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Working a Business Conference PERSONAL JOURNAL 29
EUROPE EDITION
VOL. XXXII NO. 169
$1.75 (C/V) - KES 250 - NAI 375 -
WSJ.com
TUESDAY, SEPTEMBER 30, 2014
Hong Kong Rallies Grow After Clashes HONG KONG—As pro-democracy rallies spread across Hong Kong on Monday, the government offered minor concessions and police defended the use of tear gas against protesters over the weekend. By Chester Yung, Jacky Wong and Jason Chow Tens of thousands of people stretched across Hong Kong Island’s main shopping and business districts and across Victoria Harbour into Kowloon. Newcomers joined the protests, which took on an air of spontaneity, growing as the day progressed with marchers walking and sitting on the city’s normally trafficchoked roads. Few police and almost none wearing riot gear were seen near the protesters, who were inundated with food, water and protective gear by supporters. There appeared to be no central organizing authority. “If I must name a leader of the movement, it is Hong Kong itself,” said Amy Wong, a university student who said she joined protests out of anger at the tactics used by police. The protests stayed peaceful and there was no serious damage reported, even during
the confrontations with police. On Monday morning, protesters bagged garbage from the night before, sorting plastic bottles for recycling. Protesters started calling their quest the Umbrella Revolution for the umbrellas they carried to deflect both pepper spray and the hot sun and were decorating them with phrases such democracy and freedom. The protests are driven by Beijing’s decision to impose limits on how Hong Kong elects its leader. But after the police repeatedly used tear gas against protesters on Sunday, support for the protests grew among Hong Kong residents angry over tactics not seen in the city for nearly a decade. Throughout the day, the crowds erupted in spontaneous chants calling for the resignation of Hong Kong Chief Executive Leung Chun-ying, whom they see as responsible for both the election limits and the use of force on Sunday. Protest leaders and prodemocracy lawmakers also called for Mr. Leung to quit. Legislator Alan Leong said his Please turn to page 10
Democracy push creates dilemma for Xi Jinping......... 11 Heard on the Street: Tough times for retailers.................. 32
Syrian Kurds Wait in Camps With Islamic State at Their Backs
Getty Images
Syrian Kurds compete with the elements Monday at a refugee camp near Suruc, on the Syria-Turkey border. Related articles on page 9
Spain Court Blocks Catalonia Vote
BY MATT MOFFETT AND DAVID ROMÁN
MADRID—Spain’s Constitutional Court late Monday suspended a planned referendum on independence in Catalonia, opening a potentially volatile phase in a long-running dispute between the central government and the country’s most important
industrial region. The court agreed to hear a request, filed hours earlier by the government in Madrid, to outlaw the nonbinding referendum. The court’s decision effectively bars Catalonia from going ahead with the vote, scheduled for Nov. 9, while it considers the case. The widely expected decision was a legal victory for
Fed Rate Policies Give Foreign Banks a Lift BY RYAN TRACY AND JON HILSENRATH
Banks headquartered outside the U.S. have been unlikely beneficiaries of the Federal Reserve’s interest-rate policies, and they are likely to keep profiting as the Fed changes the way it controls borrowing costs. Foreign firms have received nearly half of both the $4.7 billion in interest the Fed paid banks so far this year for the money, called reserves, they deposit at the U.S. central bank, and the $5.1 billion it paid last year, according to
an analysis of Fed data by The Wall Street Journal. Those lenders control only about 17% of all bank assets in the U.S. Moreover, the Fed’s plans for raising interest rates make it likely banks will see those payments grow in coming years. Though small in relation to their overall revenues, interest payments from the Fed have been a source of virtually risk-free returns for banks including Deutsche Bank AG, UBS AG, Bank of China Ltd. and Bank of TokyoMitsubishi UFJ, according to bank regulatory filings. U.S.
£1.70
banks including J.P. Morgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. are also big recipients of Fed interest payments, according to the filings. “It is a small transfer from U.S. taxpayers to foreign taxpayers,” said Joseph Gagnon, a former Fed economist at the Peterson Institute for International Economics. The transfer, he added, was a side effect of Fed policy, not a goal. Behind the payments is a complex interplay between new government regulatory policies and new methods the Fed has developed to control
short-term interest rates. The Fed has pumped nearly $3 trillion into the banking system since the 2008 financial crisis, increasing banks’ reserves, in efforts to stabilize markets and boost economic growth. Since 2008, it has paid banks interest of 0.25% on those reserves. The Fed affirmed this month that the rate it pays on reserves will be the primary tool it uses to raise short-term borrowing Please turn to page 26 Opinion: Central bankers as central planners........................ 15
Prime Minister Mariano Rajoy. But it could aggravate political discontent in a region where activists have mobilized massive pro-independence rallies in recent years. “Today we start entering into the area of unknowns,” said Andrew Dowling, a specialist on Catalan and Spanish politics at Cardiff University. “Madrid thinks it’s a legal is-
sue, and once they squash it legally, it’s game over. Madrid is going to find out it ain’t game over.” Legal experts say a decision could take months. Analysts said there was an outside possibility the regional government in Barcelona would defy the court and go ahead with the vote on Please turn to page 6
Inside There are many subjects of German soul-searching. Among them: Is the country saving too much water? Off the Wall................31
Like UBS, European banks must reorganize into simpler structures. Then they may still have to issue more equity or other capital. Heard on the Street.............................................32
2 | Tuesday, September 30, 2014
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THE WALL STREET JOURNAL.
PAGE TWO
What’s News— i
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n Japanese companies are turning to Southeast Asia in search of cheaper labor, stepping into territory that has been firmly in China’s sphere of influence. 17 n A flurry of new cancer-drug data are offering fresh promise for immunotherapies—drugs that boost patients’ immune systems. 17 n Tesla Motors Inc. has big ambitions for selling its electric cars in China, but first it has to get its chargers accepted by skeptics. 18
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World-Wide n Ashraf Ghani, an international development guru who was sworn in as Afghanistan’s president, will have to try turning theory into practice. 3 n The German government expressed disgust at images purporting to show security guards abusing asylum seekers at a shelter in Germany. 5 n Israeli Prime Minister Benjamin Netanyahu said defeating Islamic State but allowing Iran to move to the brink of nuclear weapons would be to “lose the war” against what he called “militant Islam.” 9
n German prosecutors have brought charges against the former chief executive and seven former board members of Hypo Real Estate, five years after the lender was bailed out by the government. 19
n Ihor Kolomoisky, a powerful figure behind Ukraine’s government, warned demarcation lines in the cease-fire deal could lead to the creation of an enduring de facto rebel state. 4
n Large banks generate more than $1 billion a year in revenue by helping hedge funds and other clients reduce taxes through a strategy that U.S. authorities have criticized. 23
n Vladimir Yakunin, a longtime friend of President Putin, says he isn’t surprised tensions have exploded between what he sees as ineluctable rivals— the U.S. and Russia. 4
n Encana Corp. said it agreed to acquire Texas shale-oil producer Athlon Energy Inc. for $5.93 billion, giving it a large land position in the oil-rich Permian Basin. 20
n U.K. Treasury chief George Osborne said the Conservative Party would cut billions of pounds more of spending to tackle the U.K.’s deficit. 6
n Pimco suffered roughly $10 billion of withdrawals following the Friday departure of cofounder Bill Gross. 25
Agence France-Presse/Getty Images
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Business & Finance
Saudi Arabian pilots shown at an undisclosed location last week after a mission to strike Islamic State targets in Syria.
Help From Arab States Opens New Front in Fight [ Capital Journal. ]
BY GERALD F. SEIB
n Hillary Clinton is bringing an unsentimental approach to policy debates ahead of the 2016 presidential contest, playing down her personal story. 8
Reuters
What’s Online
MoneyBeat
Up-to-the-minute news and analysis on deals, markets and finance around the world. blogs.wsj.com/moneybeat
The American offensive against Islamic State is a big deal, of course, inserting the U.S. into a fight in a region it has been trying to exit for most of the Obama presidency. But in the long run, that may not be the most significant part of what transpired in recent weeks. The most important development is that Arab states, at America’s urging, have finally started to take part in defending themselves against an extremist threat. If that development lasts— a big if—it represents a paradigm shift, one that is underappreciated amid the debate over America’s role in the fight against Islamic State. At a time when two nations at the heart of the Arab world— Syria and Iraq—appear to be disintegrating, the adult states around them need to play a bigger role in stabilizing the region. Ultimately, that isn’t a job the U.S. can perform alone, from the outside. If the Islamic State threat marks the beginning of a stepping out by Arab states to play more of that role for themselves, it will mark a meaningful change in recent history. Five Arab nations—Saudi Arabia, the United Arab Emirates, Jordan, Bahrain and Qatar—have actually flown combat aircraft alongside American planes since President Barack Obama broadened the attack on Islamic State a week ago. And the effort hasn’t been a symbolic, one-hit wonder; fighter jets from Saudi Arabia and the U.A.E. flew coordinated missions with American planes Friday, Saturday and Sunday. For longtime followers of the region, this is a startling development. For almost half a century, American soldiers and planes have been seen as the first line of defense for friendly but weak regimes, a role Washington willingly took on because it allowed the U.S. to ensure its own safe access to the region’s oil
fields. A change in that pattern could—actually, should—clear the way for a more sensible conversation about how the region’s sane regimes will defend themselves with some American help, not the other way around. Certainly one shouldn’t get too carried away with this thought just yet. The bulk of the air power deployed against Islamic State still is being provided by American forces, and there is little prospect that will change soon. Moreover, providing a little air power is far different from providing a lot of Arab boots on the ground if that is necessary in the long struggle that lies ahead. There also seem to be clear limits on what America’s Arab partners will and won’t do, and they remain reluctant to discuss their role publicly, a sign they fear a backlash from radical forces and perhaps their own citizens for going after Islamists this way. It’s far from clear how steadfast America’s Arab partners will remain when, as seems inevitable, they are targeted for revenge attacks from Islamic extremists enraged at their cooperation with the U.S. Still, as recently as a few weeks ago, some American officials thought the idea that Gulf states would deploy their forces against Islamic State fighters at all was a fantasy. That’s because the U.S. for years has been helping Persian Gulf states build up world-class air forces that the royal families of the region seemed happy to have but highly reluctant to use. From 1950 through 2006, the Saudis bought more than $60 billion worth of military equipment from the U.S. Then, in 2010, the Obama administration agreed to sell $60 billion worth of advanced aircraft and associated equipment to the Saudi kingdom in the largest arms deal in American history. Though the Saudis put some of that hardware to use helping the U.S. oust Saddam Hussein’s Iraqi forces from Kuwait in 1991, the purpose of more recent purchases—and sales of similar equipment to the U.A.E.—was clear: It was designed to bolster
Persian Gulf Arabs’ defenses against a threat from Iran. But now, America’s friends have to ask themselves whether the biggest threat to their longterm stability comes from Iran on the outside or from a new generation of multinational Islamic extremists sinking roots within the Arab world. Perhaps those states’ doubts about whether they can rely on Mr. Obama to send the cavalry may be having the salutary effect of convincing Arab leaders they need to saddle up themselves to deal with that threat. Meanwhile, the U.S. has thinking of its own to do. There are five well-established nations in the region: Egypt, Turkey, Saudi Arabia, Iran and Israel. Is there some way, explicitly or implicitly, to stitch together their shared interest in a more stable region? Given historical hatreds among them, to say nothing of Iran’s destabilizing nuclear ambitions, that seems far-fetched. But until recently, so did the idea that unaffiliated Islamic radicals would set up a caliphate in the heart of the Arab world.
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THE WALL STREET JOURNAL.
Tuesday, September 30, 2014 | 3
NEWS
BY NATHAN HODGE AND MARGHERITA STANCATI
KABUL—As an international development guru, Ashraf Ghani literally wrote a manual on fixing failed states. As the Afghan president sworn in on Monday, he will have to try turning that theory into practice. Mr. Ghani, a former U.S. citizen and onetime World Bank official, took office in the country’s first democratic transfer of power. At a ceremony in the heavily guarded presidential palace in Kabul—with foreign ambassadors, visiting dignitaries and Afghanistan’s most prominent politicians in attendance—Mr. Ghani pledged to stamp out corruption and called for peace with the Taliban insurgents. He inherits from the 13-year reign of former President Hamid Karzai a weak state apparatus with empty coffers and a robust Taliban insurgency that managed to strike in the heart of Kabul on Inauguration Day. But perhaps his biggest challenge will be keeping together his fragile coalition, the product of a U.S.-brokered power-sharing deal with the election’s runner-up, former foreign minister Abdullah Abdullah. “His position is even weaker than Karzai’s: Karzai at least was ruling alone, but Ghani will need to reach a consensus on all his decisions,” said Haroun Mir, a Kabulbased political analyst. In his first remarks as Afghanistan’s leader, Mr. Ghani said his country was “besieged with problems,” but he also expressed hope that “politics will no longer be an instrument of instability, but of improvement.” Messrs. Ghani and Abdullah feuded bitterly over the outcome of the June election, with Mr. Abdullah alleging that victory had been stolen from him through widespread fraud. Mr. Karzai and the U.S. helped mediate between the two presidential contenders, who this month agreed to set up a national unity government with Mr. Abdullah as chief executive, a position akin to prime minister. In his address on Monday, Mr. Ghani called on the Taliban and other militant groups to come to the negotiating table with Kabul. The Taliban marked the day with fresh attacks that killed at least 15 people, five of them civilians, and injured at least 12. An anthropologist by training who stayed abroad during his homeland’s civil war and anti-Soviet jihad, Mr. Ghani has a résumé that differs sharply from that of most other Afghan politicians. He taught at Johns Hopkins University and cowrote a book that sought to provide a recipe for state-building called “Fixing Failed States.” “He’s already put reforms into practice, and he’s done that in China and India and Russia as well,” said Clare Lockhart, Mr. Ghani’s co-author. After spending years working for the World Bank, Mr. Ghani returned to Afghanistan shortly after the 2001 toppling of the Taliban. He joined the public service and built a reputation as an effective minister of finance. Most recently, he served as transition adviser, a role that helped raise his national profile as he traveled countrywide.
His accession to the presidency clears the way for the signing, expected Tuesday, of a bilateral security agreement with Washington. The pact, which Mr. Karzai refused to sign, is needed for around 12,000 U.S. and allied troops to remain in the country after the coalition’s mandate expires in December. It is also tied to crucial funding the Afghan government needs to pay its civil servants and security forces. Mr. Ghani has vowed to revive
the country’s flagging economy and to address widespread corruption that tainted the administration of his predecessor. Tackling the problem of corruption would entail challenging the vested interests of regional strongmen who were empowered during Mr. Karzai’s time in office. Many of those individuals will be part of the new government. —Ehsanullah Amiri and Habib Khan Totakhil contributed to this article.
European Pressphoto Agency
New Afghan Leader Targets Corruption, Taliban Violence
Ashraf Ghani speaks during his swearing-in ceremony in Kabul on Monday.
4 | Tuesday, September 30, 2014
THE WALL STREET JOURNAL.
EUROPE NEWS
Ukraine Tycoon Warns of Truce Risks
Influential Governor Says Cease-Fire’s Demarcation Lines Threaten to Create Enduring De Facto Rebel State BY ALAN CULLISON
Out of Control
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Ukrainian officials want to keep separatists from making further inroads in the country’s east.
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DNIPROPETROVSK, Ukraine— This spring, Ukrainian billionaire Ihor Kolomoisky, the newly appointed governor of this region in the country’s southeast, called for building a 1,900-kilometer electric fence along the border with Russia to keep Moscow’s forces out. Today he has scaled back his plans. After months of fighting that has damaged Ukraine’s armed forces, Mr. Kolomoisky is instead beefing up the defense of his province—far west of where he first proposed the fence—in case Moscowbacked militants penetrate deeper into Ukraine. Mr. Kolomoisky is also voicing a new worry: that lines drawn in an uneasy cease-fire this month to separate government troops from rebels will become permanent. That, he said, could creating a de facto rebel state on the border of his province and a so-called frozen conflict like those Russia has used to put pressure on other former Soviet republics. Despite the cease-fire, clashes between Kiev’s forces and pro-Russia rebels on Sunday left at least 12 people dead in some of the worst violence since the agreement was signed this month. The fighting, which continued into Monday, was concentrated around the Donetsk International Airport, a strategically and symbolically important site that is the only part of the city held by government troops. German Chancellor Angela Merkel said that amid such clashes, the European Union remained far from easing sanctions on Russia, which has been assisting the rebels, and warned that the West must keep up its pressure on Moscow. “We will do our best that a reasonable situation can arise out of this cease-fire in Ukraine,” she said Monday after a meeting with her Finnish counterpart Alexander Stubb. “As a result, it is currently no option to lift existing sanctions. Instead it is necessary to keep up the pressure to achieve a reasonable political process.” Mr. Kolomoisky, who used his powerful business empire to fund Ukraine’s ragtag army and build mili-
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Shelling near Donetsk’s airport damaged a local car dealership on Sunday. tias that fought along with government troops, said he favors the peace deal hammered out by Ukraine President Petro Poroshenko and Russian President Vladimir Putin in the Belarus capital of Minsk this month. But that is because he sees no alternative. “It’s the best we can hope for,” Mr. Kolomoisky said in an interview. “We are fighting for our existence.” Parts of the plan will be hard for Ukrainians to swallow. It calls for Ukraine to cede control of Donetsk International Airport—site of Kiev’s first major stand against Russiabacked rebels, who were repelled with heavy losses when they attacked the airport in May. Ukrainian troops have hung on to the airport since then, despite daily attacks. On Monday, Ukrainian military spokesman Col. Andriy Lysenko vowed that Kiev had no intention of giving the airport up, saying it “was, is and will be” controlled by Ukraine. Fighting has been breaking out on other points of the demarcation line. Mr. Kolomoisky warns that the separatists could yet push to the west and north to take more Ukrai-
nian territory. He added there is also a danger that the conflict could become entrenched for a long time. With a border to Russia, he said, the region could become a “more difficult problem than Transnistria,” the Russia-backed enclave that has hamstrung Moldova’s westward ambitions in a frozen conflict for more than two decades. Mr. Kolomoisky’s curtailed ambitions mirror a wider fatigue in Ukraine with the war after evidence of a more direct intervention by Russian forces in August. Mr. Poroshenko has noted that the Ukrainian army lost 65% of its heavy equipment in recent fighting. With the U.S. and Europe refusing to provide military aid, a cease-fire and negotiations are the only chance Kiev has to regain the territories of Donetsk and Luhansk. But the rebels don’t appear to be interested in re-integration with Kiev. As a concession to the rebels, Mr. Poroshenko pushed through a law offering limited autonomy for the Donetsk and Luhansk regions that rebels want to make an independent state. The law was so controversial that deputies voted on it in a closed
Mariupol
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session of parliament in Kiev. The rebels have largely ignored the concession. They are refusing to take part in national parliamentary elections next month and are pushing ahead with plans for their own elections in November that would name officials to their own autonomous government. Talks between Russia and Ukraine in Minsk initially focused on setting up a buffer zone along the Russia-Ukraine border that would prevent any more incursions by Russian forces into Ukrainian territory. Today, however, the talks have focused on a line much farther west—the line of contact between rebel and Ukrainian troops. The latest drafts of the Minsk accord don’t mention the Russian-Ukrainian border, which is now effectively controlled by Russia and the separatists. Kiev last week ordered that border closed, but officials admit there is no way they can enforce the closure. Mr. Kolomoisky’s support for the war effort made his office in his regional capital a kind of an alternative headquarters for Ukraine’s de-
Source: National Security and Defense Council of Ukraine Sea of Azov
The Wall Street Journal
fense. Huge military maps span the walls of the office of one of his assistants, marking out the defensive lines held by Russian troops, and the Ukrainians facing them. Mr. Kolomoisky said that if Ukraine doesn’t soon regain control of its border with Russia, rebel-held territory could soon become similar to the Russian-backed Moldovan breakaway region of Transnistria, which has issued its own currency and doesn’t recognize the Moldovan seat of government in Chisinau. The demarcation line and the autonomy of the rebel-held territory is meant to be temporary, he said. But a looming danger, he said, is creeping permanence. Mr. Kolomoisky said Ukraine would have a much more difficult time than Moldova in luring its breakaway region back into the fold, because Ukraine’s breakaway state would share a long border with Russia. “It’s a serious problem,” he said. “And how long it will be prolonged—that’s hard to predict.” —Nick Shchetko in Kiev, Ukraine, and Andrea Thomas in Berlin contributed to this article.
Putin Ally Undeterred by Sanctions Over Ukraine MOSCOW—Vladimir Yakunin, a longtime friend of President Vladimir Putin, is still indignant that he was slapped with U.S. sanctions in March. But he says he isn’t surprised that tensions have exploded between what he sees as ineluctable rivals—the U.S. and Russia. “As you [Americans] say, ‘Nothing personal, just business,’ ” Mr. Yakunin says, slipping into the English he perfected as a Soviet diplomat in New York in the 1980s. He calls the current “demonization” of Mr. Putin in the West inaccurate and “a crude propaganda trick.” As rounds of sanctions raise the pressure on Russia’s limping economy, Western officials struggle to assess whether they also are changing the mind-set of Kremlin insiders like Mr. Yakunin, who runs Russia’s national railway. Mr. Yakunin’s answer is a resounding no. “That’s wishful think-
ing,” he scoffs. On the contrary, he says the Ukraine crisis has vindicated his long-held stance that U.S. efforts to sabotage Russia have continued since the end of the Cold War, using weapons as varied as Hollywood movies and monetarist economics. Critics who once dismissed a study he co-wrote a year ago as “conspiracy theory” now recognize “it’s a very realistic assessment of the situation,” he says. The shift in attitude suggests repairing the worst breach in EastWest relations since the Cold War could be difficult, if not impossible, as long as Russia’s current leadership remains in power. “Within the elite, this ideological matrix has really taken over,” says Olga Kryshtanovskaya, a sociologist who has studied the Russian ruling class. “They believe there is no way to mobilize the nation around the leader without an enemy.” The Kremlin portrays Ukrainian
President Petro Poroshenko as an American stooge, installed after a U.S.-fomented revolution overthrew his pro-Russia predecessor and bent on bringing his country into the U.S. orbit—presenting an existential
Bloomberg News
BY GREGORY L. WHITE
Mr. Yakunin in St. Petersburg in May.
threat to Russia’s security. Such views, conveyed nightly by anti-Western reports on state television, have spread broadly in Russian society. Fully 74% of Russians in a poll this summer said they viewed the U.S. unfavorably, up from 44% in January and the highest since the poll was first conducted in 1990. Mr. Yakunin says the U.S.’s real agenda is broader. Not only is the U.S. determined to prevent Russia’s emergence as a global power, he said, but at the same time it aims to sabotage Europe’s economy by forcing the European Union to follow suit. For Mr. Yakunin and his colleagues, the idea professed by some in the U.S. of a cooperative relationship with Russia is absurd. “If Ukraine hadn’t happened, something else certainly would have,” he says. Mr. Yakunin, 66 years old, has known Mr. Putin since the early 1990s, when they were both part of a small summer-cottage cooperative
outside St. Petersburg called Ozero. Most of its members have since taken up powerful jobs in business and politics—and been targeted by Western sanctions. Asked whether Mr. Putin shares his views, Mr. Yakunin is coy, saying that he will speak only for himself, although that reflects “other people my age and in posts more senior than mine.” He has denied persistent allegations of corruption, which he says are the work of unnamed enemies trying to sabotage him. He says the U.S. sanctions—banning him from obtaining a visa and freezing any assets he might hold in the U.S.—have “created certain complexities” for him, and admits the broader measures are hurting an economy that was already slowing. But he says it is up to the West— Europe, in particular—to see the error of its ways and return to traditional values that will inevitably bring it closer to Russia.
THE WALL STREET JOURNAL.
Tuesday, September 30, 2014 | 5
EUROPE NEWS
BY HARRIET TORRY
BERLIN—The German government expressed disgust on Monday at images purporting to show security guards abusing asylum seekers at a shelter in western Germany—as Europe’s most populous country is struggling to cope with an upsurge of refugees. Prosecutors investigating the incident released a video and a photo on Sunday they allege shows a refugee being ordered to lie in his vomit and a guard pinning the head of a handcuffed man under his boot. Both were alleged to have been taken at a facility in Burbach, a town in North Rhine-Westphalia. The images sparked outrage among lawmakers and a debate about whether the task of caring for often-traumatized asylum seekers, whose numbers are on course to almost double for the second straight year, should be outsourced to private contractors. “We are a humane country. In Germany, people’s dignity is respected,” Steffen Seibert, Chancellor Angela Merkel’s spokesman, said on Monday in reaction to the released pictures and video, which German media compared with the mistreatment of Iraqi detainees at Baghdad’s Abu Ghraib prison in 2003. Julia Klöckner, a lawmaker and member of Ms. Merkel’s coalition, said the incident should prompt a review of the country’s refugee policy and infrastructure. “If this is the consequence of outsourcing, of low finances and a lack of checks on the suitability of guards, then one needs to seriously think hard,” she said. Asylum applications in Germany hit their highest levels in more than a decade this year. While the numbers soared to more than half a million a year in the mid-1990s because of the conflict in then-Yugoslavia, the numbers dwindled from the mid-1990s until the conflict in Syria broke out. Germany had nearly 116,000 asylum applications between January and August, nearly as many as the 127,000 for 2013 and a sharp increase from just 78,000 in 2012. The increase has caused concern about municipalities’ capacity to cope and has fueled political debate. In a Deutschlandtrend opinion poll of 1,008 voters for state broadcaster ARD published late last week, respondents were split on the whether Germany should accept more refugees, with 45% against and 48% in favor. The poll was conducted between Sept. 22 and 24 and has a margin of error of 1.4 to 3.1 percentage points. Berlin will host a conference on the Syrian refugee crisis on Oct. 28. Since the start of the conflict in Syria, around 60,000 Syrian refugees have either arrived in Germany or are in the process of claiming asylum. Germany and Sweden alone count for more than half of asylum applications to Europe from Syria between January 2012 and June 2014, according to the United Nations Refugee Agency. In a recent interview with weekly Der Spiegel, Interior Minister Thomas de Maizière called for other countries in Europe to show “solidarity” and shoulder more of the burden. Johannes Daheim, spokesman for the Siegen public prosecutor’s office, said “at least five” suspects were being questioned about the images re-
leased on Sunday. He said a journalist he didn’t identify passed the video to police. Prosecutors found the separate image on a security guard’s cellphone after searches of two suspects’ homes and at the shelter, Mr. Daheim said. No charges have been filed, and the law firm representing SKI Wach- und Sicherheitsgesellschaft mbH, the security company, didn’t respond to requests for comment. In a statement on its website, European Homecare GmbH, operator
of the housing facility, said it is “shocked that such assault could have happened in one of our institutions.” In a statement on its website dated Sept. 29, SKI didn’t admit any abuses took place, but said, “The occurrences which have come to light are treacherous, of course. We have immediately taken the available consequences concerning labor law and we are supporting the police and prosecutors who are investigating the suspects.”
Reuters
Images Said to Show Abuse Of Asylum Seekers in Germany
A boy stands near a home for asylum seekers in Burbach, Germany, on Monday.
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EUROPE NEWS
U.K. Finance Chief Pledges Cuts BIRMINGHAM, England—U.K. Treasury chief George Osborne said Monday that the Conservative Party would cut billions of pounds more of public spending to tackle the deficit, part of a tough-on-the-economy message the party hopes will win over voters in the 2015 general election. Mr. Osborne, who made the announcement in a speech to the center-right party’s conference, is looking to draw the battle lines with the main opposition Labour Party over the economy ahead of the election in May. The Conservatives also hope their party’s economic message will distract attention from the party’s divisions over Europe, which have led to the recent defections of two Conservative lawmakers to a small anti-Europe rival party. With the economy a key issue for many voters, the main opposition Labour Party has accused the government of fueling a “cost-of-living crisis” by focusing too much on austerity policies to cut the nation’s budget deficit. But Mr. Osborne sought Monday to argue that the Conservatives were best able to take the tough decisions needed to get the deficit down and the economy back on track. Mr. Osborne, in his speech, focused on welfare and other cuts. He said a Conservative government, if re-elected, would freeze workingage state benefits—such as jobless support—for two years from April 2016. That would save £1.6 billion ($2.6 billion) in the financial year ending April 2017 and around £3.2 billion in the following year. The U.K. currently spends about £100 billion annually on welfare payments for people of working age. Mr. Osborne said he would save a further £13 billion in cuts to government departmental spending. The government plans to announce details in the autumn financial statement on Dec. 3 of how it would raise hundreds of millions of pounds by cracking down on multinationals that divert profits offshore to avoid paying corporation tax, Mr. Osborne said. Mr. Osborne and Prime Minister David Cameron, a close ally, have seen their Conservative Party rocked by the defection of two lawmakers to the rival anti-Europe U.K. Independence Party in the run up to the Conservative’s big annual autumn conference—the last before the election. Membership in the European Union is a key rift in the party. Some members are pushing to distance the U.K. or exit altogether while others, including the
prime minister, say they believe the U.K. is better off as part of the European club. Although the U.K.’s economy is growing at a solid pace—after its severe recession following the global financial crisis in 2008— many residents have yet to feel the benefits after several years where consumer prices rose faster than wages. Mr. Osborne made the case Monday that his economic plan is working. Unemployment is at a six-year low, according to official data, while the International Monetary Fund expects the U.K. to be among the fastest-growing of all major developed economies this year. But he also cautioned that there was more work to do. “I don’t stand here marveling at how much we have done. On the contrary, I’m humbled by how much more we have to do,” Mr. Osborne said in his speech. The U.K. still faces huge economic risks, including a large budget deficit and “dangerously high” national debt, Mr. Osborne added. He cautioned that key markets to which the U.K. exports in the eurozone weren’t growing. Mr. Osborne earlier this year said that eliminating the deficit required that the government find £25 billion in savings. On Monday, he said he wasn’t looking to raise taxes to plug the gap. “The fairest way to reduce welfare bills is to make sure that benefits aren't rising faster than the wages of the taxpayers who are paying for them,” Mr. Osborne said, adding that pensioner and disability benefit payments would be excluded from the party’s planned freeze in working-age state handouts. The Conservatives have blamed Labour for presiding over the economic crisis and warned that the opposition party would increase borrowing if it returns to power. Mr. Osborne criticized Labour leader Ed Miliband for forgetting to mention the deficit in his conference speech last Tuesday. “It is completely and totally a disqualification for the high office he seeks,” he said. Labour again criticized the Conservatives for lowering the highest rate of income tax while cutting public-sector pay in real terms since they came into office in 2010. “While working people have seen their wages fall by £1,600 a year since 2010, the Tories have once again shown they are the party of a privileged few at the top,” Chris Leslie, one of the party’s main economic spokesmen, said in a statement. “Labour will balance the books as soon as possible in the next parliament, but we will do so in a fairer way.”
BY MATTHEW DALTON
Getty Images
BY NICHOLAS WINNING AND JASON DOUGLAS
Mr. Osborne speaks on Monday to Conservatives in Birmingham, England.
Hard Sell
Economic growth in the U.K. has recently accelerated under the Conservatives, but the government has struggled to cut the deficit. Public-sector net borrowing, as a percentage of GDP
Seasonally adjusted GDP, change from previous quarter 1%
12%
0
8 Actual
–1
4
–2
0
2010 estimates 2014 estimates
–3
’08
’09
’10
’11
’12
’13
’14
–4 ’08 -’09
’10 -’11
’12 -’13
’14 -’15
’16 -’17
’18 -’19
Source: U.K. Office for National Statistics (GDP); U.K. Office for Budget Responsibility (net borrowing) The Wall Street Journal
Spain Court Blocks Referendum in Catalonia
Continued from first page Nov. 9. What seemed more likely, they said, were further street protests, and possibly early parliamentary elections that could bring an even more determinedly pro-independence government into power in Catalonia. Speaking after an emergency cabinet meeting before the court’s decision, Mr. Rajoy called the referendum “a grave attack on the rights of all Spaniards.” Such a vote “is against the law, beyond democratic law, divides Catalans, distances them from Europe
and the rest of Spain,” he said. Under the 1978 constitution, he said, all Spaniards must be consulted on issues of sovereignty. Catalan leader Artur Mas, who on Saturday signed a decree setting the date for the referendum, called the government’s lawsuit hostile and undemocratic. He implied the court was biased, speaking of the “supersonic speed” with which justices moved to hear the case. Catalans complain that their region doesn’t receive investments in proportion to the taxes it pays, and
Trial Begins In Belgium Of Alleged Jihadists
that the central government meddles in its linguistic and education policy. Spanish officials say Catalonia benefits from being part of Spain, and that many of the region’s problems are due to an incompetent and corrupt leadership class. Catalonia accounts for a quarter of Spanish exports. On Sunday, Mr. Mas’s government outlined plans to prepare 10,000 ballot boxes for the region’s 5.4 million voters and publicize the referendum with an online video. A big electronic clock was installed in downtown Barcelona over the week-
end, counting down the days and hours to Nov. 9. Mr. Rajoy said there was room for negotiation with Catalonia’s leaders over the region’s powers as long as Mr. Mas calls off the referendum. Mr. Mas “wants the government to find solutions to problems he has created by himself, through steps he took that he knew we couldn’t agree upon,” Mr. Rajoy said. “As long as I’m prime minister, Spanish law will be enforced…I’m willing to discuss anything, as long as it’s within the law.”
ANTWERP, Belgium—Belgian prosecutors laid out terrorism charges against 46 members of Sharia4Belgium, an extremist Islamic group they allege sent dozens of young Muslims to wage jihad in Syria. The trial is among Europe’s most ambitious legal efforts yet to crack down on radical Islamic groups that have allegedly sent thousands of European Muslims to fight with Islamic State and other terrorist groups in Syria. Sharia4Belgium, founded in Antwerp, helped turn Belgium into a hotbed for jihadist fighters going to Syria, Belgian authorities say. They estimate 300 Belgians have made the trip. Prosecutors allege that starting in 2011, the group worked with extremists in the U.K. and Lebanon to send people to Syria to fight with terrorist groups for the creation of an Islamic nation, purged of anyone except Sunni Muslims. The accused face charges ranging from carrying out kidnappings and murders in Syria to leading a terrorist group. Defense lawyers had yet to address the court on Monday, and no pleas were entered. Only eight of the defendants were in the Antwerp courtroom on Monday. Some others are thought to have been killed in battle, and officials say most of those still alive are fighting with Islamic State. Fouad Belkacem, the group’s leader and spokesman, sat in the courtroom. Along with others, he is charged with leading a terrorist group and of attacking a police station in Brussels. Bearded and bespectacled with long black hair, Mr. Belkacem smiled occasionally and whispered to other defendants as prosecutors read out the charges. Hakim Elouassaki, a 22-year-old from the Brussels suburb of Vilvoorde, sat a few feet away. Now shorn of the beard he previously wore, Mr. Elouassaki is accused of killing a civilian prisoner in Syria while fighting with Nusra Front, al Qaeda’s affiliate there, a charge his lawyer has denied. He suffered a shrapnel wound to his head in Syria, his lawyer has said, prompting him to return to Belgium. In the afternoon, another defendant, Bilal El Makhoukhi, 25, hobbled into the courtroom on crutches. Belgian media have reported that he was injured fighting in Syria. Among the family members of the alleged fighters in the courtroom were relatives of Brian De Mulder, a 21-year-old from Antwerp who converted to Islam, joined Sharia4Belgium and left for Syria in 2013. He hasn’t returned. “My brother was every day with Fouad Belkacem,” said Bruna Rodrigues, 26, during a break in the trial. “Before he was a Muslim, but he wasn’t a radical. After he began contact with these people, it became worse every day.” “I want to ask Belkacem: Where’s my son?” said Ozana Rodrigues Viana, Mr. De Mulder’s mother. “He took my son, to go to hell in Syria.” Mr. Belkacem’s lawyer declined to comment. Mr. Makhoukhi’s lawyer couldn’t be reached and Mr. De Mulder doesn’t have a lawyer.
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8 | Tuesday, September 30, 2014
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U.S. NEWS
BY PETER NICHOLAS
NEW YORK—When he first ran for president, Barack Obama’s themes were “hope” and “change.” Hillary Clinton, appearing at a conference last week, trumpeted what she called “evidence-based optimism.” That isn’t a phrase that lends itself to a campaign slogan, but these days it captures the unsentimental approach Mrs. Clinton is bringing to policy debates ahead of the 2016 presidential contest. Already one of the country’s best-known figures, Mrs. Clinton is playing down her personal story and instead keeping issues front and center. Her message is that she would bring to American politics a competence and analytical rigor. Mrs. Clinton’s office declined to comment for this article. But to the degree she is revealing much of anything about her private life, it is to gush over her growing family. Her daughter, Chelsea, gave birth Friday to Charlotte Clinton Mezvinsky, making Mrs. Clinton a first-time grandmother at 66 years old. In a Saturday tweet—accompanied by a picture of her cradling the baby—Mrs. Clinton wrote that she and her husband were “over the moon to be grandparents!” She also has begun emphasizing her roots in the Midwest, a region that can be a political bellwether. But while some potential 2016 Republican presidential candidates are showcasing their personalities as a reason to like and trust them, Mrs. Clinton for the most part is
making clear she would rather talk about something else. If the material is distinctly dry and unsexy, Mrs. Clinton doesn’t seem to mind. Mr. Obama defeated her in the 2008 Democratic primary in part because voters found his message and life story inspiring. But Mrs. Clinton doesn’t seem to be betting that charisma will decide things in 2016. She is bemoaning what she calls the “evidence-free zone” in American politics while celebrating “data” as the indispensable tool in choosing the best options. “Data, data, data,” she said at a Clinton Global Initiative panel discussion—another phrase not likely to find its way onto a bumper sticker. She talked about brain “hardware” and “neural connections” during one panel about childhood development and mused about new ways to measure gross domestic product during another appearance. “We obsess over metrics, get excited about data,” Mrs. Clinton said in a closing speech at the conference. Her focus insulates her to some degree from Republican attacks in the run-up to her announcement on whether she’ll be a candidate once more. It is hard to muster an attack based on a call for better data in American policy-making. What’s more, when she has ventured into details about her personal life, she has gotten into trouble. Some of her former advisers cringed earlier this year when the former first lady, U.S. senator and secretary of state said she hadn’t
Zuma Press
Clinton Keeps It About Policy, Not Personality
Hillary Clinton, shown in New York last week, is playing down her personal story and keeping issues front and center. driven a car since 1996—a result of her being under constant Secret Service protection. And she garnered little sympathy when she told a TV interviewer in June that she and her husband were “dead broke” when they left the White House in 2001. “Once she leaves the policy space and moves into personality, she just opens herself up to a broad range of attacks,” said Tad Devine, who worked for the presidential campaigns of Democrats Al Gore and John Kerry, among others. “It is much harder for opponents to deal with you as long as you occupy the policy space.” “Her comfort zone is talking more about policies and ideas than it is talking about herself and who she is,” said Peter Peyser, a longtime Democratic lobbyist.
If she runs for president, Mrs. Clinton eventually will need to present herself as more than a vessel for certain policy ideas, analysts say. Voters want to feel a connection to presidential candidates, and Mrs. Clinton would need to give them one. “She can be wonkette for some time, but running for president requires more than being a propeller head,” said Bill Whalen, who worked for former Republican President George H.W. Bush’s campaign in 1992. “You also have to propel a personality.” On the Republican side, prospective candidates are doing just that. New Jersey Gov. Chris Christie is emphasizing his bluntness and candor. Another potential GOP candidate, Sen. Rand Paul of Kentucky, is underscoring his independent streak—a willingness to part ways
with fellow Republicans who are quicker to call for U.S. military intervention. In recent weeks, Mrs. Clinton has dropped hints about the pieces of her personal life she is likely to showcase on the campaign trail. Family is emerging as major theme. In addition to talking about her new grandchild she also has been sharing stories about the hardships her late mother endured as a child. Expect Mrs. Clinton to invoke such biographical bits in pressing for policies that help shore up American families, one member of her circle said. “One of the themes you’re going to see a lot of is these issues around family,” this person said. “She can talk about that, and in a way, she’s living that.”
Immigrants Face Higher Bar as Standards Tighten BY ANA CAMPOY
Immigrants who enter the U.S. illegally are becoming less likely to be deemed eligible for asylum, as federal authorities tighten standards amid an increase in Central American migrants this year. As an initial step to request asylum, apprehended migrants who say they are scared to go back to their home country are screened to determine if they have “credible fear” of persecution or torture. In July, the most recent month available, 63% of those who claimed they were afraid to return were found to have met that criterion, down from 83% six months earlier, according to a report released to immigrant-rights groups by U.S. Citizenship and Immigration Services. The decline comes after the agency’s Asylum Division toughened the criteria its officers use during the interviews. The goal of the new guidelines, according to an agency official, is to ensure that immigrants with little to no chance of obtaining asylum in immigration court are quickly sent home. Immigrant advocates say the tougher screening criteria are preventing many immigrants from being able to make a case for asylum before a judge. “It’s turning away people who
may very well have been entitled to asylum protection,” said Eleanor Acer, refugee-protection director at Human Rights First, a New Yorkbased nonprofit group. The Asylum Division is one of many federal agencies that have been taxed by an influx of tens of thousands of immigrants who have illegally entered the country from Central America this year, many saying they were seeking refuge from gang violence and poverty. From October to June, the Asylum Division received 36,334 crediblefear claims from immigrants, surpassing the 36,035 in the 12 months of fiscal 2013, data from the office show. Immigrants from El Salvador, Guatemala and Honduras accounted for the majority of the claims. The office is responsible for screening migrants apprehended at the border, asking, for example, whether they are being persecuted because they belong to a specific social group or feel threatened because of their race or religion. If their claims are deemed credible, the immigrants are referred to immigration court, where a judge ultimately decides whether they qualify for asylum or other protection. Immigrants who go through that process, which can take years, are sometimes released in the U.S. until their cases are resolved.
Unaccompanied children arriving from Central America don’t go through the credible-fear process and are routed to the court system directly. The number of credible-fear claims surged fourfold from fiscal
2010 to fiscal 2013. During that span, the rate at which immigrants were found to have credible fear averaged 80%. The Citizenship and Immigration Services official said well below half of Central Americans are generally granted asylum by an im-
Flight to Safety As more immigrants claim that they would be persecuted or tortured if returned home, the government is becoming less likely to find them eligible for asylum.
Monthly credible-fear cases in FY2014 6 thousand
All decisions
5 4
Credible fear established
3 2 1 0
Oct.
July
Top nationalities with credible-fear cases Number of claims through the first nine months of FY2014 El Salvador
FY2013*
5,943
Guatemala
Ecuador
FY2014
13,307
Honduras
Mexico
% fear established
4,738 3,104 2,575
Note: Fiscal year ends Sept. 30. *Based on full-year data. Source: U.S. Citizenship and Immigration Services documents
60% 70
80
90 100
The Wall Street Journal
migration judge. The Asylum Division in February revised the lesson plan used to train asylum officers on credible-fear interviews. The guidelines specify that cases that have “only a minimal or mere possibility” of success don’t meet the standard for someone to make their case before a judge, according to a memo issued by John Lafferty, the division’s chief. In the subsequent months, the rate of immigrants who met the standard steadily declined, according to the report. The number of cases in which credible fear was established, however, continued to grow to more than 3,600 in July from roughly 2,300 in February as there was an overall increase in the number of people apprehended who claimed they were afraid to return home. Some conservative lawmakers say the changes at the Asylum Division don’t go far enough. Rep. Bob Goodlatte (R., Va.), who heads the House Judiciary Committee, introduced a bill in July to toughen credible-fear standards and make it more difficult for detained immigrants to be released before their claims are found to be genuine. “The Obama administration must take additional steps to ensure credible fear claims are not rubberstamped,” he said in a statement.
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Tuesday, September 30, 2014 | 9
WORLD NEWS
Netanyahu Warns on Islamic Militancy NEW YORK—Israeli Prime Minister Benjamin Netanyahu said defeating Islamic State but allowing Iran to move to the brink of nuclear weapons would be to “lose the war” against what he called “militant Islam.” Speaking at the United Nations General Assembly, Mr. Netanyahu equated the Sunni extremist group Islamic State with Hamas, Boko Haram in Nigeria, the Iranian regime and al Qaeda. He argued there was a growing threat from Shiite as well as Sunni movements in the Middle East and beyond. “The Islamic Republic is now trying to bamboozle its way to an agreement that will remove the sanctions it still faces and leave it with a capacity of thousands of…centrifuges to enrich uranium. This would effectively cement Iran’s place as a threshold military nuclear power,” he said. “Make no mistake—ISIS must be defeated,” he said, using Islamic State’s former name. “But to defeat ISIS and leave Iran as a threshold nuclear power is to win the battle but to lose the war.” Iran is negotiating a comprehensive nuclear agreement with six powers, which would see Tehran agree to concrete steps to constrain its nuclear activities in exchange for a phased lifting of sanctions. The deadline for those talks, which continued in New York this month, is Nov. 24. Iran, which has been supporting the Syrian regime and the Iraqi government in their fight against Is-
Getty Images
BY LAURENCE NORMAN
Israeli Prime Minister Benjamin Netanyahu addresses the United Nations General Assembly in New York on Monday. lamic State, denies it is seeking to develop nuclear weapons. The six-power group—the U.S., Germany, France, the U.K., Russia and China—have already accepted that Tehran should have some kind of future uranium enrichment program. In recent weeks, they have floated “creative” solutions to Iran, according to Western diplomats, which could leave some of Iran’s centrifuges in place but remove the infrastructure that makes them work. U.S. officials have insisted any agreement must significantly lengthen the time it would take Iran
to obtain enough fissile material for a nuclear weapon. Israel has long demanded a solution that would leave Iran with no enrichment capacity and without the infrastructure of a nuclear program. Mr. Netanyahu said the international community shouldn’t be “fooled by Iran’s manipulative charm offensive.” “Once Iran produces atomic bombs, all the charms and all the smiles will suddenly disappear. And it’s then that the ayatollahs will show their true face,” he said.
“There’s only one responsible course of action to address this threat: Iran’s nuclear capabilities must be fully dismantled,” he said. With peace negotiations with the Palestinians mothballed since the breakdown of U.S.-mediated talks in May, Mr. Netanyahu suggested that pushing rapprochement between Israel and pro-Western Arab states could serve as a new paradigm to advance what he said could be a “historic compromise” with the Palestinians. “Many have long assumed that an Israeli-Palestinian peace would
facilitate a broader rapprochement between Israel and the Arab world. But these days I think it may work the other way around,’’ Mr. Netanyahu said. “Namely that a broader rapprochement between Israel and the Arab world may help facilitate an Israeli-Palestinian peace. And that in order to achieve that peace, we must not only look to Jerusalem and Ramallah, but to Cairo, Amman, Abu Dhabi and Riyadh and elsewhere.” The overture to the Arab world echoed Mr. Netanyahu’s remarks during Israel’s fight with Hamas that the conflict had opened new possibilities for cooperation and even a “diplomatic horizon” with other countries in the region opposed to the Islamic militant rules of Gaza. However, such a development would require Saudi Arabia and the United Arab Emirates to depart from their long-standing practice of shunning open normalization of ties with Israel before progress is made with the Palestinians. Egypt was the only Arab state to make peace with Israel with no progress on Israeli-Palestinian ties. Mr. Netanyahu’s proposal to overhaul Israeli-Arab peacemaking efforts mirrors an initiative for a peacemaking overhaul by Palestinian President Mahmoud Abbas. During an address to the U.N. General Assembly on Friday, Mr. Abbas called on the Security Council to impose a deadline for talks on the creation of a Palestinian state in the West Bank and Gaza—an effort to pressure Israel on withdrawal through and a step away from U.S.led mediation.
Iraq’s Minorities Press to Set Up Their Own Militias BAGHDAD—Iraqi minority groups are pressing to set up militias to defend themselves against extremist group Islamic State, but complain they face resistance from a central government fearful that this would inflame separatist sentiments. The militias would be part of a U.S.-backed plan for a national guard. Members of these ethnic and religious minorities said they would wait until the government passes legislation setting up the force so as not to add to the country’s chaos. The minorities behind the push— particularly Yazidis, Turkmen and Christians—have borne the brunt the rapid advance of Islamic State, while the Iraqi military has failure to confront the Sunni insurgents. Their minority groups’ appeals to set up their own militias to defend themselves are growing louder. Fanning fears of leaders in Baghdad, Christians are pressing for their own semiautonomous region in northern Iraq, much like the one the larger Kurdish minority group already has. The Yazidis already have an active militia that has been battling Islamic State militants for months. “There is a fear of dividing the country due to demands made by different groups in Iraq,” said Ghassan al-Husseini, an adviser to Prime Minister Haider al-Abadi. “We believe that all minorities have the right to defend themselves, especially in their own areas. But we also believe it should not be away from the government.”
Agence France-Presse/Getty Images
BY MATT BRADLEY
Syrian Kurds watch clashes between Islamic State and Kurdish fighters. Mr. Abadi and other officials acknowledge that given the Iraqi military’s advanced state of disrepair, small ethnic and religious groups should be allowed to fight back and, in some cases, with close government supervision, receive arms and training from the state. But the same officials worry that these calls to arms will lead to calls for autonomy and may end up wresting political authority from Baghdad in a country already on the brink of splitting apart. Iraq’s political discourse already echoes with demands for independence. Leaders of the Kurdish minority have their own semiautonomous region and military force, which has received an influx of international aid. The Kurds have talked about holding a referendum on independence.
The oil-rich southern city of Basra has asked loudly for more ownership over its petrol resources. Some Sunni tribes in the country’s west have made common cause with Islamic State militants against the government. The central government has sought to tamp down talk of separatism. In a news conference on Sunday, former Prime Minister Nouri al-Maliki said calls for independence were “constitutional but inconvenient.” In a recent Friday prayer sermon, the powerful Shiite cleric Ayatollah Ali al-Sistani warned against dividing Iraq under the pretext of fighting Islamic State. The national guard program is meant to formalize the various irregular militias that have filled the void left by Iraq’s shattered military following Islamic State’s initial ad-
vance since June. While the details have yet to be ironed out, the plan would offer light weapons and armor to local forces who would fight mostly in their territory and under the command of local governments. Proponents said it would allow ethnic and religious groups to police themselves while also putting them under government oversight. That could help curb wartime sectarian abuses while allowing the central authority in Baghdad to present itself as the sole force safeguarding the country, said Zaid alAli, an Iraqi-American researcher and author of “The Struggle for Iraq’s Future.” “If you allow Turkmen, Yazidis or Christians to retake these areas, basically you’re saying that you’ve given up,” said Mr. Ali. “My impression is that they don’t want to give the impression that they have given up on keeping people safe.” Minority leaders said progress on the new law has been delayed even as the Sunni insurgency continues to hunt and kill minorities, particularly Christians, Yazidis, and Shiite Turkmen. While resentful of the government’s slack pace, most insist on convening fighting forces within the limits of the law so as not to be seen as contributing to Iraq’s disintegration. “The federal government should pay more attention to the different groups in the country,” said Hassan Toran, a member of parliament from the Turkmen Front, the political representation for the estimated half million Iraqi Turkmen. “We tried in the past to form armed groups, but the government de-
clined to accept them.” Many leaders within the Turkmen minority, who speak a language with roots in Turkish, would like to carve an independent state out of the violently contested, multiethnic province of Kirkuk. Some of Iraq’s approximately half million Christians have pushed for a semiautonomous region in the northern Nineveh valley—a stretch of barren land now almost entirely occupied by Islamic State. During the early days of the insurgency in June, some Christian leaders instructed adherents to put on military uniforms to give off an intimidating air of militancy, said Bassim Bello, a Christian activist and the mayor of Telkif in Nineveh. But that didn’t last, he said. The most organized and effective minority fighting force belongs to the Yazidis, an ancient religious group whose persecution at the hands of Islamic State fighters first prompted U.S. intervention in August. Yazidi leaders say their 15,000 to 20,000 fighters have been engaging their enemies for months near the northern Sinjar Mountains. While Yazidi leaders have been the quietest among other minority groups about demanding more autonomy, they still resent the lack of government aid. “We are fighting by ourselves and no one is helping us,” said Samer al-Sheikh, the son of Baba al Sheikh, the Yazidi political leader. “We requested that the Iraqi government and the Kurds help us, but nobody cares.” —Safa Majeed and Ghassan Adnan contributed to this article.
10 | Tuesday, September 30, 2014
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WORLD NEWS
Hong Kong Retailers Fear Rallies’ Impact BY KATHY CHU AND JOANNE CHIU
HONG KONG—Tension following pro-democracy protests was expected to deal a blow to Hong Kong’s retail sector during one of the city’s busiest shopping periods, with fears growing that the city could slip into recession. The political turmoil comes ahead of China’s weeklong National Day holiday, which usually brings Hong Kong a flood of mainland tourists eager to shop. As a result, October usually accounts for Hong Kong’s second-biggest retail sales period, after December. “The chance of Hong Kong running into a technical recession in the third quarter is pretty high,” said Raymond Yeung, a senior economist at ANZ, calling the turmoil “salt to the wound” of the city’s economy. “If you have a strong retail sector that continues to be vibrant, that would provide some offset to the slowdown in cross-border trade,” but the city’s turmoil raises fears that retail sales will be affected during the vital shopping period, he said. While business in much of Hong Kong returned to normal during the day Monday, banks shut branches, suspended some services and activated contingency plans to deal with disruptions as pro-democracy protests continued to grip several areas. Crowds were swelling to even larger numbers as night fell on the city. Hong Kong’s reputation as a hub for global capital entering Asia could be dented if the protests worsen, said Philippe Espinasse, a former investment banker in the city who now writes on banking and finance.
“Investors very much like visibility and certainty and could therefore become concerned about the stability of the market if the situation deteriorates significantly,” Mr. Espinasse said. The Hong Kong Monetary Authority, the city’s de facto central bank, said it has activated its contingency plan and is ready to inject liquidity into the banking system. The HKMA said it expects the city’s money markets to operate normally. Fitch Ratings, meanwhile, said Monday it is unlikely the protests would be large or widespread enough to have a “material effect on the economy or financial stability” of the city. In its first contraction in three years, Hong Kong’s economy shrank 0.1% in the second quarter as private consumption weakened. A technical recession is defined as two quarters of economic contraction. Aidan O’Meara, president of VF Asia Pacific, whose brands include Timberland, North Face and Vans, said he expects the company’s sales in Hong Kong to be “significantly impacted” during the holiday week. VF said it closed some stores in the city early Monday evening, at the recommendation of malls and department stores. “We are monitoring the situation closely and hoping for a peaceful, speedy and enduring resolution to the protests,” Mr. O’Meara said. Fewer mainland visitors could weigh on other retailers as well, and ripple through to other parts of Hong Kong’s economy, according to Caroline Mak, chairman of the Hong Kong Retail Management Association, a trade group. Ms. Mak said if weak retail sales persist in Hong Kong, it could lead to the retail industry’s first full-year
Bad for Business | Protests hit Hong Kong ahead of shopping season
Shuttered stores on Nathan Road, Kowloon, one of Hong Kong’s busiest shopping areas. Three-month peformance of selected companies vs. the Hang Seng index
Jewelry, watches and clocks and valuable gifts sales, in billions of Hong Kong dollars HK$12
30%
10
20
Sa Sa 2.71%
10 0 –10 –20
Hang Seng 0.03%
6
Wharf -1.69%
4
Chow Tai Fook -14.5% J
A
S
8
2 0
A S 2013
O
Sources: FactSet (performance); Hong Kong government (sales); Agence France-Presse/Getty Images (photo)
contraction in recent years. The last full-year contraction in retail sales in terms of value was 2003. Mainland Chinese tourists are seen as a backbone of the city’s tourism and retail industry, with nearly 41 million Chinese tourists visiting Hong Kong last year. Yet China’s slowing economy and a crackdown on corruption has stymied luxury spending in Hong Kong. The government said Monday that Hong Kong retail sales rose 3.4% in August from a year earlier to 40 billion Hong Kong dollars (US$5.15 billion), an increase retailers attributed largely to sales ahead of the Mid-Autumn Festival, which fell this year in early September. But
luxury-goods sales—a closely watched segment on account of mainland tourist shoppers’ fondness for jewelry, watches and valuable gifts—fell 6.1% in August. Luxury goods players are “highly exposed” to Hong Kong, which makes up 10% of global sales for brands like Gucci, and about twice this proportion for watch and jewelry makers, wrote Luca Solca, a managing director at Exane BNP Paribas, in a report Monday. Travel from destinations other than China may be hit as well: Australia and Italy issued travel advisories for Hong Kong on Monday. If other countries follow Australia’s and Italy’s lead in issuing
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travel advisories, it could have a “major impact” on Hong Kong’s tourism industry, warned Michael Li, executive director at the Federation of Hong Kong Hotel Owners, noting that October is a peak travel period for business travelers coming to the city for trade fairs and exhibitions. The number of mainland tour groups that had signed up to come to Hong Kong this week was already down at least 20% from the prior year before the protests began, said Steve Lam, an executive at the Hong Kong Inbound Tour Operators Association. —Enda Curran contributed to this article.
Pro-Democracy Rallies Grow; Police Defend Use of Gas
Continued from first page coalition was drafting a motion for the impeachment of Mr. Leung. “We call upon the chief executive to resign. It’s the only way he can beg for forgiveness,” Mr. Leong told reporters. The size of the protests and their peaceful nature underline the dilemma for Beijing, which doesn’t want other parts of China to follow Hong Kong’s path, but would have trouble justifying a tough crackdown on the protesters. Hong Kong’s financial sector was hit by the protests Monday. Stocks fell 1.9%, hitting their lowest level in 2½ months and 23 banks closed more than 40 branches, offices or cash machines. Accounting firm KPMG LLG told its 1,800 employees in affected offices to stay home while the Hong Kong Monetary Authority, the city’s de facto central bank, said it activated its own contingency plan and was ready to inject liquidity into the system. Markets operated normally on Monday. Chief Secretary Carrie Lam, the city’s No. 2 government official,
went back on a statement she made Sunday that the process geared at approving Beijing’s plan on elections was moving ahead swiftly. Instead, she said the city would delay the process. But she also said it would be unrealistic to ask Beijing to reverse its decision. Beijing has agreed to grant the city’s residents the right to vote starting in 2017 but only for candidates approved by a committee made up of 1,200 largely pro-Beijing, pro-business members. Currently the committee picks the chief executive without a popular vote. The process still officially has several months to go, with another around of public consultations and a vote planned in the city’s legislature. Protesters are calling for the process to start over and for Hong Kong’s people to get full control over selecting their next leader. Beijing has taken a hard line over the dispute over democracy in Hong Kong, issuing warnings to protest organizers, including students and the activist group called Occupy
Central. At a briefing at China’s Foreign Ministry, spokeswoman Hua Chunying asserted Beijing’s control over the city. “As we have always maintained, Hong Kong is China’s Hong Kong,” she said. “We firmly oppose external forces supporting illegal activities, such as the Occupy Central movement,” she said, a reference to a view of Hong Kong as a potential base for foreigners to exercise influence behind the scenes that could hurt China. The White House on Monday urged authorities in Hong Kong to respond to pro-democracy protests with restraint. “We believe that an open society with the highest possible degree of autonomy, and governed by the rule of law, is essential for Hong Kong’s stability and prosperity,” White House spokesman Josh Earnest said. Mr. Earnest said the U.S. is closely watching the protests. “We support the aspirations of the Hong Kong people,” he said. Police came under strong criticism for their tactics on Sunday and
early Monday. As crowds grew at the city’s government headquarters, police blocked entrances. The result was the protest expanded to fill the city district of Admiralty. After police used tear gas, the protests spread to two shopping districts, Causeway Bay and Mong Kok. Several security experts said police mishandled the situation. “They really shouldn’t have used any tear gas at all because ultimately it only had the effect to annoy people; the crowds were peaceful,” said Julian Russell, a security consultant who worked on the police force when Hong Kong was under British rule. In a news conference Monday, Assistant Police Commissioner Cheung Tak-keung said the decision to use tear gas and pepper spray on Sunday was made after some protesters used violence to breach police lines. He said the police had no alternative and described the option as “minimum force.” “Police respect citizens’ right to use peaceful, rational, legal means to protest. But some protesters used
violence to push through the police defense line, which we strongly condemn,” Mr. Cheung said. The protests began with a weeklong student boycott and rallies that led to the first battle with police on Friday night. On Sunday, the group called Occupy Central, which had pledged to disrupt the city’s main business district if democratic reforms were blocked, joined in. But by Monday, it appeared clear that protest groups were forming on their own. Occupy Central organizer Chan Kin-man said he was impressed with the spontaneity and resolve of the protesters. “The people outside, on the street, they are leaderless,” he said. Protesters used social-media sites to move protesters and supplies. Messages such as “Water and goggles are needed in Admiralty” brought a deluge of supplies, sometimes by motorcycle. Among the supplies were the now-ubiquitous umbrellas, used to deflect pepper spray and to block the hot sun. —Prudence Ho in Hong Kong and Bob Davis in Beijing contributed to this article.
THE WALL STREET JOURNAL.
Tuesday, September 30, 2014 | 11
WORLD NEWS
Democracy Push Poses Dilemma for Xi SHANGHAI—Pro-democracy rallies in Hong Kong present Chinese President Xi Jinping with stark choices between concession and crackdown that promise consequences for some of the nation’s policy challenges—and his own political standing. Throughout the weekend as mostly student protesters confronted police and again Monday after the demonstraANALYSIS tions shut down normal business activity in parts of Hong Kong, Mr. Xi stayed in Beijing and made no public comments on the protests. Instead, lower-level government spokesmen called the protests illegal and warned foreigners not to get involved in a domestic issue. The Hong Kong demonstrations, in which protesters are demanding election reforms, bring to the fore sensitive issues for the Chinese leadership. The government is always concerned that protests in one part of China, if left unchallenged, might encourage people in other parts to rise up. Hong Kong, which was given limited autonomy and freedoms upon its return to China from British colonial rule 17 years ago, was supposed to be a showcase for Beijing’s ability to manage a cosmopolitan financial hub with limited intervention. Now, President Xi faces tough choices between modifying the proposed formula for Hong Kong’s election system and appearing weak, or dislodging the protesters with force that would conjure memories of Beijing’s bloody 1989 pro-democracy crackdown in Tiananmen Square. The Hong Kong civil disobedience campaign is roiling public opinion in Taiwan, the democratic island that Beijing has long sought to win over. Last week, Mr. Xi mentioned Hong Kong’s semiautonomy as a model for reintegrating Taiwan in meeting a delegation from the island. But many there displayed solidarity with the Hong Kong’s protesters as footage of students overcome
Associated Press
BY JAMES T. AREDDY
Tens of thousands of people stretched across Hong Kong on Monday, occupying the city’s key commercial districts. by tear gas and the city’s financial district shrouded in white smoke played repeatedly on Taiwan television. “If Beijing has any intention of creating a kind or nice image in the hearts of Taiwan people, what happened over the weekend in Hong Kong is extremely unhelpful,” said Alex Huang, a political-science professor at Tamkang University. Beijing appeared on high alert to ensure copycat action doesn’t appear elsewhere in the country, such as the restive regions of Tibet and Xinjiang. News from Hong Kong was heavily censored in mainland China’s press and on social media; the photo-sharing app Instagram experienced outages Monday, according to several Internet-tracking organizations. In watching the events unfold in Hong Kong, China’s top leaders fear any “contagion effect” that encourages the disgruntled elsewhere in China to press for greater rights or which suggests national sovereignty is being undermined by “foreign
hostile forces” that challenge Communist Party rule, said Dingding Chen, an assistant professor of government and public administration at the University of Macau. A further problem, Mr. Chen said, is that compromise will become tougher the more the Hong Kong protests challenge Beijing or are seen as a model for other movements, rather than a reflection of the city’s unique standing within China. Should events spin beyond the control of Hong Kong’s police forces, the People’s Liberation Army maintains a garrison in Hong Kong, and a retired official said earlier this year that the forces might be called upon to suppress a riot. A contingent of China’s paramilitary police, trained in quelling civil unrest, is deployed in Guangdong province, adjacent to Hong Kong. But the chance of a Tiananmenlike response is remote, and the government pulled back riot police on Monday as a good-faith effort aimed at diffusing the tension after
widespread global criticism of the weekend’s tear gas. “The biggest thing they want to avoid is a bloody conflict,” said Mr. Chen. The problems in Hong Kong come just ahead of Wednesday’s National Day, the 65th anniversary of the founding of the People’s Republic and a time that China’s leaders use to stress national unity. As the protest activity heated up Monday, the government canceled an annual fireworks show planned for Hong Kong’s waterfront. The topic of sedition has been a sore point between Chinese leaders and the territory before. Beijing’s insistence that Hong Kong adopt an antisubversion law led to large-scale protests in 2003 and deepened the unpopularity of Hong Kong’s thenleader. In the current demonstrations, protesters are demanding the resignation of the current chief executive, Leung Chun-ying, and they want Chinese leaders to allow for free elections, retracting an election
plan that would limit nominations for chief executive to a committee largely loyal to Beijing. In recent days, many analysts said, China’s leaders have shown signs of a possible compromise over Hong Kong by withholding support in their public statements for the current chief executive, Mr. Leung, and expressing a desire for new ways of thinking about policy in the city. Over the weekend, for instance, Vice President Li Yuanchao called for “more efforts to research new situations and problems concerning Hong Kong and Macao, have concrete discussions, consolidate consensus, and bring the research of the theory and implementation of ‘one country, two systems’ to a new level.” He made the statement while meeting representatives of a group called Chinese Association of Hong Kong & Macao Studies, and Xinhua news agency’s photograph of the event showed Mr. Li with the group’s vice president Lau Siu-kai, a sociology professor who has been publicly critical of Mr. Leung. The association and Mr. Lau couldn’t be reached to comment. Asked about Mr. Leung on Monday, Chinese foreign ministry spokeswoman Hua Chunying stopped short of endorsing him, saying “we have every confidence and support for the government of Hong Kong SAR,” referring to special administrative region’s formal name. Hong Kong protesters have made Chinese leaders blink in the past. When hundreds of thousands marked the sixth anniversary of Hong Kong’s return to China in 2003 with a march to protest government plans to introduce the antisubversion law, authorities shelved the legislation. And 18 months later, the city’s unpopular first chief executive, shipping magnate Tung Chee-hwa, resigned for health reasons—though he remains active in Sino-Hong Kong affairs, leading a delegation of Hong Kong business executives to meet Mr. Xi last week.
Death Toll Rises From Volcanic Eruption in Japan TOKYO—The toll of people presumed dead from the weekend eruption of Mount Ontake rose to 36 on Monday, with many victims still stuck on the active volcano after toxic gas forced rescue squads to retreat from the peak. Self-Defense Forces troops managed to bring down eight bodies via helicopter Monday morning, bringing the official death toll to 12. Police said an additional 24 bodies, presumed dead, remained near the summit of the volcano, which erupted with little warning on Saturday, trapping climbers and spewing ash over a wide area. More than 500 police, fire department and Self-Defense Forces personnel were involved in the rescue operations Monday at Mount Ontake, a popular hiking spot straddling the border between Nagano and Gifu prefectures. Nagano police said toxic hydrogen sulfide gas and volcanic ash forced them to suspend the mission for the day in the early afternoon. The total number of people still stranded or missing is unknown. Lo-
European Pressphoto Agency
BY ALEXANDER MARTIN
Japanese troops disembark Monday on Mount Ontake to search for victims. cal media reported some people had climbed down the mountain by themselves. At 10,000 feet, Mount Ontake is Japan’s second-highest active volcano, behind only the 12,000-foot Mount Fuji. It was thought to be inactive until a series of eruptions in 1979. It last erupted in 2007. An official at the volcano division
of the Japan Meteorological Agency said that while Saturday’s eruption was preceded by a series of small earthquakes, the quakes weren’t linked to an imminent eruption. “The changes detected before the most recent eruption were minor, even compared with those before a very small eruption that took place in 2007,” the agency said.
It said eruptions on a similar scale could continue to take place over the coming days. The agency said it maintained a level 3 alert for Mount Ontake on a scale of 1 to 5. During a news conference on Sunday, Toshitsugu Fujii, professor emeritus of the University of Tokyo, who heads a committee of volcano experts, said the eruption likely resulted from a steam-driven explosion, which he said is “extremely difficult to forecast.” Government spokesman Yoshihide Suga said everything possible in line with current procedures was done to predict the eruption. “Naturally, we will carry out any necessary reviews for making improvements,” he said Monday. Prime Minister Shinzo Abe ordered his minister in charge of disaster management to make efforts to prevent secondary disasters and enhance monitoring. The eruption was the second deadly natural disaster to hit Japan this month, after heavy rains triggered landslides that killed more than 70 people in Hiroshima. Photos and footage of the erup-
tion showed a spectacular plume of white and gray ash and smoke spouting from the mountain. No lava was evident. The ash spread about 3 kilometers, and some airplanes were forced to change course over the weekend to avoid the eruption. There has been no sign of the ash cloud from the volcano in Tokyo, which is about 210 kilometers east of Mount Ontake. Survivors of the eruption told Japanese media harrowing tales of narrowly escaping death as the explosion threw piles of ashes and huge rocks near the mountaintop. One middle-aged woman said she was hit by a rock, but the backpack she held above her held absorbed the shock. She said the metal water bottle inside was broken from the impact. Others waited in anguish. A middle-aged man said he hadn’t heard from a missing family member since the initial eruption. “We’re all utterly exhausted,” he told the broadcaster NHK. —Tatsuo Ito and Toko Sekiguchi contributed to this article.
12 | Tuesday, September 30, 2014
THE WALL STREET JOURNAL.
IN DEPTH
Mike Bradley for The Wall Street Journal
John Costik, above with son, Evan, and wife, Laura, developed key parts of a glucose-monitoring system, part of a shift in the way Americans relate to the medical industry and their own health care.
Citizen Hackers in the U.S. Tinker With Medical Devices BY KATE LINEBAUGH
J
ason Adams, a business-development executive by day and a molecular biologist by training, had never considered himself a hacker. That changed when he discovered an off-label way to monitor his 8year-old daughter’s blood-sugar levels from afar. His daughter Ella has Type 1 diabetes and wears a glucose monitor made by Dexcom Inc. The device measures her blood sugar every five minutes and displays it on a nearby receiver the size of a pager, a huge advantage in helping monitor her blood sugar for spikes and potentially fatal drops. But it can’t transmit the data to the Internet, which meant Mr. Adams never sent Ella to sleepovers for fear she could slip into a coma during the night. Then Mr. Adams found NightScout, a system cobbled together by a constellation of software engineers, many with diabetic children, who were frustrated by the limitations of current technology. The opensource system they developed essentially hacks the Dexcom device and uploads its
data to the Internet, which lets Mr. Adams see Ella’s blood-sugar levels on his Pebble smartwatch wherever she is. It isn’t perfect. It drains cellphone batteries, can cut out at times and hasn’t been approved by the Food and Drug Administration. But for many, it has filled a gap. The home-built setup is part of a shift in the way Americans relate to the medical industry and their own health care. Technologically savvy patients are starting to tinker under the hoods of medical contraptions, seeking more influence over devices like blood-sugar monitors, insulin pumps and defibrillators that record and control bodily functions. Their goal is greater access to data and faster invention than is possible under the formal regulatory process. Patients have been tweaking hearing aids so they play music, using 3-D printers to make their own prosthetics and fiddling with a device used to measure acidity levels in the esophagus. The Massachusetts Institute of Technology has been hosting “hackathons” where engineers and students try to improve medical products and work out
new solutions to common diseases. The latest one, held Sept. 20-21, was aimed at improving breast pumps. “I have a huge bet on there being many other diseases that can be helped by these new forces in medicine,” said Joyce Lee, a diabetes specialist and associate professor of pediatrics at the University of Michigan who researches design as it relates to health care. “It is not the new blockbuster drug. It’s not the newest FDA-approved device. But it’s the free hack that the patient came up with.” The tinkering is raising concern at the FDA, medical-device companies and among some academics and clinicians that modifications are being used before they are fully tested and safe for a broad audience. Continuous glucose monitors such as the one Ella Adams uses are Class III medical devices, meaning they get the highest level of regulatory scrutiny, and even new support software must clear a battery of approvals. The rigorous approval process is there for a reason. A diabetes patient can come to rely on an alarm that prompts him or her to address dangerously high or low blood
sugar, so devices need to work predictably and be comprehensible to patients who aren’t schooled in technology. Dexcom, the maker of the glucose monitor, is aware of NightScout, as is the FDA, and neither is taking issue with it for now. While not completely comfortable with the software, the FDA takes a risk-based approach to enforcement and is concerned about its distribution and how it affects patient safety. “These parents are clearly crying out for ways to access their children’s devices in a way that isn’t available,” said Courtney Lias, an official from the agency’s Center for Devices and Radiological Health. Representatives of the FDA have encouraged NightScout’s backers to consult formally with the agency. The NightScout team said it filed an application in August, and a formal meeting has been scheduled for October. Benjamin West, a choral singer and software engineer with Type 1 who uses a Dexcom device and is leading the meeting with the FDA, said the agency has expressed concerns about how users can get support if
THE WALL STREET JOURNAL.
Tuesday, September 30, 2014 | 13
IN DEPTH Do-It-Yourself Medical Monitor
Diabetes patients and family members devised a system to monitor blood-sugar levels from afar, essentially hacking an FDA-approved device and uploading data to the Internet.
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1 A transmitter on the body gathers glucoselevel data every five minutes and…
2 …transmits them to a receiver for display. This works only if the receiver is within 20 feet of the transmitter.
3 To monitor from afar, a smartphone with NightScout software is connected to the receiver. The software downloads the glucose data and uploads it to a server.
The Wall Street Journal
Sources: Dexcom; NightScout
software, a $4 cable and an Android phone. That tweet caught the eye of other engineers across the country. One was Lane Desborough, an engineer with a background in control systems for oil refineries and chemical plants whose son, 15, has diabetes. Mr. Desborough had designed a home-display system for glucosemonitor data and called it NightScout. But his system couldn’t connect to the Internet, so it was merged with Mr. Costik’s software to create the system used today. Mr. Adams also saw the tweet. After the code became public, the San Diego father of three stayed up until three in the morning trying to make it work before giving up and hiring a freelance computer-science student in India, who solved his problem in 20 minutes. Two weeks later, Ella had her first sleepover. The experience hasn’t been seamless. The Android phone Mr. Adams uses to upload Dexcom data to the Internet has inexplicably frozen twice. His daughter was fine both times, but the outages were a warning that the system isn’t fail-safe. He and his wife still get up twice a night—at midnight and 3 a.m.—to check Ella’s blood sugar with a finger prick. NightScout relies on outside sites to receive the data and display glucose levels. On a recent night, two of the online hosting sites had an outage that shut down NightScout for about three hours for some users. The code also tends to drain the batteries of phones used to upload the data. As yet, there are no security settings. The system does, however, give users a monitoring option that hadn’t existed. Kristin Andrews Derichsweiler, a California
nurse and single mother of four, got the Dexcom monitor to help her 15-year-old son manage his diabetes. Two weeks after setting it up, she says she noticed her son’s blood-sugar levels were dropping while he was alone at home. When he didn’t answer the phone, she rushed back from work and found him unresponsive in bed. His blood sugar level was dangerously low—28 milligrams per deciliter, well below a normal level of 80. She got him to drink two boxes of juice and he recovered. Users stay in touch with each other and the developers via a Facebook group set up by Mr. Adams. It now has more than 6,800 members. The developers are making fixes as bugs arise and adding functions such as text-message alarms and access controls via updates. The release-and-repair approach is typical of Silicon Valley, where speed is at a premium, but alien to the medical business, where liability and regulators are major concerns. Some experts welcome the speed and inventiveness, but worry the ad hoc developers could fail to build in the necessary safeguards like alerts for when the system goes down. “This grass-roots initiative and drive is very important in accelerating the development of these technologies,” said Howard Wolpert, who runs a technology institute at the Harvard-affiliated Joslin Diabetes Center. “It is also important that the processes for approval can be accelerated so that this can be done in a way that there is an element of regulatory oversight.” The institute has received funding from Dexcom. Medical do-it-yourselfers—including
Online>>
Watch a video about NightScout at WSJ.com/Technology.
Mike Bradley for The Wall Street Journal
they run into problems, how software updates are distributed and whether there is any consideration of steps to prevent unauthorized access to the data. Other do-it-yourself developments in diabetes control—including efforts to come up with software to govern dosages of insulin, where errors could be fatal—have prompted more serious concerns. Such efforts are spreading anyway. At a recent diabetes conference, Mr. West was showing how he had devised a way to control his Medtronic Inc. insulin pump with his laptop. A nonprofit group started by a former Amazon.com Inc. engineer, called Tidepool, is teaming up with makers of diabetes devices to create better data displays for patients and doctors. The homegrown efforts are springing up, in part, because approvals through formal channels can take a long time. A new Medtronic pump that communicates with a glucose monitor and suspends insulin delivery when blood sugars are low wasn’t approved in the U.S. until 2013, after being used in Europe since 2009. Johnson & Johnson submitted a new version of its Animas insulin pump that uses the Dexcom monitor in April 2013 and is still waiting for approval. The device was approved in Europe in 2011. The FDA acknowledges the frustration and doesn’t want to be seen as standing in the way of innovation, the FDA’s Ms. Lias said. The FDA notes there are different requirements in Europe for device approvals and that approvals depend on when manufacturers submit their applications to U.S. regulators. Dexcom plans to seek FDA approval for a software system similar to NightScout by early next year with hopes of getting it on the market by year-end. “We are working proactively with the FDA to bring similar features and functionality to market,” said Steve Pacelli, Dexcom’s executive vice president for strategy. Chronic diseases such as diabetes, asthma and heart conditions—where cross referencing data can help improve health— have been an early focus of hacking. Between 1.5 million and three million Americans have Type 1 diabetes, an autoimmune condition that destroys insulin-producing cells in the pancreas. Managing it requires carefully matching injections of insulin to the consumption of carbohydrates, while taking into account factors like exercise and illness. The better the match, the lower the risk of complications. Blood sugar that gets too high can cause severe dehydration and other life-threatening conditions. Too low, and a person could have seizures or slip into a coma. NightScout got its start in the Livonia, N.Y., home of John Costik, a software engineer at the Wegmans supermarket chain. In 2012, his son Evan was diagnosed with Type 1 diabetes at age 4. The father of two bought a Dexcom continuous glucose monitoring system, which uses a hair’s width sensor under the skin to measure bloodsugar levels. He was frustrated that he couldn’t see Evan’s numbers when he was at work. So he started fiddling around. On May 14 last year, he tweeted a picture of his solution: a way to upload the Dexcom receiver’s data to the Internet using his
4 The data is gathered by a customized website and displayed. Almost any device with access to the Internet and a Web browser can view the data.
some of the people behind NightScout—are now pushing to develop systems that combine the blood-sugar data from glucose monitors with insulin dosing to even out spikes and troughs in blood sugar. Twitter engineer Scott Leibrand and his fiancée, Dana Lewis, who has Type 1 diabetes, have come up with a software program they call the “do-it-yourself pancreas.” It calculates insulin doses with data from the Dexcom monitor, details of Ms. Lewis’s meals and estimates of the length of time insulin remains active in body. The system then sends notifications to her phone and Pebble watch with suggested insulin doses to level out her blood sugar. In June, after watching Ms. Lewis’s average blood-glucose levels improve, the couple set up a table at a diabetes meeting to talk about their findings. Stayce Beck, an FDA staff member in the diabetes-device branch, asked Ms. Lewis for a demonstration. After asking some questions, Ms. Beck cautioned that because the system generates insulin recommendations based on the Dexcom monitor, which isn’t authorized for that use, it looked to her that the FDA would consider the system a Class III medical device. “They really recommended that we wouldn’t distribute the thing as is,” said Mr. Leibrand, who said that isn’t their intention. He also recognizes that if his model were able to control insulin delivery, “it would be a lot more dangerous.” A number of researchers at medical-device makers are working on similar systems that would actually inject insulin. The automated devices have shown promise in clinical trials, but none have been submitted for approval, a process that could take years. Some do-it-yourselfers are taking steps to commercialize their inventions. Former Wall Street trader Bryan Mazlish has launched a startup—Smartloop LLC—that has filed patents on computer-assisted technology to help manage blood-sugar levels. Mr. Mazlish, whose son and wife have Type 1 diabetes, has built a smartphone app that runs an algorithm to optimize blood-glucose levels by advising on insulin dosing using data from glucose monitors. Mr. Mazlish said he thinks the current system for developing medical devices could be improved, but figures he can have the most impact going the commercial route. “I’ve decided to play within the current system,” he said.
Ella Adams, above, with her father, Jason Adams. With NightScout, Mr. Adams sees Ella’s blood-sugar levels on his Pebble smartwatch wherever she is.
14 | Tuesday, September 30, 2014
THE WALL STREET JOURNAL.
OPINION: REVIEW & OUTLOOK
Iran Makes the Rules
P
resident Barack Obama sucked up most of the media oxygen at the United Nations last week with his call for collective action against the Islamic State and other jihadists. But if anyone made real news from the General Assembly’s green-marble podium, it was Iranian President Hasan Rouhani. The fabled Iranian moderate’s unsubtle message: You’ll play by our rules now. “The people of Iran,” he said, “cannot place trust in any security cooperation between their government and those who have imposed sanctions.” That was a kick in the shins to U.S. diplomats who have made little secret of their desire to make common cause with Tehran against the Islamic State—albeit a kick dressed up as an inducement to lift the sanctions. It follows Supreme Leader Ali Khamenei’s claim earlier this month that Secretary of State John Kerry is “lying” about the nature of U.S. overtures toward Iran. How’s that for improving the diplomatic mood music? Mr. Rouhani also gave no ground on nuclear negotiations, whose latest deadline is late November, in time for the lame duck Congress in case Republicans retake the chamber. Iran would continue to enrich uranium, said Mr. Rouhani, never mind Security Council resolutions
demanding a suspension of enrichment. disconnect some of the pipes connecting He also claimed that Iran had hon- one centrifuge to the next. Another idea, ored its obligations under the interim according to the Associated Press, is to nuclear agreement. That’s despite a re- allow Iran to keep as many as 4,500 cenport this month from the International trifuges, provided Iran agrees to enrich Atomic Energy Agency noting that Teh- uranium at a lower rate. ran continued to stymie its efforts to inThen there are Iran’s ballistic misvestigate the “possible siles, an essential compomilitary dimensions” of nent of its nuclear-weapTehran holds firm Iran’s nuclear program. program. Security while the U.S. keeps ons “These activities,” the Council Resolution 1929 IAEA reported, “are likely “decides that Iran shall making nuclear to have further undernot undertake any activity concessions. mined the Agency’s abilrelated to ballistic misity to conduct effective siles capable of delivering verification.” nuclear weapons.” Yet All of this explains why nuclear nego- over the summer Mr. Khamenei called on tiations have gone nowhere after nearly his Revolutionary Guards to mass-proa year—and after President Obama made duce ballistic missiles, and now the Ada point of quashing a Congressional ef- ministration is looking for an accommofort to revive sanctions if Iran fails to dation. negotiate in good faith. Harder to exUnder Secretary of State Wendy Sherplain is why the Administration is now man told a House committee in July that seeking ever more creative ways to give Resolution 1929 is “not about ballistic the mullahs what they want. missiles per se,” but about nuclearThe latest Administration brainstorm armed missiles. But that ignores that a is to abandon the longstanding demand ballistic missile that can carry a conventhat Iran dismantle its uranium-enrich- tional warhead, or a satellite, can also ing centrifuges, of which it currently has carry a nuclear warhead. installed about 10,000, with an addiThe larger problem is that these diptional 9,000 built. Under one Western lomatic gambits rest on the fanciful noproposal, Iran would merely be asked to tion that the same regime that is stone-
walling the IAEA can be trusted not to reconnect its centrifuges on short notice or increase their rates of uranium production or develop more powerful rockets. Iran has spent a decade taking advantage of the diplomatic process to buy time and advance its nuclear programs. “The Iranian nuclear game is to compromise on the elements of the program they’ve already perfected in order to gain time on the elements they haven’t,” says Mark Dubowitz of the Foundation for the Defense of Democracies. “They’ve perfected enrichment so they can suspend it for the time being. What they’ve gained in exchange is time to work on advanced centrifuge R&D. The more efficient the centrifuges, the fewer they need; the fewer they need, the easier they are to hide.” All this is happening while America’s attention has been consumed by the rise of the Islamic State and Vladimir Putin’s depredations in Europe. But permitting Iran to get to the edge of nuclear capability would be the worst setback to U.S. and world security so far in the Obama era, which is saying something. Members of both parties on Capitol Hill need to start speaking up about the Administration’s dangerous concessions to Iran’s rules.
Elon Musk Scores Again
F
resh from his $1.3 billion subsidy score in Nevada, billionaire Elon Musk hit it big again last week. New York Governor Andrew Cuomo announced free public housing and $750 million in government assistance for Mr. Musk’s unprofitable SolarCity. New York will spend $750 million over two years to build a new plant and buy manufacturing equipment for SolarCity, which already benefits from a federal investment tax credit and state solar-panel rebates. SolarCity leases and installs rooftop solar panels and this summer it bought Bay Area startup Silevo, which manufactures high-efficiency solar panels on a small scale. Last year Mr. Cuomo pledged $225 million to refurbish a for-
mer steel plant in South Buffalo for Si- $103,000 a year per head. That’s more levo and now he’s sweetened the bargain. than three times Buffalo’s median houseSolarCity will lease the state-owned hold income. SolarCity has also promised plant and equipment for $1 per month to spend $5 billion in “combined capital, for 10 years. This will let operational expenses and the company avoid propNew York State bans other costs in the State of erty taxes, which are York” over 10 years, fracking but gives the New among the nation’s highif its operation last that est. SolarCity won’t have billionaire’s company long. to pay sales tax on the SolarCity and Silevo $750 million. equipment, and the Goverhave racked up losses. Sinor’s tax reforms this year levo reported an “accumuzeroed out the corporate lated deficit” of $61.2 miltax for manufacturers. So SolarCity will lion as of Dec. 28, 2013, while SolarCity effectively operate in New York tax free. ran net losses of $151.8 million in 2013 In return, SolarCity has agreed to em- and $113.7 million in 2012, notwithstandploy 1,460 jobs at the facility for five ing abundant subsidies. SolarCity warns years, which breaks down to a subsidy of investors that “Silevo’s Triex technology
is novel and involves proprietary and complex manufacturing techniques, which may result in undetected errors or defects in the solar cells produced.” SolarCity also notes that “successfully achieving volume manufacturing of solar cells at our projected yield, efficiency and quality levels will be difficult, and we have little experience in high-volume manufacturing.” Translation: We’re flying by the seat of our pants. So Mr. Cuomo continues to ban natural gas fracking, which requires no subsidies and would increase jobs and tax revenue, yet he ponies up cash for a greenenergy company that makes no money even with subsidies. Thus do liberals help the rich get richer.
France’s Punch Drunk Unions
D
on’t be alarmed if that train you’re expecting in Paris shows up at the wrong station or if it fails to show up at all: The railway workers are exercising their human right to drink hard liquor on the job. They’ll sober up in a bit. That, in so many words, was the position taken by the General Confederation of Labor, or CGT, and two other French unions that last week went on strike after two employees of the state railway network SNCF were suspended for two days without pay for drinking rum punch while operating train signals. Four others involved had received warnings and another two disciplinary cases were pending adjudication when the strike was called. The rum-and-rail incident occurred last year at a signal post north of Paris,
although online video of it emerged French union extremism is hardly more recently amid efforts by the gov- news, but this particular example comes ernment to promote workplace sobriety. at an opportune moment for President One operator admits to François Hollande and Drinking liquor while Prime Minister Manuel sending a train toward an already-occupied plat- directing rail traffic is Valls, who are trying to form—risking a potenreform the country’s labor now a human right. laws. Amid debates about tially catastrophic accident. “Luckily the bloke ending the 35-hour work spotted it,” he says. “The week and granting emrum’s going to my head,” says another ployers and workers greater flexibility to operator. “It’s a bit strange,” chimes in a negotiate contract terms, the hallowed third. place of unions in the law is ripe for a reGet caught drinking and driving in think. Laying off or firing employees for France and you’ll face heavy fines, sus- competitive reasons, for example, still ofpension of your license and even jail ten requires union approval. time. Get caught drinking while directing Such a rethink could have major ecorail traffic, and the CGT will come to nomic-growth benefits. The other strike your defense with a strike to protest this month has been a 14-day walkout by what the union calls the railway’s “execu- Air France pilots to protest the carrier’s tive repression” of the eight employees. plan to expand its budget subsidiary.
Managers argue this is a matter of survival for the airline, which faces stiff competition from the likes of Ryanair and EasyJet. France will struggle to prosper if in matters of productivity-boosting corporate reforms the law gives one side a disproportionate advantage in negotiations. No one begrudges freely organized unions the ability to negotiate on behalf of their voluntary members. But in the matter of legal favoritism for unions, it’s time for France to sober up.
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Tuesday, September 30, 2014 | 15
OPINION
BY ROBERT GREIFELD
munications and public transport. Global capital markets also ensure an efficient and effective allocation of resources, reduce overreliance on short-term financing for long-term projects, and encourage inflow of foreign capital. Part of the appeal of capital markets is that they are fundamentally driven by “people power.” They democratize wealth by encouraging broader ownership of productive assets by small savers. The predictable, participatory nature of capital markets enables more people to benefit from economic growth and wealth distribution. And by every reliable measure, the equitable distribution of wealth is a key indicator of poverty reduction and stability. According to the World Bank, economic stagnation and its attendant lack of social progress rank among the top grievances fueling poverty, disenfranchisement and conflict around the world. Yet wherever capital markets exist and thrive, we find the kind of productive, long-term investments that can inspire a cultural shift and give people a stake in the future of their countries. Look at Sri Lanka. In 2010 the tiny island nation emerged from decades of traumatic civil war disunited and with widespread physical destruction. Yet in 2012, at the height of the global economic downturn, Sri Lanka posted 6.4% growth. Instrumental to its rapid economic growth was the Sri
As political chaos and violence spread across the Middle East and North Africa, prospects for regional economic growth would appear to be the least of our concerns. That’s shortsighted. The eruptions of violence stem at least in part from a lack of transition planning following the wave of revolutions, ousters, coups and countercoups that swept the region, including failure to provide functional economic and financial institutions.
In 2010 Sri Lanka emerged from decades of civil war in bad shape. Two years later, it posted 6.4% growth. If the U.S. government and its allies don’t have a strategy for helping these and other countries emerge from conflict—or to mitigate future calamity elsewhere in the developing world—the private sector can help provide economic continuity. The capital market in particular is a crucial tool for growth and development because it provides long-term infrastructure, IT development and capital access for projects with widespread socioeconomic benefits such as roads, water and sewer systems, housing, energy, telecom-
Associated Press
Capital Markets Ride to the Third World Rescue
A laborer carries vegetables to the marketplace in Colombo, Sri Lanka. Lankan capital market. Raising long-term finance through the capital market has allowed largescale reconstruction projects such as roads, highways, schools and other critical infrastructure to advance their economic ambitions. The country is healing, and the economic growth spurred by the capital markets is cementing a new national identity and promise for Sri Lanka. Financial-market exchanges can also play a part in starting or fueling capital markets in “frontier” and emerging economies, moving from or on the brink of instability via an advisory or partner role. For instance, Nasdaq has helped develop and upgrade capital markets in countries like Colombia—which only a decade ago
was riven by the violent drug trade—and Bahrain, which was a pioneer in recognizing the need for a modern, service-based economy. We were also involved in Rwanda via the East Africa Exchange, and in Indonesia via the Indonesia Stock Exchange. Both of these “frontier” markets have emerged from severe social and political crises, and both are now on a stability-enhancing economic uptick with vibrant capital markets humming along. There is a five-step “blueprint” to guide capital-market development in these evolving regions. First, there must be a legal and regulatory framework to protect investors. Second, the “structure” of the market must be determined
to best attract international investors and increase efficiency. Third, the exchange must have the technology to provide services in line with global best practices, particularly order execution and market monitoring for trading irregularities. This is especially important if they want to attract international investors and encourage partnerships with other exchanges and or global financial institutions. Fourth, there must be liquidity. This involves helping companies to list and create capital on the exchange, as well as offering products including cash equities and derivatives, to attract international and more advanced investors. Finally, capital markets must ideally evolve into a regional market rather than purely a country market. We have seen the limits of governments in promoting growth in the many troubled hot spots around the world. And there are limits to what the capital markets can do. But in an interconnected world, the private sector, led by capital markets, can be a crucial tool for establishing the institutions and the optimism needed for stability. From capital markets comes commerce, and from commerce the ability to trump conflict and drive macroeconomic viability for the long term.
Mr. Greifeld is CEO of Nasdaq OMX Group Inc.
When Central Bankers Become Central Planners Stanley Fischer, vice chairman of the U.S. Federal Reserve, has been tapped to head the Fed’s new financial stability committee. In recent speeches both Mr. Fischer and Fed Chair Janet Yellen have argued that so-called macroprudential regulation can prevent asset bubbles from erupting while the Fed maintains near-zero interest rates. There is not much evidence that these policies prevent financial bubbles. But there is great risk in allowing a small group of unelected technocrats to determine the allocation of credit in the U.S. economy. Macroprudential regulation, macro-pru for short, is the newest regulatory fad. It refers to policies that raise and lower regulatory requirements for financial institutions in an attempt to control their lending to prevent financial bubbles. These policies will not succeed. Consider the most common macroprudential tool: raising or lowering bank minimum capital standards. Academic research—including a recent study I co-authored with Yan Lee of the Federal Deposit Insurance Corp. and Claire Rosenfeld of the College of William and Mary—has found that increasing a bank’s minimum capital requirements by 1% will decrease bank lending growth by about six one-hundredths of a percent. Other studies have examined the effect on loan growth of raising a bank’s minimum capital re-
Reuters
BY PAUL H. KUPIEC
Stanley Fischer will head the U.S. Federal Reserve’s financial-stability committee. quirements by 1%, using data from different countries and different measurement techniques. They have found a similarly minor effect—between seven and 13 basis points. The economic magnitude is trivial. Banks adjust their lending in response to a host of factors including pressure from bank regulators, changes in their funding cost, losses on their outstanding loans and other factors. Changes in regulatory capital and liquidity requirements have only the weakest detectable effects on lending. There is also the very real risk that macroprudential regulators will misjudge the market. Banks must cover their costs to stay in business, and in the end bank customers will pay the cost banks incur to comply with regulatory ad-
justments, regardless of their merit. By the way, when was the last time regulators correctly saw a coming crisis? Other common macroprudential tools include varying maximum loan-to-value ratios and debt-to-income limits. Yet in a speech on July 10 Mr. Fischer noted that changing minimum capital requirements and maximum loan-to-value ratios on mortgage loans in Israel had little effect on attenuating a mortgagelending boom that raised central bank stability concerns beginning in 2010. When short-term interest rates are low and long-term rates are high, borrowers prefer to use short-term or floating-rate debt to minimize interest payments. And so it was in Israel when a surge in
mortgage-lending growth was fueled by mortgages keyed to low short-term interest rates. When higher capital requirements and lower loan-to-value limits did not work, the Bank of Israel reduced the growth in mortgage lending by requiring banks to tie mortgage rates to long-term interest rates, effectively prohibiting cheap variable-rate mortgages. With Mr. Fischer now heading the Fed’s new financial stability committee, might we soon see regulations requiring product-specific minimum interest rates? Or maybe rules that single out new loan products and set maximum loan maturities and debt-to-income limits to stop banks from lending on activities the Fed decides are too “risky”? None of these worries is an unimaginable stretch. Since the 2008 financial crisis, U.S. bank regulators have put in place new supervisory rules that limit banks’ ability to make specific types of loans in the socalled leverage-lending market— loans to lower-rated corporations—and for home mortgages. Since there is no scientific means to definitively identify bubbles before they break, the list of specific lending activities that could be construed as “potentially systemic” is only limited by the imagination of financial regulators. Few if any centrally planned economies have provided their citizens with a standard of living equal to the standard achieved in market economies. Unfortunately
the financial crisis has shaken belief in the benefits of allowing markets to work. Instead we seem to have adopted a blind faith in the risk-management and creditallocation skills of a few central bank officials. Government regulators are no better than private investors at predicting which individual investments are justified and which are folly. The cost of macroprudential regulation in the name of financial stability is almost certainly even slower economic growth than the anemic recovery has so far yielded.
Mr. Kupiec, a resident scholar at the American Enterprise Institute, has held senior positions at the Federal Deposit Insurance Corp., International Monetary Fund and Federal Reserve Board.
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OPINION
[ Information Age ] BY L. GORDON CROVITZ In being snubbed by the University of Chicago, the Chinese Communist Party is in fine company. In the 1950s the Chicago faculty famously refused to grant Queen Elizabeth II an honorary degree when she visited the Windy City, cheekily insisting that Buckingham Palace first produce scholarly research she had done. The university’s announcement this month that it won’t renew its Confucius Institute on campus challenges one of Beijing’s top propaganda efforts. It may prompt other schools to consider ending the operations, which are set up and controlled by the Communist Party. Beijing launched the institute a decade ago to take advantage of global interest in learning Mandarin. Schools welcomed the program because Beijing covered all the expenses. Last year, China spent more than $275 million on institutes and classrooms at some 1,100 campuses in 120 countries, including 700 primary and secondary schools. What administrators assumed would be apolitical language instruction has turned out to be
Beijing’s highly controlled way of teaching its version of Chinese history, politics and culture. Lectures, conferences, films and exhibits have a Communist Party spin previously seen only within China’s censored borders. Vice Premier Liu Yandong is the chairwoman of China’s governing council that oversees the Confucius Institute, which includes representatives of a dozen ministries such as Foreign Affairs and the State Council Information Office. The party’s head of propaganda in 2007 called the institute “an important part of the pattern of China’s overseas propaganda.” Unlike language and culture programs sponsored by the British Council, Alliance Française and Germany’s Goethe-Institut, the Confucius Institute is located on campuses and becomes part of the curriculum. For many smaller universities and grade schools, the institute is the primary, or only, place to learn about China. Beijing requires that the Confucius Institute programs abide by the laws of China. McMaster University in Canada severed its contract last year when an institute instructor, Sonia Zhao, had to hide her belief in Falun Gong, which is banned by China. She also disclosed prohibitions against topics such as the Tiananmen Square protests, Tibet, Taiwan and Chinese dissidents: “During my training in Beijing they told
Getty Images
Chicago Teaches Beijing a Lesson
Liu Yandong at a 2013 Beijing news conference. The Chinese vice premier heads the governing council that oversees the Confucius Institute. us, ‘Don’t talk about that. If the student insists, you just try to change the topic or say something the Chinese Communist Party would prefer.’ ” The Confucius Institutes at North Carolina State and Australia’s University of Sydney blocked the Dalai Lama from speaking on campus. At Canada’s Waterloo University in 2008, the institute mobilized students to defend repression in Tibet. The Chinese official who directly oversees the institutes, Xu Lin, earlier this year ordered the destruction of printed materials at a European Association for Chinese Studies conference in Portugal that referred to Taiwanese organizations.
The University of Chicago has a long history of trying to keep partisan politics and governments off campus. When I was an undergraduate at the school in the 1970s, there was uproar over an award to Robert McNamara for his work on world peace, with liberals objecting to his role in the Vietnam War and conservatives outraged by his work at the World Bank. Both sides agreed to revalidate the Queen Elizabeth precedent to avoid mixing politics and scholarship. Marshall Sahlins, an emeritus professor, led the fight at Chicago against the Confucius Institute. His article in the Nation last year, “China U,” quoted a colleague in
the East Asian department admitting to “a certain amount of selfcensorship” at the institute. That included suppressing discussion of the Dalai Lama. More than 100 members of the Chicago faculty signed a petition against the institute, saying it “subjects the university’s academic program to the political constraints on free speech and belief that are specific to the People’s Republic of China.” The student newspaper Chicago Maroon quoted history professor Bruce Cumings: “American universities should not be taking money or institute funds from governments that are jailing professors and that do not provide academic freedom in their own country.” The American Association of University Professors recently urged an end to affiliations with the institutes, which “function as an arm of the Chinese state and are allowed to ignore academic freedom.” Canadian professors took a similar position. The Toronto school board this year postponed a planned launch. With Chicago’s decision to rid its campus of an outpost of the Chinese Communist Party, universities with a prominent institute presence such as Stanford and Columbia will have to reconsider. It’s time to say “zaijian”—goodbye— and good riddance to Beijing’s propaganda presence on campuses.
Pope and Dagger [ Bookshelf ]
God’s Traitors By Jessie Childs (Oxford, 443 pages, £17) BY HENRIK BERING Among the traits Elizabeth I inherited from her father, Henry VIII, was a keen instinct for self-preservation, and few monarchs have needed it more: As a Protestant, she had been declared a heretic in 1570 by the pope, who threatened those who obeyed her with damnation. Philip II of Spain was hellbent on waging holy war against her. To him, the St. Bartholomew’s Day massacre in 1572, when the streets of Paris ran crimson with the blood of butchered Protestants, had seemed a capital idea. On the home front, many saw Elizabeth’s cousin, the Catholic Mary Stuart, as queen in waiting,
leaving Elizabeth in constant fear of a Catholic fifth column or a stiletto-wielding priest. William of Orange, the Dutch independence leader, had been shot by a Frenchman intent on collecting the reward that Philip had promised for his death, and Henry III of France was assassinated in his privy-stool by a monk. Elizabeth tasked her spymaster, Sir Francis Walsingham, with ferreting out her enemies. Those seeking government offices had to swear allegiance to her as the supreme governor of the Church of England, and though she would have preferred to leave religion a private matter, church attendance became compulsory. This is the backdrop for Jessie Childs’s brilliant “God’s Traitors,” which traces the fate of one aristocratic Catholic family, the Vauxes of Northamptonshire, from the 1570s to the Gunpowder Plot of 1605. While many English Catholics were willing to compromise, showing up in the Anglican church on Sundays and worshiping privately at home, the otherwise wellrespected Lord Vaux and his more hard-line brother-in-law, Sir Thomas Tresham, belonged to the tiny group of so-called recusants, whose conscience forbade them to attend Anglican services. Despite protestations of loyalty, they were fined heavily. Even more seriously, the Vaux family broke the law by harboring priests. To launch the Jesuit mission in England, Robert Persons arrived in 1580 disguised as a mercenary captain, “dressed in a buff leather coat trimmed with gold
braid and a feather in his hat,” while Edmund Campion, who had been the tutor of Lord Vaux’s son Henry, came as a jewel dealer. Campion was apprehended in 1581, then hanged, drawn and quartered. Charged with having sheltered him, Vaux and Tresham spent 20 months in prison.
Persecuted Catholic clergymen in Elizabethan England hid in ‘priest holes’ built into the stately homes of sympathetic nobles. But the Vauxes weren’t deterred. By 1585, Ms. Childs notes, some 300 priests were in England, hiding in the houses of noblemen, including the Vauxes. Henry Garnet was named Jesuit superior for England in 1586, with the swashbuckling John Gerard as his No. 2, and they emerge in the book as a most effective combination: the careful Garnet, who had written a treatise on equivocation, set the priorities, while Gerard, whose exploits Evelyn Waugh compared to a John Buchan novel, provided the fireworks. With raids being conducted and with ports and crossroads being closely watched, the priests relied on people like Lord Vaux’s resourceful daughters Eleanor and Anne and their sister-in-law Eliza. Great pains were taken to hide the priests. An ingenious carpenter created a number of “priest holes” for the Vauxes and others to which
the priests would repair in the event of a raid. In 1594, it was Gerard’s turn to get caught. During his torture at the Tower prison in London, he was left hanging from iron shackles for hours, but his mangled arms did not prevent him from making a spectacular escape in 1597 by rope from the roof. He immediately reverted to his mission of winning souls. With the accession of James I in 1603, Ms. Childs writes, England’s Catholics hoped for better times: James had a Catholic-convert wife and had dropped hints about an end to persecution, which led the pope to declare a period of calm. Though the early expectations turned out to be overly optimistic, only a handful of fanatics were committed James haters. Among them was Sir Robert Catesby, a Vaux cousin, who became the leader of the Gunpowder Plot. The plan was to blow the king and Protestant establishment sky high by detonating 36 barrels of black powder under the House of Lords on Nov. 5, 1605. Uncovered at the last moment, the conspirators fled London and made a stand in Staffordshire, where Catesby was killed. The eight survivors were given death sentences. During the Elizabethan era, Ms. Childs writes, many “would have loved nothing more than to have been a good Englishman and a good Catholic. Parliament and the papacy conspired to make it impossible.” For his convictions, Lord Vaux certainly paid a stiff price. Two-thirds of his estate was confiscated in 1587. There was never any
direct evidence that he committed treason, and he died in 1595 a broken man. With Sir Thomas Tresham, things look a lot shadier: During his time in prison, he busied himself with a scheme for a Spanish invasion of Scotland, and his son, Francis, was implicated in the Gunpowder Plot. Sir Thomas died two months before the plot was revealed. As for the priests, “only a handful were directly involved in what would obviously be labelled treason, but there was a vast grey area.” Garnet knew Catesby, and another of the conspirators was a convert of Gerard’s. Ms. Childs considers it unlikely that Garnet would have “gone rogue” but the two Jesuits certainly kept mum about the plot. Gerard managed to slip away to the Continent disguised as a footman for the Spanish envoy, but Garnet was executed that same day. While “anti-popery” remained, writes Ms. Childs, “the violent backlash that had been feared did not materialise and James I’s preference for accommodation over prosecution eventually prevailed.” Still, various loyalty tests, taxes, limitations in employment and other impositions on Catholics continued until the 18th century, which saw an easing of restrictions, culminating in the 1829 Catholic Relief Act. Right up to our own day, “priest holes” and hiding places for objects of worship have shown up in old houses under renovation, reminders of a time when religion became politics and faith hardened into fanaticism.
Mr. Bering is a writer and critic.
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Global Dow 2536.90 g 0.58%
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3-month Libor 0.23510
Amelia Thinks Like You, And She Is a Machine
Eurozone Bonds Show Who’s Boss
BUSINESS & FINANCE 19
Tuesday, September 30, 2014
europe.WSJ.com
Lenovo’s New Target: Servers BY JURO OSAWA
Next Step
Lenovo sees its acquisition of parts of IBM’s server business as a way to replicate its success in the personal-computer market. Top 3 players in server and PC markets world-wide Server market share
30%
PC market share
20
0
IBM*
H-P
Dell
2Q ’14
10 2Q ’13
Lenovo Group Ltd. is setting an ambitious goal of becoming the world’s largest computer-server maker, as it expects to complete its $2.1 billion acquisition of International Business Machines Corp.’s low-end server business this week. “We want to win more market share from competitors,” Lenovo Chief Executive Yang Yuanqing said in an interview. “We will not be satisfied.” Lenovo, which bought IBM’s personal-computer business in 2005, is already the world’s largest PC maker after overtaking U.S. rivals Hewlett-Packard Co. and Dell Inc. Now, Lenovo is taking on H-P and Dell in the server market, with the acquisition of IBM’s x86 server unit. The deal turns Lenovo, still a relatively minor player globally, into one of the major players in the roughly $50 billion server market. The company said Monday it had gained all the necessary approvals for its IBM server acquisition and that the deal is expected to close Wednesday. Lenovo’s expansion in the server market is also an attempt to find new engines for growth beyond the saturated PC market. While the company generates about 80% of its revenue from desktop and laptop PCs, it is trying to expand to other businesses such as servers and smartphones. Apart from the IBM server acquisition, Lenovo is in the process of completing another deal to buy the Motorola Mobility handset business from Google Inc. for $2.91 billion. The Motorola deal hasn’t closed yet. As soon as it completes the acquisition, Lenovo plans to start integrating IBM’s workforce. Adalio Sanchez, an IBM executive who heads the x86 server unit, will continue to lead the business after the acquisition, Lenovo said in a statement Monday. Since Lenovo announced its plans to buy the IBM server unit in January, concerns among IBM customers about the transition have created opportunities for competi-
2Q ’14
LONDON—A flurry of new cancer-drug data coming from a conference in Europe is offering fresh promise for immunotherapies— drugs that boost patients’ immune systems—especially their prospects when combined with other immunotherapies and existing drugs. A highlight from the closely watched conference, which kicked off in Madrid Friday, has been the encouraging trial results for immunotherapy drugs that release one specific brake on the immune system—acting on a protein called Programmed Death Receptor 1 (PD-1) or a related target called PD-L1. AstraZeneca PLC, Merck & Co., Roche Holding Ltd. and Bristol-Myers Squibb Co. all presented data on their own experimental PD-1 or PDL1 drugs, either on their own or in combinations. Experts believe immunotherapies, still in their developmental infancy, will work best when prescribed in combinations or when prescribed in tandem with other cancer drugs or chemotherapies. But toxic side effects from combining immunotherapies have raised concerns. Two PD-1 drugs have already been approved for use on their own. Merck’s Keytruda received U.S. approval to treat advanced melanoma earlier this month. Bristol-Myers’ drug Opdivo received Japanese approval in July, although it hasn’t yet been approved in the U.S. Data from an early clinical trial of AstraZeneca’s PD-L1 drug—presented Saturday—in combination with another immunotherapy, showed promise in patients with nonsmall cell lung cancer, which is one of the most common types of cancer. The clinical trial was small, with just 18 patients whose data was eligible for analysis, and the drugs were being tested for safety, not effectiveness. But 28% of patients given the combination saw their tumors shrink. It backed up encouraging data from a rival trial of a combination of immunotherapy drugs aimed at the same type of cancer. That trial combined Bristol-Myers’ Opdivo and Yervoy, and data presented back in May showed that 22% of patients responded to treatment. It is hard to compare the relative effectiveness of the two trials, since they were designed differently. But one important result, analysts said, is that AstraZeneca’s drug combination saw fewer serious side effects, including fewer patients dropping out of the trial because of the drugs’ toxicity. Still, safety concerns over immuPlease turn to page 20
THE WA L L STR E ET JOU RNAL.
2Q ’13
BY HESTER PLUMRIDGE
HEARD ON THE STREET 32
Bloomberg News
New Type Of Therapy For Cancer Gets Boost
10-year Treasury À 12/32 yield 2.491%
Lenovo
H-P
* Lenovo is only buying a portion of IBM’s server business—its low-end x86 unit. Source: IDC Photo: Parker Eshelman/The Wall Street Journal
tors to take market share from IBM. Mr. Yang said that the deal’s closure will help ease concerns among customers. “No matter how much share competitors have gained from
Dell The Wall Street Journal
IBM, we will get it back,” he said. Mr. Yang added that IBM’s x86 server unit is already a profitable business, and Lenovo will try to make it more profitable.
‘We want to win more market share from competitors,’ Lenovo Chief Executive Yang Yuanqing said Monday. ‘We will not be satisfied.’ Mr. Yang said Lenovo expects higher profit margins from servers than those from PCs. In the first year after the acquisition, Lenovo expects combined revenue of $5 billion from its own server business and that formerly of IBM. Lenovo executives declined to provide the current combined revenue figure, but said $5 billion in revenue would represent substantial growth. Lenovo’s 2013 revenue was $38.7 billion. Executive Vice President Gerry Smith, who oversees Lenovo’s businesses for corporate clients, said the company aims to achieve its goal of becoming No. 1 in the server market in five to seven years. “Our competitors had better be wary because we are coming at them and coming at them hard,” Mr. Smith said.
Japan Inc. Presses Into Southeast Asia
Japanese companies are turning to Southeast Asia’s frontier markets in search of cheaper labor, stepping into territory that until now has been firmly in China’s sphere of influence. By Warangkana Chomchuen in Savannakhet, Laos, and Mitsuru Obe in Tokyo
Take Savannakhet, Laos, a town on the banks of the Mekong River where eight Japanese companies have recently started operations. They include camera-lens producer
Nikon Corp. and a Toyota group auto-component maker. Laos, an impoverished country of seven million people run by a small Communist elite, is a close ally of Beijing. China is a top aid donor and by far the largest investor in the country, with interests in mining, hydropower and agriculture. Japan wants to change this equation. The industrial park just outside Savannakhet is part of a Japanfunded master plan in Laos that includes a bridge over the Mekong to Thailand and the upgrading of a highway to the border with Vietnam. “This country has a possibility to
be a transportation hub for our company,” said Hiroshi Yamamoto, a Laos-based manager at a Japanese company that makes camera parts for Nikon at the industrial park. It is an example of how Japan is leveraging aid and investment in Southeast Asia to counter China’s growing clout in the region. Vietnam received $1.7 billion in aid from Japan in 2012, the most Japan gave to any country and up two-thirds from the previous year. Japan is ramping up aid to Cambodia, Myanmar and Laos—traditional allies of China—albeit from a low base. The push comes at a time that
disputes over territory and wartime history have worsened ties between Japan and China. “Clearly, hedging against China is now a major consideration in Japanese aid,” said David Potter, a professor at Japan’s Nanzan University who is an expert on Japan’s official overseas disbursements. A senior Japanese trade official acknowledged that Tokyo views aid as a way of breaking China’s pre-eminence in poor nations such as Cambodia and Laos. “We are hoping to see indigenous industries grow in these countries, so they can stand Please turn to page 20
18 | Tuesday, September 30, 2014
THE WALL STREET JOURNAL.
BUSINESS & FINANCE
Lack of Chargers Hurts Tesla in China BY COLUM MURPHY
Uphill Climb
Sales in China for these types of cars are slowly increasing 20,000 vehicles 16,000
Electric vehicle Plug-in hybrid
12,000 8,000 4,000 0
2009 ’10
’11
’12
’13
’14
Source: Automotive Foresight The Wall Street Journal
Imaginechina/Corbis
BEIJING—Tesla Motors Inc. has big ambitions for selling its electric cars in China. But first, it has to get its chargers accepted by skeptics, such as the property manager at the Tonghui Riverside residential complex. That delicate task falls to Huang Weiguo, who leads a team of Tesla contractors who install charging stations at the homes of new Tesla owners in Beijing. Part technician and part diplomat, he deals with anxious garage workers, puzzled security guards and dubious building managers while laying the groundwork for the luxury car maker in China. On a recent summer day, his charm was failing him. The mission was to install a charger for a new customer outside a teahouse at the white-faced commercial and residential complex. But three hours into the process the property manager showed up, and he proved to be bullheaded. “Remove it,” he said. Mr. Huang explained the tea shop’s owner had just bought a Tesla and had authorized installation of the six-foot-tall charging station and its tangle of cables. He offered the sweating manager a cold bottle of water. The manager wasn’t persuaded. “It’s our call to decide what gets installed around here,” he said. Mr. Huang was philosophical. “We have to be patient and calm down,” he said, preparing to leave the job unfinished while pondering his next steps. China presents unique challenges for Tesla and other electriccar makers. Its people tend to live in apartment buildings rather than the single-family homes commonly found in the U.S. Low-rise multifamily housing makes up 74% of all urban housing in China, according to a 2007 estimate by consulting firm Chreod Ltd. That means the family garage is a rarity in China. People instead tend to park in shared garage complexes or on the street. That complicates setting up the home charger that is essential to keeping a Tesla running. Occasionally, it also makes wary neighbors and property managers hurdles to ownership. The process in China is “really very hard,” said Shawn Gao, who is responsible for overseeing installations for Tesla across the country. “The technical part is not the big issue. Getting approval from property-management companies is.” Jacky Tan, a Shanghai engineer, took delivery of his new Tesla Model S in June. But it spends lit-
Tesla faces hurdles in China, where most drivers park in garages or on streets. Above, a Tesla charging station in Shanghai. tle time in the parking spot he bought for it at his apartment complex. The complex’s propertymanagement company objected first; then residents expressed worry that the chargers would cause power surges or affect their power bills. “No matter how hard Tesla and I explained to the neighbors that it won’t affect their life, the committee refused to give us the green light,” Mr. Tan said. Tesla later installed the charging station at Mr. Tan’s workplace instead, an arrangement that he says is unsatisfactory. Chargers are a chicken-and-egg problem for electric-car makers. Without one, there can’t be the other. And sales of electric vehicles so far in China have been disappointing, totaling 70,000, including buses, well short of Tesla’s goal of half a million by 2015, according to Stephen Dyer, a partner in the Shanghai office of consultancy A.T. Kearney. “China is still way off target,” he said. Electric car makers are only now trying to address the problem here. BMW AG recently launched its pure electric BMW i3 and plug-in hybrid BMW i8 in China, and it has
teamed up with local partners to install 50 charging stations in Shanghai. BYD Co. and Daimler AG will work with Switzerland-based ABB Ltd. to supply wall-mounted chargers to buyers of their jointly made Denza electric cars. Nissan Motor Co. this month released its first electric car here. Tesla has tried to forestall the problem of buyers ending up with cars with no power. It said earlier this year it wouldn’t deliver cars unless local charging stations were available, frustrating some early
Chargers are a chickenand-egg problem for electric-car makers. buyers. One owner, irate at the delay, smashed the windshield of his Tesla when it was delivered and posted a picture online. In June, another wealthy Tesla enthusiast built his own network of charging stations so that he could drive to Guangzhou, some 1,300 miles from Beijing. In August, the Palo Alto, Calif., company signed a deal with tele-
communications provider China Unicom to build together 20 superchargers and 400 charging posts in 120 cities to speed up the process. It also has tie-ups with property developers such as Soho China Ltd. to install charging stations in developments. Other partnerships are in the works. A widespread network of public chargers is important because Tesla sees China as its biggest international market within three years, eventually overtaking even the U.S., said Veronica Wu, its China chief. It hopes to install a network in China of 100 superchargers, which charge cars faster than regular chargers, and to have 20 sales outlets by the end of next year. An August survey of 200 potential car buyers throughout China by consultant A.T. Kearney found that concern over the lack of charging stations was the biggest reason stopping people from buying electric cars. Tesla’s Mr. Gao said his installation teams are successful nine out of 10 times. But each faces challenges they might not see in the U.S. Building management and residents’ associations often worry that charging a Tesla could put too
much strain on a building’s power supply, which can sometimes be unstable in China. In addition, installation can often involve getting approval from one of China’s statecontrolled electricity providers, a process that had little precedent until this year. Tesla points to progress on several issues. Recent regulations in Beijing now require that about 20% of parking lots attached to new buildings be capable of housing charging units. A recent policy paper from China’s State Council was dedicated to infrastructure issues. “It’s definitely getting better,” said Ms. Wu, Tesla’s China chief. Mr. Huang, the Tesla contractor, said the troubles at Tonghui were unprecedented in his experience. “This is the first time we were shut down in the middle of the process,” he said, adding that breakdowns in communication between his team and the property managers are frequent. “Sometimes they refuse to talk to us and they don’t give a reason,” he said. But Mr. Huang said he is used to such a reaction, adding that typical Beijing property managers can’t be swayed by flattery or dining invitations. “It’s our job to come up with counterproposals,” he said. “I serve people, serve our clients.” As of mid-September the dispute over the charging installation at Tonghui Riverside hadn’t been resolved. A manager at the property who gave his surname as Song said that the installation needed approval from local officials and “if only one or two cars need this charger, we don’t really see the need.” —Rose Yu in Shanghai and Lilian Lin in Beijing contributed to this article.
INDEX TO BUSINESSES Businesses
This index of businesses mentioned in today’s issue of The Wall Street Journal is intended to include all significant reference to companies. First reference to the companies appears in bold face type in all articles except those on page one and the editorial pages.
ABB...............................18 Alibaba Group Holding.20 Allianz...........................26 American International Group..........................23 Apollo Global Management..............20 AstraZeneca..................17 Athlon Energy...............20 Banco Santander..........21 Bank of America........1,23 Bank of China.................1 Barclays.........................26 Beijing Shiji Information Technology.................20 Bristol-Myers Squibb...17 Brown Brothers
Harriman....................24 BYD ............................... 18 China Unicom................18 Chow Tai Fook Jewellery Group..........................32 Citigroup ....................... 23 Coca-Cola.......................21 Columbia Management Investment ................ 24 Commerzbank.................6 Constellation Brands 21,32 Daimler..........................18 Dell................................17 Denso ............................ 20 Deutsche Bank...........1,23 DexCom.........................12
Diageo...........................32 Encana...........................20 European Central Bank 26 European Homecare.......5 Federal Reserve............23 Financial Conduct Authority ................... 21 Glencore........................22 Goldman Sachs Group..23 Google...........................18 Hang Seng .................... 26 HSBC Holdings ............. 26 International Business Machines....................17 IPSoft............................19 Janus Capital Group.....25 Johnson & Johnson......13 J.P. Morgan Chase..........1
KKR .......................... 21,32 Lenovo Group................17 Lloyds Banking Group..21 Medtronic......................13 Merck & Co. .................. 17 Minebea ........................ 20 Morgan Stanley............23 Nikon.............................17 Nissan Motor................18 Ocado Group ................. 21 Och-Ziff Capital Management Group .. 23 Parliament ...................... 6 PrairieSky Royalty........20 Rhone Group.................21 Roche Holding...............17 Royal Bank of Scotland Group..........................21
SABMiller......................21 Sa Sa International Holdings.....................32 SKI Wach- und Sicherheitsgesellschaft 5 Soho China....................18 Starr International.......23 Tesla Motors.................18 Toyota Boshoku............20 Toyota Motor................20 TPG Capital...................32 Treasury Wine Estates 21,32 Trinity............................32 UBS ............................ 1,32 Wm. Morrison Supermarkets............21
Corrections Amplifications More than 85% of Rio de Janeiro’s roughly 1.5 million favela residents have mobile phones, according to Google Inc. A Business & Finance article in the Friday-Sunday edition about technology companies starting mapping efforts in some Rio favelas incorrectly said there are 1.5 million favela residents in Brazil. Readers can alert the London newsroom of The Wall Street Journal to any errors in news articles by emailing
[email protected] or by calling +44 (0)20 7842 9901.
THE WALL STREET JOURNAL.
Tuesday, September 30, 2014 | 19
BUSINESS & FINANCE
BY ULRIKE DAUER
FRANKFURT—Prosecutors said Monday they have brought charges against the former chief executive officer and seven former board members of Hypo Real Estate, five years after the lender was bailed out by the German government. Munich prosecutors accuse the entire management board, including former CEO Georg Funke, of falsely representing Hypo Real Estate’s financial position and liquidity risk in 2007 financial statements and the 2008 first-half report. If found guilty, the accused could face a fine or a prison sentence of up to three years. Hypo RE was nationalized in 2009 after requiring billions of euros in state aid to keep it afloat during the financial crisis. The prosecutors also allege that Hypo RE’s former chief financial officer, Markus Fell, manipulated markets when he told an investors’ conference in September 2008 that the lender’s liquidity situation was stable. Soon afterward the bank conducted the first of several liquidity-
boosting measures to prevent collapse. German law allows a fine or up to five years in prison for market manipulation. Lawyers for Mr. Funke and for Mr. Fell weren’t immediately available to comment. The charges were filed to a Munich court, which said it would decide by the beginning of next year whether it will open proceedings. Hypo RE’s financial troubles stemmed in part from the acquisition of Ireland’s Depfa Bank PLC, which it bought in 2007 for €5.7 billion ($7.3 billion). Both Hypo RE and Depfa were key lenders to local governments and the real-estate industry, and were badly hit by the global credit crisis. They were also important issuers of German covered bonds, which are popular among institutional investors. Hypo RE initially required more than €150 billion in state guarantees and capital. Depfa is currently being wound down, after Hypo Real Estate scrapped a sale in May. The process was agreed upon under a restructuring plan cleared by the European Union nearly three years ago.
BUSINESS BRIEFS FASHION
Prada Bosses Face Probe In Italy Over Tax Filings Italian fashion house Prada SpA said the company’s chief executives, Miuccia Prada Bianchi and Patrizio Bertelli, are under investigation by Italian judicial authorities over tax filings. The company said Ms. Prada and Mr. Bertelli have been informed by the “Italian judicial authority of the existence of an ongoing examination regarding the accuracy of certain past tax filings by them as individuals in respect of foreign-owned companies.” It said the procedure follows the voluntary disclosure made by Ms. Prada Bianchi and Mr. Bertelli that led to an agreement between them and the Italian Tax Authority in December last year. “This agreement completely satisfied the claims of the Italian Tax Authority as declared and confirmed by the Authority itself,” the company said. Prada said that neither the company nor any of its subsidiaries is involved in the matter. — Giovanni Legorano
BANKING
Alibaba Affiliate Gains Approval for Private Bank Alibaba Group Holding Ltd.’s financial affiliate won approval from Chinese authorities to establish a privately owned bank, regulators said Monday, as the e-commerce company moves further into financial services. The China Banking Regulatory Commission said it gave approval to start a bank to a financial affiliate of Alibaba Group that also is the parent company of Alipay, which processes ecommerce payments and is crucial to Alibaba’s operations. It said the bank would be headquartered in Hangzhou, the eastern Chinese city where Alibaba is based, and the Alibaba affiliate will own a 30% stake. The CBRC said Shanghai Fosun High Technology (Group) Co. will hold a 25% stake in the bank. The rest will be owned by several private investors. Alipay and the Alibaba financial
affiliate are controlled by Alibaba Executive Chairman Jack Ma. Alibaba and Alipay representatives didn’t respond to requests for comment. Setting up a bank would allow Alibaba’s financial affiliate to collect deposits and give it greater freedom to offer other bank-like services. While the permission allows the affiliate to move ahead on setting up a bank, it still must win a banking license from regulators before the bank can open. —Grace Zhu
FASHION
American Apparel Names New Interim CEO and CFO American Apparel Inc. moved to shore up its senior management by appointing a new interim chief executive as well as a new chief financial officer. Scott Brubaker, an Alvarez & Marsal managing director, will serve as interim CEO while the maker of jeans and T-shirts searches for a permanent successor to Dov Charney, the company’s founder. Mr. Charney was removed as CEO in June over allegations of misconduct. He is currently serving as a consultant at the company while a special board committee reviews the results of an investigation into allegations that he misused company funds and allowed nude photos to be published on the Internet of a former employee who had sued him alleging sexual harassment. Mr. Charney’s lawyer has called the allegations baseless. John Luttrell, American Apparel’s CFO and interim CEO since Mr. Charney’s removal, is leaving the company. He will be succeeded as CFO by Hassan Natha, former CFO for Fisher Communications Inc., a media company that was acquired last year by Sinclair Broadcast Group Inc. —Suzanne Kapner
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Feature Photo Service
Hypo Real Estate’s Ex-CEO Is Charged
Amelia, shown above in her text-based interface, embodies an approach to artificial intelligence called cognitive computing.
Amelia Thinks Like You, Even if She Is a Machine [ Keywords ]
BY CHRISTOPHER MIMS Here’s what it’s like to have a conversation with Amelia, the nearest thing yet to a reallife version of Samantha, the artificialintelligence operating system in the movie “Her.” “Where does Christopher Mims work?” types Ergun Ekici, the lead architect of Amelia, into her (for now) text-based interface. And then, well, there’s really no other way to put this: Amelia responds like a person. She’s read my bio online. She knows all about me. But her real talent isn’t regurgitating information; it’s solving problems. Here’s a typical conversation with Amelia, this one in another area of her expertise, diagnosing car trouble. Joe: “Hello, I’m stuck here and my car won’t start.” Amelia: “I’m sorry to hear that. Could you take a look at your dashboard? Is the battery light on?” Joe: “No.” Amelia: “OK. Are any of the lights in your car on?” Joe: “No.” Amelia: “It could be an issue with your battery. Do you have jumper cables with you?” On its own, this dialogue isn’t remarkable. It could be scripted, though it’s not. And Amelia can talk like this on pretty much any topic once she’s trained. She gets questions right nine times out of 10, says Jinho Choi, who took a sabbatical from Emory University to help build her brain, more than any other system that has been made public. Natural-language conversations with computers aren’t new. In 2013, Google unveiled “conversational search,” which lets you talk to the search engine, engaging in short dialogues about topics present in its “knowledge graph” of people, places and
things. Thus, it’s possible to ask, in spoken English, who is the U.S. president, and to follow up with questions like “who is his wife?” and “when was she born?” without having to reference the original subject of the conversation. And IBM’s Watson, famous for winning “Jeopardy,” excels not only at answering individual questions about facts in its database but also the probability that the answer is correct. Amelia, though—incubated for the past decade at a privately owned, relatively obscure IT services firm called IPSoft—is different. She learns from textbooks, transcriptions of conversations, email chains and just about any other text. As long as the answer appears in the data she gets, she can solve problems. IPSoft’s main product is another bit of artificial intelligence, a software suite known for automatically resolving IT infrastructure issues known as IPcenter. A Gartner analyst wrote that IPSoft is a “stealthy newcomer,” competing with the likes of IBM. IPSoft was founded in 1998 and has offices in nine countries. Amelia is already being tested—in some cases, alongside Watson—by companies in surprisingly diverse industries, from telecommunications to energy. She embodies a new approach to artificial intelligence called cognitive computing. Its defining characteristic is machines that can learn. Yet because of the complexity of their understanding , the knowledge they contain can’t be programmed into them. Like all software, these systems are first built by programmers, but like children, they must be taught to do the things for which they are intended. Amelia is the product of an attempt to understand how people think, rather than to copy the means by which we do it. Many traditional AI efforts try to map the human brain, or the brains of less complicated animals, like fruit
flies. But Amelia is all about turning what psychologists and linguists know about how thinking happens—a high-level understanding of it, rather than how it’s carried out by our neurons—into software. “We didn’t achieve powered flight by copying birds,” says Chetan Dube, president of IPSoft. “First, we had to understand the principles of flight.” And so it is with cognition. One potential application of Amelia is in the call center. Fortune 100 companies are already testing Amelia in this role. The goal is consistency— every time anyone calls, that person should get the same, correct answer. And the reason Amelia knows the correct answer is that she is ingesting every single support request the company receives and learning from the answers humans dispense to customers. Another way to put it: Soon, the ultimate repository of technical knowledge in a company could be the cognitive computer at its heart. Amelia is the product of a consortium’s worth of partnerships with academics in the fields of language processing and artificial intelligence. IPSoft is privately held and profitable, giving it the luxury of pursuing the interests of its founders, many of whom started as computer scientists working in universities. Amelia is still in the pilot phase, and whether or not she has real utility has yet to be publicly proved or disproved. But she is already having hundreds, and soon thousands, of simultaneous conversations with IPSoft’s customers. “The near future application is, we’re trying to replace humans with this—especially in a customer support type of situation,” says Kazu Gomi, CEO of NTT America, which is testing Amelia. Follow Christopher Mims on Twitter @Mims and write him at
[email protected].
20 | Tuesday, September 30, 2014
THE WALL STREET JOURNAL.
BUSINESS & FINANCE
Alibaba Buys 15% Stake In Hotel-Tech Company Alibaba Group Holding Ltd. is spending about $457 million to buy a 15% stake in a Beijing-based company that provides hotels with technology software and services, as the Chinese e-commerce giant continues its acquisition spree after its $25 billion initial public offering of stock in the U.S. The investment in Beijing Shiji Information Technology is Alibaba’s first major deal after it went public earlier this month on the New York Stock Exchange in the largest IPO in history. Beijing Shiji, listed on the Shenzhen Stock Exchange, disclosed Alibaba’s investment in a regulatory filing. The alliance with Beijing Shiji could help Alibaba’s travel-booking business. Alibaba, whose Taobao and Tmall online marketplaces attract millions of shoppers, also runs Taobao Travel, which allows users to book plane tickets, hotels and package tours. The deal with Beijing Shiji, whose clients include hotels across China, also fits into Alibaba’s strategy of connecting its online and mobile services with brick-and-mortar businesses. Through its mobile applications, Alibaba already allows users to pay for meals at restau-
Reuters
BY JURO OSAWA
Alibaba is spending about $457 million to invest in Beijing Shiji. The investment is the e-commerce giant’s first major deal since going public earlier this month. rants, taxi rides and other offline services, using the electronic payment system developed by the Alipay affiliate. Last year, Alibaba invested in Chinese travel website Qyer.com as part of an effort to beef up the offerings of Taobao Travel. Alibaba didn’t disclose the size or value of its stake in Qyer. Alibaba has struck more than a dozen deals this year, as it tries to expand its existing services, attract more users through mobile phones and tap into the next online boom in
Chinese consumption. Alibaba, for example, has invested in an online video company, a film-production company, a mobile game maker and a professional soccer club. Alibaba’s successful IPO in the U.S. has provided the company with a sizable war chest for more acquisitions and other investments to expand its services, as it faces stiff competition from other Chinese Internet companies, such as onlinegames and social-network company Tencent Holdings Ltd. and search provider Baidu Inc.
JapanInc.TurnstoSoutheastAsia Aid Boost
Tokyo has increased aid to Southeast Asia’s frontier markets. $2.0 billion 1.5 1.0 0.5
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Continued from page 17 on their own, and become less dependent on China,” the official said. Japan’s push is mimicking its strategy in Thailand in the 1980s and ’90s, when Japan helped finance a big buildup of Thailand’s infrastructure. Japanese companies now account for more than two-thirds of foreign investment in Thailand. That effort was driven by economic concerns, but also worked to bind the countries closer together: Thailand has remained an ally of Japan as tensions have mounted in the region around China’s increasing territorial assertiveness. Now, the frontier markets of Laos and Cambodia offer Japanese companies a cheaper alternative to both Thailand and China itself. Average salaries in Thailand have risen about 40% since a minimum-wage increase two years ago, and worker shortages are common. Few Japanese companies say they will leave Thailand, a major export hub, but they are increasingly looking to move labor-intensive businesses to neighboring countries. “We were looking for a way to reduce production costs, but we also needed to locate near Thailand,” said Toshiko Watanabe, a spokeswoman for automobile-parts maker Denso Corp., which last year opened a production facility in Cambodia. There are limits to the trend, and size matters: Thailand benefited along with Indonesia, another significant consumer market, when Japan shifted investment away from China after anti-Japanese riots there in 2012. Japanese companies invested about $10 billion in Thailand last year, a record, according to Japan’s Finance Ministry. Vietnam—a nation of 92 million people that, like Japan, is involved in territorial disputes with China— attracted almost $3 billion in invest-
Source: Ministry of Foreign Affairs The Wall Street Journal
ment from Japanese companies, up by a half from 2012. Meanwhile, smaller countries such as Cambodia and Laos are likely to remain appendages to Thailand’s supply chain. Japanese companies are eager to make inroads in Myanmar, which has been looking to reduce its dependence on China. Tokyo has provided funds for the development of an industrial zone south of Yangon, but Myanmar’s huge infrastructure hurdles limit investment plans. Japanese investment in Cambodia last year, for instance, was $127 million, up three-quarters on 2012, but still relatively small. Chinese companies invested 10 times more in Cambodia than Japanese companies between 2005 and 2012, according to the Association of Southeast Asian Nations. The push isn’t problem-free. Some Japanese companies complain workers in Laos and Cambodia often leave factory jobs at harvest time. “The biggest challenges in Cambodia are recruitment and employee retention,” said Yasuo Komine, a
spokesman for Minebea Co., a Japanese maker of motors and ball bearings. Minebea set up a factory in Cambodia recently, where more than 6,000 workers complete tasks such as gluing components onto motors. China, too, is digging in. Last year, Chinese President Xi Jinping announced plans to launch an Asian infrastructure bank, a potential rival for the Japan-dominated Asian Development Bank, which so far has coordinated efforts to improve infrastructure in Southeast Asia. China is also involved in plans for high-speed rail links to connect Yunnan province with Laos and Thailand. Still, in Laos, government officials say they are excited about the uptick in interest. Pledged Japanese investment in the country jumped to $406 million in 2013 from $27.5 million in 2012, and exceeded Japanese government aid for the first time, according to Motoyoshi Suzuki, a Japanese economic official who is advising the Laotian government. Mr. Suzuki’s data include investment from Japanese companies’ subsidiaries in Thailand and other countries. Those numbers are higher than estimates by Japan’s Finance Ministry, which comprise only realized outlays from companies’ Japan headquarters. “The cost in Laos is a third of that in China,” said Hoshi Hiroyuki, managing director at a Japanese-Lao joint venture that makes toys at the Savannakhet industrial park. Toyota Boshoku Corp. recently began making seat covers in Savannakhet, which it sends to Toyota Motor Corp. auto-production facilities in Thailand. “Suppliers for cars and smalland medium-size businesses are studying the Laos option very seriously,” said Bounthavy Sisouphanthong, vice minister at Laos’s Planning and Investment Ministry.
Encana to Acquire Shale-Oil Producer BY CHESTER DAWSON AND CAROLYN KING
CALGARY—Encana Corp. said Monday it has agreed to acquire Texas shale-oil producer Athlon Energy Inc. for US$5.93 billion in cash, giving the Canadian natural-gas company a large land position in the state’s oil-rich Permian Basin. The friendly deal is the latest in a string of transactions for Encana as it seeks to rebalance its production toward more oil output and improve its bottom line after years of low natural-gas prices. Over the past year, the Calgary-based company has sold off nearly $8 billion in natural-gas assets and used the proceeds to buy about $10 billion in shale-oil properties. The offer for Athlon is at $58.50 a share, a 25% premium to Friday’s close and nearly triple Athlon’s initial public offering price of $20 a share in August 2013. Encana will assume Athlon’s $1.15 billion of senior notes, bringing the deal’s total value to about $7.1 billon. Entering the Midland section of the Permian formation in West Texas will allow Encana to speed up its goal of raising production of oil and natural-gas liquids to half of total output by 2017, up from just 10% last year. Athlon’s assets add nearly 57,000 net hectares of land and production of about 30,000 barrels of oil equivalent a day. Encana Chief Executive Doug Suttles expects output from the Athlon assets will increase significantly from that level by 2019. “Our Permian production will grow to between 200,000-250,000 barrels of oil equivalent per day within the next five years and potentially reach even higher levels in the following years,” he said on a conference call. The $7.1 billion price tag amounts to $236,000 per barrel of oil equivalent at current production levels. But given Encana’s view that the assets hold potential production of three billion barrels of oil equivalent, “we bought those barrels at between $2-$3” a barrel, Mr. Suttles said. Based on proven reserves of 173 million barrels of oil equivalent, Encana paid $41 a barrel, according to RBC Dominion Securities Inc.
Encana plans to spend $1 billion next year to boost drilling in its newest shale-oil play, which becomes the company’s seventh core area of operations in North America. It is the largest deal so far executed by Mr. Suttles, a former BP PLC executive who has moved quickly since taking the helm a little over a year ago to turn around the fortunes of one of Canada’s largest gas producers. Encana’s profit has narrowed as natural-gas prices have plummeted in recent years because of surging North American shale-gas production. Just last week, Encana sold its remaining stake in a company recently created from its royalty income stream. The PrairieSky Royalty Ltd. stake sale, as well as proceeds from the PrairieSky initial public offering in May, raised $3.7 billion. In June, Encana agreed to sell its Bighorn properties in Alberta to Apollo Global Management LLC, a private-equity firm, for about $1.8 billion.
The offer for Texas-based Athlon is at a 25% premium to Friday’s close. Apollo helped launch Athlon in 2010 with a $360 million investment and still owns about one-third of Athlon’s shares. The deal with Encana would bring Apollo’s return to about seven times its investment, or about $2.7 billion, including fees and dividends paid to it by Athlon, according to securities filings. Mr. Suttles sees potential that Athlon didn’t. Encana expects to drill as many as 5,000 horizontal wells and anticipates three billion barrels of oil equivalent a day in production potential, which is higher than Athlon’s own projections for as many as 1,850 horizontal wells and 1.4 billion barrels of oil equivalent. With the deal, Encana expects to achieve its target of earning 75% of its operating cash flow from liquids production in 2015, two years earlier than its original estimate.
New Type of Cancer Therapy Gets Boost From Trial Results Continued from page 17 notherapy combinations remain. One patient in the AstraZeneca trial died of a drug-related side effect, which caused severe muscle inflammation. In Bristol-Myers’ trial, three patients died of drug-related side effects: respiratory failure, hemorrhage in the lungs and an extreme skin reaction. AstraZeneca said it would now move its drug combination into latestage testing. Both companies continue to study different doses of their respective drugs and different intervals between drug dosing. Roche also disclosed trial results for a combination of its own immunotherapy drug with another treatment Sunday. The trial combined Roche’s experimental PD-L1 immunotherapy with Avastin—not an immunotherapy, but an approved Roche drug for breast cancer. The trials were in patients with
kidney and colorectal cancer. They showed more promise in the former test, with a 40% response rate, versus an 8% response rate for the latter. Both were early-stage trials in small sets of patients. Meanwhile, immunotherapies continue to show promise across a broad range of cancers when used on their own, a number of trial results presented at the conference showed. The drugs showed promise in ovarian, gastric, bladder, pancreatic, head and neck cancers and melanoma. Data from a Bristol-Myers trial of Opdivo in patients with advanced melanoma, released Monday, showed 32% of patients responded to treatment, versus 11% in the patients on chemotherapy instead. And Merck’s drug Keytruda showed encouraging early data in patients with gastric cancer in trial results released Sunday, with 31% of patients treated seeing their cancer shrink.
THE WALL STREET JOURNAL.
Tuesday, September 30, 2014 | 21
BUSINESS & FINANCE
Lloyds Fires Eight Over Rate Rigging
CEO Michael Clarke said Treasury Wine sees opportunities in North America and is considering a deeper push in Asia.
TreasuryWineAbandons Campaign to Sell Itself BY ROBB M. STEWART
MELBOURNE, Australia—A bidding contest for one of the world’s biggest winemakers petered out Monday, with Treasury Wine Estates Ltd. saying it had failed to strike a deal with either of two U.S. private-equity suitors. The Australian vintner’s shares fell 8.5% to 4.5 Australian dollars (US$3.94) in Sydney on Monday following the news. Chief Executive Michael Clarke said talks with an alliance of KKR & Co. and Rhone Group LLC, and separately with an unnamed private-equity investor, had faltered after it became clear that some of Treasury Wine’s shareholders viewed the two identical A$5.20-a-share nonbinding offers as undervaluing the business. According to a person familiar with the talks, the other bidder, which emerged around the middle of August, was TPG. TPG declined to confirm it was the other suitor. “I think it’s over,” Mr. Clarke said of a race that began when KKR approached Treasury Wine in April. “They just couldn’t get their numbers to work,” he said of both suitors. Mr. Clarke added that one of the groups, which he didn’t identify, had sought to lower its offer, citing regulatory hurdles it expected to face in the U.S. The other bidder had wanted to considerably increase Treasury Wine’s debt levels—a move that could have skewed the value of the original offer, Mr. Clark said.
Both suitors looked into Treasury Wine’s books after making their offers, each of which valued the vintner at close to A$3.4 billion. Treasury Wine produces vintages ranging from California’s Beringer brand to the local premium Penfolds Grange label. The world’s second-biggest listed vintner after Constellation Brands Inc. said it would now refocus on burnishing its image. A tough environment has weighed on the Melbourne-based company since its 2011 spinoff from brewer Foster’s Group, which was later bought by SABMiller PLC. In the face of poor sales of brands such as Beringer in the U.S., Treasury Wine last year had to destroy thousands of gallons of wine that had passed the drink-by date. Treasury Wine attracted the interest of private-equity firms after the company was hit by weakening sales in the U.S. last year and rising competition at home from overseas winemakers following years of overproduction by the industry. Treasury Wine’s shares had fallen by some 16% since the start of this year by the time the company rejected an initial KKR bid in May. Monday’s decline took the company’s shares to just above where they were trading before that offer was rejected. Mr. Clarke, a former executive at Kraft Foods Group Inc. and CocaCola Co. who took the helm of the company in March, has taken steps to slash costs and reshape the business for a return to growth—which includes stepping up marketing
campaigns, altering release dates and focusing on premium brands. A spokesman for KKR in Singapore declined to discuss the breakdown in the talks, or whether the buyout firm would seek to revisit its bid. He did say that Treasury Wine’s management had shown “capability and understanding” during the negotiations. Mr. Clarke said that while management had been distracted by efforts to defend against the approaches, the heightened interest had underscored that plans to return Treasury Wine to growth would pay off. “We’ve had over 500 people, be it consultants, advisers and the two bidders themselves, crawl across every part of our business,” Mr. Clarke told investors and analysts, adding that the due-diligence process hadn’t uncovered any major concerns for the business. Mr. Clarke said the company still saw tremendous opportunities in North America, especially in luxury labels, and that it was looking to deepen its push into Asian markets with some of the brands it already produces in Australia and North America. Alliances and acquisitions were also a possibility, Mr. Clark said, without giving details. “If we can prove to shareholders we can deliver on everything we say we’re going to do, and build up a good track record, then I’m hoping shareholders will support us doing bolt-on acquisitions,” he said.
Insider Charges in Morrison Venture BY RORY GALLIVAN
LONDON—The U.K. financial regulator has charged the former treasurer and head of tax at Wm. Morrison Supermarkets PLC with insider trading in shares of grocery-delivery company Ocado Group PLC. The Financial Conduct Authority said Monday that it has charged Paul Gerard Coyle with two offenses of insider dealing, related to trading
between February and May 2013. Wm. Morrison said in March last year that it was in talks with Ocado about possibly entering the online grocery market. The two companies confirmed an agreement in May of the same year. “Wm. Morrison Supermarkets PLC confirms that following his arrest in 2013, a former employee Paul Coyle, has today been charged by the FCA with allegations of insider deal-
ing,” the company said in a statement following the announcement. “The FCA’s insider dealing investigation did not concern Wm. Morrison Supermarkets PLC nor any other Morrisons’ employee.” Wm. Morrison said it is satisfied with its procedures for handling market-sensitive data. Ocado declined to comment. Mr Coyle could not immediately be contacted for comment.
LONDON—Lloyds Banking Group PLC said it has dismissed eight employees in relation to the bank’s attempts to rig a number of market benchmarks. The partly government-owned bank also said Monday it had clawed back £3 million ($4.9 million) in bonuses from the individuals. Lloyds said that the eight individuals, which it didn’t identify, still have the right to appeal the bank’s decision to dismiss them. In July, the bank paid $370 million to settle with U.S. and U.K. authorities for attempting to manipulate a series of benchmark interest rates, including the London interbank offered rate, or Libor. The U.K.’s Financial Conduct Authority said Lloyds’s traders also manipulated the so-called BBA repo rate. The now-defunct benchmark helped determine the fees that Lloyds and other banks paid to the Bank of England during the financial crisis to swap toxic assets, such as mortgage-backed securities, for U.K. government bonds. Those bonds could then be traded for cash, help-
ing shore up the banks. The program was in effect in 2008 and 2009. At the time, the FCA said 16 individuals, seven of whom were managers, were directly involved in, or aware of, the attempted rigging. On Monday, Lloyds said it was unable to take any disciplinary action against individuals who had already left the bank before the settlements. “The board has been clear that it views the actions of those responsible for the misconduct referred to in the settlements as being completely unacceptable,” said Lloyds Chairman Norman Blackwell. The dismissals come days after the U.K. Treasury launched a consultation into whether it should extend new laws that govern Libor to cover other benchmarks. These would include the WM/ Reuters 4 p.m. London fix, a foreignexchange benchmark; the London gold and silver fixes; the ICE Brent futures contract and the ISDAFix, a global benchmark for swap rates and spreads for interest-rate swap transactions. The U.K. consultation will run until Oct. 23, and a final report will be published in June.
Bloomberg News
Bloomberg News
BY MAX COLCHESTER
The bank clawed back £3 million ($4.9 million) in bonuses from the individuals.
Santander Names Bostock As New CEO of U.K. Arm
BY RORY GALLIVAN AND MAX COLCHESTER
LONDON—Banco Santander SA has appointed Nathan Bostock as chief executive of its U.K. arm, succeeding Ana Botín, who was recently promoted to executive chairman of the entire Spanish banking group. Mr. Bostock was Santander U.K.’s deputy chief executive and had been widely expected to replace Ms. Botín, who took the top job at the banking group following the death of her father, Emilio Botín, earlier this month. Santander said Ms. Botin would remain on the board of the U.K. unit as a nonexecutive. Before joining Santander, 53year-old Mr. Bostock was Royal Bank of Scotland Group PLC’s chief financial officer and previously spent four years running RBS’s risk and restructuring business. Ms. Botín had run Santander U.K. since December 2010 when she was summoned by her father to take over the unit when his protégé, António Horta-Osório, surprised the family by defecting to
run Lloyds Banking Group PLC. She was tasked with preparing the U.K. unit for an initial public offering, a move many analysts saw as a test for bigger things. However, the bank’s executives have since cautioned that the long-awaited IPO won’t happen this year or next. Nevertheless, the U.K. unit has grown to represent 20% of the bank’s overall net profit and was cited as a key growth driver when it reported a 38% rise in second-quarter net profit to €1.45 billion ($1.84 billion) in July. Net profit from Santander’s U.K. unit was €775 million in the six months to June 30, up 59% from a year earlier, putting it among the biggest contributors to the bank’s overall results. Santander’s Brazil unit represented 19% of net profit in the second half of this year. In recent quarters, the Brazil and U.K. units have been neck-and-neck as top contributors to Santander’s results. Santander has units throughout the world, including in the U.S., Latin America and Poland. —Jeannette Neumann contributed to this article.
22 | Tuesday, September 30, 2014
THE WALL STREET JOURNAL.
BUSINESS & FINANCE
Unsecured Loans Beset South Africa
Miora Rajaonary for The Wall Street Journal
BY MATINA STEVIS
Andiswa Mde sits in her living room in Johannesburg. She took out a loan from African Bank at 32% interest to pay her mother’s hospital bills but ended up taking a second one to pay off the first. She is now struggling to repay the second loan. ‘They’re nothing but loan sharks,’ she said of the unsecured lenders.
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JOHANNESBURG—When in 2011, Maria Cristina Erasmus wanted to fix up her house, the 63-year-old retiree took out a bank loan of 50,000 South African rand ($4,465). When she wanted to buy furniture, she borrowed more. Mrs. Erasmus and her taxi-driver husband offered no collateral but agreed to pay 30% annual interest— about four times the country’s average lending rate. Now, she can’t repay the 100,000 rand that is owed. “We moved to a cheaper house, but we couldn’t do it,” Mrs. Erasmus said. “We were left with nothing after repaying the loan each month.” In July, the Erasmuses hired a debtmanagement consultant to restructure their loan after defaulting on it. The bad loan from the institution that lent Mrs. Erasmus the money, African Bank Ltd., is a small drop in a bigger bucket of trouble for South Africa’s banking system. The problems are amounting to a subprimeloan crisis for the country, home of the continent’s most sophisticated banking system. Today, the $14 billion market for unsecured personal loans accounts for about 11% of all loans in the country, according to the national regulator, having quadrupled over the past six years. And the debt is festering fast. As of March of this year, about a quarter of unsecured loans were nonperforming, meaning that they hadn’t been repaid in three months or more, up from 14% in March 2012. The default rate in the past six years has hovered around 16%, but jumped almost 10 percentage points in 2014. The lender the Erasmuses dealt with, African Bank, collapsed in August, ringing alarm bells about the murky world of unsecured lending, or high-interest personal loans not backed by collateral like a house or a car. The country’s central bank has managed to shutter the failed African Bank and avert a panic, but it hasn’t been able to prevent a large bad-debt pile from getting larger. Unsecured lending is rooted in what was once a race-based banking system. Most South Africans don’t have deeds to their homes, the result of decades of financial exclusion of blacks under white minority government. Black South Africans bought property informally, if at all, and the overwhelming majority can’t prove their ownership. Some have other assets, mainly cars, but borrowed from the unsecured loan market to buy them, so they can’t then use them as collateral. The loans—taken out from specialized banks like African Bank or, less often, major banks like Standard Bank of South Africa Ltd.—are guaranteed by nothing other than a pay slip. Interest rates are as high as 40%, five times the country’s average lending rate. Moody’s Investors Service has warned that a sluggish South African economy and a booming unsecured-lending market are a risk for banks’ balance sheets. In August, the rating agency downgraded the four biggest South African banks.
Two smaller unsecured lenders also sustained downgrades. The South African central bank made shareholders pay for African Bank’s failure, ensuring that taxpayers didn’t pick up the tab. African Bank’s healthy assets were put in a “good bank” that will be recapitalized with $1 billion raised from the rest of the industry. The plan is a replica of recently passed European Union legislation on how to resolve failing banks. Meanwhile, companies are turning to the army of South African debt consultants to get their indebted employees out of trouble. Mining company Glencore PLC has hired one such agency, the National Debt Mediation Association, to sift through the loans of its nearly 8,000 employees in the country. Glencore fears many of its miners are so deeply in debt they barely have anything left over from their paychecks after paying lenders, according to the mediation association. “This program is part of an effort to take a holistic approach to our employees’ lives,” a spokesman for Glencore said. “We are trying to look beyond the day-to-day mining.” The central bank, the South African Reserve Bank, has urged lenders to extend fewer unsecured loans. Some one million new unsecured loans worth 19 billion rand were issued in the first quarter of 2014, a 17% drop from the year before, according to the national credit regulator. Analysts say the smaller unsecured lenders are feeling the pain. African Bank had a particularly high-risk business model. It took no retail deposits and depended on short-term borrowing from the debt markets for its capital. It had few cash reserves to draw upon when its problems ratcheted up borrowing costs. In the middle of it all were people like Andiswa Mde. When the hotel employee found herself buried under a pile of emergency hospital bills for her mother, Ms. Mde turned to African Bank for her 26,000 rand loan. She agreed to a 32% interest rate but ended up taking another loan to repay the first one. She now can’t repay that second loan, building a crippling pyramid of debt. “They’re nothing but loan sharks,” she said of the unsecured lenders. Earlier this month, the central bank said that African Bank and its executives will be investigated for fraud and reckless lending. The report is expected around March 2015. African Bank’s founder and former chief executive, Leon Kirkinis, declined to be interviewed. Capitec, now the largest unsecured lender, has scrambled to insulate its business from the fallout. Capitec executives maintain a conservative corporate culture will allow them to survive and thrive in a risky market. Unlike African Bank, Capitec takes retail deposits, and that creates a relationship with customers, who think twice before defaulting, according to Capitec’s chief financial officer, André du Plessis. “Unsecured lending is here to stay,” he said.
THE WALL STREET JOURNAL.
Tuesday, September 30, 2014 | 23
BUSINESS & FINANCE
Banks’ Tax Trade Questioned by Feds BY JENNY STRASBURG
LONDON—Large banks generate more than $1 billion a year in revenue by helping hedge funds and other clients reduce taxes through a complicated trading strategy that has drawn criticism from U.S. authorities. Known as “dividend arbitrage,” the strategy is run largely from London, where the banks temporarily transfer ownership of a client’s shares to a lower-tax jurisdiction around the time when the client expects to collect a dividend on those shares, according to people familiar with the matter. The maneuver typically enables bank clients to reduce taxes from as much as 30% of the dividend payment to 10% or so—and sometimes to zero. The savings are divided between the client, bank and entities that take ownership of the shares. The business largely involves stocks listed in Europe and Asia. Banks and hedge funds say dividend arbitrage is an attractive, legal way to shrink tax bills through the differences in withholding rates around the world. But Bank of America Corp. recently was questioned by U.S. regulators about potential legal and reputational risks from the maneuver, according to a spokesman for the Federal Reserve Bank of Richmond. The Richmond Fed oversees Bank of America because it is based in Charlotte, N.C. Examiners asked earlier this year about the bank’s dividend-arbitrage clients and trades, people familiar with the discussions said. Bank of America is “responding to the risks that were raised,” the Fed spokesman said. The regulator’s concerns with Bank of America haven’t been disclosed publicly. Richmond Fed officials passed along their concerns to the broader Federal Reserve system. It isn’t clear if other banks have been questioned about the strategy. Other banks that arrange similar transfers of corporate stock include
Dividend Boost | One example of how banks use ’dividend arbitrage‘ to help clients reduce taxes Hedge fund holds dividend-paying stocks. It enters into swap transaction with a bank. E DG HE D N U F
Bank has global network of foreign subsidiaries and relationships with big custody banks.
Hedge fund sells shares to bank... Bank loans out or refinances stock position with third party.
…bank makes payments in return.
Hedge fund receives more of the dividend than it would have by keeping the stock.
Bank earns money from arranging the trade.
Sources: Fund managers; industry officials
Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley, according to clients and people involved in the business. Banks collect fees on the transactions. Citadel, Lansdowne Partners Ltd. and Och-Ziff Capital Management Group LLC are among the firms that have benefited from dividend-arbitrage trades, as well as banks that work as custodians of pension-fund assets. The hedge-fund firms declined to comment. Some clients benefit in the form of lower trading costs and financing rates on their overall business with major banks without explicitly telling the banks to shift a stock’s ownership to a lower-tax jurisdiction. Banks’ tax-cutting moves are facing broad criticism. The Obama administration is cracking down on inversions, a type of corporate merger that can cut tax bills. Swiss banks have reined in offshore accounts. Dividend arbitrage used to be an even bigger business than it is now, but criticism by Senate investigators in 2008 and the closing of loopholes by U.S. tax authorities made it much harder to shrink dividend taxes on U.S.-listed stocks. Other countries also have made it harder to use the strategy with shares of companies listed or based there.
Third party is located in country with lower or no withholding tax on specific dividends.
Third party collects the dividend. The Wall Street Journal
Still, the strategy remains popular as part of a wider offering of services aimed at helping clients reduce their tax exposure. Dividend arbitrage remains attractive because of wide variations in tax rules throughout the world. Banks generally have shifted the focus of their dividend-arbitrage work to London. “Banks see reputational issues in dividend arbitrage,” said Nigel Feetham, a Gibraltar-based lawyer specializing in financial services and taxes. “Tax authorities themselves are increasingly challenging tax arbitragers.” Concerns about possible risks from the strategy spurred a meeting at Bank of America last year that was attended by investment-banking chief Thomas Montag, according to people familiar with the situation. At the time, Mr. Montag also was co-chief operating officer at Bank of America. He now is the company’s sole operating chief. He couldn’t be reached. Last year, Bank of America estimated that trades aimed at helping clients reduce withholding taxes on stock dividends generated more than $1.2 billion for the bank from 2006 to 2012, according to people familiar with the internal estimates. The bank projected it would get $100 million in revenue from the
trades in 2013, mostly from Europe, these people added. “It’s still a very profitable trade for hedge funds and broker-dealers,” said Ihor Dusaniwsky, head of research at trade-analytics company S3 Partners. The New York firm’s Blacklight software program helps hedge funds assess dividend returns. In one of the most common types of dividend arbitrage, a bank and client enter into a stock swap, a derivative transaction in which the bank takes possession of the client’s shares of another company. The bank then transfers the shares to a subsidiary or third party in a country where the dividend would incur a lower tax compared with where the client is based—or no taxes at all. When the dividend is paid on the shares, the dividend is subject to lower taxes and the holder of the shares pockets a much higher percentage of the dividend payment. The tax savings is divided among the bank, its client and the holder of the stock. Some clients then opt to take back the shares. “From a financial point of view, it is a beautiful strategy,” said Stephen Diggle, head of Vulpes Investment Management in Singapore. “From a public point of view, no one wants to draw down the ire of a government.”
Mr. Diggle is battling Bank of America over returns he claims he is owed by the bank on dividend-arbitrage trades involving European stocks several years ago, according to people familiar with the matter. The dispute involves claims of about $10 million, these people said. Because of the dispute, he has stopped pursuing the strategy. “We haven’t stopped for moral reasons,” Mr. Diggle said. The continuing fight with Mr. Diggle was one reason for the meeting that Mr. Montag attended last year. Bank of America investmentbanking executives met at the bank’s midtown Manhattan offices to debate the pros and cons of dividend arbitrage, people familiar with the meeting said. Mr. Montag wanted to understand more about which clients were doing the trades and how much revenue they produced for Bank of America. Bank of America’s stock-financing desk was told to be careful about how it works with clients, these people said. Executives decided the business was too lucrative to walk away from, and Bank of America has continued to arrange the transactions. —Christina Rexrode contributed to this article.
BY LESLIE SCISM
WASHINGTON—A $40 billion lawsuit against the U.S. government for its crisis-era bailout of American International Group Inc. got under way in federal court Monday, with a lawyer for the insurer’s shareholders accusing the government of unlawfully seizing a majority stake in the insurer. Famed litigator David Boies called the deal a grab of a 79.9% equity stake at an “extortion interest rate” in an unlawful attempt to punish AIG’s shareholders. Government lawyer Kenneth Dintzer responded in his opening statement that U.S. taxpayers had extended “an enormous benefit” to AIG shareholders in the ultimately successful effort to stabilize AIG, one they weren’t automatically entitled to and which they apparently have “not appreciated.” In providing AIG an $85 billion loan in September 2008, the government was helping to save a failing company whose only other option at that point was bankruptcy, Mr. Dintzer said. Had AIG filed for bankruptcy, shareholders may have gotten nothing instead of the roughly 20% stake in an AIG that
has regained its footing, he said. The lawsuit was brought in 2011 by Starr International Co., an investment and charitable firm headed by Maurice R. “Hank” Greenberg, AIG’s former long-serving chief executive. Starr was AIG’s largest shareholder when the company became a government ward at the depths of the financial crisis. The suit accuses the government of violating shareholders’ rights to just compensation under terms of the U.S. Constitution. Mr. Greenberg, 89 years old, is expected to be a witness later in the trial but wasn’t in court Monday. The lawsuit is expected to play out over six weeks in the U.S. Court of Federal Claims in a bench trial. The suit was certified as a class action last year, and about 300,000 stockholders of AIG in 2008 and 2009—from big mutual-fund firms to AIG employees and retirees— would share any award with Starr. AIG’s since-repaid U.S. assistance ultimately expanded to $184.6 billion, and the government stake peaked at 92%, according to the Congressional Research Service. The government has said in the past that it received a positive re-
Associated Press
AIG Holders Claim Unlawful Seizure as Trial Starts
Maurice R. ‘Hank’ Greenberg turn of about $23 billion on the AIG bailout. Mr. Boies said in his opening statement that AIG had become a “poster child” of wrongdoing in the financial crisis, but “there is simply no authorization in the statute to give the Federal Reserve the roving permission to try to find people that they want to penalize and then use its lending authority to extract those kinds of penalties.” AIG, primarily an insurance com-
pany regulated by state insurance departments, largely got in trouble from sales of an unregulated type of insurance by a financial-products unit to banks and others to mitigate their risk on debt exposures. Mr. Boies said that the loan terms for AIG were far tougher than those applied to banks, even though some of those banks have been accused by the government of fraudulent misrepresentation in their mortgage-securities businesses. AIG hasn’t been accused of such wrongdoing, he noted. Mr. Boies also maintained that the Federal Reserve didn’t have the legal authority to acquire the 79.9% equity stake, on top of separate collateral that it required to back its loan. Mr. Dintzer countered that “terms of other rescues are not relevant” to the AIG debate. Government officials, he said, initially weren’t inclined to extend aid to the insurer, and AIG had sought private-sector solutions. As the company’s problems worsened in early September 2008 and a private-sector deal didn’t pan out, AIG neared a collapse that threatened to hurt the broader economy, and the government de-
cided to move ahead with a package. The New York Fed took on significant risk given the size of the AIG loan and the Fed’s unfamiliarity with AIG at the time it sought assistance, Mr. Dintzer said. He noted that AIG’s estimates of its cash needs were growing rapidly when it was in talks with the government, a situation that did “not inspire confidence.” In dealing with the banks that the Fed regulates, the Fed typically takes marketable securities as collateral, but AIG was using its insurance subsidies to back up its loan. There were unique and risky issues in such “hard-to-value” collateral, Mr. Dintzer said. He also maintained that the terms were legal and appropriate given the Fed’s ability as a policy matter to take “moral hazard” into consideration when extending loans to ensure that government terms aren’t more generous than those offered by the private sector. He said that the deal terms offered to AIG’s board—and approved by it voluntarily—were modeled along the lines of one of the last-ditch private-sector efforts to raise money for AIG.
24 | Tuesday, September 30, 2014
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One reason stocks were so troubled last week is that they are getting closer to what Wall Street, in its inimitable slang, calls being “priced for perfection.” Priced for perfection, unfortunately, doesn’t mean attractive. It means that stock prices are so high that gains depend on a very favorable investing environment, with strong corporate profits, low interest rates, low inflation and continued global growth. If the environment starts looking less favorable, stocks can weaken, as they did last week. Stocks probably aren’t completely priced for perfection yet, money managers say, but they are moving that way. The S&P 500 stock index closed Friday at 19.4 times its companies’ net profits for the past 12 months, well above its long-term average of 15.5, according to Birinyi Associates. Many consider the long-term economic outlook good enough that stocks can keep rising in the medium term. What worries people is the next few weeks and months. When cracks widen in the investing backdrop and stocks are pricey, traders are quicker to sell. And cracks are widening. Among them: Next year’s expected Federal Reserve interest-rate increases, which are appearing now on investors’ radar screens, growing tensions with Russia and renewed concerns about China’s uncertain economic growth. “The market is primed for more volatility,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman Private Banking, which oversees $26.8 billion in New York. “We are in for a lot more days like Thursday,” when the Dow Jones Industrial Average fell 264 points, its worst decline since July. Columbia Management Investment Advisors, which oversees $363 billion in Boston, decided a few weeks ago to reduce its stockholdings and shift funds to cash. “We are sitting and waiting to see” whether earnings and the economy continue performing well and stocks stabilize, said Columbia senior portfolio manager Anwiti Bahuguna. In the longer term, Ms. Bahuguna said, she and her colleagues are optimistic and think stocks can rise at least in line with gains in corporate earnings. But like many investors, they fear that the immediate climate could be worsening. The main problem is “the disruption we expect as the market begins to digest changes in the Fed’s policy,” Ms. Bahuguna said. She also mentioned uncertainty about how Ukraine tensions will affect Europe’s economy, which is flirting with recession. She also is concerned about weak U.S. corporate-sales growth. While earnings at S&P 500 companies grew nearly 8% in the
Paying Up
The S&P 500 index’s valuation has moved above its long-term average, measured by trailing 12-month price-to-earnings ratio. 2,000 1,900
Friday 1982.85 P/E 19.4 Average 15.5
1,800 1,700 1,600
2013
’14
Source: FactSet (S&P); Birinyi Associates (P/E) The Wall Street Journal
12 months through August, sales were up only about 3.5%, she said. Like many money managers, she says stronger sales gains are needed to push earnings ahead. She and her colleagues for several years kept a higher-thannormal amount of money in stocks, but now they have reduced stockholdings to the neutral level until they have a clearer view of the future. They hope to put the money back into stocks once markets calm down, she said. Ms. Bahuguna says she and her firm use five or 10 different ways of measuring stock value, based on earnings, sales, a company’s book value and other factors. The most common method is to compare stock prices with earnings. Because earnings forecasts are often wrong, conservative investors often use actual earnings for the past 12 months. Many money managers remove exceptional items, which produces a price/earnings ratio of 17 to 18 for the S&P 500. That is lower than the P/E of 19.4 based on net profit, but still above the long-term average of 15 to 16. A P/E ratio tracked by Nobel Prize-winning Yale professor Robert Shiller, using a 10-year average of past earnings, shows the S&P at 26 times earnings. None of these measures is near the 40 level hit at the top of the 1990s stock mania; the Shiller measure isn’t even quite back to its 2007 high of 27.5. Ms. Bahuguna says she prefers simply to call today’s stocks “fully priced.” Mr. Clemons of Brown Brothers puts it this way: “Let’s say they are priced for a lot of good news.” He has increased his own cash position to about 20% in the typical client portfolio, he said. Steven Wieting, global chief investment strategist at Citi Private Bank, says he is less concerned about P/E ratios than another sign of excess: the cheapness of options used to hedge financial investments. Cheap options could mean investors aren’t using them and aren’t ready for negative surprises. He, too, worries that investors could be rattled by the Fed’s shifting interest-rate policies. “We think it will be bumpier from here,” said Mr. Wieting, whose firm oversees $310 billion in New York.
THE WALL STREET JOURNAL.
Tuesday, September 30, 2014 | 25
MARKETS
Billions in Assets Fly Out Pimco’s Door Pacific Investment Management Co. suffered roughly $10 billion of withdrawals following the Friday departure of co-founder Bill Gross, a person familiar with the matter said, a sign of how quickly Mr. Gross’s surprise move is reshaping the bond-investing landscape.
Pimco is bracing for more outflows on the heels of the veteran investor’s departure after months of internal strife over his leadership. At the same time, some managers say they remain committed to the firm. Some within the Newport Beach, Calif., investment firm are projecting it will lose at least $100 billion or more in assets due to withdrawals, the person familiar with the matter said, and some analysts peg the estimate higher. Pimco Chief Executive Douglas Hodge said in a statement that his firm “manages nearly $2 trillion in assets, and we are confident that the vast majority of our clients will continue to stand with us.” Pimco executives are confident the firm can thrive, according to interviews with executives and people familiar with the matter, partly because the firm has had good performance in many of its funds and now has more money to retain its stars and lure new talent. Pimoc’s parent company, Allianz SE, attempted to reassure investors of its commitment to the insurer and said the departure of Mr. Gross won’t derail 2014 profit targets. Europe’s biggest insurer by revenue targets 2014 operating profit at the upper end of the €9.5 billion to €10.5 billion range ($12.04 billion to $13.3 billion). The flight of $100 billion from Pimco—more assets than many mu-
Bloomberg News
By Kirsten Grind, Gregory Zuckerman and Min Zeng
Pimco Chief Executive Douglas Hodge said he and others at the firm plan to meet with large institutional investors. tual funds hold—could roil some parts of the bond market with limited trading activity, experts say, as Pimco sells assets to meet investor redemptions and other managers put new money to work. Rivals are trying to position themselves to attract some of the Pimco outflows. “There is a good chance that Pimco will lose its dominant position as a fixed-income manager as assets find their way into other investment managers, thereby leveling the playing field in fixed income,’’ said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading in New York at Deutsche Bank AG’s private wealth-management unit. Competitor DoubleLine Capital
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OT VGB 08/31 USD
2155.22
—%RETURN— YTD 12-MO 2-YR NS
NS
NS
FUND NAME
NAV GF AT LB DATE CR
NAV
n HERMITAGE CAPITAL MANAGEMENT LTD. Tel: +7501 258 3160 www.hermitagefund.com The Hermitage Fund
GL EQ JEY 03/12 USD
963.12
—%RETURN— YTD 12-MO 2-YR
4.5
105.6
-23.2
n HORSEMAN CAPITAL MANAGEMENT LTD. T: +44(0)20 7838 7580, F: +44(0) 20 7838 7590, www.horsemancapital.com
n BANC INTERNACIONAL D'ANDORRA. BANCA MORA. Avgd. Meritxell 96, Andorra la Vella. Andorra. Ph. +376.884884 www.bibm.ad Andfs. Anglaterra Andfs. Borsa Global Andfs. Emergents Andfs. Espanya Andfs. Estats Units Andfs. Europa Andfs. Franca Andfs. Japo Andfs. Plus Dollars Andfs. RF Dolars Andfs. RF Euros Andorfons Andorfons Alternative Premium Andorfons Mix 30 Andorfons Mix 60
UK GL GL EU US EU EU JP US US EU EU GL EU EU
n CG Portfolio Fund Ltd NAV
OT
EQ EQ EQ EQ EQ EQ EQ EQ BA BD BD BD EQ BA BA
AND AND AND AND AND AND AND AND AND AND AND AND AND AND AND
11/16 09/26 11/02 09/26 09/26 09/26 02/24 09/26 10/22 09/26 09/26 09/26 12/31 09/26 12/19
GBP EUR USD EUR USD EUR EUR JPY USD USD EUR EUR EUR EUR EUR
8.47 6.26 14.77 15.08 22.51 7.32 10.98 720.53 9.66 12.40 11.91 15.95 109.45 10.46 8.96
2.8 -6.0 -20.4 6.7 7.6 -2.7 0.2 3.3 2.3 2.0 2.2 1.9 16.9 1.4 4.4
3.6 -2.9 -19.2 22.1 17.5 5.6 17.7 8.3 3.0 3.2 3.2 3.3 16.9 4.3 7.1
14.9 2.4 -4.7 22.7 17.6 8.0 13.7 30.8 6.2 1.0 2.3 2.9 8.3 3.4 -2.5
OT CYM 06/07 GBP
25839.68
5.3
10.9
9.8
n CHARTERED ASSET MANAGEMENT PTE LTD - TEL NO: 65-6835-8866 Fax No: 65-6835 8865, Website: www.cam.com.sg, Email:
[email protected] CAM-GTF Limited
OT
OT MUS 09/26 USD 351434.24
n Citadele Republikas square 2a, Riga, LV-1522, Latvia
Citadele Eastern Europ Bal EU BD LVA 09/26 EUR Citadele Eastern Europ Bd EU BD LVA 09/26 USD Citadele Russian Eq EE EQ LVA 09/26 USD
16.44 20.35 16.93
5.8
2.0
-4.9
-0.8 -0.2 -24.7
1.0 1.4 -24.2
2.0 2.8 -11.6
n DJE INVESTMENT S.A. internet: www.dje.lu email:
[email protected] phone:+00 352 269 2522 0 fax:+00 352 269 25252 DJE Real Estate P DJE-Absolut P DJE-Alpha Glbl P DJE-Div& Substanz P DJE-Gold&Resourc P DJE-Renten Glbl P LuxPro-Dragon I LuxPro-Dragon P LuxTopic-Aktien Europa LuxTopic-Pacific
ning to fire him, in part because of recent volatile behavior, according to people familiar with the matter. Recently, he earned more than $200 million a year at Pimco, people familiar with the matter had said. Even as Pimco prepared for some investors to follow Mr. Gross, Mr. Hodge said executives at the firm felt an “overwhelming” sense of excitement at the giant asset manager, which has been besieged with negative publicity, spotty performance in its flagship fund that Mr. Gross managed and investor outflows in that and other funds in recent months. The big question ahead is whether Pimco can maintain its long-term track record and keep enough clients happy. Mr. Hodge and others at the firm
INTERNATIONAL INVESTMENT FUNDS
Advertisement FUND NAME
saw its biggest inflow of the year Friday, taking in “hundreds of millions of dollars,” said Jeffrey Gundlach, chief executive. The largest U.S. public pension fund, California Public Employees’ Retirement System, said in a statement Friday that it would stay invested with Pimco “at this time” while also conducting “a thorough analysis of our exposure managed by them.” Mr. Gross said Friday morning that he was departing to run a small bond fund at rival Janus Capital Group Inc. Mr. Gross, who built Pimco into a bond powerhouse, is one of the most successful and recognizable investors of all time. Mr. Gross tendered his resignation just before Pimco executives were plan-
are planning to meet with large institutional investors, he said in an interview Saturday. They are hosting client conference calls and one-onone meetings and reaching out to pension-fund consultants and advisers with details about the goals of the new portfolio management team put in place Friday afternoon, according to Pimco executives. “All of our people have been activated,” said Mr. Hodge. “All of our clients are going to hear from us in one way or another.” Some are already jumping ship. Jayson Davidson, an adviser to pension funds and endowments with $15 billion in assets under management in Portland, Ore., sent a note to his clients Friday advising them to withdraw their money from Mr. Gross’s former $222 billion Total Return fund and another mutual fund at the firm. Many large institutional clients and their advisers have been waiting to see how a management change made earlier this year at Pimco after the departure of Chief Executive Mohamed El-Erian would play out and had placed Pimco on a so-called watch list. “We had the personnel changes with El-Erian, the change in structure, the obvious tug of war around leadership.…And then we had the lead manager’s departure,” Mr. Davidson said in an interview. “Those are all negatives and all on their own could be reason for termination.” The research firm Morningstar Inc. estimated Friday that “tens of billions, if not hundreds of billions” of assets under management might leave Pimco, following Mr. Gross to his new position overseeing a small unconstrained bond fund at Janus. A research report from AllianceBernstein on Friday said investors are likely to withdraw between 10% and 30% of Pimco’s assets under management.
OT OT LUX 09/29 EUR OT OT LUX 09/29 EUR OT OT LUX 09/29 EUR OT OT LUX 09/29 EUR OT EQ LUX 09/29 EUR EU BD LUX 09/29 EUR AS EQ LUX 07/20 EUR AS EQ LUX 07/20 EUR EU EQ LUX 09/29 EUR OT OT LUX 09/29 EUR
3.36 247.69 186.94 298.71 125.09 151.74 144.57 140.29 20.60 20.88
-7.7 -1.0 -3.4 5.6 3.1 5.3 -8.5 -8.8 1.1 4.8
-10.2 1.9 1.9 9.4 -2.5 6.3 5.0 4.4 3.2 4.2
-9.0 6.9 6.6 9.9 -18.3 4.4 7.6 7.0 6.2 3.9
Horseman EurSelLtd EUR Horseman EurSelLtd USD Horseman Glbl Ltd EUR Horseman Glbl Ltd USD
EU EU GL GL
EQ EQ EQ EQ
GBR GBR CYM CYM
08/31 08/31 08/31 08/31
EUR USD USD USD
312.36 339.74 557.34 557.34
NS NS NS NS
n HSBC ALTERNATIVE INVESTMENTS LIMITED T +44 20 7860 3074 F + 44 20 7860 3174 www.hail.hsbc.com HSBC ALTERNATIVE STRATEGY FUND Special Opp EUR Special Opp Inst EUR Special Opp Inst USD Special Opp USD
OT OT OT OT
OT OT OT OT
GGY GGY GGY GGY
n HSBC Portfolio Selection Fund GH Fund CHF Hdg GH Fund EUR Hdg (Non-V) GH Fund GBP Hdg GH Fund Inst USD GH FUND S EUR GH FUND S GBP GH Fund S USD GH Fund USD Hedge Investments Leverage GH USD MultiAdv Arb CHF Hdg MultiAdv Arb EUR Hdg MultiAdv Arb GBP Hdg MultiAdv Arb S EUR MultiAdv Arb S GBP MultiAdv Arb S USD MultiAdv Arb USD
n HSBC Uni-folio
Asian AdbantEdge EUR Asian AdvantEdge Emerg AdvantEdge Emerg AdvantEdge EUR Europ AdvantEdge EUR Europ AdvantEdge USD Real AdvantEdge EUR Real AdvantEdge USD Trading AdvantEdge Trading AdvantEdge EUR Trading AdvantEdge GBP
NS NS NS NS
NS NS NS NS
09/19 03/31 03/28 09/19
EUR EUR USD USD
130.54 88.51 123.18 137.90
6.8 0.7 4.2 6.8
12.5 -0.3 18.5 12.6
14.7 13.3 10.6 14.8
OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT
OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT
GGY GGY GGY GGY CYM CYM CYM GGY GGY GGY JEY JEY JEY JEY JEY JEY JEY
09/19 09/19 09/19 09/19 09/19 09/19 09/19 09/19 08/16 09/19 09/19 09/19 09/19 09/19 09/19 09/19 09/19
CHF EUR GBP USD EUR GBP USD USD USD USD CHF EUR GBP EUR GBP USD USD
129.90 144.88 160.43 138.67 162.53 170.39 190.95 328.82 158.48 156.59 103.16 115.28 125.83 130.82 138.35 149.42 218.00
3.6 3.9 4.1 4.4 4.8 5.0 4.7 3.8 NS 6.3 3.2 3.5 3.7 4.2 4.2 4.0 3.5
7.4 7.4 7.9 8.4 8.9 9.0 8.9 7.6 NS 13.4 5.0 5.4 5.6 6.4 6.5 6.2 5.5
7.5 7.4 8.0 8.2 8.6 8.9 8.8 7.6 3.6 13.3 4.1 4.3 4.8 5.5 5.9 5.5 4.5
OT OT OT OT OT OT OT OT OT OT OT
EQ EQ EQ EQ EQ EQ OT OT OT OT OT
JEY JEY JEY JEY JEY JEY JEY JEY GGY GGY GGY
06/30 06/30 09/28 09/28 06/30 06/30 04/30 04/30 09/19 09/19 09/19
EUR USD USD EUR EUR USD EUR USD USD EUR GBP
91.36 171.19 151.22 82.99 127.84 135.07 104.69 105.31 136.81 123.74 132.08
-6.2 -6.2 3.4 2.8 -3.4 2.0 1.3 1.5 5.0 5.6 5.1
-4.5 -4.4 -2.4 -3.0 -1.3 4.3 -9.5 -8.8 6.7 6.8 6.8
2.5 2.8 -5.5 -5.9 2.2 5.1 -1.9 -1.7 -4.4 -4.4 -4.4
FUND NAME
NAV GF AT LB DATE CR
n HSBC Trinkaus Investment Managers SA E-Mail:
[email protected] Telephone: 352 - 47 18471 HSBC Trinkaus Golden Opportunities Prosperity Return Fund A Prosperity Return Fund B Prosperity Return Fund C Prosperity Return Fund D Renaissance Hgh Grade Bd A Renaissance Hgh Grade Bd B Renaissance Hgh Grade Bd C Renaissance Hgh Grade Bd D
OT JP EU EU EU EU EU EU EU
OT BD BA BA BA BA BA BA BA
LUX LUX LUX LUX LUX LUX LUX LUX LUX
09/26 12/06 12/06 12/06 12/06 12/06 12/06 12/06 12/06
USD JPY JPY USD EUR JPY JPY USD EUR
NAV
Data provided by:
—%RETURN— YTD 12-MO 2-YR
FUND NAME UK Fund USD A
65.70 8577.68 9032.12 79.01 121.37 10807.34 11130.39 96.94 102.83
-6.1 -9.3 4.6 -12.2 -9.0 3.5 17.9 -0.9 -4.6
-21.6 -8.4 11.0 -11.1 -8.8 5.1 25.6 0.7 -4.1
-32.2 0.3 13.2 -1.0 8.1 11.3 23.9 8.4 6.9
MP-BALKAN.SI MP-TURKEY.SI
EE OT
EQ SVN 08/12 EUR OT SVN 09/26 EUR
19.29 39.75
-1.9 9.8
-8.4 -6.4
OT
NAV
OT CYM 04/13 USD
157.94
—%RETURN— YTD 12-MO 2-YR 1.8
NS
NS
n PT CIPTADANA ASSET MANAGEMENT Tel: +6221 25574 883 Fax: +6221 25574 893 Website: www.ciptadana-asset.com Indonesian Grth Fund
GL
EQ BMU 09/24 USD
174.30
n THE NATIONAL INVESTOR PO Box 47435, Abu Dhabi, UAE Web:www.tni.ae MENA Special Sits Fund MENA UCITS Fund UAE Blue Chip Fund
n MP ASSET MANAGEMENT INC. Tel: + 386 1 587 47 77
NAV GF AT LB DATE CR
OT OT OT
OT BMU 08/31 USD OT IRL 09/25 USD OT ARE 09/25 AED
1200.51 1575.46 12.38
27.8
12.5
-2.1
7.6 21.5 32.8
9.9 30.2 53.8
7.6 23.0 56.5
-10.9 -4.3
n OTHER FUNDS For information about these funds, please contact us on Tel: +44 (0) 207 842 9694/9633 Medinvest Plc Dublin
OT EQ IRL 09/30 USD
NS.00
n WINTON CAPITAL MANAGEMENT LTD Tel: +44 (0)20 7610 5350 Fax: +44 (0)20 7610 5301 n MERIDEN GROUP Tel: + 376 741 175 Fax: + 376 741 183 Email:
[email protected] Antanta Combined Fund Antanta MidCap Fund Meriden Opps Fund Meriden Protective Div
EE EE GL GL
EQ EQ OT EQ
AND AND AND AND
09/26 09/26 02/05 11/24
USD USD EUR EUR
198.49 329.30 22.68 NS.00
-5.4 -8.8 0.0 -2.8
-19.1 -13.4 -11.2 NS
-12.8 -12.2 -11.0 NS
Winton Evolution EUR Cls H Winton Evolution GBP Cls G Winton Evolution USD Cls F Winton Futures EUR Cls C Winton Futures GBP Cls D Winton Futures JPY Cls E Winton Futures USD Cls B
GL GL GL GL GL GL GL
n POLAR CAPITAL PARTNERS LIMITED International Fund Managers (Ireland) Limited PH - 353 1 670 660 Fax - 353 1 670 1185 Global Technology Japan Fund USD Polar Healthcare Class I USD Polar Healthcare Class R USD
OT JP OT OT
EQ EQ EQ EQ
IRL IRL IRL IRL
09/26 09/29 09/26 09/26
USD USD USD USD
n Hemisphere Management (Ireland) Limited Discovery USD A Elbrus USD A Europn Conviction USD B Europn Forager USD B Latin America USD A Paragon Limited USD A
GL OT EU EU GL EU
OT OT EQ EQ EQ EQ
CYM CYM CYM CYM CYM CYM
12/31 08/31 08/31 08/31 06/30 12/31
USD USD USD USD USD USD
23.68 21.49 33.85 33.04
3.7 -4.8 19.4 18.7
14.0 -5.8 33.8 32.9
16.9 11.6 36.9 36.3
101.35 9.45 162.35 331.23 NS.00 NS.00
NS NS 0.8 4.9 NS 12.7
NS NS 3.4 11.4 NS 12.7
NS NS 3.6 9.6 NS 14.2
OT OT OT OT OT OT OT
CYM CYM CYM VGB VGB VGB VGB
08/31 08/31 08/31 08/31 08/31 08/31 08/31
EUR 1203.02 GBP 1219.36 USD 1532.79 EUR 258.08 GBP 281.35 JPY 18045.81 USD 920.85
NS
1.3
-4.4
2.2 2.4 2.3 2.5 2.7 2.5 2.6
15.8 16.0 16.0 12.2 12.4 12.3 12.3
5.2 5.7 5.5 4.4 4.7 4.7 4.7
INDICES FUND NAME
NAV ——————%RETURN —————— GF DATE CR NAV 1-WK 1-MO 1-Q 1-YR 2-YR
n ARIX ABSOLUTE RETURN INVESTABLE INDEX Feri Institutional Advisors, www.feri.de ARIX Composite Gross USD OT
OT GBR 08/31.00
USD1642.82
2.5
6.7
6.3
NAV
OT CYM 06/07.00
GBP25839.68
5.3
10.9
9.8
n CG Portfolio Fund Ltd OT
Data as shown is for information purposes only. No offer is being made by Morningstar, Ltd. or this publication. Funds shown aren’t registered with the U.S. Securities and Exchange Commission and aren’t available for sale to United States citizens and/or residents except as noted. Prices are in local currencies. All performance figures are calculated using the most recent prices available. 12-month and 2-year returns may be calculated over 11- and 23-month periods pending receipt and publication of the last month end price.
For information about listing your funds, please contact: Lauren Berkemeyer tel: +44 20 7572 2102; email:
[email protected]
26 | Tuesday, September 30, 2014
THE WALL STREET JOURNAL.
MARKETS
Hong Kong Unrest Weighs on Shares
Agence France-Presse/Getty Images
BY PETER NURSE
Foreign banks are raking in cash from funds parked at the Fed. Above, the Fed’s building in Washington, D.C.
Foreign Banks Get a Boost From Fed’s Rate Policies
Continued from first page costs from near zero when the time comes, likely next year. In part because regulatory requirements discourage domestic banks from holding more cash reserves than they need, many of the reserves created by the Fed are held by foreign banks. In the past, the Fed influenced interest rates by increasing or reducing money in the banking system through small amounts of shortterm bond trades with banks. This caused the Fed’s benchmark federal funds rate to rise or fall, influencing other borrowing costs across the economy, such as those on mortgages, credit cards and business loans. Because there is so much money in the financial system now, that old method won’t work and the Fed plans to rely primarily on adjusting the interest rate on reserves to change the fed funds rate and other borrowing costs. The interest payments will increase over time as the Fed raises rates. The Fed remits most of its profits to the U.S. Treasury, and the rising cost of the interest payments could put downward pressure on the amount the central bank sends to taxpayers each year, the Fed has said. Some observers say this, especially the payments it makes to foreign banks, could become a political challenge for the Fed, . “The fact is that the Fed is going to be paying very large amounts of interest to banks,” said William Poole, a senior fellow at the Cato Institute and former president of the Federal Reserve Bank of St. Louis. “It’s highly likely that some politicians will notice that and given the proclivity of some politicians anyway to demagogue issues, the Fed is going to have some political explaining to do.” Some Fed officials also have expressed concern about how these
payments will look. “I think the optics are very difficult to defend and might get us into trouble,” James Bullard, president of the Federal Reserve Bank of St. Louis, said in an August interview with MarketWatch. Wall Street Journal calculations show foreign bank holdings of U.S. reserves held at the Fed have increased from less than 20% of the total before the financial crisis to nearly 50% today. Since 2009, they have earned roughly $5 billion by borrowing dollars cheaply, often at less than 0.10%, in short-term funding markets and depositing those funds at the Fed for 0.25%, according to the Journal analysis. That estimate doesn’t take into account the costs of raising money through other means, overhead and taxes, which affect net income.
Interest payments will increase over time as the Fed raises rates. A spokeswoman for one bank engaged in the trade, Bank of Tokyo Mitsubishi, said that the growth of excess reserves parked at the central banks is a natural consequence of the Fed’s policy. “The share of excess reserve balances held by BTMU has been in alignment with its business footprint in the U.S.,” she said. The foreign banks with the largest reserve balances at the Fed as of June 30, Deutsche Bank and UBS, didn’t respond to requests for comment. A Chinese official close to Bank of China said it has been parking funds at the Fed in order to help it comply with liquidity requirements in its home market. The foreign banks’ activity is “entirely legitimate because they are
providing a financial service and they are taking a spread,” said Lou Crandall, chief economist at research firm Wrightson ICAP. Big U.S. banks say the trade looks unattractive to them, largely because of U.S. capital requirements. All big banks must fund their assets, including cash, with a minimum percentage of investor equity, or capital. Outside the U.S., banks are generally required to maintain a ratio of equity to assets of at least 3%. Big U.S. banks must maintain equity of at least 6%, so they are less inclined to hold extra cash simply to park it at the Fed for a tiny spread. In addition, the biggest foreign banks can generally report capital levels at the end of every quarter, rather than calculate them every day as the largest U.S. banks do. That means that on most days, foreign banks can park huge amounts of money at the Fed without worrying about its impact on their capital requirements. Foreign banks have other reasons for being active in short-term U.S. dollar funding markets, beyond gains from Fed deposits. Many were caught short of dollars during the financial crisis, making it appealing for them to have increased their dollar holdings to avoid a repeat. The Fed has experimented with an alternative, known as reverse repo trades, that would allow it to control interest rates via payments mainly to U.S. money-market mutual funds, rather than foreign banks. However, Fed officials are wary of this new tool and said this month they intended to limit its use. U.S. bankers privately don’t complain about missing out on the lowmargin trade. There are “better uses of our time,” one U.S. banker said, referring to activities that could generate a larger profit. —Lingling Wei contributed to this article.
China Will Allow Yuan-Euro Trading SHANGHAI—China’s central bank said Monday that it will allow direct trading between the yuan and the euro in the interbank market for the first time, a major step in increasing trade and investment ties. The direct trading, which will start Tuesday, will help to form a direct foreign-exchange rate between the two currencies, reduce currencyconversion costs and promote the
yuan and the euro’s use in bilateral trade and investments, the People’s Bank of China said. “Direct trading brings together the [yuan] with the world’s secondmost actively traded currency, and is a significant step in [the yuan]’s globalization,” said Ryan Song at HSBC Holdings. The bank said it has received regulatory approval to be one of the
first market makers for direct onshore trading of the two currencies. The yuan is already traded directly against the U.S. dollar, the Australian and New Zealand dollars, the Japanese yen, the British pound, the Russian ruble and the Malaysian ringgit. Other currencies can be exchanged through the U.S. dollar. —Wynne Wang
The Wall Street Journal reported. France’s CAC 40 fell 0.8% to 4358.07, Germany’s DAX slipped 0.7% to 9422.91, and the U.K.’s FTSE 100 index declined less than 0.1% to 6646.60. German inflation stabilized at a very low level in September, an annual rate of 0.8%. The European Union’s statistics agency will release data for the 18-member eurozone Tuesday. Many analysts expect a decline from 0.4% to 0.3% in September, keeping the pressure on the European Central Bank ahead of Thursday’s meeting. “We expect ECB President [Mario] Draghi to stay on the dovish side at the ECB meeting amid no policy change, although we expect further measures to be announced” by the first quarter of 2015, said analysts at Barclays in a note to clients. U.S. Treasury prices climbed as the Hong Kong unrest helped spur a move toward haven assets. The 10year note rose 12/32 in price, pushing the yield down to 2.491%. The New Zealand dollar touched a 15-month low Monday after data showed that the country’s central bank sold large amounts of the currency in August, increasing expectations of further intervention. The currency touched 77.08 U.S. cents, its weakest since late June 2013, from around 78.28 U.S. cents just before the release. It was at 77.68 U.S. cents in late New York trading. Shares in Allianz rose 0.2% in Frankfurt as investors weighed news Friday that well-known asset manager Bill Gross resigned from Pimco, a subsidiary of the German insurer. Balfour Beatty plunged 15% after the international infrastructure group warned on profit. Oil for November delivery gained $1.03 a barrel, or 1.1%, to $94.57. Gold for October delivery climbed $3.40 a troy ounce, or 0.3%, to $1,217.50 an ounce on the Comex division of Nymex —Chao Deng, Dan Strumpf and Lucy Craymer contributed to this article.
Stocks in Europe and the U.S. declined Monday, as investors kept an eye on unrest in Hong Kong and looked ahead to Thursday’s meeting of the European Central Bank. The Stoxx Europe 600 dropped 0.4% to 340.99. The continuing crackdown on Hong Kong’s pro-democracy protests added to the geopolitical worries in Ukraine and the Middle East. Investors say the MARKET Hong Kong demonREPORT strations were unnerving in the context of broader concerns about a slowdown in economic growth in China. Hong Kong is a major financial hub, and the size and suddenness of the protests took many by surprise. “It’s something that people were not paying attention to that much,” said Patrick Chovanec, chief strategist at Silvercrest Asset Management, which manages $16.6 billion. “Hong Kong is China’s most visible international city and its most global city in terms of capital flows and in terms of using it as a business base, so anything that happens in Hong Kong, even if it’s limited to Hong Kong, still casts a very long shadow on China and the region.” The Hang Seng Index dropped 1.9% to 23229.21, while the Hong Kong dollar fell to its lowest level in six months, as the standoff between protesters and the police from the weekend continued Monday. Stocks in Hong Kong had rallied since early May to hit a year-to-date high of 25317.95 on Sept. 3, but have since lost 8.3%. The stock market is the world’s sixth-largest in terms of market capitalization. In the U.S., the Dow Jones Industrial Average declined 41.93 points, or 0.3%, to 17071.22. The S&P 500 dropped 5.05 points, or 0.3%, to 1977.80. The Nasdaq Composite Index shed 6.34 points, or 0.1%, to 4505.85. DreamWorks Animation SKG jumped 26%. SoftBank is in talks to buy or partner with DreamWorks,
Fund Scorecard U.S. Long/Short Equity These funds primarily take long/short positions in US equities. At least 60% of their assets are in UCDA (US/Canada/Developed America) equities. Ranked on % total return (dividends reinvested) in Euros for one year ending September 29, 2014
Leading 10 Performers FUND FUND RATING * NAME
1 NS 5 5 5 NS 4 NS 5 3
FUND MGM'T CO.
LEGAL CURR. BASE
Front Street Front Street CADCAN CDNEnergyResourceFundB Capital The Amvona Lemelson Capital USDUSA Fund, L.P. Management, LLC Whetstone Whetstone Capital USDUSA Capital LP Krensavage Krensavage Asset USDUSA Partners LP Management, LLC Cushing MLP Swank Capital LLC USDUSA Opportunity Fund I, LP Outer Outer Islands USDUSA Islands Capital LP Capital Management LLC Marlin Fund, Masters Capital USDUSA Limited Partnership Management LLC Nebulae Hesperian Capital USDCYM CanadianResourceClassAUSD Management Ltd. DKAM Capital Donville Kent CADCAN Ideas Fund LP Asset Management Inc. Tristan Cannell Capital USDCYM Offshore Fund, Ltd. LLC
NOTE: Changes in currency rates will affect performance and rankings. KEY: ** 2YR and 5YR performance is annualized NA-not available due to incomplete data; NS-fund not in existence for entire period
YTD
% Return in $US ** 1-YR 2-YR 5-YR
81.44 84.27 20.46
7.70
41.37 60.50 57.81
NS
31.88 58.43 52.32
NS
26.50
51.70 49.02 38.74
35.92
45.71 30.26 28.57
28.43 45.27 35.64 24.06 20.40 43.53 56.98 30.82 34.46 40.35 25.51
NS
19.26 38.40 27.52 28.32 8.58 38.23 31.55 22.51
Source: Morningstar, Ltd 1 Oliver’s Yard, 55-71 City Road London EC1Y 1HQ United Kingdom www.morningstar.co.uk; Email:
[email protected] Phone: +44 (0)203 107 0038; Fax: +44 (0)203 107 0001
THE WALL STREET JOURNAL.
Tuesday, September 30, 2014 | 27
GLOBAL MARKETS LINEUP Major stock market indexes
Stock indexes from around the world, grouped by region. Shown in local-currency terms. Close
PERFORMANCE Percentage change Yr.-to-date
PREVIOUS SESSION
Region/Country
Index
Net change
EUROPE
Stoxx Europe 600
340.99
-1.31
Stoxx Europe 50
3050.48
-13.26
Euro Zone
Euro Stoxx
318.77
-2.62
Euro Stoxx 50
3186.95
-32.63
Austria
ATX
2202.03
-13.75
Belgium
Bel-20
3198.25
-8.24
Czech Republic
PX
986.23
5.94
-0.3
2.8
Denmark
OMX Copenhagen
691.79
-2.29
-0.33
22.2
32.6
Finland
OMX Helsinki
7633.74
-34.40
-0.45
4.0
France
CAC-40
4358.07
-36.68
-0.83
1.4
-0.71
3.9%
-0.38%
52-wk.
Region/Country Spain
9.2%
4.5
9.3
Sweden
OMX Stockholm
-0.82
1.4
8.0
Switzerland
SMI
-1.01
2.5
9.2
Turkey
-13.5
-13.6
9.4
13.5
-0.43
-0.62 -0.26 0.61%
2.37
0.03%
7.0
9.4
BIST 100
74645.73
13.3
0.02
10.1
-0.2
U.K.
FTSE 100
6646.60
-2.79
ASIA-PACIFIC
DJ Asia-Pacific TSM
1464.40
-9.30 -49.20
2357.71
9.99
9.9
Hong Kong
Hang Seng
23229.21
-449.20
4.1
India
S&P BSE Sensex
26597.11
-29.21
1.6
-0.93 0.43
-1.6
0.9
11.4
-1.90
8.4
-0.11
-0.3
1.6
25.6
37.2
Japan
Nikkei Stock Average
16310.64
80.78
0.1
12.8
Singapore
Straits Times
3289.72
-2.49
-0.08
3.9
3.8
6.1
13.6
South Korea
Kospi
2026.60
-5.04
-0.25
0.8
1.5
8.2
16.3
AMERICAS
DJ Americas
492.10
-3.24
5.7
14.2
4.1
11.3
Brazil
Bovespa
54812.86
6.4
2.0
11.9
20.8
Mexico
IPC
44757.84
4.8
9.4
4816.88
-9.28
Italy
FTSE MIB
20526.11
-269.26
Netherlands
AEX
418.18
-0.31
Norway
All-Shares
674.37
0.70
0.10
Poland
WIG
54639.03
64.82
0.12
6.5
7.5
Portugal
PSI 20
5704.87
-12.81
-13.0
-4.9
Russia
RTSI
1126.21
-29.94
-21.9
-20.8
0.50
-0.65
-2399.52 -4.19 -126.49
Note: Americas index data are as of 3:00 p.m. ET.
S&P Dow Jones Indices
-0.28
Sources: SIX Financial Information; WSJ Market Data Group
MSCI indexes
PERFORMANCE (euros) Last Daily 52-wk.
1882.38 255.00
1401.98 1364.37 1413.16 427.35
-0.53% 17.1% -0.34 20.0
-0.42 -0.83 -0.60 -2.11
10.7 9.8 8.0 11.6
PERFORMANCE (U.S.dollars) Last Daily 52-wk.
3300.71 2536.40 241.64 3251.52 3316.64 261.38 1600.41 1578.37 1904.00 516.88 20530.65 3325.13
Price-toDividend earnings yield* ratio* S&P Dow Jones Index
-0.46% 9.1% -0.60 9.8 -0.41 12.5 -0.38 3.5 -0.36 9.5 -1.37 4.4 -0.28 3.9 -0.69 3.1 -0.67 1.2 -2.18 4.6 -0.32 15.9 -0.45 5.5
5.12%17.61 5.29 16.67 3.06 17.87 2.06 19.83 2.34 17.77 3.28 20.84 3.41 29.71 2.16 16.25
Developed and emerging-market regional and country indexes from MSCI as of September 29, 2014
PERFORMANCE (euros) PERFORMANCE (U.S.dollars) Last Daily 52-wk. Last Daily 52-wk.
Turkey Titans 20 -c Global Select Div Asia/Pacific Select Div 297.82 U.S. Select Dividend -d S&P Glb Nat Resources 2096.89 Islamic Market Islamic Market 100 Islamic Turkey -c Sustainability Europe 114.20 S&P Glb Infrastructure 1714.35 Luxury DJ Commodity
766.46 246.86 -1.36% 2.5% 323.35 1319.70 -0.69 7.0 2643.35 2856.10 3173.72 4154.26 -0.42 159.25 11.2 -0.22 19.6 2456.99 1809.37 638.63
*Fundamentals are based on data in U.S. dollar. Footnotes: a-in US dollar. b-dividends reinvested. c-in local currency. Note:All data as of 2 p.m.ET.
Cross rates
2.1
1.1
8.8
ISEQ
Global TSM Global DOW Global Titans 50 Dev Europe TSM Developed Markets TSM S&P BMI Emg Markets S&P Europe 350 S&P Euro Europe Dow BRIC 50 U.S. TSM DJ Global Select RESI
-1.5
-4.4
Ireland
2.34%19.33 2.77 19.73 2.88 15.13 3.18 20.03 2.31 20.01 2.66 14.98 3.34 19.95 3.19 25.05 3.82 26.59 3.08 10.62 1.87 21.36 3.40 22.68
-0.04 -0.63
-1.4
-67.64 219.36
Price-toDividend earnings yield* ratio* S&P Dow Jones Index
-0.26
-3.9
9422.91
-2.59%
10.7
-1.16
5264.20
17838.87
-0.22
5.0
444.69
SPX/ASX 200
DAX
-0.07
0.02% -0.52 -1.43 -0.06 -0.76 -0.30 -0.32 0.70 -0.50 -0.28 -0.99 0.83
1.7% 4.2 -3.9 15.6 0.3 12.0 15.4 -5.4 4.2 12.1 -9.8 -8.5
Price-toDividend earnings yield ratio MSCI Index
USD
GBP
CHF
SEK
RUB
NOK
JPY
MSCI ACWI
2.40
18
World (Developed Markets) 1,707.88
Australia
1.1444
1.8616
Canada
1.1143
1.8127
1.2046
0.1581
0.0290
0.1777
1.1730
0.1539
0.0283
0.1731
Denmark
5.8589
Euro
0.7872
9.5307
6.1672
0.8092
0.1485
0.9100
1.2805
0.8286
0.1087
0.0200
0.1223
4.1
16.5
-0.34
3.4
16.7
3.00
16
EAFE
1,856.03
0.56
-3.1
9.3
2.70
13
Emerging Markets (EM)
1,023.91
0.17
2.1
10.2
3.20
17
EUROPE
116.98
0.26
4.3
15.0
3.10
19
EMU
186.60 -0.09
-5.6
12.2
3.10
18
Europe ex-UK
125.28
0.37
4.1
16.1
4.20
14
Europe Value
118.93
0.32
4.8
17.8
2.30
22
Europe Growth
110.73
0.21
3.8
12.1
2.40
20
Europe Small Cap
263.74
-0.21
1.2
15.7 -3.3
Israel
3.6850
5.9944
3.8789
0.5090
0.0934
0.5724
3.30
16
Nordic Countries
0.0536
1.5899
7.4430
...
0.2136
...
0.1344
0.0337
...
4.6813
0.6290
3.3069
3.2201
16.0
1,730.55
AUD
0.0072
2.8
World ex-UK
UK
0.3105
15.3%
-0.28
World ex-EMU
7
0.3024
210.78 -0.30
EM Europe
258.27
-0.78
-6.0
1,960.53
0.15
-1.6
3.4
215.89
0.25
7.0
17.5
723.72
-0.83
-8.7
-0.3
1,235.52
0.81
8.6
20.6
DKK
CDN
1.4538
0.1953
1.0269
...
4.60
5
1.4156
0.1902
...
0.9738
2.80
20
5.2577
5.1198
0.7064
0.6879
2.90
14
AC ASIA PACIFIC EX-JAPAN 480.00
0.61
2.5
10.3
1.90
15
Japan
816.88
-1.12
1.4
19.5
3.20
10
China
63.37
-0.73
0.4
9.1
1.40
19
India
997.96
0.57
22.1
37.3
Japan
109.4020
177.9656
115.1593
15.1104
2.7738
16.9929
...
29.6885
138.9820
18.6728
98.1763
95.6004
Norway
6.4381
10.4729
6.7769
0.8892
0.1632
...
0.0588
1.7471
8.1788
1.0989
5.7775
5.6259
Russia
39.4411
64.1593
41.5167
5.4475
...
6.1262
0.3605
10.7031
50.1051
6.7318
35.3940
34.4654
Sweden
7.2402
11.7777
7.6212
...
0.1836
1.1246
0.0662
1.9648
9.1977
1.2358
6.4972
6.3268
Switzerland
0.9500
1.5454
...
0.1312
0.0241
0.1476
0.0087
0.2578
1.2069
0.1621
0.8525
0.8302
U.K.
0.6147
...
0.6471
0.0849
0.0156
0.0955
0.0056
0.1668
0.7809
0.1049
0.5517
0.5372
U.S.
...
1.6267
1.0526
0.1381
0.0254
0.1553
0.0091
0.2714
1.2704
0.1707
0.8974
0.8738
Russia South Africa
1.00
10
Korea
566.99 -0.02
-3.8
1.6
2.90
18
Taiwan
326.48 -0.30
7.9
15.0
1.90
20
US BROAD MARKET
2,236.81 -0.84
6.2
20.6
1.50
32
US Small Cap
3,213.80 -0.70
-0.5
14.4
3.20
18
EM LATIN AMERICA
3,283.02 -0.60
2.6
7.7
Source: ICAP Plc.
Currencies
Prices of futures contracts with the most open interest
EXCHANGE LEGEND: CBOT: Chicago Board of Trade; CME: Chicago Mercantile Exchange; ICE-US: ICE Futures U.S.MDEX: Bursa Malaysia Derivatives Berhad; LIFFE: London International Financial Futures Exchange; COMEX: Commodity Exchange; LME: London Metals Exchange; NYMEX: New York Mercantile Exchange;ICE-EU: ICE Futures Europe. *Data as of September 26, 2014 ONE-DAY CHANGE Commodity Exchange Last price Net Percentage
Corn (cents/bu.) Soybeans (cents/bu.) Wheat (cents/bu.) Live cattle (cents/lb.) Cocoa ($/ton) Coffee (cents/lb.) Sugar (cents/lb.) Cotton (cents/lb.) Rapeseed (euro/ton) Cocoa (pounds/ton) Robusta coffee ($/ton) Copper ($/lb.) Gold ($/troy oz.) Silver ($/troy oz.) Aluminum ($/ton)* Tin ($/ton)* Copper ($/ton)* Lead ($/ton)* Zinc ($/ton)* Nickel ($/ton)* Crude oil ($/bbl.) Heating oil ($/gal.) RBOB gasoline ($/gal.) Natural gas ($/mmBtu) Brent crude ($/bbl.) Gas oil ($/ton)
CBOT CBOT CBOT CME ICE-US ICE-US ICE-US ICE-US LIFFE LIFFE LIFFE COMEX COMEX COMEX LME LME LME LME LME LME NYMEX NYMEX NYMEX NYMEX ICE-EU ICE-EU
326.00 922.25 480.75 164.600 3,318 190.80 16.80 61.64 322.75 2,126 1,965
3.00 12.00 6.50 2.500 7 4.75 0.24 -0.25 2.25 2 10
3.0480 1217.80 17.530 1,956.50 20,550.00 6,721.00 2,087.00 2,278.00 17,380
0.0125 2.40 -0.007 -4.00 -205.00 -4.50 -2.00 5.00 65
94.51 2.7056 2.5120 4.120 97.77 819.25
0.97 0.0032 0.0239 0.091 0.14 3.50
0.93% 1.32 1.37 1.54 0.21 2.55 1.45 -0.40% 0.70 0.09 0.51 0.41 0.20 -0.04 -0.20 -0.99 -0.07 -0.10 0.22 0.38 1.04 0.12 0.96 2.26 0.14 0.43
Year high
Year low
517.00 1,279.25 765.00 165.075 3,399 222.60 19.83 84.74 385 2,187 2,218
322.00 905.50 466.25 131.500 2,639 119.90 15.51 60.83 315 1,651 1,585
3.3570 2.8845 1,390.80 1,206.60 22.240 17.270 2,113.50 1,686.50 23,770.00 20,550.00 7,422.00 6,430.00 2,287.00 2,033.00 2,410.00 1,948.00 21,100 13,425 104.63 3.0945 2.8485 4.9140 113.19 948.50
87.64 2.6600 2.4485 3.7860 96.34 807.50
Sources: SIX Financial Information; WSJ Market Data Group
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52-wk.
18
15
0.0102
2.7%
18
3.70
0.0105
YTD
-0.23%
2.30
3.50 EUR
419.75
PERFORMANCE
Daily
2.30
Source: S&P Dow Jones Indices
ILS
LOCAL-CURRENCY Last
2.40% 17
U.S.-dollar and euro foreign-exchange rates in global trading
Commodities
52-wk. 15.8
8776.73
Shanghai Composite
BUX
-1.29
Net change -165.40
Australia
Germany
-0.19
Close 10686.00
China
Hungary
1.24
PERFORMANCE Percentage change Yr.-to-date 7.8 -1.52
PREVIOUS SESSION
Index IBEX 35
Source: MSCI
London close on Sept. 29
AMERICAS
Per euro
In euros
Argentina peso-a
Per U.S. dollar
In U.S. dollars
EUROPE
Per euro
In euros
Per U.S. dollar
In U.S. dollars
10.7636
0.0929
8.4727
0.1180
Euro zone euro
1
1
0.7872
1.2704
Brazil real
3.1084
0.3217
2.4468
0.4087
1-mo. forward
0.9998
1.0002
0.7870
1.2707
Canada dollar
1.4156
0.7064
1.1143
0.8974
3-mos. forward
0.9993
1.0007
0.7866
1.2712
Chile peso
763.75
0.001309
601.20
0.001663
6-mos. forward
0.9986
1.0014
0.7861
1.2721 0.0461
Colombia peso
2576.96
0.0003881
Czech Rep. koruna-b
27.535
0.0363
21.675
Ecuador US dollar-f
1.2704
0.7872
1
1
Denmark krone
7.4430
0.1344
5.8589
0.1707
Mexico peso-a
17.1218
0.0584
13.4777
0.0742
Hungary forint
311.31
0.003212
245.05
0.004081
Peru sol
3.6676
0.2727
2.8871
0.3464
Norway krone
8.1788
0.1223
6.4381
0.1553
Uruguay peso-e
31.463
0.0318
24.767
0.0404
Poland zloty
4.1808
0.2392
3.2910
0.3039
U.S. dollar
1.2704
0.7872
1
1
Russia ruble-d
50.105
0.01996
39.441
0.02535
8.07
0.123963
6.35
0.157480
Sweden krona
9.1977
0.1087
7.2402
0.1381
Switzerland franc
1.2069
0.8286
0.9500
1.0526 1.0529
Venezuela bolivar
2028.50 0.0004930
ASIA-PACIFIC Australia dollar
1.4538
0.6879
1.1444
0.8738
1-mo. forward
1.2066
0.8288
0.9498
1-mo. forward
1.4572
0.6862
1.1471
0.8718
3-mos. forward
1.2057
0.8294
0.9491
1.0537
3-mos. forward
1.4635
0.6833
1.1521
0.8680
6-mos. forward
1.2044
0.8303
0.9480
1.0548 0.4399
1.4730
0.6789
1.1595
0.8625
Turkey lira
2.8882
0.3462
2.2735
China yuan
6-mos. forward
7.8102
0.1280
6.1480
0.1627
U.K. pound
0.7809
1.2805
0.6147
1.6267
Hong Kong dollar
9.8637
0.1014
7.7644
0.1288
1-mo. forward
0.7812
1.2802
0.6149
1.6263
78.2299
0.0128
61.5800
0.0162
3-mos. forward
0.7816
1.2795
0.6152
1.6254
12192 0.0000820
6-mos. forward
0.7824
1.2781
0.6159
1.6237
India rupee Indonesia rupiah
15488 0.0000646
Japan yen
138.98
0.007195
109.40
0.009141
1-mo. forward
138.95
0.007197
109.38
0.009143
MIDDLE EAST/AFRICA Bahrain dinar 0.4789
2.0881
0.3770
2.6527
3-mos. forward
138.83
0.007203
109.29
0.009150
Egypt pound-a
9.0833
0.1101
7.1501
0.1399
6-mos. forward
138.71
0.007209
109.19
0.009158
Israel shekel
4.6813
0.2136
3.6850
0.2714
Malaysia ringgit-c
4.1652
0.2401
3.2787
0.3050
Jordan dinar
0.9010
1.1099
0.7093
1.4099
New Zealand dollar
1.6318
0.6128
1.2845
0.7785
Kuwait dinar
0.3659
2.7328
0.2880
3.4717
Pakistan rupee
130.309
0.0077
102.575
0.0097
Lebanon pound
1921.39 0.0005205
1512.45
0.0006612
Philippines peso
57.098
0.0175
44.946
0.0222
Saudi Arabia riyal
4.7653
0.2099
3.7511
0.2666
Singapore dollar
1.6177
0.6182
1.2734
0.7853
South Africa rand
14.3053
0.0699
11.2607
0.0888
4.6661
0.2143
3.6730
0.2723
South Korea won
1338.88 0.0007469
1053.92 0.0009488
Taiwan dollar
38.727
0.02582
30.485
0.03280
Thailand baht
41.135
0.02431
32.380
0.03088
United Arab dirham
a-floating rate b-financial c-government rate c-commercial rate d-Russian Central Bank rate. Source: ICAP Plc.
28 | Tuesday, September 30, 2014
THE WALL STREET JOURNAL.
BLUE CHIPS & BONDS
Major players & benchmarks
Dow Jones Industrial Average
Below, a look at the Dow Jones Stoxx 50, the biggest and best known companies in Europe, including the U.K.
LAST: 17071.22 YEAR TO DATE: OVER 52 WEEKS
Stoxx Europe 50: Monday's best and worst...
Previous close, in local currency
Country
Industry
Volume
BG Grp
United Kingdom
Integrated Oil & Gas
5,274,083
1,146
26,906,079
456.35
1.03
-6.5
3.5
3,572,367
89.10
0.91
25.1
27.9
41,448,699
206.75
0.88
-15.7
-8.0
6,028,207
886.50
0.85
12.5
20.0
BP PLC
United Kingdom
Integrated Oil & Gas
Novartis AG
Switzerland
Pharmaceuticals
Vodafone Group
United Kingdom
Mobile Telecommunications
National Grid
United Kingdom
Multiutilities
t 41.93, or 0.25% s 494.56, or 3.0% s 1,941.55, or 12.8%
High
STOCK PERFORMANCE Previous session
Company
YTD
52-week
-11.7%
1.60%
P/E: 16
18000
Close Low
-3.9%
17500
50–day moving average
17000
t
Banco Santander S.A.
Spain
Banks
56,120,254
7.52
HSBC Hldgs
United Kingdom
Banks
26,013,690
635.00
Banco Bilbao Vizcaya Argn
Spain
Banks
25,835,783
9.40
-2.01 -1.97
AXA
France
Full Line Insurance
8,720,126
19.43
Financiere Richemont
Switzerland
Clothing & Accessories
2,472,194
79.00
19.1
-2.58% -2.34
-1.68
28.7
-4.1
-6.3
7.2
15.8
-3.9
11.7
-11.0
-13.8
16500
16000
...And the rest of Europe's blue chips Company/Country (Industry)
Volume
AstraZeneca 1,664,624 United Kingdom (Pharmaceuticals) Reckitt Benckiser Grp 983,731 United Kingdom (Nondurable Household Products) Royal Dutch Shell A 3,106,030 United Kingdom (Integrated Oil & Gas) Allianz SE 3,465,525 Germany (Full Line Insurance) UBS 13,434,364 Switzerland (Banks) Nestle 3,269,779 Switzerland (Food Products) Unilever CVA 3,609,134 Netherlands (Food Products) Roche Holding Part. Cert. 1,038,067 Switzerland (Pharmaceuticals) Unilever 2,153,096 United Kingdom (Food Products) British American Tobacco 2,098,286 United Kingdom (Tobacco) Credit Suisse Group AG 3,856,123 Switzerland (Banks) Lloyds Banking Group PLC 95,703,504 United Kingdom (Banks) Glencore PLC 18,077,279 United Kingdom (General Mining) Diageo 2,993,136 United Kingdom (Distillers & Vintners) ABB 5,998,980 Switzerland (Industrial Machinery) 2,067,898 SAP Germany (Software) L'Air Liquide 916,158 France (Commodity Chemicals) BT Group PLC 10,675,601 United Kingdom (Fixed Line Telecommunications) Deutsche Telekom 7,863,728 Germany (Mobile Telecommunications) ENI 19,848,378 Italy (Integrated Oil & Gas)
Latest, in local currency
15500
STOCK PERFORMANCE Latest YTD 52-week
4,446
0.85%
24.4%
38.9%
5,365
0.66
11.9
18.7
2,360
0.58
9.1
15.8
128.50
0.23
-1.4
10.6
16.73
0.18
-1.1
-10.8
69.60
...
6.6
10.0
31.10
-0.05
6.2
8.0
280.70
-0.07
12.6
15.1
2,561
-0.08
3.2
4.2
3,502
-0.11
8.2
6.3
26.25
-0.15
-3.7
-5.3
76.50
-0.21
-3.0
3.1
339.50
-0.22
8.6
-1.3
1,763
-0.31
-11.9
-10.8
21.43
-0.33
-8.7
-0.5
57.09
-0.38
-8.4
4.4
95.26
-0.41
-7.3
-7.8
382.00
-0.42
0.7
10.3
11.91
-0.42
-3.2
12.3
18.47
-0.43
5.6
9.0
Company/Country (Industry)
Volume
Siemens 1,642,304 Germany (Diversified Industrials) Zurich Insurance Group 332,824 Switzerland (Full Line Insurance) Prudential 4,030,989 United Kingdom (Life Insurance) BHP Billiton 5,383,955 United Kingdom (General Mining) Anheuser-Busch InBev 1,658,916 Belgium (Brewers) Deutsche Bank 5,603,142 Germany (Banks) Barclays 29,512,136 United Kingdom (Banks) Daimler 2,676,465 Germany (Automobiles) Total 3,842,237 France (Integrated Oil & Gas) GlaxoSmithKline 8,012,692 United Kingdom (Pharmaceuticals) Sanofi SA 2,244,677 France (Pharmaceuticals) ING Groep 13,102,893 Netherlands (Banks) Bayer 1,590,543 Germany (Specialty Chemicals) BASF 2,435,930 Germany (Commodity Chemicals) Rio Tinto 3,146,811 United Kingdom (General Mining) Schneider Electric SE 1,632,169 France (Electrical Components & Equipment) BNP Paribas 3,185,803 France (Banks) Telefonica S.A. 16,346,956 Spain (Fixed Line Telecommunications) Moet Hennessy Louis Vuitt 900,227 France (Clothing & Accessories) Standard Chartered 6,338,375 United Kingdom (Banks)
Latest, in local currency
93.42
3 July
STOCK PERFORMANCE Latest YTD 52-week
-0.52%
-5.9%
284.20
-0.56
9.9
21.6
1,415
-0.63
5.6
22.2
1,721
-0.66
-7.9
-6.5
87.28
-0.74
13.0
18.3
27.49
-0.74
-20.7
-19.0
226.00
-0.77
-16.9
-15.0
60.54
-0.80
-3.8
5.1
50.31
-0.83
13.0
15.2
1,421
-0.84
-11.9
-9.4
87.61
-0.90
13.6
16.6
11.19
-0.93
10.7
32.7
-0.95
6.9
25.1
72.41
-1.03
-6.6
2.1
3,051
-1.26
-10.5
-0.5
59.90
-1.29
-5.5
-7.3
52.08
-1.42
-8.1
2.3
12.12
-1.46
2.4
5.0
128.85
-1.53
-2.8
-11.8
1,156
-1.62
-15.0
-22.7
18
25
1 8 Aug.
15
22
Credit derivatives Spreads on credit derivatives are one way the market rates creditworthiness. Regions that are treading in rough waters can see spreads swing toward the maximum—and vice versa. Indexes below are for five-year swaps. Markit iTraxx Indexes Index: series/version
Mid-spread, in pct. pts. Mid-price
Europe: 21/1 Eur. High Volatility: 20/1 Europe Crossover: 21/1 Asia ex-Japan IG: 21/1 Japan: 21/1
0.63
101.71%
Coupon
SPREAD RANGE, in pct. pts. since most recent roll Maximum Minimum Average
Volume, in millions
Latest
Points
AT&T AmExpress Boeing Caterpillar Chevron CiscoSys CocaCola Disney DuPont ExxonMobil GenElec GoldmanSachs HomeDpt Intel IBM JPMorgChas JohnsJohns McDonalds Merck Microsoft Nike B Pfizer ProctGamb 3M TravelersCos UnitedTech UtdHlthGp Verizon VISA ClA
T AXP BA CAT CVX CSCO KO DIS DD XOM GE GS HD INTC IBM JPM JNJ MCD MRK MSFT NKE PFE PG MMM TRV UTX UNH VZ V
12.3 2.8 2.9 2.6 5.8 25.6 8.9 4.5 3.1 10.6 26.5 1.4 3.3 24.1 1.9 8.7 4.6 15.1 6.7 20.8 6.3 16.7 5.3 2.3 1.1 2.5 1.9 7.9 1.8
$35.25 87.93 128.68 99.79 120.53 25.12 42.24 88.91 72.07 94.54 25.43 183.56 92.94 34.95 189.70 60.35 106.49 96.23 59.46 46.45 89.17 29.82 84.38 142.11 93.70 105.09 86.41 49.76 210.89
–0.03 –0.44 –0.01 –0.59 –0.94 0.12 0.04 0.17 –0.43 –0.89 –0.20 –1.56 0.10 0.69 –0.36 –0.21 –0.61 1.53 0.07 0.05 –0.33 0.10 –0.20 –0.31 –0.70 –0.15 –0.19 –0.01 –1.05
–0.09% –0.50 –0.01 –0.59 –0.77 0.48 0.11 0.19 –0.59 –0.93 –0.80 –0.84 0.11 2.01 –0.19 –0.35 –0.57 1.62 0.12 0.10 –0.37 0.32 –0.24 –0.22 –0.74 –0.14 –0.22 –0.02 –0.50
WalMart
WMT
4.0
76.17
–0.32
–0.42
0.76
0.55
0.64
0.98
0.66
0.77
Unilever
2.62
110.21
0.05
2.99
2.19
2.55
Smurfit Kappa Fdg
0.96
100.19
0.01
1.13
0.90
1.00
0.59
101.92
0.01
0.72
0.55
0.63
3.00
Index roll Australia
2.00
t
1.00 0
Japan
–1
Source: Markit Group
Also, receive emails that summarize the day’s trading in Europe and Asia. To sign up, go to WSJ.com/Email.
CHANGE, in basis points
Yesterday Yesterday Five-day 28-day
Yesterday Yesterday Five-day 28-day
26
–1
...
...
Allianz
123
–2
–2
...
ConvaTec Healthcare
SCHNEIDER ELEC
47
–1
2
...
Stora Enso
Invensys
58
–1
1
1
UPM Kymmene
UniCredit Bk
78
–1
1
...
Stena Aktiebolag
Deutsche Bk
68
–1
10
5
Nationwide Bldg
Tesco
136
–1
47
37
ArcelorMittal Fin
40
3
7
2
227
17
46
39
234
17
43
54
220
14
39
49
413
26
83
77
50
3
5
...
SMURFIT KAPPA ACQUISITIONS
244
15
38
28
224
14
30
6
76
4
13
3
166
8
32
30
107
–1
1
–2
FKI
82
–1
...
...
BRISA CONCESSAO RODOVIARIA
INEOS GROUP Hldgs
81
–1
1
...
Intesa Sanpaolo HeidelbergCement
Behind Europe's deals: Bank revenue rankings, Eurozone Behind every IPO, bond offering, merger deal or syndicated loan is one or more investment banks. Here are investment banks ranked by year-to-date revenues from recent deals.
Deutsche Bank
Follow the markets throughout the day, with updated stock quotes, news and commentary at WSJ.com.
And the most deterioration
Source: Markit Group
April May June July Aug. Sept. 2014
WSJ.com>>
CHANGE Percentage
Source: WSJ Market Data Group
CHANGE, in basis points
0.01%
t
Spreads on five-year swaps for corporate debt; based on Markit iTraxx indexes.
26
Symbol
Stock
Showing the biggest improvement...
0.01
In percentage points
19
At its most basic, the pricing of credit-default swaps measures how much a buyer has to pay to purchase-and how much a seller demands to sell-protection from default on an issuer's debt. The snapshot below gives a sense which way the market was moving yesterday.
101.22
Note: Data as of September 26
12
Credit-default swaps: European companies
0.71
Spreads
5 Sept.
DJIA component stocks
Sources: SIX Financial Information
Tracking credit markets & dealmakers
29
Note: Price-to-earnings ratios are for trailing 12 months
4.9%
109.00
11
PERCENTAGE OF TOTAL REVENUE Debt Mergers & capital markets acquisitions
Revenue, in millions
share
Equity capital markets
$972
9.5%
29%
39%
15%
17%
7.2
33
32
19
16
Loans
JPMorgan
738
Goldman Sachs
629
6.1
31
36
20
12
Morgan Stanley
536
5.2
36
31
15
18
Citi
510
5.0
34
39
15
12
BNP Paribas
492
4.8
14
41
21
25
Bank of America Merrill Lynch
462
4.5
31
29
24
15
Credit Suisse
436
4.2
25
37
19
19
Barclays
423
4.1
21
50
11
18 Source: Dealogic
THE WALL STREET JOURNAL.
Tuesday, September 30, 2014 | 29
PERSONAL JOURNAL
Get the Most Out of a Conference And Avoid Time-Wasting Traps
BY SUE SHELLENBARGER
APPROACH 8:03 a.m.: In the line for coffee, Stefany Stanley, in black trousers and top, starts talking with another conference-goer.
CONNECT 8:05 a.m.: Ms. Stanley likes to convey warmth. She says the coffee area is a good spot for networking.
EXCHANGE CARDS 8:07 a.m. Ms. Stanley trades business cards. Her strategy is to write follow-up notes on the back of the cards.
NETWORK 10:32 a.m. Ms. Stanley has found that she gets the most out of speaking with conference speakers.
for “maybe.” “You really have to be on your A game,” she says. “You’re networking and getting all that information, plus giving your pitch and telling people about your company. It’s exhausting.” She works out to build energy, rising by 6 a.m. to lift weights and run about 5 to 8 kilometers. On the treadmill, she mentally rehearses different versions of her opening pitch to suit different people. To help her resist the free candy and junk food that abound in most exhibit halls, she stuffs granola bars into her shoulder bag. Ms. Stanley resists the temptation to befriend other new arrivals and travel with one group. “I have to stay focused on my goals, getting new ideas and new contacts,” she says. She positions herself by the coffee pot for the first networking session; talking about the coffee can be a good icebreaker. She considers introducing herself to another attendee standing alone nearby, but she hesitates, and the opportunity is lost when another attendee approaches the man. Ms. Stanley tells herself. “You’re here to network. One, two,
happen? He’ll say no. What’s so awful about that?” Her friendly approach sparks a conversation about how SAI might help his company, and they part with plans for another meeting. Ms. Stanley notes on each business card the follow-up steps she promised to take. By late afternoon, her energy wanes. She downs her third coffee of the day. Hungry after having only a salad for lunch, she allows herself a bag of Doritos, then heads for the last breakout session of the day. Blocked at the door by a security guard and a sign, “Session Full,” Ms. Stanley talks her way in with a joke. The guard laughs and opens the door. Ms. Stanley passes up an opening-night pub crawl. Networking with strangers over drinks “has never proven effective for me,” she says. The music festival on the second evening is unusual enough to lure her. She leaves after 45 minutes. “I prefer to go to bed early and be focused on the next day,” she says. Ms. Stanley once slept through a meeting because her cellphone died, she says. She now arranges a wake-up call from her hotel, in addition to setting the alarm on her
Ricky Rhodes for The Wall Street Journal (4)
Cleveland You’ve spent days wandering the cavernous halls of a convention center, trapped in windowless rooms, drinking too much coffee and talking yourself hoarse. Does anyone ever emerge from a conference as the organizers intended, feeling recharged with new ideas, conWORK & tacts and energy? FAMILY New York City marketing executive Stefany Stanley does. Among conference organizers she is known as a savvy convention-goer, someone with a strategy for rising above the dreary rounds of networking and breakout sessions. Ms. Stanley says she has gained valuable contacts, ideas and insights from the 15 conferences she has attended in the past five years. Avoiding time-wasting traps takes planning, self-discipline, skill—and for many, a lot of caffeine. The biggest mistake most conference attendees make is failing to plan ahead, set a personal agenda and report back to colleagues on their results, says David DuBois, president of the International Association of Exhibitions and Events, a Dallas trade group. Ms. Stanley, 26, admits to some apprehension as she prepares for 21/2 days at Content Marketing World. This is a conference in Cleveland focused on using content such as blogs and videos to replace traditional advertising. Her employer, Sandra Arnold Inc., or SAI, a creator and producer of corporate events and exhibits, is spending $3,000 on her trip, including a $2,000 pass to the meeting. Ms. Stanley, SAI’s business development director, hopes to return with new digital-marketing ideas and relationships with potential clients and helpful contacts. A record 70 million people will attend conferences in the U.S. and Canada this year, with attendance expected to peak next month, industry research shows. The experience can be overwhelming. Conferences usually last one to four days. Content Marketing World offers 80 breakout sessions, with time to attend only 11. It sprawls over 270,000 square feet of the Cleveland Convention Center. Sessions include “Breakthrough Moments in Content Marketing.” Eight networking sessions are scheduled to allow the 2,600 attendees time to meet. Along with the usual speeches by celebrities and exhibits, Content Marketing World provides social activities such as “our own music festival” with a Beatles tribute band and “Shooters on the Water,” an after party starting at 10:30 p.m. No matter what session conference attendees pick, they worry they’re missing a better one. The best networking may be in one session while the best speakers are elsewhere, Ms. Stanley says. She comes in with her schedule highlighted in neon yellow for “must attend” sessions and amber
three, go!” Meeting conference speakers, who tend to be high-level executives, is a key networking opportunity for Ms. Stanley in her search for corporate clients. She is nervous as she waits in line with a dozen others to introduce herself to Katrina Craigwell, global manager of digital marketing at General Electric Co., after Ms. Craigwell’s presentation on a successful digital-marketing campaign. Ms. Stanley plans to take Ms. Craigwell’s ideas, such as promoting GE research with videos on social media, back to her SAI team. She also hopes Ms. Craigwell will put her in touch with colleagues at GE who might be interested in SAI’s services. Brazilian by birth, Ms. Stanley values Latin cultures’ emphasis on warmth and spontaneity. When her turn finally comes to speak with Ms. Craigwell, she says, “You were wonderful. I felt as if I knew you.” The executive responds with equal warmth and promptly emails Ms. Stanley’s contact information to a colleague. Later, as she prepares to introduce herself to another speaker, Ms. Stanley gives herself a pep talk: “What’s the worst that can
smartphone. At a breakout session on the last day, she finds a seat near the front, only to realize that she already knows the information being presented. Usually, she avoids sitting too close to the front so she can see who else is present, and also so she can slip out quietly if necessary. “I picked the wrong seat” this time, she says. On the last day, more than an hour before a closing keynote speech by actor Kevin Spacey, hundreds line up for seats. Ms. Stanley strides past them on her way to a panel discussion. “I’m not going to not network so I can be in the front row for Kevin Spacey,” she says. “You have to keep in mind your goal.” Later, Ms. Stanley takes stock: She has reaped several good ideas and a grasp of emerging trends such as using journalistic techniques to attract customers on social media and the Web. She collected 20 business cards, initiated promising relationships with four potential clients, and made five “fair-to-good” new contacts. She isn’t done. Many people only took her card or gave her a colleague’s name. But she will follow up with them all.
30 | Tuesday, September 30, 2014
THE WALL STREET JOURNAL.
SPORTS
Pellè Making Up for Lost Time
Is Koemans Connection Inspiring Latest Import From High-Scoring Dutch League?
BY GABRIELE MARCOTTI
McGinley Bowing Out After Another Europe Triumph
Paul McGinley is ready to call it a career in the Ryder Cup, and it ended on a perfect note. McGinley made his debut in 2002 at The Belfry by holing the winning putt for Europe. His final act was as captain of another formidable team, and he called all the right shots at Gleneagles as Europe sailed to its eighth win in the last 10 Ryder Cup matches. In between, he played in two other Ryder Cups (both record wins for Europe) and was an assistant twice. “That’s six Ryder Cups now I’ve been involved in and six wins,” he said. “I do feel lucky.” After another celebration that lasted into the early hours Monday, McGinley says he won’t take part in another Ryder Cup, at least not on an official level. “I’ve gone from a player to a vice captain to a captain. I’ve been six out of six. I’ve been very lucky that I’ve had six great experiences,” McGinley said. “I’m very happy to help going forward in an unofficial capacity.” Two of his assistants at Gleneagles previously were captains—Sam Torrance in 2002 and José María Olazábal in 2012. McGinley said his personality wouldn’t allow him to return after being at the pinnacle of European leadership. “I’ve put so much on the table,” he said. “I would like to be able to support the next captain in whatever direction he went, and if I had a belief about a different area, I’m afraid there would be conflict. So I can’t see myself doing that role again.” —Associated Press
On Saturday afternoon, Graziano Pellè scored a stunning overhead kick to seal Southampton’s 2-1 victory over Queens Park Rangers in the English Premier League. It was the Italian striker’s fourth league goal of the season—his fifth in all competitions—and it propelled the club to second place in the table, three points behind league-leading Chelsea. Pellè’s early season heroics fly in the face of conventional wisdom on many levels. Southampton acquired him for a fee of €10 million ($12.6 million) from Feyenoord in the summer. He was the 26th most expensive forward to change clubs in the last transfer window— according to Transfermarkt, a website that tracks transfer fees. His price tag put him behind the likes of Quincy Promes (who joined Spartak Moscow from Twente) and Ross McCormack (whose move was within the English second flight, from Leeds to Fulham). And yet, based on his résumé, there was reason to believe that if anything, Southampton paid a little too much for his services. He had been extremely prolific for Feyenoord with 50 goals in 57 matches over two seasons. But that was in the Dutch Eredivisie. And the Dutch League has long been victim to certain pre-conceptions.
Pellè’s early season heroics fly in the face of conventional wisdom.
Injury Fears for Springboks Facing Runaway All Blacks
Zuma Press
It is seen as a competition obsessed with attacking, where defending is an after-thought. Last year, there were 3.19 goals per game in the Eredivisie, compared to 2.76 in the Premier League. Simply adjusting for that, would have brought Pellè’s goal-scoring total down to a more reasonable 43 in 57. Beyond that, there’s the issue of the strength of the league. The Netherlands may have reached the semifinals of the 2014 World Cup, but it’s not a coincidence that all but four of the players on its 23man roster now play abroad. Despite the pedigree of clubs such as Ajax, PSV Eindhoven and Feyenoord—teams that have all won European Cups—money is tight these days. And according to the UEFA rankings, which are based on performances in European competition, the Eredivisie is only the ninth best league, behind the likes of Ukraine’s, Russia’s and Portugal’s domestic championships. Pellè has heard all this before. “They say goals in Holland are worth less than in Italy, England, Germany or Spain, but the size of the goals is exactly the same everywhere you go,” he said in an interview with the Italian newspaper Gazzetta dello Sport on Friday. “That means that if your aim isn’t right, you don’t score.” It’s obviously a bit simplistic. Scoring goals isn’t just about aiming correctly, it’s about getting the splitsecond opportunity to shoot. And against defenders who are that much quicker, stronger and better pre-
HEARD ON THE PITCH
Graziano Pellè, right, scores Southampton’s second goal with an airborne shot against Queens Park Rangers on Saturday. pared, it can make all the difference. Between 2011 and 2013, seven forwards left the Dutch league for fees in excess of €7 million: Wilfried Bony, Jeremain Lens, Dries Mertens, Jozy Altidore, Luuk de Jong, Bas Dost and Bryan Ruiz. Apart from Bony and Mertens, the others have to varying degrees failed to live up to expectations. While goal-scoring is an imperfect metric, the drop-off has been stunning. Bony went from 31 in his last Eredivise season to 16 after his move, while Mertens dropped from 16 to 11. And those are the two who have done well. Consider those who have not: Lens (15 to 5), Altidore (23 to 1), de Jong (25 to 6), Dost (32 to 8) and Ruiz (9 to 2). In Pellè’s case there were further warning signs. His 50 league goals between 2012 and 2014 were almost
50% more than he had scored in the previous eight years as a professional, raising the question of whether, at 29, he is a late bloomer or whether the recent exploits had simply been a fluke. Prior to that, he had not exactly pulled up trees, whether in his native Italy—five goals in 23 appearances for Parma and Sampdoria in 2011-12—or, indeed, in the Eredivisie. He spent four seasons at AZ Alkmaar between 2007 and 2011 and his return was a paltry 14 in 78 games. So how to explain then his current exploits? The fact that he followed Ronald Koeman, his manager at Feyenoord, to Southampton, certainly helps. Koeman knows him extremely well, gets him to play to his strengths and knows how to use him.
“I had no doubts about joining him at Southampton because it was thanks to him that I went to the next level,” Pellè said. There’s also the distinct—and decidedly unsexy—possibility that Pellè’s scoring will regress to some kind of mean and that will be that. His numbers could look more like de Jong’s or Dost’s. But it’s also nice to imagine that, perhaps, Pellè is making up for lost time and has finally turned the corner. Nine years ago, he was the third leading goalscorer at the Under-20 World Cup, a competition dominated by a precocious young man named Lionel Messi. Maybe the real Pellè was that one, the Feyenoord one and the one we’re seeing now. And the mediocre version of the intervening years was just an aberration.
South Africa has injury concerns over wing Bryan Habana and No. 8 Duane Vermeulen as it attempts to stop newly crowned Rugby Championship winner New Zealand from going three seasons unbeaten in the tournament. New Zealand is back near full strength for Saturday’s final-round game in Johannesburg after center Ryan Crotty and hooker Dane Coles were recalled to the squad. The Springboks said Monday that their record try-scorer Habana had concussion symptoms and Vermeulen a rib cartilage injury after the 28-10 win over Australia. New Zealand’s title-clinching 34-13 victory in Argentina this weekend took the world champion All Blacks to 16 wins and a draw and three titles in the last three southern hemisphere championships. —AP
Reuters
Paul McGinley on Sunday
THE WALL STREET JOURNAL.
Tuesday, September 30, 2014 | 31
OFF THE WALL
Berlin
T
here are many subjects of German soul-searching. Among them: Is the country saving too much water? People here are known to flush toilets with old bath water and to take turns bathing in the same tub without refilling it. New German toilets typically use about two gallons of water for a full flush and less than one for water-saving. Conserving water is an expression of personal virtue and social responsibility. But as scholars, utility managers, and municipal officials point out, there is a dark side to the impulse. Sewage stagnates in too-large canals and noxious gas is corroding cement. Basements in Berlin are flooding because of the rising water table. As good as saving water might feel, they explain, a shower skipped in Marburg won’t add to rainfall in the Maghreb. “The water-saving was good,” said Alexander Limberg, a geologist for the city of Berlin, choosing his words carefully on a rainy morning as the Spree River sloshed outside his window. “Let’s just say: We do not need to save much more.” But when the children leave half-full glasses standing around, Dilek Güngör dumps the contents into her watering can. Same goes for the bowl of water left over after she washes lettuce. If the watering can is full, there is also the old coffeepot in the kitchen. Ms. Güngör, a writer in Berlin, is aware that saving water in the hydrologically rich capital isn’t necessarily a good thing. Nevertheless: “I feel sorry for the water,” she said. Some experts have undertaken a quixotic re-education campaign. “I have no problem using a toilet somewhere that doesn’t have the water-saving flush button,” said Hans-Jürgen Leist, an engineer and social scientist at the Ecolog Institute in Hanover. “In fact, I generally prefer to use the normal flush button.” Mr. Leist fired his first broadside in a 2002 article in the Frankfurter Rundschau daily titled “Water Saving in Germany Is Nonsense.” Undeterred by howls of protest from environmentalists, he said, he followed up with his 266page 2007 treatise: “Water Supply in Germany: Criticism and Solution Approaches.” The abstract to the tome begins: “The Germans have become true fanatics in water saving.” The basic problem, Mr. Leist and other experts say, is one of conscience. Mr. Leist argues that Germans are obsessive about water-saving thanks to a steady stream of reports about droughts elsewhere in the world. Germans learn from elementary school on to
turn the water off while shampooing their hair, soaping their hands and brushing their teeth. To be sure, one reason Germans save water is to save money. And because the majority of utilities’ costs are fixed, declining use has led to an increase in the per-liter price of water, causing consumers to become even more use-conscious. A German household consuming 21,000 gallons a year— roughly enough water for two people—paid an average of about $260 in 2013 for the privilege, compared with $235 in 2005, at the current exchange rate. A water utility in the Ruhr Valley, the Rheinisch-Westfälische Wasserwerksgesellschaft, has tweaked its pricing model in reaction, including a greater fixed-price portion on its bills. But many executives say the problem runs deeper than euros and cents. Siegfried Gendries, head of marketing at RWW, says one customer told him she saved water by spitting out what she used to rinse her mouth after brushing her teeth and using it to water the plants. “It is impossible that this is economically motivated,” Mr. Gendries says. Other Europeans save water, too, according to a survey conducted by the Institute for Empirical Social and Communication Research in Düsseldorf last year. But in Germany, more than half say they do it to protect the environment, while in Italy, Spain, France, and England, that figure ranges from 30% to 38%. Mr. Gendries and other water-company marketers are trying to take their customers’ minds off saving water. They highlight the idea that people should conserve the “virtual water” they indirectly use when buying coffee beans and bluejeans. “People have a bad conscience when they use a lot of water,” Mr. Gendries explains. “We want to give them the chance to do something for their good conscience.” But in the saga of German water-supply design, it may have been the utilities that committed the original sin; their pipes are too big. In past decades, infrastructure investments mirrored expectations of rising water use. Instead, frugality and water-efficient appliances led household use to decline to 32 gallons per person a day in 2012 from 38 gallons in 1990. France and the U.K. use about 45 gallons, according to Europe’s water-utility trade group. A U.S. government survey in 2005 found Americans connected to the public water supply used an average of 99 gallons per person a day. Now utilities such as Berliner Wasserbetriebe face a reckoning: The sewage isn’t moving quickly enough through the system. The company has an Odor and Corrosion Task Force that battles the consequences of slow-moving sewage by deploying salt, filters, and sticky panels of deodorant
with names like Gelaktiv and Kleargel. It sometimes flushes fresh drinking water through its pipes to clear them out. An engineer on the task force, Henrik Marczinski, says his household also does its part. “I myself— along with my family—still take baths and shave in the shower,” he says. “It’s true. I admit it.” But an informal survey at a hardware store in the former East Berlin found that very few people are about to change their ways. One man said he showered no more than three times a week “for the future and for the children.” Another said he had installed a device in his toilet tank to reduce flush volume and insisted that one to two minutes for a shower is “completely sufficient.” Beate Schleicher, a bookkeeper, explained that she had built a contraption on her terrace that collects rainwater for her plants. Susanna Scharrer, a doctor, compares notes about her consumption with friends to see who is using less. Ms. Güngör, the writer, is trying to take the new message to heart. When it rains, and the plants on her balcony have no need for the water she has been studiously saving, she sometimes brings herself to dump it down the drain. “This is hard,” she said.
A deodorant pad is used to reduce the stench in the Berlin water system.
DEADLY MEDICINE: A Common Surgery for Women and the Cancer it Leaves Behind
©2014 Dow Jones & Company, Inc. All rights reserved. 3DJ1371
BY ANTON TROIANOVSKI
Anton Troianovski/The Wall Street Journal
Germans Still Conserve Despite Abundant Water
When Dr. Amy Reed underwent surgery to remove uterine fibroids, she learned that the procedure worsened her prognosis. Now, her vocal criticism of this common surgery is dividing the medical community. This story, drawn from The Wall Street Journal, is a gripping account of public trust and the fallibility of modern medicine.
DOWNLOAD FREE AT: WSJ.COM/DEADLYMEDICINE
32 | Tuesday, September 30, 2014
THE WALL STREET JOURNAL.
HEARD ON THE STREET
Email:
[email protected]
FINANCIAL ANALYSIS & COMMENTARY
WSJ.com/Heard
Banks Must Find Simpler Future
Simplicity may be the ultimate sophistication in banking today. Swiss financial giant UBS said Monday that it is launching a share swap to create a new holding company structure—a seemingly mundane maneuver. But the move cuts to the heart of a larger issue: The world’s biggest banks need to be simple enough to fail. In most cases, they are anything but. Complex legal structures make it difficult for regulators to go into a troubled firm and quickly take control. This remains a problem even in the U.S. where big banks already tend to have a holding-company structure similar to that UBS is putting in place. Regulators recently rejected big U.S. banks’ resolution plans—so-called living wills—because the institutions remain too complex to allow them to work reliably in a crisis. In Europe, the situation is doubly difficult. Bank liabilities—bonds, deposits and so
Capital Punishment Targeted regulatory capital structure for typical large bank
Total lossabsorbing capital of 1-5% up to 26%* 8%
Additional buffers for systemic importance, operational risk etc. Basel III minimum equity capital requirement
*Includes senior debt Sources: WSJ analysis, Agence France-Presse/Getty Images (photo) The Wall Street Journal
on—are generally housed in a diverse group of subsidiaries or operating units. Some banks lack a single, unifying company at the top of their corporate structure. So there is no single point of entry for regulators looking to swoop in. This also means banks issue debt in such a way that it can’t be used to absorb losses in the event of failure. Regulators want that to
A Sober View of Treasury Wine
In the end, the Australian wine proved too rich for KKR and TPG to digest. After sniffing around for at least four months, the two private-equity houses broke off their separate negotiations to acquire Sydney-listed Treasury Wine Estates, the world’s largest publicly held pure-play wine company by sales. The main sticking point was price. The maker of the well-known Penfolds and Beringer brand wines says the bidders’ identical preliminary offers of $3 billion were too low. KKR and TPG were rightly unwilling to top up their bids. KKR made a preliminary offer in May that was rebuffed, which then fairly valued the company at about 20 times earnings for the year ending June 2015. Its revised pitch last month, which TPG matched, valued Treasury at 26 times analysts’ current earnings forecasts. That is richer than fellow drinks maker Constellation Brands’ 20.4 times or Diageo’s 17.8 times, despite Treasury’s lower profitability. Neither KKR nor TPG made a formal offer, suggesting they were feeling squeamish at that higher price. Treasury says there were also other disagreements, such as how much debt the company could carry. These may have heightened the bidders’ pric-
ing worries and made them more inclined to walk away. Treasury’s shares fell 8.5% Monday, on the demise of what could have been a rosy deal. The company is now emphasizing the value it can create if it sticks to Chief Executive Michael Clarke’s program of cutting costs and focusing on premium wines. The plan makes sense but the challenges Treasury faces remain serious. A glut of low-end wine left Treasury unable to sell all its wine in the U.S. last year, leading to write-downs, while China’s corruption crackdown is limiting high-end sales there. In the year ended June, Treasury sold 6.4% less wine by volume and reported a net loss due to new impairment charges, partly because it overpaid for earlier acquisitions. But Treasury’s stock is still about 10% above its level before news of KKR’s first bid broke, valued at 22 times earnings. That is still at a premium to peers, suggesting shareholders either think other bidders are lurking, or they have faith in Mr. Clarke’s ability to turn around the company. If Treasury runs into further troubles and no other suitors materialize, this high valuation could become unpalatable, too. —Abheek Bhattacharya
change and are pushing the concept of a bank’s total lossabsorbing capital. This includes a bank’s equity and everything else that is available to “bail-in” and rebuild its capital base so that taxpayers don’t have to. Such “capital” would include senior debt. That, though, brings up the structural issue. For many European banks, senior bonds are issued by
subsidiary companies and rank in the same position in a bankruptcy as depositors, who typically receive some form of government protection. This problem has been highlighted by the Bank of England’s head of resolution, Andrew Gracie. Regulators will struggle to force bondholders to prop up a bank unless that role is explicit in their contractual terms, or unless debt is issued by an entity that comes below depositors in the creditor pecking order. That argues for reorganizations of bank legal structures. This could prove difficult, however, and costly. Plus, bondholders are likely to charge banks more if they effectively rank lower in the capital structure. If all this turns out to be too tricky, banks will need to issue more subordinated debt, convertible instruments or equity. That will increase banks’ funding costs. Regulators also want banks to have more of this
total loss-absorbing capital than is often the case today. Just how much is a point of continuing debate. Christian Noyer of the European Central Bank says this should be equal to about 16% of a bank’s risk-weighted assets. That would be roughly double the minimum core equity requirement under Basel III rules. The BOE’s Mr. Gracie, on the other hand, says it ought to be twice a bank’s normal core Tier 1 equity before it hit trouble. That could mean a total loss-absorbing capital level of 26% for the biggest, most complicated banks. The first step for European banks will be, like UBS, to reorganize themselves into simpler structures. After that, they may still have to issue more equity or other capital. Ending “too big to fail” is going to prove costly. Banks are going to find that they are the ones who likely have to pick up the tab. —Paul J. Davies
Eurozone Bonds Show Who’s Boss Bond yields have only really gone one way in the eurozone this year: lower. But there have been some significant shifts in the rankings of governments relative to each other. Belgium and Spain are relative winners; France and Italy losers. As in soccer, Germany tops the eurozone yield league table. But that is a double-edged sword. A German 10-year yield of 0.96% is either pricing in further action from the European Central Bank or a truly awful long-term outlook for growth and inflation. The big rally in Germany has turbocharged returns in all countries. Worryingly, that means bond returns are well ahead of stockmarket gains this year. And the continued wide gaps between yields in Germany and elsewhere are still a headache for the ECB’s monetary policy. In southern Europe, Spain has moved decisively ahead of Italy, with 10-year yields now at 2.22% and 2.40%, respectively. That is despite concerns about the possibility of turmoil in the Spanish region of Catalonia, which is seeking to hold a referendum on independence, and a still-gaping Spanish budget deficit. Spain’s ability to return to growth and its head start on economic reform are outweighing those worries. Italy could catch up, but doubts persist about Rome’s appetite to overhaul its economy. But perhaps the most sig-
nificant change is that Belgium has stolen a march on France, with its 10-year yield falling faster so far this year. The fiscal stories of the two governments stand in contrast: Belgium in June exited the European Commission’s excessive-deficit procedure, while France is facing budget censure. Belgium historically has been one of Eu-
99.5% for France and 101.6% for Belgium. Betting outright against French bonds has proved to be a losing strategy and is likely to remain so; but France is increasingly a laggard in the European top flight. The moves in eurozone yield rankings show that, despite the broad rally, inves-
Moves in eurozone yield rankings show that, despite the broad rally, investors are more often differentiating between countries. rope’s high-debt countries, while France is rapidly becoming one. In 1995, Belgium’s debt stood at 130% of gross domestic product and France’s at just 55.5%; in 2015, Moody’s expects the two to be almost equal, at
tors are increasingly discriminating between countries. The message to governments is that their fate still lies in their own hands. They shouldn’t rely only on the ECB to deliver lower yields. —Richard Barley
Big Dipper
Eurozone 10-year government bond yields Change since start of year, 10-year yield* in percentage points Germany
–0.97
Netherlands Belgium
–1.15 –1.59
France Ireland Spain Italy
1.1% 1.24%
–1.06 –1.77
1.3% 1.69%
–1.93
2.22%
–1.69
*As of 15:45 GMT Monday
0.96%
2.4% Source: Tradeweb
The Wall Street Journal
New Pain For Hong Kong Retailers
For Hong Kong retailers that have filled their baskets with Chinese money, escalating protests in the city signal lean times ahead. Shares in the city’s most prominent shopkeepers were among the hardest hit on Monday, after police tactics including pepper spray and tear gas failed to disperse prodemocracy protesters over the weekend. Jeweler Chow Tai Fook, cosmetics chain Sa Sa International and apparelbrands owner Trinity Ltd. all fell at least 3%. Protests that began around government offices have spread to vital commercial neighborhoods across the city. Sa Sa alone has at least 18 stores in the affected areas. More worrying, the disruptions seem unlikely to die down before the start of China’s weeklong national holiday on Wednesday, when mainland tourists come to Hong Kong in droves to shop. This is no small matter for the semiautonomous city. Mainlanders dodging China’s punitive taxes on minor luxuries have become a major driver of the local economy. Last year, they accounted for 37% of Hong Kong’s total retail and restaurant spending. Chow Tai Fook and Sa Sa get around 28% and 54% of their total revenue from Chinese tourists in Hong Kong, respectively, according to Barclays. Shares in all these companies are trading well below their long-run average valuation. Sa Sa is at 14.8 times forward earnings, compared with a 10-year average of 17 times, while Chow Tai Fook is at 12.3 times compared with an average 14.4 times. If they were only facing a short-term disruption, these stocks might now look cheap. But their problems run deeper, which share prices aren’t entirely discounting. Hong Kong retail sales between January and August declined 1% from the year before. That was despite continued visits from mainland shoppers: Arrivals from China during the seven months to July were up 12.8%. Chinese arrivals might start to decline in coming months. And with Beijing fundamentally at odds with prodemocracy demonstrators over the future of the city, particularly the method for electing a chief executive in 2017, turmoil could keep simmering for years. Hong Kong’s shopkeepers—and their investors— need to gird for a longer storm. —Aaron Back
