UBS Warns of 'Further Heavy Write-Downs'

UBS confirms facing further write-downs
By Haig Simonian in Zurich
July 4 2008 12:12
Financial Times

UBS on Friday confirmed it faced further heavy write-downs on exposures to troubled US credits, meaning earnings for the second quarter would be “at or slightly below” break even.

Europe’s biggest casualty of the US subprime crisis did not quantify its latest write-downs, which analysts have estimated at up to $7.5bn. The Swiss bank said it had continued to make money in wealth and asset management, but suffered renewed losses in investment banking.

UBS said the impact of the latest losses left its Tier 1 capital ratio at about 11.5 per cent on June 30, and stressed it had no need to raise fresh capital.

The news reassured investors. UBS shares jumped 8.2 per cent higher at the open but settled back to stand 1 per cent higher at SFr21.24. The shares have lost two-thirds of their value over the past year.

The bank has raised about SFr30bn ($29bn) in recent months, mainly through a rights issue and sale of shares to strategic investors.

UBS gave an indirect indication of its latest markdowns by noting that its second quarter results would benefit from a tax credit of about SFr3bn in connection with its massive losses to date.

Working backwards, and assuming roughly normal profitability of up to SFr2bn in wealth and asset management combined, that implies a loss of at least SFr5bn in investment banking to produce break-even.

UBS said its latest write-downs had stemmed from the effect of “further market deterioration” on previously disclosed positions, particularly adjustments to the value of its exposures to monoline insurers.

At the time of its first quarter results, UBS disclosed it had exposures of about $6bn to monoline insurers – a position viewed as ominous by many analysts given the concerns, and subsequent ratings downgrades – of many monolines.

The bank also confirmed fears that its problems with subprime, and broader reputational damage, had eroded its until-recently blue chip private banking franchise. UBS said group net new money had been negative in the second quarter, though it did not distinguish between wealth and asset management.

It added that outflows had been most severe in April, but had improved in May and June, especially in wealth management.

The profits warning had been expected, but for July 1, immediately after the end of the second-quarter trading period and in line with the bank’s practice in two earlier quarters. Instead, UBS that day released information about important corporate governance changes, but said nothing about earnings.

UBS officials said Friday’s statement represented “voluntary disclosure”, in the sense of refining existing guidance to investors, rather than an obligatory announcement triggered by market rules requiring profits warnings when circumstances showed “material differences” compared with previously available information.

Full results for the second quarter will be published on August 12.

Refco CEO Sentenced to 16 Years in Prison for Fraud

Ex-Refco CEO Bennett Sentenced To 16 Years in Prison for Fraud
By Chad Bray
Wall Street Journal

NEW YORK -- Phillip R. Bennett, Refco Inc.'s former chief executive, was sentenced to 16 years in prison Thursday after he pleaded guilty to criminal charges in a scheme to hide the commodities broker's financial troubles.

At a hearing Thursday, U.S. District Judge Naomi Reice Buchwald in Manhattan said white-collar defendants like Mr. Bennett often "just don't think they'll get caught."

"You and others like you play a truly high-stakes poker game," the judge said.

The judge didn't impose a fine and said restitution will be discussed at a later date.

Moody's Cuts Toll Brothers To Junk On Dire US Housing Outlook

There is a lot of junk out there in the US financials. It is just in various stages of being marked to an accurate market rating. The dominos are falling. Alt-A debt will be the next to go, then credit cards, then the corporate bonds, and the Fed will make its stand on the US bond and the dollar, at a much lower level than today.

And then one way or another a bottom will be made, and we will gather ourselves together and go forward.

The degree to which the system is reformed and justice is administered will be a measure of this generation's character and commitment to our children.

AP
Moody's cuts Toll Brothers rating to junk status
Thursday July 3, 11:56 am ET
Moody's downgrades senior unsecured rating of Toll Brothers to junk status

NEW YORK (AP) -- Moody's Investors Service on Thursday cut the senior unsecured rating of homebuilder Toll Brothers Inc. to junk status, as homebuilding trends continue to weaken.

Moody's downgraded the Horsham, Pa.-based company's senior unsecured rating to "Ba1" from "Baa3." A rating of "Ba1" is one notch below investment grade. At the same time, Moody's confirmed the company's "Ba2" subordinated debt rating and assigned a corporate family rating of "Ba1."

"While the company is one of the only remaining homebuilders that is currently generating earnings before impairment charges, Moody's does not expect this to continue, as falling prices and lower absorption rates continue to impact margins," the ratings service said.

While the company's tower business in the Northeast has been relatively strong up until now, Moody's expects this business to weaken, as condominium inventory levels have escalated in recent months.

A Stable outlook reflects Moody's expectations that Toll Brothers will continue to build cash balances and will be fiscally disciplined during the downturn.

The ratings or outlook could benefit if the company were to demonstrate significant inventory reduction or continue generating positive earnings before impairments, Moody's said.

The European Central Bank Chooses to Fight Inflation

A tough decision but one that makes sense from their perspective. The Bernanke Fed does not like it because they do not have the same latitude, and must take the risks of unleashing a further decline in the dollar, despite brave talk and faked statistics.

ECB Raises Benchmark Rate to Seven-Year High to Fight Inflation
By Christian Vits
July 3, 2008 07:46 EDT

July 3 (Bloomberg) -- The European Central Bank raised interest rates to a seven-year high to fight inflation even as economic growth cools.

The ECB's Governing Council, meeting in Frankfurt, increased the benchmark lending rate by a quarter point to 4.25 percent today, as predicted by all but one of 58 economists in a Bloomberg survey.

Policy makers say they're worried that the fastest inflation in 16 years will develop into a wage-price spiral as workers demand more pay to compensate for rising costs. The risk is that higher interest rates deepen Europe's economic downturn. France and Spain have already said that the ECB may not be paying enough attention to the growth outlook.

``The ECB is choosing the lesser of two evils,'' said Rainer Guntermann, an economist at Dresdner Kleinwort in Frankfurt. ``We fear that oil prices and inflation will create the need to raise interest rates further.''

Investors have fully priced in another quarter-point rate increase to 4.5 percent by the end of the year and most expect a third step by March, Eonia swap contracts show.

ECB President Jean-Claude Trichet, who said last month a July rate increase was ``possible,'' holds a press conference at 2:30 p.m. to explain today's decision.

`Exploding' Inflation

Central banks from Russia to Brazil are raising rates as inflation replaces the global credit crunch as their biggest concern. Indonesia moved today for the third time in as many months and Sweden lifted its benchmark rate to a 12-year high.

``If we're not decisive, there's a risk of inflation exploding,'' Trichet told German newspaper Die Zeit in an article released yesterday.

Record food and energy prices pushed inflation in Europe to 4 percent this month, twice the ECB's 2 percent limit. Producer prices jumped a record 7.1 percent in May from a year earlier.

Oil prices have doubled over the past year and breached $145 a barrel for the first time today, fanning inflation concerns.

Still, with faster inflation sapping purchasing power and further damping the growth outlook, Trichet said last month that some of the ECB's 21 policy makers were against raising rates.

One `Should Be Enough'

Executive Board member Lorenzo Bini Smaghi said June 17 that one quarter-point rate increase ``should be enough'' to rein in inflation. Spain's Miguel Angel Fernandez Ordonez has expressed concern about ``contractionary trends'' in his economy, which grew at the slowest pace in 13 years in the first quarter.

``I am not convinced it is prudent to significantly raise interest rates at this stage,'' French Finance Minister Christine Lagarde said in an interview with BFM Television last week.

``The division in the Governing Council has never been bigger,'' said Uwe Angenendt, chief economist at BHF-Bank AG in Frankfurt. ``I see a small risk of the ECB raising interest rates again in September. But I generally expect a marked economic slowdown followed by rate cuts.''

Economists expect the bank to start cutting borrowing costs in June next year, another Bloomberg News survey shows.

Euro-region economic growth will slow to about 1.8 percent this year and 1.5 percent in 2009 from 2.6 percent last year, according to ECB forecasts. European manufacturing and service industries contracted in June.

Euro's Appreciation

In addition to higher costs, companies are grappling with the euro's 17 percent appreciation against the dollar in the past year, which makes their exports less competitive.

The euro has been boosted by the widening interest-rate gap between Europe and the U.S., where the Federal Reserve lowered rates seven times since mid-September to fend off a recession. The U.S. housing slump made banks reluctant to lend, pushing up credit costs worldwide.

At the same time, ``apprehension is growing that inflation expectations are on the rise,'' Bundesbank President and ECB council member Axel Weber, an advocate of higher interest rates, said June 25. ``This is chiefly true for short-term to medium-term inflation expectations, which cover the relevant time horizon of monetary policy.''

Inflation expectations, as measured by the breakeven on five- year French inflation-indexed bonds, jumped to a record 2.82 percent today from 2.12 percent in March.

Unions are already pushing through bigger pay claims. European labor costs rose 3.3 percent in the first quarter from year earlier, the most in almost five years.

While attempting to damp speculation that the ECB is embarking on a ``series'' of rate increases, Trichet has left open the option of further moves.

``I said that we could increase rates by a small amount in order to secure a solid anchoring of inflation expectations,'' Trichet told the European Parliament in Brussels on June 25. ``I didn't say that we could envisage a series of increases. That being said, of course we never pre-commit.''

To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net