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from Global Investing:
Poland, the lonely inflation targeter
Is the National Bank of Poland (NBP) the last inflation-targeting central bank still standing?
The bank shocked many today with a quarter point rate rise, naming stubbornly high inflation as the reason, and signalling that more tightening is on its way. The NBP has sounded hawkish in recent weeks but few had actually expected it to carry through its threat to raise rates. Economic indicators of late have been far from cheerful -- just hours after the rate rise, data showed Polish car production slumped 30 percent in April from year-ago levels. PMI numbers last week pointed to further deterioration ahead for manufacturing. And sitting as it does on the euro zone's doorstep, Poland will be far more vulnerable than Brazil or Russia to any new setback in Greece. Its action therefore deserves praise, says Benoit Anne, head of emerging markets strategy at Societe Generale.
(Poland's central bank) is one of the last orthodox inflation-targeting central banks in the global emerging market central bank universe. They are taking action because they are seeing inflation creeping up and have decided to be proactive.
The rate rise is especially notable given many central banks in developing countries appear effectively to have surrendered their inflation-fighting mandate. Nowhere is the push for lower interest rates more pronounced than in Brazil where the government last week announced plans to scrap fixed-rate savings deposits in a move that is seen paving the way for more agressive rate cuts. Clearly there is tolerance here for higher inflation, which will still end 2012 well above target.
But many analysts such as Manik Narain at UBS consider Poland's decision a high-risk one given the growth issues. Narain sees it possibly motivated by the need to signal Poland will not welcome further currency weakness (the zloty like most emerging currencies has shed much of its early-2012 gain) Therefore a prolonged monetary tightening cycle is unlikely, he says. Indeed many reckon the NBP may find itself, like the European Central Bank last year, reversing an ill-considered rate rise. Analysts at Capital Economics write:
If we are right in expecting growth and inflation to slow by more than most expect over the second half of this year then this may well be the NBP’s “ECB moment”. Recall that having hiked rates twice in the first half of 2011, the ECB was forced to start loosening policy once again by November as the economy weakened. In Poland’s case, we think there is a good chance that today’s rate hike will be reversed by the end of the year.
from Financial Regulatory Forum:
Switzerland says goodbye to light touch regulation
LONDON, May 3 (Thomson Reuters Accelus) - These days even the Swiss are fed up with their bankers. The financial crisis has riled Swiss citizens to the point that the Alpine country's reputation for light-touch financial regulation will soon be a thing of the past. In a direct democracy such as Switzerland, where every citizen can vote on laws and even propose them, the people have spoken. What they have said is: we want more rules and regulation for bankers and asset managers.
"In the past people were against regulations which seemed too restrictive, but this is changing. The public mood is still critical vis-à-vis the banks and the culture of big bonuses for board of directors and management. Now we may see overregulation also because of the immediate political pressure facing a direct democracy," Marc Raggenbass, head of the regulatory, compliance and legal practice at Deloitte in Zurich, told Thomson Reuters.The Swiss Federal Council, with the blessing of its citizens, has already taken a hard look at its financial services sector. It plans to introduce targeted measures to improve the general regulatory and tax environment with a view to shoring up the competitiveness and sustainability of the Swiss financial services sector, which employees 212,000 people and represents about 10.6 percent of GDP.
Last year the Council revised Switzerland's Banking Act to strengthen financial sector stability and brought in too-big-to-fail capital requirements on Credit Suisse and UBS — 19 percent of risk-weighted assets to be held in equity in the narrowest sense — considered to be the most stringent requirements for systemically important financial institutions (SIFIs).
There is more to come from the Federal Council. In January this year, it set out an agenda for financial services and tax regulatory reforms and initiatives. In addition, the Financial Market Supervisory Authority (FINMA), the Swiss financial regulator, recently reported to the Council on a package of measures aimed at strengthening consumer protection. This proposal is being considered by the Council, which is also studying whether to bring in a whole new financial services act. The Council will publish its own views on these matters at the end of the year, which could initiate another round of rule making.
Mario Tuor, a spokesman for the Federal Council, told Thomson Reuters: "We need to find a balance between consumer protection and market competitiveness. We want the best regulation, not the most."
EXTERNAL PRESSURES
from Global Investing:
Hungary can seek IMF aid now. But can it cut rates?
The European Union has given Budapest the green light to seek aid from the IMF. (see here) In fact, the breakthrough after five months of dispute does not let Hungary completely off the hook -- to get its hands on the money, Viktor Orban's government will have to backtack on some controversial recent legislation, starting with its efforts to curb the central bank's independence. It remains to be seen if Orban will actually cave in.
But markets are reacting as if the IMF money is in Hungary's pocket already. There have been sharp rallies in Hungarian dollar bonds, CDS and currency markets (see graphic below from Capital Economics). The Budapest stock market has posted its best one-day gain since last November while the yield on local 10-year bonds have collapsed almost 100 bps. Hungarian officials are (a bit prematurely) talking of issuing bonds on world markets.
What investors are hoping for now is a cut to the 7 percent interest rate. Hungary's central bank jacked up rates by 100 bps in recent months to defend the forint as cash fled the country. Now there is a chance those rate rises can be reeled back in. After all, the moribund economy could really use a dash of monetary easing. Thanasis Petronikolos, head of emerging debt at Baring Asset Management has been overweight Hungary and recalls that after 2008 crisis, the central bank was able to quickly take back its 300 bps of currency-defensive rate hikes.
In the aftermath of this, the central bank may be prompted to cut short term interest rates. If the risk premium comes down a lot, the central bank may feel that 7 percent interest rates are not justified. I’m expecting them to at least take this 100 bps back assuming they can reach an agreement with the IMF.
Hungary's FRAs (forward rate agreement), are still pricing slightly higher short-term interest rates and have not yet reacted to the shifting picture. Many urge caution however on the rate cut expectations, noting that Orban and the IMF may struggle to reach common ground and the central bank will want to see money on the table before it actually acts.
Petronikolos is right in that the economy is moribund, credit growth has slumped and there is a big output gap. But headline inflation is running at 5.5 percent, well above the central bank's 3 percent target, due to an increase in sales tax. Sandor Jobbagy, at CIB Bank in Budapest is one analyst who says inflation risks have forced him to push back the date of likely interest rate cuts.
from Alison Frankel:
2nd Circuit delivers more bad news for sophisticated investors
Remember U.S. District Judge Victor Marrero's opus last month in a hedge fund case against Goldman Sachs? The Manhattan federal judge refused to dismiss claims that Goldman duped the fund, Dodona, into investing in doomed-to-fail Hudson collateralized debt obligations. In 64 vivid pages, Marrero detailed the fund's allegations that Goldman engaged in a sweeping effort, initiated by CFO David Viniar, to shed its exposure to subprime mortgages -- and simultaneously to take advantage of clients who were slower to perceive the looming collapse of the mortgage-backed securities market. Marrero described the alleged scheme as "not only reckless, but bordering on cynical."
What a difference a judge makes. Last September, in a parallel case involving Goldman's Davis Square CDOs, U.S. District Judge William Pauley, also of Manhattan, needed only 19 pages to dismiss fraud and negligent misrepresentation claims by Germany's Landesbank Baden-Wuerttemberg. On Thursday, without even bothering to write a precedential opinion, a three-judge panel of the 2nd Circuit Court of Appeals upheld the dismissal. Chief Judge Dennis Jacobs and Judges Rosemary Pooler and Susan Carney agreed with Pauley that the German bank was a sophisticated investor and received plenty of warnings about the risk of investing in the Davis CDOs.
"The relationship between Landesbank and the defendants was that of buyer and seller in a standard arm's length transaction; and by its own representations Landesbank possessed sufficient expertise to evaluate the risks of its investment," the 2nd Circuit wrote in a summary order. "The complaint therefore fails to plead justifiable reliance." Landesbank's counsel at Motley Rice had notified the 2nd Circuit of Marrero's ruling, in a letter spelling out the judge's conclusion that even if Dodona was a sophisticated investor, its reasonable reliance on Goldman's representations isn't precluded as a matter of law. By giving Landesbank's argument such short shrift, the federal appeals court clearly believes the contrary.
The 2nd Circuit didn't cite a New York state appeals court's dismissal last month of HSH Nordbank's $500 million fraud claim against UBS, even though Goldman's lawyers at Sullivan & Cromwell notified the federal court of the state appeals ruling right after it came down. But there are distinct similarities in the two appellate decisions. Both the Landesbank and HSH Nordbank cases involved German banks investing in subprime mortgage-linked CDOs -- and in both, the appeals courts held that sophisticated investors have an independent duty to assess the risks of their investments, particularly when offering documents disclaim the issuer's responsibility.
Taken together, the state and federal rulings add up to very bad news for sophisticated investors who lost money in complex financial instruments. Big boys, the courts are saying, shouldn't cry when they fall, even if Goldman Sachs or UBS stuck out a leg to trip them.
We're still in the relatively early stages of mortgage-backed securities litigation, in which all kinds of foreign banks and sophisticated U.S. investors have sued for fraud. As Reuters noted in its coverage of the 2nd Circuit ruling Thursday, not many of these cases have reached appellate courts. So the state and federal precedent in the Goldman and UBS cases should surely embolden defendants.
For more of my posts, please go to Thomson Reuters News & Insight
from Breakingviews:
UBS rolls the dice with Andrea Orcel grab
By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Sergio Ermotti is taking a gamble. The UBS chief executive is preparing to install his former colleague Andrea Orcel as co-head of the Swiss group’s investment banking division. Luring the BofA Merrill Lynch dealmaker would be a sign that battle- and scandal-scarred UBS can still attract big names. But given Orcel’s patchy management track record, he has a lot to prove.
There’s no question that UBS could do with a shot in the arm. The combination of its 2008 near-death experience, last year’s 2 billion Swiss franc rogue trading loss, and the departures of a string of senior bankers have prompted rivals to predict its demise. Orcel’s famed contacts book should ensure a steady stream of deals: he was closely involved in BofA Merrill’s decision to underwrite last year’s hair-raising - but ultimately successful - 7.5 billion euro rights issue by Italian lender UniCredit. And though his work on the 2007 break-up bid for ABN Amro, which helped drag down Royal Bank of Scotland and Fortis, must count as a black mark, it was a bold and imaginative deal - not to mention the lucrative fees.
As investment banks like UBS shrink their trading arms and concentrate on fostering relationships with senior corporate clients, Orcel’s skills will arguably become more valuable. The bigger question is whether he is capable of leading a large and complex investment bank. His defenders would argue that he has not yet had the chance to prove himself, and that BofA Merrill was preparing to install him as its European chief when he decided to leave. However, the acrimonious nature of his departure is hardly exemplary. According to a person familiar with the matter, Orcel did not tell his superiors he was in talks with UBS until after they had told BofA’s current European chief, and the UK regulator, about the planned internal reshuffle.
Orcel’s reputation as a lone operator will also prompt questions about his ability to coexist with Carsten Kengeter, the former Goldman Sachs trader who is currently UBS’s sole investment banking chief. It will no doubt also prompt unease among UBS investment bankers unused to having outsiders parachuted in from above.
Ermotti may feel that a shake-up is precisely what UBS’s investment bank needs right now. Nevertheless, Orcel will have to prove he can deliver more than fees.
from Global Investing:
Oil prices — Geopolitics or growth?
It's the economy, stupid. Or isn't it?
Brent crude has risen 15 percent since the end of last year, focusing people's minds on the potential this has to choke off the recovery in world growth. But some reckon it is the recovery that's at least partly responsible for the surging oil prices --- economic data from United States and Germany has been strong of late. There are hopes that France and the United Kingdom may escape recession after all. And growth in the developing world has been robust.
Geopolitics of course is playing a role as an increasing number of countries boycott Iranian oil and fret over a possible military strike by Israel on Iran's nuclear installations. But Deutsche Bank analysts point out that world equity markets, an efficient real-time gauge of growth sentiment, have risen along with oil prices.
Their graphic (below) shows a remarkably close relationship between oil prices and the S&P 500. Click to enlarge
Deutsche says:
We find it hard to believe that a genuine concern about a real risk of war would have accompanied a 4.7 percent gain in the S&P 500 index during February to a post-Lehman high.
from Alison Frankel:
Bond insurers drop MBS letter bomb on UBS
Last month, as U.S. banks began reporting their third-quarter financials, I noted that the banks had beefed up their disclosure of potential liability for mortgage-backed securities activity. Morgan Stanley revealed that it had received a demand letter from Gibbs & Bruns, the firm that represents the big funds that negotiated the proposed $8.5 billion MBS breach-of-contract settlement with Bank of America. Goldman upped its reported MBS exposure to $15.8 billion, from a mere $485 million in the second quarter. The new emphasis on disclosure, I said, was partly the result of more claims, but also partly due to pressure from the Securities and Exchange Commission and the Public Company Accounting Oversight Board to improve MBS disclosures.
The bond insurers' trade group, the Association of Financial Guaranty Insurers, has also been agitating for banks to acknowledge their MBS exposure -- and particularly their exposure to MBS breach-of-contract (or put-back) claims. In September 2010 AFGI sent a blistering letter asserting that Bank of America's MBS put-back liability to its members was more than $10 billion. This September the bond insurers targeted Credit Suisse, which, according to AFGI, had failed to account for billions in put-back claims.
Late Wednesday AFGI struck again. The recipient this time was UBS. According to the letter AFGI sent to UBS CEO Sergio Ermotti, the Swiss bank has reported a $93 million reserve for put-back claims in its most recent financial report -- even though it has received more than $800 million in put-back claims from just one bond insurer, and that insurer (presumably Assured Guaranty) has indicated its intention of demanding a total of $4 billion in put-backs from UBS.
UBS has included disclaimers about the uncertainty of the volume of put-back claims and its success in rebutting put-back demands, but AFGI asserts the boilerplate language is misleading. "AFGI submits that neither refusing legitimate repurchase requests nor failing to discharge legitimate liabilities constitutes 'success' nor in any way reduces or eliminates the liabilities," the letter said.
The bond insurers also sent the UBS letter to the bank's regulators, the Swiss Financial Markets Supervisory Authority and the New York State Department of Financial Services, as well as to UBS's auditor, Ernst & Young.
In a statement, a UBS spokesperson said: "The letter from the AFGI -- a trade association for monoline insurers -- is inaccurate and we dispute AFGI's numerous unfounded allegations. In particular, UBS stands behind its financial reporting, including its disclosures and provisions concerning its potential RMBS-related liabilities as entirely appropriate and fully compliant with all legal and regulatory requirements. We take issue with the quality and integrity of the industry loan reviews cited in the letter and note that UBS has received numerous unfounded loan repurchase demands -- and these demands are fully reflected in UBS's disclosures. Moreover, the AFGI's membership includes ultra-sophisticated insurers that accepted significant premiums to insure risks and that now seek to evade these obligations. Today's letter adds nothing new, and is merely the latest in a series of efforts by the Association and its members to shift responsibility for their actions."
For more of my posts, please go to Thomson Reuters News & Insight
from Global Investing:
Good reasons for rupee’s fall but also for recovery
It's been a pretty miserable 2011 for India and Tuesday's collapse of the rupee to record lows beyond 52 per dollar will probably make things worse. Foreigners, facing a fast-falling currency, have pulled out $500 million from the stock market in just the last five trading sessions. That means net inflows this year are less than $300 million, raising concerns that India will have trouble financing its current account gap. The weaker currency also bodes ill for the country's stubbornly high inflation.
Why is the rupee suffering so much? First of all, it is a casualty of the general exodus from emerging markets. As a deficit economy, India is bound to suffer more than say Brazil, Korea or Malaysia. And 18 months of interest rate rises have taken a toll on growth.
UBS analysts proffer another explanation. They point out a steady deterioration in India's net reserve coverage since the 2008 crisis. The reserve buffer -- foreign-exchange reserves plus the annual current account balance, minus short-term external debt -- stands at 9 percent of GDP, down from 14 percent in 2008. Within emerging markets, only Egypt, Venezuela and Belarus saw bigger declines in net reserve coverage than India.
"What it really means for the present, in our view, is that the rupee is now joining the ranks of higher beta “risk” currencies," UBS said.
Still not everyone is overly perturbed. Some expect the rupee to rebound as the global picture improves. One reason is that the rupee is generally seen as undervalued in nominal terms, as well as on purchasing power parity (PPP) basis, more so than most emerging currencies. The latter is the rate at which one currency would convert to another to buy the same amount of goods and services in each country. On that basis the Indian rupee would equate to 20 to the dollar, data from the World Bank/IMF shows. Given the strong underlying story, investors are more likely to buy back the rupee than say the South African rand when risk appetite improves.
Furthermore, Indian equity valuations are looking more reasonable than before, despite the slowing economy. Stocks trade now around 12 times forward earnings, compared to 17 times a year ago. That should lure some overseas cash once the dust starts to settle.
"This may not be bottom of the market but for us, investing at these levels of currency and equity valuations is an attractive proposition," says Phil Poole, head of global and macro strategy at HSBC Global Asset Management.
from Breakingviews:
UBS’s slimming strategy deserves two cheers
By Margaret Doyle and Antony Currie The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
Give UBS two hearty cheers for its decision to slim down to a more suitable fighting weight. New Chief Executive Sergio Ermotti told shareholders on Thursday that the Swiss lender is to almost halve risk-weighted assets at the investment bank to 150 billion Swiss francs. Moreover, he is putting UBS’s private and Swiss banking operations front and centre. That’ll please regulators and investors alike.
But investors should hold off on the third cheer for now. Granted, the plans Ermotti and investment bank boss Carsten Kengeter have put together look sensible enough. They’re shutting several businesses that consume too much capital without providing commensurate returns, such as prop trading, non-mortgage securitisation and complex structured products. Others, like U.S. credit trading and synthetic equities, will be scaled back.
That shows a healthy dose of self-awareness: not only of the limitations of both capital constraints and its own penetration in certain businesses, but also of where an investment bank tethered to one of the premier global private banking franchises should draw the line.
On top of that, UBS is also trimming its return-on-equity ambitions for 2013 to between 12 percent and 17 percent - previously executives were aiming for 15 percent to 20 percent. The new target looks far more realistic. And the return of a dividend, however token, is welcome from a bank that already looks well capitalised with good liquidity.
But some of this looked overdue even before the painful $2 billion rogue trading loss in the summer. Several rivals have already slashed earnings targets. Some 45 percent of the balance-sheet trimming stems from offloading unwanted legacy assets. And this is not the first time UBS has insisted it’s embracing a client-centric strategy.
What’s more, shrinking ambitions while trying to maintain already dented staff morale is no easy task. UBS still needs to rebuild confidence in its compliance and risk-management practices in the wake of the rogue trading scandal. And executives must demonstrate they can stick to their knitting – though having legacy assets managed at group level should reassure investors that the investment bank won’t quietly plough the proceeds back into other ventures.
from Reuters Investigates:
Behind the scenes at UBS
Emma Thomasson and Edward Taylor tell the inside story of UBS's turbulent week in today's second special report "How a rogue trader crashed UBS."
UBS chief Oswald Gruebel’s decision to resign after the bank said a rogue trader lost as much as $2.3 billion was not just a response to the immediate crisis. It was also an admission that the bank’s latest scandal has effectively undone all his efforts over the past two years to lobby against tougher bank regulations.
The alleged rogue trades have killed any remaining ambitions UBS might have to compete with the titans of Wall Street. They also cast a huge shadow across the entire industry and make tough new regulations far more likely, as the 67-year-old hinted in a memo to staff after he quit. "That it was possible for one of our traders in London to inflict a multi-billion loss on our bank through unauthorised trading shocked me, as it did everyone else, deeply. This incident has worldwide repercussions, including political ones," he wrote.
After a round of job cuts, the recent events sparked some gallows humor in the banking world. As one senior banker in Zurich put it:
“The joke going around is that Gruebel didn’t need to sack 3,500 people to save 2 billion. He could have just sacked ONE."
UBS had only recently started to win back the trust of its wealthy private banking clients after risky bets on subprime mortgages came close to felling it in the financial crisis of 2008, as this graphic shows:
