Euro Crisis Warnings

World Bank chief warns Europe risks ‘Lehmans moment’

LONDON (AFP) Sun Jun 17 2012 01:05:06 GMT-0500 (Central Daylight Time)   

Outgoing World Bank president Robert Zoellick warned that Europe was facing a

Win Mcnamee/AFP/Getty Images/File

Outgoing World Bank president Robert Zoellick warned that Europe was facing a “Lehmans moment” and the collapse of the euro currency could trigger a global crisis, in an interview out Sunday.

Zoellick will warn the G20 summit that Europe risks sparking a financial meltdown that would have desperate consequences for developing countries, he told British newspaper The Observer.  “Europe may be able to muddle through but the risk is rising,” the 58-year-old American said. “There could be a Lehmans moment if things are not properly handled.”

The 2008 collapse of US financial services firm Lehman Brothers — one of Wall Street’s most prestigious companies — after its risky bets on the US housing market soured, sparked global financial panic.

Zoellick said developing nations needed to “prepare for the uncertainty coming out of the eurozone and the wider financial markets.

“It will be better if they can avoid piling up short-term debts that can come due in volatile periods and look to the fundamentals of future growth — infrastructure and human capital.”

Zoellick, who steps down at the end of June after five years in charge, said the World Bank was taking action to prevent a credit crunch in southeast Europe and to protect north African states that were exposed to Europe’s debt crisis.

He said the Washington-based institution was focusing on helping emerging economies to protect the most vulnerable if another global financial meltdown occurred.

“Uncertainty in markets is now starting to increase costs for developing countries,” he said.  “The ripple effects are making everybody’s life harder.

“Given the volatility in the world economy, there is a big emphasis on helping developing countries to develop social safety nets that don’t bust the budget.”  Zoellick said Brazil and Mexico had shown the way forward using effective, low-cost targeting, the right mix of incentives plus information technology.

The Group of 20 summit of world leaders is being held in Mexico on Monday and Tuesday.

He said the higher interest rates being paid by Spain and Italy was down to the failure of fellow European countries to give the “right backing”.  Zoellick said he was worried that the lengthy crisis was beginning to lead to demands for economic nationalism.

“This is not just an economic crisis but a political threat as well,” he said.  “We must make sure we keep markets open and beware against creeping protectionism. We are starting to see some increase in the use of trade restrictions.”

This article, World Bank chief warns Europe risks ‘Lehmans moment’, is syndicated from AFP and is reposted here with permission. Copyright 2012 AFP.  All Rights Reserved

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JPMorgan Trading Victims: The Shareholders?

Investors filed two lawsuits against the firm, alleging that the firm took undue risks and made misreprentations to shareholders prior to last week, when the firm announced the losses. Chief executive officer Jamie Dimon called the trading errors “egregious” and the losses “self-inflicted.”In Congress, lawmakers used a hearing on bank regulation to raise concerns about the JPMorgan investments that went awry. Some lawmakers argued for breaking up the largest banks, which include JPMorgan.

And Sen. Bernie Sanders (I) of Vermont called for new legislation to remove conflicts of interest between regulators and Wall Street banks. Two-thirds of theFederal Reserve‘s regional-bank board members are appointed by the banking industry, Senator Sanders noted in a letter to his fellow lawmakers. Mr. Dimon is now serving as a director of the Federal Reserve Bank of New York.

All these developments are signs that, more than three years after a financial crisis plungedAmerica into a deep recession, the question of how to maintain a healthy bank system is still a hot one – and that industry’s risks remain at least partially untamed by new laws or managerial self-discipline.

Even before the loss made headlines, congressional hearings were under way on how to implement the Dodd-Frank banking reforms of 2010, and whether additional changes should be made to financial-system oversight.

Among the important questions being considered:

  • How to implement the so-called “Volcker rule” in Dodd-Frank to limit banks’ investment activity.
  • Whether to break up large banks – a legislative long shot, supported by some lawmakers.
  • Whether some broader constraints on financial risk are needed.

Now, the JPMorgan loss has colored all these conversations, with both sides employing it for their arguments.

Sen. Bob Corker (R) of Tennessee last Friday urged the Senate Banking Committee to hold a hearing on what the debacle implies for bank-system soundness. JPMorgan’s loss arose from credit-derivative bets on European corporate debt, involving a trader who became known in credit markets as the “London Whale.”

Rep. Ed Royce (R) of California on Wednesday used the JPMorgan affair to defend a post-crisis boost in the capital cushion that big banks are required to hold – a shift that some critics have said is harming economic growth. “I hope that recent incidents put that argument at rest,” Congressman Royce said at a House Financial Services Committee hearing, eliciting agreement from one of the regulators testifying.

At the same hearing, Rep. Brad Miller (D) of North Carolina said the JPMorgan loss was evidence of the need for a tougher regulatory regime than Dodd-Frank has imposed so far. “What sense does it make to create banks this big?” he asked. “And they’re actually even bigger now than they were before…. Why not have smaller banks?”

The JPMorgan losses could also come up at a hearing on derivatives regulation, set for the Senate Banking Committee on May 22.

Although massive, the loss doesn’t put JPMorgan or the US banking system at any immediate risk. But it served as an alarm bell, given that the bank and its CEO had cultivated a sterling reputation. Dimon had been Wall Street’s lead spokesman for the idea that Congress should take a lighter regulatory approach to the industry.

The loss is a reminder that smart people, in sophisticated transactions, can sometimes go wildly wrong. If a large number of firms do this simultaneously, as occurred with investments related to the housing market prior to 2008, the whole financial system can be at risk.

In an election-year, the politicking is sure to spread beyond congressional hearings.

It’s an issue in the presidential race, where Republican Mitt Romney has been raking in donations from Wall Street, while remaining largely silent about bank regulation. And it figures prominently the Massachusetts Senate race in which Democrat Elizabeth Warren is seeking to oust Sen. Scott Brown (R).

The voting public didn’t like the bank bailouts crafted by the Bush and Obama administrations in 2008 and 2009. But they were crucial in avoiding an even more precipitous economic collapse, say many economists.

“When banks can’t lend,… the economy doesn’t do very well,” Northern Trust chief economist Paul Kasriel explained in an interview before his retirement last month. Mr. Kasriel suggests that a bank-credit revival was vital during the Depression, and has been the vital again since 2008.

The Federal Deposit Insurance Corp. reports that US banks, although still facing challenges, are much stronger now than they were a couple of years ago. After sharply tightening the flow of credit during the recession, banks have have begun to ease a bit on loan conditions.

The challenge, which policymakers know but haven’t fully solved, is how to maintain a banking system that is both vibrant and safe – not allowing implicit government backstops to become licenses for risky behavior by bankers.

One such backstop contained in the Dodd-Frank law is the designation of the biggest banks as “systemically important,” which some lawmakers see as confirmation that those banks will be bailed out should they get in trouble again.

Hold That Position: Can Lululemon Extend Without Breaking?

The yoga craze is getting everyone’s attention in today’s health & wellness-oriented culture – spawning yoga brands, if you can believe it.    Devotees to the yoga lifestyle know familiar names like Gaiam, Lucy, Prana, Shakti and Lotuswear, but the most recognizable phenomenon in yoga has to be Lululemon Athletica.  We’re not just talking about yoga pants and leotards.  Lululemon accessories are ubiquitous around Chicago.  On the local El train you’re more likely see  their purses among female commuters than brands you’d expect, like Coach or Kate Spade. 

After going public in 2007, Lululemon has rolled into the enviable position of media darling, with a market valuation above $10 Billion to the fascination of the Wall Street crowd…and it’s kinda popular with its customers as well.  The attention is great, but can it stand the scrutiny?

While some leading firms started with deep roots in yoga’s core philosophies and culture (Gaiam, for example, was founded in 1988 with a focus on teaching media and materials before evolving into a full-blown lifestyle company), Lululemon is one a number of industry leaders created by yoga newbies and converts.  Snowboard and surfing entrepreneur Dennis “Chip” Wilson founded the company in 1998 after his very first yoga class.  Ironically, the level of buzz and brand loyalty Lululemon has generated seems to be something that perhaps only could have been achieved by a “cool” outsider.  For all of its well-earned credibility as one of the first recognizable yoga brands, Gaiam’s image is often mired in the “new age” haze, and it’s easy to see why the company can’t connect with consumers as readily as Lululemon when you endure Gaiam’s prominently placed 3 minute informational video.  After watching it, I asked myself whether there is a word that means the opposite of “buzz”?  Gaiam’s website tries to educate you, while Lululemon gets right to the point with a website that pushes its exclusive wares the instant you arrive.

According to a recent Wall Street Journal feature, exclusivity is one of the key drivers that Lululemon has used to effectively reach sales figures that help it outpace established firms like JCPenney, as well as high-end juggernauts like Nieman Marcus in key metrics such as valuation and sales margins.  Lululemon accomplishes all this in part by going against modern conventions, including a very intentional orientation away from technical analytics and data mining of its customer activity, according to its Chief Executive, Christine Day.  Beyond its focus on offering quality products, the company does not just rely upon the illusion of exclusivity, it actually creates it by stocking limited quantities of popular items.

While a large part of Lulu’s strategy is getting the product right, an equally important part is keeping it scarce. The goal is to sell gear at full price and to condition customers to buy when they see an item rather than wait. “Our guest knows that there’s a limited supply, and it creates these fanatical shoppers,” says Ms. Day.  New colors and seasonal items get three, six or 12-week life cycles so stores feel fresher. Sheree Waterson, Lulu’s chief product officer, says a hot-pink color named “Paris Pink” that launched in December was supposed to have a two-month life cycle but sold out its first week.

This whole discussion sends my mind back to one of my favorite economics jokes, surprisingly enough courtesy of Jim Henson’s famed Muppets.  In the opening scenes Muppet Christmas Carol, Gonzo (in the role of the earnest Bob Cratchet) chides Rizzo the Rat for eating the wares for sale in his apple cart.  Rizzo’s classic response, “I’m creating scarcity…Drives the price up.”  (If you’re too impatient, just skip to the 3:30 mark.)  I guess what was true in this Victorian-era flashback remains true today.

Who’s to say whether yoga devotees will start feeling sore after being manipulated in that way?  Analysts and investors won’t be the only ones asking whether Lululemon’s “cultivated scarcity” can last now that it’s competitors and its customers are waking up to the secrets at Lululemon’s core.

Lululemon – WSJ Analyst Discussion

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