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In Case You Missed It: Business News Round-Up

Beth 005Contributed by Beth Collinge of CTG – a division of ILX Group plc.

At the beginning of the week, the euro gained almost 2 per cent against the US dollar. Goldman Sachs has commenced negotiations with the SEC in order to try and reach an out-of-court settlement of the agency’s civil fraud action against the bank.

Economic Backdrop

  • In the currency markets, sterling initially rose against the dollar after the announcement of the UK’s Conservative/Liberal Democrat coalition. Investors in Europe had been buyers of sterling, as they see the UK as a safe haven compared to the turbulence in Europe. However, sterling ended the week lower after the Bank of England issued a doveish inflation report, indicating continuing low interest rates.
  • At the beginning of the week, the euro gained almost 2 per cent against the US dollar, when the European Union and the International Monetary Fund announced an emergency funding facility worth as much as €720bn (£625bn). The stabilisation scheme consists of government-backed loan guarantees and bilateral loans worth up to €440bn provided by eurozone members; a further €60bn supported by all EU members; and up to €220bn provided by the IMF.
    However, doubts soon set in as to whether the measures represented anything more than a short-term solution to the underlying problems facing the eurozone and the euro fell to an 18-month low of $1.23 against the dollar. A further concern for investors was the European Central Bank‘s (ECB) decision to buy peripheral eurozone government bonds, a direct contradiction of its previous stance. The ECB has said it will “sterilise” these purchases, meaning it will stimulate the bond markets without quantitatively expanding the money supply. Some see the central Bank’s decision as a European “Greenspan put” since it creates a moral hazard not just for sovereign borrowers but for the whole banking sector which could come to rely on taxpayers coming to the rescue.
  • Gold prices hit an all-time high at $1,230 (£824) a troy ounce, as demand surged to the highest level since the collapse of Lehman Brothers in 2008 amid volatile financial markets in Europe.

Mergers and Acquisitions

  • Germany’s SAP, which is the world’s largest enterprise software maker, agreed to pay $5.8 billion for Sybase, an American software company that specialises in software for businesspeople to run applications on wireless devices.
  • University Partnerships Programme (UPP), the UK’s largest private university campus developer, is to be split and partially sold by Barclays Capital in a process expected to raise about £800m. UPP owns and manages student accommodation in 11 universities in the UK. UPP is owned by the infrastructure funds of BarCap.
  • IBM announced plans to spend $20bn in purchases over the next 5 years.

Financial Institutions

  • Goldman Sachs has commenced negotiations with the US Securities and Exchange Commission (SEC) in order to try and reach an out-of-court settlement of the agency’s civil fraud action against the bank. A key priority for the bank will be to set up a new committee to police its ethical business standards.
  • Plans to hand over banking supervision of the Financial Services Authority (FSA) to the Bank of England will be watered down under the new coalition. While the Bank will be given macro-prudential control – monitoring systemic risk in the economy – the Liberal Democrats insisted that it should not also be responsible for regulating individual banks. Both parties have agreed to impose a banking levy and to crack down on bonuses, to create more competition in the banking sector and explore ways to require banks to make more loans available to small businesses.
  • America’s Securities and Exchange Commission and Commodity Futures Trading Commission launched an investigation into the extreme stockmarket volatility on May 6th, focusing their attention on rapid-fire computer programs. Though regulators were unable to offer a full explanation for last week’s wild swings, they might introduce uniform industry-wide “circuit breakers”, to kick in uniformly across different exchanges, and may also change liquidity provision rules.
  • The European Union plans to push through controversial new hedge fund regulations next week, after turning down British pleas to defer a vote in Brussels. The UK finance sector is most concerned by the “passporting” provisions in the directive, which say that non-EU domiciled or managed funds have to apply for a license to operate in each of the EU’s member states. The UK is home to 80 per cent of Europe’s hedge funds.
    Germany and France, which are home to fewer hedge funds and private equity firms, are the main proponents of stricter rules that will also curb pay and borrowing at hedge funds and impose greater transparency on a traditionally secretive industry.
  • The proposed rules have also provoked anger in the US, with Treasury Secretary Timothy Geithner arguing that the planned rules would discriminate against US fund managers doing business in Europe.

Credit

  • The investment arms Dubai International Capital, Dubai Group and the non-financial Dubai Holding Commercial Operations Group have engaged Deloitte, KPMG and PwC respectively, ahead of a potential multibillion-dollar debt restructuring. Investment bank Lazard is also advising Dubai International Capital and Dubai Group. The move comes as the emirate seeks to deal with its $109bn debt mountain and regain economic growth after almost two years of recession in the aftermath of the global economic crisis.
  • Moody’s disclosed on 7 May that the US Securities and Exchange Commission had warned in a “Wells notice” that it is moving toward filing charges that the rating agency’s description of its ratings procedures was false and misleading. The allegations stem from a 2008 revelation by the Financial Times that Moody’s awarded incorrect triple A ratings to billions of dollars in European debt obligations because of a modelling error. Moody’s, which still has a chance to head off the enforcement case, has acknowledged that its staff violated policy but it said it disagrees that “violation of a company policy by a company employee renders the policy itself false and misleading”.

Other

  • Britain’s most iconic luxury department store, Harrods of Knightsbridge, has been sold to the Qatar royal family for over £1.5bn, after a quarter of a century in the hands of Egyptian mogul Mohamed Al-Fayed.
  • It emerged that numerous security warnings prior to the oil-well explosion off America’s Gulf Coast were ignored, and the companies involved are now blaming each other. BP, which owns the well, blamed Transocean, a contractor, for the failure of a valve system that could have prevented the blowout. Transocean pointed the finger at Halliburton, which was in charge of the cement work to stabilise the rig. Halliburton maintained that BP was ultimately responsible.

Note: The details contained in this article have been drawn from a daily review of the Financial Times and The Economist.

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