Morning Agenda: Assessing Europe’s Bank Stress Tests

The European Central Bank said on Sunday that of the 130 European banks it reviewed, only 13 lacked sufficient capital to withstand a financial crisis or severe economic downturn, concluding a yearlong audit of eurozone lenders that is potentially a turning point for the region’s battered economy, Jack Ewing reports in DealBook. “The highly anticipated assessment of European banks was intended to remove a cloud of mistrust that has impeded lending in countries like Italy and Greece,” he writes. Markets in Europe were losing enthusiasm in Monday morning trading, as investors sought to assess the results. Stocks in the United States were expected to open lower, based on futures trading.

By exposing a relatively small number of sick banks, the central bank could make it easier for healthier ones to raise money that they can lend to customers. But some analysts wondered whether the lack of more problems meant that the health exam was not tough enough. No major European banks failed the central bank’s test. Contrary to some forecasts, the stress-test results were not likely to force any banks to close. Those deemed having too little capital to protect against risk have two weeks to file plans for raising more, and will then have up to an additional nine months to meet the minimum threshold.

The 13 banks that failed the stress test, including four in Italy and two in Greece, were among 25 that the central bank found had capital shortfalls through the end of 2013. The total shortfall for those 25 banks was 25 billion euros, or about $31 billion. But a dozen of those banks have since raised capital or made other moves to bolster themselves. In the coming weeks and months, investors, customers and potential business partners will probably pore over the enormous amount of data that the central bank made available about individual banks. Weaker lenders, like Monte dei Paschi di Siena of Italy, could face pressure to improve their performance or seek merger partners.

Results of a parallel review by a second regulator, the European Banking Authority, which included 20 banks in Britain, Sweden and other European Union countries outside the 18-member euro currency bloc, were also announced on Sunday. The findings were largely in line with the European Central Bank’s review. None of the banks that the authority’s stress tests found at risk were outside the eurozone. In Britain, the major banks all passed the stress test comfortably.

HUGE TAX BREAKS FOR BALLMER ON CLIPPERS DEAL | When Steven A. Ballmer, Microsoft’s former chief, purchased the Los Angeles Clippers for $2 billion earlier this year, quite a bit of head scratching ensued. But, it turns out, the deal may have made a whole lot of sense. According to a Financial Times analysis of United States tax laws, Mr. Ballmer could gain up to $1 billion in tax benefits from his $2 billion purchase of the team. The analysis shows that Mr. Ballmer could claim about half of the purchase price in current terms over the next 15 years against his taxable income. The credits can be claimed under a little-known feature of the tax code covering so-called active owners of sports franchises.

“Under an exception in United States law, buyers of sports franchises can use an accounting treatment known as good will against their other taxable income,” The Financial Times writes. “In this case, Mr. Ballmer can spread the good will over 15 years and reduce his tax liability on his other income by a certain amount for each of those years. Using a conservative model that assumes Mr. Ballmer could account for $1.5 billion in good will and a reinvestment rate of 7 percent, the potential tax credits equate to about $1 billion in current terms.”

ACKMAN’S OUTSIZE BETS | Whether it’s buying a top-of-the-world apartment or fighting a corporate takeover war, the hedge fund mogul William A. Ackman does everything big. And this may be his biggest year yet, Alexandra Stevenson and Julie Creswell write in The New York Times. His hedge fund, Pershing Square Capital Management, which oversees more than $17 billion, is up 32 percent in a year when many other hedge funds are just breaking even. His recently completed public offering of stock in Europe of part of Pershing Square raised $2.7 billion that he can use to make more big bets. What’s more, he’s also a driving force behind one of the biggest potential mergers of the year: Valeant’s $53 billion hostile takeover bid for Allergan.

Mr. Ackman’s critics agree that he’s big, saying that he stands out for his big mouth and oversize ego. Others warn that his fund has a risk of blowing up. His portfolio is made up of bets on fewer than a dozen companies, meaning when things go bad, they can go really bad. As his fund grows, he said he would have to make bigger, but not riskier investments. “All successful people have stories to tell about what allowed them to achieve fabulousness. There is usually a moral. In the story that Mr. Ackman likes to tell, the moral is this: Never doubt Bill Ackman,” Ms. Stevenson and Ms. Creswell write.

During his career, Mr. Ackman has gone after big targets and taken his battles into the public arena. Sure, there have been failures. His $2 billion bet on Target, for example, went bad, as did his wager on J. C. Penney. And his three-hour presentation this summer about Herbalife, on which he has staked a $1 billion bet, seemed to backfire at the time. But his defenders argue that anyone with a fund as large as Pershing is going to have the occasional blunder.

ON THE AGENDA | The Markit flash services purchasing managers’ index comes out at 9:45 a.m. The pending homes sales index is released at 10 a.m. Amgen, T-Mobile and Twitter report earnings after the market closes.

COURT RULING DISARMS SHAREHOLDERS | Since the financial crisis, regulators and prosecutors have been reluctant to pursue high-level miscreants. And so, hoping to achieve greater accountability, wronged investors have filed many cases against top corporate officials, accusing them of breaching fiduciary duties and of other misdeeds, Gretchen Morgenson writes in the Fair Game column. But even this enforcement mechanism is under attack, thanks to a recent decision by the Delaware Supreme Court. In a proceeding last May, the court ruled that a company could adopt, without shareholder approval, bylaws requiring investors who filed lawsuits against it to pay the company’s legal fees if the suit was unsuccessful.

Legal experts say that, because most companies are incorporated in Delaware, the State Supreme Court’s blessing of fee-shifting will result in fewer shareholder actions and less accountability. “Levying legal fees on unsuccessful plaintiffs could have one benefit: reducing the number of frivolous lawsuits filed, and there are many of those,” Ms. Morgenson writes. “But the rules are sure to have a chilling effect on meritorious cases.” Since the ruling, more than two dozen companies ‒ including Smart & Final, a warehouse grocery store chain ‒ have added fee-shifting language to their governing documents. The Chinese e-commerce giant Alibaba Group also requires shareholders to reimburse it for legal fees.

“It isn’t surprising that the business-friendly Delaware courts would rule against shareholders in this way. But critics say the ruling enters new and perilous territory,” Ms. Morgenson writes. “Shareholders are already at a severe disadvantage when trying to hold corporate executives and directors accountable. Limiting their options even further is a giant step in the wrong direction.”

| Contact: @melbournecoal | E-mail

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