BusinessDay 06 Mar 2018
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Tuesday <strong>06</strong> <strong>Mar</strong>ch <strong>2018</strong><br />
FT FINANCIAL TIMES<br />
C002D5556<br />
BUSINESS DAY<br />
A1<br />
World Business Newspaper<br />
Shadow banking<br />
grows to more than<br />
$45tn assets globally<br />
Financial Stability Board data include China<br />
and Luxembourg assets for first time<br />
CAROLINE BINHAM<br />
Negotiations cut short after Washington offers worse package than EU<br />
The US is offering Britain a<br />
worse “Open Skies” deal after<br />
Brexit than it had as an EU<br />
member, in a negotiating stance that<br />
would badly hit the transatlantic operating<br />
rights of British Airways and<br />
Virgin Atlantic.<br />
British and American negotiators<br />
secretly met in January for the first<br />
formal talks on a new air services<br />
deal, aiming to fill the gap created<br />
when Britain falls out of the EU-US<br />
open skies treaty after Brexit, according<br />
to people familiar with talks.<br />
In a sign of the battle Britain faces<br />
to replicate its existing rights, the talks<br />
were cut short after US negotiators<br />
offered standard bilateral conditions<br />
that would reduce access and in effect<br />
exclude all main UK-based carriers<br />
because they would not meet the<br />
criteria for ownership and control.<br />
Replacing Libor<br />
proves harder in<br />
practice after scandal<br />
trol over the sector.<br />
But defining shadow banking<br />
can be a slippery business. The FSB’s<br />
exercise starts with looking at the<br />
assets of anything that is not a bank,<br />
including pension funds, insurers,<br />
and “other financial institutions”,<br />
or OFIs. That wider ecosystem accounts<br />
for $160tn assets worldwide,<br />
compared with $340tn total financial<br />
assets globally.<br />
Meanwhile, OFIs grew by 8 per<br />
cent to $99tn; a faster level than<br />
banks, insurers and pension funds.<br />
OFIs now account for 30 per cent of<br />
the entire financial system’s assets;<br />
the highest level since 2002.<br />
From OFIs, the FSB then drills<br />
down further to its “narrow” definition<br />
of shadow banking, which this<br />
year included granular data from<br />
China for the first time.<br />
Luxembourg hosts collective<br />
investment vehicles, which the FSB<br />
underscored as being susceptible<br />
to runs by investors. In early 2017, it<br />
put out measures that G20 countries<br />
should adopt to mitigate runs —<br />
including “gates” to stop investors<br />
getting immediate access to their<br />
cash in exceptional circumstances.<br />
Such collective investment<br />
schemes account for 72 per cent<br />
of the FSB’s narrow definition of<br />
shadow banking.<br />
Meanwhile, in China, the growth<br />
of trust companies was particularly<br />
striking. They grew 47 per cent in<br />
2016; a faster rate than the average<br />
33 per cent growth rate seen between<br />
2011 to 2015, the FSB said. The assets<br />
of Chinese trust companies — which<br />
conduct asset-management business<br />
for investors — totalled $3.4tn<br />
in 2016. That equated to 6 per cent<br />
of domestic Chinese assets and 3.4<br />
per cent of the OFI category’s total.<br />
UK-US Open Skies talks hit Brexit turbulence<br />
KATRINA MANSON, ALEX<br />
BARKER AND TANYA POWLEY<br />
Page A3<br />
One person attending the London<br />
meetings to “put Humpty Dumpty<br />
back together” said: “You can’t just<br />
scratch out ‘EU’ and put in ‘UK’.” A<br />
British official said it showed “the<br />
squeeze” London will face as it tries<br />
to reconstruct its international agreements<br />
after Brexit, even with close<br />
allies such as Washington.<br />
Negotiators are confident of an<br />
eventual agreement to keep open<br />
the busy UK-US routes, which account<br />
for more than a third of current<br />
transatlantic flight traffic. But there<br />
are legal and political obstacles that<br />
could impede the two sides from<br />
reaching a deal in time to give legal<br />
certainty to airlines booking flights a<br />
year in advance.<br />
“We have every confidence that<br />
the US and UK will sign a deal that is<br />
in everyone’s interests and that IAG<br />
will comply with the EU and UK own-<br />
Continues on page A2<br />
Trump tax cuts herald $1tn bonanza for US investors<br />
Growth in stock buybacks outstrips investment in capex, R&D and employees<br />
US companies are on track this<br />
year to return a record $1tn<br />
to shareholders, as Donald<br />
Trump’s tax cuts prompt boards to<br />
boost buybacks and dividends at a<br />
faster rate than their capital expenditure,<br />
research and development<br />
budgets or wage bills.<br />
The expected surge in returns to<br />
shareholders is based on forecasts<br />
that a lower corporate tax rate, incentives<br />
to repatriate overseas cash and<br />
strong earnings will supercharge<br />
growth in share repurchases by S&P<br />
500 companies.<br />
Goldman Sachs estimated in February<br />
that buybacks would jump by<br />
23 per cent to $650m this year, while<br />
JPMorgan predicted on Friday that<br />
they would rocket by as much as 50<br />
per cent to $800bn.<br />
The 11 per cent rise in capital<br />
expenditure and 10 per cent increase<br />
in R&D Goldman expects for the year<br />
would exceed anything seen in the past<br />
Noble co-CEO paid $20m in 2017 despite record $5bn loss<br />
DAVID SHEPPARD AND<br />
NEIL HUM<br />
The departing co-chief executive<br />
Noble Group was paid<br />
more than $20m in 2017 as the<br />
troubled commodity trader slumped<br />
to a record $5bn loss and headed<br />
for a restructuring that will all but<br />
wipe out shareholders and some<br />
bondholders.<br />
Jeff Frase, who ran the oil and<br />
gas businesses at Singapore-listed<br />
Noble, took home $3.4m in sharebased<br />
payments and almost $17m<br />
in other so-called emoluments, as<br />
part of a package to keep him on<br />
until the operations he oversaw<br />
were sold.<br />
The bumper pay package was<br />
more than what the rest of Noble’s<br />
executive directors received combined<br />
last year and is $5m more<br />
than what perpetual bond holders<br />
stand to receive under a proposed<br />
debt-for-equity swap, on which the<br />
company’s survival now hinges.<br />
The restructuring has faced<br />
sharp criticism from some share<br />
How the Middle East<br />
is sowing seeds of a<br />
second Arab spring<br />
<strong>Mar</strong>k Carney, governor of the Bank of England who also chairs the FSB, said it was ‘vital’ that resilience of the shadow<br />
banking sector was maintained © PA<br />
ANDREW EDGECLIFFE-<br />
JOHNSON<br />
Page A4<br />
three years, but is likely to be dwarfed<br />
by the growth in shareholder returns, as<br />
the bank also sees dividends expanding<br />
by 12 per cent to $515m.<br />
President Trump and other Republicans<br />
have hailed the expected<br />
boost to companies’ investment plans<br />
from the tax bill that was signed into<br />
law in December. Treasury Secretary<br />
Steven Mnuchin said 70 per cent of<br />
the benefits would flow to employees<br />
while Democrats countered that the<br />
surge in buyback spending showed<br />
investors, big corporations and top<br />
executives will benefit far more than<br />
their staff.<br />
Nancy Pelosi, the House minority<br />
leader, said in January that the bonuses<br />
several companies promised employees<br />
were insignificant “crumbs”<br />
by comparison with their spending on<br />
buybacks and dividends. Just Capital,<br />
a non-profit with a focus on social<br />
justice, estimates just 6 per cent of the<br />
tax windfall will go to workers.<br />
Companies have discretion over<br />
when to execute the buyback programmes<br />
they have announced,<br />
Shadow banking” grew by<br />
nearly 8 per cent globally<br />
to more than $45tn on a<br />
conservative measure after<br />
international rulemakers<br />
were able to include detailed data<br />
from China and Luxembourg for<br />
the first time.<br />
Shadow banking — the parts of<br />
the financial system that perform<br />
banklike functions such as lending<br />
but do not have the same safeguards<br />
— accounted for 13 per cent of total<br />
global financial assets, according<br />
to the Financial Stability Board, the<br />
international group of policymakers<br />
and regulators that makes recommendations<br />
to the G20.<br />
The data form part of the FSB’s<br />
annual monitoring exercise of shadow<br />
banking, which it says is necessary<br />
in order to calibrate policy responses.<br />
The inclusion of China and<br />
Luxembourg — home to a large part<br />
of the world’s investment funds —<br />
makes this year’s monitoring report<br />
the most detailed yet.<br />
The report covers 2016 figures.<br />
But since then China has launched<br />
a continuing crackdown on its<br />
shadow-banking sector.<br />
China contributed $7tn, or 15.5<br />
per cent, of the $45tn assets comprising<br />
the FSB’s conservative definition<br />
of shadow banking, while<br />
Luxembourg contributed $3.2tn, or<br />
7.2 per cent.<br />
The data come after the FSB said<br />
last summer that it had “tamed”<br />
the most toxic parts of the shadowbanking<br />
industry, which was widely<br />
blamed for exacerbating the financial<br />
crisis a decade ago. Since then,<br />
reform has been under way led by<br />
the FSB to try to exercise more conand<br />
bondholders who have claimed<br />
Noble is giving a better deal to<br />
senior creditors and management<br />
ahead of the interests of other stakeholders.<br />
Senior bondholders will get<br />
70 per cent of the restructured company<br />
and management, including<br />
Will Randall, the remaining chief<br />
executive, will control up to 20 per<br />
cent of the restructured business.<br />
The payment to Mr Frase, which<br />
was revealed in a supplementary filing<br />
to the annual results last week,<br />
came after the former JPMorgan<br />
and Goldman Sachs oil trader<br />
agreed to remain at the helm of the<br />
North America energy business,<br />
which was split up and sold to Vitol<br />
and Mercuria last year.<br />
Mr Frase resigned from the company<br />
after the sale of the oil business<br />
to Vitol in November to pursue<br />
“other interests” the company said<br />
at the time.<br />
Included in the $20m total was a<br />
$5m loan to Mr Frase from the company<br />
that was written off at the end<br />
of the year. People familiar with the<br />
payments say most of the remaining<br />
making estimates of full-year figures<br />
uncertain. However, Chris Costelloe of<br />
Birinyi Associates, an equity research<br />
group, said: “We are expecting a larger<br />
amount of buyback announcements<br />
and executions than we’ve seen in<br />
previous years.”<br />
US companies have announced a<br />
record $187bn in new buyback plans<br />
so far this year, according to Birinyi.<br />
Cisco and Wells Fargo lead the list,<br />
with plans to repurchase $25bn and<br />
$20bn respectively.<br />
Boards’ willingness to tap their record<br />
cash reserves has been bolstered<br />
by a strong fourth-quarter earnings<br />
season that outstripped analysts’<br />
forecasts for both profits and — more<br />
unusually — revenues. Thomson Reuters<br />
estimates earnings grew by 15.2<br />
per cent in the quarter on an 8.2 per<br />
cent jump in revenues.<br />
Howard Silverblatt, senior index<br />
analyst at S&P Dow Jones, said expectations<br />
of a robust year for earnings,<br />
coupled with the acceleration in buyback<br />
announcements, had supported<br />
US equities.<br />
$12m was related to an arrangement,<br />
demand by the company’s key lenders,<br />
to keep Mr Frase in position<br />
until the oil business was sold.<br />
The supplementary figures also<br />
revealed that Richard Elman, the<br />
British-born trader who founded<br />
the company over 30 years ago, is<br />
still paid as an executive director.<br />
He became ‘chairman emeritus’<br />
of the company in May after restructuring<br />
expert Paul Brough<br />
was appointed to oversee the company’s<br />
debt restructuring talks. His<br />
daughter and son were also shown<br />
in the filing to be on the company’s<br />
payroll, earning S$150,000<br />
to S$200,000, and S$50,000 to<br />
S$100,000 respectively.<br />
Mr Frase, who was hired by Mr<br />
Elman to build the company into<br />
a global force in oil trading, has not<br />
yet revealed his future plans. On his<br />
LinkedIn profile he has updated his<br />
position to ‘Chief Relaxation Officer’<br />
of Frase & Co.<br />
Noble declined to comment. Mr<br />
Frase was not immediately available<br />
to comment on Monday.