9% at $46.25/bbl after testing the $43.22/bbl area. WTI crude slumped to lows after the latest inventory report showed a larger than expected build while news that Senate has enough votes to back the Iran nuclear deal also contributed to the brief weakness in oil.

Today's trading volume was well above average, staying true to recent trends. With that in mind, more than a billion shares changed hands at the NYSE floor.

Economic data included, ADP Employment Change, Q2 Productivity/Unit Labor Cost data, Factory Orders, and MBA Mortgage Index:

  • The ADP National Employment Report revealed that employment in the nonfarm private business sector rose by 190K in Augus while the consensus expected an increase of 201K
    • The July reading was revised down to 177,000 from 185,000
  • Productivity data for the second quarter showed an increase of 3.3% (consensus 2.8%), which was better than the 1.3% increase that had been reported in the preliminary reading
    • Unit labor costs for the second quarter were revised lower to reflect a decrease of 1.4% (consensus -0.9%) after they had reportedly increased 0.5% in the preliminary reading
  • Factory orders increased 0.4% in July after increasing an upwardly revised 2.2% (from 1.8%) in June while the Briefing.com consensus expected an increase of 0.9%
    • The relative softness in the factory orders data was the result of declining oil prices weighing down sales at petroleum refineries as refinery orders fell 7.9% in July after increasing 0.8% in June
  • The weekly MBA Mortgage Index spiked 11.3% to follow last week's 0.2% uptick

Tomorrow, the Challenger Job Cuts report for August will be released at 7:30 ET while weekly Initial Claims (consensus 273,000) and July Trade Balance (consensus -$42.70 billion) will both be released at 8:30 ET. The day's data will be topped off with the 10:00 ET release of the ISM Services Index for August (consensus 58.4).

  • Nasdaq Composite +0.3% YTD
  • S&P 500 -5.3% YTD
  • Russell 2000 -4.8% YTD
  • Dow Jones Industrial Average -8.3% YTD

FT : Tiger Global fund lost 7% on China stocks

Tiger Global fund lost 7% on China stocks

Chase Coleman — the most prominent of the “Tiger Cub” hedge fund managers who learned their craft while working for Julian Robertson — suffered a 7.4 per cent loss in the value of his stockpicking fund in August, as Chinese internet stocks bore the brunt of market turmoil.
His Tiger Global Long-Only Opportunities fund was one of a number of hedge funds to incur losses during a month of volatility which has hit equities-focused funds especially hard.

A 22 per cent fall in shares of JD.com, the Shanghai-based ecommerce company, was one of the biggest contributors to Tiger’s weakness in August, according to investors familiar with its portfolio. The Tiger fund is JD.com’s third largest shareholder, with a 6.4 per cent stake.
Hedge funds had bought into JD.com in the second quarter of this year, according to regulatory filings — many switching out of shares in its rival Alibaba — but the JD.com share price is now down 35 per cent since its June peak.
Concerns over the health of the Chinese economy increased volatility across global markets in August, ultimately causing a sell-off far beyond Chinese stocks.
John Paulson’s $11bn suite of event-driven hedge funds, which invest in potential takeover targets, fell in value last month, and its “enhanced” merger arbitrage fund, which uses leverage to juice returns, ended August down around 6 per cent, according to investors familiar with its performance. It had been up 20 per cent for the year until the start of August, but this gain was pared to 13 per cent last week. Tumbling healthcare stocks were the main culprits behind the decline.
Mr Coleman, along with other Tiger Cubs — who all began their careers with Mr Robertson’s Tiger Management — made heavy bets on Chinese internet ventures, where some of the most aggressive investor selling has been concentrated.
According to the most recent regulatory filing, Tiger Global’s other large holdings include Vipshop, a discount retailer headquartered in Guangzhou, which suffered an 8 per cent fall in its share price last month, and Autohome, a vehicle listings website, which was down 20 per cent.
In July, Tiger’s $3.5bn long-only fund was merged with a smaller fund that invested only in internet stocks. Its larger $6.5bn long-short fund also had a tough August, down 4.7 per cent, and is now flat for the year.

Another of the “Tiger Cub” managers which has a sizeable holding in JD.com is Philippe Laffont’s Coatue Management, with a 1.4 per cent stake in the company.
One Robertson protégé who avoided the stock was Lee Ainslie. His Maverick Fund was up nearly 20 per cent until the middle of last month, according to investor materials. It is likely to have given up some gains during the recent sell-off, however, as Maverick holds a 2.4 per cent stake in Chinese search engine Baidu.
Fund managers are mailing their August performance numbers to investors this week, after which it will become clear how the industry as a whole has performed.
Despite complaining about high fees, institutional investors have given more money to hedge funds to manage this year, backing the theory that they will outperform if there is an equity market correction, or if interest rate rises hurt the bond market.
Among the most prominent hedge fund casualties during the recent turmoil is Greenlight Capital, led by shortseller David Einhorn, which is down 14 per cent since the start of the year, having made a 5 per cent loss in August alone.
For more than a year, Mr Einhorn had voiced scepticism over the sustainability of the US equity bull market. He argued in April 2014 that “we are witnessing our second tech bubble in 15 years” and set up bets against a “bubble basket” of fashionable and high-flying technology shares. However, losses on big holdings in Apple and General Motors outweighed gains on short positions in his main fund.

(Janus) Bill Gross : Sept. Outlook ; Size Matter (pdt attached)

Sizing Up the Global Economy
Size matter in the financial markets.
Super-size August movements in global stocks are but one sign that something may be amiss in the global economy itself – China notwithstanding. There’s the timing and the eventual “size” of the Fed’s “tightening” cycle that I have long advocated but which now seems to be destined to be labeled “too little, too late.” The “too late” refers to the fact that they may have missed their window of opportunity in early 2015, and the “too little” speaks to my concept of a new neutral policy rate which should be closer to 2% nominal, but now cannot be approached without spooking markets further and creating self-inflicted “financial instability.” The Fed, however, seems intent on raising FF if only to prove that they can begin the journey to “normalization.” They should, but their September
meeting language must be so careful, that “one and done” represents an increasing possibility – at least for the next six months. The Fed is beginning to recognize that 6 years of zero bound interest rates have negative influences on the real economy – it destroys historical business models essential to capitalism such as pension funds, insurance companies, and the willingness to save money itself. If savings wither then so too does its Siamese Twin – investment – and with it, long term productivity – the decline of which we have seen not just in the U.S. but worldwide.
But this imbalance between savings/investment and consumption is not the only Frankenstein creation that zero percent yields have created. Over the past 6 years and perhaps on average since the beginning of the 21st century, artificially low yields have propelled financial markets and have impacted the real economy in numerous ways which are not well discussed in the financial press nor certainly in Washington, London, Brussels, or Tokyo. I list them below without further elaboration if only because of space constraints. Keeping it short in this case is the right policy

(Economist) Brazil prepares to make a grave fiscal error

Brazil prepares to make a grave fiscal error

The government is in an economic hole—and still digging

PLENTY of countries run deficits. And when recessions occur, loosening the public purse strings makes sense for many of them. But Brazil is not most countries. Its economy is in deep trouble and its fiscal credibility is crumbling fast.

The end of the global commodity boom and a confidence-sapping corruption scandal, following years of economic mismanagement, have extinguished growth in Brazil. GDP is expected to contract by 2.3% this year. Fast-rising joblessness, together with falling real private-sector pay and weak consumption, are squeezing tax receipts. Meanwhile rising inflation, allied to a free-falling currency, means investors demand higher returns on government debt. The result is a budgetary black hole. This year a planned primary surplus (ie, before interest payments) has evaporated. Once interest payments are included the total deficit this year is projected to be 8-9% of GDP.

Faced with the prospect of public finances that are slipping out of control, Brazil’s policymakers have stuck their heads in the sand. The 2016 draft budget sent to Congress this week by the president, Dilma Rousseff, builds in a primary deficit for the first time in the post-hyperinflation era. The very legality of a budget with a primary deficit has been questioned: a fiscal-responsibility law passed in 2000 has long been interpreted as banning spending that outstrips receipts. But whatever the legal debate, the budget is calamitous.

First, Brazil would have to borrow to cover all its interest payments—a risk for a country with by far the highest real interest rates of any sizeable economy, at a time of recession and wider emerging-market jitters. Second, a primary deficit sends a bleak message about Brazilian economic governance. Since the turn of the century Brazil’s government has been guided by three principles: a credible inflation target, a floating currency and primary surpluses ideally large enough to bring public debt down. This “tripod” allowed it to move away from its hyperinflationary past, convinced rating agencies to grant it an investment-grade badge—and underpinned growth that propelled millions out of poverty. All this is now in jeopardy.


Brazil's economic woes, in charts
Ms Rousseff is not the only one to blame. She had hoped to run a primary surplus despite the recession by resurrecting a tax on financial transactions that was abolished in 2007. But her political weakness put paid to that plan. At just 8%, her public-approval rating has hit depths unplumbed by any previous Brazilian president, undermining her authority in Congress. Lawmakers are also angered by her finance minister’s attempts to rein in pork-barrel spending, and alarmed by a wide-ranging investigation into corruption at the state-controlled oil giant, Petrobras. Knowing that the new tax would be unpopular—and hoping to weaken Ms Rousseff further—they made it clear that they would block it.

Congress, Ms Rousseff’s advisers say, must now find a way to pay for the spending it refuses to cut. But it is stuffed with short-termists who are more concerned with lining their pockets than securing Brazil’s future. The opposition is wasting its energy on trying to impeach Ms Rousseff, rather than proposing better economic policies. Unless this impasse is resolved quickly, business and consumer confidence will fall further and foreign investors will pull out. Brazil will be headed for a multi-year slump and a ratings downgrade.

Heaven can wait
So how might Brazil reach a primary surplus? By far the best solution would be to cut public spending, which accounts for more than 40% of GDP, much more than in other middle-income countries. Public pensions swallow a greater share of national income than in Belgium—even though the share of old people in the population is only half as high. The 2016 budget includes plans to raise the minimum wage and many welfare payments by a whopping 10%. But congressional gridlock and a constitution that is chock-full of unaffordable spending commitments mean that only rarely have Brazilian governments managed to trim outgoings—and only under presidents endowed with remarkable political and leadership skills. Ms Rousseff falls far short of that ideal.

That leaves the sticking-plaster. The proposed financial-transaction tax would be, like so many Brazilian taxes, poorly designed and hard on growth. But it would still be better than ramping up spending with no way to pay for it. If not this tax, then some other is needed—and only after that, the business of reforming Brazil’s greedy and profligate government.

(Economist) China is scaring away foreign investors with its efforts to defend s

China is scaring away foreign investors with its efforts to defend shares

THE ups and downs of China’s stockmarket have become plainly, painfully visible to the world. Less transparent, but perhaps more damaging in years to come, has been another kind of rollercoaster. The government has gone from the concerted wooing of international investors to doing just about everything in its power to keep them out. That of course is not China’s intent. Its goal is to stabilise share prices and, to that end, it still welcomes cash from abroad. But the cumulative result of its interventions in recent weeks has been to scare away investors.

China’s stockmarket has never been for the faint of heart. Big, inexplicable swings in share prices are bad enough. The regulatory labyrinth that foreigners have to navigate just to earn the privilege of joining the fray has long been even more forbidding. But over the past year it looked like China was finally getting serious about opening its stockmarket to the world.

A new trading link meant that, in theory, any foreigner with a brokerage account in Hong Kong could invest in mainland stocks. China also addressed a series of foreign investors’ long-standing complaints: it cleared up confusion about its capital-gains tax; made it easier to short individual stocks; and developed index futures, a vital hedging tool. Chinese officials met with institutions in New York, London and Frankfurt, encouraging them to apply for investment quotas. FTSE Group, which creates stock indices for funds to track, launched a transitional benchmark that, for the first time ever, included Chinese domestic shares. China’s stockmarket was clearly still immature, the evidence in its rapidly swelling bubble, but regulators seemed committed to building a healthier, more professional market.

The bursting of the bubble has, in dramatic fashion, undermined this progress. In the first days, the immaturity of China’s policymakers was on display for all to see. Panicked at the sell-off, they used central-bank funds to prop up share prices and ordered state-owned companies to buy back shares. However, it is the use of law as a cudgel, wielded with increasing force in recent days, that has been most alarming to investors.


Stockmarket turmoil in China may not spell economic doom, but it does raise hard questions
On Monday state television aired a confession by Wang Xiaolu, a journalist from a top financial magazine, to having caused “panic and disorder”. His apparent misdeed was to have pointed out that the state’s intervention in the market was not working and to question whether it would come to an end. Police have also gone after executives with Citic Securities, the nation’s top brokerage, eliciting confessions for insider trading in near record time. Then there is the mysterious case of Li Yifei, the head of China for Man Group, a leading hedge fund. Bloomberg reported that she had been taken into custody, though subsequent reports said she had merely been summoned to a multi-day meeting with officials in an undisclosed location.

Investors face a growing slate of impositions. New rules cap the size of their open positions in index futures, a move that makes it harder to hedge against the market’s wild movements. Because investors holding more than 5% of individual stocks are effectively barred from selling, fund managers are wary of buying too much. At the same time, the government is forcing brokerages to put more of their own money into the market. A series of top securities companies announced on Tuesday that they would directly invest as much as 20% of their net assets in stocks, hoping to stabilise prices.

Sure enough, foreign interest in China’s stockmarket is waning. Fund managers who control quotas for institutional investors report that take-up has slowed to a crawl. Use of the trading link with Hong Kong had begun to rebound in late July after the big fall in share prices. But it has dwindled in the wake of the crackdowns. Just 156 billion yuan ($25 billion) out of a possible 300 billion yuan was invested in China at the end of August.

China has never really needed foreign investors in its stockmarket for their money. Their assets in the mainland only amount to about 1% of the value of all shares. But it does need their experience and expertise if it is ever to build a truly functional stockmarket. Highly volatile share prices and a deteriorating economy were already enough to keep many foreigners away. Now the threat of arrests, the elimination of hedging tools and cash-calls in aid of the state have all made the decision that much easier.

(BFW) Clariant Preparing Legal Framework for Spinoff Largest Unit: FuW

Clariant Preparing Legal Framework for Spinoff Largest Unit: FuW
2015-09-02 18:38:11.344 GMT


By James Kraus
(Bloomberg) -- Sale or transfer of plastics & coating
division to joint venture not on the agenda for next 3-5 yrs,
Finanz und Wirtschaft reports, citing CEO Hariolf Kottmann.

* Goal is to be in a good position for a possible “plug in -
plug out” transaction
* NOTE: Clariant to Separate Plastics, Coatings Unit in Profit
Drive NSN NSB3GD6JIJUR<GO>


For Related News and Information:
First Word scrolling panel: FIRST<GO>
First Word newswire: NH BFW<GO>

To contact the reporter on this story:
James Kraus in Geneva at +41-22-317-9232 or
jkraus2@bloomberg.net
To contact the editor responsible for this story:
Mariajose Vera at +49-89-244478-803 or
mvera1@bloomberg.net

(BFW) *START-UP OF FLAMANVILLE EPR REACTOR DELAYED: LE FIGARO

- was supposed to be launch in 2012, it has been postponed to 2017, according to sources won't start before 2018...cost of could be above 10bil euros
BFW 09/02 18:13 *START-UP OF FLAMANVILLE EPR REACTOR DELAYED: LE FIGARO
TRANSLATION: Le Figaro: Alert: INFO LE FIGARO - The initiation of the Flamanville EPR again postponed
2015-09-02 18:11:18.792 GMT

Tweet translated from French to English by Google.
Alert: INFO LE FIGARO - The initiation of the
Flamanville EPR again postponed
Original Tweet content
Alerte : INFO LE FIGARO - La mise en route de
l'EPR de Flamanville encore repoussée
Le Figaro @Le_Figaro
 
Sent With: Alertes_Infos_Figaro
  Original tweet on Twitter.com
found here.

Twitter profile information as of September 2, 2015

Description: Actualités, économie, politique, culture et divertissements.Le
Figaro, premier quotidien généraliste et premier site d'information
généraliste en France.

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-0- Sep/02/2015 18:09 GMT -0- Sep/02/2015 18:11 GMT

>>> FEDERAL RESERVE BEIGE BOOK: 11 DISTRICTS REPORT MODEST TO MODERATE GROWTH; C

FEDERAL RESERVE BEIGE BOOK: 11 DISTRICTS REPORT MODEST TO MODERATE GROWTH; CLEVELAND REPORTS SLIGHT GROWTH 

Reports from the twelve Federal Reserve Districts indicate economic activity continued expanding across most regions and sectors during the reporting period from July to mid-August. Six Districts cited moderate growth while New York, Philadelphia, Atlanta, Kansas City, and Dallas reported modest increases in activity. The Cleveland District noted only slight growth since the last report. In most cases, these recent results represented a continuation of the overall pace reported in the July Beige Book. Respondents in most sectors across Districts expected growth to continue at its recent pace, but the Kansas City report cited more mixed expectations.District reports on manufacturing activity were mostly positive, although among these, the Cleveland, St. Louis, Minneapolis, and Dallas Districts painted a somewhat mixed picture across manufacturing sectors. Only the New York and Kansas City Districts cited declines in manufacturing.

Retail contacts in a majority of Districts reported that their sales and revenues continued to expand. By contrast, the Cleveland and Minneapolis Districts cited flat consumer activity since the last report, Atlanta was mixed, and Dallas reported decreased sales year-over-year. Most Districts reported increased auto sales. Among Districts with information on tourism, activity was strong in most reports.

Demand for nonfinancial services, including staffing, generally expanded over the reporting period. Districts mentioning the transportation sector mostly noted activity increases. Districts reporting on the banking sector mostly tallied increases in both business and consumer loan volumes. Credit quality was reported to be improving in most Districts, while credit standards were generally said to be unchanged.

Reports on residential and commercial real estate markets across the Districts were mostly positive. Existing home sales and residential leasing widely improved, with home prices moving up in most areas. Commercial real estate activity also rose in most Districts; commercial construction activity ranged from strong in the Cleveland and Minneapolis Districts to up only slightly in Chicago, while commercial leasing was reported to have increased across the board.

Agricultural conditions were mixed across Districts. Farm contacts indicated that anticipated yields were up for corn and soybeans, but conditions deteriorated in the St. Louis and Kansas City Districts; drought was an ongoing concern in the San Francisco District and was also a factor in parts of the Atlanta and Minneapolis Districts. Districts reporting on the energy sector indicated that conditions were stable to declining; coal production was down in the Richmond and St. Louis Districts, while oil-related activity declined in the Cleveland, Atlanta, and Dallas Districts.

Most Districts reported modest to moderate growth in labor demand, although Boston, Cleveland, and Dallas cited only slight increases in hiring. This tightening of labor markets was said to be pushing wages up slightly in selected industries or occupations, especially in the New York, Cleveland, St. Louis, and San Francisco Districts. Across all Districts, input and selling prices were reported to be stable or up only slightly.

GROWTH BY DISTRICT:
- Boston: moderate growth ("stable or improving" prior)
- New York: modest increases in activity ("modest" growth prior)
- Philadelphia: modest increases in activity ("modest" growth prior)
- Cleveland: Slight growth ("steady" prior)
- Richmond: moderate growth ("strengthened moderately" prior)
- Atlanta: modest increases in activity ("moderate" expansion prior)
- Chicago: moderate growth("moderate" growth prior)
- St. Louis: moderate growth ("moderate" growth prior)
- Minneapolis: moderate growth ("moderate" growth prior)
- Kansas City: modest increases in activity ("modest" growth prior)
- Dallas: modest increases in activity ("moderate" growth prior) 
- San Francisco: moderate growth ("moderate" growth prior)

FT : Kleinwort Benson turns to Oddo for counter bid to fend off Fosun

Kleinwort Benson turns to Oddo for counter bid to fend off Fosun

China’s Fosun International faces growing doubts about its ambition to expand into the European banking sector amid signs that its aggressive acquisition spree is running out of steam.
The Belgian owner of Kleinwort Benson is seeking to repel a hostile €675m bid from Fosun, its biggest shareholder, by encouraging France’s Oddo & Cie to make a “white knight” counter offer, said two people familiar with the matter.

Fosun, China’s largest private conglomerate that models itself on Warren Buffett’s Berkshire Hathaway, is also in talks to buy Novo Banco, the Portuguese bank created from the wreckage of Banco Espírito Santo last year.
But a person familiar with the situation said the auction of the Portuguese bank was likely to collapse after the exit earlier this week of Anbang Insurance, another Chinese group that had been the highest bidder.
Both Fosun and Anbang have been snapping up assets across Europe’s financial services industry in recent years, including insurers in Portugal, Belgium and the Netherlands.
But one investment banker who has dealt with both groups on a recent sales process said the sharp fall in Chinese stock markets seemed to have reduced their appetite for European acquisitions.
Fosun’s Hong Kong-listed shares have fallen sharply in line with a 40 per cent drop in the Shanghai Composite index from its June 12 peak.
The banker said he suspected the group was facing political pressure in China to invest in its domestic market to prop up local asset prices, potentially at the expense of doing deals in Europe. Fosun declined to comment.
Oddo & Cie, the French asset manager, has been considering making a counter bid for BHF Kleinwort Benson, the Belgian company in which it holds a sizeable stake, to challenge an indicative offer made by Fosun. Oddo and BHF Kleinwort Benson declined to comment.
As well as Kleinwort Benson, one of the City of London’s oldest names in finance, the Belgian-listed company also owns a banking licence through its acquisition last year of BHF, the German private bank.
Fosun is already the biggest shareholder in BHF Kleinwort Benson, having built up a 19.5 per cent stake in the group. It recently agreed to buy the stake held by Tim Collins, the US private equity investor, to increase its holding beyond 28 per cent.
Oddo is likely to wait until Fosun submits a formal takeover bid before deciding whether to make a bid of its own. The French group recently expanded in Germany via the acquisition of Meriten, the Düsseldorf-based arm of BNY Mellon.
Two people familiar with the matter said Fosun had launched its bid after falling out with Lenny Fischer, the former Credit Suisse banker who is chief executive of BHF Kleinwort Benson.
Shares in BHF Kleinwort Benson have risen well above Fosun’s €5.10 offer price and closed at €5.50 on Wednesday, indicating that investors believe a higher bid will be forthcoming. Other large shareholders include Franklin Templeton, BlackRock and Aqton, the investment vehicle of Germany’s Quandt family.

FT : Banks should not be able to game accounting rules

Banks should not be able to game accounting rules
A stack of ten euro banknotes is arranged with fifty and twenty euro banknotes for a photograph inside a Travelex store, operated by Travelex Holdings Ltd., in London, U.K., on Monday, Jan. 12, 2015. The euro approached a nine-year low against the dollar as European Central Bank officials fueled speculation the institution will start a program of government-bond buying as early as next week to stave off deflation. Photographer: Simon Dawson/Bloomberg©BloombergW
hen it comes to banks, bad accounting practices can contribute to financial instability. Booms flatter their measured profitability, which encourages them to take more assets on to their balance sheets. Thus leverage begets more leverage throughout the banking system, until asset prices can rise no longer and the whole edifice comes crashing down.
Accounting should aim off for this natural tendency to spiral into debt-fuelled expansion. But far from doing so before the financial crisis, international rules leaned the other way.

For instance, they gave banks the ability to shift assets between the trading book, which was marked to market, and the banking book, where they were assumed to be held to maturity and not sold at market prices.
In good times, this allowed the banks to mark ever more assets to market and book the profits that emerged — even if these were unrealised. Bad times brought the opposite incentive: banks squirrelled assets away into loan books. That allowed them to avoid realising ugly losses or accounting for the higher risk that they might occur.
Nor was that the only snag with the old regime. A second problem concerned conventional loans that were held in the banking book. Provisioning against the value of these assets was only required when there was evidence of impairment, such as a missed payment. At best this made banks slow to react to emerging problems when the financial crisis struck. At worst they allowed outright concealment of economic realities; fair value gave way to the fictions of “extend and pretend”.
Granted, the authorities have acknowledged the need for significant changes. Since 2009, the rule setters have sought to eliminate some of the procyclicality and opacity to which the old system was clearly prone. New rules — in the shape of IFRS 9 — will be introduced in much of the world outside the US in 2018. Banks will have less scope for moving assets from one book to the other. As for the loan book, the directors will have to take a provision for an advance as soon as it is made, and more later on if the chances of a problem have grown.
Nonetheless the planned reform has only softened the old system’s perversity. It has not been done away with. Not only will asset-juggling from one side of the house to the other still be possible, the rules on provisioning are both unnecessarily complex and too weak. They do not for instance require a bank to take a provision against the lifetime expected loss on the loan, but just an estimate of the likely loss in the next 12-month period. On a book of 25-year mortgages, that is akin not just to guessing the outcome of a football match, but the precise times at which the goals will be scored.
Accounting should be tougher and less prone to idiosyncratic judgments. A simple prudential rule could be introduced that would reduce the leeway to put assets beyond mark-to-market valuation. All trading assets could be valued at the lower of cost and net realisable value. Further, in the loan book, provisions should take into account not just the next 12 months but the lifetime outcome of the loan. This would give investors a far truer and fairer view of the value of those assets the balance sheet contains.
Bankers complain that a tougher regime might force them to realise more losses in the short term. Tough. The special nature of banking demands a sound accounting regime. The existing plans go some of the way but not far enough. Investors should monitor more closely what financial institutions do. But if they are to perform this task, they need the tools to do the job.