When an organisation buries the most important piece of information at the end of a press release, it is a fair bet it is embarrassed about it. Take the latest communiqué from the British Bankers’ Association about Libor, the London Interbank Offered Rate. The BBA indicated a fortnight ago that it would not bow to demands for a radical overhaul of how the daily reference overnight rate was calculated. It argued that this could destabilise the market.
But this week the BBA suggested (deep in a lengthy statement) that it would consider whether to introduce two new benchmarks to reflect the cost of dollar borrowing.
Given that trillions of dollars of derivatives and loan contracts are based on this dollar Libor benchmark, that looks pretty radical by anyone’s standards.
Whether the BBA will implement such a reform remains unclear: the organisation will be in consultation mode for the rest of this month. However, what is evident is that the group is in a nasty hole, even if it is not one entirely of its own making.
Dollar Libor started life, three decades ago, as a so-called “eurodollar” index – meaning that it was mostly used by international banks trading in London. But in the past decade, the index has been used as the benchmark for a mountain of domestic US contracts.
When times were good, nobody noticed this discrepancy (and the BBA simply enjoyed the boost to its brand) but now the pitfalls of basing so much domestic US activity on an index compiled in London have been laid bare.
Logic suggests that this problem could be solved by creating a new US-focused dollar index, perhaps set during New York trading time with US banks. But the BBA may not be best placed to do this. A second index could create even greater confusion and would underline the patchiness and uneven pace of global capital market integration. No wonder the BBA would rather keep the debate out of the headlines.
Sticking it out at EADS
The alleged insider trading scandal at EADS continues to haunt the company, its directors and core shareholders. Lagardère, the French industrial shareholder of the Franco-German aerospace group, revealed on Wednesday that it had received what it called a threatening letter from lawyers working for Crédit Mutuel.
Back in 2006, the mutual bank was one of the French institutions that bought convertible bonds issued by Lagardère to cut back its stake in EADS from 15 per cent to 7.5 per cent. Soon after Lagardère issued the bonds convertible into EADS shares, the aerospace group’s value started tumbling on the back of surprise profit warnings over delays and technical problems at its Airbus civil aircraft affiliate. The EADS stake being sold was worth more than €2bn ($3bn). Today, it is worth less than half that.
EADS shares have been under constant pressure ever since Airbus reported problems in its A380 superjumbo programme. The weak dollar has made things worse. This comes amid suspicion that has flourished around alleged insider dealing investigations by the French financial regulator, which have left all involved under a cloud, although everyone vehemently denies any wrongdoing.
Lagardère insists that Crédit Mutuel’s “strange approach” in seeking to annul the bonds unless the matter was subject to negotiation has “no legal merit”. The mutual bank bought its bonds not from Lagardère but another institution. Lagardère accuses Crédit Mutuel of presuming that it will be found guilty in the insider trading case, which is far from certain.
This latest twist in the EADS saga yet again casts a harsh light on the commitment of the company’s core industrial shareholders, Lagardère and Germany’s Daimler. Both have often said that they eventually want to pull out of EADS to focus on their core business: cars for Daimler, media for Lagardère.
It clearly makes sense for EADS to find new shareholders prepared to invest and support the group for the long haul. If there has been one fundamental flaw in this group in recent years, it has been its shareholder structure and the lack of long-term commitment from its two core industrial shareholders. The problem is that there are no obvious or willing candidates to replace Lagardère and Daimler. Given the national sensibilities surrounding the group, one might reluctantly conclude that it would probably be in everybody’s interest if Lagardère and Daimler stopped eyeing the exit door. They should simply decide for the next decade that they have an obligation to remain core shareholders to support EADS and get it out of its mess.
This means neither standing in the way of investments such as the A350 airliner that may require them to put their hands in their pockets, nor blocking strategic purchases in the US. Only this kind of support can create the value needed to aid the group’s flagging share price.
Surely this would be in their interest too. First it would help dampen the impression that they are simply trying to cut their losses. Second, and perhaps more importantly,It would also eventually allow them to exit EADS with honour.
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