Financial Teasers 13 March 08

Top Stories

Treasury report analyzes subprime collapse
The U.S. Treasury is about to release a report that attempts to explain why the subprime mortgage market collapsed and offers suggestions for revamping the financial regulatory framework, sources say. The report highlights the need for reforms, such as greater transparency, to prevent the next crisis. The Washington Post (13 Mar.)

Lenders seize Carlyle Capital's assets
Carlyle Capital says its lenders are taking over its assets, forcing the fund into insolvency after it defaulted on $16.6 billion of debt. The high-profile collapse is the first time a Carlyle Group fund has failed and follows a week of unsuccessful negotiations. The Washington Post (13 Mar.) , Bloomberg (13 Mar.)

Hedge funds ready to collapse despite Fed's help
Several hedge funds with assets exceeding $4 billion have halted withdrawals or are on the verge of failing, despite the Federal Reserve's drastic action to ease the credit crisis. A leading private equity executive said funds are "snapping like twigs." Meanwhile, the chief business officer of Freddie Mac is predicting that the Fed's $200 billion collateral lending facility will not solve Wall Street's credit crisis. The Times (London) (13 Mar.) , Financial Times (subscription required) (13 Mar.)

Demand for insurance creates imbalance in CDS market
Banks and hedge funds are buying insurance to protect themselves from turmoil the credit markets. The increasing demand for downside protection is fueling an imbalance that could harm the broader financial market. "The credit default swap market has become lopsided," says Peter Fisher, co-head of fixed income at BlackRock Financial Management. "It's not deep and liquid the way we normally think of that - it's more like an insurance market in which few want to write insurance and many want to buy." Financial Times (subscription required) (12 Mar.)

Ratings agencies confirm Ambac's AAA credit ratings
After Ambac Financial Group Inc. sold $1.5 billion in stock and equity units, its AAA bond insurer credit ratings were confirmed Wednesday by Standard & Poor's and Moody's Investors Service. Fitch Ratings is giving Ambac a rating of AA and, like the other ratings agencies, is keeping its outlook for Ambac at negative. Bloomberg (12 Mar.)

Korean group to invest billions to attain raw materials
A group led by state-owned Korea Resources Corp. is planning to invest $6 billion over the next eight years in mining and energy projects to gain access to raw materials. "What we plan to do is not to simply ship metal concentrates out of the countries, but explore, develop and produce and then process the concentrates there," said Lee Han Ho, CEO of Korea Resources. "Plus we build roads or power plants for the countries." Bloomberg (13 Mar.)

Freddie Mac says cash reserves fine, will protect investors
Freddie Mac says it is not planning a capital raising, which would dilute current shareholder stakes, as it has sufficient reserves. Both the Treasury and the Federal Reserve have requested that the government-sponsored entity consider raising more capital. "This company will bow to no one," CEO Richard Syron said in response to a question at a meeting with analysts. "It's clear what our fiduciary responsibility is." Bloomberg (12 Mar.)

Market Activity

Japanese exporters lead Asian markets to losses
Japanese exporters, including Canon Inc. and Toyota Motor Corp., fell as the yen soared against the dollar, causing Asian markets to suffer heavy losses on Thursday. The Nikkei 225 Average fell 3.3%, the Shanghai Composite was down 2.4% and the Hang Seng China Enterprises Index dropped 4.8%. Meanwhile, South Korea's Kospi and Taiwan's Weighted index were both down, 2.6% and 2.7%, respectively. MarketWatch (13 Mar.)

Shanghai Composite Index drops 2.3%
China's benchmark stock index, the Shanghai Composite Index, fell 2.3% to end at a seven-month closing low. The index underperformed foreign exchanges due to concerns about monetary tightening. People's Daily (China) (13 Mar.)

Analysts say market has yet to hit bottom
Analysts at a credit conference say the Federal Reserve's move to inject liquidity into the credit markets will offer short-term relief but they warn of more pain ahead. Panelists said the credit markets will not thaw until banks realize more mortgage-related losses. Tavakoli Structured Finance President Janet Tavakoli said investors are shying away from the credit markets in part because they do not trust credit ratings or the experience of managers. Reuters (12 Mar.)

Economics

Dollar falls against yen, euro as hedge fund talks fail
Following the failure of a Carlyle Group affiliate to reorganize its debt, the dollar dropped to its weakest level against the yen since 1995 and to record lows against the euro and Swiss franc. "Investors are getting out of dollar assets and this is going to lead to a dollar crash," said Tetsuhisa Hayashi of Bank of Tokyo-Mitsubishi UFJ Ltd. ClipSyndicate/Bloomberg (12 Mar.) , Bloomberg (13 Mar.)

Darling boosts U.K. borrowing, closes tax loopholes
U.K. Chancellor Alistair Darling closed tax loopholes for businesses to raise roughly £1.5 billion and planned to issue a record amount of government bonds. Executives and investors have criticized the chancellor for the Northern Rock crisis and for tax changes unfavorable to businesses. Bloomberg (13 Mar.)

Geopolitical/Regulatory

EU summit to focus on market turmoil, climate change
At their two-day summit in Brussels, European Union leaders plan to concentrate on the turmoil in the financial markets, energy resources and climate change. Summit participants are likely to be concerned about the euro's strength against the dollar. Other topics of interest include the jobs and growth strategy for the EU, as well as the overall economic outlook. ClipSyndicate/Bloomberg (13 Mar.) , Forbes/AFX News Limited (13 Mar.)

Bush: U.S. economy faces tough times, but not in recession
President George W. Bush says the U.S. economy has hit a "tough patch" but is not in recession "because there's a definition for the 'R' word, and we haven't reached the definition." In a rare interview about the economy, to be broadcast Thursday night, Bush said he wants to give the first economic stimulus package time to work before considering a second. MarketWatch (13 Mar.)

Financial Products

Merrill to offer 4 exchanged-traded certificates in Asia
Merrill Lynch's entry into the exchange-traded certificate market in Asia will get a quick start with offers of four new certificates. The products, which will be listed in Singapore and Hong Kong within the next couple of months, started trading in Australia earlier this week. The certificates are based on four Chinese themes: luxury brands, water and Chinese stocks listed in Singapore and Hong Kong. FinanceAsia.com (13 Mar.)

Ethics

Fraud reporting proposal includes loophole for overseas work
The Justice Department's proposal to require U.S. contractors to report fraud, abuse or waste they find while doing government work was supposed to cover all government contracts. For unknown reasons, however, the proposal includes an exemption for contractors working overseas. The loophole has infuriated the Justice Department and lawmakers. The Washington Post (13 Mar.)

Second employee detained in SocGen investigation
French police are questioning a second Societe Generale employee about whether he helped rogue trader Jerome Kerviel place billions of euros in unauthorized deals, sources say. Police searched the employee's desk at the bank's office near Paris. Earlier, a judicial source said a broker working for SG Securities, a branch of the bank, had been held for questioning.
Agence France-Presse (12 Mar.)

IT professionals say Enron-type scandal could hit U.K.
A survey of 70 senior IT executives found that 77% thought "greed, panic, lax systems and apathy" could lead to a U.K. scandal similar to the Enron scandal. Only 6% said current financial regulations in Britain would be able to prevent a similar situation. Director of Finance (UK) (12 Mar.)