ABN Amro reaches €480m anti-money laundering settlement

ABN Amro has reached a €480m settlement with Dutch prosecutors over anti-money laundering failings, following an investigation that has also triggered the resignation of Danske Bank’s chief executive.

ABN said on Monday that prosecutors had found “serious shortcomings in ABN Amro’s processes to combat money laundering in the Netherlands, such as the client acceptance, transaction monitoring and client exit processes”, and that it had put in place a plan to improve its processes.

The Dutch Public Prosecution Service said that “various clients engaged in criminal activities were able to abuse bank accounts and services of ABN Amro for a long time”.

The €480m settlement is made up of a €300m fine and €180m of disgorgement, which reflects the savings the bank made from its inadequate controls. The problems occurred between 2014 and 2020.

Chief executive Robert Swaak said: “Regretfully, I have to acknowledge that in the past we have been insufficiently successful in properly fulfilling our important role as gatekeeper. This is unacceptable and we take full responsibility for this.”

Three former ABN Amro board members have been identified as suspects in an investigation by prosecutors. One of them, Chris Vogelzang, resigned from his position as chief executive of Denmark’s Danske Bank on Monday. 

The move is an embarrassment to Danske, which brought Vogelzang in as an outsider to clean up its own money-laundering scandal, one of the largest ever uncovered.

Danske, which is under investigation by US authorities and facing a significant fine, named its chief risk officer Carsten Egeriis to replace Vogelzang.

Vogelzang said he was “surprised” by prosecutors’ decision to name him a suspect, four years after he left ABN Amro, but stressed it did not imply he would be charged. He stressed he was “comfortable with the fact that I managed my management responsibilities with integrity and dedication”.

He added: “Given the special situation Danske Bank is in and the intense scrutiny the bank is under, particularly in relation to anti-money laundering as a consequence of the still unresolved Estonia matter, I do not want speculations about my person to get in the way of the continued development of Danske Bank. Therefore, I feel that the only right thing is for me to leave.”

Vogelzang took up the job as boss of Danske in June 2019, three months before ABN Amro disclosed the probe into it by Dutch public prosecutors.

Lithium miners in $3.1bn merger as electric vehicles fuel demand

Australian mining groups Orocobre and Galaxy Resources plan to merge in a A$4bn (US$3.1bn) deal that would create one of the world’s largest lithium producers as rising demand for electric vehicles turbocharges prices for the metal.

The Australian Securities Exchange-listed companies said on Monday the combined business would establish a diversified production base across Australia, South America and Canada, as well as boost the groups’ financial firepower and capacity to grow more rapidly.

Together, Brisbane-based Orocobre and Perth-headquartered Galaxy would be the world’s fifth-largest producer of lithium, which is an important material in electric vehicle batteries. The two companies said they had the potential to expand annual production of lithium carbonate, a processed form of the raw material used in batteries, from 40,000 to 100,000 tonnes in the next few years.

“The transaction will allow the group to materially accelerate the development of our combined growth projects,” Simon Hay, Galaxy chief executive, told investors. “And this growth is perfectly timed to meet the demand surge coming from our customers.”

Shares in Orocobre rose almost 5 per cent following the deal’s announcement, while those in Galaxy added 2.7 per cent.

Between them, Galaxy and Orocobre are planning several big development projects, including Olaroz and Sal de Vida in Argentina and James Bay in Canada, which analysts forecast will require more than A$1bn in capital expenditure.

The merged company would be headquartered in Argentina, where Orocobre operates the Olaroz lithium facility, and have $487m in cash on its balance sheet.

“The combined entity will have materially increased liquidity and improved access to capital, which we see as a major enabler to delivering accelerated growth plans,” said Reg Spencer, an analyst at an investment bank Canaccord Genuity.

Canaccord said it would consider upgrading its current production forecasts for both companies of 130,000 tonnes of lithium carbonate in 2025 if the merger goes ahead.

The global market for lithium has bounced back after two years of depressed prices, prompted by concerns of a supply glut from a flurry of mine expansions.

Lithium carbonate prices have soared about 70 per cent this year on strong demand for electric vehicles, according to Macquarie. The bank forecast further price increases of 30-100 per cent over the next four years, as electric vehicles begin displacing the 1bn or so internal combustion engines in the world.

“Our bullish electric vehicle demand outlook sees the lithium market move to [a] deficit in 2022 with material shortages emerging from 2025,” said Macquarie in a recent note.

Under the proposed merger, which has been endorsed by both companies’ boards, Galaxy shareholders would receive 0.57 Orocobre shares for each Galaxy stock. Orocobre shareholders would own 54.2 per cent of the combined entity, with Galaxy investors holding the remainder. The merger is subject to shareholder approval.

Martín Pérez de Solay, Orocobre chief executive, will lead the combined group. Galaxy’s Hay will become president of the merged entity’s international business and report to de Solay.

“The company will have a very, very strong balance sheet and that will enable us to raise debt whatever it is required to develop projects . . . quickly,” said de Solay.

Italy seeks domestic production of mRNA Covid vaccines

Italy has held talks with several manufacturers about starting production of mRNA-based Covid-19 vaccines in the country, in the latest sign that European officials want to deepen those supplies over other types of shot.

Rome has discussed the domestic production of mRNA-based vaccines with US biotech Moderna, Switzerland’s Novartis and Italy’s ReiThera, people familiar with the matter said.

The recent talks with Novartis and ReiThera included the possibility of producing the mRNA vaccine developed by Germany’s CureVac in Italy, two of the people said.

Basel-based Novartis signed an initial agreement with CureVac in March to manufacture some of the company’s coronavirus vaccine. The shot is still in phase 3 trials, but the German biotech said this week it hoped the vaccine would be approved for use in the EU in May or June. ReiThera has its own adenovirus-based jab under development, but it is still in phase 2 trials. 

The talks between Novartis, ReiThera and the Italian government were at an early stage, the people said, and might not yield a final agreement. Novartis, ReiThera and CureVac all declined to comment.

In addition, Mario Draghi, Italian prime minister, has spoken directly to Moderna’s chief executive Stéphane Bancel, other people familiar with the matter said. The talks failed, the people said, as Moderna lacked the capacity to oversee the transfer of the necessary technology to Italian manufacturing sites or to staff those sites with the expertise needed to increase production.

Moderna declined to comment. It has previously pointed to a general lack of qualified vaccine staff as a constraint to the expansion of manufacturing.

The Italian effort to secure domestic production of mRNA-based Covid shots, which use new technology to deliver the vaccine into the body, comes as the EU appears to be moving away from the adenovirus-based vaccines produced by AstraZeneca and Johnson & Johnson.

Several European nations have either restricted or halted use of the AstraZeneca shot after the European Medicines Agency found a causal link with a very rare side effect involving blood clots. The rollout of J&J, a similar type of vaccine, has also been delayed while US and EU authorities probe a possible link.

EU member states feel they have been stung by their dealings with AstraZeneca, in particular, which has also failed to meet delivery targets, downgrading its supply projections to the bloc several times.

“We need to focus now on technologies that have proven their worth,” European Commission president Ursula von der Leyen said on Wednesday. “MRNA vaccines are a clear case in point.” Brussels is now in talks with BioNTech/Pfizer, which produces one of the leading mRNA vaccines, for a deal for up to 1.8bn doses in 2022-23.

There is no suggestion that any Italian-made doses would be reserved for the country alone. Rather, they would boost European manufacturing capacity and be used to fulfil current and future vaccine procurement deals negotiated by Brussels on behalf of EU member states.

A commission official said Brussels welcomed Rome’s “engagement in vaccine production” and was aware of contacts between Italian authorities and companies. EU member state moves to boost vaccine production were “complementary” to the similarly targeted commission-led efforts and the two co-ordinated regularly, the official added. 

Fights over the export of vaccines and the growing acceptance that people could require annual booster shots have increased the incentives for politicians to increase domestic production. Last month, Draghi said the EU’s ability to produce its own vaccines was now as important as military spending.

“People speak a great deal about strategic autonomy, often in
reference to defence, security, the single market,” he said. “I
believe the first strategic autonomy today should be vaccines.”

Giancarlo Giorgetti, minister for economic development who would be in charge of any new manufacturing, has also said that both Italy and the EU needed to “guarantee ourselves self-sufficiency in terms of
vaccine production”.

One Italian official, however, said that Rome was focused on
vaccine supply for this year and hitting its daily vaccination targets
rather than longer-term plans. The Ministry of Economic Development declined to comment, as did the Ministry of Health.

Additional reporting by Erika Solomon in Berlin and Hannah Kuchler in London

Wirecard inquiry: Germany’s political and financial elite exposed

It was an innocuous question, posed shortly before midnight some nine hours into an exhausting parliamentary hearing into the Wirecard scandal.

“Did you ever actually own Wirecard shares?” Cansel Kiziltepe, the Social Democrat MP, asked Ralf Bose, head of Germany’s auditor watchdog Apas. His answer caused a political earthquake and brought an abrupt end to his more than 30-year career.

A former partner at KPMG, Bose ran a government agency that is normally protected from public scrutiny by stringent secrecy laws. But those laws do not apply to the Bundestag’s inquiry into Wirecard. Bose disclosed that he had bought and sold Wirecard stock while Apas was investigating Wirecard’s auditor EY. Just hours later the German government started to probe the transactions. And within a matter of weeks Bose had been fired.

His late-night admission last December was one of the high points of an inquiry that has electrified Berlin’s political class and has led to a swath of resignations among top regulators and financial executives.

“[With Bose] it was one of those moments when you knew there and then that this person would have to go,” says Matthias Hauer, one of the MPs leading the probe.

Markus Braun, former CEO of German Wirecard, is exercising his right to remain silent © Filip Singer/Getty Images

Constituted last October, the inquiry’s overriding objective is to find out why German regulators failed to spot one of the country’s worst ever cases of corporate fraud and take steps to prevent it — and to figure out how to stop it happening again. German authorities seemed blindsided when Wirecard announced last June that €1.9bn were missing from its accounts and days later collapsed into insolvency.

The inquiry reaches an emotional climax this week when MPs interrogate Germany’s two most powerful politicians — Angela Merkel, the veteran chancellor, and finance minister Olaf Scholz. Coming just five months before a national election — and at an extraordinarily fluid time in German politics — the encounters could shape the political debate for weeks to come.

MPs will want to know why Merkel lobbied for Wirecard in China when reports about suspected fraud at the company had been in the public domain for months. Scholz will be asked to explain how BaFin, the financial regulator he oversees, not only failed to uncover the Wirecard fraud but went after short-sellers and Financial Times journalists who first highlighted irregularities at the company.

Scholz, who is running as the Social Democrats’ candidate for chancellor in September’s election, has placed the bulk of the blame on Wirecard’s auditors. He has also sought to appease his critics by initiating a wide-ranging reform of financial regulation in Germany, substantially beefing up BaFin’s powers and poaching Mark Branson, the respected head of Swiss regulator Finma, as BaFin’s new head.

German Chancellor Angela Merkel and finance minister Olaf Scholz, who has placed the bulk of the blame on Wirecard’s auditors
German Chancellor Angela Merkel and finance minister Olaf Scholz, who has placed the bulk of the blame on Wirecard’s auditors © AFP via Getty Images

But that hasn’t dispelled lingering criticism of his ministry’s inaction before Wirecard’s collapse. Lisa Paus, one of the Green MPs on the inquiry, says Scholz was driven by a desire to nurture one of Germany’s rare examples of high-tech success.

“You have this impression that this was an emerging Dax company that the finance ministry wanted to somehow protect,” she says. “At all the critical junctures they decided in favour of Wirecard.”

The inquiry’s deliberations are ongoing, but they have already provided moments of high drama that have left MPs gasping in disbelief. They have expressed amazement at the scale of the Wirecard lobbying operation, with its network of former police chiefs, ministers and spymasters, and at revelations that BaFin employees traded Wirecard shares while the company was under investigation. They also expressed shock at the fanciful stories cooked up by Wirecard lawyers alleging journalists’ attempts to blackmail the company.

“The lockdown may have shut down all the theatres in Germany, but this inquiry has compensated for that in full,” says Michael Maier, a veteran Austro-German journalist and publisher of the Berliner Zeitung daily.

It will be many weeks before the committee’s members compile their final report, which needs to be published by the end of the parliamentary term in September. But one thing is already clear, MPs say: that the Wirecard scandal could have been prevented if authorities such as BaFin had connected the dots and not ignored the profusion of warning signs about the company’s suspicious behaviour.

“We can say today that there were compelling, substantiated indications of criminal activity at Wirecard, for our authorities, for BaFin, for prosecutors in Munich, for other supervisory agencies and also for politicians sitting in the finance ministry,” says Florian Toncar, an MP for the opposition Free Democrats.

Yet these weren’t acted upon. On the contrary, “state and sovereign institutions fell over themselves to be duped by a criminal gang”, says Fabio De Masi, a leftwing MP and one of the most prominent members of the investigative committee.

Dogged pursuit

The inquiry has been one of the most exhaustive ever undertaken by the Bundestag. Equipped with subpoena powers akin to those of criminal prosecutors, MPs have amassed nearly a terabyte of data and 174,000 pages of documents and interrogated more than 80 witnesses and experts, some of them repeatedly.

They have also mandated two special investigators, one to probe Wirecard’s connections to the law enforcement agencies and secret services, and another to evaluate the work of its auditor, EY, which resulted in a damning report.

Sometimes the hearings have verged on the theatre of the absurd — particularly the interrogation of former Wirecard chief executive Markus Braun, who was the inquiry’s first witness.

Braun, who had been summoned out of police custody and gave his address as “Augsburg penitentiary”, made clear he would not go beyond a brief introductory statement — but MPs interrogated him for a good three hours anyway. His robotic answers to some 150 questions alternated between, “I can’t answer this today”, “I exercise my right to remain silent” and, “I refer to my statement”. Braun even refused to confirm he had a daughter, or what the title of his PhD thesis was.

Germany’s Green party Bundestag Member Danyal Bayaz and Lisa Paus of the Green party, give a statement to the media after an extraordinary meeting on the Wirecard scandal held by parliament’s financial committee last September
Germany’s Green party Bundestag Member Danyal Bayaz and Lisa Paus of the Green party, give a statement to the media after an extraordinary meeting on the Wirecard scandal held by parliament’s financial committee last September © Alamy

Though they made little headway with Braun, MPs have doggedly pursued lines of inquiry that have led to a string of resignations. The most prominent were BaFin head Felix Hufeld and his deputy Elisabeth Roegele, who were forced out in January.

Then there is Edgar Ernst, head of the accounting watchdog FREP: Hubert Barth, EY’s Germany head; Alexander Schütz, a member of the supervisory board of Deutsche Bank; Jana Hecker, UniCredit’s head of equity capital markets; and Commerzbank analyst Heike Pauls. Deutsche Bank’s head of audit Andreas Loetscher, a former EY partner who was in charge of the Wirecard audit, has also stepped aside. And of course there’s Bose, the former head of Apas, who was fired in mid-January.

“Judged on the number of resignations, the inquiry’s track record has been pretty respectable,” says De Masi.

The pressure has been relentless. In order to squeeze the proceedings into the final 11 months of a four-year parliamentary term, MPs have worked round-the-clock, with witness questioning often dragging into the early hours of the morning.

“Any sceptic of parliamentary democracy should attend one hearing, and they would immediately be converted,” says Maier.

‘Siding with criminals’

A key focus of the investigation has been BaFin’s controversial decision in February 2019 to impose a ban on the short selling of Wirecard shares, despite misgivings expressed by the Bundesbank, Germany’s central bank.

“That . . . was probably the biggest mistake our authorities made,” says Danyal Bayaz, a Green MP on the committee. “It was at that moment that they sided with criminals, and investigated journalists and market participants who were posing critical questions.”

But none of Germany’s regulatory authorities have emerged from the Wirecard proceedings with their reputation unscathed. The Munich criminal prosecutors currently investigating Markus Braun and other Wirecard executives for fraud have also come under mounting scrutiny.

Jan Marsalek, former Wirecard COO, is considered one of the masterminds of the fraud and is currently on an Interpol wanted list
Jan Marsalek, former Wirecard COO, is considered one of the masterminds of the fraud and is currently on an Interpol wanted list

MPs have criticised them for failing to issue an arrest warrant for Jan Marsalek, Wirecard’s former chief operating officer, on the day the company revealed the massive hole in its balance sheet. Marsalek, who is considered one of the masterminds of the fraud and is currently on an Interpol wanted list, was able to flee to the Belarusian capital Minsk and has not been seen or heard of since.

The Munich prosecutors’ role in the BaFin short selling-ban has also proved controversial. The chief prosecutor Hildegard Bäumler-Hösl told MPs that two years ago she had a curious phone call with a star Munich lawyer who was working for Wirecard. He told her that Bloomberg reporters had attempted to blackmail the payments company: they purportedly threatened to “take up an offer from the FT” and publish negative stories about Wirecard, unless it paid them €6m.

Bäumler-Hösl sent a memo to BaFin summarising the information. Fearing a so-called “short attack” on Wirecard, BaFin then issued its now infamous short selling ban, which appeared to suggest Wirecard’s biggest problem was the speculators betting on its falling share price rather than the allegations of fraud swirling round the company.

But the blackmail story was a fiction. Chats unearthed by MPs on the messaging platform Telegram between Marsalek and the head of Wirecard’s legal department show “that he dreamt up this whole story himself”, says Jens Zimmermann, a Social Democrat MP on the investigative committee.

Bäumler-Hösl insisted in parliament that her team had simply passed on the information to BaFin without assessing its accuracy. BaFin, on the other hand, said prosecutors stressed in a number of phone calls that they deemed the information credible. Yet in a letter to Bloomberg at the time, Wirecard itself cast doubt on the veracity of the blackmail claim. Bloomberg has also denied its reporters ever tried to pressure Wirecard.

“Everyone on the committee was surprised a story which was invented by Wirecard . . . ended up being the cause of the short selling ban,” says Zimmermann.

TV news crews film as visitors exit the Wirecard headquarters during a raid by police and prosecutors in Munich last July
TV news crews film as visitors exit the Wirecard headquarters during a raid by police and prosecutors in Munich last July © Bloomberg

‘Too big and complex’

Other agencies have also been found wanting, such as the money-laundering authority in Lower Bavaria where Wirecard was based. MPs were shocked at how ill-equipped it was to supervise a company of such complexity. It even lacked a comprehensive database of the firms under its jurisdiction.

“You have six to seven full-time employees who oversee thousands of car dealers and estate agents,” says Hauer. “How are they supposed to supervise a Dax-listed company with 58 subsidiaries, many of them based abroad?”

Germany’ accounting watchdog FREP has also been in the MPs’ crosshairs. Its outgoing head, Ernst, admitted to MPs that the body, which was founded in the aftermath of the Enron accounting fraud, lacked the resources to conduct forensic audits on questionable companies. Ernst said FREP’s budget was deliberately kept small to limit the financial burden on German companies, which fund the body.

Yet in early 2019, BaFin asked FREP to investigate Wirecard’s accounts. It was still waiting for the agency’s report in June the following year, when Wirecard collapsed into insolvency.

“FREP is definitely one of the culprits, because they knew Wirecard was too big and too complex for them to deal with and still they didn’t say anything,” says Zimmermann.

FREP’s woes climaxed earlier this year when the inquiry committee revealed that Ernst had ignored the agency’s strict corporate governance rules. He told MPs he had joined the supervisory board of German wholesaler Metro despite a rule imposed in 2016 that barred the agency’s staff from taking on any more outside directorships. In February he was forced to step down.

Another casualty was Schütz, the member of Deutsche Bank’s supervisory board. His fate was sealed in mid-January, when MPs on the investigation committee questioned Deutsche Bank chief executive Christian Sewing.

Zimmermann confronted him with an email sent by Schütz to Braun in early 2019, just after the Financial Times had reported whistleblower allegations of accounting fraud in Singapore. Schütz told Braun he had recently bought additional shares in Wirecard, and urged Braun to “do this newspaper in!! :-)”. The advice was striking considering Wirecard’s reputation for intimidating, spying on and hacking its critics.

A flustered Sewing declined to comment on the email. But Deutsche later described it as “unacceptable” and Schütz later announced his resignation from the bank’s board.

For MPs, the Schütz correspondence showed the extent of Wirecard’s vast network of businessmen, politicians and lobbyists. One of those on its payroll was Waldemar Kindler, the former Bavarian chief of police. Lawmakers discovered during the inquiry that he used his influence to procure a firearms licence for Braun’s driver.

“You maybe expect that kind of thing in Sicily, but not in Bavaria,” says Maier.

Another adviser lavishly paid by Wirecard for his services was the former German defence minister Karl-Theodor zu Guttenberg. He asked Merkel in September 2019 to intercede for Wirecard over an acquisition it was making in China. The chancellor duly raised the issue on her official trip to China a few days later.

Hans Michelbach, an MP for the governing CDU/CSU bloc, says the inquiry had revealed that Wirecard spent €62.4m just in the four years from 2016 until 2020 on lobbying activities — an unusually large figure for a German company.

“The fact that former ministers, state secretaries, a former police chief and an active Berlin politician all allowed themselves to be harnessed by Wirecard leaves me speechless,” he says.

None of their efforts were able to save Wirecard, whose collapse wiped out €24bn in market value. “That was the money of small investors . . . people who now have to get up at 5am and do a double shift because their family savings were destroyed,” says De Masi.

He says he and his colleagues feel they owe it to those people to get to the bottom of the Wirecard debacle — even if it often means working until the small hours to do so.

‘Litigation will take over’: US lawmakers warned of Libor chaos

US regulators and government officials last week appeared en masse before a congressional committee to make a plea over the country’s sluggish transition away from scandal-hit interest rate benchmark Libor.

Without an act of Congress, they said, there could be chaos.

“If this Libor transition does not go well, people may not know what their mortgage payment is if it is linked to Libor, they may have their credit card payments disrupted,” Brian Smith, deputy assistant secretary for federal finance at the Treasury, told the House financial services committee.

“Financial markets may be disrupted. Lending to businesses may be disrupted,” he said. “Litigation will take over.”

Thousands of loan, bond and derivatives contracts, adding up to a boggling $200tn of notional value, still use the US-dollar version of the London Inter-Bank Offered Rate to govern interest payments. This more than a decade after a rate-fixing scandal revealed Libor’s shortcomings and prompted the effort to switch to a better, market-based alternative.

In fact, the number of contracts overall referencing Libor has increased in recent years, rather than decreased, according to the Alternative Reference Rates Committee, an industry group set up by US regulators to steer the transition.

UK regulators, who oversee the benchmark, are phasing out most currency versions of Libor by the end of 2021, but US dollar Libor has been given a reprieve. All new contracts will have to use an alternative reference rate from next year, but existing contracts have until mid-2023 to be switched.

The ARRC estimated that 33 per cent of current contracts would still be outstanding when the mid-2023 deadline hits. Some of these contracts have pre-agreed language written into them to govern what happens if Libor goes away, but the ARRC said $1.9tn lack “effective means” to transition to a different benchmark.

“The goal here is to get to a place where borrowers and lenders have certainty,” said Tom Wipf, vice-chair of institutional securities at Morgan Stanley, who chairs ARRC. “If we don’t get that, imagine the number of disputes we would get across products. The entire financial system could be affected to some degree.”

The ARRC has endorsed an alternative to Libor — the Secured Overnight Financing Rate, or SOFR — for certain derivatives and other financial contracts. But using it in every contract that currently references Libor has proved unfeasible.

Since the rate that eventually gets plugged in to all these old contracts could make a big financial difference, and the losers would surely want to sue, legislation would be able to give legal safe harbour to counterparties that switch to a federally-approved benchmark.

Jay Powell, Fed chair, and Janet Yellen, Treasury secretary, have already united to call for Congress to act. At Thursday’s financial services committee hearing, officials from the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Housing Finance Agency added their names to the list.

In Europe, legislation was passed in February to provide a fallback from Libor to interest rates selected by the European Commission. 

The New York state legislature also passed legislation stipulating that replacement rates recommended by regulators can be used in Libor contracts currently lacking the relevant guidance.

The vast majority of contracts under the purview of US regulators are written under New York law, but a significant number are covered by other local state laws, especially for consumer products like mortgages.

That makes a national solution a “requirement”, according to Joseph Abate, a strategist at Barclays. “[New York] provides a template and covers a lot of securities and contracts, but it doesn’t cover everything.”

Many corporations “are getting nervous that everything is going to be very last-minute, which will make [an] orderly transition very difficult,” said Sarah Boyce, an associate director at the Association of Corporate Treasurers, a UK lobby group.

Industry players holding out hope of further delays to the switchover may be disappointed. Randal Quarles, the Fed’s vice-chair of supervision, hinted in a speech last month that entities continuing to issue new Libor contracts after year-end could face penalties, and the full court press on Congress suggests a desire to resolve the issue once and for all.

“We have long suspected that American regulators would soon be switching to the stick-hand on Libor reform after the carrot failed to mobilise sufficient production away from Libor,” said Daniel Krieter, a director in the fixed income strategy group at BMO Capital Markets. “It appears that process has begun.”

Regulators at last week’s hearing appeared to have already convinced some lawmakers to back a national rule, with support coming from both sides of the political aisle.

“This is a very important transition for our financial markets,” said Steve Stivers, Republican representative of Ohio. “Republicans and Democrats both want to get this transition right, and we stand ready to work with the administration and the SEC, FHFA and the Federal Reserve in any way we can.”

Revival of bonds as buffer for market shocks

The recent run-up in government bond yields is a gift to any fund manager fretting over market risks ranging from geopolitics to leverage.

It is true that the first quarter of this year was no fun for holders of government bonds, which dropped in price on the largest scale in four decades. But bond bulls took one for the team.

The pullback means that, just as Russia and the US once again lock horns, and as the Archegos implosion stirs concerns over potentially systemic risks stemming from plentiful global leverage, government bonds again offer something of a safety net.

Led by the US rates market, the biggest in the world and a foundation for global asset prices, bonds tumbled in the opening months of 2021, spooked by the chance of higher inflation as the global economy emerges from pandemic lockdowns.

Bondholders took fright at the notion that supersized fiscal stimulus packages, particularly in the US, might generate a sufficiently rapid rise in consumer prices that bonds’ fixed regular returns appear to shrink or even that central banks might signal an intention to tap the brakes on their essential monetary support — truly, the stuff of investors’ nightmares.

For some fund managers, yields remain too feeble. But for others, they are now high enough to cushion mixed portfolios against a range of risks, and to act as a shock absorber that has helped to produce a respite from volatility.

At the longer end of the maturity spectrum, US 30-year debt now yields about 2.3 per cent. That is towards the lower end of the range that has prevailed for most of the past decade. But compared with the collapse to 0.7 per cent in the darkest days of the coronavirus crisis of 2020, and the 1.3 per cent area it held for most of the year, it is positively lavish.

This provides investors with a super-safe asset that they can use to balance out risks in other areas. Eric Lonergan, a macro hedge fund manager at M&G Investments, said he has been adding US 30-year debt to his portfolio, as it now offered “room for diversification”.

“You don’t care about diversification when things are going right,” he said. “You care when something goes wrong. Right now I have a high degree of confidence that if that happens, Treasuries will do well. It’s insurance against anything . . . except much higher US inflation.”

Global stock indices remain at or close to record highs and, without a bizarre change of heart from central banks, they appear destined to keep pushing higher. But geopolitics — including stand-offs between Russia and Ukraine, and China and Taiwan — or acts of God like natural disasters, can always flare up and spark a rush into safe retreats that will rise in price when the going gets tough.

But it is not only acts of God and of politicians that are playing on investors’ minds. Some also point to the recent blow-up of family office Archegos Capital Management as a sign that markets are littered with unstable excesses.

Bill Hwang’s Archegos misfired in large part because of leverage. His bets were overly concentrated, leaving him stranded when one stock tumbled. But the incident hit harder because the bets were supercharged with borrowing. The rampant use of total return swaps, which allow users to bet on a share price without owning the shares outright, meant he was in effect renting investment banks’ balance sheets on an eye-popping scale.

Considered alongside the surge in trading by inexperienced amateurs in January — sometimes, again, using leverage, albeit on a much smaller individual scale — and the relentless frenzy for cryptocurrencies and even digital art, it is easy to build a case that the ocean of cash sloshing around the global system could easily, and unexpectedly, capsize some ships.

“We should not underestimate how, in an increasingly interconnected global financial system, ‘stuff happens’,” wrote Steven Major, chief bonds analyst at HSBC and one of the most strident voices in favour of continued investor demand for bonds. 

“There is far too much leverage in the system, much of which may not be visible until something happens. And when these shocks come, money flows to the safest of safe havens, US government bonds invariably being the first choice.”

That may be overly gloomy. Bonds specialists, after all, thrive on doom — it is their job to think of things that can go wrong. And a rethink on leverage is already under way among banks and regulators. Still, it is not hard to imagine leverage gaining traction as a pressing global concern, and bond markets picking up the slack.

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Abu Dhabi’s Mubadala looks beyond resource roots

Abu Dhabi’s most active investment fund Mubadala is turning away from its roots as it cuts its holdings in energy and other commodity-related assets while ramping up investments in technology, healthcare and disruptive industries.

Khaldoon al-Mubarak, chief executive, said the $232bn fund’s strategy shift would mean more selldowns in “legacy commodity sectors” either through market listings or private placements, including an initial public offering for Emirates Global Aluminium.

Mubadala is also planning an IPO for Yahsat, a satellite company set up 14 years ago, and is considering whether to list GlobalFoundries, the US-based chipmaker into which it has pumped billions of dollars over the past decade that turned its first profit in 2019.

At the same time, the fund is increasing its investments in Asia’s two powerhouses as it aims to double its assets under management by 2030.

“The sectors we like all have a significant growth trajectory in China and if you look at the overall portfolio and the percentage of coverage we have in China it’s nowhere near where it should be,” Mubarak told the Financial Times. “The same applies for India.”

Mubadala deployed more funds and “monetised” more assets last year than the highs it hit in 2019, when it invested $18.5bn and raised $17bn through divestments, Mubarak said, adding that annual results in June would reveal higher income.

The shift in strategy reflects Abu Dhabi’s thinking as its leaders increasingly focus on developing tech-related hubs and industries rather than manufacturing. It also fits with the deepening economic ties between the United Arab Emirates and Asia.

Born out of petrodollar wealth, Mubadala, chaired by de facto UAE leader Sheikh Mohammed bin Zayed Al Nahyan, has embodied Abu Dhabi’s ambitions for the past two decades.

In the 2000s it was tasked with diversifying the oil-dependent economy and making strategic overseas investments. The fund drove greenfield projects including a desert aircraft parts plant and its huge aluminium business, as well as real estate, energy and tourism.

Mubadala garnered a reputation as the Gulf’s most professional state investment vehicle. When another, the International Petroleum Investment Company, became embroiled in the 1MDB fraud, its assets were folded into Mubadala, further boosting its firepower.

But its industrial projects have had mixed success. The aerospace parts factory, which opened in 2009, only employs about 600 people, while plans to establish a semiconductor plant in Abu Dhabi after Mubadala pumped billions of dollars into GlobalFoundries never made it off the drawing board.

Its overseas exposure, meanwhile, became heavily weighted to the US, which accounts for more than $100bn of the fund’s assets under management, as it partnered with groups such as General Electric and Carlyle. Mubadala on Friday invested $75m in Recursion Pharma through an IPO, raising its stake in the US company to about 11 per cent. 

Today, its partners are more likely to be SoftBank, US private equity company Silver Lake and Google. Mubadala was one of the anchor investors in SoftBank’s Vision Fund, pumping in $15bn, and its biggest deals last year were a $2.4bn commitment to a partnership with Silver Lake and a $1.2bn investment in Indian conglomerate Reliance Industries’ digital upstart Jio Platforms.

Silver Lake said on Wednesday it would invest $800m in Group 42, an Abu Dhabi-based artificial intelligence and cloud computing company in which Mubadala has a significant stake.

Mubadala this year formally switched its core areas of investment from the likes of petrochemicals, aerospace and manufacturing to direct investments, disruptive industries and real estate and infrastructure.

It announced a multibillion-pound “sovereign investment partnership” with the UK last month, pledging £800m to a life sciences fund and a commitment to make similar investments in British tech, green energy and infrastructure over five years.

“We are not going to take a pause, the momentum is there and it’s the whole point with this shift in the portfolio,” Mubarak said. “I’m not saying we are going to completely exit headwind sectors, but the strategy of redeployment and rebalancing our portfolio strategy . . . has proven to be successful”.

The changes began two years ago as Mubadala’s development mandate diminished and it focused more on returns while reducing its exposure to sectors once at its core but now facing “headwinds”.

This included multibillion-dollar sales of stakes in companies such as European gas company Cepsa and chemicals group Borealis as the fund has cut it exposure to energy, petrochemicals and mining by about a third to 45 per cent. Mubarak expects a further drop to 20-30 per cent of the portfolio.

He said Mubadala was considering its options with GlobalFoundries, a capital-intensive business that has struggled to compete with market leaders Taiwan Semiconductor Manufacturing Company and Samsung Electronics.

“It’s a very challenging industry, a very competitive industry, [and] we went through lots of ups and downs . . . but the thesis [for the investment] was the right one,” Mubarak said. “Now GF has reached that point where it’s really in the right place and ready to go to the next level. Is that next level an IPO, is it something else? This is what we will decide.”

He said Mubadala’s focus in Abu Dhabi was now on the development of new industries in the UAE where “we can . . . be competitive globally and where we can have scale”.

“It’s that next industrial play. Life sciences, that’s a sector we know is going to be growing immensely and we have the sort of competitiveness in that space where we can create the right industries here,” Mubarak said. “Technology is [another] area we are very strong in.”

Gaming inspires new worlds of virtual work

It is an average work day at home in London. It is raining, but I am busy in a world of tropical islands suspended mid-air over a blue ocean, jotting notes on a whiteboard during a brainstorming session. Later I teleport to the “rooftop” bar to shoot hoops and drink a virtual beer with my fellow collaborators.

This is Gemba’s VR world, where, through an Oculus headset, immersive executive masterclasses and other collaborative meetings are enhanced by 3D presentations, virtual Post-it notes and whiteboards (and a relaxing clear sky).

As we emerge from lockdowns and into hybrid working, employees are unlikely to be in the office all together every day — with some companies going fully remote permanently. VR tools such as Gemba’s, and more accessible 2D desktop applications, are designed to help avoid Zoom fatigue and encourage more natural exchanges — or “water cooler” moments.

Gemba was developed by the Leadership Network, an executive training provider and, given the pandemic, its decision to develop the VR experience was “fortuitous”, says Dominic Deane, Gemba’s managing director, as he gives me a virtual guided tour. During the crisis, bookings have increased by 150 per cent.

As I drift among other avatars (with neutral floating robot torsos), it feels surprisingly natural and easy to use with the two-hand controls provided. “It needs to be as intuitive as possible,” Deane adds. The headset, while still a little heavy, is portable and cordless.

While the technology is at the high end of bringing together employees, managers and executives dotted all over the world — cutting the cost of business travel and the time employees need to be away from the office — cheaper 2D apps, such as Reslash, Topia and Around, are providing imaginative collaborative environments designed to make exchanges more fluid.

“We call ourselves the antithesis of Zoom,” says Ashwin Gupta, founder and CEO of Reslash, which provides different rooms — such as a coffee bar and lobby — where “spatial audio” means groups can gather in the same virtual space but can’t hear each other unless they sidle up to one another.

Gupta and his co-founders thought about what it would be like if teams could have multiple conversations without going into breakout rooms, doing daily group work together but in the same space.

For example, people from one team might be hanging out in the corner of one room — your screen — and someone may want to put a question to another team on the other side. A user simply moves themselves across (individuals appear via their camera in little bubbles) and give a virtual tap on the shoulder.

Different teams can hang out together, have chats and ask questions, rather than having to set up a video call. Employees can be together all day if they want or they can just drop in to see who’s there.

PhishCloud, a cyber security company, stumbled across Reslash and decided to try it out “as Zoom definitely wasn’t cutting it”, says Terry McCorkle, chief executive. Reslash has replicated some office interactions, “but that’s not to say that in person time is not important,” he adds.

Topia is another intriguing platform that provides illustrated greyscale environments. I found it rather like being in a book that had come to life, especially in a forest with a crackling campfire. Fun, but not too distracting.

Topia can be used for all sorts of gatherings, but in a work context, its founder, Daniel Liebeskind, says it’s about community and bringing people together. “It’s getting rid of isolation and facilitating those water cooler moments,” he says.

He is keen to stress that it is not a productivity tool and is an add on to apps such as Slack. “This is not a replacement for real life . . . what it does is give more people access.”

Over in the Swiss Alps, I meet Paul Hamilton and Andy Philippou of vTogether, one of two tech companies accredited by Topia to build bespoke worlds on their platform.

They say there is a “flippancy” that you do not get with video conferencing technology. In a similar way to VR, when using Topia, “you enter into behaviour that you would display in real life”, says Philippou.

Take the avatars for example: when exploring the spaces and stopping to have a chat, a certain degree of personal space is observed and, without thinking, you position yourself in a circle to chat, just as you would if you were talking in the kitchen at work or in a meeting room.

Topia has proved particularly useful for networking events. WeAreTheCity.com, a networking website for working women, has used bespoke Topia worlds for events such as conferences that have had to go online.

With Topia “there is no hierarchy”, says Vanessa Vallely, WeAreTheCity’s chief executive and founder. It can make people feel less awkward, so “it makes networking easier and it’s easier to navigate for those who are more introverted”.

But how will all this software evolve in a world of hybrid work?

You can still build strong connections with others and do things together without using VR for every meeting, says Jeremy Dalton, head of VR at PwC, the professional services firm.

Demand for headsets has increased both within the firm and from clients.

Dalton adds that he doesn’t see VR and 2D apps “cannibalising” each other’s markets. “It’s not easy getting hundreds of headsets to users across the world.” And with the apps, “you don’t even need to download anything, you just log in like [Microsoft] Teams or Google Meet,” he says.

Meanwhile, with 2D apps, there is lots of scope for workers to experiment as they figure out what works best for them.

Kyle Hurst, PhishCloud’s chief technology officer, believes the platform reduces the need to travel around the globe for on-site meetings.

Post-pandemic, could a merging of worlds be upon us? Gupta of Reslash is very enthusiastic about how the lines between real and virtual interactions could be blurred. “It completely boggles the mind,” he says. Potentially a virtual office ecosystem could exist within a real one. “The possibilities are endless,” he adds.

Matsuyama’s golf triumph is also Japan’s

Last Monday, a rumour swirled among Tokyo bankers that CVC’s $20bn private equity buyout proposal to Toshiba had been quietly cooked-up on a golf course.

If true — and, while plausible, there is no evidence — it would nevertheless have ranked a distant second among Japan’s most engrossing golf stories of the week. Nothing, of course, could top the triumph of Hideki Matsuyama in becoming the first Japanese player to win The Masters.

Several moments stood out amid the great fizz of joy uncorked by the 29-year-old’s victory and the jubilation that, at long last, Japan’s best really was the world’s best. There was the desperation of interviewers as they attempted to prise words of delight from one of the world’s most laconic sportsmen. There was the much-tweeted footage of Matsuyama’s caddie returning the flagpole to the 18th hole and bowing in respect to the course.

But most telling were the sobs of the Japanese golf commentators. Veteran broadcasters were so choked with ecstasy that they blubbered the word sumimasen, or sorry, as the game’s final scenes played out.

Those tears, in all their spontaneity, genuineness and relief, felt like they belonged to the entire sport of golf in Japan — a pursuit into which the nation has diverted the sort of money, ingenuity, time and perseverance normally reserved for wars or weddings. The overwhelming sense was that while Matsuyama’s triumph was his, it was also something both deserved and overdue for Japan.

Consider how devotedly the world’s third-biggest economy has chipped and putted towards this outcome. After a slow start in the early 20th century, Japan’s golf addiction soared in tandem with its economic rise from the 1970s, reaching an acme of participation and expenditure just after the bubble burst in 1991. The government clocked the notional number of Japanese golfers that year (many will not have actually played a proper round) at about 18m.

Participation is well down from the levels of that era, but private equity funds still see huge opportunity in the growing ranks of retiree golfers. One recent report calculated that the number who played at least one round in 2019 was still almost 6m, or 5.5 per cent of the adult population.

Significantly, in an economy where the revenues from many leisure activities are in decline, golf has held steady for almost a decade, with players and equipment sales rising in 2019 and a reported 170,000 new players taking up the sport in 2020, despite the pandemic. Although some 200 courses have closed in the last decade, Japan still has 3,100 across 2,227 facilities, placing it second in the world after the US.

What such statistics fail to capture is the formidable force of will behind Japan’s love affair with golf. There is the very existence of those 3,000 courses in a country which is about three-quarters mountain and the rest either intensively farmed or urbanised. Construction was only part of the challenge.

Byzantine land laws required would-be operators to navigate dark labyrinths of legalese and lobbying to convince small and often fabulously ornery landowners to lease the plots necessary to build the courses. Just as awesome is their flawless maintenance, given the way that the natural world, with belligerent fertility, seems to do all it can in Japan to ruin a pristine fairway. 

For those who adore the sport, there is also the act of will in pursuing a hobby that remains expensive and where courses are often a considerable distance from where most people live, requiring brutally early morning starts to make the tee-time.

Finally, there are the extended acts of will required of many Japanese — both players and their families — of pretending to be OK with a thief of time that feels deliberately crafted to disguise work as leisure. For those obliged to devote weekends to clients and bosses, it is a burden. For those complicit in such obligations, golf can look a lot like power abuse.

The joyous tears of the commentators were undoubtedly shared with a great many other Japanese who have waited for a Matsuyama to emerge and knock in that final, championship-winning putt. Having paid such stupendous dues, it was high time Japan received from golf what it was owed.

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Australia targets vaccine nationalism and carbon tariffs on European tour

Australia will ask the EU to lift export restrictions on vaccines and drop a plan to introduce carbon tariffs on imports from outside the bloc in high-stakes talks due to begin on Monday.

Dan Tehan, Australia’s trade minister, told the Financial Times that he would warn his European counterparts about the dangers of introducing protectionist measures as the world seeks to bounce back from a coronavirus-induced recession.

He will also try to re-energise talks on an Australia-UK free trade deal, which have stalled over concerns in London about opening its market to Australian farm imports.

“Ultimately the world will go backwards if protectionism runs rife following this Covid-19 pandemic,” said Tehan, who will meet his counterparts in Germany, France, Brussels and London in the coming days.

“I think all of us now need to be stepping up and making sure that everything we do takes a liberalising approach rather than a protectionist approach.”

Canberra has blamed the EU for delays affecting 3m doses of the Oxford/AstraZeneca vaccine, which have severely disrupted the country’s inoculation programme. It has also undermined Australia’s efforts to distribute vaccines to Papua New Guinea, a Pacific neighbour suffering a deadly wave of Covid-19.

Tehan said in an interview that “vaccine nationalism” made global efforts to combat the pandemic “fraught” and difficult to plan. Canberra wanted to discuss with the EU and World Trade Organization how countries could work together to boost vaccine production.

Dan Tehan, Australia’s trade minister, said he also planned to confront Brussels over planned carbon border tariffs, which he described as ‘in no one’s interest’ © EPA-EFE

Brussels said it had only blocked a single shipment of 250,000 doses of AstraZeneca vaccines to Australia on the basis that the company had not fulfilled its contractual obligations to the EU. It denied playing a role in disrupting the export of 3m vaccines to Australia.

However, Tehan said Brussels had sent signals to AstraZeneca that any further applications for exports of vaccines outside the bloc would be rejected.

“They’ve [AstraZeneca] been encouraged not to apply and that has meant that 3mn doses that we thought we had contracted for haven’t arrived here in Australia,” he said.

He added that New Zealand’s trade minister had phoned him to say he could speak for Wellington as well on concerns that “vaccine nationalism” would hurt the entire Pacific region.

Tehan will also use his first trip to Europe as trade minister to lobby his counterparts to drop plans for a carbon border adjustment mechanism. The scheme is intended to increase the cost of imports from non-EU countries that have not signed up to the Paris climate goals or committed to net-zero emissions. Supporters said it was critical to preventing “carbon leakage”, whereby one nation’s attempts to cut emissions push fossil fuel use elsewhere.

Canberra, which has refused to commit to net-zero emissions by 2050, is concerned the measures could hit Australian exporters.

“Carbon border tariffs will be used as protectionist measures and that’s in no one’s interest,” said Tehan, who defended Australia’s environmental record, adding that it had met its targets under the Kyoto and Paris climate pacts.

“We should be looking at very positive ways to deal with this through liberalisation and through reducing tariffs on environmental goods and services rather than seeking to put additional tariffs in place.”

Tehan said he also wanted to advance talks on a free trade deal with the UK, which had failed to meet his predecessor’s target of an agreement by the end of 2020.

He said negotiators needed to be more ambitious and move beyond debates over animal welfare standards, a big issue in opening access to the UK market for Australian farm products.

“What we want to make sure is the free trade agreement is about actually liberalising market access for agriculture, rather than being a debate on who’s got the best standards,” he added.

“Given the current structures of both our economies, in many ways the UK has more to gain from the full liberalisation of goods and services than Australia does.”