Financial Teasers 3 March 2008

Top Stories
UBS analysts predict financial firms' losses to hit $600B
UBS AG analysts are predicting that financial firms, including brokers, banks and insurers, will experiences losses of $600 billion or more in the crisis stemming from the subprime mortgage market meltdown. So far, financial institutions have revealed write-downs and credit losses of more than $181 billion. Bloomberg (29 Feb.)

Investment bank fees to plunge as M&As decline
Investment banks took in a record $42.4 billion in advisory fees for mergers and acquisitions last year, with Goldman Sachs leading the way, followed by Morgan Stanley and Citigroup. This year, the number and size of M&A deals are down significantly, so the fees paid to investment banks are plummeting. Bloomberg/ClipSyndicate (03 Mar.) , Bloomberg (03 Mar.)

Japan to develop activist SWF with £10 billion portfolio
While Japanese corporations are being criticized for ignoring shareholder demands, the government plans to develop an activist sovereign wealth fund that is shareholder-friendly. The plan is to focus on domestic investments with an emphasis on higher performance. Sources say a worldwide search is underway to recruit fund managers. The Times (London) (03 Mar.)

Buffett: SWF investments result of U.S. economic policies
In his annual letter to shareholders, billionaire investor Warren Buffett said recent high-profile investments by sovereign wealth funds are the result of U.S. economic policies and not "some nefarious plot by foreign governments." He also said he has four candidates for the chief investment officer position at Berkshire Hathaway. Buffett's letter predicts a sharp fall in margins for the insurance industry. Financial Times (subscription required) (29 Feb.)

Bank of America had most days of trading losses
Bank of America traders lost money on 29% of the trading days last year, more than any other U.S. investment bank, according to SEC filings. "Excluding the discrete write-downs on our super senior collateralized debt obligation exposure, 21% of trading days had losses greater than $10 million, and the largest loss was $159 million," the filing said. Financial News Online (03 Mar.)

Bank of Montreal may pull out of commercial-paper rescue
Bank of Montreal, faced with new write-downs in excess of $500 million, has indicated it may abandon an effort to rescue $33 billion in asset-backed commercial paper. Sources say the bank has advised some investors that, despite its previous commitment, it may not be able to contribute to the $14 billion line of credit, which is central to the rescue plan. The Globe and Mail (Toronto) (29 Feb.)


Gold hits record high as dollar plunges to historic low
Gold hit a record high of $979.20 per ounce in Asia, prompted by a fall in the U.S. dollar and strong oil prices. "Gold has more room to rise considering that its pace of rise has been slower relative to other commodities," said Tatsuo Kageyama, an analyst at Kanetsu Asset Management. "Gold should reach $1,000 very soon." CNBC/Reuters (02 Mar.)

Pentagon awards $40B air tanker contract to European group
Critics are attacking the Pentagon's decision to award a $40 billion contract for air tankers to a European consortium that includes Airbus rather than to U.S.-based Boeing. Most analysts and experts expected Boeing, with its strong ties to the U.S. military and powerful lobbying in Washington, to get the contract for 179 air tankers, one of the biggest defense contracts ever. Telegraph (London) (03 Mar.)

Zinifex to merge with Oxiana to form massive zinc producer
Zinifex and Oxiana have ended months of speculation by announcing their plans to combine. Owen Hegarty, managing director of Oxiana, said the merger will create a "base and precious metals powerhouse" with a "terrific financial position of great strength." The union will create the second-largest zinc producer in the world. The Herald Sun (Melbourne, Australia) (03 Mar.)

Market Activity
Tokyo leads Asian market plunge
The Nikkea 225 Index dropped almost 4% to 13,075.08 as the yen rose against the dollar and Takefuji, a consumer lender, disclosed unexpected subprime-related losses. As the strong yen weighs on exporters, Honda Motor dropped 5.2%, Sony was down 4.2% and Canon plunged 6.1%. Hong Kong's Hang Seng Index followed Tokyo's tumble by falling 840.1 points after the opening bell. In Australia, the S&P/ASX 200 was down 3% in late afternoon trading.
Forbes (03 Mar.)

Municipal bond slump expected to continue
With U.S. states and local governments seeking to replace more than $160 billion of auction-rate securities, the municipal bond slump is expected to continue. Failed auctions have prompted California, Duke Energy Corp., and Boston's largest hospital to convert their bonds to other types of debt, thus flooding the municipal bond markets with excess supply. Bloomberg (03 Mar.)

Chinese economist says stock market may undergo correction
Li Yining, a renowned Chinese economist, said that the local stock market will not turn bearish despite fluctuation. "The stock market was bullish last year in general. But as the split-share structure reform has drawn to an end, it may undergo correction," Li said. People's Daily (China) (03 Mar.)

HSBC reports $17.2 billion writedown on credit-related losses
HSBC annual profits increased 10% to $24.2 billion despite a higher-than-expected $17.2 billion loss on investments tied to the credit squeeze. Faced with pressure from activist investors, the UK's largest bank is conducting an internal review of HFC, its struggling US banking business. Bloomberg/ClipSyndicate (03 Mar.) , BBC (03 Mar.) , The Times

Economics

Several factors force dollar's declineComments by Federal Reserve Chairman Ben Bernanke suggesting another reduction in interest rates, along with dismal
U.S. economic reports, are contributing to the dollar's sudden drop. But other factors are also playing on the dollar, including momentum trading and crosscurrents with commodities, especially oil. MarketWatch (01 Mar.)

China says exports will withstand subprime turmoil
Chen Deming, China's commerce minister, said that while the government is closely watching the global financial crisis, Chinese exports will see limited impact from the subprime meltdown. Chen said exports, which grew by 25.7% last year to $1.218 trillion, will continue to grow but at a slower rate. Reuters (03 Mar.)

Geopolitical/Regulatory
Medvedev wins Russian presidential election by landslide
Dmitry Medvedev, the Kremlin favorite, easily won Russia's presidential election, according to preliminary results. Medvedev had received 70% of the vote, with 99% of ballots counted. Communist Party leader Gennady Zyuganov, Medvedev's nearest rival, took 18% of the votes in an election that saw a record turnout of nearly 70% of Russia's 109 million eligible voters casting ballots. Bloomberg/ClipSyndicate (03 Mar.) , RIA Novosti (Russia) (03 Mar.)

Chavez threatens war on Colombia
Barroso says protectionist pressures up across Europe
European Commission President Jose Manuel Barroso said increasing protectionist pressures are being felt throughout Europe. "Political forces in Europe that were traditionally pro-market are today – let's put it elegantly – more prudent," he said. "Some on the center-right are now more conservative in that regard." Barroso also said the idea of developing a pan-European financial regulator has been dismissed. Financial Times (subscription required) (02 Mar.)Venezuelan President Hugo Chavez mobilized troops, fighter jets and tank units close to the Venezuelan-Colombian border after Colombian security forces killed rebels with warm ties to his government. On Saturday, 17 members of the Revolutionary Armed Forces of Colombia were killed in Ecuadorean territory. International Herald Tribune (03 Mar.)

Europe, U.S. to complain about China's ban on financial info
The European Union and the U.S. plan to file a complaint with the World Trade Organization against China for prohibiting foreign firms from offering financial news directly to clients in China. The long-expected complaint will increase the pressure on already strained economic ties. International Herald Tribune/Reuters (02 Mar.)

Financial Products
Non-profit group to issue rand-denominated bond in JapanGavi Alliance will give retail investors in Japan the opportunity to invest in South African rand-denominated bonds. The non-profit group will use the proceeds to immunise needy children around the world. The issue will be Gavi's second through its finance division, the International Finance Facility for Immunisation. Financial Times (subscription required) (02 Mar.)