Friday, September 30, 2016

How Khamenei Played His Ace To Sideline Ahmadinejad

Mahmoud Ahmadinejad appeared to be on the verge of disobeying Supreme Leader Ali Khamenei until the ayatollah went public with his disapproval.


Al-Monitor
September 30, 2016

Former Iranian President Mahmoud Ahmadinejad finally got the opportunity to meet with Supreme Leader Ayatollah Ali Khamenei on Aug. 30. In the 40-minute meeting, Ahmadinejad reportedly sought to obtain Khamenei’s view on his pursuing a possible bid for the presidency in the May 2017 elections.

The media reported Ahmadinejad saying, “The weak actions of the [incumbent] government have left people devastated, and they ask me to enter the election.” The supreme leader is said to have replied, “Your [provincial] trips shouldn’t look electoral, because you are not supposed to take part in the competition.” Khamenei added, “Your presence in the election will polarize it, and this is not in the interest of the revolution and the people, and you should resist these demands [of people].”

The meeting, and what transpired during it, was not supposed to have been made public. After Khamenei’s reported rejection of an Ahmadinejad candidacy, however, the circle around the former president began leaking details of the secret meeting on social networks, especially via Telegram, the popular smartphone app. The aim of the leaks appears to have been to rally public opinion in favor of allowing Ahmadinejad to run.

All the while, the Principlist former president remained silent, suggesting that he did not intend to sit back and forgo the election. As a result, conservatives who believed that Ahmadinejad was still planning to get back into the game wrote a series of articles confirming the secret meeting and asking him to obey the supreme leader.

As recently as Sept. 15, Ahmadinejad was still clearly signaling that he was adamant about contesting the 2017 vote. That day, he visited the northeastern city of Gorgan on one of his provincial trips, which looked quite “electoral.” Three days later, on Sept. 18, the Fars News Agency published a report affirming Khamenei’s “advice” to Ahmadinejad and warned him about going against the velayat-e faqih (guardianship of the jurist), Iran’s ruling political system, which is based on a theory in Shiite Islam that holds that Islam gives an Islamic jurist, or “faqih,” custodianship over the people. Fars wrote:

"Today, Ahmadinejad and his staunch friends are subjected to an important test. The test of obeying the guardianship of the jurist. Today, Ahmadinejad should show in practice how he will react to the prohibition [of his candidacy] by … the guardian jurist. Will he obey or … will he go his own way? He, during his presidency, … claimed that he had his chest ready to shield Agha [the supreme leader] from the arrows pointing toward him. Today, Ahmadinejad must show whether he will really have his chest ready to shield the supreme leader against the arrows, or God forbid, he himself is an arrow targeting the supreme leader.”

Following the conservatives’ affirmation of the secret meeting between Khamenei and Ahmadinejad, the former president’s friends and supporters went to the next phase of their plan — denying all reports of the meeting. Indeed, it appears that they assumed that the supreme leader would never make a public statement on the matter to contradict them. As such, on Sept. 24, Abdol-Reza Davari, a political analyst and known Ahmadinejad media adviser, criticized the reports in conservative media about Ahmadinejad having secretly met with the supreme leader, calling it “psychological warfare.”

Davari said, “This piece of news isn’t valid, as it hasn’t been published by the official media [of the supreme leader]. And we shouldn’t pay attention to this. Even If Ahmadinejad had said this, I would have said this is not valid.”

The same day, Bahman Sharifzadeh, a cleric close to Ahmadinejad, said, “These quotes do not affect Ahmadinejad’s thinking. … As far as I have heard, his provincial trips will continue.” He added, “About the supreme leader, no quote is acceptable as long as it is not published by his office.”

If anything, the debacle made observers of Iranian politics reminisce about the controversies surrounding Ahmadinejad’s close confidante Rahim Esfandiar Mashaei. Ahmadinejad had appointed Mashaei, widely criticized for his “deviant” thoughts on Islam, as his first deputy in July 2009. The appointment immediately met with opposition from major conservative figures. Subsequently, the supreme leader wrote Ahmadinejad a private letter expressing his opposition to Mashaei's appointment. As in the recent scenario, Ahmadinejad hedged.

Mohammad Hassan Aboutorabi-Fard, former deputy parliament Speaker, has stated, “The supreme leader wrote [Ahmadinejad] a letter. … I gave the letter to Mr. Ahmadinejad. The letter wasn’t answered. … I can’t remember precisely, but [even] a few days after the letter was passed, the government had not replied.” Following publication of the letter by the supreme leader’s office, which was unprecedented, Ahmadinejad was ultimately forced to withdraw his appointment of Mashaei as vice president.

As Ahmadinejad’s aides were denying Khamenei’s most recent rejection, the one thing they never thought would happen actually happened. On Sept. 26, the supreme leader went public about the matter in a speech, stating, “I didn’t tell him don’t run. I said it’s not in your own or the country’s best interest to run.”

The next day, Sept. 27, Ahmadinejad penned a letter to the supreme leader, saying, “You recommended that it is not suitable at this time for me to participate in the election. Therefore, I have declared my obedience. … I have no plans to compete in next year’s election. … God willing, I will always proudly remain the revolution’s little soldier and a servant to the people.”

Despite the letter, the whole debacle appears to have, if anything, convinced conservatives already distrustful of Ahmadinejad that the former president is not loyal to Khamenei, given that he initially appeared not to heed the supreme leader’s advice. He only retreated and expressed a readiness to obey Khamenei when he had no other option after the supreme leader publicly commented on the situation.

Iranian law stipulates that presidential candidates must be committed to obeying the guardian jurist. This tenet is one of the most crucial elements in the Guardian Council’s vetting process. Thus, it looks like Ahmadinejad may have lost not just the game ahead of next year’s vote, but the poll four years after that as well.


Article Link To Al-Monitor:

Syria's 'Army of Islam' Says It Wants No War With Israel

By Eli Lake
The Bloomberg View
September 30, 2016

There was a time when you could count on hard-core Sunni Islamists in the Middle East to be reliably opposed to the existence of the Jewish state. Organizations ranging from the Muslim Brotherhood to al-Qaeda disagreed on everything from jurisprudence to short-term strategy, but when it came to Israel there was consensus.

The slaughter in Syria is changing that. Take, for example, Jaish al-Islam, a Syrian coalition of rebels whose name translates conveniently to "Army of Islam." Mohammed Alloush, the political leader of the group, Wednesday told me his fighters did not seek war with Israel.

"We have no intention to make war against anyone except for the Syrian regime," he said. "If we compare all the killing in the history of the Arab-Israeli conflict, the Syrian regime has committed many more crimes than the whole conflict. Our aim now is to get rid of the Syrian regime," he said.

Alloush went further. He said President Bashar al-Assad and Hezbollah, the Iran-supported Lebanese militia backing the Syrian government, have exploited the issue of Palestinians to support their war. "The regime and Hezbollah use the Israel conflict to recruit supporters and build armies and all of these armies are used to kill us, to starve us," he said.

This is significant for a few reasons. To start, Alloush is saying something out in the open that many Sunni Arab governments are saying in private. Israel has enhanced its diplomatic relations with Saudi Arabia and other Gulf states during Barack Obama's presidency, as America's traditional allies fear the U.S. is seeking a new partnership with their archrival, Iran.

Alloush's statements also show that Israel has purchased some goodwill among the Syrian opposition. Israel operates a field hospital on its side of the Syrian border for many Syrian rebels, including at times members of terrorist groups like the Islamic State and the al-Qaeda affiliate al-Nusrah. Israeli officials have told me that they do not expect much intelligence value from the hospital, and Alloush told me he thinks it's an important humanitarian gesture.

All of that said, Alloush is not ready to start selling Israel bonds. Like Saudi Arabia, which has supported Jaish al-Islam, Alloush is not giving up on the Palestinians. He told me that he supports the U.N. resolutions that call for Israel to withdraw from the West Bank and Golan Heights. A spokesman for Jaish al-Islam stepped down under pressure last month after he spoke to an Israeli think tank.

Alloush is an important figure in the Syrian opposition. His group, which is comprised of several smaller Islamist, Salafi and nationalist rebel militias, is a key part of what remains of a respectable opposition. Al-Nusrah and the Islamic State fight Assad as well, but they also conduct terrorist attacks all over the world. Jaish al-Islam does not. What's more, Alloush's organization fights the Islamic State and has kept al-Nusrah out of its territory in and around Damascus.

To be sure, Alloush's organization is not comprised of Jeffersonian democrats. "Jaish al-Islam is one of the more frustrating rebel groups to anatomize in Syria. In every sense but one they are unpalatable to the West," Michael Weiss, co-author of "ISIS: Inside the Army of Terror," told me. "They have trafficked in murderous sectarian rhetoric and paraded allegedly pro-regime prisoners in cages, purportedly as 'human shields' to forestall airstrikes." The group has also been accused, although they deny it, of kidnapping the human rights activist Razan Zeitouneh.

Charles Lister, a senior scholar at the Middle East Institute in Washington, told me he estimates there are between 12,000 and 15,000 fighters in Jaish al-Islam. Alloush said he has 20,000 fighters. Lister said that since Alloush's brother Zahran was killed, their official rhetoric against Syrian minorities has toned down considerably.

On the issue of Israel, Lister said Alloush was expressing a view he has heard from many Syrian rebels. "Armed groups have been able to take a longer-term perspective," he said. "As far as they are concerned, Assad is the most evil, and anyone who is not supporting Assad is comparatively better. Even Israel, which was seen for so long as the archenemy of Syrians, is considered better than Assad, Russia, Iran or Hezbollah."

This issue has caused a split among pro-Palestinian activists in the West. Some now support a no-fly zone in Syria, a proposal backed for years by interventionists on the left and right. This spring, the activist group Avaaz began a petition to urge Obama to establish such a safe zone. Meanwhile, a major Palestinian militia, the Quds Brigade, has joined the fight in Syria on Assad's side.

The lack of solidarity from many Palestinians confounds Alloush. Using the language familiar to them, many of whom still keep the keys to homes they fled in the 1948 war of independence, he told me: "It's crazy to think people in a country with 3 million homes destroyed by Bashar al-Assad would want a war with anyone except for Bashar al-Assad."


Article Link To The Bloomberg View:

Obama’s Russia Policy Is In Flames

By Noah Rothman
Commentary
September 30, 2016

We’re a long way off from those heady days when Mitt Romney was the subject of withering mockery for daring to notice that Moscow’s geopolitical objectives were in direct conflict with our own. Today, with the Republican Party’s nominee doing his best to rehabilitate the image of Vladimir Putin, Barack Obama has adopted a lot of hard-nosed rhetoric when it comes to Russia. In practice, however, the Obama administration has continued to rely on Russia to help maintain an international order toward which Putin is openly hostile. Today, the White House’s misguided Russia policy is going up in smoke.

In 2009, just one year after Moscow invaded and carved up Georgia, Russian Foreign Minister Sergei Lavrov and then-Secretary of State Hillary Clinton were posing for “reset” photo ops. In 2013, when the president wanted a way out of his pledge to punish Bashar al-Assad for using chemical weapons, the Russians were more than happy to oblige. Finally, when Western forces were compelled to intervene in Syria, Moscow stepped in to rescue its faltering client in Damascus. This bellicosity was rewarded by Obama in the form of legitimizing “non-confliction” agreements and de facto military partnerships. All of this was to protect and preserve the Obama administration’s singular mission: a nuclear agreement with Iran.

Today, with the third ceasefire agreement of 2016 dead and buried, Secretary of State John Kerry would like you to believe that he’s had all he can stand from the Russians. In a telephone call with Lavrov, Kerry struck a tough tone. He insisted that Moscow must take “immediate steps” to bring an end to the regime offensive on the rebel-held city of Aleppo—an offensive that Russian air assets are actively supporting. The Russians, for their part, have done nothing. And why would they? Obama has demonstrated clearly and for seven years that nothing Moscow can do—from invading and annexing territory in Europe, to harassing American air and naval assets, to displacing the United States in the Middle East as the diplomatic power of first resort—will dissuade the White House from seeking deeper bilateral ties.

Kerry’s furrowed-brow warnings come amid a series of unspeakable Russian atrocities in Syria. The United States alleges it was the Russian air force that targeted and neutralized a United Nations convoy of relief bound for Aleppo. It has not refuted reports that Russia is using cluster weapons, incendiary munitions, and white phosphorous against anti-Assad rebel targets in Syria. Kerry reportedly expressed “grave concern” over reports that Moscow is joining with Assad’s air forces to target civilian infrastructure and even hospitals.

Kerry’s grave concerns were expressed on the very same day that a Netherlands-based investigation into the 2014 destruction of a civilian airliner over Eastern Ukraine was the work of Moscow just one step removed. As Max Boot explained earlier in detail, the Russian SA-11 (Buk) surface-to-air missile that targeted and destroyed Malaysian Airlines flight 70—killing 298 people, 80 of whom were children—was moved into Ukraine and back into Russia on the same day of the attack. The war Russia is still waging in Ukraine has yielded a few targeted sanctions against individuals in the Russia government, but nothing so severe that it might actually compel a behavior change on the part of the Kremlin.

Now, with Russian military intelligence believed to be linked to brazen cyber warfare operations directly aimed at influencing the American political process and handicapping Democrats, Barack Obama feels moved to talk tough. Kind of. When asked if the hacks amounted to a Russian intelligence operation on Wednesday, CIA Director John Brennan confessed that it “certainly looks like a duck, smells like a duck and flies like a duck.” But even this concession was something the White House had hoped to avoid, lest they threaten the project of rapprochement with Russia.

According to BuzzFeed defense reporter Ali Watkins, the White House leaned on the ranking members of the House and Senate intelligence committees—Representative Adam Schiff and Senator Dianne Feinstein, both Democrats—to keep what they knew about the hacks and their Russian links quiet. The two did not agree, although they reportedly omitted some of the specifics of the Russian operation. The statement they eventually released was by no means watered down. “Based on briefings we have received, we have concluded that the Russian intelligence agencies are making a serious and concerted effort to influence the U.S. election,” they insisted. So much for the president’s working relationship with Moscow.

This is a policy failure historians will study for generations.


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Friday, September 30, Morning Global Market Roundup: Asia Stocks Slip As Deutsche Sours Mood, Oil Pulls Back

By Nichola Saminather
Reuters
September 30, 2016

Asian stocks extended losses on Friday as worries about the health of Deutsche Bank weighed on financial shares and as oil prices inched back from near-one month highs on scepticism over OPEC's new plan to curb output.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS lost almost 1 percent and was on track for a 0.8 percent drop for the week.

But it is poised for a 1.7 percent gain in September, and a 9 percent jump in the third quarter.

On Thursday, Wall Street lost about 1 percent as Deutsche Bank shares slumped to a record low after a report that trading clients had withdrawn excess cash and positions held in the largest German lender.

The bank's U.S. shares closed down 6.7 percent at $11.48 after earlier falling to as low as $11.185.

The immediate cause of Deutsche's crisis is a fine, disputed by Deutsche, of up to $14 billion by the U.S. Department of Justice over its sale of mortgage-backed securities.

But Germany's biggest bank has struggled for years, highlighting Europe's inability or unwillingness to push through tough but much needed financial sector reforms.

A grilling of Wells Fargo's chief executive by U.S. lawmakers following a scandal over its opening of client accounts without agreement also helped push the S&P bank index down 1.6 percent.

A raft of data out of the U.S. next week is also contributing to market jitters, with the chance of a Federal Reserve interest rate hike in December still seen at around 50-50.

Numbers to watch include September manufacturing PMI and August construction spending on Monday, non-manufacturing PMI for September and August factory orders on Wednesday and non-farm payrolls for September on Friday.

"People are very nervous going in to next week, with risk factors including the U.S. election and economy, with payrolls coming out next week," said Stefan Worrall, director of Japan equity sales at Credit Suisse in Tokyo. "So it's normal to expect volatility in an air pocket of uncertainly."

Japan's Nikkei .N225 retreated 1.6 percent after weaker-than-expected consumption and inflation data. It is on track for a loss of 2.7 percent for the month, but could end the quarter 5.5 percent higher.

While industrial output beat expectations in August, that did little to lift pressure on the central bank to ease monetary conditions further.

Some Bank of Japan board members doubted whether the central bank's overhaul of its massive stimulus program, announced last week, would enhance flexibility of monetary policy, a summary of opinions at the central bank's September rate review showed on Friday.

China's CSI 300 index .CSI300 bucked the regional trend to rise 0.4 percent, paring losses for the month to 2.1 percent.

China's factory activity inched up in September, in line with analyst forecasts, but growth was tepid. Output expanded in September but at the slowest pace in three months.

Chinese markets are closed for a holiday all next week.

Oil prices pulled back after rising 7 percent in two days after OPEC agreed to its first output cuts in eight years.

Even if production is scaled back, some analysts doubted the reduction would be enough to make a substantial dent in the global crude glut.

"The accord has not yet defined individual quotas or other forms of accountability, suggesting that this is a soft output cut at best," Francisco Blanch, commodity and derivatives strategist at Bank of America Merrill Lynch, wrote in a note.

"OPEC's action won't propel prices much above our $70 mid-year target," he added.

U.S. crude futures CLc1 slipped 0.6 percent to $47.56. They closed up 1.7 percent at $47.83 on Thursday, after climbing to as high as $48.32, the highest level in almost five weeks. They're on track for gains of 6.4 percent in September.

Brent crude LCOc1 fell 0.7 percent to $48.93. They rose 1.1 percent to $49.24 on Thursday, after earlier touching a three-week high of $49.24. They're on track to end the month 4 percent higher.

The U.S. dollar advanced 0.5 percent to 101.52 yen JPY=D4, heading for a 0.5 percent gain for the week, but down 1.8 percent for September, and 1.6 percent for the quarter.

While the yen is headed for its third straight quarter of gains, speculation that Japanese investors may buy more foreign assets in their new business half-year starting from Oct. 1 could stem the Japanese currency's gains in the near term.

The euro EUR=EBS slipped 0.1 percent to $1.12130, on track to end the month 0.5 percent stronger.

The Indian rupee INR= extended losses on Friday after posting its biggest drop since June on Thursday.

Indian officials said troops crossed into Pakistan-ruled Kashmir and killed suspected militants preparing to infiltrate and carry out attacks on major cities, in a surprise raid that raised tensions between the nuclear-armed rivals.


Article Link To Reuters:

Oil Prices Down On Profit-Taking After Two-Day Jump

By Keith Wallis
Reuters
September 30, 2016

Oil prices dropped on Friday as investors took profits following a 7-percent rise in the last two sessions, amid doubts that OPEC's first planned output cut in eight years would make a substantial dent in the global crude glut.

Brent crude futures LCOc1 had fallen 31 cents to $48.93 a barrel by 0434 GMT, after settling the previous session up 55 cents, or 1.1 percent.

U.S. crude CLc1, was down 28 cents at $47.55, after closing up 78 cents and having touched a one-month high of $48.32 that session.

Both November contracts expire after Friday's settlement.

Brent and U.S. crude are on course for a weekly gain of around 7 percent, prompting investors to take profits in the Asian trading session, said Jonathan Barratt, chief investment officer at Sydney's Ayers Alliance.

The Organization of the Petroleum Exporting Countries (OPEC) agreed on Wednesday to cut output to 32.5-33.0 million barrels per day (bpd) from around 33.5 million bpd, estimated by Reuters to be the output level in August.

The details, including the quotas for each member and the implementation data, will be finalised at OPEC'a policy meeting in November.

"It's incredible," Barratt said on the oil price moves.

"The U.S. has more confidence the deal will be done than traders and investors in Asia," he said after prices rose in the previous session and fell on Friday in the Asia time zone.

"U.S. investors believe OPEC wouldn't have announced a deal if its members hadn't already signed off on it," Barratt said.

"In essence the 700,000 barrel per day cut is a minute amount compared with total production, but it marks a turnaround by Saudi Arabia to preserve OPEC," Barratt added.

OPEC's move to cut output has raised the upside risk to prices in the fourth quarter this year and in 2017 and while the deal will help to strengthen market sentiment there will be muted impact on fundamentals, BMI Research said in a report on Friday.

"We question the rationale for a cut. Resilience in U.S. shale output has consistently surpassed expectations, while output gains in Russia continue to accelerate. Production in both markets will see short-term gains from any increase in prices and may blunt the impact of action by OPEC," the BMI report said.

Analysts at Goldman Sachs said higher crude prices will spur non-OPEC output, particularly U.S. shale oil. The U.S. oil drilling rig count has risen in 12 of the 13 past weeks. [RIG/U]


Article Link To Reuters:

China Factories Limp Along, Japan Inflation Goes Backwards

By Wayne Cole 
Reuters
September 30, 2016

China's factory sector struggled to gain speed in September while Japanese inflation went backwards in August despite the best efforts of policymakers, underscoring the limits of stimulus in reviving world growth.

Friday's unflattering figures bookmarked a week in which the IMF warned it would likely downgrade forecasts for the U.S. economy, and the World Trade Organization slashed its outlook for global trade flows.

That was unwelcome news for markets spooked by troubles at Deutsche Bank, whose U.S. shares took a hammering on reports some hedge funds had reduced financial exposure to Germany's largest lender.

The bank said the "vast majority" of its clients remained supportive, but the situation still drew comparisons to the 2008 failure of Lehman and the resulting global financial crisis.

There was at least some evidence that China, the world's second largest economy, had stabilized, if only because of a burst of government spending and a red-hot housing market.

The Caixin measure of manufacturing activity (PMI) edged up a tenth of a percentage point to 50.1, led by output and new orders. While the move was marginal, it was only the second time the index had reached positive territory since February 2015.

The U.S. economy also looked to have bounced back in the third quarter, while a string of data showed Europe weathered Britain's Brexit vote better than many had feared.

All of which encouraged Barclays to nudge up its 2017 call for global growth to 3.5 percent, from an expected 3.1 percent this year. Yet a true lift-off still seems remote.

"Given the modest acceleration in growth that we forecast and the many downside risks around these forecasts, it seems overly optimistic to suggest that the global economy has reached "escape velocity"," said Barclays economist David Fernandez.

His list of headwinds included a miserly pace of global business investment, lackluster productivity, sluggish wage growth and too-low inflation.

"Although these trends do not seem to be worsening, there are few signs – despite tremendous policy efforts – of any meaningful turnaround," said Fernandez.

Missing Inflation


The limits of policy stimulus were all to evident in Japan where core consumer prices fell 0.5 percent in August from a year earlier, the largest drop since March 2013.

The data seemed to mock the Bank of Japan's recent pledge not only to boost inflation to 2 percent but to lift it above that, so far unreachable, target for a sustained period.

Nor were Japanese consumers cooperating. Household spending sank 4.6 percent in the year to August, almost twice the fall expected by analysts.

Indeed, Friday's data across Asia were littered with unwanted milestones.

In tech bellwether South Korea, factory output suffered the steepest decline in 19 months in August as strikes stalled auto production. Things were no better in September with the Nikkei/Markit measure of manufacturing falling to a 14-month trough at 47.6 as new export orders hit their lowest since mid-2013.

Malaysia's version of the PMI contracted for the 18th straight month in September as new export orders dropped at the fastest pace in three months.

Inflation, or the lack of it, will also feature heavily in European and U.S. data due later on Friday.

The flash measure of consumer price inflation in the euro zone is forecast to rise an annual 0.4 percent in September. That would be up from 0.2 percent in August but still a world away from the European Central Bank's target of just under 2 percent. ECONEZ

The Federal Reserve's preferred measure of U.S. inflation, the core personal consumption expenditures index, is seen stuck at 1.6 percent for the year to September, exactly where it has been since March. ECONUS


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NXP Semiconductors Explores Sale To Qualcomm

By Greg Roumeliotis and Liana B. Baker
Reuters
September 30, 2016

NXP Semiconductors NV (NXPI.O) is exploring selling itself to Qualcomm Inc (QCOM.O) in a deal that could be valued at more than $30 billion, two sources familiar with the matter said on Thursday.

The deal would help diversify Qualcomm's business and make it a bigger supplier to the automotive industry. Talks are in the early stages and NXP may entertain other offers, should they emerge, according to one of the sources.

An agreement with Qualcomm could be struck in the next two to three months, according to the Wall Street Journal, which first reported news of the talks.

Representatives for Netherlands-based NXP and San Diego-based Qualcomm declined to comment.

NXP shares rose 16.9 percent to close at $96.12 on Thursday, while Qualcomm's rose 6.3 percent to $67.45.

NXP closed a nearly $12 billion deal to buy U.S.-based Freescale Semiconductor last December, creating the world's top maker of automotive electronics and doubling the percentage of its auto-related revenue to 40 percent. It could also attract interest from other large semiconductor companies such as Broadcom and Texas Instruments Inc (TXN.O), analysts have said.

Qualcomm, which supplies Android smartphone makers and Apple Inc (AAPL.O), has been dealing with slowing smartphone sales and stiff competition from Chinese and Taiwanese rivals.

Qualcomm has so far sat out the transformative consolidation sweeping the industry, which has seen mega-deals such as Avago (AVGO.O) buying Broadcom for $37 billion last year.

Qualcomm gets the bulk of its revenue from chip sales but most of its profit comes from wireless patents it licenses to the mobile industry. It explored a plan to break up its chip business from its patent licensing unit after pressure from activist investor Jana Partners but decided to remain whole.

Mizuho Securities analyst Vijay Rakesh said that the deal would give Qualcomm a roadmap for the next decade while moving away from a maturing handset market and toward the faster growing opportunity in automotives.

Qualcomm was ranked third in terms of revenue among global semiconductor companies in 2015, while NXP ranked No. 7, according to research firm IHS.

RBC analyst Amit Daryanani said the potential deal would be accretive to Qualcomm, which could also use offshore cash.

"Assuming a reasonable valuation is paid, this would be an attractive acquisition for Qualcomm and a good use of $30 billion in cash Qualcomm currently has on their balance sheet," Daryanani said.

NXP has a market value of about $28.5 billion, while Qualcomm's is about $93 billion.


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Goldman Sachs Feels The Heat In Asia As IPO Engine Slows

By Denny Thomas and Sumeet Chatterjee 
Reuters
September 30, 2016

Goldman Sachs failed to make it to the upper echelon of Asia's equity market fee earners for the first time in more than a decade, hit by a squeeze in fees that is prompting the U.S. bank to cut back jobs in the region.

Goldman has shared dominance of the Asia Pacific equity capital market arena with UBS and Morgan Stanley since clinching the mandate for China's first privatization in 1997.

But increased competition from Chinese rivals and a dearth of the blockbuster deals it has previously relied on to make money in Asia are putting pressure on global investment banking powerhouses such as Goldman, quarterly Thomson Reuters data shows.

"The value, the opportunity in the market has vaporized," said Keith Pogson, EY Asia Pacific financial services senior partner. "You cannot sustain a big-hitting team with seven-figure salaries if you are not going to hit the ball out of the stadium."

IPO activity in Asia Pacific fell 13.2 percent in the first nine months of the year to the weakest level since 2013.

While maintaining its leadership in terms of volumes in M&A advisory in Asia Pacific, excluding Japan, Goldman slipped to No. 4 in the equity capital market (ECM) Thomson Reuters league table in the first nine months of the year, from first in 2015.

The New York-based bank saw a 73 percent slump in the volume of Asia Pacific ECM deals it worked on, the sharpest fall among the top 10 equity underwriters in the region, closely followed by UBS with a 71 percent tumble.

China's CITIC Securities Co Ltd clinched the top slot in the ECM rankings, followed by Morgan Stanley and UBS.

In terms of fees, a key gauge of investment banks' revenue prospects, Goldman sank to No. 11, the first time it has been out of the top 10 rankings since at least 2000, earning an estimated $83.8 million in the first nine months of this year, according to Thomson Reuters/Freeman & Co estimates.

CITIC Securities also topped the fee table in the period, pocketing an estimated $216 million, followed by Morgan Stanley with $195 million. Seven Chinese players, including GF Securities and Guotai Junan Securities, muscled into the top 10 group, while UBS receded to No. 8.

Reuters reported last week that Goldman was considering cutting nearly 30 percent of its investment bankers in Asia.

Other investment banks may follow suit with staff reductions in the region, senior bankers said.

By moving first with the big job cuts, Goldman will however turn itself into a more nimble player and could keep its powder dry for when the market eventually rebounds.

"It's just a matter of prioritizing and deciding where the revenues are going to be from, and in a way realigning or right-sizing the team accordingly," one person familiar with Goldman's Asia business told Reuters.

In the first six months of 2016, Goldman's revenues in Asia more than halved to $1.7 billion. Its pre-tax earnings plunged 71 percent to $404 million, accounting for 10 percent of global pre-tax profit from 25 percent a year ago, its filings showed.

Smaller Pie


Equity capital market fee rankings are the most important benchmark for banks operating in Asia.

But the pie for Western banks is getting smaller as they have limited access to a growing number of domestic listings in China and fees are increasingly divided up among an ever larger number of banks.

This week's listing of state-owned Postal Savings Bank of China in Hong Kong, at $7.4 billion the world's biggest IPO in two years, involved 26 banks who earned a combined $118.4 million, or 1.6 percent, in fees.

An average IPO in the United States would have earned 7 percent fees, with far fewer players involved, earning each of them a much larger revenue, according to consulting firm Freeman & Co.

The shrinking fee pool is more painful for global banks because there is regulatory pressure on them to deploy less of their own capital, which limits their ability to dabble in IPOs.

Damien Cleris, head of coverage and global transaction banking at France's Natixis, told Reuters his bank was focusing on select Asian markets such as M&A and financing, but not ECM.

"The volumes have decreased this year and as a result people are more aggressive in competing for the transactions. This is driving overall revenues down in Asia," said Claudio Lago de Lanzos, a partner with Oliver Wyman.

"None of the relevant banks in the region are really thinking of exiting Asia, but they are really thinking hard about where to place resources."


Article Link To Reuters:

Ex-U.S. Treasury Summers Welcomes BOJ's Yield Curve And Inflation Targets

By Stanley White
Reuters
September 30, 2016

The Bank of Japan's decision to target the yield curve and allow consumer prices to overshoot its 2 percent goal are welcome steps in Japan's long battle to encourage inflation, said former U.S. Treasury Secretary Lawrence Summers.

Targeting the yield curve will keep interest rates low enough to encourage government borrowing, which is needed to help support the economy, Summers told reporters at a seminar hosted by the Japanese central bank.

The BOJ's commitment to overshoot its price target should encourage inflation expectations and is something other central banks should consider, said Summers, currently an economics professor at Harvard University.

"I salute (BOJ Governor) Kuroda and his colleagues on the BOJ board for their clear signal of an intention to approach 2 percent inflation from above rather than below," Summers said.

"The commitment to yield curve targeting was potentially constructive."

BOJ Governor Haruhiko Kuroda and the policy board overhauled their policy framework last week to focus on controlling interest rates after more than three years of aggressive money printing failed to ignite inflation.

The BOJ announced a target for the 10-year government bond yield of around zero. In the future the central bank will use its existing minus 0.1 percent interest rate, and the 10-year yield target to control the shape of the yield curve.

Summers' comments came after the BOJ seminar speech, which partly focused on "secular stagnation" and how policymakers should respond.

Summers made waves in 2013 when he revived the concept of "secular stagnation" to describe weak demand, low growth and low employment in the U.S. after the global financial crisis.

On Friday, Summers said the natural rate of interest - the short-term real interest rate consistent with full employment - has fallen so far in advanced economies that conventional monetary policy cannot bring rates low enough to create full employment.

Higher savings rates among households and companies, slower population growth and efficiency gains from technology are driving the natural rate of interest lower, Summers said in his speech.

Government spending will help raise the natural rate of interest by raising inflation expectations, and central banks need to make a general commitment to keep rates low enough so it is easy for governments to borrow, he said.

Summers, however, conceded that there may not be much more room for the BOJ and other central banks to take rates further into negative territory as consumers could revolt and start to hoard cash.

Some structural reforms, such as removing barriers to corporate investment, could raise the natural rate of interest but the burden should fall on cooperation between fiscal and monetary policy, he said.


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Philippines Leader Likens Himself To Hitler, Wants To Kill Millions Of Drug Users

By Karen Lema and Manny Mogato
Reuters
September 30, 2016

Philippine President Rodrigo Duterte appeared to liken himself to Nazi leader Adolf Hitler on Friday and said he would "be happy" to exterminate three million drug users and peddlers in the country.

In a rambling speech on his arrival in Davao City after a visit to Vietnam, Duterte told reporters that he had been "portrayed to be some cousin of Hitler" by critics.

Noting that Hitler had murdered millions of Jews, Duterte said: "There are three million drug addicts (in the Philippines). I'd be happy to slaughter them.

"If Germany had Hitler, the Philippines would have...," he said, pausing and pointing to himself.

"You know my victims. I would like (them) to be all criminals to finish the problem of my country and save the next generation from perdition."

Duterte was voted to power in a May election on the back of a vow to end drugs and corruption in the country of 100 million people. He took office on June 30 and over 3,100 people have been killed since then, mostly drug users and peddlers, in police operations and in vigilante killings.


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The Obama-Clinton Coal Bailout

They’re teeing up taxpayers to save the mineworkers’ pension.


By Review & Outlook
The Wall Street Journal
September 30, 2016

Democrats have a three-stage strategy when they want to destroy an industry: Pick a politically vulnerable target, then pile on new regulatory costs, and finally demand that taxpayers bail out the victims of the destruction. We’re now in phase three in President Obama’s war on coal, with Democrats demanding that Congress save the United Mine Workers pension fund.

The United Mine Workers of America (UMWA) runs a multi-employer pension plan that has struggled as coal has shrunk under Mr. Obama’s political assault and competition from natural gas. For every worker there are now 10 retirees. Liabilities have exploded as bankrupt companies have stopped paying for their workers and retirees.

Benefits are underfunded by $5.6 billion, or about $600,000 per worker, and the pension plan is projected to go broke by 2025. A retiree who worked 30 years would then receive a maximum of $12,870 per year from the federal Pension Benefit Guaranty Corporation (PBGC) versus $24,250.

Congress has tried to help coal miners avoid this fate. In 1992 Congress authorized the U.S. Treasury to divert interest from the Abandoned Mine Land Reclamation Fund, which is financed by taxes on coal production, to the union’s retiree health care. In 2006 Congress allowed taxpayers to be billed if interest from the reclamation fund doesn’t cover the cost of the union’s generous health-care benefits. In 2015 interest transfers accounted for $32 million while taxpayers chipped in $142 million.

Now the union wants taxpayers to underwrite the pensions. Legislation propping up the union’s pension fund has gained steam as both parties mine for votes in the Rust Belt. Last week the Senate Finance Committee approved a bill that would allow up to $490 million in taxpayer subsidies and interest from the reclamation fund to be redirected to the union’s retiree health and pension benefits.

The Congressional Budget Office estimates that backfilling the pension and retiree health benefits would cost $3.5 billion over the next decade. Although the federal government helped establish the UMWA pension plan in 1947, taxpayers have never been liable for benefits beyond what is guaranteed by the PBGC. Congress has also never provided financial assistance to any private, state or local pension plan.

The mineworkers’ predicament is real, but shoring up their pensions would set a dangerous and expensive precedent. About 1,238 of the country’s 1,361 defined-benefit multiemployer plans are underfunded to the tune of $611 billion.

The PBGC itself is forecast to go broke by 2025, which would result in benefits being slashed by up to 90%. In 2014 Congress passed legislation allowing endangered multi-employer plans to reduce benefits to up to 110% of the PBGC guarantee as long as disabled and elderly pensioners are held harmless. The goal was to prevent a cascade of insolvent plans from toppling the pension insurer.

Yet the UMWA hasn’t proposed adjusting benefits. While reductions might not be enough to salvage the plan at this late stage, PBGC Director Joshua Gotbaum has suggested a “partition” that transfers “orphans” that were offloaded by a bankrupt company to a new plan supported by the PBGC. This would make benefits for current workers sustainable.

But the union figures it can get Congress to cut another check, which Mr. Obama would be happy to endorse. In 2010 a top official at the Department of Interior warned that similar legislation would “add significant new costs, and eliminate savings sought by the Administration.” But having targeted coal for extinction, Mr. Obama and Hillary Clinton have joined the bailout chorus to reduce the political fallout.

The Senate bill is also backed by at least nine Republicans including Tom Cotton (Ark.), Pat Toomey (Pa.) and Rob Portman (Ohio). Companion legislation in the House has drawn nearly 50 GOP co-sponsors.

The Senate has left town, but the bill may come up during the lame duck. By agreeing to rescue coal miners’ pensions, Republicans would be teeing themselves up for more bailouts. You can bet Democrats will later try to bludgeon Republicans into saving the Teamsters’ pensions too. This is the bigger reason Democrats are suddenly championing the coal miners they did so much to put out of work.


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America's Irrational Saudi Arabia Relations

Washington is sending mixed messages to one of its most important regional allies.


The National Interest
September 30, 2016

For the first time in the seven and a half years of the Obama presidency, the legislative branch was able to override a presidential veto yesterday and force the White House to implement a law that it opposes. The bill, of course, is the Justice Against Sponsors of Terrorism Act (or JASTA in Washington lingo), which provides U.S. victims of terrorist attacks on American soil with the ability to bring a foreign government to court if they have a suspicion that the foreign government in question aided or supported the attack.

The House and Senate easily met the two-thirds threshold under the Constitution: the Senate voted 97 to 1 to buck Obama on JASTA, and the House quickly followed suit by a resounding 348 to 77 margin. Congressional Democrats who the White House has come to rely on to prevent GOP–legislation from reaching the president’s desk were some of the most passionate advocates for passing JASTA despite the administration’s objections—a humiliating defeat for the Obama administration. Press Secretary Josh Earnest called the decision the “single most embarrassing thing the Senate has done since 1983.”

As senators pat themselves on the back for going to bat for Americans who have been injured or whose relatives have been killed in terrorist attacks, they seem to be oblivious to the fact their actions are rather schizophrenic.

One week, Saudi Arabia is perceived to be America’s most-vital Arab ally in a dangerous region torn by conflict, civil war and terrorism. But during the next week, Saudi Arabia is akin to a rogue state that sponsors or creates the very international terrorism that the United States has been fighting against for the last fifteen years. One week, senators trust the Saudis to use American-made weapons responsibly and in accordance with international law, but in the next week is judged as an accomplice that deserves to be held financially liable for the worst act of mass killing in the continental United States since the Civil War. If King Salman and Crown Prince Mohammed are confused about where Washington stands on their country, they wouldn’t be the only ones. It’s increasingly tough for Americans to know what is in the minds of their elected representatives, let alone Saudis half a world away.

A week before the Senate overrode President Obama’s objections on JASTA, this same body blocked a proposal from Sens. Rand Paul of Kentucky and Christopher Murphy of Connecticut that would have halted the sale of $1.15 billion worth of Abrams tanks and ammunition to Riyadh. If you’re dazed and confused, you should be. Talk about selective morality: it doesn’t make a whole lot of sense to sell heavy weapons platforms to a country that, a week later, is practically designed by the U.S. Congress as a state sponsor of the worst terrorist attack on American soil.

As Senator Rand Paul rightly asked during last week’s debate on his legislation, “does no one sense the irony?” This is, indeed, the definition of irony: approving a billion dollar weapons contract with Saudi Arabia, the very same country that lawmakers have now decided is worthy of being sued for crimes related to terrorism. It’s more than ironic, it’s irrational in every meaning of the word. It’s similar to a bugler conducting a robbery and stealing everything in sight, but then showing up the next day asking the homeowners if they want to be friends.

What are members of Congress thinking? Are they even thinking?

Washington is deal-making town. Senators who voted to kill Paul and Murphy’s amendment probably did so in part on the belief that it would free them up to vote against the Saudis and with the 9/11 families when JASTA came up on the floor. This would be a simple “have your cake and eat it too” arrangement—please Riyadh as a great ally deserving of U.S. military support, but later on make the widows and orphans of the September 11 attacks happy by siding with them several days later. This wouldn’t be the first time that lawmakers have made this kind of political calculation, and it definitely won’t be the last.

Just because it may be good politics, though, doesn’t mean it’s good foreign policy. After the completion of the Iranian nuclear agreement, Riyadh is already eyeing the U.S. with suspicion, and it wouldn’t be a foolish to believe that King Salman is probably beginning to think of U.S. officials as a bunch of hypocrites who will say one thing for political expediency, but do another. The actions of Congress over the last two weeks won’t give him much reason to doubt this theory.


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Step Up Your Smart-Home Security Now

In an age when hackers take over internet-connected cameras, it’s important to use your available defenses.


By Nathan Olivarez-Giles 
The Wall Street Journal
September 30, 2016

Connected cameras and other smart-home devices promise a Jetsons-esque future. But as a recent hijacking of more than 100,000 networked cameras and DVRs demonstrates, they also provide fertile ground for hackers.

“You should make the assumption that anything that’s internet accessible is hackable. If it has a camera or a mic built in, it can be taken over,” said Kenneth White, a security researcher and director of the Open Crypto Audit Project, a nonprofit that promotes cybersecurity.

To protect yourself, you have to have the right perspective. “You need to take this seriously, but not be afraid of it either,” he said. Once you accept that hacking happens, embrace the security at your disposal. Here are some easy tips to help you step up your smart-home defenses:

Research before you buy. If you’re shopping for any smart-home device, search online to see how often its maker issues security updates, and how open they are about security vulnerabilities when they do inevitably happen. If they don’t talk about security, that’s a red flag. And the less you pay, the less protection you can expect. “If the camera is $50 or $99, its security features are going to be bad,” said Mr. White.

Update the firmware.
Use the instructions that come with the device. (Often, you can do this with the product’s app.) Even update a brand new product, because this can change day to day. If the product has an auto-updating option, use it. Set a calendar reminder every month to check for updates on all of your cameras, thermostats and other smart home products.

Change the password. The best bang-for-buck hackers get is from trying the default username and password for popular devices thousands of times over. It is best to use secure passwords, and to not use the same password for all your devices and accounts. (If you have trouble coming up with good passwords—and remembering them—a password manager like Dashlane can help.

Secure your router.
That means updating firmware, changing the default admin login and choosing a new strong unique password. While many products such as cameras have online logins that your router can’t defend against, it never helps to leave your network’s front door wide open. If you don’t already have your Wi-Fi security set to WPA2, do it now. All new gadgets will support it. (If it doesn’t, don’t buy it.)

Create a network for devices.
To be extra careful, use a newer router to create a separate Wi-Fi network that only your smart-home devices use. This keeps them from falling prey via vulnerable PCs. Also, if a smart-home is compromised, it won’t give hackers access to your home computers.

Point your cameras with care.
Assume that your internet-connected cameras could be hacked. That means you should limit the number of cameras you have pointing inside your home, especially in bedrooms. And if you don’t trust yourself to keep your connected video baby monitor up-to-date, best to buy an old-fashioned audio-only one.

Ask your service provider.
If you have an installer for home security and automation, be it ADT or a local firm, ask your provider about firmware updates. Often, providers will ensure that their hardware is updated. However, if they say you are responsible, ask for detailed instructions.

Buy new hardware.
Some older gadgets will simply leave you vulnerable, especially if you don’t have network-engineering know-how. Newer products have smarter security features and are easier to keep up-to-date. “If the company that made your [device] isn’t selling that model anymore or offering security updates, that’s a good sign for you to throw it in the trash,” Mr. White said.


Article Link To The Wall Street Journal:

Germany Gets Economic Rebalancing Only Half Right

By Olaf Storbeck
Reuters
September 30, 2016

Positive economic news is in short supply in the euro zone. Germany, however, remains the exception to the rule. The currency bloc’s largest economy is this year set to grow at its fastest pace since 2011, an economic report commissioned by the government predicted on Sept. 29. Expected real GDP growth of 1.9 percent is a quarter above estimates of the country’s long-term potential.

What’s more, this performance sits on a broader and healthier footing than in the past. The widely-held view of Germany as an export-driven machine is increasingly out of date: most of the growth is coming from internal sources. Rising employment, higher wages and low inflation are pushing up household income and spending. Private consumption, which last year accelerated at the fastest pace in more than a decade, will rise by another 1.8 percent this year, according to the report by eight economic think tanks. With imports rising at a faster pace than exports, net trade is less important for growth than before. Over the coming two years, it is even expected to become a slight drag.

When it comes to Germany’s current account balance, however, the rebalancing is invisible. The country’s current account surplus is expected to hit yet another all-time record this year, rising to 8.8 percent of GDP. That’s well above the 6 percent threshold deemed sustainable by the European Commission.

Excessive fiscal restraint is partly to blame. The government is on track to run a fiscal surplus for the third year in a row. In a sluggish economic environment, such a policy is irresponsible.

But Chancellor Angela Merkel is not the only culprit. Chronically weak corporate investment is also to blame. Like their counterparts across the developed world, German companies are either hoarding the cash or investing abroad. Equipment investment, which has been below par for years, is expected to rise by just 1 percent in 2016 and may be even weaker next year.

This investment freeze in turn weighs heavily on imports. Each euro spent on machinery in Germany boosts imports by more than 0.44 euros, data from the RWI Essen think tank shows. By comparison, a euro spent by the government brings in just about 0.1 euros of imports.

If this trend continues, Germany’s capital stock – and hence its export potential – will eventually shrink. That would be the most painful way for the economy to rebalance.


Article Link To Reuters:

The Hypocrisy Of Hillary’s Tax Attack

By Seth Lipsky
The New York Post
September 30, 2016

If I were Donald Trump — a stretch, to be sure — I’d respond to Hillary Clinton’s nudging by refusing to release my tax return, now or ever. It’s none of her, or anyone else’s, business.

The idea that baring one’s tax return should be required of presidential candidates strikes me as an affront to privacy. If anyone in the government released Trump’s tax return, they’d be prosecuted.

Clinton’s fixation on this illuminates how she thinks about taxes, money, property and privacy. In the debate at Hofstra, she speculated on three reasons for Trump’s reticence.

One: Trump is “not as rich as he says he is” (neither was Midas). Two: “Maybe he’s not as charitable as he claims to be” (Scrooge McTrump). Three: He doesn’t want Americans to see “he’s paid nothing in federal taxes.”

At this point Trump interjected to suggest that paying nothing in federal taxes would make him smart. That went right past Comrade Clinton, who thinks of tax revenues as the government’s money, not the capitalists’.

Instead, Clinton suggested Trump has “paid zero, that means zero for troops, zero for vets, zero for schools or health.” Then she said “it must be something really important, even terrible” that Trump is “trying to hide.”

What backward logic. Were Trump trying to hide something “terrible,” why in the name of Al Capone would he put it in his tax return? That would hand it over to the tax cops at the IRS.

If one had something terrible to hide, like ill-gotten gains maybe, one is more likely — this, too, is but speculation — to hand it over to a tax haven, like, say, the Clinton Foundation.

The very purpose of that foundation is to permit rich people to reduce their taxes by letting the Clintons use their money. In turn, the Clintons get to use the lucre to do what they, instead of the government, deem to be good works.

Just for the record (and since Clinton brought it up), the Los Angeles Times reports that the Clinton Foundation said it had sent a scant $105,000 to veterans’ organizations — since 2006.

That would suggest that on average over the past decade the Clintons dropped about $10,000 a year on vets. That’s in a period during which rich people have ladled into the foundation hundreds of millions of dollars.

Against which, just to underline the point, these rich persons will save on their own taxes. Fine with me, but so much for Clinton’s malarkey about vets, troops, schools and health.

The whole ruckus over Trump’s tax return is a smokescreen for Clinton to avoid talking about tax policy, jobs and growth. These are the issues on which Trump made his strongest showing in the debate.

America has emerged in recent decades as a high-tax country. So $2.5 trillion or more is now trapped overseas in the coffers of American companies who dare not bring it home.

They fear that much of it will be taken away in taxes. Hillary Clinton, meet “Atlas Shrugged.” She and President Obama have learned the hard way that the owners of that $2.5 trillion are in a position to wait.

If the $2.5 trillion trapped overseas were allowed home, Trump pointed out Tuesday, it could be put to work by companies to create factories and jobs in, among other places, America’s inner cities.

Clinton has offered nothing to address this. She’d essentially continue Obama’s economic policy even though he’s set to be the only president in modern American history never to have had a single year of growth of 3 percent or higher.

Clinton just doesn’t want — or know how — to talk about that. She wants to distract voters by conjuring imaginary horrors about The Donald’s tax return, and he was waiting for her.

Trump announced in the middle of the debate that he’d release his tax returns when Clinton releases the 33,000 missing e-mails. Before that his position was he’d wait for the end of his audit.

Then again, too, he also announced in the debate that his audit has been going on for 15 years. He could have told her just to flake off. But it turns out that The Donald is too polite.


Article Link To The New York Post:

Three Things Learned From The Wells Fargo Hearing

John Stumpf endured a more than four-hour grilling.


By Steve Goldstein
MarketWatch
September 30, 2016

Wells Fargo Chairman and CEO John Stumpf endured a more than four-hour grilling before the House Financial Services Committee Thursday over his bank’s unauthorized opening of millions of customer accounts. Here’s some of what we learned.

1. $41 million didn’t buy total peace. However bad Thursday’s hearing was for Stumpf, it would have been orders of magnitude worse had the bank WFC, -2.07% not decided to strip him of $41 million in unvested equity awards, as well as salary during an independent investigation. Recall that at the Senate hearing into the same matter, Stumpf had not yet suffered a financial penalty. That was what led to the now-famous upbraiding by Sen. Elizabeth Warren, who asked him what taking responsibility meant if he still had his job and his pay.

The new fault line was Stumpf holding both the chairman and chief executive role at the bank. That drew criticism from across the political spectrum, from Rep. Randy Neugebauer, the Texas Republican, to Rep. Maxine Waters, the California Democrat. Waters also pointed out that Stumpf is a director of both Chevron CVX, -0.86% and Target TGT, -0.15% board positions that seem to be in jeopardy. Rep. Denny Heck, a Washington state Democrat, said it’s inconceivable that the same board that stripped pay from Stumpf isn’t also considering giving the executive the boot.

2. Breaking up the bank? Speaking of Waters, she made an interesting announcement near the very end of the hearing — she supports breaking up Wells Fargo.

Wells Fargo, in some senses, is not an obvious breakup candidate. It doesn’t, like Citi or J.P. Morgan Chase, have what could be neatly hived off investment banking and consumer banking arms — it’s overwhelmingly a retail bank. On the other hand, Stumpf struggled, in the Senate hearing in particular but to a degree in the House affair, to explain with precision just what is going on at his bank. In a back-and-forth with Rep. Keith Ellison, he professed to have no idea about the amount of prospecting required for his staff to meet their sales goals. Maybe that’s a rope-a-dope, play-innocent strategy meant to avoid giving any more fodder to the additional legal action inevitably facing the bank. But it sure seemed like a chief executive, who ahead of this scandal was considered one of the top bankers in the country, if not the world, had only a fuzzy idea of what was happening.

Clearly, just because Waters says something, doesn’t make it policy. Importantly, though Republicans also attacked Stumpf and Wells Fargo, they didn’t go anywhere close to suggesting they favor this route. And the one regulator who could conceivably break up Wells Fargo — the Federal Reserve — has not come close to suggesting it would even put it on the table. On Wednesday, Federal Reserve Chairwoman Janet Yellen suggested the penalty for banks that didn’t have adequate living wills would be to hold additional capital.

3. Executives have learned a touch of humility.
So one trap that Stumpf didn’t fall into? He took commercial, and not a private jet, to the hearings. (Virgin America to be specific.) He repeatedly thanked representatives for their questions even when they were excoriating him (and at one point insinuating that he committed illegal insider trading.) He apologized any number of times.

Maybe that was sincere, maybe not. At the very least Stumpf didn’t pour gasoline on the fire.


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Tech Must Look To Past To Protect The Future From An Artificial Intelligence Apocalypse

Industry needs to devise simple rules like Isaac Asimov.


By Therese Poletti
MarketWatch
September 30, 2016

Through a joint alliance on artificial intelligence, five tech giants need to take a better look at the guidelines established by one of the most influential writers of modern science fiction to protect us from an apocalyptic future.

Fears of what autonomous technologies are capable of is entirely understandable, even though artificial intelligence is still in early stages. So Amazon.com Inc. AMZN, +0.04% Alphabet Inc.’s DeepMind/Google GOOG, -0.84% GOOGL, -0.92% Facebook Inc. FB, -0.88% IBM Corp.IBM, -0.11% and Microsoft Corp. MSFT, -1.09% have created an ethics-focused nonprofit that says it has goals such as educating the public, protecting the privacy and security of individuals, and to create a forum for discussion of the complex issues in a future with machines may be in decision-making roles.

The Partnership on AIproposed a set of eight tenets to ensure that the use of AI is “beneficial to people and society.” But the corporate-sounding tenets seem to be a trumped-up, yet still watered-down, version of the three fundamental “Rules of Robotics,” as written by legendary science fiction author Isaac Asimov. Asimov recorded his rules in a 1942 short story called “Runaround,” which takes place in approximately 2015 and involves two engineers working with a robot to get a mining station working again on the planet Mercury.

The three rules state:

1) A robot may not injure a human being, or, through inaction, allow a human being to come to harm.

2) A robot must obey the orders given it by human beings except where such orders would conflict with the First Law.

3) A robot must protect its own existence as long as such protection does not conflict with the First or Second Laws.

The last two rules contradict each other in the story, when the robot gets stuck in an infinite loop as he obeys the command to gather some much needed selenium from a pool 17 miles away from the mining station, but hesitates to approach the pool because it may present a danger. One of the scientists then decides to venture out into Mercury’s life-threatening heat, and the robot breaks out of its loop to try to rescue him, illustrating that the first rule—protecting human beings—is the most important of all.

Partnership on AI has a seemingly corporate take on Asimov’s most important rule. Rule No. 6 of the group’s tenets has several parts, including that it will “work to maximize the benefits and address the potential challenges of AI technologies,” by “ensuring that AI research and technology is robust, reliable, trustworthy, and operates within secure constraints;” and “opposing development and use of AI technologies that would violate international conventions or human rights, and promoting safeguards and technologies that do no harm.”

The group’s statement of “do no harm” though, is more nebulous than Asimov’s rules, which are clear, plain and simple. Attempting to understand those convoluted rules could produce an infinite loop in a human being, much less an artificially intelligent machine.

It is laudable that a group of tech giants are starting to think about ethics, responsibility and education of the public, but the Partnership on AI lacks enforcement capabilities and could be more about public relations than true action. If the industry is going to continue to pursue tech development as it has been predicted by futurists, it also needs to come up with a set of tenets that a machine can understand and set a precedent on protecting human life, just as Asimov suggested.


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Elizabeth Warren Trains Her Sights On A New Target

The Education Department is chasing borrowers to repay student loans they may not owe.


By Shahien Nasiripour 
Bloomberg
September 30, 2016

The U.S. Department of Education’s debt collectors may be violating the law by collecting on defaulted federal student loan debt that’s likely invalid yet owed by "vast numbers" of defrauded for-profit college students, Senator Elizabeth Warren (D-Mass.) charged Thursday.

The issue concerns nearly 80,000 Americans in default on loans they collectively took out to attend more than 100 schools from 2010 to 2014 owned by defunct for-profit giant Corinthian Colleges Inc. The schools—which went by the Everest, Heald, and WyoTech brand names and were spread across more than 20 states—allegedly duped students into enrolling in dozens of programs by marketing false job-placement statistics, the Education Department has concluded.

Corinthian filed for bankruptcy last year amid an avalanche of government lawsuits alleging fraud.

Federal student loan borrowers can petition the department to cancel their debt—and get a refund on past payments—if they were defrauded. Borrowers who attended Corinthian programs that published false career data need only check a box and sign their names to a government form to discharge their debts. Then-Education Secretary Arne Duncan said last year that defrauded borrowers would receive “every penny of relief they are entitled to under law.”

The problem, according to Warren, is that the feds are making borrowers apply for debt cancellations, rather than giving it to them outright and not acting aggressively enough to get the word out to them. The Education Department has mailed applications to tens of thousands of potentially eligible borrowers and sent them e-mail reminders, but the department’s debt collectors and loan servicers still send them monthly bills that don’t detail the fact they can erase their loans.

The government’s process has clearly failed distressed borrowers, Warren said. An unknown number of the 79,717 former Corinthian students in default on their loans were likely defrauded, she said, citing data her office received from the Education Department. Yet the department has received just 23,185 debt cancellation applications from Corinthian borrowers. The federal government is seizing tax refunds, Social Security benefits, and earned-income tax credit payments intended for low-income Americans from more than 30,000 former Corinthian students in default on these loans. The Education and Treasury departments are also garnishing wages from more than 4,000 of them, Warren added.

One such borrower, Darnell E. Williams of Dorchester, Mass., sued the Education and Treasury departments on Wednesday for allegedly violating federal law by seizing his federal tax refund of $1,263 to pay off his Corinthian-related debt of nearly $11,000, even though the two federal agencies “possess ample information to conclude that [his] debt is presumptively nonenforceable.” The lawsuit was brought by lawyers at the Project on Predatory Student Lending at Harvard Law School.

The Federal Trade Commission and the Consumer Financial Protection Bureau have sued companies in the past for allegedly violating the law by collecting on debt they knew to be invalid.

In response, Education Undersecretary Ted Mitchell said his agency would conduct further outreach later this fall to inform Corinthian borrowers about their options. He didn’t provide any further details in his prepared statement. Rob Runyan, a Treasury spokesman, didn’t have an immediate comment. Pamela Shepherd, a spokeswoman for the National Council of Higher Education Resources, a Washington-based trade group that represents many Education Department debt collectors, referred questions to the department.

“We believe part of what is required is for students to attest they actually were defrauded by their institution,” Education Secretary John B. King Jr. said Thursday afternoon at the White House.

The Education Department tries to stem loan defaults in part by threatening to revoke colleges’ access to federal student loans and grants—lifeblood for most schools in the U.S.—if their former students default at high rates. But over the past two years, the department has spared some colleges from accountability by lowering their loan default rates on account of faulty servicing practices. Dorie Nolt, a department spokeswoman, wouldn’t say whether the feds gave colleges a break this year, too. The borrowers who defaulted on those debts were not granted a similar reprieve.

Canceling the Corinthian borrowers' debt would likely represent a significant cost to the federal government in the form of forgone future monthly payments. Consumer advocacy groups reckon that the feds are more concerned about the potential fiscal cost of debt forgiveness than about making cheated borrowers whole. “The burden should not be on innocent students—that obligation lies with those who failed to protect them in the first place,” said Randi Weingarten, president of the American Federation of Teachers.


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Pensions Fly Only If You Believe They Can

By Megan McArdle
The Bloomberg View
September 30, 2016

There’s a bank run happening in Dallas. The funny thing is, it’s not happening at a bank.

The city’s pension for firefighters and police is disastrously underfunded. Start with the normal problem that virtually all public pension plans are facing (overpromising benefits, underinvesting in the fund). Add in an attempt to make good on promises by investing in “non-traditional” assets like timber and real estate, which didn’t pan out as the investors had hoped. Add in a deferred retirement program which allows people to accumulate assets in the fund long after their retirement date -- and to withdraw that money in a lump sum whenever they want. And what you get is a big mess.

Alarmed by the state of its pension fund, city officials have started talking about fixes. Folks with money in the fund have become justifiably suspicious that those fixes might include cuts. They are hastening to withdraw their money. At the moment, those withdrawals actually help the fund, because it’s required to pay out a fixed rate of interest that is below the current investment returns. But if the withdrawals continue, the fund will soon be in a parlous state. Naturally, this makes people want to withdraw their money, in order to get it out before the thing collapses.

As an example of what can happen to a pension fund, this is interesting, but not particularly representative. Pension funds do not have to allow lump-sum distributions, though many do. But it is nonetheless useful to look at what’s happening in Dallas, because it illustrates why bank runs happen, and why they’re so hard to stop once they’ve started.

The ultimate source of a bank run -- the original sin of the financial system, if you will -- is the conflict between what we want as borrowers and what we want as savers. As savers, we want a vehicle that will guarantee that we will not lose money and that we can get that money out before we need it. As borrowers, we want a predictable, fixed payment, preferably for a long time at a low interest rate. In economic terms, savers have a very high preference for liquidity (the ability to easily turn your investment back into cash), while borrowers have a very high preference for illiquidity.

That translates into the price of investments: the more illiquid it is, the more the investors are willing to pay for the privilege in the form of higher interest rates or other investment returns. This is why 30-year mortgages have higher interest rates than 15-year mortgages -- and 30-year mortgages nonetheless dominate the market. The same sort of logic applies to assets, like stocks, that are generally relatively liquid, but are also volatile -- meaning that their value can move around a lot over short periods, so that while you can usually liquidate, you might have to do so at a loss.

The good news is that while people want to have the option to liquidate their investments, they don’t necessarily use that option very often. So if you pool a lot of savers together, and a lot of borrowers, you can make a sort of simulated asset that is both liquid and not volatile, even though it's made out of assets that are actually fairly illiquid and/or volatile. This has real benefits to savers, who get a better return on their money than they would by lending it out short term or leaving it in a stack of bills; and to investors, who get lower rates than they would if they had to persuade an individual to give them a 30-year mortgage.

This is fundamentally what banks do, and in a way, pensions do it too. While a pension is not as liquid as a savings account, it guarantees low volatility and regular withdrawals, while investing the money in assets that have variable returns and are potentially hard to sell without taking a loss. Because at any given time, people are going to be accessing only a small amount of the overall assets in the funds, they can do this without going broke.

That is, most of the time. The problem is that, like some sort of arcane magic, the simulation works only as long as everyone believes in it. If people stop depositing money in the system, and start taking it out instead, the underlying volatility and illiquidity reassert themselves, and you get a run. The paradox of a bank run is that it doesn’t matter whether the bank’s assets are basically healthy or not; if enough people try to leave, the bank will be insolvent, even if its underlying assets are throwing off more than enough cash to keep operating normally.

There are ways to mitigate this problem, but it never really goes away. The government can guarantee the assets, as we do with deposit insurance -- but then people start worrying about the government’s soundness, as we saw in many places in Europe during the eurozone crisis. (The Dallas government has just had its bond rating downgraded by Standard & Poor’s, thanks in part to worries about the police pension fund.) You can stop people from making withdrawals (as many banks did during the Great Depression), but then your liquid, low-volatility asset has turned into something riskier, and people will demand higher returns to put their money in it, which means the underlying financial model no longer works the way it did.

In other words, as I’ve written before, risk can neither be created nor destroyed, only transferred or transformed. And the process of transforming or transferring risk creates its own, new risks: that when the illusion cracks, people will start rushing for the exits, leaving the slowest and most credulous holding an empty bag.


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Pressure Is Building For Germany To Show It's Ready To Rescue Deutsche Bank

By Jeff Cox
CNBC
September 30, 2016

German officials could be about to find themselves in an uncomfortable position: Being called on to show they're ready to rescue a bank in a part of the world where such operations are considered taboo.

Deutsche Bank came under intensified market fire Thursday, the latest salvo being a Bloomberg report that a small number of hedge funds are trimming their sails at the German bank.

In a broad perspective, the move would represent a minor dent in Deutsche's derivatives clearing business. Barry Bausano, chairman of Deutsche's hedge fund business, told CNBC on Thursday that while there have been some outflows, there have also been inflows, which he said is "part of the typical ebbs and flows" of the prime brokerage business.

But at a time when investors are fearing what the future holds for the highly leveraged institution, such news is enough to cause ripples. Shares tumbled more than 7 percent in mid-afternoon trading. The plunge took the broader market down as well.

Consequently, market talk intensified that it's becoming time for the German government step in and assure investors that it will be at the ready to stabilize both Deutsche and the broader system — much along the lines of what U.S. officials had to do during the 2008 financial crisis.

"They're going to probably have to say that they would be willing to put funds into the bank," said banking analyst Christopher Whalen, senior managing director and head of research at Kroll Bond Rating Agency. "It's exactly like what (former Treasury Secretary Henry) Paulson did with Citi ... It's a very analogous situation. Hopefully, the German government will take a page from that particular book and look at how the U.S. responded."

In a statement, Deutsche Bank pointed out that it is financially stable: "Our trading clients are amongst the world's most sophisticated investors. We are confident that the vast majority of them have a full understanding of our stable financial position, the current macro-economic environment, the litigation process in the U.S. and the progress we are making with our strategy"

As Citigroup teetered in late-2008 and early-2009, Paulson's Treasury stepped in with two cash injections to keep the financial contagion from spreading after Lehman Brothers failed on Sept. 15, 2008. The highly unpopular bailouts kept Citi afloat as fear spread about further implosions in the financial system.

However, the European corporate culture is different, particularly when it comes to banking. Bailouts are considered anathema, and German officials in recent days have signaled an unwillingness to step in.

"The Germans have to stop talking about this publicly unless they say, 'Yep, we got 'em, there is no issue here,'" Whalen said. "The concern is that the statements they did make were not helpful."

The situation conjured dark images of the 2008 financial crisis — with the important caveat that the overall risks are nowhere near as great now as they were then.

"After being there I am literally sitting here with chills coming down my spine because we're in a very similar dynamic," Larry McDonald, head of global strategy at ACG Analytics, said on CNBC's "Power Lunch." "Deutsche Bank is not Lehman in terms of the overall global risk, but the political situation is almost identical."

"The politicians in Germany aren't in position right now to do anything ahead of the election," he added. "The beast in the market, the serpent in the market, knows this, and the market will push and push and push until they break the politicians in Germany to come up with public funds."

In the meantime, market angst builds.

Millennium Partners, Capula Investment Management and Rokos Capital Management are among the 10 hedge funds that have pulled cash and cut positions at Deutsche, according to the Bloomberg report, which noted that most of the 200 firms that conduct derivatives clearing with Deutsche have not altered their positions. Rokos declined comment to CNBC and the other firms did not respond to requests.

Bloomberg cited a company statement in which the bank expressed confidence that most of its clients understand the path Deutsche is taking toward resolving its issues. The bank is in the midst of negotiating a settlement with the U.S. Justice Department over mortgage-backed securities. Reports indicate a figure of $14 billion is on the table, which would hit Deutsche hard.

The bank has about about $16 billion in equity and some $160 billion in debt.

"The thing that people forget is the EU has very, very strict rules on the book. The whole thing is no state assistance," Kroll's Whalen said. "The Germans have let this situation with banks fester for years, and unfortunately the guys at Deutsche have waited to settle their outstanding issues. They've always been this way."


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