The number is zero.  According to a recent Harvard study, two of every three bankruptcies in the US are medical-related. That’s why at least catastrophic coverage for everyone is the real purpose of healthcare reform. Why some Americans don’t understand this is beyond me.

Related posts:

• What real comprehensive healthcare reform looks like
• Chart of the day: the largest bankruptcies in US history
• UBS is too big for Switzerland
• Obama caves to pressure on consumer financial protection
• Now watch this drive

It is refreshing to read the foreign press because they have decidedly different takes on issues.Whether you agree or not, it is important to hear those views.

The Swiss are very negative on the U.S. and their tax fight against UBS. This has them dredging up pass legal skirmishes. Here’s an article from the Swiss daily Tagesanzeiger – a media outlet that is not considered a establishment paper – about Marc Rich.  Remember him?  He’s the wealthy man living in exile who created a scandal when he was pardoned by U.S. President Bill Clinton at the urging of Rich’s ex-wife.  Here’s what the paper had to say (my translation):

U.S. law takes precedence: thanks to this principle and massive financial penalties, the United States has also forced Marc Rich on his knees.

The American oil dealer Marc Rich, living in Zug, got into the crosshairs of the U.S. authorities in the beginning of the eighties. The United States accused him of profiting from untaxed income of 100 million U.S. dollars at his Swiss company, and therefore claimed 48 million U.S. dollars in tax payments.

Request denied

Rich denied the claim. Then a district court judge in New York asked Marc Rich & Co. AG to submit all business documents concerning the oil deals. There were hundreds of thousands of pages. Rich refused. The judge, therefore, punished him with a fine of 50,000 dollars per day. For a full year, the oil dealer transferred a check on Monday and Friday to the U.S. – a total that came to over 20 million U.S. dollars in the U.S.. Only then was Rich ready to deliver the documents to the court.

And as a result, he fell into the crosshairs of the Swiss judiciary. The Office of the Attorney General seized all the remaining documents. An investigation into Rich was opened because of the economic news agency.

100 million U.S. dollars blocked

In the U.S. as well, the then-Attorney General Rudi Giuliani stepped into action, bringing charges against Rich and blocking his assets in the U.S. (real estate, pension funds, etc.). Their value was estimated at around 100 million U.S. dollars.

But that was not enough. Banks which had been associated with Rich in business were put under pressure. They were warned not to receive any money from Rich or to pay out money to him – including his own. Beside U.S. companies, non-American banks with branches in the U.S. became entangled in the wider net of the judge’s ban. "It was this pressure which forced him to capitulate," said "Weltwoche» journalist Daniel Ammann, who in October will publish a biography of Marc Rich ( "The King of Oil," St. Martin’s Press, New York). Under these conditions, Rich could no longer do business transactions. He signed to pay a re-imbursement in U.S. court, although he has always denied the allegations.

According to Ammann, Marc Rich is said to have paid 200 million U.S. dollars, which for 1984 was a huge sum. Did the U.S. win? Ammann: "In the Rich case, the U.S. has not won. They were not not able to get Rich before a court and never were able to obtain the desired documents. But they got the money. "The Americans could have gone through the legal route. This way was just too slow," said Ammann. He calls this attitude of the U.S. in his book "legal isolationism."

While you might abhor Rich and think the Swiss banking system is built on a bunch of tax dodging, this account regarding “legal isolationism” has the ring of truth to it.  Certainly, these same issues are at play in the detention of enemy combatants at Guantanamo Bay.  I would argue they are also at play in the Swiss tax law cases as well. And despite the Obama’ Administration’s claims to break from the past, don’t expect a change in America’s sense of “legal isolationism” any time soon.

Source

Wie die USA den Ölhändler Marc Rich weichklopften – Tagesanzeiger

Related posts:

• UBS is too big for Switzerland
• GM gets the green light on its section 363 bankruptcy
• Did JP Morgan cause Lehman’s bankruptcy?
• Judge stops BofA deal with the SEC
• Bloomberg wins Freedom of Information lawsuit against Fed

The U.S. has been using the weakness of the UBS banking franchise to shake down the organization for the names of American clients suspected of using the bank to dodge taxes in the United States. As far as the Swiss government is concerned, this would set a bad precedent in the Swiss banking community where Swiss banking secrecy is part and parcel of the attractiveness to foreign clients.  As a result, the government has moved to prevent UBS from handing over names to the IRS.

The Swiss government is arguing that handing over the client details would breach its national bank secrecy rules.

UBS is refusing to release data on 52,000 Americans that hold Swiss bank accounts to US tax authorities who accuse them of tax evasion.

Switzerland’s largest bank, UBS faces a court hearing in Miami on 13 July.

In a case brought under civil law, it stands accused by the US of hiding close to $15bn (£9.33bn) in assets in secret accounts.

‘International conflict’

Back in February, UBS did hand over the details of 250 US clients to American authorities to avoid a criminal case, but it is continuing to refuse to pass on data on the further 52,000.

Back on the first of the month, included in the daily links was an article in the Swiss daily Le Temps, which indicated the precedent set by UBS with the U.S. tax authorities was furthering the passing of data by Credit Suisse to French tax authorities. Clearly, as the economy has faltered, governments are looking to maximize revenue and are cracking down on suspected cases of tax evasion. Below is my translation of the publicly available bits of the French-language article on Credit Suisse:

Fearing retaliation, the [Credit Suisse] group is requiring its customers allow it to transmit their identity to the French tax authorities. The measure applies to all holders of French-traded securities.

Fifteen days after the signing of a new tax treaty between Switzerland and France on 11 June, Credit Suisse is taking unusual steps to avoid falling into the focus of the French tax authorities. Fearing new prosecutions of customers not reporting.. the bank plans to close the accounts of customers who do not have the ‘smell of holiness’ with the French tax authorities.

Clearly, things are getting out of hand as far as the Swiss government is concerned because Switzerland is losing its status among wealthy private clients.  In fact, Bank of America, through its acquisition of Merrill Lynch, recently dethroned UBS as the top dog in Private Banking.  UBS has been shrinking in share due to its financial woes and the uncertainty about bank secrecy. This is why the Swiss are fighting back now.

I should also point out that the Germans are getting in on the more aggressive policing of tax dodging. It seems as if everyone is using this economic crisis to try and pry open Swiss banking secrecy laws.  The 13 July hearing in Miami regarding UBS is the next important date in this effort.

Related posts:

• Swiss citizens think a large Swiss bank will fail
• Credit Suisse and UBS have hands out for more capital
• UBS reports Tuesday: brace yourself
• FDIC Friday Night: Silverton Bank is seized
• SunTrust Bank receives insured deposits of Omni National Bank

Dollar bears are getting their way in the currency markets right now.  While most eyes are peeled on Sterling (up 3 big figures since Friday) and the Euro, all currencies are rising against the Dollar (including the Commodity Dollar Complex – Auusie, Kiwi, and Loonie).  For me, the most interesting currency is the Swiss Franc because it is approaching parity with the U.S. Dollar (now down near 1.06 on the dollar) .  The problem with Dollar/Swissy parity is Eastern Europe.

This brings us to EU East.  And by that I mean members of the European Union nations east of the Eurozone, which stops at Germany, Austria and Italy (Slovakia is also a Eurozone member as of Jan. 1st).  Countries in this region have seen fantastic growth rates over the past decade, but, also a huge increase in debt, asset prices, and current account deficits.  All of this points to excess.

The problem, of course, is the Impossible Trinity.  These countries want stable exchange rates, monetary policy control and free movement of capital.  But, with the excesses already highlighted, the first to go in this trio was always going to be the exchange rate.

Now, EU East loaded up to the nines with debt in Swiss francs, Euros and U.S. Dollars.  Companies, Individuals, even hospitals have huge foreign currency debt exposure (see my post “Reverse carry trade borrowing is deadly” from October).

The above is a quote from my post “The European Problem.”  And this is one reason I wouldn’t be long the Euro – because European banks are a lot weaker than is presently being admitted. But, I am writing here about the Swiss Franc, not the Euro.  As I see it, a strong Swiss Franc is not a good thing for anyone – Swiss bankers, debtors in Poland or the global economy.  But this is what we are getting right now.  Back in March I said this is exactly what Swiss central bankers are trying to avoid:

Apparently, the Swiss franc is too high — or so says the Swiss central bank.  As a result, they are selling francs in the foreign exchange market to get the franc to come down.  There has been a lot of speculation about the Swiss and their plans to devalue the Swiss franc, including on this site.  It now seems clear that devaluation is where things are headed. Quantitative easing (QE) may be next.

Watch this trade because it is going to create problems in Euroland where Eastern European debtors, struggling with a depression and in the last economies likely to recover, are going to come under increasing stress.  CEE stress means Swiss bank and Austrian bank stress and writedowns in particular – and this will have very serious consequences for Europe as a whole.  Market rallies that move too far too fast often sow the seeds of a whiplash trade down the line.

Related posts:

• The Swiss get on the QE2
• The dollar collapses
• The dollar is rising against floating currencies
• Why are the Swiss now issuing debt in U.S. Dollars?
• Switzerland threatened with bankruptcy

This past Sunday Felix Salmon wrote a post called “10 reasons for the lack of German econobloggers.” I found it inaccurate and offensive. Let me tell you why.

I was in Germany at the time I read the post and had been there for the better part of the week. In reading and watching German news, I was very heartened that there was a comfortable debate about the goings-on in finance and in the German and world economy.

Now, I would sum up Felix’s arguments regarding German bloggers as a typical and stereotyped Anglo-American view of Germany and the German-language realm. The core of the view is that Germans are hidebound, hierarchical, conservative and obedient. This is at odds with the ethos of the blogosphere. Therefore, Germany and the German-speaking world will never have a good blogging community.

I happen to think highly of Felix’s work but his views here are out of bounds. Moreover, he’s just plain wrong. There actually is a good thriving German-speaking econblogging community. I have four of the blogs on my blogroll and often correspond with their writers. They are:

• Immobilienblasen:  the blog title means property bubble in German.  I have aways considered Immobilienblasen a good bilingual effort that does a good job of bridging the German and Anglo-American world.  It has been around since well before the econblog space got noticed.
• Zeitenwende: this is a Swiss blog in German and has been a very good source of information fr me on the goings on at UBS, Credit Suisse, Glencore and other Swiss companies. It went on a brief hiatus earlier this year, but I am happy to report that it is back.
• egghat’s blog: Egghat is another German blogger who has been around for quite some time (since before the econblogging space became noticed after Lehman’s demise).  Although, he writes completely in German, egghat does have a lot of good information on the U.S. financial crisis as well.
• Blick Log: this is the most recent German-language blog I have been turned on to.  Very, very good detail on the German situation specifically.  If you want to know what is happening at HSH Nordbank, WestLB or Deutsche Bank, this should be on your list.

There are any number of other German blogs as well (Boersennotizbuch is one) that are not on my blogroll of which I am aware.

As to the substance of Felix’s argument – that German cultural traits prevent a flourishing blogosphere, I would say there might be kernels of truth in what he says. For instance, I was walking through the town centre in Duesseldorf on Monday. And whenever I came to a traffic light I felt that dreaded social pressure I always felt to be coercive and corrosive when I lived in Germany not to cross on red. Social pressure is subtle and the pressure to conform to social norms is one of the key ingredients that created a massive credit bubble. Here it was in action at the pedestrian crossing.

Nevertheless, Felix overstates his case. There are very good German blogs. Moreover, the German press is and always has been MUCH more critical of the government than the U.S. press has been. One could legitimately argue that magazines like Spiegel and even ARD and ZDF, the public television stations, take on a role in Germany that the mainstream media in the U.S. do not.

The arguments that there are few German bloggers compared to U.S. bloggers could be made regarding Australia, Canada, France, Spain, Ireland, or even the U.K. In the U.K, you have Alphaville, Willem Buiter, Alice Cook, and Mark Wadsworth as examples but there are not nearly enough econbloggers in the U.K. given the severity of the economic crisis there. And, it’s not because the Brits are ‘too German’ that there aren’t more blogs there.

Like Felix, I wish there were more blogs outside of the U.S. because they might give us a different perspective. But to say that the Germans will never develop a good econoblogosphere is just plain wrong.

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This comes from French-language Swiss daily Le Temps:

Over 50% of respondents in Geneva surveyed by the HEG School of Management believe that the bankruptcy of a large institution is likely.

The Swiss political world is clearly convinced that it will never let one of the major banks in the country go bankrupt. Despite the rescue of UBS by the Swiss Confederation and the Swiss National Bank (SNB), 53% of the approximately 550 people surveyed by the Haute Ecole de Gestion (HEG) in Geneva in the first quarter 2009 estimate it “likely” that a major bank will declare bankruptcy. This proportion was only 37% last June.

Clearly either the citizens have it wrong or Switzerland is in big trouble. Along those lines, I have another poll for you (click through to the site to vote): Will Citigroup eventually escape this crisis without a drastic reduction in size?

Let us know what you think.

Related posts:

• The Swiss get on the QE2
• Switzerland threatened with bankruptcy
• UBS woes with IRS have Swiss worried
• Swiss Franc at Dollar parity?
• Michael Panzner: regional banks in trouble

I am sure you have seen the catastrophic financial results of Swiss bank UBS released this week. I have been saying for quite some time that UBS is too big to fail, but also too big to bail for tiny Switzerland. In my view, the recent financial results demonstrate that, although this situation has stabilised somewhat, UBS still represents a grave risk to the Swiss economy. I am not alone in this. Manuel Ammann, a banking expert of noted German-language university St. Gallen has shared similar views with Swiss daily Tagesanzeiger. My translation is below.

Today’s announced strategy by UBS, to continue investment banking and to remain active as a universal bank, is economically risky, according to banking expert Manuel Ammann. “UBS is really too big for Switzerland,” he said today in “Rundschau” on Swiss television. In order to stabilize the banking system, we need a lot of small banks which carry much less systemic risk.

The professor at the University of St. Gallen is confident that the world will still experience more financial crises – among other things, because in recent months “problematic incentives” have been created. Through the intervention of the state, the wrong signals have been sent to the banks – if one fails, in an emergency, the state will come to the rescue. At present, bankers still feel burned by the current experience. But a few years from now, when all is well again, the same risks will be taken.

The worst of the current financial crisis is behind us. “There is less talk about the collapse of the international financial system.” Nevertheless, more negative news from the financial sector will likely continue for now.

Ammann is essentially making the same argument that others like Willem Buiter make i.e. that large banks pose too much of a systemic risk and must be broken up as a policy remedy to prevent further crises.

There is a video of Amman at the link below, which should be interesting if you speak German (especially Switzerduitsch).

Source
Die UBS ist zu gross für die Schweiz – Tagesanzeiger

Related posts:

• How the U.S. beat a suspected tax cheat into submission
• Switzerland threatened with bankruptcy
• Switzerland: politicians need to act now
• Swiss citizens think a large Swiss bank will fail
• FDIC moves in at Great Basin Bank

First Spain, now Switzerland:

Consumer prices in March were down 0.4% from a year ago, the Federal Statistics Office said, a 50-year low.

The country has been close to deflation all year, with inflation having fallen from a peak of 3.1% in July 2008. The rate was 0.2% in February.

The Swiss National Bank predicts that inflation will average -0.5% this year and remain close to zero throughout 2010 and 2011.

The deflation was blamed on energy, rent and transport costs all falling as a result of lower oil prices.

The year-on-year price fall for March was the biggest since December 1959, when consumer prices fell 0.6%.

Full story at link below.

Source
Switzerland experiences deflation – BBC News

Related posts:

• Britain gets deflation
• U.S. CPI: Lowest since 1954 – deflation here we come
• Germany gets deflation
• Ireland gets deflation
• Quote of the day: William White and inflation

This comes from Swiss daily Le Temps (my translation):

Credit Suisse will request the creation of additional conditional capital of 3.98 million at the General Meeting of April 24. The operation is to guarantee to the bank the “strategic flexibility” needed.

Conditional capital has already been used almost exclusively for the issuance of mandatory convertible bonds (mandatory convertible notes) last October, hence the need for this new measure, the second-largest Swiss bank said Tuesday by publishing the proposals to be submitted to shareholders.

Credit Suisse is also proposing to renew the authorized capital by increasing to a maximum of 4 million (nominal value) and extend it until 24 April 2011. The measure will fund potential acquisitions, said the group.

UBS too

UBS did the same last week by asking its shareholders to approve the creation of conditional capital and an authorized capital during its general assembly on April 15. However, the reasons are different and the amounts involved are more substantial because Credit Suisse is moving away from government aid.

The conditional capital of CHF 10 million maximum should serve as collateral for the SNB [Swiss National Bank], which bought illiquid assets from UBS. As for the authorized capital (29.3 million francs maximum), it should give UBS the flexibility to raise any new funds if the bank runs out of equity.

Source
Credit Suisse augmente son capital-actions – Le Temps (French-language)

Related articles
Press release regarding UBS October need for capital – UBS website

Related posts:

• National City gets approval to raise cash
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• UBS and Credit Suisse must pony up $70 billion
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Apparently, the Swiss franc is too high — or so says the Swiss central bank.  As a result, they are selling francs in the foreign exchange market to get the franc to come down.  There has been a lot of speculation about the Swiss and their plans to devalue the Swiss franc, including on this site.  It now seems clear that devaluation is where things are headed. Quantitative easing (QE) may be next.   On Feb 19th, I said as much:

The Swiss are not a member of the Eurozone. They are not even a member of the EU. Like Norway (and Iceland, for that matter), the Swiss are on their own. This has benefits. The Impossible Trinity is a non-sequitur. One can print money and devalue at the heart’s content. The Brits have shown us the power of devaluing a currency from 2.11 per U.S. Dollar to 1.43 per U.S. Dollar. Surely, the Swiss can do the same. In fact, in the case of the Swiss, devaluation would mean that their debtors will be able to repay their loans more easily. I fully expect the Swiss National Bank understands this and is prepared to crank up the presses if they have not begun to do so already.

Just the other day, the Brits started quantitative easing a.k.a. printing money — joining the Americans and the Japanese in plucking bills off the money tree at the central bank.  

Who’s next to get on the QE2 – its a lovely ship?  Why, Switzerland, of course.

The Swiss franc plunged to its lowest level so far this year on Thursday after the Swiss National Bank said it was set to make purchases in the foreign exchange market to halt the currency’s rise against the euro.

The Swiss franc’s haven status has been heightened by the recent market turmoil and seen it rise 9 per cent on a trade-weighted basis since July and come close to its record high around SFr1.43 against the euro in recent weeks.

The SNB said the Swiss franc’s strength represented an “inappropriate tightening of monetary conditions” as it battled against a sharp deterioration in the Swiss economy.

“In view of this development, the SNB has decided to purchase foreign currency on the foreign exchange market to prevent any further appreciation of the Swiss franc against the euro,” the central bank said.

The central bank said it had implemented its decision, with traders confirming that the SNB had been active in the market.

This represented the first time a major central bank has intervened in the foreign exchange markets since 2004 when the Bank of Japan sought to weaken the yen.

The Swiss franc dropped 3.2 per cent to SFr1.5290 against the euro and dropped 3.7 per cent to $1.1952 against the dollar.

Marc Chandler at Brown Brothers Harriman said even though the SNB’s intervention to weaken the franc was enjoying immediate success, the policy’s longer term prospects were more questionable.

But do the Swiss have any choice? The Swiss are going to do QE too.

“The SNB is certainly next in line for such moves,” said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. “The SNB probably needs to do more. It’s game over for conventional monetary policy.”

Source
Swiss central bank sells own currency – FT.com
SNB May Cut Rates, Opening Door for Other Tools – Bloomberg.com

Related posts:

• Swiss Franc at Dollar parity?
• Why are the Swiss now issuing debt in U.S. Dollars?
• The dollar collapses
• Chart of the day: US Dollar
• The U.S. dollar plunges due to quantitative easing

The following post is from John Mauldin, who is a Best-Selling author and recognized financial expert. He is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

The Risk in Europe

I mentioned last week that European banks are at significant risk. I want to follow up on that point, as it is very important. Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.

In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.

But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.

Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan’s zombie banks.)

The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the “host” countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.

Western European banks have been very aggressive in lending to emerging market countries worldwide. Almost 75% of an estimated $4.9 trillion of loans outstanding are to countries that are in deep recessions. Plus, according to the IMF, they are 50% more leveraged than US banks.

Today the euro rallied back to $1.26 based upon statements from German authorities that were interpreted as a potential willingness to help out non-German (in particular, Austrian) banks.

However, this more sobering note from Strategic Energy was sent to me by a reader. It nicely sums up my concerns:

“It is East Europe that is blowing up right now. Erik Berglof, EBRD’s chief economist, told me the region may need e400bn in help to cover loans and prop up the credit system. Europe’s governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

“The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan — and Turkey next — and is fast exhausting its own $200bn (e155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country — facing a 12% contraction in GDP after the collapse of steel prices — is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia’s central bank governor has declared his economy “clinically dead” after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

“‘This is much worse than the East Asia crisis in the 1990s,’ said Lars Christensen, at Danske Bank. ‘There are accidents waiting to happen across the region, but the EU institutions don’t have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.’ Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.

“The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU “union bonds” should the debt markets take fright at the rocketing trajectory of Italy’s public debt (hitting 112pc of GDP next year, just revised up from 101pc — big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?”

While Rome Burns

I hope the writer is wrong. But the ECB is dithering while Rome burns. (Or at least their banking system is — Italy’s banks have large exposure to Eastern Europe through Austrian subsidiaries.) They need to bring rates down and figure out how to move into quantitative easing. Europe is at far greater risk than the US.

Great Britain and Europe as a whole are down about 6% in GDP on an annualized basis. The Bank Credit Analyst sent the next graph out to their public list, and I reproduce it here. (www.bcaresearch.com) In another longer report, they note that the UK, Ireland, Denmark, and Switzerland have the greatest risk of widespread bank nationalization (outside of Iceland). The full report is quite sobering. The countries on the bottom of the list are also in danger of having their credit ratings downgraded.

This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?

We are going to find out this year whether the European Union is like the Three Musketeers. Are they “all for one and one for all?” or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don’t think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.

However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the “luxury” of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.

As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.

As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. “We have a number of countries in the eurozone that are clearly getting into trouble on their payments,” he said. “Ireland is in a very difficult situation.

“The euro-region treaties don’t foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty.”

That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.

It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged. (This was definitely a topic of “Conversation” this morning when I chatted with Nouriel Roubini. See more below.)

The Euro Back to Parity? Really?

I wrote over six years ago, when the euro was below $1, that I thought the euro would rise to over $1.50 (it went even higher) and then back to parity in the middle of the next decade. I thought the decline would be due to large European government deficits brought about by pension and health care promises to retirees, and those problems do still loom.

It may be that the current problems will push the euro to parity much sooner, possibly this year. While that will be nice if you want to vacation in Europe, it will have serious side effects on international trade. It clearly makes European exporters more competitive with the rest of the world, and especially the US. It also means that goods coming from Asia will cost more in Europe, unless Asian countries decide to devalue their currencies to maintain an ability to sell into Europe, which of course will bring howls from the US about currency manipulation. It is going to put pressure on governments to enact some form of trade protectionism, which would be devastating to the world economy.

Large and swift currency swings are inherently disruptive. We are seeing volatility in the currency markets unlike anything I have witnessed. I hope we do not see a precipitous fall in value of the euro. It will be good for no one. It is a strange world indeed when the US is having such a deep series of problems, the Fed and Treasury are talking about printing a few trillion here and a few trillion there, and at the very same time we see the dollar AND gold rising in value. Which all serves as a good set-up to the next section.

Back to the Basics

“Stocks for the long run” has been weighed in the balance in Baby Boomers’ retirement accounts all over the world and has been found wanting. The S&P 500 is now roughly where it was 12 years ago, although earnings in 1997 were higher than those projected for 2009. The Dow closed at 7466 on Thursday, a six-year low, giving all those who follow Dow Theory a clear bear market signal, suggesting there is more pain ahead.

In 1997 I was a young 49. For me to make the advertised 8% average annual returns in my equity portfolio, the Dow would have had to go on a tear for the next 8 years. 8% compound from 1997 would have the Dow well over 30,000 now. Remember those silly books which predicted such nonsense? (Seriously, what statistically flawed analysis, yet people bought it.) Now the market would have to do 18% a year for the next 8 years to get to 30,000. Anyone want to make that bet? Let’s look at a few paragraphs I wrote in Bull’s Eye Investing.

Living in Paradise

Would you like to live in paradise? There’s a place where the average daily temperature is 66 degrees, rainy days only occur on average every five days, and the sun shines most of the time.

Welcome to Dallas, Texas. As most know, however, the weather in Dallas doesn’t qualify as climate paradise. The summers begin their ascent almost before spring arrives. On some days the buds almost wilt before turning into blooms. During the lazy days of summer, the sun frequently stokes the thermometer into triple digits, often for days on end. There are numerous jokes about the Devil, hell, and Texas summers.

Once winter arrives, some days are mild — perfect golf weather. Yet the next day might be frigid, with snow or the occasional ice storm. That’s good for business at the local auto body shops, though it makes for sleepless nights for the insurance companies. Certainly the winters don’t match the chilly winds of Chicago or the blizzards of Buffalo, but Dallas is far from paradise as its seasons ebb and flow.

For the year though, the average temperature is paradisical.

Contrary to the studies that show investors they can expect 7% or 9% or 10% by staying in the market for the long run, the stock market isn’t paradise either. Like Texas summers, the stock market often seems like the anteroom to investment hell.

Historically, average investment returns over the very long term (we’re talking 40-50-70 years) have been some of the best available, but the seasons of the stock market tend to cycle with as much variability as Texas weather. The extremes and the inconstancies are far greater than most realize. Let’s examine the range of variability to truly appreciate the strength of the storms.

In the 103 years from 1900 through 2002, the annual change for the Dow Jones Industrial Average reflects a simple average gain of 7.2% per year. During that time, 63% of the years reflect positive returns, and 37% were negative. Only five of the years ended with changes between +5% and +10% — that’s less than 5% of the time. Most of the years were far from average — many were sufficiently dramatic to drive an investor’s pulse into lethal territory!

Almost 70% of the years were “double-digit years,” when the stock market either rose or fell by more than 10%. To move out of “most” territory, the threshold increases to 16% — half of the past 103 years end with the stock market index either up or down more than 16%!

Read those last two paragraphs again. The simple fact is that the stock market rarely gives you an average year. The wild ride makes for those emotional investment experiences which are a primary cause of investment pain.

The stock market can be a very risky place to invest. The returns are highly erratic; the gains and losses are often inconsistent and unpredictable. The emotional responses to stock market volatility mean that most investors do not achieve the average stock market gains, as numerous studies clearly illustrate.

Not understanding how to manage the risk of the stock market, or even what the risks actually are, investors too often buy high and sell low, based upon raw emotion. They read the words in the account-opening forms that say the stock market presents significant opportunities for losses, and that the magnitude of the losses can be quite significant. But they focus on the research that says, “Over the long run, history has overcome interim setbacks and has delivered an average return of 10% including dividends” (or whatever the number du jour is. and ignoring bad stuff like inflation, taxes, and transaction costs).

The 20-Year Horizon

But how long is the “long run”? Investors have been bombarded for years with the nostrum that one should invest for the “long run.” This has indoctrinated investors into thinking they could ignore the realities of stock market investing because of the “certain” expectation of ultimate gains.

This faulty line of reasoning has spawned a number of pithy principles, including: “No pain, no gain,” “You can’t participate in the profits if you are not in the game,” and my personal favorite, “It’s not a loss until you take it.”

These and other platitudes are often brought up as reasons to leave your money with the current management which has just incurred large losses. Cynically restated: why worry about the swings in your life savings from year to year if you’re supposed to be rewarded in the “long run”? But what if history does not repeat itself, or if you don’t live long enough for the long run to occur?

For many, the “long run” is about 20 years. We work hard to accumulate assets during the formative years of our careers, yet the accumulation for the large majority of us seems to become meaningful somewhere after midlife. We seek to have a confident and comfortable nest egg in time for retirement. For many, this will represent roughly a 20-year period.

We can divide the 20th century into 88 twenty-year periods. Though most periods generated positive returns before dividends and transaction costs, half produced compounded returns of less than 4%. Less than 10% generated gains of more than 10%. The P/E ratio is the measure of valuation reflected in the relationship between the price paid per share and the earnings per share (”EPS”). The table below reflects that higher returns are associated with periods during which the P/E ratio increased, and lower or negative returns resulted from periods when the P/E declined.

Look at the table above. There were only nine periods from 1900-2002 when 20-year returns were above 9.6%, and this chart shows all nine. What you will notice is that eight out of the nine times were associated with the stock market bubble of the late 1990s, and during all eight periods there was a doubling, tripling, or even quadrupling of P/E ratios. Prior to the bubble, there was no 20-year period which delivered 10% annual returns.

Why is that important? If the P/E ratio doubles, then you are paying twice as much for the same level of earnings. The difference in price is simply the perception that a given level of earnings is more valuable today than it was 10 years ago. The main driver of the last stock market bubble, and every bull market, is an increase in the P/E ratio. Not earnings growth. Not anything fundamental. Just a willingness on the part of investors to pay more for a given level of earnings.

Every period of above-9.6% market returns started with low P/E ratios. EVERY ONE. And while not a consistent line, you will note that as 20-year returns increase, there is a general decline in the initial P/E ratios. If we wanted to do some in-depth analysis, we could begin to explain the variation from this trend quite readily. For instance, the period beginning in 1983 had the lowest initial P/E, but was also associated with a two-year-old secular bear, which was beginning to lower 20-year return levels.

Look at the following table from my friend Ed Easterling’s web site at www.crestmontresearch.com (which is a wealth of statistical data like this!). You can find many 20-year periods where returns were less than 2-3%. And if you take into account inflation, you can find many 20-year periods where returns were negative!

Look at the 20-year average returns in the table above. The higher the P/E ratio, the lower (in general) the subsequent 20-year average return. Where are we today? As I have made clear in my last two letters, we are well above 20. Today we are over 30, on our way to 45. In a nod to bulls, I agree you should look back over a number of years to average earnings and take out the highs and lows of a cycle. However, even “normalizing” earnings to an average over multiple years, we are still well above the long-term P/E average. Further, earnings as a percentage of GDP went to highs well above what one would expect from growth, which is usually GDP plus inflation. Earnings, as I have documented in earlier letters, revert to the mean. Next week, I will expand on that thought.

And given my thesis that we are in for a deep recession and a multi-year Muddle Through Recovery, it is unlikely that corporate earnings are going to rebound robustly. This would suggest that earnings over the next 20 years could be constrained (to say the least).

In all cases, throughout the years, the level of returns correlates very highly to the trend in the market’s price/earnings (P/E) ratio.

This may be the single most important investment insight you can have from today’s letter. When P/E ratios were rising, the saying that “a rising tide lifts all boats” has been historically true. When they were dropping, stock market investing was tricky. Index investing is an experiment in futility.

You can see the returns for any given period of time by going to http://www.crestmontresearch.com/content/Matrix%20Options.htm.

Now let’s visit a very basic concept that I discussed at length in Bull’s Eye Investing. Very simply, stock markets go from periods of high valuations to low valuations and back to high. As we will see from the graphs below, these periods have lasted an average of 17 years. And we have not witnessed a period where the stock market started at high valuations, went halfway down, and then went back up. So far, there has always been a bottom with low valuations.

My contention is that we should not look at price, but at valuations. That is the true measure of the probability of success if we are talking long-term investing.

Now, let me make a few people upset. When someone comes to you and starts showing you charts that tell you to invest for the long run, look at their assumptions. Usually they are simplistic. And misleading. I agree that if the long run for you is 70 years, you can afford to ride out the ups and downs. But for those of us in the Baby Boomer world, the long term may be buying green bananas.

If you start in a period of high valuations, you are NOT going to get 8-9-10% a year for the next 30 years; I don’t care what their “scientific studies” say. And yet there are salespeople (I will not grace them with the title of investment advisors) who suggest that if you buy their product and hold for the long term you will get your 10%, regardless of valuations. Again, go to the Crestmont web site, mentioned above. Spend some time really studying it. And then decide what your long-term horizon is.

If I Had a Hammer

Let me be very candid. As the saying goes, if you only have a hammer, the whole world looks like a nail. Many investment professionals only have one tool. They live in a long-only world. If the markets don’t go up, they don’t make a profit. So, for them the markets are always ready to enter a new bull phase, or stocks are always a good value. That is what they sell, and that’s how they make their money. What mutual fund manager would keep his job if he said you should sell his fund? Frankly, it is a tough world.

About half the time they are right. The wind is at their backs and they look very, very good. Genius is a riding market. And then there are those times when it is just no fun to be them OR their clients. Driving to the airport today, I had CNBC on. They had a mutual fund manager on who was talking about why you should ignore the down periods and invest today. He used every hackneyed bromide I have heard and a few new ones. “You have to do it for the long run.” “If you aren’t invested, you miss the bull when it comes.” (Which is SO statistically misleading! Maybe next week I will go at that one!) “Long-term valuations are very good.” “The economy looks to turn around in the latter half of the year, so now is the time to buy, as the market anticipates the rebound by six months.” Etc. He was selling his book.

Again, back to basics. In terms of valuations, markets cycle up and down over long periods of time. These are called secular cycles. You have bull and bear secular cycles. In a period of a secular bull, the best style of investing is relative value. You are trying to beat the market. These periods start with low valuations, and you can ride the ups and downs with little real worry. Think of 1982 though 1999.

But in secular bear cycles, the best style of investing is absolute returns. Your benchmark is zero. You want positive numbers. It is much harder, and the longer-term returns are probably not going to be as good. But you are growing your capital against the day the secular bull returns. And, as bleak as it looks right now, I can assure you that bull will be back. Some time in the middle of the next decade, maybe a little sooner, we will see the launch of a new secular bull.

Why? Because low valuations act just like a coiled spring. The tighter it gets wound, the more explosive the result. You just have to have patience.

Now let’s look at two charts from Vitaliy Katsenelson. They illustrate my basic point: markets go from high valuations to low valuations and then back. The first uses one-year trailing earnings and the second uses a smoothed 10-year trailing earnings stream. But however you look at them, you see a very clear cycle. By the way, the one-year chart is a few months old, so the numbers would look even worse after the horrific earnings from the 4th quarter of last year.

It is time to hit the send button. Next week, we will look at a very simple method for timing the markets within the cycles, which can help you avoid the real downturns. While it may seem obvious that avoiding bear markets will do wonders for your portfolio, a lot of investment professionals say you can’t do it. To that I politely say, garbage.

The tables above clearly lay out how you can time the markets in broad patterns. You can’t pick the absolute highs and lows, but you don’t need to. You just need to know the direction of the wind and where you want to sail.

Source
While Rome Burns – John Mauldin, Thought from the Frontline

Related posts:

• Remittances to Eastern Europe to slow dramatically
• The EU promises to bail out eurozone members
• EU planning 200 billion euro package for Eastern Europe
• Quote of the day: Austrian banks
• Eastern European economic growth to crater in 2009

FT Alphaville has a post up indicating that the UBS EMEA economics team is much more sanguine about prospects in Eastern Europe than many market participants. The most important part of the UBS contents reads as follows:

We don’t normally respond directly to articles in the financial press, but quite a number of clients have requested clarification on recent reports that Eastern Europe is now facing a financial “meltdown”, and one that threatens to take the stability of Western European banking systems down with it (this theme has suddenly appeared in quite a few articles, including those on gold, commodities and banks, but the one that was forwarded to us most often was “Failure To Save East Europe Will Lead to Worldwide Meltdown“, Daily Telegraph, 17 February 2009).

This is heady stuff, and of course has helped call attention to the state of Eastern European economies (for most economists, the irony here is that all the press notice comes at a time when nothing has really changed in terms of the underlying regional situation; we’ve been writing about Eastern Europe’s problems for a good long time now). However, we need to stress our view that the conclusions above are also highly exaggerated, with at least as much “hype” as hard analysis.

Read more at the link below.

Source
UBS: No Eastern European meltdown – FT Alphavlle

Related articles
“Europe is now the epicenter” – FT ALphaville

Related posts:

• EU planning 200 billion euro package for Eastern Europe
• Roubini’s RGE Monitor: Threat of ‘Asia-Style Crisis’ in Eastern Europe
• Bloomberg talks Eastern Europe as Latvia downgraded
• EU: Banks ask for a bailout for poor lending in Eastern Europe
• Remittances to Eastern Europe to slow dramatically

In an interview with Swiss daily Tagesanzeiger, a well-known economist has warned that Switzerland risks bankruptcy, if the recent market turmoil centering on Eastern Europe is not contained quickly.  At issue are loans made in Swiss francs to Eastern European debtors.  With  many countries in the region falling into depression, currencies and asset prices are plunging. Therefore, debtors domiciled in Eastern Europe are increasingly expected to have difficulty with mounting foreign debt loads — and that spells trouble for Switzerland.

Below is my translation of the Tagesanzeiger article.

Switzerland threatened with bankruptcy

Swiss banks have given billions of credit to Eastern Europe – now the customers cannot pay back the money. Switzerland is threatened with the fate of Iceland, says economist Arthur P. Schmidt.

In countries such as Poland, Hungary and Croatia, the Swiss franc has become an important currency. Thousands of households and small firms took out loans in Swiss francs, and not in the national currency zloty, forint, or kuna because of lower interest rates. In Hungary, 31 percent of all loans are in Swiss currency. Amongst household loans, they are almost 60 percent.

Borrowers in distress

Now, the financial crisis has ended the era of cheap credit. As a result, Eastern European currencies are falling. At the end of September, one had to pay 46 francs for 100 Polish zlotys. Today it is 30 francs. That means more and more borrowers are having problems with interest payments and repayment. So the question is what effect this has on the Swiss financial marketplace. One who sees a dark future for Switzerland is economic expert Artur P. Schmidt. He believes that the Swiss franc is in danger because of the loans in Eastern Europe.

In Poland, Hungary and Croatia, the Swiss franc has become an important foreign currency – the dollar, so to speak, of Eastern Europe. Thousands of households and businesses have franc loans. Why?

The rapid growth in many countries of Eastern Europe was stimulated through loans in Swiss francs. Swiss banks and offshore institutions loaned the local banks francs, which passed the francs onto their customers. The loans were attractive because borrowers pay interest rates much lower than required for loans in local currency.

Now, this system has been shaken?

Yes, the system has only worked as long as the exchange rate between the franc and the currencies were reasonably stable. But that is not currently the case. For example, the Hungarian forint and Polish zloty have lost over a third of their value against the Swiss franc in recent weeks. Because of the devaluations of the national currencies, the debt to Switzerland has increased by more than one-third. Many of the Eastern European countries have serious payment difficulties, and are virtually bankrupt.

What does this mean for Switzerland?

It is likely that a significant proportion of the total 200 billion U.S. dollars of Eastern European loans were issued in Swiss francs. According to a report by the Bank for International Settlements worldwide franc loans equivalent to around 675 billion U.S. dollars are in circulation – which was about 150 billion directly from Switzerland, 80 billion of Great Britain and about 430 billion U.S. dollars through offshore financial centres. How many of these loans have gone bad is not known. But even if the failure rate is 20 percent, the banks would lose a lot of money.

Is the federal government going to intervene now?

If the banks require a massive writedown of such loans, above a certain magnitude, the government must intervene. This is already happening via the Swiss National Bank. In Poland, it has made several billion francs available to the local central bank so that Polish banks can cover the loans. At the same time, the Swiss National Bank inquired by the European Central Bank whether it could borrow money in an emergency. This is a clear warning sign that the Swiss franc could be under huge devaluation pressures in the near future.

Swiss banks were too careless in their lending in Eastern Europe?

Yes, indeed. Many bankers wanted to earn a lot and neglected the risks. The National Bank is also at fault as it did not intervene. In addition, the regulator and the politicians completely failed.

What Switzerland must do now?
Now, the possible losses caused by these loans must be made transparent. Above all, all of the Eastern European risks must be fully disclosed. Together with the loan losses from UBS and Credit Suisse, the entire writedown for Switzerland could exceed the Swiss gross domestic product.

That is to say?
Switzerland, like Iceland, is threatened with a potential national bankruptcy. One consequence would be that the Swiss currency could fall massively in value — possibly even crash. Another would be that Switzerland’s credit rating would be massively downgraded. That would be a trauma for the country: Switzerland was always as a stronghold of stability. The franc could become an unstable soft currency. Then Switzerland would perhaps be forced to abandon the franc and take on the euro.

This article fills in a lot of gaps for me. Two weeks ago, I happened to catch another post in the Swiss press about the Swiss government issuing debt in U.S. Dollars.  In my post “Why are the Swiss now issuing debt in U.S. Dollars? I asked an open question as to why the Swiss were issuing debt in dollars.  No one knew and I had yet to hear a satisfactory answer to this question.

However, my post also pointed to central bank swap lines between Switzerland and a number of countries in Eastern Europe as a related event.  The Tagesanzeiger article makes clear that these swap lines are needed due to Eastern European exposure to loans in Swiss Francs. I expect the U.S. dollar swap lines and dollar debt issuance are related – as are the Euro swap lines with the ECB – for liquidity in case of emergency.

These machinations are a testament to the continued fragility of the global financial system. The interconnectedness across currencies and countries is staggering. One domino falls and the whole global financial system is at risk.

Welcome to the dark side of globalisation.

[Update - 18 Feb 2009 730PMEST]: The Berlingske Tidene, a Danish newspaper is now covering this story. Here is the link, if you speak Danish:
Schweiz truet af stats-bankerot – Berlingske Tidene
And Willem Buiter has some words to say about this crisis that are of a similar nature. He suggests capital controls are coming to Eastern Europe:
The return of capital controls – Willem Buiter

Sources
SNB schliesst Swap-Abkommen auch mit ungarischer Zentralbank – Money Cab Finance News
Der Schweiz droht der Bankrott – Tagesanzeiger

Related posts:

• Swiss Franc at Dollar parity?
• Why are the Swiss now issuing debt in U.S. Dollars?
• EU planning 200 billion euro package for Eastern Europe
• The Swiss get on the QE2
• Switzerland: politicians need to act now

Below is my translation from an excerpt in the Swiss newspaper NZZ:

In 2008, the lucrative business with loans to U.S. students came to an abrupt end. Today, UBS sits on paper that could still be worth $8.4 billion – or less. The collapse of the market for student loanshas increased the barrier to a good education for young Americans.

Sebastian Bräuer, New York
Chris Croteau knows UBS only by hearsay. He has no account with the Swiss bank. Nevertheless, there is a fatal connection between the derivatives operations of UBS and the fact that the young man from New Hampshire was on the verge of interrupting his studies.

In the autumn of 2006, the now 20-year old, began to study Business. In order to pay the usual high tuition fees, he took out a loan. A foundation of his state (NHHEAF) awarded favorable loans to students…..

In February 2008 something happened, which UBS later sheepishly described as a “surprising and unexpected result of the U.S. subprime crisis”: Auctions [for student-loan backed securities] were no longer established. There were no more investors. That has not changed: The ABS market is frozen.

For the students in New Hampshire, this had a direct effect: One month later, the NHHEAF stopped awarding new loans. In the previous year the Foundation had funded $67 million in grants that supported 6000 students. “In 2008, demand would have been just great,” said NHHEAF spokeswoman Tara Paine. Thousands of students have had to seek private loans.

The result of the credit crisis has been two-fold:

1. Students have bee cut off from funds that were previously available.  This makes college unffordable for some. 
2. Banks like UBS are sitting on massive losses in student loans as a result of the downturn in this market and in the economy. Whether these writedowns are excessive because of mark-to-market accounting is hotly contested – hence the abuse of reclassification of assets as Level 3 assets.

I mention this story because it gives one a real understanding of what happens when the credit markets seize up. I first highlighted the implosion of thestudent loan market in May and then again in October. It is not just about over-leveraged subprime borrowers. There are other very real consequences. I think it is tragic that many young people might be denied an education because of this situation.

Moreover, this story highlights the degree to which there are many more credit writedowns which still need to be taken. For a troubled institution like UBS, taking these writedowns here and now could be fatal. In my view, this is yet another concrete example of the fragility of European and global banking.

At the end of December UBS had Asset-backed securities with a market value of $12.9 billion, of which $8.4 billion were based on student loans. The sum is only a vague estimate, because there is currently no demand. What the paper is really worth, is controversial. “The asset-backed securities could be worth 20 to 30% more in value,” says Sean Egan of the independent rating agency Egan-Jones. That does not benefit UBS, however, long as they cannot find buyers. Egan believes interest by private investors will likely return in one to two years at the earliest.

Until then, the ABS’s are a ticking time bomb. In the worst case, they must be written down. How much and how fast is a matter of accounting rules. In the last quarter, UBS reported a writedown of $ 1.2 billion – without a refined reclassification of assets, the bank would have had to report a trading loss of $4.2 billion.

Source
Die UBS sitzt auf Milliarden geplatzter Studentenkredite – NZZ

Related posts:

• Student Loans: New Credit Crunch Casualty
• What is a credit writedown?
• What Home-Loan Banks reveal about the effects of mark-to-market
• Deutsche Bank and HBOS hit by writedowns
• New Writedown Risk: Alt-A

What are the Swiss doing selling dollars? I don’t have an answer to this question. But, I thought I would posit it because a reader tipped me off to a development via the Blog Alea (hat tip Scott):

The Swiss National Bank (SNB) is introducing a new monetary policy instrument. It will issue its own debt certificates in US dollars (SNB USD Bills) with terms of less than one year. The instrument will be employed as of mid-February 2009 and will be used until further notice to finance the SNB’s loan to the SNB StabFund.

The first auction of SNB USD Bills is to be held on Monday, 16 February 2009, from 10.00 a.m. to 10.30 a.m., via the Eurex Zurich Ltd electronic trading platform. After that, auctions of SNB USD Bills will be held once every two weeks. All parties who are authorised by the SNB to participate in both the CHF repo market and the primary and new issues market section of Eurex Zurich Ltd are eligible to take part in the auctions.
These parties may also accept subscriptions from third parties. The auction will take the form of a variable rate tender with allotment according to the Dutch auction method. The denomination is USD 0.5 million and the SNB USD Bills are offered with terms of 28, 84 and 168 days.

SNB USD Bills will be included in the list of collateral eligible for SNB repos. Consequently, they may also be used in SNB repo transactions. Moreover, in accordance with art. 16 of the Banking Ordinance, these securities may be counted as liquid assets. The general issue conditions as well as the conditions applying to the individual issues and their results will be announced on the SNB website (www.snb.ch, Financial markets, Monetary policy operations, SNB USD Bills).

The only connection I can see to recent events is a link I posted in my links on Jan 22nd. Below is the relevant text:

Swiss National Bank Vice-President Philipp Hildebrand said policy makers are prepared to intervene in currency markets at fixed exchange rates if necessary to prevent a “renewed appreciation” of the franc.

“With short-term rates of practically zero, the SNB can’t prevent a further appreciation in the Swiss franc through a rate cut,” Hildebrand said in a speech in St. Gallen, Switzerland today. “The SNB is able to sell unlimited Swiss francs versus another currency. In an extreme case, it can commit itself at the same time to buying unlimited currencies at a fixed-exchange rate.”

The franc has risen around 7 percent against the euro since October as the global financial crisis forced the Swiss central bank to cut its benchmark rate by 225 basis points, taking it to 0.5 percent. That’s smothering inflation and hurting exports, which make up more than half of Swiss gross domestic product.

“The strong franc is certainly a burden for exports given waning global demand,” said Fabian Heller, an economist at Credit Suisse Group in Zurich. “Words are not enough to weaken the franc. But the longer the situation lasts, the higher the chance of the SNB intervening” in currency markets.

The franc dropped after the remarks, trading at 1.4846 per euro at 6:52 p.m. in Zurich, from 1.4793 yesterday. It reached a record high of 1.4315 versus the euro on Oct. 27.Against the dollar, it weakened to 1.1543, from 1.1462 yesterday.

‘Further Options’

SNB comments on the strength of the franc will probably discourage bets the currency will keep rising, Ashley Davies, a currency strategist at UBS AG, the world’s second-largest foreign-exchange trader, said in a note on Jan. 19. The franc will trade between 1.47 and 1.54 versus the euro throughout 2009, Davies said.

“A central bank is always able to increase the absolute amount of its own currency in circulation,” said Hildebrand. “Further options” for policy makers include purchasing government bonds on the secondary markets, he said, conceding that using unconventional tools “isn’t without risks.”

“The SNB will assess very carefully whether and to what extent it will use them,” said Hildebrand.

I am still left wondering why the Swiss are trying to issue debt using dollars. Ostensibly they receive dollars for these bonds, which takes currency out of circulation and makes the dollar strengthen. Can someone help me out here?

If I find anything in the Swiss press, I will post a translation.

UPDATE 2009-02-03: This is what I have heard regarding possibilities:

1. The Federal Reserve is not going to renew their U.S. dollar swap facilities in April.  Therefore, the Swiss, the Europeans, and the British will need to find other ways to achieve this dollar exposure. This is not bullish for the Euro, Franc or Pound.
2. The Swiss are funding the UBS assets they took on in September.  UBS transferred positions worth $16 billion to the same SNB StabFund issuing the short-term U.S. dollar notes. The SNB is acquiring tens of billions in toxic assets. Here is a story on that (here).  This seems very likely.

 You should also note that the SNB has created swap lines with the Polish and Hungarian central banks, suggesting there is a level of stress in Eastern Europe that concerns central bankers because of Western European bank exposure to falling asset prices there.

Sources
Hildebrand Says SNB Can Intervene in Franc Market – Bloomberg.com
Scoop: Swiss National Bank to Issue SNB Bills in US dollars – Alea Blog
SNB schliesst Swap-Abkommen auch mit ungarischer Zentralbank – Money Cab Finance News
SNB: StabFund übernimmt erste Tranche von UBS-Aktiven – Money Cab

Related posts:

• The Swiss get on the QE2
• Swiss Franc at Dollar parity?
• The dollar collapses
• Chart of the day: US Dollar
• The U.S. dollar plunges due to quantitative easing

Zero percent interest rates are pretty Dollar-bearish.  So, the U.S. Dollar is getting hammered.  See these charts from the last day and a half of trading.  Even the British Pound is cleaning up!

Dollars per Euro

Dollars per British Pound

Swiss Francs per Dollar

Japanese Yen per Dollar

Related posts:

• U.S. Dollar: Cliff Diving Again
• Chart of the day: US Dollar
• US Dollar rising dramatically
• Chart of the day: Japanese Yen
• The U.S. dollar plunges due to quantitative easing

You have probably never heard of Glencore. Well you have heard of its founder Marc Rich, the man infamously pardoned by President Clinton before he left office. And I suspect that you will soon hear a lot more about the company as well.

Glencore is a metals production and trading company based in Switzerland. It is one of the largest privately-owned companies in the world and a very large employer in Switzerland. The problem is that commodities prices have been absolutely decimated. So, the secretive Swiss company’s credit default swaps are trading at huge premiums, something we alluded to last month.

The obvious question is: why is that? Unfortunately, the answer is: nobody knows. But rumors of financial problems are mounting.

Glencore announced on Tuesday that it was considering a debt buy-back after the cost of insuring against its default rose to a level that did not reflect its financial situation, the world’s largest commodities trader said.

The decision by the secretive Swiss-based group came hours after Standard & Poor’s, the rating agency, downgraded Glencore’s long- and short-term credit rating to BBB-minus and A-3 respectively, down from BBB and A-2. The outlook is “stable”, S&P said.

Glencore’s credit default swap spread reached a record high last week. From a level of less than 200 basis points in early September, it rose to more than 3,100bp, meaning it cost more than €3.1m ($4.1m) annually to protect €10m of the firm’s debt over five years.

“Glencore strongly believes its current credit spreads do not reflect its underlying credit profile, and has therefore decided to utilise part of its strong liquidity position to selectively consider debt buy-back opportunities,” it said in a statement.

The company did not say how much debt it planned to buy back.

Glencore said that its current liquidity, both cash and undrawn banking facilities, exceeded $3.5bn. It added that lower commodities prices were reducing its working capital needs and estimated that this natural deleveraging would result in another $2bn of spare liquidity by the end of the year. S&P estimated Glencore’s short-term debt for 2009 at about $2bn.

This seems like a case where the external business environment is declining rapidly, yet the company paints a pretty picture of its finances. But, no one really knows what’s happening inside. They can only speculate based on publicly available data. And that data is not good.

Glencore, which is controlled by its employees, trades base metals, minerals, oil and agriculture commodities. It also owns smelters and stakes in mining companies, such as 35 per cent of miner Xstrata.

S&P said it had cut its view on the Swiss trader because of “metal prices’ unprecedented fall and weak near-term outlook” and “the related significant drop in the value of Glencore’s industrial investments portfolio, which has resulted in weaker asset-debt coverage levels”.

The market value of Glencore’s 35 per cent stake in Xstrata has, for instance, shrunk to about $3.7bn from around $22bn at the end of June.

Stay tuned.

Sources
Glencore considers debt buy-back – Financial Times

Related posts:

• The latest on Glencore
• Glencore: A Swiss giant on the edge
• Rio Tinto: all kinds of trouble
• Lehman Brothers: a primer on Credit Default Swaps
• Treasury credit default swaps rise dramatically

Despite the plethora of data that has come out recently, one thing that has occasioned very little comment is the outlook for U.S. exports. Exports are generally not a big factor in the subset of companies involved in the ISM survey, but the plunge in export orders to 34.5 suggests that U.S. exports, hitherto a support in an otherwise collapsing economy, could be in big trouble as well.

U.S. November ISM Non-Manufacturing Index: Summary

	Nov.	Oct.	Sept.	Aug.	July	June	May	April	March	6-mo Avg
	2008	2008	2008	2008	2008	2008	2008	2008	2008
Composite Index	37.3	44.4	50.2	50.6	49.5	48.2	51.7	52	49.6	46.7
Export Orders*	34.5	50	50.5	44.5	47.5	52	54	48.5	55	46.5
Import Orders*	40	52	47.5	46	49	50.5	48	50	54.5	47.5

U.S. November ISM Non-Manufacturing Index: Summary, December 3, 2008, Bloomberg

Note that the export order index is falling faster than the import order index. The recent strength of the dollar is clearly having an impact. The combination of these two sub indices of the manufacturing ISM shows the substantial positive differential of exports over imports has disappeared. The same sub indices for the non-manufacturing ISM may be telling us once again that the whole trade improvement that was such a positive for the U.S. economy in recent quarters is about to disappear and may even reverse. This ominously echoes what happened in the wake of the Asian Financial Crisis in 1997/98, where a flight into the dollar from the Asian currencies triggered a huge deterioration in the U.S. current account and a further hollowing out of the country’s manufacturing base. With Detroit already on the verge of collapse, the decline of the Korean won from 900 to 1400 massively improves Korea’s competitiveness in the U.S. auto market. If dollar strength persists, then no bailout or no bailout, GM, Ford and Chrysler are toast.

Related posts:

• Dollar strength is an illusion
• Japanese defend dollar’s status while China tears it down
• U.S. Dollar: Cliff Diving
• The U.S. dollar plunges due to quantitative easing
• Why I am bearish on the U.S. Dollar

I caught a post today on the Swiss Blog Zeitenwende about Glencore, the Swiss corporate giant, which should reinforce the fact that this credit crisis is far from over. As the original post was in German, I have translated it into English below:

If Charts could speak, what would the following one tell us then? This concerns five-year Credit default Swaps of the company Glencore. In case you have never heard of this company, then now is the critical time. Glencore is the largest enterprise by turnover in Switzerland, recording record sales of 142.3 billion USD in 2007. According to its own data, Glencore directly or indirectly employs 52,000 employees. And obviously some of it has gone pear-shaped

The company, which is active in raw materials, was originally founded by notorious Marc Rich and has always been completely in private ownership.

Today Glencore ranks among the leading raw material companies world-wide and deals with, among other things, production, processing and trade of aluminum, alumina, bauxite, ferrous alloys, nickel, zinc, copper, lead, coal and oil, as well as agricultural products. Right now, things are looking bad for raw materials. Apparently, bad is how things are going at Glencore, if this Chart reflects the reality of the company. Only – one does not know the details. Concerning the rumors that Glencore could be having liquidity problems, an analyst at BNP said that the company has more than 3.5 billion USD of cash and open lines of credit as of the end of of Octobers.

The chart speaks volumes. While you may have never heard of Glencore until now, I suspect it is a company that will become very familiar to us in due course.

Source
Was ist nur mit Glencore los? – Zeitenwende

Related posts:

• Glencore: credit default swaps suggest something amiss
• The latest on Glencore
• Swiss Franc at Dollar parity?
• Swiss citizens think a large Swiss bank will fail
• Steve Keen: On the Edge with Max Keiser

Hansruedi Ramsauer is one of the foremost German-language finance bloggers, writing over at the Swiss site Zeitenwende. In a recent post, he draws attention to the dire state of Swiss banking and calls on Swiss politicians to act now to secure the industry during this global credit crisis.

With UBS due to report earnings and fears running high about writedowns and job losses at the venerated Swiss bank, Zeitenwende’s call is urgent. The solution, however, is still murky.

Below is the translation of his post from the original German.

Swiss politicians are called to act now

Politicians of every stripe have been swearing to the citizenry, almost mantra-like, that our banks are safe — even as the horror scenario of a bank run menaces them. However, the unwillingness of the banks to lend to one another shows how credible such statements are. The interbank market has completely dried up.

Why should the people trust politicians, if the banks themselves have no trust? Who knows better here?

These political slogans are anxiety pills [dispensed] in order to forestall the inevitable. But the inevitable has already become fact in many places – the promises of bank managers and politicians in recent months have mostly turned out, just days later, to have not been worth a single cent.

The words of the new Swiss Finance Minister Eveline Widmer-Schlumpf exemplify this:

The big [Swiss} banks "belong to the [list of] well capitalised banks, as they always have,” the Minister said.

The banks are well-capitalized banks only on the basis Bank for International Settlements (BIS) risk models. The unfortunate thing is that these risk models have failed. If one uses the core capital ratio as a basis for security, then things look bleak.

More information here: Is the BIS is the cause of the credit crisis?

At UBS, share capital of 44 billion Swiss francs stands against a balance sheet total of 2,077 billion Swiss francs [$2 trillion US]. This gives an equity ratio (core capital) of 2.11 percent. (Source). A year ago, 51 billion Swiss francs stood against total assets of 2,539 billion Swiss francs [nearly $2.5 trillon US]. At the time, the equity ratio stood at 2%. The financial crisis was, therefore, not surprising — the same is true for many other banks with comparablly high leverage (use of debt).

The losses at UBS in the American mortgage market were, when compared with total assets of CHF 2,539 billion and with the low equity, FATAL! However, UBS was lucky because the crisis hit it with its full force first, so that it could increase share capital and shrink the balance sheet sooner than many others.

Today, UBS is in relatively good condition in comparison to the other heavyweights in the financial industry. The situation is still catastrophic with recession in Europe and the U.S. looming. You do not need much imagination to estimate how little it would take for UBS to crater on a share capital raio of 2.11 percent. The fact that other European banks are worse off or that Credit Suisse is not in much better shape, should be of little comfort.

Back to politics: The fact that Minister Widmer-Schlumpf is passing out anxiety pills to calm investors and customers of big banks is, from a national political perspective, understandable if not mandatory. However, merely hoping that one could slide through this crisis is not a strategy for a country whose financial industry is one its major employers and taxpayers. So what can one do?

An estimated 600 billion Swiss francs are lying in Swiss pension fund coffers. The amount accumulated and invested in the financial markets per capita is a record worldwide. The financial crisis would have destroyed decades of provisions made by Mr. and Mrs. Swiss overnight. But thanks to world-wide state intervention in favor of overly indebted financial institutions, this capital – despite still unknown losses – has remained relatively stable.

A large part of this capital flowed until now into the bond market and financial institutions, which have long dominated that market. But this is history now. Investors, just like the pension funds, no longer want these bonds in their portfolios – so large is the uncertainty. Such investor behavior is increasingly drying up liquidity, and it’s only a matter of time before other companies, which have financed themselves in the short-term capital markets, get into difficulty.

Now for my solution

UBS and CS are, on the one hand, too big to fail for Switzerland. However, Switzerland is also too small to save the big banks. Since the [Swiss] Confederation cannot draw upon sparring partners in the EU, it needs a different solution and my solution is: Pension funds!

The pension funds can re-capitalize the major Swiss banks. The yield, in a purely economic sense, would be many times greater than current investment returns — if the big banks can be saved long-term and if no tax funds are needed and if — and this is important — the paralyzing fear of all Swiss citizens that their savings will taken in a single stroke can be laid to rest.

Source
Jetzt ist die Schweizer Politik gefordert – Zeitenwende

Related posts:

• Glencore: A Swiss giant on the edge
• Switzerland threatened with bankruptcy
• UBS is too big for Switzerland
• Doubling down at AIG
• Are European banks sitting on 16.3 trillion in toxic assets?

UBS reported a loss of 358 million Swiss Francs ($332 million) after writing down a further $5.1 billion in debt.

In my post yesterday, I said the market expected as much. But, more importantly UBS has confirmed plans also mentioned in yesterday’s post of splitting the bank up into three autonomous units – effectively ending the universal banking model. Citigroup, another big loser in this credit crunch will be under increasing pressure to follow suit, as Sandy Weill’s ‘financial supermarket’ concept has performed abysmally.

The Financial Times also notes that UBS is quite downbeat about turnaround prospects for the second half of 2008. If one takes this to mean that the same environment which caused these writedowns is likely to hold, I believe it means we should see significant writedowns in Q3 and Q4 earnings cycles — and not only from UBS.

However, investors have developed a severe case of heartburn when it comes to financial services share offerings. Share sales at this point in the year will likely be met with little investor appetite and risk failing. If writedowns continue unabated into the third and fourth quarter as UBS management has suggested, a weaker global player will likely go to the wall because of limited capital raising opportunities.

These are very nervous times.

Sources
UBS shakes up board amid further losses – FT
UBS to Separate Businesses After Second-Quarter Loss – Reuters/NY Times
UBS to reorganise in three units – BBC News

Related posts:

• JPMorgan: Beats expectations despite writedowns
• Goldman loses $2.1 in the third quarter
• Merrill and Citi are the big losers this season
• $467 billion in writedowns and counting
• Writedown news: 13 Aug 2008

Let’s hope the UBS earnings report is not as bad as Merrill. If you recall, Citi, Merrills and UBS are the three worst offenders when it comes to writedowns. Given the recent asset sales by RBS and Merrill, one would expect to see some real ugliness at UBS tomorrow. Stay tuned.

The pressure is growing to make some radical moves, after a series of challenges:

• The bank’s writedowns on bad credit investments are expected to reach $43 billion.
• A settlement was announced Friday with U.S. regulators to buy back as much as $19 billion in auction-rate securities.
• The bank’s private-banking business is fighting to keep lucrative clients amid a tax-evasion investigation.

Among the options being aired: the sale of a UBS money-management unit in the U.S., formerly known as PaineWebber, and the separation of its troubled investment bank into an independent unit.

-WSJ, 11 Aug 2008

Related posts:

• Citi close to selling German unit
• UBS woes with IRS have Swiss worried
• Mortgage insurers will trigger further writedowns
• UBS writes down another $5 billion
• Didn’t Merrill just write down over $9 billion?

This is a big story coming from the Swiss German-language paper Sonntagszeitung. I originally saw this story in a derivative report from MarketWatch and then again at Calculated Risk. It’s not getting enough play as yet in the English-language press, perhaps because no one has translated the full story.

The long and short here is that Swiss politicians are looking to compel their financial institutions to be ’super-capitalised’ in order to avoid writedown risk down the line. As a result, both UBS and Credit Suisse may be compelled to raise huge amounts of additional capital. As this is highly dilutive to existing shareholders, this will be a disappointment in the stock market, particularly for UBS which has already raised record amounts after writing off nearly $40 billion in losses. But, it may also cripple them in the Investment Banking world in the US.

I reported a few days ago that UBS was going to write down additional billions in U.S. losses but that it had over 11% Tier 1 capital equity and needed no further capital. Nevertheless, earlier warnings from the Swiss National Bank that it was going to compel Swiss financial institutions to have higher capital ratios are now being felt. In a post on 4 June 2008, called ‘Deleveraging redux,’ I quoted an article from the Herald Tribune that seems to identify the source of present concerns.

Switzerland’s large banks should increase their capital cushion and cut debt to better face the current credit crisis, the president of the Swiss National Bank said Friday.

“We will firmly support initiatives … to increase the equity of our large banks and to reduce their debt,” Jean-Pierre Roth said at a forum in Geneva.

Swiss banking chief says banks need capital cushion, less debt amid credit crisis, IHT, 23 May 2008

Obviously, the Swiss are worried about the reputation of the safety of their financial sector because financial services is one of Switzerland’s most prized industries (along with watch-making and pharmaceuticals). Now, political pressure inside Switzerland is obviously coming to bear as well. In the IHT article, Roth said the capital requirements were something they would address after the credit crisis. Politicians are obviously looking to move that timetable up as much as possible.

Below is my translation of the story and the original text.

My translation:

Big banks are to be heavily restricted

Politicians have had enough of the billions in losses. Swiss banks will virtually be forced to a withdrawal from Investment Banking in the United States as a result of new rules.

By Othmar von Matt and Arthur Rutishauser

After seeing the big banks write off 60 billion francs because of the U.S. credit crisis, the Swiss Federal Banking Commission (SFBC) has stepped in. According to research by “Sonntagszeitung,” the big banks must have at least 4 percent equity capital in the future. Today, UBS makes do with just under 2 percent and Credit Suisse with about 3 percent.

In addition, the ’so-called’ tiered capital will have to be increased massively. SVP National parliamentarian Hans Kaufmann says, what this means is massive capital increases: “40 billion for UBS, 30 billion francs for Credit Suisse.” These are the sums he has heard in conversations.

The SFBC confirmed that it has determined specific figures and that the banks have until after the summer holiday to respond. Spokesman Alain Bichsel: “In the autumn we want to release a definitive position.”

He leaves no doubt that the SFBC will not waiver despite any protest from the banks, but that the SFBC is prepared to discuss details regarding implementation and the transition periods.

The big banks, however, are fighting vigorously against the new rules. Credit Suisse spokesman Marc Dosch: “Such measures must be based on the real problem, which in our view is not the case regarding leverage ratios and the capital buffers.”

Even if no capital has to be raised immediately, the banks would practically be shut out of any capital-intensive financing activities – such as the lucrative business of financing takeovers.

This would turn UBS and Credit Suisse into also-rans in the US. Dosch: “Such one-sided actions endanger the international competitiveness of Swiss banks and Switzerland as a financial centre. We will examine the proposals already received from the SFBC closely and discuss them in detail with the authorities.”

Hildegard Fässler, SP-National parliamentarian and President of the Economic Commission STC, sees the measures positively: “Politics is emancipating itself from the big banks. A change of thinking has occurred in the Bundesrat [Senate] as well. The government is now taking a certain critical distance. “

Privately, the Department of Finance also says: “And if Investment Banking goes away, it won’t be any big deal: In the end, UBS has already lost 40 billion.”

Original German-language text:

Grossbanken werden massiv eingeschränkt

Von Othmar von Matt und Arthur Rutishauser

Nachdem die Grossbanken wegen der US-Kreditkrise zusammen 60 Milliarden Franken abschreiben mussten, schreitet die Eidgenössischen Bankenkommission (EBK) ein. Gemäss Recherchen des «Sonntags» müssen die Grossbanken künftig mindestens 4 Prozent Eigenkapital ausweisen. Heute fährt die UBS mit knapp 2 Prozent und die Credit Suisse mit etwa 3 Prozent.

Hinzu kommt, dass auch das so genannt gewichtete Eigenkapital massiv erhöht werden soll. SVP-Nationalrat Hans Kaufmann sagt, was dies bedeutet – nämlich massive Kapitalerhöhungen: «40 Milliarden für die UBS, 30 Milliarden Franken für die CS.» Das habe er in Gesprächen gehört.

Bei der EBK bestätigt man, dass man sich auf Zahlen festgelegt hat und die Banken bis nach den Sommerferien Zeit hätten, sich dazu zu äussern. Sprecher Alain Bichsel: «Im Herbst wollen wir dann die definitive Verfügung erlassen.»

Er lässt aber keinen Zweifel, dass die EBK bei allem Protest der Banken hart bleiben will und man sich allenfalls noch bei den Ausführungsdetails und bei den Übergangsfristen auf Diskussionen einlässt.

Bei den Grossbanken hingegen wehrt man sich kräftig gegen die neuen Vorschriften. CS-Sprecher Marc Dosch: «Solche Massnahmen müssen auf das tatsächliche Problem abzielen, was nach unserem Dafürhalten etwa bei Leverage Ratio und Kapitalpuffer nicht der Fall ist.»

Auch wenn das Kapital nicht von heute auf morgen beschafft werden muss, könnten kapitalintensive Neugeschäfte praktisch nicht mehr getätigt werden – zum Beispiel die lukrative Finanzierung von Firmenübernahmen.

Damit würden UBS und CS in Amerika zu Nonvaleurs. Dosch: «Solche einseitigen Massnahmen gefährden die internationale Wettbewerbsfähigkeit der Schweizer Banken und des Finanzplatzes. Die nun eingegangenen Vorschläge der EBK werden wir eingehend prüfen und mit den Behörden im Detail diskutieren.»

Hildegard Fässler, SP-Nationalrätin und Präsidentin der Wirtschaftskommission WAK, sieht die Massnahmen positiv: «Die Politik emanzipiert sich von den Grossbanken. Auch im Bundesrat hat ein Umdenken stattgefunden. Die Regierung hält nun eine gewisse kritische Distanz.»

Beim Finanzdepartement heisst es denn auch hinter vorgehaltener Hand: «Und wenn das Investmentbanking abwandert,
wäre das nicht so dramatisch: Schliesslich hat es der UBS den 40-Milliarden-Verlust eingebrockt.»

(mz/nos)

Related posts
De-leveraging redux

Source
Grossbanken werden massiv eingeschränkt, Sonntagszeitung

Related German-language article
Rating-Agenturen: Notengeber kommen unter Druck, Handelszeitung
Die grosse Finanzkrise hat eben erst begonnen, Sonntagszeitung (this article is also partially translated here)

Related posts:

• Credit Suisse and UBS have hands out for more capital
• Writedown News: 7 Jul 2008
• UBS rights issue hits an air pocket
• UBS woes with IRS have Swiss worried
• Writedown News: 12 Jul 2008

UBS has announced that it expects further massive hits from the credit crisis and subprime meltdown to affect its quarterly earnings to be released soon. However, after raising a huge amount of equity capital, the company is well-capitalised enough to weather the storm. They ned not raise further capital as their Tier 1 capital, at over 11%, is well above levels needed to be considered well-capitalised.

Although their announcement was greeted with mixed results in the market, I consider this to be a net positive for UBS and the banking system as a whole. Their losses were largely expected but their capital position puts them in a strong position.

Thank god for rights issues.

UBS AG may avoid a loss in the second quarter and has no plans raise capital after 3 billion Swiss francs ($2.9 billion) in tax credits offset damage from the subprime crisis.

UBS, the European bank hardest hit by the subprime contagion, said today its results were “at or slightly below break-even” in the quarter. Citigroup Inc. analysts estimated this week UBS would post a loss of 4.56 billion francs in the period on about 7 billion francs in asset writedowns.

Chief Executive Officer Marcel Rohner, who has announced plans to cut 5,500 jobs and shrink the investment bank, is also trying to stem defections among wealthy clients after 25.4 billion francs of net losses. UBS said its money management division suffered client defections in the second quarter, with the withdrawals most pronounced in April.

“UBS clearly wanted to show that it didn’t do that bad,” said Florian Esterer, a senior portfolio manager at Swisscanto Asset Management, which oversees about $63 billion. “What worries me are the net new money outflows, which indicate a serious problem for the franchise.”

UBS fell 54 centimes, or 2.6 percent, to 20.48 francs in Swiss trading, after initially climbing as much as 8.2 percent. The Bloomberg Europe Banks and Financial Services Index fell 3.1 percent. UBS is down 56 percent this year.

Rating Cut

The Swiss bank sees no need for further capital because its Tier 1 ratio, a measure of solvency, stood at about 11.5 percent at the end of June, up from 6.9 percent on March 31. UBS raised 16 billion francs in a rights offer in the second quarter, after turning to investors for 13 billion francs earlier this year.

Goldman Sachs Group Inc. analysts estimated today that European banks may have to raise as much as 90 billion euros ($141 billion) as slowing economies drive up losses on loans.

Moody’s Investors Service cut its rating on UBS senior debt by one level to Aa2, citing “challenges still facing the bank’s management team to return UBS to a position of stability,” and expectations of weaker client fund inflows.

Banks worldwide have announced $402 billion in writedowns and credit losses related to the subprime crisis, data compiled by Bloomberg show. Markdowns at UBS amounted to more than $38 billion in the previous three quarters. UBS is scheduled to publish second-quarter results on Aug. 12.

UBS, which earned a profit of 5.55 billion francs in the second-quarter of 2007, said market turmoil led to writedowns and a loss at the investment bank in the past three months.

-Bloomberg News, 4 Jul 2008

Related posts:

• UBS rights issue hits an air pocket
• $467 billion in writedowns and counting
• UBS writes down another $5 billion
• Credit Suisse and UBS have hands out for more capital
• Writedowns hit $500 billion

European banks are still in need of time or money to recapitalise their weak balance sheets. This has to be especially worrying for UK banks as they have raised a significant amount of capital and their housing market has yet to see the level of write-offs that the U.S. housing market has engendered. The FT argues that this under-capitalisation goes right across the board.

European banks have a $400bn hole on their balance sheets in spite of a record-breaking week in fundraising from rights issues.

This is a 20 per cent increase from the end of last year, raising a big question mark over the health of the banks and suggesting the credit crisis is deepening, according to Citigroup.

Royal Bank of Scotland and UBS raised $40bn from rights issues this week as capital-raisings since the end of the third quarter last year rose to $110bn.

However, the gains from capital-raisings are being outweighed by structured credit writedowns and lower underlying earnings, which are hitting the equity base of the big banks.

The so-called capital deficit, which measures the amount of equity banks should have in relation to risky assets on their books, now stands at more than $400bn, according to Citigroup.

The U.S. financial services group said in a research note: “It doesn’t matter how you think of capital: every measure of capital adequacy looks to have got worse since last year. We believe European banks remain further away than ever from a gold standard level of capital adequacy.”

RBS, UBS, Barclays, Deutsche Bank, Hypo Real Estate, Crédit Agricole, Commerzbank, Natixis, Alliance & Leicester and Société Générale all remain highly leveraged, according to Citigroup.
-Financial Times, 14 Jun 2008

Funny that the FT would have caught this analysis from Citigroup because just last week they had argued that the European banking sector was ripe for a little M&A activity. The truth is that most European banks are in no position to go into risky mergers unless forced upon them in order to bolster capital and diversify risk. For now, Europe’s main concern in its banking sector should be avoiding risk, not seeking it.

Related posts:

• Debt financing gone
• European banks have hands out for more capital
• UBS to write down but has massive Tier 1 capital
• B&B gets its money, HBOS and Barclays don’t
• The Germans get tough with the state banks