Should the savings banks be embraced by investors, or avoided?

SPAIN’S savings banks, or cajas, have survived for nearly 200 years without the help of shareholders. But lots of these institutions, which are largely controlled by regional politicians, are now short of capital and on the hunt for private investors. A delegation from the Confederation of Spanish Savings Banks (CECA) toured European cities this week, touting what it called the “lighthouse of a new Spanish equity opportunity”.

Bad analogy. A lighthouse warns of dangers, and there are plenty of these in the cajas, chiefly political meddling and a high exposure to dud property loans. The state has already pumped €14.4 billion ($18.7 billion) into the sector, most of it from its Fund for Orderly Bank Restructuring (FROB). Five cajas failed the stress tests, and will require another €1.8 billion in capital. Another four came close, and may also need to raise funds. ...

Europe’s stress tests were a mixed affair. Many banks still face an uphill struggle to finance themselves

“IT’S an analyst’s wet dream,” says one banker of the European stress tests announced on July 23rd. If financial detail is what turns you on, then the exercise delivered in style with hundreds of pages of information on 91 banks’ solvency and their exposures to the bonds of under-siege governments in the euro zone. As a piece of organisation, if not quite a triumph, it was an impressive feat. But whether all that new disclosure or the tests’ conclusion—that seven European banks need a piffling €3.5 billion ($4.5 billion) of new capital—help the banks escape their funding problems remains to be seen.

The initial signs were modestly encouraging. Credit-default-swap (CDS) spreads, a proxy for banks’ borrowing costs, improved slightly across Europe, according to Markit, a research firm. Banks’ share prices rose too, although that had as much to do with the news on July 27th that the new Basel 3 rules on the sector’s capital and funding would be watered down. Still, wide differences remain. Five of the seven banks to fail were Spanish savings banks (see article): many of the cajas still face CDS spreads many times those of safer firms. On July 26th Bankinter, a midsized Spanish commercial bank that just scraped through the tests, paid a record spread of 240 basis points to issue a mortgage-backed bond. ...

In the first in a series of profiles of financial institutions after the crisis we look at PIMCO, a giant fund manager

BILL GROSS has a dual passion for philately and philanthropy. In 2007 he gave to Doctors Without Borders the $9.1m he earned from an auction of his collection of British stamps. He has said he is happy to part with “old friends” for a good cause. But the 66-year-old shows no sign of parting ways with the company he co-founded in 1971, Pacific Investment Management Co (PIMCO), one of the world’s largest bond-fund managers and, since 2000, a unit of Allianz, a German insurer. As co-chief investment officer, he manages PIMCO Total Return, the world’s largest mutual fund with $234 billion of assets. It is as successful as it is big, returning an average 7.5% over the past five years—better than 98% of its peers, according to Bloomberg.

PIMCO itself, however, is changing. Having long marketed itself as “the global authority on bonds”, it recently switched to “your global investment authority”. It is too early to claim that crown. But the asset-management industry is sure to feel the effects of any effort by its most respected—and, by many, most feared—member to diversify its portfolio of offerings into equities, exchange-traded funds, risk hedging, valuation services and more. ...

A useful new way to capture the many aspects of poverty

WHAT IS poverty and when is a person poor? Most would agree that poverty involves not having enough of certain things, or doing without others that richer people take for granted. But what is “enough”, which goods and services really matter, and who should decide these questions—researchers, governments or international agencies—are less tractable issues. Perhaps the poor themselves should have the final word. But this presents its own problems. Tabitha, a 44-year-old woman from a slum outside Nairobi, told researchers from Oxford University that going without meals was “normal for us”. Diminished expectations are only one of the effects of dire poverty.

In the world of international development, most have rallied around the “dollar-a-day” poverty line (or more precisely, the $1.25-a-day measure) and its less acute cousin, $2-a-day poverty. These World Bank measures judge a person to be poor if his income falls short of a given level, adjusted for differences in purchasing power. In principle poverty rates based on these measures count the fraction of people in a country who lack the resources to buy a notional, basic basket of goods. ...

After a few conspicuous flops, a private-equity firm gets back to its roots

“PEOPLE were prematurely writing the epitaph of our investments and our firm,” says Mark Neporent of Cerberus, a private-equity firm and hedge fund. “Hopefully it’s pretty apparent to people that we’re back.” The firm, named after the three-headed dog in Greek mythology that guards the gates of the underworld, has spent the past two years trying to claw its way out of hell. Two of its largest and best known investments tanked. Chrysler, a carmaker, filed for bankruptcy and GMAC, General Motors’ financing arm, had to be rescued by the American government, which now owns most of it. For Cerberus, an intensely private firm, these were very public embarrassments.

Some wondered whether the embattled firm would go the way of those two investments. But Cerberus’s flagship private-equity fund rebounded last year, making up for its 25% fall in 2008. (Its main hedge fund was still down by around 4% in 2009.) Its recent sale of Talecris Biotherapeutics, a blood-plasma company it bought in 2005 for $600m, to a Spanish health-care company for $3.4 billion has added to a sense of revival. Nor has the firm given up hope on Chrysler. Cerberus still has control of Chrysler Financial, the company’s finance arm, and there is talk of turning it into a diversified financial firm. Some say Cerberus may be able to recoup its money or even record a profit on its $7.4 billion investment in Chrysler if it plays its card right on Chrysler Financial. ...

Can microlenders serve shareholders and the poor?

THE loans that microfinance companies make may be tiny but their ambitions can be vaulting. Take SKS Microfinance. Already India’s biggest microlender, with 6.8m clients and 5.8m active borrowers in the year ending on March 31st (see chart), it intends to become the world’s largest by 2012, with 15m clients. To fund this growth, it hopes to raise nearly $350m by selling a 21.6% stake in an initial public offering (IPO) which got under way this week.

According to the Consultative Group to Assist the Poor (CGAP), a think-tank housed at the World Bank, the IPO is only the second by a pure microfinance institution, after the offer by Mexico’s Compartamos Bank in 2007. More may follow. CGAP reckons that SKS’s move “should set the stage for future IPOs in the sector.” The omens are good. On July 27th SKS announced that it had raised $64m from anchor investors, including JPMorgan Chase, Morgan Stanley, and India’s ICICI Prudential and Reliance Mutual Fund, at the top end of the expected price range. ...

Time to reassess how fund managers are rewarded

FUND managers have been some of the biggest beneficiaries of the financial sector’s growth over the past 30 years. Bankers may routinely earn million-pound bonuses but some hedge-fund and private-equity managers have become billionaires. Seldom has so much been earned by so few.

These riches have been generated despite the ability of investors to take advantage of low-cost exchange-traded funds and index-trackers. Investors have surged off-piste in search of higher returns. In aggregate, however, they will merely end up paying higher fees (typically, a 2% annual fee plus 20% on performance), a phenomenon this column has described as “catch two-and-twenty”. ...

Correction: Burger-lovers in Argentina were enjoying a special discount on Big Macs when we collected data for our index (July 24th 2010). At nornal prices the peso is undervalued by 5% not 52%. Sorry for the whopper. This has been corrected online.

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Conventional economic models failed to foresee the financial crisis. Could agent-based modelling do better?

MAINSTREAM economics has always had its dissidents. But the discipline’s failure to predict the financial crisis has made the ground especially fertile for a rethink.

Critics tend to agree on what is wrong with current macroeconomic forecasting. A hearing of the House of Representatives Committee of Science and Technology on July 20th targeted the “dynamic stochastic general equilibrium” (DSGE) models used by the Federal Reserve and other central banks. The hearing aimed to “question the wisdom of relying for national economic policy on a single, specific model when alternatives are available.” The Institute for New Economic Thinking in New York, which had its inaugural conference in April, has attacked many of the assumptions, including efficient financial markets and rational expectations, on which these models are predicated. These assumptions were clearly too simplistic. But there is less agreement on what should replace the old ways. ...

Banks’ bad debts are shrinking but so too are revenues

“PEOPLE may look back at this quarter as essentially the first earnings period of the post-crisis era” for American banks, says Michael Poulos of Oliver Wyman, a consultancy. The comment is intentionally double-edged.

The good news is that loan losses are easing. At JPMorgan Chase second-quarter charge-offs (of loans viewed as beyond repair) fell by 28% compared with the previous quarter, for instance. That allowed the banks to release some of the reserves set aside to cover dud loans. However, this will provide only a temporary pop to earnings. Although the worst is over, many of the forces helping banks in the boom times—such as falling interest rates and buoyant employment—are gone for years. ...