Finance

WHEN JIMMY Carter, the Democratic candidate for American president in 1976, wanted to criticise the record of the incumbent Gerald Ford, he reached for a number invented by the economist Arthur Okun. A rough-and-ready indicator of the state of the economy, what Okun called the economic discomfort index added together the unemployment rate with the level of inflation. Four years later Ronald Reagan, the Republican candidate, renamed the indicator to the pithier misery index and used it against Mr Carter, who had presided over rising inflation and unemployment. Reagan went on to win the election and the subsequent one, in 1984, as the index fell on his watch. More

One thing nobody thinks of Donald Trump’s return to the White House is that it will herald four years of quiet, predictable government. Here, then, is a puzzle for readers interested in the more abstract bits of finance. Why was Mr Trump’s re-election greeted by resounding drops in volatility all across the world’s most important markets? More

The trickiest issue facing the climate negotiations at COP29, which began in Baku on November 11th, goes by the opaque name of the “new collective quantified goal” (NCQG), mainly because that is more dignified than “bigger pile of money”. The NCQG is meant to replace the longstanding goal of an annual $100bn a year in climate finance from richer countries to poorer ones. It is supposed to be in place by next year, when all countries are expected to say what they are going to do to cut emissions in the next ten years. More

ACROSS CABINET tables, boardrooms and diplomatic missions this week, one topic of discussion has overshadowed all others. The sweeping victory of Donald Trump and the Republican Party in America’s elections will give huge powers to an impulsive president with unorthodox economic beliefs and a belligerent approach to negotiation. Bigwigs in government and business all over are scrambling to analyse the consequences—for America and for the rest of the world. More

Britain’s motor finance industry is in disarray, with analysts warning of worst-case scenarios similar in magnitude to the country’s costliest consumer banking scandal.
The crisis stems back to a landmark judgement from the U.K.’s Court of Appeal in late October, when the court ruled it was unlawful for car dealers to receive bonuses from banks providing motor finance — without getting the customer’s informed consent.
It has prompted comparisons to Britain’s payment protection insurance (PPI) scandal, which was estimated to have cost banks more than £50 billion ($63.8 billion).

View looking towards the Royal Exchange and in the City of London where the glass architecture of the tower 22 Bishopsgate disappears into mist on 6th November 2024 in London, United Kingdom.
Mike Kemp | In Pictures | Getty Images

Britain’s motor finance industry is in disarray, with analysts warning of worst-case scenarios similar in magnitude to the country’s costliest consumer banking scandal.
The burgeoning crisis stems back to a landmark judgement from the U.K.’s Court of Appeal in late October, when the court ruled it was unlawful for car dealers to receive bonuses from banks providing motor finance — without getting the customer’s informed consent.

The decision caught many in the motor finance industry off guard and appears to have paved the way for a multi-billion-pound redress scheme to compensate consumers.
It has prompted comparisons to Britain’s payment protection insurance (PPI) scandal, which was estimated to have cost banks more than £50 billion ($63.8 billion) and is regarded as the biggest mis-selling scandal in the country’s financial services history.
Britain’s Financial Conduct Authority, the country’s financial watchdog, said on Wednesday that it will write to the Supreme Court to expedite a decision over whether to give lenders the green light to appeal the ruling.

Banks left ‘in limbo’

The FCA, which noted that car financing groups were likely to have received a surge in complaints in recent weeks, said that it would consider intervening “to share its expertise” if permission to appeal is granted.
It urged motor finance groups to consider setting aside financial provisions to resolve the high volume of complaints.

Niklas Kammer, equity analyst at Morningstar, said Britain’s banks have been left in “in limbo” since the Oct. 25 court ruling, with Lloyds thought to be the most at risk through its Black Horse business. Barclays also has some exposure, Kammer said, “but meaningfully less.”

A Lloyds Banking Group Plc bank branch in London, UK, on Monday, Oct. 21, 2024.
Bloomberg | Bloomberg | Getty Images

“I think it is fair to say that the ruling by the Court of Appeal came as a surprise to the banks as well as the FCA. According to the banks, they followed the rules and guidelines set by the FCA, which are not aligned with the new Court of Appeal ruling,” Kammer told CNBC via email.
“As such, there exists significant uncertainty which set of rules banks have to abide by. The FCA has said that it will await the outcome of a potential Supreme Court ruling before taking a decision on the matter,” Kammer said.
“If the ruling stands, the FCA will have to change its rules on disclosures. Initially, the FCA pointed out that the matter should not take similar proportions to the PPI mis-selling, but should the new ruling stand, worst case scenarios do come close to the same magnitude in impact.”

Lenders ‘likely to pull out of the market’

Benjamin Toms, U.K. banks analyst at RBC Capital Markets, said that if the Supreme Court upholds the lower courts verdict, the downside impact for the motor finance sector, which includes both banks and non-banks, could be as much as £28 billion.
“Some lenders are likely to pull out of the market, which will mean less choice and higher prices for those looking to buy a vehicle,” Toms said.
“There is also the potential for legal creep, with other types of lending like premium finance also coming under the spotlight,” he added.

London Taxis wait in a queue at a taxi rank outside Fenchurch Street Station on October 14, 2024 in London, United Kingdom.
John Keeble | Getty Images News | Getty Images

In January, the FCA launched a review into the motor finance industry to probe whether there was widespread misconduct related to discretionary commission arrangements, or DCAs, before they were banned in 2021.
It said on Wednesday that it is currently considering the impact of the Court of Appeal’s judgement on its review.
Fitch, an influential rating agency, warned earlier this month that it had placed the ratings of Close Brothers Group on “Rating Watch Negative” due to the lender’s “high exposure” to motor finance.
Other lenders that have been “significantly involved” in motor finance lending include Barclays, Investec, Lloyds and Santander UK, Fitch said.
Lloyds, Britain’s largest car finance business, has set aside £450 million in financial provisions. More

U.S. and Canadian banks reported a tenfold surge in digital scams this year as criminals flock to techniques that rely on duping customers into sending them money, according to cybersecurity firm BioCatch.
The sharp rise in reported scams comes as banks have put in place more controls to prevent account takeovers and other forms of fraud, according to BioCatch Director of Global Fraud Intelligence Tom Peacock.
BioCatch, a Tel Aviv, Israel-based firm that uses behavioral data from mobile apps and websites to help banks distinguish between real users and criminals, provided its findings to CNBC ahead of a report that culled information from 170 U.S. and Canadian institutions.

Leylaynr | E+ | Getty Images

U.S. and Canadian banks reported a tenfold surge in digital scams this year as criminals flock to techniques that rely on duping customers into sending them money, according to cybersecurity firm BioCatch.
The sharp rise in reported scams from the first three quarters of 2023 comes as banks have put in place more controls to prevent account takeovers and other forms of fraud, according to BioCatch Director of Global Fraud Intelligence Tom Peacock.

“Fraudsters have realized that the humans are the weakest link,” Peacock said. “It’s easier to convince a human to do something through manipulation than it is to try and circumvent a technological control.”
BioCatch, a Tel Aviv, Israel-based firm that uses behavioral data from mobile apps and websites to help banks distinguish between real users and criminals, provided its findings to CNBC ahead of a report that culled information from 170 U.S. and Canadian institutions. The company said American Express, Barclays and HSBC are among its clients.
Banks are under pressure to kick criminals off their platforms and compensate more victims as regulators and lawmakers focus on the harm done by digital scams. JPMorgan Chase, Bank of America and Wells Fargo have said the Consumer Financial Protection Bureau may punish them for their roles in the giant Zelle payments network. Customers of the three banks reported a combined $166 million in Zelle transactions were fraudulent in 2023.
The rise of “social engineering scams,” in which criminals use persuasive tactics to convince victims to send them money, began around five years ago, but “really started to take off” in the past 18 months or so, Peacock said.
Zelle is the preferred way criminals extract their funds because it is faster than other remittance options, Peacock said.

“When social engineering scams really started to take off in the U.S., it kind of coincided with Zelle, because the two went together,” he said. “Platforms like Zelle are enabling fraudsters to be a lot quicker and more successful.”
Zelle owner Early Warning Services has said that while transaction volumes rose in 2023, reports of scams and fraud fell by almost 50%, and that only a tiny fraction of payment volumes are disputed as fraud.
The increase cited by BioCatch is also driven by greater identification of activity that the banks previously didn’t flag as scams because of mounting regulatory pressure, Peacock added. BioCatch declined to provide a specific number for reported scams, citing client confidentiality.
In another sign of the cat-and-mouse dynamic of cybercrime, BioCatch clients reported 59% fewer fraudulent account openings. Instead, criminals have focused on taking over existing bank accounts, leading to a threefold increase in fraud through that channel, the firm said.

Don’t miss these insights from CNBC PRO More

TO HEAR DONALD Trump’s transition team describe it, everyone wants to work for him. Howard Lutnick, the boss of Cantor Fitzgerald, an investment firm, and a co-head of the recruitment crew, has bragged that he is in touch with “the top 150 businesspeople across the United States of America”. A vast array of names have been bandied about for all kinds of roles, including treasury secretary—from Jamie Dimon, boss of JPMorgan Chase, a bank (who has repeatedly clarified he has no interest in the job), to Jay Clayton, who ran the Securities and Exchange Commission during Mr Trump’s first term (but is apparently more interested in running the CIA this time) and Steven Mnuchin (who did the job last time but does not want it back). More

Traders work on the floor of the New York Stock Exchange. 

There’s been a rush of enthusiasm on Wall Street regarding Donald Trump’s election win, but hedge funds actually generate more alpha when the White House is occupied by a Democrat president than a Republican one, according to HFR, collating data going back to 1991.
When compared with the S&P 500, the industry underperformed regardless of who was president. But during Democratic administrations, the gap was about 183 basis points, with hedge funds delivering average, annualized returns of 10.16%, compared to 11.99% from the S&P 500. The underperformance gap during Republican administrations was 331 basis points. (1 basis point equals 0.01%.)

Arrows pointing outwards

When compared with the a bond index, HFR found that hedge funds under both parties outperformed – with stronger alpha when a Democrat was in the White House.
The total net asset flows were higher under Republican administrations (about $450 billion) than Democratic ones (about $400 billion), even though since 1991, Democrats served six more years in the highest office than Republicans.

Arrows pointing outwards

Surprisingly, the way that hedge fund participants donate in elections was a bit more tilted toward one party. According to a recent report by Open Secrets, in the 2024 election cycle, individuals in the industry donated $31 million to Democratic candidates, while almost half that amount — $16 million — went to Republican candidates.

Arrows pointing outwards

Open Secrets

Of course the takeaway here is that hedge fund returns are far more correlated with positioning relative to various asset-class performances than particular policies by the administration. So, it’s hard to make any predictions about what the next four years entails for the industry.
At Wednesday’s 14th annual Delivering Alpha event, we should get a sense as to how money managers may be reconfiguring their portfolios. More