Month: November 2018

It was just this past Monday when GE resumed its plunge after a tentative stabilization, following a research report that questioned the value of GE Capital’s goodwill following the recent bankruptcy of a helicopter leasing company.

And, in a delightful (if not for the few remaining bulls) symmetry, GE is now closing off the week the same way it started it, with its stock sinking after two analysts raised more red flags around the company’s liquidity, while a report said former GE employees were being questioned by federal investigators about its troubled insurance business.

On the sell-side, Deutsche Bank analyst Nicole DeBlase slashed her price target on the stock by more than a third, from $11 to $7, over continuing questions on the industrial conglomerate (and shadow bank’s) liquidity outlook. According to Bloomberg, in DeBlase’s model, GE will likely be able to build up its balance sheet next year with cash flow from its industrial units to around 34 cents a share, assuming economic headwinds don’t worsen in the next three years and debt comes down, she said. Still, the scenario supports a lower price target on the stock, resulting in a new price target of $7.00 (down from $11.00). The bearish “downside case” assumes power unit earnings continue to decline and GE’s other business units are hit by a modest downturn. DeBlase sees the industrial units facing a cash burn of about 21 cents per share next year.  However, unlike some of her even more bearish colleagues, she doesn’t see the company facing a liquidity crisis, “even in this drastic scenario.”

And speaking of her bearish colleagues, GE’s nemesis – JPM analyst Stephen Tusa – who has long been the most bearish GE voice on Wall Street, said commentary from GE’s partner Safran “supported his view that profit and cash flow growth at the aviation segment would be below consensus expectations.”

Adding injury to sellside insult, also on Friday Morning, the Wall Street Journal reported that Federal investigators are questioning former employees of General Electric about details in a legacy insurance business that led to accounting problems at the conglomerate in the past year, and whether the business failed to internally acknowledge worsening results over the years. The employees also said that they were interviewed by government lawyers.

Shares fell as much as 3.7% in pre-market trading in New York, sliding deeper into 7-handle territory and approaching its financial crisis lows of $6.66.

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We don’t expect the West to denounce xenophobia and prejudice on this one: officials in Kiev have announced that Russian men will be barred from the country following the imposition of martial law this week. 

The ruling targets men aged 16-60, who will no longer be able to enter the country, with the only exceptions being for “humanitarian cases” like funerals or an emergency. Martial law is in effect in 10 Ukrainian regions until December 26 following the Russian Navy seizing three Ukrainian ships and 24 sailors in the Black Sea last Sunday as the crew stands accused of “dangerous maneuvers” in Russian territorial water. 

The new restrictions connected to the martial law decree from early this week were announced following a meeting between President Petro Poroshenko and the country’s top security officials and border guard chiefs in Kiev. The president said in a public statement that the policy aimed to prevent the further formation of “private armies” in Ukraine — a reference to pro-Russian militia groups and separatist organizations Kiev has fought since 2014.

A sizable amount of the Ukrainian population has relatives living just across the Russian border and vice versa. These families will be most impacted by the travel ban especially over the holidays. Currently direct flights between the two countries have been suspended by Kiev authorities, which along with the Russian travel ban will have a huge impact, given that 1.5 million Russian nationals visited Ukraine last year alone, according to official statistics published by Unian news agency, cited in the BBC.

Russian Foreign Ministry spokeswoman Maria Zakharova reacted to the ban by assuring that Moscow had no plans to “mirror” the measure as this “could result in full madness”. 

Україна ввела обмеження щодо в’їзду громадян РФ чоловічої статі віком від 16 до 60, щоб РФ не формувала в Україні загони “приватних” армій, які насправді є представниками Збройних Сил РФ. Щоб не дати росіянам здійснити в Україні ті операції, які вони планували ще у 2014 році. pic.twitter.com/upJyp1JLrO

— Петро Порошенко (@poroshenko) November 30, 2018

The ban will apply to all entry points to Ukraine, especially along the 1200+ miles of the Ukrainian-Russian land border, which is enforced by a system of Ukrainian border fortifications — through the ambitious project akin to a “border wall” is still in development and unfinished. Further details of how security officials plan to enforce the ban have yet to be revealed. 

In mid-September, one Ukrainian province in the western part of the country issued an official ban on all Russian-language books, films, broadcasts and songs. A regional council had voted to “impose a moratorium on the public broadcast and use of Russian-language content” until Russian forces “withdraw” from Ukraine, however unlikely it is to actually enforce. 

Early this week in a televised interview Poroshenko condemned what he described as a rapidly increased Russian military presence on the border with Ukraine, saying, “The number of [Russian] tanks at bases located along our border has tripled,” according to the AFP.

The Ukrainian president added that “the number of units that have been deployed along our border – what’s more, along its full length – has grown dramatically.” He ultimately concluded that the military buildup meant that the country is “under threat of full-scale war with Russia.”

But Kiev’s latest anti-Russian travel ban is sure to only stoke tensions dramatically, especially as it takes the conflict far beyond the mere political domain, targeting language and identity in a Balkanized sense, and dividing families in the process. 

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Having slumped to session lows, US stock futures – extremely sensitive to any trade-related headlines – surged instantly when Bloomberg reported that trade hawk Lighthizer had a good feeling about tomorrow’s dinner and would be surprised if the China dinner fails:

• LIGHTHIZER SAYS HE WOULD BE SURPRISED IF CHINA DINNER FAILS

The headline was enough to spike equity futures, however algo momentum was quickly stopped when Reuters published its own take on what Lighthizer had just said:

• LIGHTHIZER: EXPECT XI-TRUMP DINNER TO BE A ‘SUCCESS,’ BUT NO PREDICTION ON POSSIBLE DEAL

The following clarification from Reuters did not help sentiment either:

• LIGHTHIZER SAYS WHETHER OR NOT TRUMP AND XI REACH A TRADE DEAL IN THEIR MEETING IS ENTIRELY UP TO THE TWO PRESIDENTS

… but by then the headline scanning algos had established enough upside momentum, and having spiked on Bloomberg’s initial take which boosted optimism for a favorable outcome especially once CNBC’s own creative take came in…

… and refuting the Goldman pessimism we reported earlier, animal spirits have awoken with the Trump administration clearly intent on massaging stocks before – and perhaps after – the much anticipated dinner tomorrow.

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As we have repeatedly documented in these pages, Goldman Sachs’s relationship with the Federal Reserve isn’t limited to one between a regulator and regulatee. In fact, for decades, Goldman Sachs, more than any other bank, enjoyed an influence over the Federal Reserve – and particularly the New York Fed, the “first among equals” of the Federal Reserve system – that flips the conventional wisdom on its head: To put it succinctly, it was Goldman that dictates the rules to the Fed, not the other way around.

Any doubters can familiarize themselves with the story of Carmen Segarra, who – at personal risk to any future career in banking or government – came forward several years ago with a cache of secret recordings the revealed the pervasiveness of “regulatory capture” at the New York Fed, which included evidence that her superiors repeatedly brushing aside her insistence that Goldman’s regulatory rating be downgraded because of the “conflict-ridden” nature of some of its deals (note: Segarra was making her recordings exposing the central bank’s unwillingness to challenge Goldman around the same time that the storied “Vampire Squid” was underwriting the $6 billion in 1MDB bonds, despite evidence that the bank ignored its own compliance department’s warnings about the deal). And let’s not forget the incident that unfolded five years ago where a junior Goldman banker received insider information directly from a “source” inside the NY Fed – offering unmitigated evidence of collusion between the two organizations. That banker, though fired from Goldman, was later let off with a slap on the wrist. 

This renders last week’s “leak” that the Fed had asked Goldman to tighten oversight of its investment committees to better protect against conflict of interest as self-serving. That’s because the NY Fed knows that, so long as the DOJ’s spotlight lingers on Goldman’s malpractice, it’s only a matter of time before the regulator itself comes under scrutiny.

But the Fed’s tacit campaign to show the public (and, more importantly, certain Fed skeptics in Washington) that it is “doing something” to change this toxic culture of complicity before Goldman helps another gang of plutocrats siphon off billions of dollars in public money continued on Thursday, when Bloomberg published a “leaked” report alleging that the Fed is ramping up its investigation into how Goldman managed to evade both its internal compliance controls, as well as the Fed’s controls, while pursuing the 1MDB deal (though we imagine the endorsement by Goldman’s then-CEO had something to do with it).

The Federal Reserve is ramping up its investigation into how Goldman Sachs Group Inc. executives dodged the bank’s internal controls while helping Malaysian authorities raise billions of dollars that later went missing, according to people briefed on the matter.

The probe examines the actions of the New York-based investment bank as well as individuals and has been gaining momentum in recent weeks, the people said, asking not to be identified because the inquiry is confidential. The Fed doesn’t have the powers of a criminal prosecutor, but it can and often does sanction people involved in banking scandals.

The Fed has previously interviewed current and former employees at the firm, prying into how easy it is to short-circuit compliance systems, the people said. In recent weeks, representatives from Goldman Sachs met with the Fed and defended the bank’s controls, according to a person with knowledge of the matter.

As Goldman Sachs’s main regulator, the Fed has broad authority to penalize the bank or impose other changes. Earlier this year, it capped Wells Fargo & Co.’s size until the lender shores up internal controls.

“It is the Federal Reserve’s policy not to confirm or deny the existence of investigations,” the central bank said in an emailed statement. “We refer criminal violations to the Department of Justice as necessary and exercise our enforcement and safety and soundness authorities if the facts are warranted.”

If the New York Fed has been so bamboozled by Goldman’s ability to evade oversight, they should look no further than the fact that former Goldmanites have been running the US financial system for decade. Former NY Fed Governor Bill Dudley worked at Goldman. Treasury Secretary Steven Mnuchin also worked there, and former Trump economic advisor Gary Cohn once helped run the bank. But most importantly, many of the central bank’s employees yearn for the opportunity to walk through the “revolving door” leading from the doldrums of government hackery to the untold riches of the private sector.

Need more evidence that 1MDB was the result of a systemic problem? Look no further than Tim Leissner, the former head of Goldman’s Southeast Asia operation who recently pleaded guilty to knowingly abetting money laundering and violations of the Foreign Corrupt Practices Act, alleged in his plea agreement that his actions were the result of a “culture of corruption” Goldman.

In a statement to the court, Leissner said his behavior was “very much in line of its culture of Goldman Sachs to conceal facts from certain compliance and legal employees.” The Justice Department has also said in filings that the business culture at Goldman Sachs, particularly in Southeast Asia, prioritized consummating deals ahead of the proper operation of its compliance functions.

Still, the DOJ filings said individual bankers knowingly circumvented controls the bank had in place and hid certain details about the deal to prevent compliance officers from seeking to block the firm’s involvement in the transactions.

While we’re sure the people of Malaysia appreciate Goldman CEO David Solomon’s feigned “outrage” over Goldman’s behavior, the bank’s attempts to paint Leissner as a rogue employee have been seriously undermined by reports about the involvement of its senior leadership in the deal. Because 1MDB is just the latest in a long line of Goldman’s regulator enabled disregard for the wellbeing of its client and, well, anybody who isn’t Goldman. But maybe this time, the public backlash against the bank, and the decision of at least two high-profile clients to sue over 1MDB, will force Goldman to reconsider such “short-term” thinking by jeopardizing the only thing that matters to Goldman: Its client book.

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Chinese President Xi Jinping and US President Donald Trump, each accompanied by senior officials (with uber China-hawk Peter Navarro present), will dine together Saturday on the sidelines of the G20 conclave in Argentina. Market participants are intensely focused on the leaders’ meeting as a potential inflection point in the escalating economic tensions between the two countries.

And while many have expressed hopes that at least some tentative thawing in relations will emerge as a result of tomorrow’s meeting, Goldman Sachs disagrees, and in a Thursday note said that a continued escalation of the U.S.-China trade war would be the “most likely” outcome of the meeting.

In previewing the three possible outcomes of the Saturday dinner, Goldman writes that it sees three basic scenarios for the  outcome of the meeting.

• The first and in Goldman’s view most likely outcome, is continuing on the current path of “escalation”— tariff rates rise to 25% on all imports currently under tariff, and tariffs are extended to remaining Chinese imports.
• A close second is a “pause”, where existing tariffs remain in place but the two sides agree to keep talking with escalation put on hold.
• A “deal”, which Goldman thinks is unlikely in the near term, would involve complete rollback of the current tariffs.

The reason why Goldman is surprpsingly pessimistic on the outcome is because there has been a growing sense among US policymakers that China has benefited disproportionately from the bilateral economic relationship, effectively supporting a hard line stance against Beijing.

This view has been articulated forcefully by President Trump, who has said for example “China has taken advantage of the United States for many, many years”, but has adherents in both political parties.

• Most obviously, the US trade deficit with China has widened to new highs .
• The US endured a huge retrenchment in manufacturing employment after China’s entry into the WTO, in contrast to expectations at the time.
• Foreign companies operating in China have repeatedly expressed frustration with the business environment and perceptions of a non-level playing field.
• Meanwhile, China has seen enormous improvement in material standards of living over the past two decades (accounting for the bulk of the reduction in global poverty over this period)—reflecting in part the spillovers from strong export growth.

Goldman also notes the political and policy divergence between the two countries. Here, the willingness of the US and other developed democracies to include China in international economic frameworks such as the WTO reflected in part an expectation that economic development would eventually lead to some form of political liberalization. But recent events have suggested divergence rather than convergence of political models and goals, for the following reasons:

• Domestically, President Xi effectively consolidated power and the two-term limit on the presidency was abolished earlier this year. A range of other policy changes have generally been perceived as increasing Communist Party control, for example increased efforts to establish Party committees in private and foreign enterprises.
• Internationally, China has adopted a more forward-leaning posture economically (e.g. with the Belt and Road Initiative, as well as efforts to negotiate a regional trade agreement) and geopolitically (e.g. South China Sea, etc).

Critically, these concerns appear to be shared by US politicians and bureaucrats well beyond President Trump. For that reason, in the view of many foreign policy practitioners, the US-China relationship may be more challenging to manage than in the past. If so, the past year’s disruptions to long-established economic relationships—and the possibility that they return in the future—may continue to influence firms’ investments in China even in the event of a near-term “deal” on trade policy.

In its take on the economic consequences of the G-20 event, Goldman predicts that Chinese export growth will likely weaken in coming months on payback from recent “front-loading”, and—unless a deal is reached—over time by some US substitution to non-Chinese suppliers. And while the bank expects these effects to slow Chinese growth beginning in early 2019, renminbi depreciation this year is likely to mitigate the impact. Meanwhile, continued tariffs will weigh on Chinese domestic demand—in the short term, via increased uncertainty and negative effects on confidence, which are bad for investment and durables consumption; in the long term, by potentially encouraging some relocation of production.

Finally, Goldman writes that the assets most sensitive to the trade outcome are likely to be the renminbi and equities.

In a “pause” or “deal” scenario Goldman expect USDCNY to remain below 7; “escalation” would likely result in moderate renminbi depreciation over the next few months (to the 7.3-7.4 range).

Equity market valuations are likely to be quite sensitive as well; Goldman models the relationship of equities with policy uncertainty and estimate that the MXCN price-earnings ratio could increase to 12 by year-end 2019 in a “deal” scenario (relative to a base-case target of 11) or fall to roughly 10 in an “escalation” scenario.

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Reeling from a Morgan Stanley downgrade of European Banks and a second day of raids on its Frankfurt headquarters, Deutsche Bank shares declined by another 3% on Friday to a new all time low just above €8, bringing the YTD loss to 50%.

In what appears to be the latest in a string of financial crimes and scandals that have generated some $18 billion in fines since the financial crisis, prosecutors are investigating whether two employees in the bank’s wealth management division helped clients set up accounts in offshore tax havens, including the British Virgin Islands, and possibly allowed criminals to move money through these shelters, some of which may have flowed through accounts at the bank (other employees may also have been involved, prosecutors said). According to Frankfurt prosecutors, the investigation, which stems from revelations contained in the ‘Panama Papers’, covers behavior that stretched through this year, meaning that it could become a blemish on the performance of the bank’s newly-installed CEO Christian Sewing.

Before becoming CEO, Sewing was responsible for the bank’s wealth management division as head of its retail bank, a position he held from 2015 to when he was offered the CEO job in April.

According to the Financial Times the illicit transactions that two DB wealth management employees neglected to flag in 2016 alone stood at €311 million ($353 million), but people familiar with the case is almost certainly much larger, given that the suspicious activity continued for five years. The activity under investigation allegedly began in 2013.

As the raids continue, more details about the bank’s alleged misconduct are trickling out. According to the Financial Times, the DB unit that’s emerged as the focus of the investigation is a 100% owned subsidiary of DB that has been operating since 2010. 

The Deutsche unit at the core of the case is called Regula Limited, domiciled in Road Town on the British Virgin Islands, a person familiar with the matter told the Financial Times, confirming a report by German daily “Süddeutsche Zeitung,” which was one of the newspapers that led the reporting about the “Panama Papers” in 2016.

Regula has been listed as a 100 per cent-owned subsidiary in Deutsche Bank’s annual reports since 2010 and is classified as an “other enterprise” in its most recent annual report. Deutsche sold the entity in March 2018, according to the person.

DB has insisted that it had provided prosecutors with all the materials they had requested as part of their investigation, and that the bank was surprised by the raids. 

But if there’s anything DB watchers should take away from the second day of raids, it’s that prosecutors raided the office of DB board member and head of compliance Sylvie Matherat. This follows reports earlier in the week that Matherat and another DB executive were on the verge of being pushed out. Matherat generated headlines last year when she spoke out in an interview last year about the difficulty in improving the bank’s fragmented compliance systems.

Matherat has told associates she might need to prepare to leave the bank, and has expressed unhappiness with what she described to some associates as constraints to improving financial-crime controls and mending Deutsche Bank’s relationships with regulators, some of the people say.

Matherat has told associates she might need to prepare to leave the bank, and has expressed unhappiness with what she described to some associates as constraints to improving financial-crime controls and mending Deutsche Bank’s relationships with regulators, some of the people say.

Given the deeply involved nature of the investigation, it’s increasingly likely that the bank will need a scapegoat: Will it be Matherat?

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Any hopes that the G-20 summit would offer a brief respite from President Trump’s unceasing stream of tweets were dashed Friday morning when the president mocked allegations that he misrepresented his company’s pursuit of a Trump Tower Moscow deal that came under scrutiny Thursday after former Trump attorney Michael Cohen pleaded guilty to lying to Congress about the timeline of the deal talks (it ultimately fell apart, though talks reportedly continued until the summer of 2017).

Trump again blasted the Mueller probe as a “witch hunt” and said he only “lightly looked at doing a building somewhere in Russia”. Trump added that the fact that he ran his business while running for president was “very legal and very cool.” Trump also pointed out that he put up “zero money, zero guarantees and didn’t do the project.”

Oh, I get it! I am a very good developer, happily living my life, when I see our Country going in the wrong direction (to put it mildly). Against all odds, I decide to run for President & continue to run my business-very legal & very cool, talked about it on the campaign trail…

— Donald J. Trump (@realDonaldTrump) November 30, 2018

….Lightly looked at doing a building somewhere in Russia. Put up zero money, zero guarantees and didn’t do the project. Witch Hunt!

— Donald J. Trump (@realDonaldTrump) November 30, 2018

Trump told reporters on Thursday that Cohen was lying to shave years off a “lengthy” prison sentence, and that he had been entirely truthful about the Trump Tower Moscow deal – something that his lawyer, Rudy Giuliani, confirmed during an interview with the New York Times. Giuliani said Trump answered questions about the project posed by Mueller in a set of written answers he provided to the investigation last week.

But more salacious details about the negotiations have surfaced, including a Buzzfeed report claiming that the Trump Organization had planned to gift a $50 million penthouse at the tower to Russian President Vladimir Putin.

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