Raphael Stevens

There are mergers to worry about and mergers to welcome. In the first category are tie-ups between biggish firms in the same line of business. In these “horizontal” mergers, a competitor is taken out of the market, removing a constraint on prices. In such cases, competition authorities will investigate the merger and may block it. Other mergers have historically been considered less troublesome. If a firm buys another in an adjacent line of business (a conglomerate merger) or if a supplier buys a customer (a vertical merger), the effects on competition have been seen as benign. But that has changed in recent years. More and more non-horizontal mergers are being challenged by antitrust authorities. In September America’s Federal Trade Commission (ftc) lost its challenge in court to a tie-up between Illumina, which provides “next-generation” dna-sequencing tools, and Grail, a developer of early cancer-detection tests, which rely on Illumina’s technology. The ftc is appealing the judgment. In October Britain’s Competition and Markets Authority (cma) forced Facebook to undo its purchase of Giphy, a supplier of gifs to social-media platforms. On February 8th, the cma issued an initial finding that the acquisition by Microsoft, maker of the Xbox games console, of Activision Blizzard, a game studio, would reduce competition in the industry. Vigorous antitrust policy is often motivated by anxiety about big tech. Facebook, Google and Microsoft became swiftly dominant in their markets because of the power of networks: the more people used their products, the better they became and the more attractive they were to other customers. Although it is difficult to find fault with such organic growth on competition grounds, there is a conviction in trustbuster circles that big tech should not have been allowed to buy other businesses along the way. The recent regulatory activism is therefore fuelled by regret about the past. Yet it carries its own risks. In many circumstances mergers are, in fact, a boon to consumers. The danger now is that the pendulum will swing towards over-enforcement. To understand how regulators got to this point, it is worth returning to the 1970s. A group of antitrust thinkers orbiting the University of Chicago cast doubt on the idea that vertical mergers could be harmful by employing the theory of “one monopoly profit”. This theory says that a monopolist cannot extend its market power up or down the vertical chain of production. To grasp it, imagine an airport operator that leases space to two coffee shops. The operator owns a monopoly resource: the property around a captive market of passengers who require their morning caffeine. To maximise profits, it will set the rents high enough to allow the shops no more than a competitive return. Yet were the operator to buy one of the coffee retailers, the profit-maximising rent would not change (hence one monopoly profit). Looked at this way, vertical mergers cannot harm consumers. They may even help them. A related theory posits that a vertical merger in an industry where there is some market power at each stage of production will lead to lower prices, because one of the non-competitive markups will be eliminated. In such circumstances, one monopoly profit means you don’t get gouged twice. Trustbusters these days are less focused on pricing. They are more concerned that a vertically integrated firm will use its muscle in one part of the chain to freeze out rivals in another part. In the Illumina case, the concern is that rivals of Grail will be denied the dna-sequencing tools they need to develop competing cancer tests. In the Microsoft case, the fear is that Sony, maker of PlayStation, the rival console to Xbox, will be denied games made by Activision, to the detriment of competition. To make the charge stick, trustbusters must demonstrate that such restrictions would be profitable, which they are unlikely to be in the short term, since they mean at least initially selling fewer products. Regulators thus have to make predictions about how a market might evolve. This is the economic equivalent of long-range weather forecasting. Which brings the story back to big tech. The winner-takes-all aspect of networks tends to eliminate competitors to the big tech giants. There is not much competition policy can do about such dominance. In theory, countless startups are vying to knock big tech firms from their perch, which ought to act as check on their business conduct. But so-called “shoot-out” acquisitions—purchases of startups that might become a rival to big tech firms—tend to neuter any threat from this corner. For many trustbusters, Facebook’s acquisition in 2012 of a fledgling Instagram was in this category. There are also regrets that Google’s acquisition in 2008 of DoubleClick, an ad server, helped to strengthen its hold on digital advertising, a market now the subject of a big antitrust probe. In praise of big businessDoubtless there were times when more vigilance was warranted. But it is easy to forget that the Chicago revolution was a response to overmighty trustbusters, who believed big was always bad and small businesses, however awful, should be shielded from competition. In America the courts are a check on over-enforcement. There are decades of jurisprudence, shaped by the Chicago School, which says non-horizontal mergers are benign. Nevertheless, the prospect of a court battle is enough to put off some firms. Last year Nvidia, a chipmaker, abandoned its proposed merger with arm, a chip designer, in the face of antitrust scrutiny. It is telling that the cma has taken the lead in blocking mergers involving tech giants, such as Facebook and Microsoft. Britain’s trustbusters may now be among the most feared. Freed from the eu’s competition policy, the cma revamped its guidelines in 2020 to give more weight to how post-merger markets might evolve. In Britain and Europe competition cases are pursued in an administrative system, not in a court, as in America. All of which gives the cma considerable powers. A rare example of a Brexit dividend? Trustbusters might say so. Not everyone would agree. ■Read more from Free Exchange, our column on economics:The AI boom: lessons from history (Feb 2nd)Have economists misunderstood inflation? (Jan 26th)Could Europe end up with a worse inflation problem than America? (Jan 19th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Can a central bank make $2.5trn of cash vanish without anyone much noticing? That is the improbable, even audacious, mission the Federal Reserve has begun, trying to shrink its vast balance-sheet while minimising disturbances to the economy. The process—known as “quantitative tightening” (qt)—got under way in mid-2022. The Fed has already shed nearly $500bn in assets, a good first step. But recent ripples in the banking system hint at turbulence ahead. Some analysts and investors think these strains will ultimately force the Fed to call off qt well ahead of schedule. Others suspect that the central bank still has time, and tools, on its side.It may sound like a technical and arcane debate. It is most certainly complex. But it also gets to the heart of modern monetary policy. The Fed, like other central banks, has come to rely on quantitative easing (qe)—purchasing assets, especially government bonds, on a giant scale—to calm financial markets and boost the economy during severe downturns. For qe to work in the future, qt must work now: expanding balance-sheets in bad times is only sustainable if they shrink in good times, otherwise they will ratchet ever higher.Since the global financial crisis of 2007-9 the Fed has resorted to qe on four occasions, yielding a body of research about how it works. In contrast, the Fed has employed qt just once, from late 2017 to 2019, stopping early after the money market started to buckle. There is thus a lot of uncertainty about its consequences.One superficially appealing way to think about qt is as qe in reverse. Just as qe involves creating central-bank reserves to buy bonds, so qt involves removing reserves as the central bank pares back its holdings. And just as qe helps to hold down long-term rates, so qt raises them. Researchers estimate that shrinking the Fed’s balance-sheet by about $2.5trn over a few years has roughly the same impact as raising rates by half a percentage point.Many think this has already happened, with the market lifting long-term rates when the Fed laid out its qt plans last year. Christopher Waller, a Fed governor, has argued that since investors have priced in the announced reductions, the Fed is now simply fulfilling expectations: “The balance-sheet is just kind of running in the background.” Fed officials have said qt should be about as exciting as watching paint dry.The trouble with the analogy is that whereas paint gets drier and drier, qt gets more and more treacherous. This is also a crucial way in which it differs from qe. When the economy is in good shape, central banks can gradually step away from qe. In the case of qt, the danger is that it takes market turmoil for the Fed to realise it has gone too far, as in 2019. Initially qt drains money from a commercial-banking system that is awash in liquidity; as it continues, however, liquidity gets steadily tighter, and funding costs for banks may soar without much warning.A preview of the possible stresses has played out in the past few weeks. Some banks, having recently lost deposits, have turned to the federal-funds market to borrow reserves from other lenders in order to meet regulatory requirements. Daily borrowing in the fed-funds market in January averaged $106bn, the most in data going back to 2016. So far the squeeze has been confined to smaller banks, a hopeful sign that the financial system is returning to its pre-pandemic state, in which big banks lend to their punier peers. Nevertheless, it raises the question of whether and when other banks will hit funding shortages.The idea that a crunch is far away is supported by a look at the Fed’s liabilities. About $3trn are banks’ reserves (in effect deposits at the central bank). Another $2trn is money from firms which enter into exchanges with the Fed for Treasury securities (such overnight reverse-repurchase agreements, or reverse-repos, allow them to get a small return on their excess cash). Mr Waller has said that qt ought to run smoothly until bank reserves hit about 10% of gdp, when the Fed will slow its balance-sheet reductions to try to find the right size for the financial system. If reserves and reverse repos are interchangeable, as Mr Waller suggests, then reserves now amount to 19% of gdp, leaving plenty of room. Thus qt could roll on for another couple of years, taking a big bite out of the Fed’s balance-sheet in the process.But problems may arise well before then. First, banks probably need more reserves than they did before covid-19 because their assets have expanded faster than the rest of the economy. Second, and crucially, reverse repos and reserves may in fact not be interchangeable. Much of the demand for reverse repos comes from money-market funds, which function as an alternative to bank deposits for firms seeking slightly higher returns. If that demand persists, the weight of qt will instead fall more heavily on bank reserves. In this scenario, reserves may run short before the end of this year, think strategists at T. Rowe Price, an investment firm. The Fed’s balance-sheet would be stuck at around $8trn, almost double its pre-pandemic level. This would fuel concerns about its ability to embark on qe in future.Oddly, the debt-ceiling mess may conceal any ructions for the next few months. With the Treasury unable to borrow until Congress raises the debt limit, it is running down its cash holdings at the Fed. As money leaves the Treasury’s account, much ends up in the banking system, which in turn helps banks to replenish reserves. But when Congress does get around to raising America’s debt ceiling, the Treasury will need to ramp up its borrowing. For banks this may mean a rapid loss of reserves. The Fed has created a lending facility to relieve such squeezes. There is, though, no telling how it will perform in the wild, adding yet more uncertainty to the course of qt. The market may be placid for now. It is unlikely to stay that way. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Lower Manhattan’s skyline has long symbolised the fortunes of corporate America. A skyscraper boom in the roaring 1920s heralded the More

“Buying the house in 2021 might be one of the biggest regrets of my life,” says Kim Myung-soo, a 33-year-old whose home in Jamsil, eastern Seoul, has fallen in value by about $400,000. His wife is 33 weeks pregnant and Mr Kim does not know how he will repay the mortgage. He had planned to wait for prices to rise before selling the property to pay off the loan. Mr Kim is not alone in his worries. Across the rich world, property markets look precarious. Few are in as bad shape as South Korea’s. House prices fell by 2% in December alone, the biggest monthly drop since official figures began in 2003. The slump has been particularly brutal for apartments in Seoul: prices are down by 24% since their peak in October 2021. South Korea’s market offers a glimpse of what may lie ahead elsewhere. The Bank of Korea (bok) began raising interest rates in August 2021, seven months before the Federal Reserve and almost a year ahead of the European Central Bank. The benchmark rate now sits at 3.5%, a 14-year high, after officials raised it once again in January.The broader economy is feeling the pinch. Private consumption fell by 0.4% in the fourth quarter of 2022. And exports, which dropped by 17% year-on-year in January, have hardly cushioned the blow. They were hit by a collapse in semiconductor orders at the end of a pandemic-era boom in electronics sales. This sluggishness will only add to the drag on house prices.There are other sources of stress, too. Household debt reached 206% of disposable income in 2021, well above even the 148% in mortgage-loving Britain. Some 60% of South Korean housing loans are floating-rate, in contrast with America, where most lending is on fixed terms. As a result, household finances are squeezed more quickly when rates rise. The danger is that buyers like Mr Kim turn into forced sellers—something he says he will try to avoid at all costs—meaning a slide in house prices becomes a collapse. This risk is enhanced by the country’s bizarre rental system, known as jeonse. Many tenants pay huge lump sums to landlords, often 60-80% of the value of a property, which are returned after two years. In the interim the landlord can invest the cash as they wish. The system is a relic of South Korea’s rapid industrialisation, when mortgages were harder to attain.In a downturn, some landlords are forced to make firesales to reimburse departing tenants, having invested in risky assets, including more housing, and lost the money. Stories about sudden defaults and vanishing “villa kings”, owners of dozens of rental properties, proliferate. South Korea also demonstrates how high household debt and asset prices can constrain monetary policy. Opinion is split about whether housing-market frailty, and the hit to household incomes, will stop the bok raising rates further. Oxford Economics, a research firm, thinks the bok will keep going. Nomura, a bank, expects it to reverse course in May, and cut the benchmark rate to 2% by the end of the year. Most countries are not as exposed as South Korea. But some, including Australia, Canada, the Netherlands, Norway and Sweden, share the same mix of high household debt and frothy property prices. All began raising rates after South Korea, and have further to go before the pressure feeds through. They are in for a rocky ride. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

The Credit Suisse quarterly result was worse than analyst projections of a net loss attributable to shareholders of 1.32 billion Swiss francs, and took the embattled Swiss lender’s full-year loss to 7.3 billion Swiss francs.
Credit Suisse in October announced a plan to simplify and transform its business in an effort to return to stable profitability following chronic underperformance in its investment bank and a litany of risk and compliance failures.

Credit Suisse on Thursday reported a fourth-quarter and annual net loss that missed expectations, as the Swiss bank continued with its huge strategic overhaul.
The lender’s fourth-quarter net loss attributable to shareholders came in at 1.4 billion Swiss francs ($1.51 billion), worse than analyst projections of a loss 1.32 billion Swiss francs, according to Eikon.

related investing news

7 hours ago

21 hours ago

It took the embattled Swiss lender’s full-year loss to 7.3 billion Swiss francs, worse than the 6.53 billion Swiss franc loss expectation by analysts.
Credit Suisse is telegraphing another “substantial” full-year loss in 2023 before returning to profitability in 2024.
CEO Ulrich Koerner told CNBC on Thursday that the full results were “completely unacceptable,” but underscored the need for the ongoing multi-year transformation program.
Under pressure from investors, the bank in October announced a plan to simplify and transform its business in an effort to return to stable profitability following chronic underperformance in its investment bank and a litany of risk and compliance failures.
Koerner in a statement accompanying results that 2022 was a “crucial year for Credit Suisse” and that it had been “executing at pace” on its strategic plan to create a “simpler, more focused bank.”

“We successfully raised CHF ~4 billion in equity capital, accelerated the delivery of our ambitious cost targets, and are making strong progress on the radical restructuring of our Investment Bank,” he said in the statement.
“We have a clear plan to create a new Credit Suisse and intend to continue to deliver on our three-year strategic transformation by reshaping our portfolio, reallocating capital, right-sizing our cost base, and building on our leading franchises.”
In November, the bank projected a 1.5 billion Swiss franc loss for the fourth quarter amid large-scale restructuring costs, while Credit Suisse shareholders greenlit a $4.2 billion capital raise aimed at financing the overhaul.
The capital raise included the sale of 9.9% of Credit Suisse shares to the Saudi National Bank, making it the bank’s largest shareholder. The Qatar Investment Authority became the second-largest shareholder in Credit Suisse after doubling its stake late last year.

The logo of Swiss bank Credit Suisse is seen at its headquarters in Zurich, Switzerland March 24, 2021.
Arnd Wiegmann | Reuters

Reports of liquidity concerns led Credit Suisse to experience significant outflows of assets under management in late 2022, but Koerner told CNBC at the World Economic Forum in January that the bank had seen a sharp reduction in outflows, and that money was now coming back to some areas of the business.
Despite this, net outflows hit 110.5 billion Swiss francs in the fourth quarter, taking the annual asset outflows for 2022 to 123.2 billion Swiss francs, compared to 30.9 billion inflows for 2021.
The bank’s wealth management division alone saw net asset outflows of 95.7 billion in 2022, concentrated heavily in the fourth quarter.
Credit Suisse revealed that around two thirds of the broader net asset outflows in the quarter occurred in October, and “reduced substantially for the rest of the quarter.”
Koerner told CNBC that 60% of the total outflows came in October. Since then, the bank has embarked on an outreach program, speaking to 10,000 global wealth management clients and 50,000 clients in Switzerland.
“That has created tremendous momentum, and I expect that momentum traveling with us throughout 2023 but you can see it if you look into January,” Koerner told CNBC’s Geoff Cutmore.
“The group is net positive on deposits, wealth management globally net positive on deposits, Asia Pac net positive on deposits, Asia Pac positive on net new assets and also Switzerland positive on net new assets, so I think if you look at that situation which we experienced since January, I would say the situation has changed completely,” Koerner said.
He also expressed confidence that the outreach program and “tremendous” levels of client loyalty would help the bank retain and build on returning inflows.
In its report, the bank said its results were “significantly affected by the challenging macro and geopolitical environment with market uncertainty and client risk aversion.”
“This environment has had an adverse impact on client activity across all our divisions. While we would expect these market conditions to continue in the coming months, we have taken comprehensive measures to further increase our client engagement, regain deposits as well as AuM and improve cost efficiencies,” the bank said.
Other highlights from Thursday’s earnings:

CET 1 (common equity tier one capital) ratio, a measure of bank solvency, reached 14.1% from 14.4% a year ago.
Fourth-quarter net revenues stood at 3.06 billion Swiss francs, from 4.58 billion Swiss francs a year earlier.
Total fourth-quarter operating expenses were 4.33 billion Swiss francs, versus 6.27 billion a year ago.

Credit Suisse’s restructuring plans include the sale of part of the bank’s securitized products group (SPG) to U.S. investment houses PIMCO and Apollo Global Management, as well as a downsizing of its struggling investment bank through a spin-off of the capital markets and advisory unit, which will be rebranded as CS First Boston.
Credit Suisse shares have gained almost 17% since the turn of the year.
The planned carve-out of the investment bank to form U.S.-headquartered CS First Boston moved ahead in the fourth quarter. Credit Suisse on Thursday announced that it had acquired The Klein Group for $175 million.
The bank also confirmed the appointment of Michael Klein as CEO of banking and the Americas, as well as CEO designate of CS First Boston.

WATCH LIVEWATCH IN THE APP More