Get ready for the $4.5tn takeover

Coronavirus dispels private capital’s postwar delusions of autonomy

Jonathan Guthrie


© Ingram Pinn/FinancialTimes


One of the most moving responses to coronavirus has come from home-quarantined Italians singing together from their balconies. They were belting out Il Canto della Verbena or Volare.

The subtext was that interdependence is the only defence humans have against their own fragility. For postwar individualist philosophers like Ayn Rand — cheerleader for the primacy of private capital — the jig is well and truly up.

Witness the extraordinary efforts by governments to stabilise their economies and forestall the collapse of business. The US signed off on a $2tn aid package in the early hours of Wednesday morning and the global bailout — central bank liquidity support included — will have a sticker price of more than $4.5tn.

That is a big number, even by the standards of recommended takeovers. And have no doubt that this is a takeover. Bringing in the state to help fend off the virus resembles a tactic in which target companies recruit “white knight” bidders to frustrate hostile bids by asset strippers. It is an ironic term for a least worst option.

Swaths of businesses are in the same needy place today. Whole sectors — notably airlines, hotels and cruise lines — will lack a raison d'être for months. For many companies, revenues will fall short of overheads. But state support, and the quid pro quos that go with it, are preferable to going bust.

“This is analogous to a war we have to mobilise to deal with,” says Jesse Fried, an economist and Harvard law professor. “It is not part of the normal boom and bust cycle.”

The UK is ahead of the US on per capita infection levels. Britain therefore provides transatlantic pointers on how coronavirus can extend the frontiers of the state. Recently, the government has promised loans and grants to business worth £330bn, and basic pay for company employees who are left workless. In an echo of the wartime command economy, ministers are co-ordinating supermarkets to distribute food and manufacturers to make ventilators.

“If the government said it was nationalising all the UK’s shoe shops, people would regard it as entirely plausible,” jokes Howard Davies, chairman of Royal Bank of Scotland.

For diehard free marketeers, the only mercy is that Mr Johnson is a conflicted dirigiste. Conservatives are qualified for interventionism because they generally pursue it from necessity, not choice. The irony of Tories enacting the agendas of the Labour opposition is weaker than pundits pretend.

But the government will need to go further, not least in softening loan terms. Travel businesses like airlines need bailouts. If the state also takes equity stakes, it will wind up with a share portfolio again. All this after 40 years of privatisations interrupted only by a brief detour into bank bailouts.

Such expedient interventions will create legacies that will take years to unwind. “The danger is that free market economies end up resembling Soviet tractor collectives,” warns Simon French, chief economist of broker Panmure Gordon. In time, loans must be recouped or written off, and equity stakes sold.

Just about everything economic libertarians disapprove of is happening all at once. “If your house is burning, you have to put up with fire fighters flooding it with water,” sighs Matt Kilcoyne of the libertarian Adam Smith Institute.

Sadly for Mr Kilcoyne, the works of libertarian philosophers like Ayn Rand are among the chattels going up in smoke. Traumatised by the evils of communism, this Russian émigré coined an equally ruthless materialist philosophy. It glorified entrepreneurs rather than workers and elevated financial relationships not community ties. It fed into the nineties neoliberal view of globalising corporations as a parallel power base to nation states.

The 9/11 terrorist attacks in 2001 and the financial crisis in 2008 damaged the ideology. The emergence of tech giants has kept it alive in the US, a more individualist society. But coronavirus is dispelling any doubts that ultimately the state, not business, is in charge. It can create money or pencil in future tax increases. Businesses cannot.

What they can do right now is help. Imminent bankruptcy precludes this for many. But plenty of businesses are solvent and able to show they are part of society more meaningfully than by printing a pretty brochure once a year.

French luxury group LVMH is making hand sanitiser. UK grocer Morrisons has set up a call centre for seniors who cannot order food online. Amazon will reportedly distribute Covid-19 test kits.

Duty aside, it makes business sense to accrue goodwill now. It may be needed in coming years, when every buyback and executive payout will face a tough public sniff test. Businesses in developed, democratic nations especially need to emerge well from coronavirus to maintain their competitive advantages.

Lucy Neville-Rolfe, a Conservative peer and City grandee, puts it like this: “When plague broke out in ancient Athens, it enabled Sparta, which was more disciplined, to become dominant.”

No prizes for guessing, as China seeks to emerge from its own coronavirus lockdown, who might be Sparta this time.

Gold Won’t Be the Only Winner of This Crisis

By David Forest, editor, International Speculator

Zoom shifts to tackle privacy concerns as regulators circle

Videoconferencing app’s chief Eric Yuan says it will put new features on hold while it fixes security issues

Hannah Murphy in San Francisco


Zoom has faced a public backlash following a litany of data security and privacy stumbles in recent days © AFP via Getty Images


Zoom, the videoconferencing app that has recorded an explosion in growth during the coronavirus pandemic, has said it will deploy all of its engineering resources to tackle data privacy concerns after coming under fire for lax practices, as European and US regulators begin to circle.

Zoom’s chief executive Eric Yuan issued a mea culpa on Thursday and said that over the next 90 days the app was freezing the building of new features and instead “shifting all our engineering resources to focus on our biggest trust, safety, and privacy issues”.

The move comes as the Silicon Valley company, which listed publicly in April last year, battles to stem a public backlash following a litany of data security and privacy stumbles in recent days.

These include revelations of undisclosed data sharing practices, features that allowed users to harass other users or mine data from them without their knowledge, and misleading statements about its encryption capabilities — all of which it has since acknowledged publicly and sought to address with policy or technology updates.

“We recognise that we have fallen short of the community’s — and our own — privacy and security expectations,” Mr Yuan said in a blog post, adding that the group had not foreseen the explosion in popularity of the product as millions have shifted to remote working under national lockdowns. “For that, I am deeply sorry.”

While Zoom’s shares are nearly double where they were at the start of the year, they have dropped more than 20 per cent from highs last week, giving the company a market capitalisation of $34bn.

The mis-steps are now attracting increased scrutiny from regulators. Graham Doyle, a deputy commissioner with the Irish Data Protection Commission, which oversees the EU’s privacy regulations, told the Financial Times on Thursday that the regulator had “contacted other privacy watchdogs” in the bloc to assess whether member states had received complaints or had worries about the app.

A spokesperson for the UK’s Information Commissioner’s Office said that it was “considering various concerns that have been raised regarding video conferencing apps”.

This week, the New York state attorney-general sent a letter to Zoom raising questions as to whether the company could properly protect sensitive user data amid the sharp spike in traffic.

In his blog post on Thursday, Mr Yuan said that the company now had 200m daily meeting participants, up from a maximum of 10m at the end of December.

As part of efforts to ramp up security, he also committed to undertaking third-party security reviews of “new consumer use cases”, preparing a transparency report related to data requests made to Zoom, and “enhancing” a bounty programme that encourages hackers to search for bugs in its system.

Even before its spectacular rise, security experts have raised concerns about the app, particularly after the discovery last year of a serious bug that would have allowed potential hackers to hijack a user’s device webcam.

Zoom is also facing wariness from some security experts over its operations in China, where it has a data server, and a research and development department with more than 700 staff as of January 31, according to regulatory filings.

The company told the Financial Times that “data originating in the US stays in the US, and cross-border meeting data goes to wherever the host’s enterprise account is headquartered”.

It added that “Zoom’s employees based in China do not have clearance or the ability to access to meetings, recordings or data held outside of China”.

Meanwhile, the app faces looming challenges from larger rivals: Facebook on Thursday launched a desktop version of its Messenger app, casting the new platform as an opportunity for users to do “group video on a large screen”.

The Calculated Risk of the Coronavirus

By: George Friedman


We live in a world filled with risks, some large and some small. When we step off the sidewalk to cross the street as the light turns green, there is a risk the car to our left will suddenly accelerate and kill us.

We see it stopped there, we evaluate our desire to cross the street, and we decide the threat is too small to delay us. Overwhelmingly we are right. On rare occasions, someone gets hit and dies.

We do not respond to the risk by refusing to cross streets when cars are on the road.

The cost of eliminating all risk is too high, and the probability of the risk materializing is too small. It’s a calculated risk, when the risk of doing something or not doing something is understood.

Sometimes the calculation takes months. Sometimes it takes seconds. But it is always there, and you are always analyzing it and making decisions accordingly, rightly or wrongly.

Risk and reward are at the center of human life.

And to be sure, humans are not averse to risk. Many cultivate risk as a gourmand chooses from a menu. There is a pleasure in choosing to confront a risk and an exhilaration in surviving it.

My wife loves to scuba dive. We learn the mechanics of diving so that the risks are controlled to the extent they can be.

The point is that risk is an integral part of life, even a rare pleasure, not solely a burden that we must live with.

Though most of us try to avoid risk, it is everywhere.

Life itself is a risk that shares its place with rewards. Every relationship is a risk, for people we meet may carry with them some unknown and even uncontrollable threat.

But it is impossible to live our lives alone, because man is a social animal, and even the most reclusive of us must make a decision based on uncertain and poorly glimpsed realities.

We cannot eliminate it any more than we can refuse to face it. The best we can do is calculate the risk.

Which brings us to the coronavirus. It causes just one disease in a world filled with diseases, some of which are fatal, and any one of which could strike at any moment.

Yet we press on. A big difference is that the coronavirus is new, and we fear new risks far more than old ones. It is highly contagious, but for 98 percent of those who contract it, it will cause a week or two of illness.

For those of us older than 70 or suffering from other diseases, it is far more deadly.

None of my research suggests Hungarian Jews over 70 are exempt from this calculus.

Our collective solution to combat the coronavirus is to avoid all human contact. We share no comments on the weather or laughter.

There is little commonality among us, save the suspicion that this person in aisle three might cause my death. A disease that has a degree of calculability has caused us to fear not only the stranger but also the friend.

And now we must keep our distance from each other, by the command of the state.

If this meant that the disease could be eliminated in a certain time, it would be worth it. But the fact that it might subside after we all hide doesn’t mean it won’t reemerge. Quarantine can mitigate but not eliminate the enemy.

Our calculation is that we can push off the reckoning by living strange and inhuman lives.

Sometimes, when the risk has grown out of proportion in our mind, and the reward seems to be life itself, the finely honed risk-reward ratio loses its bearing. The decision has been made that the disease must be battled at all cost, even if the battle can’t be won; any compromise with the fact that it exists and will not readily go away is considered reckless and dangerous.

And so we risk the consequence. With human contact rendered unacceptable, our ability to produce what we need to in order to live declines to the point of potential disaster. We have established a calculation in which the risk from this disease outweighs all other risks, from wreckage to our economy, to the solace of friendship.

We might hope that our vast medical-pharmaceutical complex will invent something to at least mitigate the disease. But the ethical foundation of that complex is risk aversion. So a vaccine can’t be produced in less than a year.

The consequence is a vast fragmentation of humanity, and the threat of an economic failure not seen in 90 years. The avoidance of risk creates the apparent certainty of disaster. The idea of calculated risk, where the risk of harm is measured against the certainty of harm, is absent.

The attempt to shut down New York City is a loss of all proportion. COVID-19 is a nasty disease, but the possibility of being sequestered in a Bronx apartment like the one I grew up in, for as long as it takes, is appalling.

And then there is the problem that we don’t know how long “however long it takes” is. But when you don’t know what to do, the most unbearable solutions seem the only reasonable ones.

Avoiding the pain of the novel coronavirus demands isolation and economic disaster. There should be a symmetry between the risk and the calculated solution, even if it is merely a temporary respite.

Perhaps, until the flawless vaccine is created, the calculated risk must be that we will endure this disease as we have others. The Black Death killed perhaps half of the people in Europe’s cities. HIV killed most it infected. Heart disease and cancer will kill many of us. We live with them by taking calculated risks.

Some of us may die from the risks we take. Others will not. But a disease that likely kills less than 2 percent of those infected, the old and rarely the children, demands a different risk-reward ratio.

There is a possibility that I will die from it. But there is the certainty that the current measures will create deep hardship for my children and grandchildren by wrecking the economy.

For me the calculated risk is this: I probably won’t die, and if I do, I will not have to live with the vision of a shattered country, and the shattered lives of children I both love and must serve.

From coronavirus crisis to sovereign debt crisis


© AP

In this guest post, Lee Buchheit, professor at the University of Edinburgh’s Law School and a former senior partner at Cleary Gottlieb, and Sean Hagan, a visiting professor at Georgetown University’s Law Center, and the former general counsel at the IMF, urge bondholders to consider debt forbearance for emerging market countries with precarious finances and high levels of poverty. Forceful action is needed to protect stricken countries from litigious creditors.


In the 21st century, no country borrows money with the expectation that it will ever repay the full sum. They simply assume that when their liabilities come due they will borrow from someone else to pay the maturing debts. This assumption has permitted countries, large and small, to carry debt loads that in a quainter era would have been thought wildly unsustainable. But this notion is an illusion. Covid-19 may expose how fragile it is.

The combination of economic downturns, capital flights, commodity price collapses, political instability resulting from the social consequences of the epidemic and a pervasive “risk off” sentiment in the markets may in the coming months make it difficult or impossible for some countries to refinance their debts — what the economists call a sudden stop.

Drawing down reserves could in some cases postpone a default, but those reserves may be needed for more pressing humanitarian purposes. Once defaults begin, bondholders will be entitled to commence legal enforcement measures, making a sovereign debt crisis irreversible even if the global economy recovers.

The vast majority of creditors can be expected to show restraint in light of the coronavirus crisis. The danger lies in the small minority of creditors who pride themselves on being more aggressive and litigious than their more docile peers.

For stricken countries unable to keep servicing their debts - because the bond market has been shut off or because all available resources must be directed to ameliorate the crisis - this means avoiding a situation where their debts are rendered permanently unmanageable as a result of accelerations and legal enforcement by small groups of creditors.

Initiating a standstill mechanism

While some defaults could be avoided by emergency financing from the IMF or World Bank, their resources would be swamped in a global recession. Rather, what is needed is a standstill mechanism that would freeze the situation until the longer-term effects of this crisis can be assessed.

A key issue is how such a standstill could be legally implemented. Potential tools may involve either self-help mechanisms implemented by the countries themselves, or some form of official intervention. The objective of such measures will be to erect roadblocks for litigious creditors bent on exploiting this crisis.

Self-help remedies will probably require a creative use of the “collective action clauses” (CACs) that now appear in most sovereign bonds in the developing world. Sovereign issuers could, for example, attempt to use those clauses to raise the percentage of holders that must vote in favour of an acceleration of the debt from the customary 25 per cent to 50 per cent – or even higher.

The majority or supermajority of bondholders will thus remain in control of the situation, while protecting themselves and sovereign debtors from precipitous action by a maverick minority.

A particularly innovative use of CACs would permit the supermajority of bondholders to impose an obligation to share rateably with all holders the proceeds of any recovery following a rogue litigation; a feature common to syndicated bank loans.

This is not a panacea, however. Although potentially useful, CACs have significant limitations.

Not all sovereign bonds have them. The scope and terms of the clauses vary widely country-by-country and even bond-by-bond. Some sovereign debt, like syndicated bank loans, lack CACs altogether. Some form of official sector intervention may therefore be needed to preserve the status quo until the world can begin to recover from this crisis.

Although there have been discussions in the past about an international treaty that would create some kind of sovereign bankruptcy court, there is neither the time nor the political consensus to resuscitate those debates. If the official sector at either the national or international level is disposed to intervene, it will need to do so quickly.

Halting legal exposures

For example, the sovereign immunity laws in the US and the UK - the jurisdictions whose laws are chosen to govern most emerging market sovereign bonds - could be amended to permit judges to halt lawsuits against countries where the IMF certifies that normal debt service is impossible in light of the current crisis. Think of it as the international equivalent of a temporary moratorium on mortgage foreclosures.

Alternatively, the litigious instinct might be suppressed by making the prospect of an eventual recovery more remote. In 2003, for example, the UN Security Council passed a resolution that created worldwide legal immunity for the oil assets of post-Saddam Iraq, shielding those assets from “all forms of judicial process.”

One objective was to deflate any expectation on the part of Saddam-era creditors that they would be able to seize Iraqi assets abroad while that country’s economic recovery program was underway. In the US, the president has considerable scope to intervene in matters, like sovereign debt, that bear upon the foreign relations of the United States.

If a suspension of some sovereign debt payments becomes unavoidable in the coming months, the goal should be to ensure that this does not precipitate a destructive debt crisis for the afflicted countries.

Corporate borrowers may seek such a standstill protection from a bankruptcy court; sovereign debtors must look elsewhere.

Securing an effective standstill will also be critical to achieving inter-creditor equity. The IMF and World Bank earlier this week requested all official bilateral creditors to exercise forbearance with respect to amounts due to them. It will be difficult for official sector creditors to justify this forbearance to their taxpayers if the money is simply paid over to more importunate commercial lenders.