Citigroup wanted workers to share client orders, ex-trader says 

Citigroup Inc executives encouraged foreign-exchange traders to use electronic chat rooms to share client orders with employees of rival banks, a practice that forced finance companies to pay US$10 billion in regulatory fines, according to evidence presented to a London employment tribunal. 

PHOTO: BLOOMBERG

JAN 26, 201610:00 PM

[LONDON] Citigroup Inc executives encouraged foreign-exchange traders to use electronic chat rooms to share client orders with employees of rival banks, a practice that forced finance companies to pay US$10 billion in regulatory fines, according to evidence presented to a London employment tribunal.

Carly McWilliams, a London-based trader fired during a probe into the currency-rigging scandal, said executives were aware of how the foreign-exchange desk operated long before the scandal attracted the attention of regulators, according to evidence read in court on the first day of her employment suit. Jerome Kemp, the Citigroup executive who fired McWilliams, denied the claim in court Tuesday.

"The bank has encouraged precisely what it now complains of," McWilliams said in an e-mail to the bank's HR department before her disciplinary hearing on May 7, 2014.

McWilliams is one of several traders to sue their former employers in London's employment tribunals in recent months, after banks suspended dozens of people who were subject to regulatory probes. Last week Shivani Mathur, implicated in the Libor scandal, began her case against Deutsche Bank AG. Ian Drysdale, a former Royal Bank of Scotland Group Plc trader fired for colluding with members of a chat group nicknamed the 'Cartel,' won his case, although the judge did not award him damages.

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McWilliams is the second former Citi trader to sue the bank over unfair dismissal, with Perry Stimpson winning his case in November. The bank is taking no chances this time, sending 10 lawyers to a preliminary hearing on Monday, a move that "must be a record," judge Alison Russell said.

Citigroup said McWilliams was fired after its own investigation found she had "engaged in misconduct." "Individual accountability continues to be important to Citi and for that reason we are defending Ms. McWilliams case in the tribunal," the bank said in a statement. "We expect our employees to adhere to the highest ethical standards."

BLOOMBERG

      

Global stock market's recession fears not yet self-fulfilling

The global-recession fears of stock investors may not yet prove self-fulfilling. 

PHOTO: BLOOMBERG

JAN 26, 20169:00 PM

[LONDON] The global-recession fears of stock investors may not yet prove self-fulfilling.

"At a certain point the markets become reality if they affect the behavior of regular people," Steven Schwarzman, chief executive officer of Group LP, told Bloomberg Television last week.

"At this point, I don't think that's happened." Also breathing easy is David Mericle, an economist at Goldman Sachs Group Inc., who published a report on Tuesday citing research showing that a $1 decline in financial wealth typically reduces consumption by about 2 cents over the next couple of years. So a 10 per cent decline in US equities should restrain consumption by almost 0.4 per centage points.

The good news is that half of this should be offset by gains in American housing wealth. Sales of existing housing were the strongest since 2006 last year, while the unemployment rate is the lowest in seven years.

"Our analysis suggests a relatively modest drag from wealth effects in 2016," said Mericle.

Even less worried is Paul Donovan, an economist at UBS Group AG in London, who echoes Mericle by saying labor and housing markets are more important drivers of the US economy given just 13 per cent of households directly own stocks.

This argument is also backed by Deutsche Bank AG economists, who say while shifts in the S&P 500 often drive consumer sentiment surveys, that doesn't translate through to actual spending. That's because 80 per cent of U.S. equities are owned by the richest third of households, who spend only 65 per cent of their pre-tax income compared to lower paid families who spend 1.7 times their income.

"There are reasons to suggest that the feedback for equities to the real world is significantly weaker at the moment than it has been in the past," said UBS's Donovan.

Among the other factors he gives are that the S&Ps 500 is more driven by manufacturing and mining companies than the services industry which make up a bigger share of the economy.

Publicly-listed companies also reflect just 15 per cent of the US economy, omitting the small- and medium-sized businesses which power it. While falling stocks typically raise the cost of capital for companies that's not a problem at the moment with easy monetary policy keeping credit flowing, said Donovan.

Repeating the view of Credit Suisse Group AG CEO Tidjane Thiam that he doesn't "like periods where the price of risk is distorted," Donovan also says maybe the recent declines will prove healthy.

"For now the move in China and other equities markets should perhaps be considered a good thing, bringing markets closer to fundamental value," said Donovan. "It is worth remembering falling equity markets are not bad, equity markets out of line with economic fundamentals are."

BLOOMBERG

    
 

Yuan drop may spur new Plaza Accord deal, Deutsche Bank says 

The world's central banks should plan for coordinated currency intervention akin to the 1985 Plaza Accord to support the Chinese yuan and keep the dollar from strengthening more, according to Deutsche Bank AG. 

PHOTO: AFP

JAN 27, 20167:58 AM

[NEW YORK] The world's central banks should plan for coordinated currency intervention akin to the 1985 Plaza Accord to support the Chinese yuan and keep the dollar from strengthening more, according to Deutsche Bank AG.

"It is not too early for the US and other major global players to consider how best they can support China in a transition to a market determined exchange rate," Alan Ruskin, New York-based global co-head of foreign-exchange research at Deutsche Bank, the world's second largest currency trader, wrote in a note on Tuesday.

Joint currency interventions helped stem the previous two dollar strengthening periods since the 1980s, and "it is quite likely that similar actions will be needed in this big USD cycle," he wrote.

The yuan has weakened about 6 per cent against the dollar over the past six months as the economy slowed and capital outflows mounted. The decline has roiled global markets and prompted the central bank to spend a record US$513 billion in foreign reserves to shore up the currency.

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PLAZA ACCORD

Some investors are concerned that, at the current rate of declines of about US$100 billion a month, China's US$3.3 trillion foreign reserves may soon fall below adequate levels. 

Should capital controls fail to stem outflows and slow the pace of depleting reserves, China may have to give up intervention and allow the currency to weaken, said Mr Ruskin. That may cause the dollar to surge, to the detriment of the US and other global economies, he added.

"If China's currency starts to weaken more than desired by both China and the global community, or China's reserve erosion fails to slow despite macroprudential measures, coordinated intervention would likely be top of the list of prospective actions," the strategist said.

In 1985, the US and its allies were forced to band together in the Plaza Accord to drive the dollar down after the currency's appreciation led to an outburst of trade protectionism.

The Federal Reserve, the European Central Bank and Bank of Japan also joined forces to prop up the euro in 2000.

This time, intervention may involve the US selling dollars and buying Chinese and foreign assets, said Mr Ruskin. It may also include interest rate cuts by the Fed to weaken the greenback.

DOLLAR PERFORMANCE

The Fed's gauge of the dollar against major US trading partners has increased more than 40 per cent since reaching a record low in May 2011.

The index surged 67 per cent from a trough in 1978 to a peak in February 1985, seven months before major central banks signed an agreement at the Plaza Hotel in New York to weaken the US currency. By the end of 1987, the dollar had dropped about 40 per cent from the peak.

"It is far easier to weaken a strong currency than strengthen a currency with a weakening bias," Mr Ruskin wrote in his report.

To anchor investor expectations, the Chinese authorities have stressed that it aims to keep the yuan stable against a basket of currencies, breaking its tie to the rising dollar.

They have also tightened capital controls to stem outflows, which amounted to US$1 trillion last year based on data compiled by Bloomberg.

Bank of Japan Governor Haruhiko Kuroda said at the World Economic Forum last week that capital controls are a preferred way to defend the yuan rather than keep burning through reserves. Concerns about capital outflows sent the Shanghai Composite Index of stocks down more than 6 per cent Tuesday to a 13-month low.

In Tuesday's note, Mr Ruskin said the restrictions are only a short-term solution because they inhibit the process of balancing supply and demand and erode investor confidence.

While it is not the best time to relinquish controls on the exchange rate when the economy is slowing and the debt level is rising, a "strong" counter argument is that China needs to preserve foreign reserves in case it needs to bail out financial institutions as the credit cycle turns, said Mr Ruskin. It is a better way to deploy the reserves than supporting a currency valuation that is "not consistent with market forces," he said.

BLOOMBERG