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Europe Opens $80 Trillion Shadow Banking Pandora’s Box: Will Seek To Collapse Repo “Collateral Chains”; Banks and brokers face a clampdown on using assets they hold for clients as collateral for their own trades

Europe Opens $80 Trillion Shadow Banking Pandora’s Box: Will Seek To Collapse Repo “Collateral Chains”

Tyler Durden on 05/24/2013 10:51 -0400

In what may be the most important story of the day, or maybe year, for a world in which there already is an $11 trillion shortfall in high-quality collateral (and declining every day courtesy of Ben’s monetization of Treasury paper) so needed to support the deposit-free liability structures of the shadow banking system (as most recently explained here), Bloomberg has just reported that Europe may begin a crackdown on that most important credit money conduit: the $80 trillion+ global shadow banking system, by effectively collapsing collateral chains, and by making wanton asset rehypothecation a thing of the past, permitted only with express prior permission, which obviously will never come: who in their right mind would allow a bank to repledge an asset which may be lost as part of the counterparty carnage should said bank pull a Lehman. The result of this, should it be taken to completion, would be pervasive liquidations as countless collateral chain margin calls spread, counterparty risk soars all over again, and as the scramble to obtain the true underlying assets finally begins.

From Bloomberg:

Banks and brokers face a clampdown on using assets they hold for clients as collateral for their own trades as part of European Union moves to bolster market stability and rein in shadow banking. The European Commission is weighing whether firms should have to obtain formal consent from their clients before being allowed to reuse assets to back other trades, according to a document obtained by Bloomberg News. The consent would be enshrined in a “contractual agreement” between the parties. The handing over of collateral is an integral part of repurchase agreements, or repos — one of the activities under review by global regulators as part of their efforts to regulate shadow banking. The reuse of clients’ assets poses a potential threat to financial stability should one of a chain of firms that handled the securities go bankrupt, according to the document prepared by commission officials and dated May 15. Uncertainty about who holds an asset can fuel panic in times of market stress, according to the paper. “Complex” chains of collateral can make it difficult for investors to “identify who owns what, where risk is concentrated and who is exposed to whom,” according to the document. “This has consequences for transparency and financial stability.” Under the plans being weighed by the commission, banks and brokers holding securities for clients wouldn’t be allowed to reuse the assets for trading on their own account — speculation on the markets aimed solely at boosting their own revenues, according to the document. The Financial Stability Board has estimated that the global shadow-banking system was worth $67 trillion in 2011, with EU-based activities accounting for about $31 trillion.

Here’s the kicker: collateral chains collapse on their own when confidence and faith in the financial system is evapoarting. This is usually manifested in soaring variation margin, and demand for delivery of collateral (which having been pledged at 10 or more different places just doesn’t actually exist). In other words, the last thing Europe needs is to force the aftereffect of a plunge in systemic confidence to be imposed upon the market participants! And yet, it is doing just that.

Personality, social media and marketing: A plan to assess people’s personal characteristics from their Twitter-streams

Personality, social media and marketing: A plan to assess people’s personal characteristics from their Twitter-streams

May 25th 2013 |From the print edition

IN AMERICA alone, people spent $170 billion on “direct marketing”—junk mail of both the physical and electronic varieties—last year. Yet of those who received unsolicited adverts through the post, only 3% bought anything as a result. If the bumf arrived electronically, the take-up rate was 0.1%. And for online adverts the “conversion” into sales was a minuscule 0.01%. That means about $165 billion was spent not on drumming up business, but on annoying people, creating landfill and cluttering spam filters.

Which might, in the modern, privacy-free world of sliced and diced web-browsing analysis, come as something of a surprise. Marketing departments gather terabytes of data on potential customers, spend fortunes on software to analyse their spending habits and painstakingly “segment” the data to calibrate their campaigns to appeal to specific groups. And still they get it almost completely wrong. Read more of this post

Eavesdropping on secret communications is about to get harder, thanks to quantum mechanics

Eavesdropping on secret communications is about to get harder

May 25th 2013 |From the print edition

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CRYPTOGRAPHY is an arms race between Alice and Bob, and Eve. These are the names cryptographers give to two people who are trying to communicate privily, and to a third who is trying to intercept and decrypt their conversation. Currently, Alice and Bob are ahead—just. But Eve is catching up. Alice and Bob are therefore looking for a whole new way of keeping things secret. And they may soon have one, courtesy of quantum mechanics. Read more of this post

The mismanagement of Indian cricket reveals India’s wider failings

The mismanagement of Indian cricket reveals India’s wider failings

May 25th 2013 |From the print edition

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CRICKET is like a religion in India, it is said—especially by Indians, who take almost as much delight in their love of the sport as in the contest between bat and ball. Nothing, they suggest, unites their vast and varied country so much as its devotion to what was once an English summer game. That is one reason why the epic mismanagement of Indian cricket matters. The other is that it gets to the heart of the cronyism and high-level abuse that plague India more widely.

Every cricket season brings news of a fresh scam or intrigue including, on May 16th, the arrest of three cricketers and a dozen bookmakers for alleged match-fixing in the country’s most popular domestic tournament, the Indian Premier League (IPL). Investigators in Delhi hint that the players were paid indirectly to underperform by the Mumbai gangsters who control much of India’s enormous illegal gambling industry (betting on cricket is against the law in India). If they are right, the nexus between racketeers, bookmakers and greedy cricketers, exposed in 2000 in one of the biggest scandals in modern sport, remains in place. This would not be surprising: India’s government and the men who run cricket there have done almost nothing to dismantle it. Read more of this post

Zhang Yong, creator of the wildly popular Chinese hot-pot chain Hai Di Lao, may not have the global cult following Steve Jobs, but in China’s food and beverage industry, he isn’t far behind

May 24, 2013, 12:00 PM

Star Entrepreneur’s Business Advice: Don’t Listen to Me

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Zhang Yong, the creator of the wildly popular Chinese hot-pot chain Hai Di Lao, may not have the global cult following of Apple founder Steve Jobs, but in China’s food and beverage industry, he isn’t far behind. In 2011, bookstores stocked the shelves with “Learn from Hai Di Lao.” Media outlets are clawing for an opportunity to interview him, a spokeswoman said.

The question for the entrepreneur—who has built a growing empire of 75 restaurants that serve sliced lamb, beef and vegetables to be boiled in spicy broth—is always, What’s next? And how did he come up with the idea to distinguish his chain with service perks like manicures, board games and noodle performances?

Mr. Zhang, who confesses that after 20 years of eating hot pot he doesn’t particularly like it, said he plans to take Hai Di Lao public, but isn’t sure in which market. The timing isn’t optimal right now, he adds, noting that other Chinese companies have listed and flopped almost instantaneously. Read more of this post

The Unintended Consequences of High Expectations and Pressure on New CEOs

The Unintended Consequences of High Expectations and Pressure on New CEOs

Kevin Krieger University of West Florida

James S. Ang Florida State University

April/May 2013
Journal of Business Finance & Accounting, Vol. 40, Issue 3-4, pp. 501-526, 2013

Abstract: 
We provide empirical tests of a general version of targeting theory that greater scrutiny could lead to executive abuses. Our results show that new CEOs under higher expectations or pressure are more likely to report meeting analyst forecasts; however, this apparent superior performance dissipates after excluding firms having characteristics synonymous with earnings manipulation. We find evidence that new CEOs under greater pressure are considerably more likely to engage in manipulation while the link between expectations and manipulation is much weaker. The results are strongest for new CEOs whose firms report meeting forecasts and do not “walk down” earnings estimates.

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