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Bloomberg Markets Magazine

Bloomberg Markets Magazine March 2015

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Bloomberg Finance LP
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in this issue

2 min
the bond engineer

THE FINANCIAL ENGINEERS who created the investment instruments that would play such a toxic role in the global economic crisis gave both finance and engineering a bad name. The credit-default swap, originally designed as a kind of insurance for bank loans, mutated into a monster that aggravated risk instead of mitigating it— impelling, among other things, a $182 billion bailout of American International Group Inc. by the U.S. government. Well, the CDS is back, and this time, as Edward Robinson reports, financial innovator John “Mac” McQuown plans to embed it inside a corporate bond (“WHIZ KID,” page 26). Why would he want to do such a thing? McQuown, still spry and restless at age 80, is an actual engineer (he has a degree in mechanical engineering from Northwestern University) who pioneered the…

2 min
crisis in the currency casino

UPDATE FXCM Inc. has learned firsthand the dangers of leverage in the foreign-exchange markets. Since Bloomberg Markets’ “The Currency Casino” (December 2014) showed how companies lure investors into risky forex trading by letting them put down as little as 2 percent, the largest U.S. retail forex broker has imploded— itself a victim of too much leverage. On Jan. 15, New York–based FXCM announced that customers’ losses exceeded their margin deposits by $225 million in a single day, after Switzerland unexpectedly removed the trading-range cap on its currency. The franc soared 41 percent against the euro, forcing several brokers to shut when their customers’ margin accounts swung into the red. FXCM, a subject of our story, saw its shares plummet 92 percent the next day before trading was halted. Leucadia National Corp.,…

4 min
oil spillover

IN MAY, a small oil producer called Energy XXI (Bermuda) Ltd. sold $650 million in bonds. Less than a year later, after the biggest oil market rout since the Great Recession, those bonds are trading below 50 cents on the dollar. Although the Houston-based company is one of the lesserknown players in the U.S. drilling boom, its capital markets crackup shows how quickly the effects of falling crude prices are spreading. Energy XXI and dozens of independent drillers like it racked up billions of dollars in debt in recent years as investors poured money into energy companies, helping boost U.S. oil output—and create a global supply glut. Bondholders, shareholders and banks are now facing losses. What happens in the oil patch doesn’t stay in the oil patch. Michael Shaoul, who helps oversee…

2 min
stagnation nation

31% Percentage of Americans who would rather forgo sex for a year than give up their smartphone Source: Boston Consulting ECONOMISTS CALL A prolonged period of slow growth or no growth “secular stagnation.” At the American Economic Association meeting in Boston in January, Larry Summers and Gregory Mankiw, both former White House advisers and both now Harvard professors, debated whether we’re stuck in it. STAGNATION “We are recovered only on a definition that revises down what it means to be recovered. [Economic output] is now about 10 percent below potential as it was estimated in 2007. Insofar as the output gap has closed, it is not because we have gotten closer to what we previously thought potential was; it is because we have revised downward our assessment of what the economy’s potential is. That 10…

2 min
pushing for pieces

REVVING DOWN TRADING REVENUE AT GOLDMAN SACHS HAS DECLINED BY MORE THAN HALF SINCE 2009. Source: Bloomberg COULD JPMORGAN Chase & Co.’s parts be worth more to investors than the firm as a whole? Analysts at Goldman Sachs Group Inc. think so. In a Jan. 5 research note, a team of analysts there concluded that JPMorgan—whose size would subject it to stricter capital requirements proposed by the U.S. Federal Reserve—could unlock value by splitting its four main businesses or dividing into consumer and institutional companies. “JPMorgan—and other money centers—would strongly consider strategic alternatives, providing shareholders with a breakup ‘put option’ if capital requirements get tougher,” the analysts wrote. Chief Executive Officer Jamie Dimon wasn’t too thrilled by the prospect. “We think that we can earn a superior return, still, versus other banks and…

2 min
china’s big bang

‘THEY HAVE A COLLECTIVE PH.D. IN ECONOMICS, AND ALL OF THEM ARE WEAK.’ — Author Dennis Gartman, describing the worrying accuracy of zinc, copper, tin and aluminum in predicting slower growth IN 2014, just three years after releasing its smartphone, the Mi, Xiaomi Corp. overtook Apple Inc. and Samsung Electronics Co. in China sales. The Beijing-based company already ranks No. 3 in sales globally. Now, co-founder Lei Jun is on a buying spree to move beyond handsets—and, he says, build a bigger brand than his rivals within a decade. During the past few months, Xiaomi participated in investments valued at more than $600 million in established companies and announced that it has taken undisclosed stakes in 25 startups, which make everything from an air purifier to low-energy light bulbs. “Xiaomi is looking to…