Financial Teasers 27 March 08

Top Stories

Moody's downgrades billions worth of complex credit products
As the assets underlying complex credit products continue to deteriorate, Moody's Investors Service has slashed the ratings of more than $25 billion worth of the products. The downgrades were mostly taken on collateralized debt obligations, and Moody's said further downgrades are possible. Financial Times (26 Mar.)

FGIC's mortgage loss exposure exceeds legal risk limits
FGIC Corp. said it may have to raise capital to beef up its loss reserves because of a lawsuit against German bank IKB. The bond insurer also said its exposure to mortgage losses has exceeded the risk limits set by New York state insurance law. While FGIC maintained that the issue is a "technical violation," an insurance analyst called it a "bombshell." Reuters (26 Mar.)

Write-down speculation drives up cost to protect banks' debt
Speculation that the tightening of the credit markets will force banks to take additional asset write-downs is boosting the cost of protecting the banks' debt. Credit-default swaps on Citigroup increased to 168 basis points, a 13-point increase, while contracts on Deutsche Bank were up 10 basis points to 91. Bloomberg (26 Mar.)

Equity loans the latest flash point in mortgage crisis
Lulled by ever-increasing home prices, millions of Americans borrowed against their home equity, to the tune of $1.1 trillion. Now, with housing prices declining, the home-equity loans are fueling the next round in the credit crisis. The New York Times (registration required) (27 Mar.)
Moody's forecasts expansion of Islamic finance in Africa
Moody's Investors Service said that as Africa attracts investments and economic growth continues, the continent's Islamic finance industry expanded from $18 billion at the end of last year to as much as $235 billion. Anouar Hassoune, an analyst at Moody's, reported that only 37 financial institutions in Africa currently provide Shariah-compliant services as the sector is still in its "infancy." Bloomberg (26 Mar.)

E-mail sets up lawsuit over failed Clear Channel deal
In July, Bain Capital and THL Partners say, they received a misdirected e-mail from Credit Suisse about how the banks planned to renege on the lending agreement for the private-equity firms to buy Clear Channel Communications. On Wednesday, Bain and THL sued the bank consortium, including Citigroup, Credit Suisse, Morgan Stanley, Royal Bank of Scotland, Deutsche Bank and Wachovia, over the collapsed $19.5 billion takeover. The New York Times (registration required) (27 Mar.) , The Wall Street Journal (subscription required) (27 Mar.)

Moody's: Credit crunch may hinder Russian companies
Moody's Investors Service said that the tightening global credit markets may force Russian companies to find alternative funding sources. Matthias Hellstern, an analyst with Moody's, wrote in a report that because of prolonged under-investment, Russia's metal, mining, telecommunication and energy firms need "significant capital injections." Bloomberg (27 Mar.)

Other News
New Nova Bolsa exchange to be world's third largestMercoPress (Uruguay) (26 Mar.)

Market Activity

Shanghai Composite drops 5.4% to lead Asian market slide
China's Shanghai Composite plunged 5.4% as most Asian markets fell today, fueled by fears about the slowdown in the U.S. economy and global financial markets. The Nikkei 225 Average slid 0.8% while Australia's S&P/ASX 200 and South Korea's Kospi both edged down 0.2%. The benchmark Hang Seng Index, however, drifted between positive and negative territory. MarketWatch (27 Mar.)

Citigroup raises $1 billion by offering higher interest
Citigroup sold $1 billion worth of 10-year bonds yielding more than 300 basis points over similar U.K. government notes. "It is difficult to see the rationale of a bank raising 10-year money at spread levels well above those paid by lesser rated non-financial borrowers," said Georg Grodzki, head of credit research at Legal & General Group. "The rating agencies are unlikely to be pleased about a bank raising senior funds at spread levels well out of line with its credit rating." Bloomberg (26 Mar.)

South Korean fund opts against U.S. Treasuries as yields drop
South Korea's National Pension Service, the fifth-largest pension fund in the world with $220 billion in assets, said it will not buy U.S. Treasuries right now because of low yields and a desire to diversify. Safe-haven-seeking investors and interest rate cuts by the Federal Reserve have driven down Treasury yields recently. Financial Times (27 Mar.)

Economics

Bank of England plots radical action to fight credit crunch
Mervyn King, governor of the Bank of England, signaled that the central bank is planning radical measures to ease the credit crunch. King told the Commons Treasury Committee that current conditions are "the sorts of circumstances in which central bank action is necessary to prevent a major shock to the system as a whole." The Times (London) (27 Mar.) , Financial Times (26 Mar.) , Telegraph (London) (27 Mar.)

Australian banks healthy, central bank chief says
Glenn Stevens, governor of the Reserve Bank of Australia, says the country's banks have remained profitable with adequate capital reserves during the global credit crunch. "There is very little direct exposure to the U.S. subprime problems," Stevens said. "The main reason for the resilience is many years of robust economic growth, sound regulatory foundations and prudent risk management." Bloomberg (27 Mar.) , The Sydney Morning Herald/Reuters (27 Mar.)

Germany braces for collapse of global financial system
The turmoil roiling the global financial system has hit the German economy hard, prompting the country to prepare for a serious meltdown. The situation has forced Bundesbank, like many other central banks around the world, to consider radical and controversial measures to curb the crisis. Spiegel Online (26 Mar.)

BOJ official says uncertainty plagues Japan's economy
Kiyohiko Nishimura, deputy governor of the Bank of Japan, said uncertainty over the nation's economic outlook is high and that the central bank "will act in a flexible manner." Finance Minister Fukushiro Nukaga, meanwhile, expressed concern about the yen advancing against the dollar, which is hurting the earnings of exporters. Forbes/Associated Press (27 Mar.)

Geopolitical/Regulatory

Regulators may rein in ratings agencies
The International Organisation of Securities Commissions said ratings agencies, such as Moody's Investors Service and Standard & Poor's, may face a new code of conduct that prevents them from recommending ways to create structured debt securities. The organization also urged independent reviews of how the agencies assign ratings. Bloomberg (26 Mar.)

Fed may gain power, influence at SEC's expense
As officials consider the lessons learned from the ongoing financial crisis and ways to prevent a future crisis, some industry insiders are proposing that the Federal Reserve should emerge with a larger role. Former regulators say a shift in power and influence from the Securities and Exchange Commission to the Fed is likely. Bloomberg (27 Mar.)

Regulators investigate cross-border fees by Visa Europe
Acknowledging that it has no evidence of wrongdoing, the European Commission has launched a formal investigation into whether Visa Europe violated price-fixing laws with the fees levied against cross-border transactions. Last year, the commission ruled against MasterCard's similar fees. International Herald Tribune (26 Mar.)

Financial Products

Terror-Free Index Series to launch
The Conflict Securities Advisory Group and the FTSE Group have joined forces to launch a Terror-Free Index Series. The series of three indexes weeds out hundreds of non-U.S. companies that do nonhumanitarian business with Sudan, Syria, North Korea and Iran, countries considered to be "sponsors of terrorism" by the State Department. FinancialWeek/Investment News (26 Mar.)

U.S. Futures Exchange to launch contracts on Sensex
On April 4, the Chicago-based U.S. Futures Exchange will roll out futures contracts on India's benchmark equity index, the Sensex. In November, officials from the Bombay Stock Exchange and the USFE worked out the deal that allows U.S. investors to participate in India's booming equity market without American depositary receipt authorization. FinanceAsia.com (27 Mar.)

Ethics

Citigroup to pay Enron, forgo claims to settle fraud case
Rather than go to trial, Citigroup has agreed to settle the fraud litigation against it by paying $1.7 billion to Enron Creditors Recovery Corp. and dropping more than $4 billion in claims. Citigroup had been scheduled to face what is left of Enron late next month in a trial before U.S. Bankruptcy Judge Arthur Gonzalez, who has handled the case since the beginning. ClipSyndicate/Bloomberg (26 Mar.) , Houston Chronicle (26 Mar.)

Probe into New Century failure partially blames accountants
An investigation commissioned by the Justice Department into the collapse of New Century Financial found that the subprime lender's accounting firm, KPMG, condoned and enabled "significant improper and imprudent practices." Echoing charges that emerged about Arthur Andersen after the Enron scandal, the report of the five-month inquiry places some blame on the accountants. The New York Times (registration required) (27 Mar.)