U.S. government wants $15bn from Deutsche to end securities probe

Deutsche Bank will need to cough up around $15 billion if they want a mortgage-backed securities investigation by the Department of Justice to end.

In response Deutsche said they “believe the figure cited is preposterous and are unlikely to settle potential civil claims in that region.”

The scandal has hit the German bank’s US operations hard and their shares fell over 6 percent in the morning session in New York. There could be worse to come as the negotiations and investigation could take the rest of the year.

A spokesman for the Department of Justice (DOJ) said the “scale of the investigation is being widened; it’s much bigger than first thought.”

Deutsche said in a statement this morning, “This is just the start of talks between us and the DOJ. Going on previous settlements by banks in a similar situation we believe the end figure will be much lower.”

The German banking giant is being blamed for playing a role in the global economic crisis of 2007-2009 when it sold residential mortgage-backed securities. Deutsche is not the only bank in the U.S. who has been probed.

Many banks are accused of offering mortgages to unqualified borrowers, then selling the loan off as a solid investment, essentially passing on the risk.

But the fine the DOJ are proposing for Deutsche is by far the largest since the financial crisis. They penalised Citigroup $11 billion in 2014 for repackaging financial products related to mortgages. The eventual settlement was $8 million.

Some observers are wondering whether financial watchdogs are doing more harm than good at this stage.

“Some of these settlements are huge. Obviously there need to be penalties for what happened, but we want our economy to get back on our feet don’t we?” said ETX Capital chief analyst Neil Wilson in a TV interview on Friday.

Goldman Sachs settled for close to $5 billion early in 2016, while JP Morgan Chase got a $14 billion penalty for overstating the stability of mortgages being sold to their investor base.

“The timing of Deutsche’s fine is unfortunate to say the least,” said Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management. “Revenues have been down nearly 25 percent this quarter and profits have suffered badly. There was also the Fed affair in the summer when Deutsche’s U.S. unit failed a stress test from the central bank.”

German VC position in balance over trade agreement

The Vice Chancellor of Germany, Sigmar Gabriel, will be hoping that a trade deal between Canada and the E.U. will be pushed through in October, as his future as a politician and his ambitions to become Chancellor may hinge on it.

As part of his pledges in his role as economy minister, the VC and centre-left SPD party leader Gabriel has continuously backed the Comprehensive Economic Trade Agreement (CETA), even amid sceptical criticism of the deal from within his own party claiming the trade agreement would not benefit the European Union, only help large worldwide conglomerate gain access to the financial bloc, giving nothing in return.

Should Mr. Gabriel fail to convince the majority of his fellow SPD members of the merits of the deal at next week’s party convention, it could scupper his chances of running for Chancellor in the 2017 national elections. Another blowback could be the ignition of an internal power struggle in the SPD, which is a partner in Germany’s coalition government, the conservatives led by Angela Merkel being the senior partner.

“There is every chance that Gabriel could resign as the party leader if the CETA fails to win favour next week, most people observing German politics would say that would not be a good situation,” said Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management in a note to clients.

“Emotions are running particularly high with the refugee issue and Merkel needs the full support of the SPD to counterbalance the CDU party’s position,” Poulson added.

If Gabriel were to convince the delegation to back CETA it would give him a much needed boost. He is currently a distant second to Merkel in the German political approval ratings even though the current Chancellor’s ratings took a nosedive with her decision to allow an influx of refugees into the country.

Gabeiel wants CETA as a counterbalance to China’s increasing influence on the world trade stage, and he was quick to condemn a competing trade proposal, the Transatlantic Trade and Investment Partnership (TTIP), which he said “had failed to meet the needs of the parties involved”.

CETA, conversely, would be a chance for developed nations to “make a move up the ladder of trade co-operation in the global market” if the deal is ratified by member states at the end of next month.

Gabriel made a trip to Ottowa last week in order to hammer out pre-agreement guarantees so as to appease any lingering doubters within the SPD.

British interest rates look set to continue fall

On the eve of one of the most influential economic events in the last 100 years, the financial meltdown of 2008, British interest rates stood at a very healthy 5 percent. In the turbulent weeks and months that followed, the Bank of England (BoE) aggressively chopped the rates down until by early 2009 they stood at 0.5 percent.

The broad assumption that ultra-low interest rates were just a temporary stop-gap to the financial situation of the time has proved completely untrue, and much to the dismay of even the most pessimistic of economists, this month, the BoE are considering a further cut, this time from the current rate of 0.25 to a miniscule  0.1 percent.

In the wake of the 2007-2009 economic troubles, the global financial system has never returned to full speed. Real incomes have declined, growth has remained stagnant and anti-establishment sentiment has never been higher, symbolized by the British vote to leave the EU and Donald Trump’s chequered attempts to win the U.S. presidential race.

As the UK’s central bank ponders the various implications that an exit from the euro zone financial bloc will bring, a possible further interest rate cut would not really be that surprising a move. The cut could even be as early as late December. The monetary policy committees (MPC) left the 0.25 percent level unchanged at the end of their last meeting, but the indicators are that they will continue with the easing strategy moving forward into next year.

“I don’t think the BoE are going to change their tact,” said Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management on the company’s blog. “Economists in general are surprised that the UK economy has fared as well as it has post-Brexit, but most of us know that the test will be in the long run, and the financial authorities are going to do everything they can to spur spending.”

The MPC predicted that the UK economy would virtually come to a standstill after the British public voted to leave the European Union. That hasn’t happened, and when all the data is collected it may even show that growth is even better than last month’s projections.

The BoE will stay safe at their next meeting, according to many observers, but the rate cut will come sooner rather than later. The main purpose is to add further downward pressure on the sterling in order to stimulate foreign orders for British products and boost international trade in general.

Juncker - Predecessors’ move to Goldman Sachs is “questionable”

José Manuel Barroso, the former European commission president, has raised a few eyebrows with his recent move to U.S. investment banking giant Goldman Sachs, and none more so than the man who replaced him, the current president Jean-Claude Juncker.

Juncker claims Goldman Sachs had a pivotal role in the financial meltdown of 2008 and remarked that Barroso’s move was “questionable”.

“José and I have been friends for many years and I have a very high degree of respect for the man. I have always thought of him as honest and reputable. He has made a decision to move to a company that played a leading role in the economic world crisis between 2007 and 2009, and personally I find the career choice questionable at best,” Juncker said in a TV interview.

The comments come in a week when Juncker has personally begun an investigation concerning whether or not Barroso violated EU regulations by taking the Goldman Sachs position. Barroso will be called for questioning in front of the commission and the main talking points will be his exact responsibilities at the bank.

“Barroso will be feeling the heat. Many of his former colleagues are up in arms at his appointment to Goldman Sachs,” said Head of Corporate trading at Nikko-Desjardins Asset Management, Stuart Poulson. “What’s baffling is why he has chosen an organization that was so implicit in the troubles of 2008. It’s a strange moral decision.”

Barroso has even been called on to give up his pension for bringing the European Union into disrepute by making the career move. The former prime minister of Portugal received a petition signed by over 140,000 people to that effect. In response, he has said publicly that he will carry out tasks at his new company “with total honesty and integrity to the best of my abilities.”

Barroso also wrote a letter to Juncker expressing his devotion to impartiality stating he has not been asked to lobby or advise the bank at any time concerning the British vote to leave the EU. Juncker hit back by saying Barroso would “be treated as a lobbyist by the EU rather than honoured as a former president.”

In response Barroso said “the decision by the president of the EC to make a special investigation out of this affair is inconsistent with what happened concerning other former members, I’m not sure why I’m being singled out.”

Record breaking cash takeover as seed companies make deal

A record breaking cash transaction will be completed later this week that will create the world’s largest pesticide and seed retail entity. German chemicals titan Bayer announced that a deal has been finalized with U.S. firm Monsanto for a huge $67 billion.

Monsanto, who are famous for their GM seeds for crops, said their shares hold a value of $129 in relation to the offer.

Bayer specialises in healthcare products but has been through a major diversification process recently, especially into the agricultural sector.

Genetically modified seeds are used widely in the United States, but stern environmentalist opposition has so far scuttled plans to introduce them into Europe. Bayer hopes to change that situation. They say if the world wants to feed its growing population then GM foods are vital.

“This is going to bring substantial benefits not only to Bayer shareholders and staff, but to the population of Europe at large,” said Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management in a phone interview.

The takeover comes amid a torrent of M&A action in the agricultural industry as declining crop prices force farmers to count their pennies, decreasing profits for the big companies in the sector. In order to save operational costs, the industry has been consolidating.

Other major firms in the sector, including Syngenta, DuPont and Dow Chemical, have all announced mergers in the past year.

Regulatory watchdogs will be scrutinizing those deals and also the Bayer-Monsanto tie-up, as there will be concerns over anti-competition with the current offer threatening to create an entity that would control 25% of the world’s supply of pesticides and seeds.

Farmers have been vocal in their opposition to the merger, citing that the move will probably lead to spiralling seed prices and less choice of seeds in general.

Monsanto has been described as the 'Frankenstein crop producer’ by some in the media and many observers are worried European farmers will be at a strong disadvantage if the deal goes through.

Bayer has paid a massive premium for Monsanto, nearly a 50 percent upward revision from the previous share price before talks began. Should the deal fall through, the fleeing party would have to pay a $3 billion fine.

In response to the news, Monsanto shares gained 1.7 percent and Bayer shares were up nearly 4 percent in New York’s morning session on Friday.

United States employment figures continue solid trend

Although latest reports suggest that the rate of job growth is declining, last week saw a surprise drop in the number of Americans claiming unemployment benefits, revealing a durable labor market.

The encouraging figures may not be enough to convince the Federal Reserve to hike rates at its upcoming policy meeting towards the end of this month. Gloomy services and factory industry activity and the downturn in job growth last month are more likely to be factors the Fed will sit up and take notice of.

“We haven’t seen a labor market this rosy for over forty years,” said Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management. “The Fed is at a very important crossroads here, with rates far from normal levels, so should the economy turn nasty they don’t really have any recourse.”

There was a 3,000 decrease in primary unemployment claims for the week ending September 4th according to data from the Department of Labor, representing the lowest levels for over two months.

The financial markets in the U.S. were unmoved by the jobs report, with the greenback hitting a fortnightly low versus the euro amid a neutral stance by the European Central Bank regarding expansion of the bank’s asset buying scheme.

As concerns continue over chronically low inflation levels, the Fed has kept its benchmark interest rate steady. The last change was in December 2015, and that was the first adjustment in ten years.

Although hiring was still sluggish, data from the government revealed July job vacancies were at a record high, suggesting a probable skills deficiency, or over-skilled, in the potential workforce. The labor market, however, can still be seen as healthy.

Fed Chair Janet Yellen had previously announced that one hundred thousand new jobs would need to be created to keep up with growth, and the economy outperformed that figure by 50,000.

RDQ Economics analyst John Ryding attempted to pinpoint persisting issues, “Although the labor market seems tight on the surface, the underlying problem is trying to find people who are willing to work for the kind of wages that are being offered. There are plenty of vacancies but salary and skills are lacking on either side of the equation.”

The downturn in employment growth is to be expected as the recovery from the 2008 financial crisis shows its age, with significant cooling in the financial industry and also in the manufacturing sector.

Recall episode prompts air bag firm to court bids

The Japanese air bag manufacturer Takata Corp is fighting to stay afloat after the car industry’s largest ever recall, and it has prompted the firm to take primary bids from a list of investors ready to come to the rescue.

According to several anonymous sources close to the company, Lazard Ltd will be receiving rescue plans from a host of potential investors on Takata’s behalf which include, but are not limited to, Brain Capital, chemical maker Daicel Corp, electronic giants Joyson and KKR & Co.

At least 15 deaths have so far been reported linked to the company’s disastrous mistake of putting a volatile chemical inside the propellant used in their air bag system. The chemical was exploding inside the car and sending a deadly spray of shrapnel around the front compartment.

Takata are desperately seeking financial clout as they face billions of dollars in liabilities in upcoming court cases.

None of the companies involved in the potential buyout commented after email and phone call enquiries, and the sources preferred to remain un-named due to the sensitive nature of the affair.

The sources say Takata will attempt to narrow the amount of bids down to two by the end of September by setting up a steering committee to eliminate suitors. Over thirty organizations and business showed interest in the bailout arrangement after Takata announced they required a financial backer.

The winner of the bidding war will be responsible for keeping in check growing costs at the company and funding the restructuring of the business. Takata shares have plummeted well over 80 percent in the last two years.

“It’s been a torrid episode,” said Stuart Poulson, Head of corporate trading at Nikko-Desjardins Asset Management in a TV interview. “But it does represent a major opportunity to get some new blood, and cash, into the company and turn it around. Of course, the shares being at rock bottom prices won’t hurt potential investors either.”

Takata is one of the few dominant air bag makers in the world and many Japanese auto-manufacturers depend on the company to organize and refit the continuing recalls and to keep air bag prices down by providing on-going competition in the industry. As such, they have just about managed to stay in the red while their liabilities are pending.

Warburg eager to pick up mutual fund stake

According to sources close to the matter, French banking giant Societe Generale are in final discussions with Warburg Pincus to offload their 49 percent stake in a mutual fund joint venture with Baosteel Group, a Chinese iron and steel company based in Shanghai.

China first allowed foreign firms to enter their mutual funds business in 2002 and SocGen, France’s second largest banking entity was first into the market. The company they formed with Baosteel in 2003 was named Fortune SG Fund Management.

In the intervening 13 years a plethora of foreign firms including Aviva, Value partners and Bank of New York Mellon Corp, who entered into similar ventures, have sold off their stakes citing an overly competitive marketplace. SocGen have finally given up hope, and Warburg Pincus, a U.S. private equity firm, are looking to take over the reins.

None of the firms involved commented on the news.

Fortune SG was in the top twenty mutual fund ventures by assets, with an estimated $20 billion in assets under their control as of the end of July, according to China’s Asset Management Association.

The sources who broke the news did not mention the value of the proposed deal, but in similar arrangements in the past, fund managers would typically pick up between 3 and 4 percent of their assets.

Warburg is playing the long game. They are betting that over the next 20-year period China’s mutual fund sector, which is worth over a trillion dollars, will deliver high returns. They are already very familiar with Baosteel, being investors in their gas subsidiary for the past two years.

“It’s well known that Warburg have been raising a kitty in the region of around two billion dollars,” said Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management in a phone interview. “In the past they have put massive bets on the country’s financial industry, like with the 2014 investment in China Huarong, so they are continuing with that strategy.”

That $800 million China Huarong investment, which preceded the company’s IPO in Hong Kong, was not the first foray into foreign markets for Warburg. The previous year they built a mutual arrangement with London-based Santander Asset Management which manages over $100 billion across the euro zone and South America.

Under the country’s stringent regulations, 49% is the maximum stake allowed for foreign companies in China.