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.)

Financial Teasers 6 March 2008

Top Stories

Dollar, pound drop to all-time lows against euro
Mounting anxiety about the economic health of the U.S. and U.K. is forcing the dollar and the pound to record lows against the euro. "Yet again the data is an indication that the U.K. economy is slowing, and that puts further pressure on the (Bank of England)," said Jeremy Stretch, a strategist at Rabobank. "It's a case that sterling continues to be seen as the ugly sister to the dollar." Telegraph (London) (06 Mar.)

Dollar may decline more if Fed cuts rates again: Ben Bernanke, chairman of the Federal Reserve, has suggested he may cut interest rates once again in an attempt to boost the sluggish U.S. economy. Many expect that will push the dollar down even further and cause inflation to swell. CNBC/Reuters (05 Mar.)

Credit crunch continues to spread as banks pull back
Banks in the U.S. and Europe have significantly curbed their support of trading in capital markets as the credit squeeze enters a new phase. Banks are reluctant to provide leverage to speculative investors and are scaling back on buying bonds that go unsold at debt auctions. Financial Times (subscription required) (05 Mar.)

Ambac's recapitalization plan disappoints investors
Shares of Ambac dropped nearly 20% Wednesday on news of the bond insurer's $1.5 billion recapitalization plan. Investors had hoped a group of banks would inject as much as $2 billion into Ambac. Instead, the monoline will sell $1 billion worth of common stock and $500 million of other instruments, substantially diluting values for the firm's existing shareholders.
Bloomberg/ClipSyndicate (06 Mar.) , Financial Times (subscription required) (05 Mar.)

Bank of China sells all CDOs
Bank of China Chairman Xiao Gang said the Chinese lender, which reported nearly $8 billion of subprime-related investments at the end of September, has sold all its collateralized debt obligations. Xiao did not disclose what the bank's subprime-related debt is currently. "It will be in everybody's interest to find out what exactly they are holding," said Dominic Chan, an analyst at CLSA Asia-Pacific Markets. People's Daily (China) (06 Mar.)

OPEC keeps output steady as oil hits all-time high
OPEC ministers, attributing record oil prices to forces beyond their control, decided at their meeting Wednesday to keep output steady. U.S. crude hit $104.64 a barrel. The U.S. had argued that even a small increase in output wold help curb prices and contain damage to the global economy. Reuters (05 Mar.)

Hedge fund accuses UBS of fraudulently marketing CDOs
Pursuit Partners says UBS, already dealing with one major investor lawsuit, marketed collateralized debt obligations as investment grade when the Swiss bank knew Moody's was about to downgrade them. The hedge fund has filed a lawsuit claiming it bought CDOs from UBS based on "fraudulent concealment" of information. BusinessWeek (06 Mar.)

Merrill's China investment banking chairman Feng resigns
After four years with Merrill Lynch & Co., Wilson Feng, the bank's Hong Kong-based chairman of China investment banking, has resigned and said he will pursue a position at a state-owned company. "I want to change my life," said Feng, 40. "It's a nightmare. My father won't recognize me if I stay in investment banking. I didn't see him for almost three years." Bloomberg (06 Mar.)

Gazprom settles natural gas dispute with Ukraine
Gazprom and Naftogaz, the national energy company in Ukraine, said they have resolved differences regarding the price of natural gas without having to disrupt Europe's supply. Gazprom had drastically reduced its natural gas supply to Ukraine to prompt the settlement of the country's $600 million bill. International Herald Tribune (05 Mar.)

Coffee demand spurs price hike
Maxwell House owner Kraft Foods has become the latest coffee company to raise prices as the cost of arabica and robusta beans hit their highest level in more than 10 years. With global demand for coffee outpacing supply, the price of robusta coffee futures contracts have soared. The May contract increased by about 40%. Financial Times (subscription required) (05 Mar.)

Other News

Bond insurers may move to set up shop in Bermuda
Financial Times (05 Mar.)

Market Activity

Italy intervenes in debt markets as yields surge
In an unusual move, the Italian treasury has stepped into the bond market to curb the soaring yields on government debt while hedge funds with heavy exposure to the debt are scrambling to raise cash. An Italian newspaper reported that investors have been urged to trade 10-year BTP treasuries for new five-year instruments. Telegraph (London) (06 Mar.)

Economics

ECB, Bank of England expected to hold interest rates steadyThe Bank of England and European Central Bank are expected to hold interest rates steady Thursday to focus on inflation. An expected slowdown in upcoming months, however, will likely spur future reductions in interest rates. MarketWatch (05 Mar.)

Europe's resilience allows Trichet to focus on inflation
Europe's economy is on track to outpace that of the U.S. for the second consecutive year. Europe is better able to withstand the global credit crunch because Europeans save more than Americans and spend less on stocks and homes, thus reducing the need to lower interest rates. That allows Jean-Claude Trichet, president of the European Central Bank, to focus on battling inflation. Bloomberg (06 Mar.)

Fed's "Beige Book" shows U.S. economy slowing this year
The Federal Reserve's "Beige Book" report shows that all 12 Fed districts are experiencing a deceleration of economic growth this year. The survey found that manufacturing was down in half of the Fed regions, while service industries were sluggish in most areas. Most regions are seeing rising costs for materials and energy. Reuters (05 Mar.)

China coping with increased inflation pressure
Financial officials in China say they are confident they can hold inflation rates to the 4.8% target despite increasing pressure for prices hikes due to a credit boom and food shortages. Ma Kai, chairman of China's planning agency, said a tight monetary policy will be maintained while striving to ensure supplies of meat, grain and other food. Forbes/Associated Press (06 Mar.)

Geopolitical/Regulatory

Officials tell Congress SWFs are beneficial to U.S.
Several witnesses testified before a House financial services subcommittee that sovereign wealth funds are not harmful, although better transparency would help. "Sovereign wealth funds have been a beneficial source of capital for U.S. financial institutions," said Scott Alvarez, general counsel for the Federal Reserve Board. Reuters (05 Mar.)

Lawmakers want Pentagon to explain air tanker contract
Members of the U.S. House Appropriations Committee have asked the Pentagon to explain why it gave a multi-billion-dollar contract for air tankers to a European company rather than to U.S.-based Boeing, and are warning they may kill the deal. Sue C. Payton, the Air Force's assistant secretary for acquisition, said the contract was awarded after fair and open bidding. The New York Times (registration required) (06 Mar.)

Financial Products

Merrill creates equity index for "frontier markets"
Aiming for clients with a greater hunger for risk, Merrill Lynch has launched a "frontier markets" equity index. The index will cover stocks from 17 countries, including Kuwait, Pakistan, Vietnam and Morocco. These markets are gaining fans because they are performing well in the credit crunch. CNNMoney.com/Dow Jones Newswires (05 Mar.)

Ethics

FSA discards proposed whistle-blowing rule
The Financial Service Authority as decided not to pursue a proposal that would have required investment banks to report regulatory violations by companies for which they raised equity. The FSA and industry representatives had discussed the proposal, but the regulator bowed to market pressure. Financial Times (subscription required) (05 Mar.)

Fidelity agrees to pay $8 million to settle SEC charges
Fidelity Investments will pay a fine of $8 million to settle charges by the SEC that the company's traders took gifts from brokers who were seeking Fidelity's business. The settlement includes no admission of guilt. The SEC probe targeted 13 former and current Fidelity employees, including Peter S. Lynch, once a star fund manager. The Boston Globe (06 Mar.)

Financial Teasers 5 March 2008

Top Stories

Banks work toward rescue of struggling Ambac
Banks are edging closer to a rescue for Ambac Financial Group, sources say. Ambac's stock gained on news that a deal was near. Although talks could fail at the last minute, people close to the situation are confident of a rescue. CNBC (04 Mar.)

Despite US pressure, OPEC likely to hold output steady
At a meeting today in Vienna, OPEC ministers are prepared to resist calls from the U.S., its largest consumer, to increase output to help the economy. The group says oil prices, hovering around $100 per barrel, are propped up by speculation and a weakening dollar and not lack of supply. Bloomberg/ClipSyndicate (05 Mar.) , Reuters (05 Mar.)

UBS chairman: Wealth management should stay within bank
Marcel Ospel, chairman of UBS, said that while there are risks to its wealth management business from subprime-related write-downs, the division should stay within the bank and not be spun off. He also noted synergies between investment banking and the wealth management operation, which has received new funds. "These are the key reasons why it does make strategic sense to operate those two businesses under the same roof and as closely as possible," Ospel said. Reuters (04 Mar.)

Goldman Sachs may acquire 20% stake in Eurotunnel
Goldman Sachs is likely to become a significant shareholder in Eurotunnel because it was left with the majority of an €800 million holding of deferred shares. The 20% stake would give Goldman influence over the future of the Channel Tunnel operator. Telegraph (London) (05 Mar.)

South Korean government says 50% of grain, bean supply secured
South Korea's Ministry of Agriculture, Fisheries and Food said domestic companies have secured more than half of the wheat, corn and beans that the country is expected to use in 2008. South Korean companies have deals with foreign suppliers for more than 8 million tons of the commodities. The country consumes an average of 14.10 million tons each year. Yonhap News Agency (Korea) (04 Mar.)

Australia lifts limits on wheat exporters
Following the AWB scandal, Australia is easing restrictions on how many companies are allowed to export wheat. "Once somebody is given an export license they will not have limitations placed on them as to tonnage and export destination," said Agriculture Minister Tony Burke. The new rules are expected to take effect July 1. The Sydney Morning Herald (05 Mar.)

Germany's airport workers plan to strike today
The Verdi union said workers at eight German airports are planning to strike today over wages. Lufthansa expects to cut 142 flights and is urging passengers to take the train. A separate strike in Berlin, however, will likely reduce train services as well. BBC (05 Mar.)

Market Activity

Most Asian markets down as credit crunch continues
Australian stocks withdrew early gains to close at a loss for the fifth consecutive session, while Shanghai-listed stocks continued to slide on fears of monetary policy tightening. Japanese stocks wavered between negative and positive territory, dragged down by financials. "The continuation of credit issues and data showing slowing growth is obviously disheartening to anybody trying to be bullish," said Matt McKeith of First State Investments in Hong Kong. MarketWatch (04 Mar.)

Most auction-rate bonds failed this week
Nearly 70% of auction-rate bonds failed this week and the market shows no signs of reversing as investment banks have stopped purchasing the securities that have been abandoned by investors. Average yields on the bonds, which were at 3.63% before demand plummeted in January, hit 6.52% at the end of February. Bloomberg (05 Mar.)

Economics

Europe pressures Washington to stop dollar's decline
With the dollar at a record low against the euro, policymakers in Europe are pressuring their U.S. counterparts to stop the greenback's slide. "It's up to ... U.S. authorities, who repeat that they are in favor of a strong dollar but who should reaffirm their words," said Guy Quaden, a representative for Belgium at the European Central Bank. Reuters (04 Mar.)

Premier says China needs to curb inflation, lending
Wen Jiabao, China's premier, told nearly 3,000 of the country's lawmakers that the government must do more to curb inflation and lending, indicating that the central bank may increase interest rates. Wen said China's biggest challenge, despite the global slowdown, is overheating. Bloomberg (05 Mar.)


Bush, Fed inch toward housing rescue
The Federal Reserve and the Bush administration are making slow progress toward a government-backed rescue of mortgage lenders and struggling homeowners, despite their ideological opposition. While not calling for a government bailout, Fed Chairman Ben Bernanke said industry and the government could do more. Meanwhile, the White House has begun increasing the government's response to the crisis. The New York Times (registration required) (05 Mar.)

Bernanke puts pressure on Paulson over homeowner aid: In a speech to bankers in Florida, Federal Reserve Chairman Ben Bernanke encouraged lenders to help struggling homeowners by forgiving parts of some mortgages. The request goes beyond the plan backed by Treasury Secretary Henry Paulson, which focuses on interest rate negotiations. "This puts enormous pressure on Paulson," said Michael Barr, a professor at the University of Michigan Law School. "Treasury's response so far has been insufficient." Bloomberg (05 Mar.)

Geopolitical/Regulatory

Lawmakers blast bank regulators for not warning about risks
U.S. senators grilled bank regulators Tueday about the risky lending practices that led to the mortgage market meltdown and why they failed to intervene. Donald Kohn, Federal Reserve vice chairman, and John Dugan, comptroller of the currency, both said they were aware of the risks, discussed them with banks and tried to warn others. Kohn acknowledged, though, that they may have needed to be more "forceful" in their warnings. CNNMoney.com (04 Mar.)

Clinton wins Texas, Ohio; Pennsylvania up next
Sen. Hillary Rodham Clinton silenced naysayers by defeating Sen. Barack Obama in the pivotal states of Ohio and Texas, as well as Rhode Island. Obama, whose winning streak was snapped at 12 states, was victorious in Vermont. The Democrats now gear up for the April primary in Pennsylvania. Meanwhile, Sen. John McCain wrapped up the Republican nomination. Bloomberg/ClipSyndicate (05 Mar.) , The Washington Post (05 Mar.)

Qatar balances relations with U.S., IranSheikh Hamad bin Jasmin bin Jaber al-Thani, prime minister and chief diplomat for Qatar, has learned to balance relations with nations that have contradictory political interests, such as the U.S. and Iran. The small Middle Eastern nation has become adept at using its natural gas resources to increase its influence on the global landscape. Bloomberg (04 Mar.)

Financial Products

UBS index allows investors to profit from food inflation
UBS is launching a new commodities index so that investors can profit from the increasing food inflation. The UBS Bloomberg Constant Maturity Commodity Food Index will include soy oil, orange juice, high-quality winter red wheat, lean hogs and other raw materials not generally included in commodity indexes. Financial Times (subscription required) (04 Mar.)

Ethics

FSA cold-calls for insider trading evidence
The Financial Services Authority has been calling investors and traders directly as it works to gather evidence of insider trading. The U.K. regulator had previously given individuals several weeks' notice before interviewing them, but now it is conducting interviews immediately. Financial Times (subscription required) (04 Mar.)

EC proposes ways to clamp down on tax havens
Fresh from the Lichtenstein tax scandal, the European Commission has started to put the screws to tax havens with proposals to broaden laws against tax evasion. Countries in the European Union say tax evasion costs them billions of euros each year. Germany alone estimates the figure to be as much as €30 billion. International Herald Tribune (04 Mar.)