B12| Wednesday, September 11, 2019 THE WALL STREET JOURNAL.**
on the negative rate to
depositors. Bankers don’t
want to do this because the
first big bank to bring in
negative rates on euro
deposits would lose business
to rivals.
But if they all acted
together at the behest of the
ECB, the anger of account
holders could be redirected
at central bankers. No central
banker will want to do this,
but as it is the logical
consequence of offering
negative rates, they should be
ready to take the blame.A
s well as helping banks
to rebuild profit
margins, it would make
monetary policy work better,
discouraging saving in banks
and encouraging spending
and riskier asset purchases,as the ECB wants. (Other
unwanted side effects of
negative rates, such as
encouraging higher saving by
those with pension targets,
would remain.)
For now, the chances are
the ECB will carry on with
even more negative rates,
and it will start to poison the
financial system. But the
comments from ECB officials,
including incoming chief
Christine Lagarde’s pledge of
a review of the side effects,
suggest to me that something
is wrong with market pricing.
Either negative rates will
be dropped as a tool,
meaning money markets are
getting it wrong; or one of
the politically tricky options
will eventually be used to
shield banks. Either way,
bank stocks are too cheap.The chief executives of
Deutsche Bank and UBS
warned against negative rates
last week, and even some of
the beneficiaries of cheap
borrowing are worried.
“When you’re looking at
the French debt having
negative rates, it is of course
in our interests,” said Bruno
Le Maire, France’s finance
minister. “[But] there may
also be some very negative
consequences for the banking
sector because the
profitability of the banking
sector is obviously under
threat.”
This has left the banks
pleading with ECB officials to
help them out. Most of the
options have serious political
barriers that make them
tricky.
These include exemptionsfrom negative rates—known
as “tiering”—which would
shield the banks but is widely
understood as a tool to
weaken the currency. With
President Trump already
railing against the ECB, this
would risk stirring up trans-
Atlantic tensions.
Buying bank bonds would
ease their financing costs but
would definitely stir up
trouble with Germans already
concerned about the risks the
ECB is running.
And the nuclear option of
the ECB lending to banks at
an even lower rate than it
takes deposits would amount
to a subsidy for banks, as
well as hitting the ECB’s
profits.
An alternative is for the
ECB to tell the banks it
regulates that they must passSTREETWISE|By James Mackintosh
There Is Too Much Negativity
Surrounding Negative Rates
European bankers are
squealing in fear that they
will be stuck with even
steeper
negative
interest rates
by the
European
Central Bank
this week. The banks quite
rightly fret that lower rates
hit their profits, and they
want the ECB to help. To
avoid trouble in the future, it
should.
Negative rates are clearly
bad for banks in principle,
lowering lending rates while
deposit rates remain stuck at
zero. That squeezes profits.
Worse, the ECB now thinks
negative rates didn’t even
have that much effect on the
economy or prices. Risking
damaging the financial
system for tiny moves toward
its repeatedly missed
inflation goal seems like a
mistake.
The defense of negative
rates is that so far banks
have been fine. Since rates
went negative in the
eurozone in June 2014, bank
profit margins haven’t been
squeezed, lending is up and
interest income is about flat,
as hedge-fund manager
Davide Serra of Algebris
Investments points out.
The pluses from the
improving economy have
offset the effect from
negative rates. This being
economics, it is hard to tell
for sure if it was negative
rates, other ECB policies or
sheer luck that drove the
changes.
“It’s a general problem of
bank profitability, and now
[the banks] can find someone
—the ECB—to blame,” says
Christian Odendahl, chief
economist at the Centre for
European Reform.
The trouble comes in the
future. The direct effect of
taking rates more negative,
or keeping them negative for
a long time, is likely to hurt
profits more than the indirect
effect on the economy helps
profits. Markets already
reflect an outlook of
miserable profits
forevermore, with bank-stock
prices below the post-
Lehman Brothers low of- Investors don’t think
banks will go bust, with their
bonds trading normally, but
they won’t make much
money for shareholders,
either.
I
nvestors seem to believe
that the ECB doesn’t care.
Euro interest-rate swaps
suggest interest rates will be
taken even more negative
and stay below zero for more
than a decade.
However, a coming ECB
study shows negative rates
did little to spur growth and
inflation, their ostensible aim.
Chief Economist Philip Lane
last week presented early
results of a study that showed
negative rates boosted
inflation by less than 0.1
percentage point a year, with
a slightly bigger impact on
the economy.
As ECB Vice President Luis
de Guindos said over the
weekend at Italy’s Ambrosetti
Forum: “We’re not almighty.”
When the effects are this
small and the side effects on
banks so obvious, it raises the
question ofwhether it is
worth bothering.
Plenty argue not, including
Vítor Constâncio, Mr. de
Guindos’s predecessor and
now an academic.
“Negative rates should not
be overused, and in Europe
we’re close to the limit,” Mr.
Constâncio said.‘We’re not almighty,’ says ECB Vice President Luis de Guindos.GIULIO NAPOLITANO/BLOOMBERG NEWSBond yield and deposit rate
4–10123%2010
*Eurozone core inflation year over year
Sources: Institute of International Finance(inflation);Refinitiv(yield,deposit rate)The European Central Bank continues to predict a recovery in
inflation toward its target of just below 2%.2.000.51.01.5%2010 ’15 ’20Realized inflation* ECB's quarterly forecasts June 2019 forecastNegative ECB rate’15 ’19German 10-year yield
ECB deposit ratenavigate potential opioid-crisis
liabilities and other issues.
“We view the divestiture as
a positive, since it provides an
additional cushion to meet
near-term financial obliga-
tions,” wrote Elliot Wilbur, an
analyst at Raymond James &
Associates, in a note to clients.
Mallinckrodt recently sus-
pended plans to spin off its di-
vision that sells generic prod-
ucts, citing unfavorable
market conditions and uncer-
tainty created by opioid litiga-tion. The company has also
faced accusations of deceptive
marketing and pricing contro-
versies tied to its anti-inflam-
matory drug H.P. Acthar Gel,
which last year totaled about
one-third of Mallinckrodt’s
$3.2 billion revenue. Mallinck-
rodt has said it is addressing
Acthar issues and believes in
the drug’s benefits.
While Mallinckrodt may not
have gotten enough value for
selling BioVectra, which has
been generating about $55million annually the past two
years, that is less of a concern
given the company’s current
financial state, Ami Fadia, an
analyst at SVB Leerink, wrote
in a note to clients. “Any cash
is good cash,” she wrote.
Mallinckrodt, which has
U.S. headquarters in St. Louis
but is domiciled in Ireland,
makes branded and generic
medicines as well as raw ma-
terials for rivals’ products. It
has manufactured opioids for
years.Mallinckrodt PLC agreed to
sell its contract drug-manufac-
turing subsidiary to private-
equity firm H.I.G. Capital in a
deal valued at up to $250 mil-
lion, sending its stock price up
85%.
In selling the segment,
called BioVectra Inc., Mall-
inckrodt will receive $135 mil-
lion up front, a long-term note
for $40 million and up to $75
million in contingent pay-
ments. Mallinckrodt said the
deal is expected to close in the
fourth quarter, and that the
sale wouldn’t have a material
tax effect on financial results.
Tuesday’s announcement
follows a week in which the
drugmaker’s shares reached a
year-to-date drop of some
90%. The stock rose to $3.88
on Tuesday.
The company said Friday it
tentatively agreed to a settle-
ment package of $30 million
to resolve two opioid-crisis
lawsuits, allowing the drug-
maker to avoid a coming land-
mark trial. It still faces hun-
dreds of other lawsuits.
Mallinckrodt also recently
drew down the remainder of
its revolving credit facility and
hired AlixPartners, a consult-
ing firm that specializes in re-
structuring, to advise on strat-
egies for improving its
business operations.
Analysts said the deal pro-
vides Mallinckrodt with much-
needed resources as it tries to
BYJAREDS.HOPKINS
ANDDAVESEBASTIAN
Mallinckrodt Soars After Unit Sale
The company’s stock rose 85% after its deal to sell a drugmaking segment to a private-equity firm.GEORGE FREY/REUTERSBANKING & FINANCE
lower.
While Mr. Dimon stressed
he wasn’t expecting zero rates
at this point, the fact that he
would entertain such a conver-
sation is a sign of how sharply
the environment has changed.
A year ago, the Federal Re-
serve was still raising rates,
and many bankers including
Mr. Dimon expected the rate
increases to continue into this
year.
Instead, the Federal Re-
serve lowered its key bench-
mark rate in July by a quarter
point to a range of 2% to
2.25%, its first rate cut in
more than a decade, and it is
expected to cut another quar-ter point as soon as this
month.
If the Fed were to go all the
way to zero, or to negative
rates as some European cen-
tral banks have, it would likely
be against a backdrop of a U.S.
recession or a worsening
global economy.
Yields in some countries in-
cluding Germany, France and
the Netherlands have fallen
below zero already.
Low interest rates squeeze
margins banks make on loans.
Hitting zero or negative rates
raises complex questions
about how to charge custom-
ers for loans and still make
money. Banks would also haveto grapple with whether to
charge customers for their de-
posits without alienating
them, a dynamic U.S. consum-
ers and businesses haven’t yet
dealt with.
The change in tone about
U.S. interest rates has weighed
on bank stocks this year, as
the KBW Nasdaq Bank Index
has underperformed the S&P
500.
Wells Fargo &Co., Citi-
group Inc. and JPMorgan all
told investors at this week’s
Barclays financial services
conference in New York that
lending profitability in the
second half of the year would
likely be less than the bankshad previously expected.
The bankers blamed falling
interest rates along with a
growing list of global concerns
including Brexit and protests
in Hong Kong, which they say
are hampering business clients
from making decisions. The
trade war between China and
the U.S. remains the biggest
impediment, the bankers said.
“People are a little less will-
ing to make bets,” Bank of
America Corp.’s Chief Operat-
ing Officer Thomas Montag
said. Some clients are chang-
ing supply chains, while others
are holding off on drawing
down on their revolving lines
of credit, he said.The biggest bank in the U.S.
is starting to prepare for how
to make money if interest
rates in the U.S. drop to zero.
James Dimon, chief execu-
tive of JPMorgan Chase &
Co., said at an industry confer-
ence Tuesday the bank has be-
gun discussing what fees and
charges it could introduce if
interest rates go to zero orBYDAVIDBENOITJPMorgan Plans for Zero-Rate Prospect
Bank is discussing
what fees could be
introduced without
alienating customersIndex performance
since September 2018
Source: FactSet
5–25
–20
–15
–10
–50%Oct. Jan. Sept.
2018 2019S&P 500KBW Nasdaq
Bank Indexand brokerages reaped the
benefits, raising lending rates
while keeping interest on cli-
ents’ cash low.
Concerns over slowing eco-
nomic growth and trade policy
spurred the Fed to reverse
course, cutting rates this sum-
mer and signaling it would do
so again.
Another Schwab executive,
in a separate meeting with em-
ployees, said Schwab was
wrong in its interest-rate fore-
casts and hadn’t expected the
Fed to cut rates, according to a
person in the meeting.
The move by Schwab comes
less than two months after it
struck a deal to buy assets of
USAA’s investment-manage-
ment company, including bro-
kerage and managed-portfolio
accounts, for $1.8 billion. With
the acquisition, Schwab is set
to move deeper into the retail
financial-advice business,
which for some clients it offers
free of management fees. It
has been able to do that in
part because those clients are
required to keep a portion of
their investment portfolio in
cash, which was lucrative when
interest rates were higher.
Many of the jobs eliminated
are expected to be in the retail
division that includes Schwab
financial advisers and others
who work with clients to man-
age investments, the people
said, though the cuts aren’t
limited to that part of the busi-
ness.Charles Schwab Corp. is
cutting about 600 jobs as it
deals with the impact of lower
interest rates.
Chief Executive Walt Bet-
tinger discussed the coming
layoffs, which would amount to
roughly 3% of the San Fran-
cisco brokerage’s staff, in a re-
cent town hall with some em-
ployees, according to an
attendee. The cuts are part of
an effort to rein in expenses as
falling interest rates pinch
profit at Schwab’s banking
arm, said people familiar with
the situation.
“We initiated a process to
review our expense base to en-
sure we remain well-positioned
to serve clients while navigat-
ing an increasingly challenging
economic environment,” a
Schwab spokeswoman said.
The cuts are expected as
soon as next week.
Schwab’s rate-sensitive
bank is a huge part of its busi-
ness. It made up more than
half the company’s overall rev-
enue of $10.13 billion last year,
up from about a quarter in
2009.
The move by Schwab comes
as firms across Wall Street and
beyond grapple with a shift in
Federal Reserve policy that
surprised some people. After
holding interest rates near
zero for years after the 2008
financial crisis, the Fed began
lifting them in late 2015. BanksBYLISABEILFUSSCharles Schwab to Cut
Workforceby600Jobs