Financial Teasers 7 March 2008

Top Stories

Wall Street's credit trading models become unreliable
Credit trading models used by investment banks have failed, causing an increase in borrowing costs for companies even though the Federal Reserve has dropped interest rates. "The credit-default swap market is completely distorting reality," said Henner Boettcher, treasurer of HeidelbergCement. "Given what these spreads imply about defaults, we should be in a deep depression, and we are not." Bloomberg (06 Mar.)

Citigroup to reduce $200 billion mortgage portfolio by 20%
To free up capital and reduce its reliance on low-growth assets, Citigroup is planning to cut its $200 billion mortgage portfolio by 20%. The firm plans to securitise or sell the bulk of its new loans to Fannie Mae and Freddie Mac to move them off its balance sheet. The bank also plans to reduce staff and the number of branches. Financial Times (subscription required) (06 Mar.) , Reuters (06 Mar.)

Japan's foreign currency reserves surpass $1 trillion
Japan's Ministry of Finance said the country's official foreign currency holdings rose to $1.01 trillion at the end of February. The news may encourage ruling-party lawmakers to push harder for the creation of a sovereign wealth fund to capitalize on the country's assets. Bloomberg (07 Mar.)

Pimco's warning could have saved Allianz shareholders billions
Allianz SE, the parent company of Pimco and Dresdner Bank, could have saved its shareholders $45 billion of market value had internal advice been heeded. A year ago, Pimco money managers warned Dresdner Bank traders that subprime-related losses could poison the entire financial industry. "It's staggering that Dresdner bought so much of those crappy investments despite being part of the same group as Pimco," said one outside observer. Bloomberg (07 Mar.)

China says banks have limited exposure to subprime meltdown
China's central bank governor said the U.S. subprime mess will have limited impact on the country's banks and won't significantly affect their bottom line. But Zhou Xiaochuan advised caution as the debt crisis unfolds. "There will be further indirect impact from the U.S. subprime mortgage crisis on China's economy," he said. "It cannot be underestimated since what lies ahead is far beyond our experience." China Daily (Beijing) (07 Mar.)

SocGen takes loss from fraud in 2007 rather than 2008
Societe Generale has sparked furor in accounting circles by reporting the €6.4 billion loss from its recent trading scandal on its 2007 financial statements, even though it happened in January 2008. The bank is invoking the "true and fair" provision of international accounting standards to depart from the rules, raising questions about whether the standards can be consistently applied. International Herald Tribune (06 Mar.)

Oil falls as U.S. jobs data spurs speculation of recession
The price of crude oil dropped for the first time in three days as U.S. unemployment data pointed to a possible slowdown in demand. "There are signals every day confirming a recession," said trader Stanislav Nazarati of Letofin AS in Estonia. Bloomberg (07 Mar.)

Market Activity

Financials lead heavy losses in Asian markets
Declines by Mizuho Financial Group in Tokyo, HSBC Holdings in Hong Kong, Sydney's National Australia Bank and other financials helped drag down Asian markets on Friday. The Hang Seng Index in Hong Kong fell 3%. "Things seem to be getting worse because there is no buying. The (trend of declines) will go on until the end of this quarter and we don't expect any rebound until April," said Francis Lun of Fulbright Securities in Hong Kong. MarketWatch (06 Mar.)

Carlyle affiliate may be unwinding after margin calls
Carlyle Capital Corp., an affiliate of The Carlyle Group, is working with its banks to restructure some of its loans after it failed to meet requests for repayment. Some are concerned that the Dutch-listed firm may be unwinding. It has settled $60 million in margin calls in the past week and is faced with $37 million more. CCC said it was unable to meet some of the new margin calls, resulting in at least one default notice and more expected. The Times (London) (07 Mar.) , The Wall Street Journal (subscription required) (07 Mar.)

Ambac sells $1.5 billion of shares, convertibles
Ambac Financial Group Inc. sold $1.25 billion of common shares and $250 million of mandatory convertible securities Thursday. Some analysts were disappointed Ambac didn't raise more capital. Reuters (07 Mar.) , Bloomberg (07 Mar.)

Chinese official says second board market to launch ASAP
China Securities Regulatory Commission Chairman Shang Fulin said the regulator will seek public comments on the market's management in April, suggesting the long-awaited launch of the second board market is imminent. "We have prepared for the second board market and expect to launch it as soon as possible," Shang said, although he declined to offer more details.
People's Daily (China) (07 Mar.)

Economics

ECB, Bank of England hold rates, sending currencies up
The European Central Bank and the Bank of England both held interest rates steady, causing the euro and pound to surge. Comments by ECB President Jean-Claude Trichet along with expectations that cuts to interest rates are not likely in the near future helped boost the euro to a record $1.5372 against the dollar, while the pound broke the $2 mark for the first time in 2008, hitting $2.0066. Bloomberg/ClipSyndicate (07 Mar.) , The Times (London) (07 Mar.) , Telegraph (London) (07 Mar.)

Data reveals fallout from subprime mortgage meltdown
Data from the Mortgage Bankers Association shows that home foreclosures in the U.S. hit a record high in late 2007, while the net wealth of households dropped. The mortgage delinquency rate reached its highest point in more than 20 years in the fourth-quarter of last year. Reports from retailers and the Department of Labor also pointed to an economic slowdown. Bloomberg/ClipSyndicate (07 Mar.) , Reuters (06 Mar.)

Japanese government nominates Muto as Bank of Japan head
The Japanese government has nominated Toshiro Muto, now the Bank of Japan's deputy governor, to lead the central bank. Some fear the nomination and battle over the position may create a policy vacuum while turmoil roils the global financial markets. Toshihiko Fukui, the current BoJ governor, is set to retire in less than two weeks. Reuters (07 Mar.)

Geopolitical/Regulatory

SWF officials warn Congress about regulating the funds
Representatives of Norwegian and Singaporean SWFs testified before Congress that additional regulations on sovereign funds could be seen as protectionism and may prompt foreign governments to invest elsewhere. The fund officials said the processes must remain fair and the markets open if Washington wants the SWFs to invest in the U.S. Bloomberg/ClipSyndicate (07 Mar.) , FinancialWeek (06 Mar.)

Spain heads into election under shadow of economic woes
New data on jobs and manufacturing are adding to Spain's economic gloom just before a general election. Unemployment rose 53,000 last month, while the manufacturing purchasing managers index dropped sharply. Financial Times (subscription required) (05 Mar.)

FSA proposes changes to sponsor regime
A recent consultation paper from the Financial Services Authority outlines proposed changes to the sponsor regime for listed firms. "The sponsor regime is integral to the primary listed equity market," said Alexander Justham, the FSA's director of markets. "With this consultation, we are hoping to ensure the regime is practical, reflects good market practice and ensures that sponsors are clear on the high standards expected of them." Director of Finance (UK) (06 Mar.)

Financial Products

ICICI Prudential's fund promises little downside risk
ICICI Prudential Asset Management has launched an equity-linked fund to offer investors in India upside participation with downside protection. The Fixed Maturity Plan - Series 33 is tied to the National Stock Exchange's Nifty index and aims to provide the low risk of a fixed income-style product with the high returns sought by equity investors. FinanceAsia.com (07 Mar.)