Russell Lee Dillon, Montana, trading center for prosperous cattle and sheep country 1942
“Hidden within the German firm is a big finance operation that makes loans to car buyers and dealers and also takes deposits, acting as a bank.”
“..more than half Europe’s claimed gains in efficiency since 2008 have been “purely theoretical”, says T&E.”
Class-action lawsuits from aggrieved motorists will arrive at the speed of a turbocharged Porsche. On September 22nd VW announced a €6.5 billion provision to cover the costs of the scandal but that is likely to prove too little. By that stage the company’s value had fallen €26 billion. The financial damage could go further. Hidden within the German firm is a big finance operation that makes loans to car buyers and dealers and also takes deposits, acting as a bank. Its assets have more than doubled in the past decade and make up 44% of the firm’s total. And it may be vulnerable to a run. In previous crises “captive-finance” arms of industrial firms have proven fragile. After the Deepwater Horizon disaster BP’s oil-derivative trading arm was cut off from long-term contracts by some counterparties.
General Motors’ former finance arm, GMAC, had to be bailed out in 2009. With €164 billion of assets in June, VW’s finance operation is as big as GMAC was six years ago, and it appears to be more dependent on short-term debts and deposits to fund itself. Together, VW’s car and finance businesses had €67 billion of bonds, deposits and debt classified as “current” in June. This means—roughly speaking—that lenders can demand repayment of that sum over the next 12 months. The group also has a big book of derivatives which it uses to hedge currency and interest-rate risk and which represented over €200 billion of notional exposure at the end of 2014. It is impossible to know if these derivatives pose a further risk, but if counterparties begin to think VW could be done for they might try to wind down their exposure to the car firm or demand higher margin payments from it.
If depositors, lenders and counterparties were to refuse to roll over funds to VW, the company could hang on for a bit. It has €33 billion of cash and marketable securities on hand, as well as unused bank lines and the cashflow from the car business. The German government would lean on German banks to prop up their tarnished national champion, 20% of which is owned by the state of Lower Saxony. So far the cost of insuring VW’s debt has risen, but not to distressed levels. Still, unless the company convinces the world that it can contain the cost of its dishonesty, it could yet face a debt and liquidity crisis.
The losses accelerate.
A week after it admitted to cheating on U.S. emissions tests for years, Volkswagen’s pain is beginning to spread throughout Europe’s credit markets. The Bank of France stopped trading two securities backed by Volkswagen auto loans on Friday, while executives of parts supplier Schaeffler AG find themselves fielding questions about their biggest customer as they drum up support for an initial public offering, according to people familiar with the matters. Since Volkswagen admitted Sept. 18 that it had cheated on U.S. air pollution tests since 2009, the chief executive officer resigned, the company became the target of a joint investigation by 27 U.S. states and the stock price tumbled 28%. Matthias Mueller, the former Porsche chief who was appointed Volkswagen’s CEO Friday, said his most urgent task is to win back trust for the company.
“Under my leadership, Volkswagen will do everything it can to develop and implement the most stringent compliance and governance standards in our industry,” he said in a statement. The two Volkswagen-related securities weren’t in an updated list the Bank of France distributed on Friday after being included in the original version sent to investors earlier this week, said the people, who asked not to be identified because they aren’t authorized to discuss the matter publicly. The Paris-based bank is buying asset-backed securities under a ECB purchase program designed to help boost lending in the euro area. Volkswagen Financial Services has €22.8 billion of outstanding asset-backed debt, according to a September presentation on its website.
Everyone knew. And everyone was involved.
EU officials had warned of the dangers of defeat devices two years before the Volkswagen emissions scandal broke, highlighting Europe’s failure to police the car industry. A 2013 report by the European Commission’s Joint Research Centre drew attention to the challenges posed by the devices, which are able to skew the results of exhaust readings. But regulators then failed to pursue the issue — despite the fact the technology had been illegal in Europe since 2007. EU officials said they had never specifically looked for such a device themselves and were not aware of any national authority that located one. The technology is at the heart of a scandal that exploded last Friday when US regulators revealed Volkswagen had used it to rig emissions tests, potentially laying itself open to criminal charges and substantial fines.
The Environmental Protection Agency said the defeat devices turn on emissions controls when vehicles are being tested but turn them off during regular driving. This means that while on the road, the cars are able to emit up to 40 times the amount of nitrogen oxides that US environmental standards allow. Initially the focus was exclusively on cars sold by Volkswagen into the US market. But Germany has now said that the company cheated in the same way in Europe as well. The inability of regulators across the EU to expose this deceit has shone a spotlight on the lobbying power of the European motor industry, which has made a huge gamble on diesel. Some 53% of new car sales in the EU are diesels, up from just more than 10% in the early 1990s.
Meanwhile the British government came under fire on Friday from the opposition Labour party after it admitted receiving evidence nearly a year ago that some diesel cars were fitted with equipment to rig emissions tests. The Department for Transport received evidence in October 2014 that there was a “real world nitrogen oxides compliance issue” for diesel passenger cars. The evidence was contained in a 60-page report by the International Council on Clean Transportation. It tested 15 vehicles and found they produced an average of seven times the legal limit for the deadly gas. One car produced 25 times the limit. The DfT said the report demonstrated the shortcomings in the old testing system and that ministers had been pushing for the EU to accelerate the introduction of a real-driving emissions test.
Matthias Mueller is the wrong chief executive for Volkswagen. The scandal-hit German carmaker on Sept. 25 appointed the 62-year-old CEO of its brand Porsche to replace Martin Winterkorn, who resigned days earlier after VW admitted tampering with its cars to falsify regulatory emissions tests. Just as with new chair Hans Dieter Poetsch, it has chosen an insider when it should have looked beyond its Wolfsburg base. Mueller knows the gigantic carmaker inside out, and has what it takes to fix operational woes. But having been at the group since the late 1970s, he is also a deeply entrenched member of the Wolfsburg old guard. His insider status suggests he is an imperfect investigator of the scandal. From 2007 and 2010, he was the group’s head of product management, responsible for all vehicle projects of the Volkswagen brand.
The company started to fit diesel cars with so-called “defeat devices” that manipulated emission tests in 2009. VW’s supervisory board has stressed that the new CEO is personally untainted by the wrongdoing. Investors have no choice but to take its word. But given VW’s investigation is in its early days, it still seems an unnecessary risk, especially as a well-versed auto manager with no Wolfsburg history was readily available. Herbert Diess, the new head of VW’s passenger-car group, was poached from rival BMW earlier this year. The scope of the misconduct is massive, and the scandal is still evolving. This week, Volkswagen has admitted 20% of all its passenger cars sold from 2009 to 2014 might be affected by the emissions manipulations.
On Sept. 25, Germany’s transport minister Alexander Dobrindt said VW falsified emission data of light commercial vehicles too. Switzerland banned the sale of affected models. And Bloomberg reported on the same day that executives in Wolfsburg controlled key aspects of the rigged emissions tests, referring to three unnamed people familiar with the company’s U.S. operations. Winterkorn’s speedy exit was the right move. But the departed CEO is still around, as chief executive of Porsche SE, the holding company that owns 50.7% of VW voting shares. The group as a whole urgently needed a proper restart to cope with the emission scandal. For now, it does not look like it is getting one.
Of course there are.
Volkswagen may also have used software to fake diesel-emission tests in 1.2-liter engines, widening the number of vehicles under scrutiny, German Transportation Minister Alexander Dobrindt said. “There’s also discussion now about 1.2-liter cars being affected,” Dobrindt said in a speech to parliament in Berlin on Friday. “At least for now we believe that possible manipulations can come to light here, too. That’s being further investigated in the current talks with Volkswagen.” So far, the “illegal” tampering with emission controls affects about 2.8 million Volkswagen vehicles in Germany with 1.6-liter and 2-liter diesel engines, including light utility vans, Dobrindt said.
Germany’s motor-vehicle certification bureau has asked VW for “a binding statement on whether the company can redress the technical manipulations it has acknowledged so the vehicles can be returned to a condition that meets technical regulations,” said Dobrindt, who set up a government investigating commission this week after Volkswagen’s actions came to light. Volkswagen “has pledged full support for the commission’s work and to cooperate in the investigation,” he said.
“..’das VW-Gesetz,’ the Volkswagen Law.”
In Italy, the privilege is called potere speciale; in France, action spécifique; in the U.K., it’s a “golden share.” Those are all different names for an ownership stake that gives a government—be it national or local—special powers above any other shareholder. That makes a crucial difference in running a business. Governments, for example, have good reason to prevent jobs from moving to more competitive labor markets. A golden share can help with that. In Europe, most golden shares are held in utilities and telecoms, companies that were state monopolies before being privatized. For more than a decade, the European Union, as it expanded and liberalized its common open market, has been trying to undo the persistence of state control. But there is one golden share that has endured, a German law so breathtakingly exceptional it can only be called what it is in fact called—“das VW-Gesetz,” the Volkswagen Law.
It is explicitly designed for a single company. Germany has managed to defend its golden share against the EU because VW had built a reputation as a force for good: responsible corporate citizen, pioneer in environmental progess. That reputation has just run out of Fahrvergnügen. Regulators in the U.S., France, South Korea, Italy, and now Germany have announced investigations into whether Volkswagen purposely designed software so its diesel engines could defeat emissions tests. The company will recall 11 million cars, and its stock has fallen as much as 30% on the news. The company quickly set aside $7.3 billion to cover costs related to the scandal, a figure that may fall short of the mark. On Sept. 21, Martin Winterkorn, Volkswagen’s chief executive officer, apologized, looking panicked.
A metallurgist with a Ph.D. who used to run technical development for Volkswagen, Winterkorn has a reputation as an engineer’s engineer. But there was no easy fix here. On Sept. 23 he offered his resignation to the company’s supervisory board. The board quickly accepted. “The damage done,” said a board member at a press conference in Braunschweig, “cannot be measured.” The same day, Stephan Weil, prime minister of Lower Saxony, the state where Volkswagen is headquartered, announced that “whoever’s responsible would be aggressively sued.” He spoke at the same press conference—and on behalf of the company. Weil sits on Volkswagen’s supervisory board, because Lower Saxony owns 20% of the company.
Per the Volkswagen Law, Saxony has a controlling interest with virtual veto power—the golden share. Weil is both government minister and owner. This is a coziness that is exceptional even in consensus-driven Germany. Publicly held German companies have two boards. Executives sit on the management board. They are in turn controlled by the supervisory board, which includes shareholders and labor leaders. Broadly, Germany’s dual-board structure preserves executive independence. Yet at Volkswagen, labor has an extra friend on the top board: the state. “You have the voice of the government present in the shareholder meetings,” says Carsten Gerner-Beuerle at the London School of Economics. “That is not something you’d see in any other board.”
“It’s been a soap opera ever since it started.”
There is a long tradition of scandal and skulduggery in the auto industry, but few schemes appear as premeditated as Volkswagen’s brazen move to use sophisticated software to circumvent United States emissions standards. That such a thing could happen at Volkswagen, Germany’s largest company and the world’s largest automaker by sales — 202.5 billion euros last year — has mystified consumers and regulators around the world. But given Volkswagen’s history, culture and corporate structure, the real mystery may be why something like this didn’t happen sooner. “The governance of Volkswagen was a breeding ground for scandal,” said Charles M. Elson, professor of finance and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “It was an accident waiting to happen.”
The company, founded by the Nazis before World War II, is governed through an unusual hybrid of family control, government ownership and labor influence. Even by German standards, “Volkswagen stands apart,” said Markus Roth, a professor at Philipps-University Marburg and an expert in European corporate governance. “It’s been a soap opera ever since it started.” Volkswagen’s recent history — a decades-long feud within the controlling Porsche family, a convoluted takeover battle and a boardroom coup — has dominated the German financial pages and tabloids alike. This week, the German newspaper Süddeutsche Zeitung compared Volkswagen’s governance to that of North Korea, adding that its “autocratic leadership style has long been out of date.” It said “a functioning corporate governance is missing.”
Until a forced resignation this spring, the company was dominated by Ferdinand Piëch, 78, the grandson of Ferdinand Porsche and the father of 12 children. He reigned over Volkswagen’s supervisory board and directed a successful turnaround at the luxury brand Audi before taking the reins at its parent, Volkswagen, in 1993. Mr. Piëch set the goal of Volkswagen’s becoming the world’s largest automaker by sales, a goal the company achieved this past year. He stepped down as chairman in April after unsuccessfully trying to oust the company’s chief executive, Martin Winterkorn, who himself was forced out this week. One measure of Mr. Piëch’s influence: In 2012, shareholders elected his fourth wife, Ursula, a former kindergarten teacher who had been the Piëch family’s governess before her marriage to Ferdinand, to the company’s supervisory board.
Although many shareholders protested her lack of qualifications and independence, they have little or no influence. Porsche and Piëch family members own over half the voting shares and vote them as a bloc under a family agreement. Labor representatives hold three of the five seats on the powerful executive committee, and half the board seats are held by union officials and labor. Of the remaining seats, two are appointed by the government of Lower Saxony, the northwestern German state that owns 20% of the voting shares. Two are representatives of Qatar Holding, Qatar’s sovereign wealth fund, which owns 17% of Volkswagen’s voting shares. Members of the Piëch and Porsche families hold three more seats, and a management representative holds another. Outside views rarely penetrate. “It’s an echo chamber,” Professor Elson said.
“I know this, I’m doing this for the right reasons and you know what, the right things will happen as a result.”
House Speaker John Boehner, under fire from conservatives over a looming government shut down, said Friday he will resign from Congress at the end of October. “Prolonged leadership turmoil would do irreparable damage to the institution,” he said. In an afternoon news conference, Boehner became emotional when expressing gratitude to his family and constituents, and said he was proud of what he’s accomplished. However, Boehner said he plans to get as much work done as he can on outstanding fiscal issues before he leaves Congress at the end of October. He said although he doesn’t know what he will do in the future, “I know this, I’m doing this for the right reasons and you know what, the right things will happen as a result.”
Boehner, 65, told House Republicans of his decision earlier in the morning. Later, he left a meeting and answered a reporter’s shouted question about how he felt with, “It’s a wonderful day.” President Barack Obama said he was taken by surprise by Boehner’s decision, adding that he called the Republican leader after hearing the news. “John Boehner is a good man. He is a patriot. He cares deeply about the House, an institution in which he has served for a long time. He cares about his constituents and he cares about America,” Obama told reporters at a joint press conference with China’s president.
“We have obviously had a lot of disagreements, and politically we’re at different ends of the spectrum, but I will tell you he has always conducted himself with courtesy and civility with me,” Obama said. House Majority Leader Kevin McCarthy of California will likely be Boehner’s successor, political observers told CNBC. Boehner said that although the choice of the next speaker is up to members of Congress, he thinks McCarthy would make an “excellent speaker.”
“.. it theoretically signals that traders view the credit of banks as superior to that of the U.S. government..”
At the height of the financial crisis, the unprecedented decline in swap rates below Treasury yields was seen as an anomaly. The phenomenon is now widespread. Swap rates are what companies, investors and traders pay to exchange fixed interest payments for floating ones. That rate falling below Treasury yields – the spread between the two being negative – is illogical in the eyes of most market observers, because it theoretically signals that traders view the credit of banks as superior to that of the U.S. government. Back in 2009, it was only negative in the 30-year maturity, a temporary offshoot of deleveraging and market swings following the credit crisis. These days, swap spreads are near or below zero across maturities.
The shift is a result of a confluence of events, says Aaron Kohli, an interest-rate strategist in New York at BMO Capital Markets. It’s a ripple effect of regulations spawned by the credit crunch, combined with large-scale selling of Treasuries and surging corporate issuance.
“All of these effects have been pushing swap spreads the same way – lower,” Kohli said. “If this doesn’t go away after quarter-end, it could be the fact that a lot of the structural changes that have taken place in the marketplace are now manifesting. And this might then be one of the most visceral examples.”
Take your losses and pull the plug.
It’s every U.S. shale investor for himself as the worst oil rout in almost 30 years drags down its latest victims. Investors in $158.2 million of Goodrich Petroleum’s debt agreed to take 47 cents on the dollar in exchange for stock warrants for some note holders and a lien on Goodrich’s oil acreage, according to a company statement today. That puts them second in line if the Houston-based company liquidates its assets in bankruptcy and pushes the remaining holders of $116.8 million in original bonds to the back of the pack. “In the industry it’s called ‘getting primed,’” said Spencer Cutter, a credit analyst with Bloomberg Intelligence. “It’s every man for himself. They’re trying to get in and get exchanged, and if you can’t you’re getting left out in the cold.”
Wildcatters attracted billions of dollars during the boom after years of near-zero interest rates sent investors hunting for returns in riskier corners of the market. U.S. high-yield debt has more than doubled since 2004 to $1.3 trillion while the amount issued to junk-rated energy companies has grown four-fold to $208 billion, according to Barclays. Most of the companies spent money faster than they made it even when oil was $100 a barrel and are struggling to stay afloat with prices at $45. Goodrich didn’t name the bondholders who participated in the swap. The largest holder was Franklin Resources, which owned about 24% of the bonds, according to data compiled by Bloomberg. Franklin has invested in the debt of other distressed drillers, including Halcon Resources, SandRidge Energy and Linn Energy.
This was Goodrich’s second exchange this month. Three weeks ago, the company swapped $55 million on convertible notes for bonds worth half as much. To sweeten the deal, it lowered the share price at which investors can turn their notes into stock to $2. Investors who didn’t participate in Goodrich’s earlier exchange took another hit with today’s swap because it put holders of the new bonds ahead of them in liquidation. Prices fell four cents to 18 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Caterpillar is set to drag down a wide swath of shares.
Wall Street is bracing for a grim earnings season, with little improvement expected anytime soon. Analysts have been cutting projections for the third quarter, which ends on Wednesday, and beyond. If the declining projections are realized, already costly stocks could become pricier and equity investors could become even more skittish. Forecasts for third-quarter S&P 500 earnings now call for a 3.9% decline from a year ago, based on Thomson Reuters data, with half of the S&P sectors estimated to post lower profits thanks to falling oil prices, a strong U.S. dollar and weak global demand. Expectations for future quarters are falling as well. A rolling 12-month forward earnings per share forecast now stands near negative 2%, the lowest since late 2009, when it was down 10.1%, according to Thomson Reuters I/B/E/S data.
That’s further reason for stock investors to worry since market multiples are still above historic levels despite the recent sell-off. Investors are inclined to pay more for companies that are showing growth in earnings and revenue. The weak forecasts have some strategists talking about an “earnings recession,” meaning two quarterly profit declines in a row, as opposed to an economic recession, in which gross domestic product falls for two straight quarters. “Earnings recessions aren’t good things. I don’t care what the state of the economy is or anything else,” said Michael Mullaney, chief investment officer at Fiduciary Trust in Boston.
The S&P 500 is down about 9% from its May 21 closing high, dragged down by concern over the effect of slower Chinese growth on global demand and the uncertain interest rate outlook. The low earnings outlook adds another burden. China’s weaker demand outlook has also pressured commodity prices, particularly copper. This week, Caterpillar slashed its 2015 revenue forecast and announced job cuts of up to 10,000, among many U.S. industrial companies hit by the mining and energy downturn. Also this week, Pier 1 Imports cut its full-year earnings forecast, while Bed Bath & Beyond gave third-quarter guidance below analysts’ expectations.
The continuing story. Getting worse by the day.
It’s been another week of bloodshed in emerging markets, with the Brazilian real, South African rand and Turkish lira all pummelled to record lows as China growth concerns and uncertainty about U.S. rate hikes continue to bite. Remarks by Fed Chair Janet Yellen late Thursday suggesting the central bank could still raise rates this year sparked fresh selling on Friday, with the Malaysian ringgit and Indonesian rupiah falling to their lowest levels since the Asian financial crisis in 1998. “EM currencies are being squeezed between concerns about the severity of China’s economic slowdown and increasing uncertainty regarding U.S. monetary policy,” Nicholas Spiro at Spiro Sovereign Strategy, told CNBC.
“Country-specific vulnerabilities, notably in Brazil and Turkey, are also weighing on sentiment – indeed more so than external factors in the case of many EMs,” he said. A rout in Brazil’s currency – what has shed almost 10% this month and almost 60% this year – against a backdrop of a political crisis and an economy mired in recession, has also soured sentiment towards other emerging markets. “In short, the world is not falling apart. Yet for EM, Brazil is vital,” analysts at Standard Bank said in a note. “Too big to fail but not big to save. IMF, would you please step in and save us all?” To stem the slide, Brazil’s central bank on Thursday warned it would use its foreign exchange reserves to defend the currency.
These strong words bought some respite to the real, which bounced more than 5% and off a record low of about 4.248 per dollar hit earlier on Thursday. Brazil isn’t the only country bank taking action to shore up a battered currency. Indonesia’s central bank on Friday said it will announce new steps to increase onshore supply of dollars – part of a move to support the rupiah, which has shed about 20% of its value this year.
Brazil will soon need capital controls. Like Greece. And like Greece, it needs debt retsructuring.
The extent of emerging markets’ foreign-currency borrowing binge is laid bare in new number-crunching from CreditSights. With EM currencies down a collective 15% since the start of the year, the cost of repaying debt and loans denominated in foreign currencies, such as the U.S. dollar and the euro for EM countries, is likely to increase. With that scenario in mind, CreditSights analysts Richard Briggs and David Watts have analyzed cross-border lending data from the Bank for International Settlements and corporate bond index data from Bank of America Merrill Lynch to try to figure out just how big EM’s foreign debt bill could be.
First up are the BIS data on cross-border lending, scaled against a country’s foreign currency revenue (i.e. exports). Bank figures range from a mere 6% in South Korea to a whopping 56% in Brazil. Next up are corporate bonds, via BofAML’s hard-currency, emerging-market corporate bond index, as a% of foreign-currency revenue. Brazil dominates again, with a big chunk of its foreign FX bonds having been sold by energy companies. Combine cross-border lending, plus foreign FX corporate bonds, then add a smattering of government debt, and you get the CreditSights chart below, showing total hard-currency borrowing by country Brazil is the standout, followed by Turkey and Colombia.
It’s not a pretty chart, and unfortunately, as the CreditSights analysts note, the real picture of emerging markets’ foreign-currency borrowing is probably even uglier. (When it comes to corporate bonds, for instance, the BofAML index excludes dollar or euro-denominated debt that exceeds certain thresholds.)
We have tried to capture as much of the hard currency debt as we can reliably get for a cross country comparison using BIS and the bond index data but the actual total will almost certainly be higher given that only BIS reporting banks are included and the bond debt only includes the index eligible deals.
Isn’t Gates just getting what he deserves for his large fossil fuel investments?
The Bill and Melinda Gates Foundation is suing Brazil’s Petróleo Brasileiro SA and its auditor in a New York court, claiming a vast corruption scheme centered on the state-run oil company caused the charitable organization to lose tens of millions of dollars. The foundation, started by the billionaire co-founder of Microsoft and his wife, joins a long list of plaintiffs seeking to recoup money they lost as the scandal hammered the value of their investments in Petrobras shares. It is just the latest bad news for the troubled oil company, which is scrambling to restore its reputation, rebuild investor confidence and pay down ballooning debt amid a global slump in oil prices.
Petrobras has long maintained it was a victim of a yearslong bid-rigging and bribery ring that Brazilian prosecutors say was cooked up by suppliers and a few crooked insiders who fleeced the oil company for at least $2 billion. The Gates lawsuit, filed against Petrobras and the Brazilian unit of PricewaterhouseCoopers LLP or PwC, alleges that corruption at the oil company was so widespread as to be “institutional” and that wrongdoing was “willfully ignored” by its auditor. “The depth and breadth of the fraud within Petrobras is astounding. By Petrobras’s own admission, the kickback scheme infected over $80 billion of its contracts, representing approximately one-third of its total assets,” the lawsuit said.
“Equally breathtaking is that the fraud went on for years under PwC’s watch, who repeatedly endorsed the integrity of Petrobras’ internal controls and financial reports. This is not a case of rogue actors. This is a case of institutional corruption, criminal conspiracy, and a massive fraud on the investing public.” The Gates Foundation filed the lawsuit late Thursday in the Southern District Court of New York. A co-plaintiff in the lawsuit is WGI Emerging Markets Fund, LLC, which managed investments for the Gates Foundation. The Gates Foundation held more than $27 million in Petrobras shares as of 2013, according to a tax filing.
Must. Get. Rid. Of. Harper.
The Bank of Canada is hoping the average Canadian continues to do the heavy lifting for the economy and gets it out of its rut from the first half of the year, even with dangerously high household debt levels. That may be a big ask. Canada’s average household debt-to-income ratio is back at a record high of 164.6% in the second quarter, driven by mortgages, after inching lower in the previous two quarters. Since the financial crisis Canadian household debt has increased at the second-fastest pace among developed nations, according to a recent McKinsey Global Institute study. Greece topped the list. Citing figures from Ipsos Reid, a 2014 Bank of Canada report concluded that 40% of all household debt was held by borrowers who had a total debt-to-income ratio greater than 250%, compared to the average of 162.3%.
This segment of heavily indebted borrowers rose to about 12% in 2014 from around 6% in 2000. Consumer spending – primarily related to the housing market – has been the main driver of the Canadian economy over the past five years. It buoyed and boosted Canada through the worst of the global financial crisis, even as the U.S. housing market and economy crashed. But now Canada’s economy has taken a sharp turn for the worse. The jobless rate hit a one-year high of 7% in August as sharp falls in oil prices took their toll. Even U.S. Federal Reserve Chair Janet Yellen cited the slowdown in Canada, an important U.S. trade partner, in its concerns about the global economy that led it to hold off yet again on its first rate rise in nearly a decade.
Because they can.
There was a simple aim at the heart of the top-secret program: Record the website browsing habits of “every visible user on the Internet.” Before long, billions of digital records about ordinary people’s online activities were being stored every day. Among them were details cataloging visits to porn, social media and news websites, search engines, chat forums, and blogs. The mass surveillance operation — code-named KARMA POLICE — was launched by British spies about seven years ago without any public debate or scrutiny. It was just one part of a giant global Internet spying apparatus built by the United Kingdom’s electronic eavesdropping agency, Government Communications Headquarters, or GCHQ.
The revelations about the scope of the British agency’s surveillance are contained in documents obtained by The Intercept from National Security Agency whistleblower Edward Snowden. Previous reports based on the leaked files have exposed how GCHQ taps into Internet cables to monitor communications on a vast scale, but many details about what happens to the data after it has been vacuumed up have remained unclear. Amid a renewed push from the U.K. government for more surveillance powers, more than two dozen documents being disclosed today by The Intercept reveal for the first time several major strands of GCHQ’s existing electronic eavesdropping capabilities. One system builds profiles showing people’s web browsing histories. Another analyzes instant messenger communications, emails, Skype calls, text messages, cell phone locations, and social media interactions.
Separate programs were built to keep tabs on “suspicious” Google searches and usage of Google Maps. The surveillance is underpinned by an opaque legal regime that has authorized GCHQ to sift through huge archives of metadata about the private phone calls, emails and Internet browsing logs of Brits, Americans, and any other citizens — all without a court order or judicial warrant. Metadata reveals information about a communication — such as the sender and recipient of an email, or the phone numbers someone called and at what time — but not the written content of the message or the audio of the call. As of 2012, GCHQ was storing about 50 billion metadata records about online communications and Web browsing activity every day, with plans in place to boost capacity to 100 billion daily by the end of that year.
The agency, under cover of secrecy, was working to create what it said would soon be the biggest government surveillance system anywhere in the world. The power of KARMA POLICE was illustrated in 2009, when GCHQ launched a top-secret operation to collect intelligence about people using the Internet to listen to radio shows. The agency used a sample of nearly 7 million metadata records, gathered over a period of three months, to observe the listening habits of more than 200,000 people across 185 countries, including the U.S., the U.K., Ireland, Canada, Mexico, Spain, the Netherlands, France, and Germany.
“The animals suffer greatly, yet they live on and multiply. Doesn’t that contradict the most basic principles of Darwinian evolution?”
At first sight, domesticated animals may seem much better off than their wild cousins and ancestors. Wild buffaloes spend their days searching for food, water and shelter, and are constantly threatened by lions, parasites, floods and droughts. Domesticated cattle, by contrast, enjoy care and protection from humans. People provide cows and calves with food, water and shelter, they treat their diseases, and protect them from predators and natural disasters. True, most cows and calves sooner or later find themselves in the slaughterhouse. Yet does that make their fate any worse than that of wild buffaloes? Is it better to be devoured by a lion than slaughtered by a man? Are crocodile teeth kinder than steel blades?
What makes the existence of domesticated farm animals particularly cruel is not just the way in which they die but above all how they live. Two competing factors have shaped the living conditions of farm animals: on the one hand, humans want meat, milk, eggs, leather, animal muscle-power and amusement; on the other, humans have to ensure the long-term survival and reproduction of farm animals. Theoretically, this should protect animals from extreme cruelty. If a farmer milks his cow without providing her with food and water, milk production will dwindle, and the cow herself will quickly die. Unfortunately, humans can cause tremendous suffering to farm animals in other ways, even while ensuring their survival and reproduction.
The root of the problem is that domesticated animals have inherited from their wild ancestors many physical, emotional and social needs that are redundant in farms. Farmers routinely ignore these needs without paying any economic price. They lock animals in tiny cages, mutilate their horns and tails, separate mothers from offspring, and selectively breed monstrosities. The animals suffer greatly, yet they live on and multiply. Doesn’t that contradict the most basic principles of Darwinian evolution? The theory of evolution maintains that all instincts and drives have evolved in the interest of survival and reproduction. If so, doesn’t the continuous reproduction of farm animals prove that all their real needs are met? How can a cow have a “need” that is not really essential for survival and reproduction?
“They have had enough to fear. Now they have hope.”
“They lose everything when their boats overturn – everything from their cell phones to their babies,” the Belgian nurse told me. He said it in a matter-of-fact tone that I recognized from my days giving tours of the cleaned-up Ground Zero site. It is not the sound of people who don’t care; it is the sound of people who have been living in the middle of horror for so long that they cannot keep stopping to cry. I cried when I got on the boat to leave the island of Lesbos, walking past the tent city that has sprung up at the docks. I cried all over again when my mother called to ask how my trip to Greece had been. But the refugees weren’t crying. So many of them looked happy, sitting under makeshift tents put together out of reams of netting and whatever cloth they could find.
Some smiled as they walked down the road with a backpack or a garbage bag that contained everything they had in the world. Others smiled as they walked down the road without one. Children laughed, men waved, mothers grinned shyly. “They’re safe now,” said one of the doctors at Kara Tepe, the temporary camp where refugees, largely from Syria, wait for passage to the European mainland. “They’re happy because they’re safe.”
[..] These hundreds of thousands survived the Taliban, the Islamic State, the Syrian civil war. They survived a perilous crossing, clinging to their children in a flimsy raft. They have finally arrived on safe shores. Where will these refugees go? America is willing to eventually take 100,000 Syrians a year. Where will these refugees go? Europe is squabbling over the distribution of 120,000 people over the next two years. Where will these refugees go? Mostly, no one knows. There is no plan for most of the estimated 4 million who have fled Syria so far, or for the thousands who are still coming every day. Where will these refugees go? The few I was able to talk to had no answer, but they were not afraid. They have had enough to fear. Now they have hope.
Europe and the U.S. have seen these people as a problem to be solved, or at best an obligation to be fulfilled. Take another look: These people are pioneers. Future citizens, teachers, engineers, P.T.A. dads, entrepreneurs, valedictorians, doctors. They are following in the footsteps of the immigrants who built the United States: the ones who chose to strike out for unknown territory, heading west with not much more than a knapsack. The modern-day pioneers striving toward Europe shouldn’t have to beg for a chance to build productive lives in Germany or Britain or the U.S. We should be going out to invite them in. We should have started much sooner.
The EU will use warships to catch and arrest human traffickers in international waters as part of a military operation aimed at curbing the flow of refugees into Europe, the bloc’s foreign affairs chief has said. “The political decision has been taken, the assets are ready,” Federica Mogherini said on Thursday at the headquarters of the European Union’s military operation in Rome. The first phase of the EU operation was launched in late June. It included reconnaissance, surveillance and intelligence gathering, and involved speaking to refugees rescued at sea and compiling data on trafficker networks. The operation currently involves four ships – including an Italian aircraft carrier – and four planes, as well as 1,318 staff from 22 European countries.
Beginning on October 7, the new phase will allow for the seizure of vessels and arrests of traffickers in international waters, as well as the deployment of European warships on the condition that they do not enter Libyan waters. “We will be able to board, search, seize vessels in international waters, [and] suspected smugglers and traffickers apprehended will be transferred to the Italian judicial authorities,” Mogherini said. “We have now a complete picture of how, when and where the smugglers’ organisations and networks are operating so we are ready to actively dismantle them,” she said. The new measures come at a time when Europe is enduring the largest refugee crisis since World War II.
An estimated 13.9 million people became refugees in 2014, while an average of 42,500 were displaced from their homes each day due to conflict and persecution, according to the UN refugee agency. Europe has already received more than 700,000 asylum applications in 2015. The Organisation for Economic Co-operation and Development predicts that number will exceed one million by the end of the year. Expanding the operation into Libyan waters is still pending the approval of the EU’s security council and the Libyan government. “We have a lot to do in high seas, and in the meantime we are continuing to work on the legal framework that could make it possible for us to operate also in Libyan territorial waters,” she added.
Gerry Simpson, a senior researcher at Human Rights Watch’s refugee programme, described the operation as “lawful but misguided”. “EU officials are misguided when they treat smugglers and traffickers as the root of the refugee problem,” he told Al Jazeera. “The roots of the problem are the violence in their home countries, as well as the conditions in the first countries where they take refuge – Egypt, Libya, Turkey [and] Sudan.” “Instead of wasting tax payers money on tackling smugglers who will always find a way to bring their clients to Europe, officials should pressure or support those first countries of asylum to properly protect and help refugees,” Simpson said.