TIME Economy

Could a 40-Year-Old Bank Collapse Have Saved the U.S. Economy?

Michele Sindona In His Office
Michele Sindona in his office in 1970, before Franklin National Bank collapsed Mondador / Getty Images

Forty years ago, the U.S. did a good job of overseeing a failed bank. Then came Lehman Brothers

When Franklin National Bank collapsed 40 years ago on Oct. 8, 1974, it was more of a beginning than an end. A lurid tale of the bank’s downfall emerged over the next decade, involving mafia connections, ambitious Wall Street wannabes à la Jordan Belfort and a principal investor with a suspicious bullet wound in his leg.

More importantly, the bank’s demise was the first notable instance in which federal regulators helped a major bank wind down its operations in order to prevent global economic damage.

Franklin began as a humble Long Island bank with big-league aspirations. In the 1960s, the bank made questionable financial decisions to expand its operations and bum-rush the Manhattan banking scene. Franklin’s overzealous bankers bought a luxurious, too-large office on Park Avenue and sold a controlling stake in the firm to a shady Milan-based international financier, Michele Sindona.

The Sindona story reads like an American Hustle-style, stranger-than-fiction tale. In 1974, high-risk loans, ill-advised foreign currency transactions, and swings in foreign exchange rates caused Franklin to hemorrhage cash. The company lost $63 million in the first five months of 1974, more than any other bank in American history until that point. Not long after, the U.S. charged Sindona with illegally transferring $40 million from banks he controlled in Italy to buy Franklin National, and then siphoning $15 million from it. In August of 1979, just before his trial was about to begin, Sindona — who had ties to the Vatican and likely the Mafia — disappeared under mysterious circumstances; his family and lawyers got letters that “supposedly proved that he had been abducted by Italian leftist radicals,” according to TIME’s coverage of the episode. When he finally emerged after nearly three months — in a payphone booth near Times Square — he had what he said was a bullet wound in his leg. (Sindona claimed he was kidnapped by Italian terrorists but his defense later admitted it was a hoax, and Italian magistrates said that a secret Masonic lodge helped Sindona fake his own kidnapping.) He was sentenced to serve a 25-year prison sentence and died in prison by cyanide poisoning in 1986.

But the bigger story about Franklin National was the boring one. The bank, which was the 20th-largest in the U.S., was the first major financial institution whose wind-down was orchestrated by federal regulators. In 1974, the biggest questions federal authorities faced were how much it would damage the global economy if Franklin collapsed, and whether regulators should get involved.

Sound familiar?

It should: A similar crisis occurred in 2008 when the collapse of the largest American financial institutions seriously damaged the global economy. Much like Lehman Brothers, JPMorgan Chase and Goldman Sachs, Franklin National was deeply enmeshed in the global economy. In both 1974 and 2008, federal regulators were in a position to take decisive action, but they responded in very different ways.

In 1974, as Franklin began to collapse, the Federal Reserve’s strategy was to lend it money in order to buy time for a bigger strategy, according to Joan Spero, author of The Failure of the Franklin National Bank: Challenge to the International. The Fed loaned Franklin a total of $1.75 billion, the largest bailout ever offered to a member bank at the time. Later, the Federal Deposit Insurance Corporation stepped in to help arrange a bank takeover. The FDIC set up negotiations with 16 banks, and a firm called European-American ultimately purchased Franklin for $125 million. The bottom line is that regulators helped to avoid an economic hit by lending Franklin money, and then smoothly transitioning the bank into a subsidiary of a functional institution.

“The entire financial world,” Arthur Burns, the chairman of the Federal Reserve Board, told TIME shortly after, “can breathe more easily, not only in this country but abroad.”

A very different scenario emerged in September 2008. The United States was on the cusp of the worst recession since the 1930s, and Lehman Brothers, the nation’s fourth-biggest bank, was in trouble. Granted, the problem was much more serious in 2008 than in 1974, and the stakes were higher — as would have been the size of the required bailout. The Fed ultimately allowed Lehman brothers to go bankrupt, and the economy seized up. (A sale to Barclays did look possible at the last minute, but it didn’t work out.) A litany of critics have suggested that the Fed should have orchestrated a Franklin National Bank-like wind-down for Lehman, and thereby could have prevented an international catastrophe.

“For the equilibrium of the world financial system, this was a genuine error,” Christine Lagarde, France’s finance minister at the time, said in the days after Lehman’s bankruptcy, reports the New York Times. Indeed, what followed in the U.S. was the worst recession since the Great Depression.

Still, federal regulators tend to come under a lot of fire when things go wrong — no matter what they do, which is kind of the point. Even in 1974, TIME criticized federal authorities for not being proactive enough with Franklin National Bank, despite its orderly purchase by European-American. In its story published in October of that year, TIME said federal authorities should have scrutinized Franklin and others more closely:

Faced with the failure of more than 50 federally insured banks in the past decade, the FDIC and other regulatory agencies need to keep a much closer watch not only on the roughly 150 banks on the FDIC’S “problem” list but also on virtually every bank in the nation. That way ailing banks will stand a better chance of being helped long before they reach a Franklin finale.

In other words, TIME’s message to federal authorities was: Be vigilant and act quickly. It’s a mantra we could learn something from today.

TIME

How Bitcoin Could Save Journalism and the Arts

The Innovators

Walter Isaacson is the author of The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution, out this week.

Micropayment systems have the potential to reward creativity and exceptional content—on a realistic scale

The rise of Bitcoin, the digital cryptocurrency, has resurrected the hope of facilitating easy micropayments for content online. “Using Bitcoin micropayments to allow for payment of a penny or a few cents to read articles on websites enables reasonable compensation of authors without depending totally on the advertising model,” writes Sandy Ressler in Bitcoin Magazine.

This could lead to a whole new era of creativity, just like the economy that was launched 400 years ago by the Statute of Anne, which gave people who wrote books, plays or songs the right to make a royalty when they were copied. An easy micropayment system would permit today’s content creators, from major media companies to basement bloggers, to be able to sell digital copies of their articles, songs, games, and art by the piece. In addition to allowing them to pay the rent, it would have the worthy benefit of encouraging people to produce content valued by users rather than merely seek to aggregate eyeballs for advertisers.

This is something I advocated in a 2009 cover story for Time about ways to save journalism. “The key to attracting online revenue, I think, is to come up with an iTunes-easy method of micropayment,” I wrote. “We need something like digital coins or an E-ZPass digital wallet–a one-click system with a really simple interface that will permit impulse purchases of a newspaper, magazine, article, blog or video for a penny, nickel, dime or whatever the creator chooses to charge.”

TIME, February 16, 2009

That was not technically feasible back then. But Bitcoin has now spawned services such as ChangeTip, BitWall, BitPay and Coinbase that enable small payments to be made simply, with minimal mental friction or transaction costs. Unlike clunky PayPal, impulse purchases can be made without a pause or leaving a trace.

When reporting my new book, The Innovators, I discovered that most pioneers of the Web believed in enabling micropayments. In the mid-1960s, Ted Nelson coined the term hypertext and envisioned a web with two-way links, which would require the approval of the person whose page was being linked to.

Had Nelson’s system prevailed, it would have been possible for small payments to accrue to those who produced the content. The entire business of journalism and blogging would have turned out differently. Instead the Web became a realm where aggregators could make more money than content producers.

Tim Berners-Lee, the English computer engineer who created the protocols of the Web in the early 1990s, considered including some form of rights management and payments. But he realized that would have required central coordination and made it hard for the Web to spread wildly. So he rejected the idea.

As the Web was taking off in 1994, I was the editor of new media for Time Inc. Initially we were paid by the dial-up online services, such as AOL and Compuserve, to supply content, market their services, and moderate bulletin boards that built up communities of members.

When the open Internet became an alternative to these proprietary online services, it seemed to offer an opportunity to take control of our own destiny and subscribers. Initially we planned to charge a small fee or subscription, but ad agencies were so enthralled by the new medium that they flocked to buy the banner ads we had developed for our sites. Thus we decided to make our content free and build audiences for advertisers.

It turned out not to be a sustainable business model. It was also not healthy; it encouraged clickbait rather than stories that were so valuable that readers would pay for them. Consumers were conditioned to believe that content should be free. It took two decades to put that genie back in the bottle.

In the late 1990s, Berners-Lee tried to create new Web protocols that could embed on a page the information needed to handle a small payment, which would allow electronic wallet services to be created by banks or entrepreneurs. It was never implemented, partly because of the complexity of banking regulations. He revived the effort in 2013. “We are looking at micropayment protocols again,” he said. “The ability to pay for a good article or song could support more people who write things or make music.”

These micropayment protocols still have not been written. But Bitcoin may be making that unnecessary. One of the greatest advocates of using Bitcoin for micropayments is the venture capitalist Marc Andreessen, who as a student at the University of Illinois in 1993 created the first popular Web browser, Mosaic.

Originally, Andreessen had hoped to put a digital currency into his browser. “When we started, the first thing we tried to do was enable small payments to people who posted content,” he explained. “But we didn’t have the resources to implement that. The credit card systems and banking system made it impossible. It was so painful to deal with those guys. It was cosmically painful.”

Now Andreessen has become a major investor in companies that are creating Bitcoin transaction systems. “If I had a time machine and could go back to 1993, one thing I’d do for sure would be to build in Bitcoin or some similar form of cryptocurrency.”

Walter Isaacson, a former managing editor of Time, is the author of The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution, out this week.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

TIME ebola

Liberians in Dallas Convey Hope Back Home

Liberia Races To Expand Ebola Treatment Facilities, As U.S. Troops Arrive
A Liberian Ministry of Health worker, dressed in an anti-contamination suit, speaks to a child in a holding center for suspected Ebola patients at Redemption Hospital on Oct. 3, 2014 in Monrovia, Liberia. John Moore—Getty Images

The disease and its aftershocks have been ravaging their homelands for months; now the U.S. is joining the fight

The first diagnosed case of Ebola in the U.S., discovered nearly a week ago at a hospital in north Dallas, seized the country, as public health officials rushed to contain both the virus and the fear it inevitably caused. But Ebola has been tearing through the lives of West Africans in Dallas for months, killing loved ones back in Africa and putting a strain on bank accounts here in Texas.

Now that the virus has reached America’s shores there’s a grim sort of hope that help may finally be on the way.

“People are not happy that the disease has made it to America,” Alben Tarty, spokesperson for the Liberian Community Association of Dallas-Fort Worth, told TIME Saturday. “But with the attention it has garnered they think, ‘Ok, this is a bad thing, but maybe America can now appreciate what we’re going through.”

Jenny Dakinah lost her half brother and almost his entire household to Ebola (his wife, niece, mother-in-law and teenage son all died; miraculously, her now 10-month-old nephew survived). She’s mailing canned food to her family still in Liberia.

“You don’t know who you come in contact with when you buy food,” she said. Sending food and money to help her family survive the sputtering economy is straining her resources. “It’s getting harder and harder.”

Liberia is one of the most remittance-dependent countries on earth. Money sent to relatives from Liberians living in the U.S. accounted for 20% of the West African country’s economy in 2012 (the second highest percentage in Africa, after Lesotho), according to a 2014 World Bank report. As Ebola takes lives—both directly and by overwhelming the healthcare infrastructure so that even less lethal diseases become more deadly—it is also gutting economies where it strikes.

In Liberia, the hardest-hit country in this outbreak, the economy is buckling as society and its markets hunker down. Schools and offices close as a precaution. People interact less, leave the house less, and thus buy less. Without revenue many businesses that do stay open eventually shut down and lay off workers. The Liberian economy has been clawing its way back to health since the end of the country’s civil war in 2003 but the World Bank projects that if the virus isn’t substantially contained by next year its growth rate will plummet—to negative 4.9%.

“The financial implications of this are huge. Tremendous,” said James Kollie, the pastor of Better Life Church, a largely Liberian congregation in the Dallas area. “Millions of dollars have been lost in this outbreak. As I’m talking to you, more. Billions of dollars could be lost.” Kollie has family and a business back in Liberia. “Right now everything has been affected. I’m not making an income right now. Everything has come to a standstill.”

Albert Travell has lost seven nieces and nephews to Ebola. With the country now on lockdown he sends what he can to help his brother and sister get by. “I helped them with money just yesterday for them to buy food because they’re not working.” He sends $100 at a time. Sometimes $125. “The little money I had, I had to send to them”

Amid this dire situation, news that up to 4,000 U.S. troops will head to West Africa to help fight back against the disease has been a welcome ray of hope.

“We were just Africa, just hurting every once in awhile, but now that it’s affecting America, every hour it’s on the news,” Tarty said. “America is the most powerful country in the world with robust healthcare systems and is now paying attention to the virus and will do something about it. That’s the feeling people have right now.”

TIME Economy

We Still Haven’t Dealt With the Financial Crisis

Five Years After Start Of Financial Crisis, Wall Street Continues To Hum
A street sign for Wall Street hangs outside the New York Stock Exchange on September 16, 2013 in New York City. John Moore—Getty Images

It often takes years after a geopolitical or economic crisis to come up with the proper narrative for what happened. So it’s no surprised that six years on from the financial crisis of 2008, you are seeing a spate of new battles over what exactly happened. From the new information about whether the government could have, in fact, saved Lehman Brothers from collapse, to the lawsuit over whether AIG should have to pay hefty fees for its bailout (and whether the government should have penalized a wider range of firms), to the secret Fed tapes that show just how in bed with Wall Street regulators still are (the topic of my column this week), it seems every day brings a debate over what happened in 2008 and whether we’ve fix it.

My answer, of course, is that we haven’t. To hear more on that, check out my debate on the topic with New York Times’ columnist Joe Nocera, on this week’s episode of WNYC’s Money Talking:

TIME Economy

U.S. Jobless Rate Below 6% for First Time in 6 Years

People attend a jobs fair at the Bronx Public Library on Sept. 17, 2014 in the Bronx Borough of New York City.
People attend a jobs fair at the Bronx Public Library on Sept. 17, 2014 in the Bronx Borough of New York City. Andrew Burton—Getty Images

Gain of 248,000 job gain re-starts the 200,000-plus job addition streak that was broken in August

fortune-logo

U.S. job growth jumped back above the 200,000 mark in September, suggesting the weak employment reading in August was a blip and the labor market continues to make steady progress.

The U.S. economy added 248,000 jobs last month, re-starting the 200,000-plus job addition streak that was broken in August. The gains reported by the Bureau of Labor Statistics are higher than the 210,000 jobs that economists had anticipated, according to Bloomberg data.

The nation’s unemployment rate slipped to 5.9% from 6.1% in August, falling below the 6% level for the first time since 2008.

Payrolls numbers for July and August were revised higher.

February through July of this year all saw strong monthly job gains, and August took most economists and analysts by surprise. However, the low number was revised higher to 180,000 Friday from the initial report of 142,000 jobs. The initial August employment report was the weakest month since December of last year.

While the job gains have started to pick-up again, the recovery remains uneven. Weak wage growth has plagued the economy due to the mix of jobs created, which have been heavily skewed towards part-time work and lower-paying retail jobs.

There were nearly 7.1 million involuntary part-time workers in September, which is largely unchanged month over month. Those are workers who are part-time employed for economic reasons and would prefer full-time work.

“The overall trends in the job market have been what we call improving,” said Mark Hamrick, the Washington bureau chief for BrankRate.com. “But there are also some structural issues that are harder to get our arms around. Perhaps employers in more instances than we know are favoring part time workers.”

Part-time workers have been part of the reason for slow-growing wages, which Federal Reserve chairman Janet Yellen has been worried about recently. The high number of part-time workers, especially given the broad number that would prefer full-time work, represents a “significant underutilization of labor resources,” which is dampening wage growth, she said.

As the job market continues to improve, there is an opportunity for more of these part-time employees to move into full-time work, said Hamrick.

“If we do see further declines in the employment rate,” he said. “Eventually these employers are going to have to resolve their resource needs in the sense of getting a qualified worker in the position.”

This could bode well for the end of the year as holiday hiring picks up and the economy continues to gain back steam during a plodding recovery.

Hiring this year has been generally broad. The economy finally regained all the 8.7 million jobs lost during the financial crisis in May of this year, capping off a recovery that took more than four years.

This piece originally appeared on Fortune.com

TIME 2014 Election

President Obama Plays Politics in Economic Speech He Calls Nonpolitical

Barack Obama
President Barack Obama waves to the crowd after speaking at the Congressional Black Caucus Foundation’'s 44th Annual Legislative Conference Phoenix Awards Dinner in Washington, D.C., on Sept. 27, 2014 Susan Walsh—AP

"I'm not going to tell you who to vote for," the President said, "although I suppose it’s kind of implied"

“This isn’t some official campaign speech or political speech,” President Obama declared Thursday in Chicago, in the middle of a nearly hour-long address that was, if nothing else, decidedly political.

With 33 days until the midterm elections, the President was attempting once again to pivot the national conversation back to the economy after months dominated by foreign crises, in West Africa, Iraq, Syria and Ukraine. Obama had spent the morning campaigning with beleaguered Illinois Governor Pat Quinn, a Democrat in a close re-election battle, an event that marked the President’s return to the campaign trail for Democrats. Senior aides said last month that Obama would use much of October to help Democrats where he can, which is a dwindling set of locales, given the drag of his approval ratings in many contested districts and states.

Perhaps for this reason, he chose the campus of Northwestern University to attempt again a feat he has so far failed to achieve: convincing the American people that his economic policies were working.

“It is indisputable that our economy is stronger today than when I took office,” Obama said. “By every economic measure, we are better off now than we were when I took office. At the same time, it’s also indisputable that millions of Americans don’t yet feel enough of the benefits of a growing economy where it matters most, and that’s in their own lives.”

Delivering a recap of past progress and outlining four cornerstones “of a new foundation for growth and prosperity,” Obama’s new message was familiar, differing only in its sharply subdued ambition. Longtime horizons have replaced the calls for swift action in a speech whose signature refrain was a call to collective action that is almost certain no to come: “Let’s do this,” he said, again and again.

Driving home the traditional Democratic messaging points on immigration, minimum wage and health care, Obama blamed Republicans, and Fox News, for standing in his way. “A true opposition party should now have the courage to lay out their agenda,” he complained. In a break from past practice, he didn’t promise an end to political gridlock after November; there was no pledge that the “fever will break” if his favored candidates win. Indeed, many of the most vulnerable Senate Democrats now seeking to avoid defeat are campaigning on their ability to convince their constituents that they will block Obama, as much as work with him.

“I’m not on the ballot this fall — Michelle’s pretty happy about that,” Obama said, before delivering a line that will make most vulnerable Democrats cringe. “But make no mistake: these policies are on the ballot, every single one of them.”

Then, in a speech he maintained was presidential and not political, he turned an unsparing tongue on his Republican foes. “The one thing they did vote yes on was another massive tax cut for the wealthiest Americans,” Obama said, reflecting on one of the most unproductive legislative sessions in American history.

Not that he was campaigning of course. “I’m not going to tell you who to vote for,” he added. “Although I suppose it’s kind of implied.”

TIME Economy

Why Everyone Who Lives in Alaska Is Getting $1,884 Today

North slope oil rush Alaska
The North slope oil rush in Alaska, circa 1969 Ralph Crane&—The LIFE Picture Collection/Getty Images

That's enough to buy a trip to somewhere warmer

If polar bears and Snow Dogs weren’t enough to make you want to move to Alaska, consider this: You can get paid thousands of dollars a year just for living there.

Today, Oct. 2, almost every permanent resident of Alaska — even babies — will get paid $1,884 as a dividend from the state’s Alaska Permanent Fund, a government fund that invests proceeds generated from the state’s oil reserves to ensure future wealth for the state.

When the first dividend checks were issued to residents in 1980, TIME predicted that the windfall would be long-lasting:

Nor is there any end in sight to the flow of dividends from the oil fund, which by the end of this year is expected to total more than $1 billion. Oil price increases could also continue to swell the fund. While most Americans complain bitterly every time OPEC members raise prices, Alaskans have reason to applaud. With the price of domestic oil now decontrolled, Alaskan crude can rise to the world level; thus the state’s royalties will grow with each foreign price hike.

Today the Alaska Permanent Fund is valued above $50 billion, and the dividend paid to residents this week will total $1.1 billion.

And for the individual who’s squirreled away his dividend payment each year since the program launched in 1980? He’s made a cool $37,000 just for being loyal to the state.

Read more about the origins of the Alaska Permanent Fund in TIME’s archives: Alaska Bonanza

TIME Economy

Our Dysfunctional Financial System

Tapes of what really happens between bankers and regulators show how far we have to go

In some ways, the most shocking thing about the 46 hours of secret audiotapes made by former Federal Reserve bank examiner Carmen Segarra in 2012 is that they are no shock at all. Did anyone ever doubt that the New York Fed was in hock to Wall Street? Or that Fed bank examiners–the regulators tasked with monitoring the risks banks take–might fear alienating the powerful financiers on whom they depend for information or future jobs?

It’s one thing to know and another to hear in painful, crackling detail how the Fed’s financial cops slip on their velvet gloves to deal with Goldman Sachs. Or how Segarra, one of a group of examiners brought in after the financial crisis to keep a closer watch on the till, was fired, perhaps for doing her job a little too well. One can only hope that this latest example of regulatory capture by Wall Street will focus minds on the fact that six years on from the crisis, we still have a dysfunctional financial system.

Consider one of the shady deals highlighted on the secret tapes of New York Fed meetings, which Segarra made with a spy recorder before she was let go and which were made public on Sept. 26 in a joint report by ProPublica and This American Life. The 2012 transaction with Banco Santander, initiated in the midst of the European debt crisis, ensured that the Spanish bank would look better on paper than it really was at the time. Santander paid Goldman a $40 million fee to hold shares in a Brazilian subsidiary so that it could meet European Banking Authority rules. The Fed employees, who work inside the banks they examine (yes, it’s literally an inside job), knew the deal was dodgy. One even compared it to Goldman’s “getting paid to watch a briefcase.” But it was technically legal, and nobody wanted to make a fuss, so the transaction went through.

It’s hard to know where to begin with what’s problematic here. I’ll focus on the least sexy but perhaps most important point: existing capital requirements–the cash that banks are obligated to hold to offset risk–are pathetic. Despite all the postcrisis backslapping in Washington about how banks have become safer, our system as a whole has not. No too-big-to-fail institution currently is required to keep more than 3% of its holdings in cash (a figure that will rise to 5% and 6% in 2018), which means banks can fund 97% of their own investments with debt. No company outside the financial sector would dream of conducting daily business with that much risk. As Stanford professor Anat Admati, whose book The Bankers’ New Clothes makes a powerful case for reining in such leverage levels, told me, “We’ve got to get rid of this idea that banking is special and that it should be treated differently than every other industry.”

Of course, if you start telling financiers they should use more than a few percentage points of their own money when they gamble, they’ll throw a fit. They will tell you that would make it impossible for them to lend to real businesses. They will also uncork lots of complex financial terms–“Tier 1 capital,” “liquidity ratios,” “risk-weighted off-balance-sheet exposures”–that tend to suffocate useful (a.k.a. comprehensible) debate. Financiers use insider jargon to intimidate and obfuscate. This is something we need to fight. In banking, as in so many things, complexity is the enemy. The right questions are the simplest ones: Are financial institutions doing things that provide a clear, measurable benefit to the real economy? Sadly, the answer is often no.

One thing we’ve learned since the crisis is that bailing out Wall Street didn’t help Main Street. Credit to individuals and many businesses plummeted during and after the bailouts and remains below precrisis levels today. Numerous experts believe that the size of the financial sector is slowing growth in the real economy by sucking the monetary oxygen out of the room. Banks don’t want to lend; they want to trade, often via esoteric deals that do almost nothing for anyone outside Wall Street.

This disconnect between the real economy and finance is now being closely studied by policymakers and academics. Adair Turner, a former British banking regulator, thinks that only about 15% of U.K. financial flows go to the real economy; the rest stay within the financial system, propping up existing corporate assets, supporting trading and enabling $40 million briefcase-watching fees. If the New York Fed really wants to redeem itself, it might consider commissioning a similar study to look at Wall Street’s contribution to the U.S. economy. After all, if finance can’t justify itself by showing it’s actually doing what it was set up to do–take in deposits and lend them back to all of us–what can justify it?

TIME Economy

‘Fat Finger’ Error Blamed for $617 Billion Stock Orders Scrapped in Japan

A businessman walk past an electronic stock board in Tokyo, Oct. 1, 2014.
A businessman walk past an electronic stock board in Tokyo, Oct. 1, 2014. Shuji Kajiyama—AP

An accidental stock order ran in the hundreds of billions of dollars

Over $600 billion worth of stock on the Japanese market was ordered and then abruptly canceled Wednesday before they could be executed, possibly the result of a so-called “fat finger” error, or accidental order.

Stock requests totaled 67.78 trillion ten, or $617 billion, and included 57% of outstanding shares in Toyota, the world’s biggest carmaker, and large stakes in Honda, Canon, and Sony, Bloomberg reports. Based on electronic orders to buy or sell stock, market makers and arbitragers use computerized strategies to anticipate demand or profit from price discrepancies. Orders are often withdrawn, but investors were surprised by the scale of Wednesday’s cancellations.

“I’ve never heard of orders this big being canceled before,” Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd., which oversees about $474 billion, told Bloomberg. “There must have been an error.”

The Japan Securities Dealers Association received an error report before the orders were matched.

Read more at Bloomberg

TIME Hong Kong

Hong Kong’s Protesters Are Fighting for Their Economic Future

Thousands of protesters attend a rally outside the government headquarters in Hong Kong as riot police stand guard
Thousands of protesters attend a rally outside the government headquarters in Hong Kong as riot police stand guard on Sept. 27, 2014 Tyrone Siu— Reuters

The city can't remain a global financial center without its own political process

The conventional wisdom about Hong Kong’s pro-democracy protests is that they are bad for business. Hong Kong has become one of the world’s three premier financial centers (along with New York City and London) because the city has been a bastion of stability in an ever changing region, the thinking goes, and therefore the tens of thousands of protesters who paralyzed downtown Hong Kong on Monday are a threat to its economic success. The Global Times, a state-run Chinese newspaper, used just such an argument to try to persuade the protesters to clear the streets. “These activists are jeopardizing the global image of Hong Kong, and presenting the world with the turbulent face of the city,” it said in an editorial on Monday.

That worry isn’t merely Beijing propaganda. Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch, said one of the big questions facing Hong Kong over the long term is “whether the political standoff eventually impacts domestic and foreign perceptions of Hong Kong’s stability and attractiveness as an investment destination.” The fallout for Hong Kong’s financial sector from the Occupy Central movement was immediate. The stock market dropped, banks closed branches, and the Hong Kong Monetary Authority, the de facto central bank, had to reassure the investor community that it would “inject liquidity into the banking system as and when necessary” to overcome any possible disruptions.

But the real reason why Hong Kong has been so successful is that it is not China. When Hong Kong was handed back to Beijing by Great Britain in 1997, the terms of the deal ensured that the former colony, ­now called a “special administrative region,” or SAR, of China ­would maintain the civil liberties it had under British rule. That separated Hong Kong from the Chinese mainland in key ways. In China, people cannot speak or assemble freely, and the press and courts are under the thumb of the state. But Hong Kongers continued to enjoy a free press and freedom of speech and well-defined rule of law. The formula is called “one country, two systems.”

That held true in the world of economics and finance as well. On the Chinese side of the border, capital flows are restricted, the banking sector is controlled by the state, and regulatory systems are weak and arbitrary. Meanwhile, in Hong Kong, financial regulation is top-notch, capital flows are among the freest in the world, and rule of law is enshrined in a stubbornly independent judicial system. Those attributes have given Hong Kong an insurmountable advantage as an international business hub. Banks from all over the world flocked to Hong Kong, while its nimble sourcing firms orchestrated a global network of supply and production that became known as “borderless manufacturing.” While there has been much talk of Shanghai overtaking Hong Kong as Asia’s premier financial center, the Chinese metropolis simply cannot compete with Hong Kong’s stellar institutions, regulatory regime and laissez-faire economic outlook.

What happens if Hong Kong loses this edge? In other words, what happens if Beijing changes Hong Kong in ways that make its governance and business environment more like China’s? Hong Kong would be finished. The fact is that Hong Kong’s economic success, the nature of its institutions and the civil liberties enjoyed by Hong Kongers are all inexorably entwined. If Beijing knocks one of those pillars away, ­if it suppresses people’s freedoms or tampers with its judiciary, ­Hong Kong would become just another Chinese city, unable to fend off the challenge from Shanghai. Foreign financial institutions would be forced to decamp for a more trustworthy investment climate.

That’s why the Occupy Central movement is so critical for Hong Kong’s future. So far, Beijing has generally abided by its agreement with London and left Hong Kong’s economic system more or less unchanged. But when China’s leaders made clear last month that Hong Kongers would be able to choose their top official, known as the Chief Executive, from 2017 onward only from candidates who have the approval of Beijing, it became obvious that Hong Kong was going to face tighter control by China’s communists over time. That raises the specter that Beijing will at some point dismantle “one country, two systems” and along with it the foundation of the Hong Kong economy.

By fighting for their democratic rights, the activists in Hong Kong are fighting for an independence of administration and governance that will perpetuate their city’s economic advantages. Beijing should realize that ultimately a vibrant Hong Kong is in its own interests. China has benefited tremendously from Hong Kong over the past 30 years. It was Hong Kong manufacturers that were among the first to bravely open factories in a newly opened China, thus sparking the mainland’s amazing economic miracle. Chinese firms have been able to capitalize on Hong Kong’s stellar international reputation to raise funds and list shares on the city’s well-respected stock exchange. Even now, China continues to upgrade its economy by seeking Hong Kong’s expertise. The stock markets in Hong Kong and Shanghai are in the process of being linked to allow easier cross-border investment.

Of course, Hong Kong’s economy is far from perfect, and here, too, the importance of Hong Kong’s democracy movement can be found. The SAR suffers from a highly distorted property market and one of the widest income gaps in the world. Such ills have bred more resentment in the city toward Beijing. Yet right now many of the people of Hong Kong simply don’t trust their Beijing-chosen leaders to resolve these issues. Hong Kong requires a popular administration that commands the support of the people in order to implement the reforms necessary to tackle these critical problems. Thus the battle unfolding on the streets of central Hong Kong is a contest for the city’s very survival. Perhaps Hong Kong’s pro-democracy activists will disrupt the usually sedate financial district for a few days. But that’s a tiny sacrifice compared to the long-term damage Hong Kong faces if its citizens do nothing.

Schuman reported from Beijing.

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