CAPITALI$M IS DEBT AND CONSUMPTION

Dimon: The excess savings amassed by low-income consumers are now gone

JPMorgan Chase (JPM) CEO Jamie Dimon sees a divergence between the two ends of his customer base, with lower-income consumers running out of a cash cushion they amassed during the pandemic.

“They don't have excess savings anymore,” said JPMorgan Chase CEO Jamie Dimon in a interview with Yahoo Finance on Wednesday night where he discussed topics ranging from geopolitics to the future direction of interest rates.

Executives from other banks view it the same way, noting that lower-income consumers are feeling more pain on several fronts. Wells Fargo’s CEO of consumer lending, Kleber Santos, called it a "tale of two cities" on Thursday.

Middle- and upper-class customers are "performing quite well" while there are "signs of stress" among those with lower incomes, Santos said while speaking at a BancAnalysts Association of Boston conference. "That’s where the deterioration is mostly."

Wells Fargo bank branch in Beverly Hills, Calif. (PATRICK T. FALLON/AFP via Getty Images) (PATRICK T. FALLON via Getty Images)

As a result, he said, Wells (WFC) is becoming "more conservative" on extending loans to that income segment, and not originating subprime loans "anywhere, any asset class, nothing."

The strength of the US consumer is a subject of debate across the financial world at a time when economic data has been coming in largely stronger than expected despite the Federal Reserve’s interest rate hiking campaign as the central bank seeks to cool inflation.

The Fed on Wednesday maintained its benchmark interest rate in a range of 5.25%-5.50%, the highest in 22 years, while leaving the door open for further action as officials work to bring inflation back to the central bank's 2% target.

The Fed also upgraded its assessment of the economy to "strong" in the third quarter from "solid" in September, a change that comes after third quarter GDP data published last week showed growth clocked in at a whopping 4.9% annualized rate over the summer months. That was driven in large part by strong consumer spending.

Federal Reserve Chair Jerome Powell speaks during a news conference Wednesday. (Susan Walsh/AP Photo) (ASSOCIATED PRESS)

"We may have underestimated the balance sheet strength of households and small businesses," Fed Chair Jerome Powell said at a press conference Wednesday while discussing the strength of the consumer.

"The question is how long can that continue."

As of the end of the second quarter, total US credit card debt crossed $1 trillion as delinquency rates edged closer to pre-pandemic levels, according to a household debt and credit report from the Federal Reserve Bank of New York. On Tuesday the New York Fed will release third quarter results.
What the market is 'most worried about'

Several other banks have offered warnings about slowing consumer spending while releasing their third quarter earnings in recent weeks, highlighting the pain they see among the lower end of their customer bases.

Citigroup (C) CEO Jane Fraser said affluent customers are accounting for almost all of the spending growth, and weakness is showing among those with lower credit scores. Citi expects its credit card losses to reach pre-COVID levels by the end of the year.

Jane Fraser, CEO of Citigroup. (Mike Blake/REUTERS) (Mike Blake / reuters)

Bank of America (BAC) CEO Brian Moynihan said its consumer bank balances are still above pre-pandemic levels but they are coming down. In late September, he said the bank's consumers were spending at pre-pandemic rates "consistent with 2016, 2017, 2018."

Fifth Third (FITB) executives also cited more economic pain among lower-end subprime borrowers. And that, according to Fifth Third CEO Tim Spence, is what the market is "most worried about right now."

Capital One (COF) CEO Richard Fairbank said spending and delinquencies among lower-end consumers, which the bank saw rising in past quarters, is beginning to stabilize, but now higher-income customers are starting to follow the same downward trend.

"Our upmarket segments are sort of just a little bit behind," he said.

'There are a lot of different ways to measure it'

To be sure, Dimon told Yahoo Finance that overall the consumer "is in very good shape," and that if the economy does go into recession "the consumer is going in better shape than they gone in most recessions."

At the same time, the boss of the largest US bank said the lower third of consumers who have accounts with the largest US bank have run out of their excess savings amassed during the pandemic.

The middle class is getting close to zero, he said, with no excess savings. "But they still have jobs and wages are going up."

The wealthy, he added, “still have excess."

JPMorgan Chase CEO Jamie Dimon. (Elizabeth Frantz/REUTERS) (Elizabeth Frantz / reuters)

Taken together, the savings in an average checking account at JPMorgan "is being spent down" and "we’ve seen that number coming down."

There is still disagreement even within JPMorgan about when the overall figure from all consumers will drop further.

Dimon said he saw three different forecasts, all produced by JPMorgan. One said this savings number would come down by the first quarter of next year, one said the third quarter, and one said the end of next year.

"There are a lot of different ways to measure it."

Real estate industry facing pushback to longstanding rules setting agent commissions on home sales

ALEX VEIGA
Wed, November 1, 2023 

Homes in Middlesex Township, Pa., are shown on Apr. 19, 2023. A case in federal court in Missouri ended Tuesday with a jury ordering the National Association of Realtors and some of the nation's biggest real estate brokerages to pay almost $1.8 billion in damages after finding that they artificially inflated commissions paid to real estate agents. 

(AP Photo/Gene J. Puskar, File) 

LOS ANGELES (AP) — A series of court challenges seek to upend longstanding real estate industry practices that determine the commissions agents receive on the sale of a home — and who foots the bill.

A federal jury in one of those cases on Tuesday ordered the National Association of Realtors along with some of the nation's biggest real estate brokerages to pay almost $1.8 billion in damages, after finding they artificially inflated commissions paid to real estate agents.

The class-action lawsuit was filed in 2019 on behalf of 500,000 home sellers in Missouri and some border towns. The verdict stated that the defendants “conspired to require home sellers to pay the broker representing the buyer of their homes in violation of federal antitrust law.”

If treble damages — which allows plaintiffs to potentially receive up to three times actual or compensatory damages — are awarded, then the defendants may have to pay more than $5 billion.

“This matter is not close to being final as we will appeal the jury’s verdict,” Mantill Williams, a spokesman for the NAR, said in a statement. “In the interim, we will ask the court to reduce the damages awarded by the jury.”

Williams said it will likely be several years before the case is resolved.

But already the NAR and several real estate brokerages are facing another lawsuit over agent commission rules. Fresh off winning the verdict in the 2019 case, the lawyers filed a new class-action lawsuit in the U.S. District Court for the Western District of Missouri that seeks class-action status covering anyone in the U.S. who sold a home in the last five years. It names the trade association and seven brokerage companies, including Redfin Corp., Weichert Realtors and Compass Inc.

“What’s at issue nationwide is costing Americans about $60 billion in extra real estate commissions,” said Michael Ketchmark, one of the attorneys representing the plaintiffs in the lawsuits.

The focus of the lawsuits is an NAR rule that requires that home sellers offer to pay the commission for the agent representing the homebuyer when they advertise their property on a local Multiple Listings Service, where a majority of U.S. homes are listed for sale. This is in addition to also having to cover the commission for their listing agent or broker.

The NAR's rules also prohibit a buyer's agent from making home purchase offers contingent on the reduction of their commission, according to the complaint.

“Defendants’ conspiracy forces home sellers to pay a cost that, in a competitive market and were it not for defendants’ anticompetitive restraint, would be paid by the buyer,” the plaintiffs argued in the lawsuit filed Tuesday.

Plaintiffs also claim that the NAR requirement effectively keeps commissions for a homebuyer's agent artificially high.

If NAR’s “Mandatory Offer of Compensation Rule” were not in place, then homebuyers would foot the bill for their agent's commission, which would open the door for competition — and lower commissions — among agents vying to represent a homebuyer, the plaintiffs contend.

The NAR argues that the practice of listing brokers making offers of compensation to buyer brokers is best for consumers.

“It gives the greatest number of buyers a chance to afford a home and professional representation, while also giving sellers access to the greatest number of buyers,” Williams said.

The NAR spokesman also noted that the trade association's policies have always required that an offer of agent compensation be made without specifying an amount, adding that it could be as little as $1 or even a penny.

In July, the independent Bright MLS, which covers some states in the eastern part of the country, changed the rules so that it's OK for a home listed in that region's MLS to not include an offer of agent compensation at all. That still falls within NAR's guidelines.

“In addition, regardless of the offer, those offers are always negotiable,” Williams said.

As home prices have soared in recent years, pushing the national median sales price to $394,300 as of September, so have agents’ commissions.

“Today, what effectively happens is the buyer agent's commissions are added to the sale price of the house, inflating the sale price,” said Stephen Brobeck, senior fellow at the Consumer Federation of America. “If sellers no longer had to pay the buyer agents, there wouldn’t be that inflation and buyers could negotiate the commission down and they would end up paying less money.”

Typically, the home seller pays their listing agent, who then splits the commission with the buyer’s agent according to the NAR rules. Traditionally, that works out to a 5% to 6% commission split roughly evenly between the buyer’s and seller’s agents.

Such commissions are justified, given the professionalism agents offer their clients and the hefty expenses they often incur in preparing to sell a home, including costs for staging, marketing, photography, lock boxes and even cleaning, said Matthew Shelton, a Kansas City area real estate agent.

“Never have I had a seller even bat an eye or question a commission,” he said. "If somebody takes control and limits what commissions can be charged that would be more concerning, you know, if they put a cap on anything. I don’t think that that’s accurate or correct.”

The 2019 lawsuit originally also included Anywhere Real Estate Inc. and Re/Max, but the two companies reached a settlement agreement, which included Anywhere paying $83.5 million, Re/Max paying $55 million, and the pair agreeing to pull back on their relationships with NAR.

Homebuyers and sellers aren’t likely to see any immediate change in the way agent commissions for homes listed on the MLS are typically handled, as the NAR has vowed to appeal Tuesday’s verdict.

However, the industry will be watching for what the court will do next now that the jury has spoken.

“What’s critical is how far the court orders the industry to restructure their compensation and offers," Brobeck said. “The real solution is for buyers to be able to finance the buyer-agent commissions as part of their mortgages .... But there are regulatory barriers to that occurring right now — regulatory barriers that are strongly supported by the industry."

In a blog post Tuesday, Redfin CEO Glenn Kelman noted that it may take days or weeks for the judge to decide what structural changes the jury's verdict will entail, and possibly years of court appeals.

“For now, the initial size of the damages alone will ensure major change,” he wrote.

Last month, Redfin announced it would mandate that its brokers and agents withdraw from NAR membership, citing partly the trade association's requirement of a fee for the buyer’s agent on all listings.

The agent commission lawsuits aren’t the first time that the residential real estate industry has drawn scrutiny about the impact its rules have on competition.

The Justice Department filed a complaint in 2020 against the NAR, alleging it established and enforced rules and policies that illegally restrained competition in residential real estate services. The government withdrew a proposed settlement agreement in 2021, saying the move would allow it to conduct a broader investigation of NAR’s rules and conduct.

___

Associated Press writer Michelle Chapman in New York and Heather Hollingsworth in Kansas City contributed to this report.

MONOPOLY CAPITALI$M

Cedar Fair, Six Flags agree to $8 billion theme park merger


Cedar Fair and Six Flags Thursday announced an $8 billion "merger of equals." The combined company will operate 42 parks and 9 resort properties across 17 U.S. states. File Photo by Bill Greenblatt/UPI | License Photo

Nov. 2 (UPI) -- Cedar Fair and Six Flags amusement park operators said Wednesday they are entering a merger of equals transaction to create a combined company valued at approximately $8 billion.

When this merger closes Cedar Fair shareholders will own approximately 51.2% of the new combined company while Six Flags shareholders will own 48.8%.

The companies did not disclose whether employees will lose jobs in the merger.

"Our merger with Six Flags will bring together two of North America's iconic amusement park companies to establish a highly diversified footprint and a more robust operating model to enhance park offerings and performance," said Cedar Fair CEO Richard Zimmerman in a statement.

Both companies' boards of directors approved the merger.

"The combination of Six Flags and Cedar Fair will redefine our guests' amusement park experience as we combine the best of both companies," Six Flags CEO Selim Bassoul said in a statement. "Six Flags and Cedar Fair share a strong cultural alignment, operating philosophy, and steadfast commitment to providing consumers with thrilling experiences."

Zimmerman will be the CEO and President of the combined company. Bassoul will be the executive chairman of the combined company's board of directors.

The combined company will operate 27 amusement parks, 15 water parks and 9 resort properties across 17 states in the United States, Canada and Mexico.

According to the two companies, benefits of the merger include "an expanded and diversified footprint, a more robust operating model and a strong revenue and cash flow generation profile."

The companies also expect significant cost savings and increased revenue.

"Cedar Fair and Six Flags expect the combined company will benefit from the significant value created by total anticipated annual synergies of $200 million," their joint statement said. " Approximately $120 million of these synergies are expected to be related to identified administrative and operational cost savings, which the companies anticipate realizing within two years following transaction close."

South Korea’s Main Airlines Agree On Plan to Push Merger Through

Heejin Kim
Wed, November 1, 2023 

In this article:

(Bloomberg) -- Asiana Airlines Inc. agreed to a plan on merging with Korean Air after holding long-running talks to overcome concerns about how their combination might impact competition on European routes.

The plan, signed off at a board meeting Thursday, includes selling Asiana’s cargo business to another South Korean carrier, removing the main obstacle to the merger. Others will also be allowed to use the airlines’ Seoul to Paris, Frankfurt, Rome and Barcelona routes.

European regulators feared that if Korean Air took over Asiana, a move first proposed in 2020, it would threaten competition on airfreight services to and from Europe, as well as passengers routes.

Read More: Korean Air Seeks to Fix EU Concerns Over $1.3 Billion Asiana Buy

Three Asiana board members voted in favor of the plan, one opposed it and another abstained, a spokeswoman at Asiana told Bloomberg News.

Korean Air said it will submit the new proposals to European authorities and await a decision. The airline aims to win approval by the end of January.

It is also awaiting the nod from the US and Japan. The airline said it will talk with US authorities and submit a proposal to Japan, with expectations of a decision in early 2024.

“While Korean Air continues its efforts to secure approval from the European Commission, the airline will also communicate closely with the remaining regulatory bodies to finalize the approval process as quickly as possible,” a Korean Air spokesperson wrote in a text message to Bloomberg News.

Others such as China and the UK have already given the green light to the plan.

Korean Air said it will seek a buyer that guarantees Asiana’s cargo workers keep their jobs.

“Korean Air proposed alternative ways to ease competition concerns but the EC rejected all of them — the cargo business sale was the only option to propose for winning approval,” the spokesperson said.

State-run Korea Development Bank has injected 3.6 trillion won ($2.7 billion) of taxpayers’ money into trying to salvage debt-ridden Asiana. When outlining the merger in 2020, KDB said it would give South Korea a single, competitive national airline amid restructuring and consolidation in the industry.

Having surged in anticipation of an agreement being reached, Asiana’s shares slid Thursday afternoon in Seoul, dropping 7.7% as of 2:45 p.m.

More on mergers in the aviation industry:

Spirit CEO Says Pandemic Losses Pushed It to JetBlue Merger


Italy Sees Closing of ITA Stake Sale to Lufthansa by End of 2024


Air India Plots Rapid Buildout of Budget Unit, Taking On Indigo


Air France-KLM Takes SAS Stake in $1.2 Billion Restructuring

 Bloomberg Businessweek

Asiana backs sale of cargo unit, removing one hurdle to Korean Air merger

Wed, November 1, 2023 


By Heekyong Yang and Hyunsu Yim

SEOUL (Reuters) - South Korea's Asiana Airlines said on Thursday its board had approved the sale of the company's cargo business - an important step towards allaying EU competition concerns about a proposed takeover by Korean Air Lines.

Korean Air, the country's biggest carrier, said in a statement following the decision that it had submitted a package of remedies to the European Commission - remedies that also include it divesting routes to some European Union cities.

Analysts said, however, that Asiana's greenlighting of the cargo unit sale did not necessarily ensure smooth sailing ahead for the deal.

They noted the desired valuation for the air cargo unit of some 700 billion won ($520 million) including debt, as reported by local media, was probably too high. That could become a new stumbling block for the sale and hence regulatory approval.

"The price seems to be way too expensive, and there aren't that many players at home with the means to spend that much money on Asiana's debt-ridden cargo unit ... there are lingering uncertainties," said Bae Se-ho, an analyst at Hi Investment & Securities.

And even if the deal gets the nod from the European Union, it still needs approval from the United States and Japan, analysts also noted.

Korean Air said in a statement that while it was continuing with "its efforts to secure the approval from the European Commission, the airline will also communicate closely with the remaining regulatory bodies to finalize the approval process as quickly as possible."

Approving the sale was a contentious issue at Asiana amid concerns that a takeover by Korean Air would lead to the loss of many Asiana jobs. Just this week, one board member resigned ahead of the vote, although the reasons for the departure were not disclosed.

In the end, three board directors voted in favour, while one opposed the plan and one abstained, a source familiar with the matter said, declining to be identified.

Korean Air also said it will buy 300 billion won of convertible bonds issued by Asiana, part of fresh financial support to the smaller airline.

Any takeover of Asiana by Korean Air would come amid a wave of consolidation in the industry, with Lufthansa acquiring a 41% stake in Italy's ITA Airways and British Airways and Iberia owner IAG buying the remaining 80% of Spanish carrier Air Europa it does not already own.

Asiana creditors, including state-run lender Korea Development Bank, have been looking for a new owner for the debt-laden carrier for several years. Korean Air agreed to acquire Asiana in 2020.

As of end-June, Asiana had debt of more than 13 trillion won.

The company accounts for about a fifth of South Korea's market for overseas air cargo. With 11 cargo planes, its service encompasses 21 routes to 25 cities in 12 countries, including the United States, Germany and Russia.

Shares in Asiana closed down 8.7%, a decline analysts attributed to a lack of potential positive news for the airline now that the sale has been approved.

($1 = 1,342.9900 won)

(Reporting by Joyce Lee, Heekyong Yang and Hyunsu Yim; Editing by Edwina Gibbs)

How Japan poses a threat to the global financial system


The Economist
Thu, November 2, 2023 

The bank of japan (boj) failed to deliver a Halloween thriller. Even as central banks elsewhere have raised interest rates in recent years, the boj has stuck with its ultra-loose policy, designed to stimulate growth. Japan’s benchmark interest rate sits at -0.1%, where it has been for seven years. And on October 31st, despite building pressure, the bank decided merely to tweak its cap on ten-year government-bond yields. The 1% ceiling on yields, which the bank makes enormous bond purchases in order to defend, is now a reference rather than a rule. Indeed, yields on the benchmark bond are at 0.95%, their highest for over a decade (see chart).

After the boj’s announcement, the yen fell to ¥151 to the dollar, its lowest in decades. Inflation, long quiescent, is no longer so low—the boj raised its forecasts for underlying “core” inflation over the next three years. Many analysts expect the central bank to end its yield-curve-control policy once and for all early next year, and to have raised interest rates by April. But even when the boj does finally raise interest rates, it is likely to be by just a fraction of a percentage point, meaning the gulf between Japanese bond yields and those in the rest of the world will remain large, with major consequences for global financial markets. A fright is still in the offing.

To understand why, consider the impact Japan’s rock-bottom interest rates and continued intervention to suppress bond yields have had. Low rates at home have generated demand for foreign assets, as investors seek better returns. Last year the income from Japan’s overseas investments ran to $269bn more than was made by overseas investors in Japan, the world’s largest surplus, equivalent to 6% of Japanese gdp. The huge gap between bond yields in Japan and those in the rest of the world now presents dangers to both the Japanese investors that have bought foreign bonds and the global issuers that have benefited from Japanese custom.

Jeopardy is particularly apparent at Japan’s largest financial firms, which make big investments abroad. The cost of hedging overseas investments depends on the difference between the short-term interest rates of the two currencies at play. America’s short-term interest rates are more than five percentage points above Japan’s equivalent, and the gap exceeds the 4.8% yield on ten-year American government bonds. This means Japanese buyers now make a guaranteed loss when buying long-term bonds in dollars and hedging their exposure. Hence why the country’s life insurers, which are among the institutions keenest to hedge their currency risk, dumped ¥11.4trn ($87bn) in foreign bonds last year.

The huge gap between short-term interest rates means that Japanese investors now have more limited options. One is to continue buying overseas, but at greater risk. Meiji Yasuda Life Insurance and Sumitomo Life, each of which held more than ¥40trn in assets last year, say they will increase their overseas bond purchases without hedging against sudden currency shifts, in effect betting against a sudden rise in the yen. Life-insurance firms are usually conservative, but the longer the enormous gap in interest rates persists, the more they will be encouraged to take risks.

Meanwhile, rising yields on long-term Japanese bonds, which will surely rise further still if the boj does abandon yield-curve control, may tempt local investors to bring home their money. Japan’s 40-year bonds offer yields of 2.1%—enough to preserve the capital of investors even if the boj hits its target of 2% inflation. Martin Whetton of Westpac, a bank, says that this prospect ought to worry firms and governments in America and Europe used to a voracious Japanese appetite for their bonds.

In such a scenario, a source of demand would turn into a source of pressure on the funding of Western firms and governments. The yen might then surge, as Japanese investors sell foreign-currency debt and make new investments at home. Bob Michele of JPMorgan Asset Management warns of a decade of capital repatriation.

The flow of Japanese capital to the rest of the world, which emerged during a decade of easy monetary policy around the world, looks likely to be diminished. Whether the resulting pain will be felt by local financial institutions, or foreign bond issuers, or both, will become clearer over the months to come. What is already clear is that it will be felt by someone.

For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter.

© 2023 The Economist Newspaper Limited. All rights reserved.

Japan Faces Speculators on Two Sides Challenging the Yen, Bonds

Ken McCallum
Wed, November 1, 2023 
 

 

(Bloomberg) -- The contradictions in Japan’s efforts to protect the yen while slowing the pace of rising bond yields are becoming increasingly clear in currency and debt markets.

While Thursday presents a slightly different picture after the Federal Reserve kept rates on hold, the action in Tokyo on Wednesday underscores Japan’s huge challenge.

The day began with the nation’s top currency official at the finance ministry giving one of the starkest warnings yet that authorities were ready to intervene in the foreign exchange market to stem the yen’s fall. By lunchtime the Bank of Japan was preparing to wade into the debt market to slow the speed of the 10-year bond yield’s ascent toward 1%.

The BOJ’s unscheduled bond purchases were jarring — coming just 24 hours after the central bank removed its 1% cap on these yields. The operation also worked directly against efforts to support the yen, which is being weighed down by the wide gulf between interest rates in Japan and the US.

The upshot for the currency was a 0.5% advance Wednesday and a further 0.2% gain so far Thursday. That’s taken it away from the 151 level versus the dollar, but it remains well within sight if its 33-year low set last year. The 10-year bond yield still ended up for the day and was just 1.5 basis points below the fresh decade high it set before the central bank announced its buying operations. Bond futures point to lower yields Thursday while the longer-term picture for gains is unchanged, and a 10-year debt auction due later in the day has traders on edge.

“The MOF and BOJ’s actions are out of sync,” said Tsuyoshi Ueno, senior economist at NLI Research Institute, who sees the answer to the problem lying out of their hands and in any future interest rate cuts in the US. “Until then, authorities will have to be patient.”

Speculators in both markets are betting that Japan’s policymakers won’t be able to maintain their balancing act, and the stakes are rising. An excessive yen depreciation could worsen Japan’s inflation, in part by pushing up import prices, while higher yields could prematurely crimp Japan’s recovery.

“We’re on standby,” said Masato Kanda, the top currency official at the ministry, echoing language he used a year ago on the day Japan made the first of three forays into the market. “But I can’t say what we’ll do, and when — we’ll make judgments overall, and we’re making judgments in a state of urgency.”

Read more: Japan Ramps Up Yen Intervention Warning After BOJ-Fueled Selloff

His comments on Wednesday followed the yen’s biggest one-day drop since April on Tuesday after the BOJ’s underwhelming tweak to its cap on bond yields showed that moves away from ultra-loose policy would likely continue to be slow and gradual.

Japan’s stock market, on the other hand, the Topix index climbed the most in more than a year because of the tailwind to equities from low borrowing costs and the weak yen.

While Japan’s 10-year benchmark yield had doubled since July 27, one day before Governor Kazuo Ueda made his first tweak to yield-curve control, it is still about four percentage points below its US equivalent.

The BOJ appears intent on moderating moves while traders are constantly trying to push yields higher.

“Although the BOJ took action to discourage rises in yields, market players probably want to see the long-term yield reaching 1%,” said Keisuke Tsuruta, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co.

He added that the unscheduled buying operation this time may have been a pre-preemptive move before the closely-watched 10-year bond auction Thursday.

BOJ Buys More Bonds to Slow Rising Yields a Day After Tweak

“At the bottom of the BOJ’s thinking is its lack of assurance that they could achieve sustainable inflation of 2%, so a somewhat easy monetary policy needs to be maintained,” said Shusuke Yamada, head of Japan currency and rates strategy at BofA Securities Inc. “For the finance ministry, it’s looking at volatility and trading levels for foreign exchange. Letting the yen weaken has disadvantages for consumers.”

--With assistance from Yumi Teso and Daisuke Sakai.

CRIMINAL CAPITALI$M
Indian authorities seize $65 million of property in Jet Airways fraud case


Reuters
Wed, November 1, 2023 a

Naresh Goyal, Chairman of Jet Airways speaks during a news conference in Mumbai

GALURU (Reuters) - India's financial crime agency has seized properties worth 5.38 billion rupees (nearly $65 million) as part of its probe into money laundering allegations against the now-defunct Jet Airways and founder Naresh Goyal, the agency said on Wednesday.

The Enforcement Directorate (ED) said it has seized 17 residential and commercial properties in London, Dubai and India that were registered in the names of various companies and people, including Goyal, his wife and son.

Goyal has been in judicial custody since September when the ED arrested him in relation to the money laundering that was filed by state lender Canara Bank in May.

Jet Airways had siphoned off loans from a consortium of banks led by State Bank of India and Punjab National Bank, the ED said.

The agency doubled down on its claim that under Goyal's leadership, the airline had siphoned off funds under the garb of professional and consultancy fees to overseas entities and towards the expenses of Goyal and his family members.

"Naresh Goyal implemented a massive financial fraud," it said on Wednesday.

Goyal's lawyer told Reuters, "We are going through the charge sheet and are currently evaluating our options."

Goyal founded Jet Airways in 1992 and led it to become India's second-largest carrier in India by market share. It shut down operations in April 2019 after running out of cash. ($1 = 83.2615 Indian rupees)

(Reporting by Indranil Sarkar in Bengaluru; Editing by Savio D'Souza)

Nikola electric truck recall price tag $61.8M

Alan Adler
Thu, November 2, 2023 

Nikola reserved $61.8 million to cover the cost of recalling 209 battery-electric trucks. 

(Photo courtesy of ABC15/Phoenix)

Nikola Corp. has set aside $61.8 million to replace the batteries in its recalled electric trucks. The company expects to begin returning repaired trucks to customers in the first quarter.

The accrued liability in third-quarter earnings includes the estimated cost to reengineer, validate and retrofit the 209 recalled battery-electric trucks with an alternative battery pack. Nikola did not identify the supplier.

“Upon further investigation, it was determined that the compromise of the battery packs was not limited to only the coolant manifold,” Nikola said in a news release. “As a result, our team has decided to replace the Romeo packs on existing customer battery-electric trucks with an alternative solution.”

Unlike most safety recalls where the supplier of the defective component contributes to the recall cost, Nikola owned Romeo Power. Therefore, it bears the recall costs alone.
Recall cash spend should be less than accrual

Nikola expects to spend less than the accrual. Selling off the remaining battery-electric trucks in inventory should bring in $13 million. Nikola expects another $10.7 million coming from accounts receivable. That means spending $38.1 million over the next nine to 12 months. The company has said it will assemble battery-electric trucks as orders are received.

Nikola in June liquidated Romeo. Its assets were sold to Mullen Automotive. Nikola reported a $101 million loss from discontinued operations during the quarter.

Despite the recall, Nikola said it received an order for 47 battery-electric trucks from one dealer in Q3.

Nikola shipped three trucks, bought back seven and built no new units during the quarter. It reported negative revenue of $1.7 million. The startup lost $425.8 million, or 50 cents a share. That compared to a loss of $236.2 million, or 54 cents, a year ago. However, following the recent doubling of authorized shares, Nikola had 857.2 million outstanding shares compared to 438.4 million a year ago.

The company improved its cash and equivalents to $362.8 million, mostly through the sales of new equity. The money is sufficient to cover the recall expense and run the business into 2024, CFO Stacy Pasterick said on a call with analysts.

Nikola focusing on selling fuel cell trucks in California

Nikola began producing fuel cell electric vehicles (FCEVs) on Sept. 28. It has 277 nonbinding orders from 35 customers.

“We think the competition is well behind us and believe there is white space for us to capture market share with the introduction of the Advanced Clean Fleets Rule,” CEO Steve Girsky said.

The company is mining business based on California voucher programs that cut up to $288,000 from the price of a fuel cell truck for a large fleet and up to $408,000 for a small fleet of 20 or fewer trucks.

“We are driving forward, capitalizing on our first-mover advantage with our hydrogen fuel cell electric truck and laying the foundation for the ‘hydrogen highway’ starting in California,” Girsky said.

Nikola has mobile fueling and availability of hydrogen fuel to last into the first quarter of 2024. It has slowed plans for mobile fuelers to conserve costs and because early customers are using less fuel than expected. Startup infrastructure developer Voltera is Nikola’s partner in planning eight hydrogen fueling stations at sites it is developing in California.

Nikola sees tailwinds from the adoption of zero-emissions vehicles, specifically in California, where all new drayage trucks registered with the California Air Resources Board beginning Jan. 1, 2024, must emit zero tailpipe emissions.
So far, so good

Nikola said its Tre FCEV Class 8 truck accounts for 96% of the California’s Hybrid and Zero-Emission Truck and Bus Voucher Incentives Project (HVIP) for fuel cell trucks through last Friday. Its battery-electric trucks are listed in 50% of Class 8 vouchers issued.

More than 30,000 trucks operating in California ports will eventually need to be replaced.

“We believe this represents a significant opportunity for Nikola in the near term and are well on our way to capturing market share,” the company said.

Panama lawmakers scrap plan to annul copper mine concession

Valentine Hilaire and Elida Moreno
Thu, November 2, 2023 

View of the Cobre Panama mine, of Canadian First Quantum Minerals, in Donoso, Panama, December 6, 2022.

 REUTERS/Aris Martíne

By Valentine Hilaire and Elida Moreno

(Reuters) - Lawmakers in Panama scratched provisions from a proposed bill that would cancel a recently approved mining concession extending the life of a controversial but lucrative copper mine by at least two decades, legislators told Reuters on Thursday.

The fate of the Cobre Panama mine, which accounts for 1% of global copper output and is operated by a local unit of Canadian miner First Quantum, has been roiled by street protesters opposed to the project over the past couple weeks.

Two independent lawmakers, Edison Broce and Juan Diego Vasquez, told Reuters that the proposed legislation will not include annulment of the concession.

The bill now focuses on enshrining into law an indefinite nationwide ban on all new mining concessions, which goes further than a similarly focused decree ordered last Friday by President Laurentino Cortizo.

Protesters have expressed concerns over the contract signed by the government and the company late last month, arguing it is tainted by corruption and too favorable to the Canadian miner, as well as harmful to the environment.

The fight over the future of the mine has caused shares of First Quantum to shed nearly half their value in recent days.

Under the terms of the renewed contract, the miner would pay a minimum of $375 million annually to the government in return for two decades of continued operations with the option to extend them another 20 years.

Last Sunday, Cortizo called for a referendum to give the public a say on the contract's future, but lawmakers are still debating legislation that would authorize the vote.

The Supreme Court is considering several challenges to the contract, and may ultimately decide its legal validity.

But if lawmakers reverse course and seek to end the contract via legislation, that could open the door to international arbitration, according to legal experts.

(Reporting by Valentine Hilaire; Additional reporting by Elida Moreno and Divya Rajagopal; Editing by Brendan O'Boyle)

CANADA
Hedge Fund Executive’s Sudden Death Exposes a Firm Deep in Trouble

Derek Decloet, Layan Odeh, Esteban Duarte and Christine Dobby
Thu, November 2, 2023




(Bloomberg) -- The bonhomie was flowing inside the Great Banking Hall in Toronto as the city’s hedge fund barons arrived to toast their success and themselves.

Among the guests of honor on that Tuesday night last month: Chris Callahan, whose firm was to be celebrated for top-notch performance.

He didn’t show. A little more than a week later, he was dead.

Friends and associates are stunned. And, to the industry’s shock, authorities are in the process of untangling what happened to the young trader and his once-high-flying investment firm.

Officials haven’t disclosed a cause of death — police say it wasn’t suspicious in nature — but Callahan’s sudden passing has led to a widening investigation into what appears to be tens of millions of dollars in losses at his Traynor Ridge Capital Inc.

What’s only now becoming clear is that Callahan’s firm found itself in deep trouble in October.

Even as Traynor Ridge was scheduled to be feted at the annual Canadian Hedge Fund Awards, it was already sinking under the weight of bad bets on cannabis and energy companies, according to people with knowledge of the events.

An assortment of trades left three brokerage firms holding the bag for nearly C$100 million ($72 million) in potential losses, according to the Ontario Securities Commission. Regulators are probing the matter and one market-maker, Virtu Financial Inc., has filed suit to recover its losses, while Callahan’s friends and former colleagues mourn.

Echelon Wealth Partners Inc., a Canadian money manager and capital markets firm with more than C$8 billion in assets under management and administration, was one of those caught, having made trades for Traynor that it couldn’t settle.

Echelon — which hired Callahan soon after he graduated from university in 2014 — quickly sold those positions and is no longer exposed, Chief Strategy Officer Dominic Chow said, declining to discuss the details of the trades or say how large they were. Callahan’s age couldn’t immediately be confirmed.

Affluent investors who helped Traynor Ridge grow from a startup to more than C$120 million in assets under management have their money stuck in limbo, for now. Securities regulators in Ontario have prohibited trading by the fund, which they say appears to be in “serious financial difficulty.” Even if it were allowed to trade, Callahan’s death has left no one in charge — he was Traynor’s “ultimate designated person,” its only director and shareholder as well as its chief compliance officer, according to regulators.

Topping the list of those who are stuck are customers of Westcourt Capital Corp., a Toronto advisory firm that connects the wealthy with hedge funds, real estate opportunities and other private investments not available to the masses.

Westcourt’s clients, who typically have more than C$10 million in assets, represented the majority of the money managed by Callahan’s fund, David Kaufman, who founded Westcourt and is its chair and co-chief executive officer, told Bloomberg News in an email.

Key to Traynor’s fundraising success was William Chyz, a finance executive Callahan hired in 2021 and who was in a position to know Westcourt’s client base — because he’d spent almost nine years there, according to his LinkedIn profile. Chyz did not respond to multiple requests for comment.

But Callahan’s early performance undoubtedly helped, too.

Exploiting Inefficiencies

Callahan marketed himself as a trader who was able to exploit “inefficiencies” in public markets. His biography on Traynor’s website reads: “Chris has been involved in hundreds of merger and convertible arbitrage investments along with having significant experience in event-driven special situations.”

Traynor’s flagship TR1 Fund was sold as a market-neutral fund that aimed to make money regardless of the overall direction of equity and bond prices.

“We employ arbitrage strategies for the most part. These are strategies that generate returns off specific defined events occurring as opposed to what the broader markets are doing,” Callahan said during an event put on by a Canadian hedge fund group in May. “What I saw was a strong opportunity to focus a smaller capital base on a variety of deals that actually had a really strong risk-adjusted return. And really what that means is that in our view, the deals are mispriced.”

It seemed to work, at first. Just as the fund opened its doors, Covid-19 was beginning to spread around the globe, causing a wave of panic in markets and a stock market crash in February and March of 2020.

Callahan eked out small gains in both of those months and much larger ones as equity prices recovered and the global economy began the long, halting process of reopening from the initial shutdown. Traynor ended its first year up almost 40%, and followed that with a 24% return in 2021, according to a document prepared by Bank of Montreal’s prime brokerage services desk.

Callahan continued to outperform last year, dodging a historic correction on equities and bonds to post a return of just under 1%, the document says. But the fund suffered its worst losing streak — three straight down months from May through July — and was down 3.2% for the year as of September, according to the document.

Then came October.

Traynor Ridge was active in small-cap securities, trading convertible bonds in relatively illiquid companies, along with preferred shares and cannabis stocks, according to people with knowledge of the fund’s strategy. It also invested in blank-check companies, the people said.

Failed Trades

It’s not clear how things went south so quickly. But at some point in the middle of October, Callahan was making trades that it appears the fund didn’t have the money to back up.

Over a period of weeks, Traynor Ridge made dozens of “failed trades,” according to a lawsuit filed Monday by Virtu, a market-making firm that has been doing business with the fund since its inception.

Before last month, all of the trades Traynor Ridge made through Virtu were allocated to its accounts at CIBC World Markets Inc., one of the hedge fund’s prime brokers. The fund also did business with the prime brokerage divisions of Bank of Montreal and Toronto-Dominion Bank, according to documents seen by Bloomberg. Spokespeople for all three banks declined to comment.

Prime brokers help hedge funds with services such as loans, borrowing securities and cash management. When a fund makes a trade, it’s required to instruct its prime brokers to release money or securities to settle it. In Canada, that happens two business days after the trade, Virtu said.

Virtu contacted CIBC to ask about Callahan’s trades. Officials with the bank said they didn’t have any instructions about them. On Oct. 23, at 6:34 p.m. Toronto time, Virtu emailed Callahan and Gianluca Curcuruto, an analyst at Traynor, telling them it would begin selling the securities the next day and that the fund would be on the hook for any losses, according to court documents.

Position Dump

Brokers began to dump the fund’s positions, which included at least three cannabis companies — Curaleaf Holdings Inc., Cresco Labs Inc. and Cannabist Company Holdings Inc. — and a tiny energy exploration company named Trillion Energy International Inc., said the people, who spoke on condition they not be named because of the sensitivity of the matter.

The shares of all four companies had already tumbled hard amid a broader swoon in the stock market. Now they crashed: Cannabist shares plunged 48% in Toronto over four trading sessions beginning Oct. 24, while Curaleaf and Cresco each dropped more than 20%.

Virtu said in the court filing that it’s lost more than C$5 million in resolving Traynor’s failed trades so far and it expects that number to rise.

“Traynor Ridge was a client of Virtu. We are working with our client and regulators to help resolve the misconduct that took place at Traynor,” Andrew Smith, a spokesperson at Virtu, said via email. “Our exposure was not material. We are keeping the principals at Traynor Ridge in our thoughts and prayers at this difficult time for them.”

KPMG, the auditor on the fund, declined to comment.

Governance Concerns

While the regulators’ investigation may bring more definitive conclusions, the structure of Traynor Ridge — in which Callahan held all of the most critical roles — has caught the eye of corporate governance and finance experts.

When the chief investment officer is also the chief compliance officer, “then you have a profound web of conflicts of interest,” said Jon Aikman, a lawyer who is an adjunct faculty member at Queen’s University — the school where Callahan graduated with an economics degree before launching his career in finance.

For his part, Callahan appeared to believe that his firm was sound, having passed the test of regulators. Canadian regulators put hedge funds through a rigorous process before registering them, he said during that industry event in May.

“It’s a high standard,” he said, “and you have to make sure that your structure and your firm is up to that high standard.”

--With assistance from David Gillen.

Most Read from Bloomberg Businessweek

Amid war, some Palestinians rage against another target: Their own rulers

Nabih Bulos
Wed, November 1, 2023 

Residents of Jenin, in the occupied West Bank, comb through rubble in the aftermath of an Oct. 22 Israeli airstrike on a local mosque. (Marcus Yam / Los Angeles Times)


Even amid the terrible destruction that has transformed parts of Jenin into pits of jumbled masonry, the bullet-pocked tower of the Palestinian government headquarters stands out — not for the relatively light damage it sustained but for who caused it.

Whereas homes in this West Bank city have been demolished by Israeli troops, roads have been churned up by Israeli bulldozers and storefronts have been disfigured by Israeli gunfire, the offices of the Sultah, or Palestinian Authority, were attacked by Palestinians themselves during a noisy protest over Israel's bombardment of Gaza.

Disgusted with the authority's inability to protect its own people or stand up to Israel, militants in the crowd aimed their bullets at the government compound after its security forces tried to break up the demonstration.


"The Sultah started firing live rounds at us to stop it, so the guys fired back," said Abu Hamzeh, a bulky 37-year-old fighter with the Jenin Brigade, a cross-factional Palestinian resistance group that includes members of Hamas, Islamic Jihad and Fatah.

Palestinian fighters escort the funeral procession for Mohammad Abu Aabed, who was killed in an Israeli airstrike on Al Ansar Mosque in Jenin, in the occupied West Bank, on Oct. 22. (Marcus Yam / Los Angeles Times)

His comrade in arms beside him, hand on the butt of a weathered-looking M4 rifle, warned of Palestinians' growing anger with their nominal rulers alongside their antipathy toward Israel.

"When things get beyond the limit, it's a problem," said Abu Mohammad, 33. "When you pressure us, there will be an explosion. We're facing both Israel and the Sultah."

Read more: Airstrikes flatten blocks of Gaza refugee camp, bringing rage, grief and a perilous new phase of war

Since Oct. 7, when Hamas launched its multipronged cross-border attack on southern Israel, killing some 1,400 people and capturing more than 200 others, the Israeli government has stepped up what it calls counterterrorism operations across the occupied West Bank alongside its relentless offensive in Gaza. The United Nations says that more than 120 Palestinians, including 33 children, have been killed by Israeli security forces or settlers in the West Bank.

In the last week, restive Jenin, long a militant hotbed, has become the site of near-daily raids involving scores of Israeli soldiers, dozens of armored vehicles and even airstrikes that have killed at least a dozen people, according to Palestinian health officials. Israel says the incursions target terrorists who have attacked Israelis in the past or are planning to do so.

Mourners attend the funeral procession of two men killed in an Israeli airstrike on Al Ansar Mosque in Jenin, in the occupied West Bank. (Marcus Yam / Los Angeles Times)

Although much of their fury is directed at Israel, many in Jenin accuse the Palestinian Authority of abandoning them, saying its leaders are more concerned with their own survival and its security forces with pursuing Palestinian armed groups at Israel's behest than they are with protecting Palestinian lives.

"When Palestinian Authority security personnel withdraw from the streets, people here start stocking up because they believe an Israeli incursion will soon follow," said Mustafa Sheta, who heads the Freedom Theater in Jenin's refugee camp, echoing a common view that the local security forces are too cozy with their Israeli counterparts.

The Palestinian Authority, which was founded as a proto-state administration as a result of the 1993 Oslo peace accords, manifests itself mainly as a sprawling bureaucracy across the West Bank, where it has limited powers. In Gaza it has none, after the violent ouster there of its ruling party, Fatah, in 2007 by Hamas, its top rival.

Read more: A stone, a bullet, a burial. A Palestinian boy's death in the West Bank signals wider unrest

As yet, there does not seem to be any movement to drive out Fatah and the Palestinian Authority from the West Bank as well, which would create a dangerous power vacuum.

But disenchantment with the authority — its weakness, inefficiency and corruption scandals — has been brewing for years. And the idea that Fatah and the authority could reestablish control in Gaza if Israel succeeds in its goal of extirpating Hamas seems ludicrous to many Palestinians, who consider Mahmoud Abbas, the authority's octogenarian president, as moribund as the administration he heads. Although Palestinian Authority presidents serve a four-year term, Abbas was voted into office in 2005 and has not held an election since.

As Israel pursues its punishing ground offensive in Gaza and the casualties mount, the Palestinian Authority's impotence only comes into sharper relief. On Tuesday, in response to reports that Israel had bombed the Jabaliya refugee camp in Gaza, Palestinian groups called for protests and a West Bank-wide strike Wednesday.

Palestinian fighters' weapons sit inside a home in Jenin, in the occupied West Bank. A Palestinian fighter displays items he dug out of the rubble in the aftermath of an Israeli airstrike on a mosque in Jenin. A view of the Jenin refugee camp. Marcus Yam / Los Angeles Times

Israel remains in de facto control of the West Bank and coordinates with the Palestinian Authority's security apparatus to stop Palestinian militant attacks, either through the authority's security personnel or through its own operations — a deeply unpopular policy that critics say reduces the authority to little more than Israel's guard dog.

There was a time when the Palestinian Authority represented hope for Jenin. In 2008, six years after Israel demolished vast swaths of the city during the second intifada, or Palestinian uprising, Jenin was seen as a model of Palestinian-Israeli cooperation, in matters of both security and economic investment that would bring peace through prosperity. Even former Israeli Prime Minister Ehud Barak, then the defense minister, called it a "great success" that, "done right, we think could become an example."

Residents examine the aftermath of an Israeli airstrike on the Al Ansar Mosque. (Marcus Yam / Los Angeles Times)

Few believe that now, especially not in the Jenin refugee camp, a decrepit neighborhood running up a steep hill, whose 14,000 residents are refugees and their descendants from the 1948 "Nakba" — "catastrophe" in Arabic — referring to the mass displacement of Arabs that accompanied Israel's independence.

The camp, one of the poorest neighborhoods in the West Bank, is steeped in the culture of resistance against Israel's occupation. At night, residents place metal hedgehogs at the camp's entrances to stymie armored vehicles, while keeping a close eye on anyone coming in, for fear of Israeli undercover agents. Almost no building is free of a martyr poster, and the cemeteries overflow with those killed in clashes with Israeli troops. Since July, a fourth graveyard has had to be opened.

Sitting in a living room with martyr posters of Abu Mohammad's relatives who were killed while fighting together with the Palestinian security forces they both now revile, Abu Mohammad and Abu Hamzeh — the two men's noms de guerre — complained at length about how the Palestinian Authority's economic policies had plunged people into debt and poverty, forcing them to rely on handouts rather than fight the occupation. The authority's security coordination with Israel they viewed nowadays as nothing less than treason.

Family and members of the community attend the funeral for Mohammad Abu Aabed, who was killed by an Israeli airstrike on the Al Ansar Mosque. (Marcus Yam / Los Angeles Times)

Read more: 'He isn't Winston Churchill.' Despite anger and blame, war buys time for Netanhayu, Israel's unpopular leader

In many ways, the two fighters' lives tracked the trajectory of the souring relationship between the Palestinian Authority and the people it ostensibly governs.

Both had once been members of the security apparatus for years before Israel's suspicions of militant links led to their being imprisoned — Abu Mohammad by Israel, Abu Hamzeh by the Palestinian Authority — and then fired from their jobs. Faced with few prospects and a new ultranationalist Israeli government they see as intent on empowering settlers and frustrating hopes of Palestinian nationhood, they joined the Jenin Brigade, making them wanted men in the eyes of Israel and the Palestinian Authority.

The group was formed in 2021 with funding from Iranian-backed Islamic Jihad and brings together different armed factions in joint pursuit of the refugee camp's defense.

Samira Salahat pours water onto her son Izz Al-Deen's gravesite to pay her respects at the Jenin cemetery. A cemetery at the Jenin refugee camp. Abla Al Aabed, center, mourns her son, who was killed in an Israeli airstrike on Jenin. Marcus Yam / Los Angeles Times

The rift with the authority had been growing for some time, the two men said, but the chasm had never been as wide as now, with Israel's military giving settlers free rein and mounting a security dragnet that has killed scores of Palestinians in the West Bank since Hamas' Oct. 7 incursion.

"I'll throw away my gun, but come protect me," Abu Mohammad said, in a challenge to the Palestinian Authority. "Stop them from entering my home, beating my mother, wife and children, and I'll throw away the gun."

Failing that, he added, the authority should move out of fighters' way rather than help Israel neutralize them.

"If anyone — Muslim, Arab, Christian, Jew — comes near the weapon I use to fight the Israelis, I'll kill him," he said.

Abu Hamzeh issued his own warning to the Palestinian Authority and its forces.

Residents examine the aftermath of an Israeli airstrike on Al Ansar Mosque, where two Palestinians were killed, in Jenin, in the occupied West Bank. (Marcus Yam / Los Angeles Times)

"We hope our brothers in the security apparatus know the right path against the occupation, because when it comes to the West Bank, Israel will do like it did in Gaza and won't show mercy to anyone, to neither us, Sultah security personnel, women or children," he said.

Although the Jenin refugee camp has long been in Israel's crosshairs, the military's recent raids display a different level of ferocity, residents say.

On Monday, Israel deployed drones, snipers and dozens of armored vehicles, including two bulldozers that tore up streets and infrastructure near the camp, leveled the iconic arched gate over its entrance and destroyed a sculpture commemorating the 2002 Israeli incursion. Four men were killed and nine other people were wounded, Palestinian health authorities said.

Late on Tuesday, Israeli special forces teams surged into Jenin, broke into the house of a top Fatah leader in the city and beat him and his son before taking them into custody, residents said. That was followed by yet another incursion involving bulldozers, drones, snipers, dozens of troops and airstrikes. They withdrew several hours later, leaving three Palestinians dead and a trail of bullet-scarred walls, ripped-up asphalt and destroyed cars.

Family and members of the community attend the funeral of Mohammad Abu Aabed, who was killed in an Israeli airstrike in Jenin, in the occupied West Bank, on Oct. 22. (Marcus Yam / Los Angeles Times)

On Oct. 22, a pair of missiles lanced through the roof of Al Ansar Mosque, blowing up the main hall, shredding two Jenin Brigade fighters and nearly killing a third, witnesses said.

Afterward, said a militant who identified himself only as Ahmad, the Israeli intelligence officer responsible for the area, who goes by the nom de guerre Captain Iyad, called fighters' relatives.

"He phoned up the families of all the guys. Called my wife, told her: 'Ahmad escaped this time. If he doesn't give himself up at 7 a.m., consider him a dead man,'" Ahmad said, a sardonic look on his face because it was already past 8 a.m. when he recounted the story to a Times reporter.

He and other members of the Jenin Brigade expect no mercy from the Israelis, nor any help from the official Palestinian leadership.

"Every one of us knew the moment we carried the rifle we were dead men," he said, adding: "We're not going anywhere."

This story originally appeared in Los Angeles Times.

Column: We don't know how Israel's military is using AI in Gaza, but we should

Brian Merchant
Thu, November 2, 2023 

Smoke and flames rise after Israeli air forces target a shopping center in the Gaza Strip on Oct. 7. (Anadolu Agency / Getty Images)

The fog of war has thickened in Gaza, a ground invasion is gathering steam, and aerial bombardments continue at a furious pace. On Tuesday, missiles struck a refugee camp in Jabaliya, where the Israel Defense Forces said a senior Hamas leader was stationed, killing dozens of civilians.

Debate over the crisis rages online and off, yet for all the discourse, there’s one lingering question I haven’t seen widely considered: To what extent is Israel relying on artificial intelligence and automated weapons systems to select and strike targets?

In the first week of its assault alone, the Israeli air force said it had dropped 6,000 bombs across Gaza, a territory that is 140 square miles — one-tenth the size of the smallest U.S. state of Rhode Island — and is among the most densely populated places in the world. There have been many thousand more explosions since then.

Israel commands the most powerful and highest-tech military in the Middle East. Months before the horrific Hamas attacks on Oct. 7, the IDF announced that it was embedding AI into lethal operations. As Bloomberg reported on July 15, earlier this year, the IDF had begun “using artificial intelligence to select targets for air strikes and organize wartime logistics.”

Israeli officials said at the time that the IDF employed an AI recommendation system to choose targets for aerial bombardment, and another model that would then be used to quickly organize ensuing raids. The IDF calls this second system Fire Factory, and, according to Bloomberg, it “uses data about military-approved targets to calculate munition loads, prioritize and assign thousands of targets to aircraft and drones, and propose a schedule.”

In response to a request for comment, an IDF spokesperson declined to discuss the country's military use of AI.

In a year when AI has dominated the headlines around the globe, this element of the conflict has gone curiously under-examined. Given the myriad practical and ethical questions that continue to surround the technology, Israel should be pressed on how it’s deploying AI.

Read more: Column: On social media, the 'fog of war' is a feature, not a bug

“AI systems are notoriously unreliable and brittle, particularly when placed in situations that are different from their training data,” said Paul Scharre, the vice president of the Center for a New American Security and author of “Four Battlegrounds: Power in the Age of Artificial Intelligence.” Scharre said he was not familiar with the details of the specific system the IDF may be using, but that AI and automation that assisted in targeting cycles probably would be used in scenarios like Israel’s hunt for Hamas personnel and materiel in Gaza. The use of AI on the battlefield is advancing quickly, he said, but carries significant risks.

“Any AI that’s involved in targeting decisions, a major risk is that you strike the wrong target,” Scharre said. ”It could be causing civilian casualties or striking friendly targets and causing fratricide.”

One reason it’s somewhat surprising that we haven’t seen more discussion of Israel’s use of military AI is that the IDF has been touting its investment in and embrace of AI for years.

In 2017, the IDF’s editorial arm proclaimed that “The IDF Sees Artificial Intelligence as the Key to Modern-Day Survival.” In 2018, the IDF boasted that its “machines are outsmarting humans.” In that article, the then-head of Sigma, the branch of the IDF dedicated to researching, developing, and implementing AI, Lt. Col. Nurit Cohen Inger wrote that "Every camera, every tank, and every soldier produces information on a regular basis, seven days a week, 24 hours a day.”

"We understand that there are capabilities a machine can acquire that a man can’t,” Nurit continued. “We are slowly introducing artificial intelligence into all areas of the IDF — from logistics and manpower to intelligence."

The IDF went so far as to call its last conflict with Hamas in Gaza, in 2021, the “first artificial intelligence war,” with IDF leadership touting the advantages its technology conferred in combating Hamas. “For the first time, artificial intelligence was a key component and power multiplier in fighting the enemy,” an IDF Intelligence Corps senior officer told the Jerusalem Post. A commander of the IDF’s data science and AI unit said that AI systems had helped the military target and eliminate two Hamas leaders in 2021, according to the Post.

The IDF says AI systems have officially been embedded in lethal operations since the beginning of this year. It says that the systems allow the military to process data and locate targets faster and with greater accuracy, and that every target is reviewed by a human operator.

Yet international law scholars in Israel have raised concerns about the legality of using such tools, and analysts worry that they represent a creep toward more fully autonomous weapons and warn that there are risks inherent in turning over targeting systems to AI.

Read more: Column: How CEOs are threading the needle in talking about Israel and Gaza

After all, many AI systems are increasingly black boxes whose algorithms are poorly understood and shielded from public view. In an article about the IDF’s embrace of AI for the Lieber Institute, Hebrew University law scholars Tal Mimran and Lior Weinstein emphasize the risks of relying on opaque automated systems capable of resulting in the loss of human life. (When Mimran served in the IDF, he reviewed targets to ensure they complied with international law.)

“So long as AI tools are not explainable,” Mimran and Weinstein write, “in the sense that we cannot fully understand why they reached a certain conclusion, how can we justify to ourselves whether to trust the AI decision when human lives are at stake?” They continue: “If one of the attacks produced by the AI tool leads to significant harm of uninvolved civilians, who should bear responsibility for the decision?”

Again, the IDF would not elaborate to me precisely how it is using AI, and the official told Bloomberg that a human reviewed the system’s output — but that it only took a matter of minutes to do so. (“What used to take hours now takes minutes, with a few more minutes for human review,” the head of the army’s digital transformation said.)

There are a number of concerns here, given what we know about the current state of the art of AI systems, and that’s why it’s worth pushing the IDF to reveal more about how it’s currently wielding them.

For one thing, AI systems remain encoded with biases, and, while they are often good at parsing large amounts of data, they routinely produce error-prone output when asked to extrapolate from that data.

“A really fundamental difference between AI and a human analyst given the exact same task,” Scharre said, “is that the humans do a very good job of generalizing from a small number of examples to novel situations, and AI systems very much struggle to generalize to novel situations.”

Read more: Column: Afraid of AI? The startups selling it want you to be

One example: Even supposedly cutting-edge facial recognition technology of the sort used by American police departments has been shown time and again to be less accurate at identifying people of color — resulting in the systems fingering innocent citizens and leading to wrongful arrests.

Furthermore, any AI system that seeks to automate — and accelerate — the selecting of targets increases the chance that errors made in the process will be more difficult to discern. And if militaries keep the workings of their AI systems secret, there’s no way to assess the kind of mistakes they’re making. “I do think militaries should be more transparent in how they’re assessing or approaching AI,” Scharre said. “One of the things we’ve seen in the last few years in Libya or Ukraine is a gray zone. There will be accusations that AI is being used, but the algorithms or training data is difficult to uncover, and that makes it very challenging to assess what militaries are doing.”

Even with those errors embedded in the kill code, the AI could meanwhile lend a veneer of credibility to targets that might not otherwise be acceptable to rank-and-file operators.

Finally, AI systems can create a false sense of confidence — which was perhaps evident in how, despite having a best-of-class AI-augmented surveillance system in place in Gaza, Israel did not detect the planning for the brutal, highly coordinated massacre on Oct. 7.

As Reuters’ Peter Apps noted, “On Sept. 27, barely a week before Hamas fighters launched the largest surprise attack on Israel since the 1973 Yom Kippur war, Israeli officials took the chair of NATO's military committee to the Gaza border to demonstrate their use of artificial intelligence and high-tech surveillance. … From drones overhead utilizing face recognition software to border checkpoints and electronic eavesdropping on communications, Israeli surveillance of Gaza is widely viewed amongst the most intense and sophisticated efforts anywhere.”

Yet none of that helped stop Hamas.

“The mistake has been, in the last two weeks, saying this was an intelligence failure. It wasn’t, it was a political failure,” said Antony Loewenstein, an independent journalist and author of “The Palestine Laboratory” who was based in East Jerusalem between 2016 and 2020. “Israel’s focus had been on the West Bank, believing they had Gaza surrounded. They believed wrongly that the most sophisticated technologies alone would succeed in keeping the Palestinian population controlled and occupied.”

That may be one reason that Israel has been reluctant to discuss its AI programs. Another may be that a key selling point of the technology over the years, that AI will help choose targets more accurately and reduce civilian casualties, currently does not seem credible. “The AI claim has been around targeting people more successfully,” Loewenstein said. “But it has not been pinpoint-targeted at all; there are huge numbers of civilians dying. One third of homes in Gaza have been destroyed. That’s not precise targeting.”

And that’s a fear here — that AI could be used to accelerate or enable the destructive capacity of a nation convulsing with rage, with potentially deadly errors in its algorithms being obscured by the fog of war.

This story originally appeared in Los Angeles Times.