Bernanke, Greenspan at Fault as U.S. Faces Slump, Stiglitz Says
By Mark Barton and Ben Sills

Feb. 26 (Bloomberg) — Joseph Stiglitz, a Nobel-prize winning economist, said successive Federal Reserve chairmen have left the U.S. economy facing a “very significant” slowdown.

Current Fed chief Ben S. Bernanke was too slow to cut interest rates as the U.S. real-estate market deteriorated, while his predecessor, Alan Greenspan, “actively looked the other way” as the housing market inflated, Stiglitz said in a Bloomberg Television interview today in London.

The spillover from the biggest U.S. housing slump in 25 years, turmoil in financial markets and higher energy prices are curbing growth in the world’s biggest economy. The financial- services industry is curtailing credit and conserving capital.

Greenspan “is right that this downturn is going to be the worst downturn in a quarter century, but he’s largely to blame,” Stiglitz said. “It’s not just that he was asleep at the wheel, he actively looked the other way” by dismissing the housing-price appreciation as “froth.”

Following mounting losses on past loans, banks have already taken writedowns of $163 billion since the beginning of 2007. President George W. Bush signed a $168 billion stimulus package that will deliver tax rebates to more than 100 million households.

Bernanke cut Fed interest rates twice last month, including an emergency reduction of 75 basis points between meetings, in a bid to prop up growth as the financial writedowns and the prospect of a further housing decline saw U.S. stocks slump. The S&P 500 index is down 6.6 percent this year.

`Too Late’

“Clearly they acted too late,” Stiglitz said. “The dramatic lowering of the main interest rate by 75 basis points was a panic not a prudent measure.”

The $3 trillion cost of the Iraq war, which diverted the country’s resources from investment in economic productivity and sent the budget deficit higher, will continue to hold back growth in the U.S., Stiglitz said.

European monetary-policy makers may also be under- estimating the risks to economic growth, Stiglitz said. The European Central Bank’s mandate, which sets price stability as the sole objective, is “flawed” because it prevents ECB President Jean-Claude Trichet from supporting job creation.

“He should not be focusing so much on inflation especially when so much of it is imported,” Stiglitz said. “Higher interest rates won’t solve the problem of higher oil prices.”

To contact the reporters on this story: Mark Barton in London at barton1@bloomberg.net ; Ben Sills in Madrid at bsills@bloomberg.net .

Last Updated: February 26, 2008 07:02 EST

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Suzan Sabanci Dincer Proves Turkey’s Answer to Customer’s Man
By Ben Holland

Feb. 26 (Bloomberg) — Suzan Sabanci Dincer was an 8-year- old schoolgirl when she began visiting the main office of her family’s bank, Akbank TAS, during summer vacations. In the 1970s, she befriended Medeni Berk, Akbank’s chief executive officer at the time.

“He would tell me that a good banker has to know very good mathematics and would give me all these math questions,” Sabanci Dincer says. “I’d carry his files and do the homework he gave me, and he’d reward me with chocolates.”

The prize today for Sabanci Dincer, 42, is leadership of Turkey’s $200 billion commercial and consumer lending market, which grew 25 percent last year. She’s now the managing director of Akbank, Turkey’s biggest financial institution by market value, and is being groomed to succeed her father, Chairman Erol Sabanci, 69.

The Sabancis have steered the bank through a series of national financial crises, turning it into Turkey’s most profitable company, with net income in 2007 of 2 billion liras ($1.7 billion) on revenue of 8.8 billion liras, according to the Istanbul Stock Exchange. The bank’s management won a vote of confidence from New York-based Citigroup Inc., which paid $3.1 billion for a 20 percent stake in October 2006.

The latest challenge for the father-daughter team is to overcome the global fallout from the U.S. subprime mortgage crisis, which has sent shares of emerging-market companies tumbling. The MSCI Emerging Markets Index, which tracks more than 900 stocks from South Korea to Brazil, has fallen 7 percent this year.

Turkey Shares Hit

Turkey has been even worse hit. Akbank shares fell 22 percent in the same period, tracking a 19 percent decline in the benchmark Istanbul ISE 100 Index. The ISE rose 42 percent in 2007.

“It will be an interesting year, a challenging year,” the British- and U.S.-educated Sabanci Dincer says. “There might be less appetite for investment and lending, and this will make emerging-market banks more conservative. We’ll have to look at the terms of our lending policy very carefully. But if Turkey doesn’t mess up in terms of the economy, there’s still a tremendous potential.”

Turkey’s economy grew an average of about 7 percent a year from 2002 through 2007, and that was good news for Sabanci enterprises. The family company, Haci Omer Sabanci Holding AS, named after Sabanci Dincer’s grandfather, had estimated sales of $14 billion last year, accounting for 3 percent of Turkey’s gross domestic product. Sabanci Holding controls 70 companies with 57,000 employees and operations in 18 countries. In addition to banking and insurance, it has stakes in energy, retail, plastics, tobacco, auto sales and cement.

Wal-Mart Connection

One division, headed by Sabanci Dincer’s husband, Haluk Dincer, 46, operates a joint venture with Paris-based Carrefour SA, the world’s biggest hypermarket operator after Wal-Mart. The Sabanci conglomerate is building coal-fired and hydroelectric power stations. It also sells cars for Tokyo-based Toyota Motor Corp. and makes tires with Tokyo-based Bridgestone Corp.

Istanbul-based Akbank is the group’s crown jewel, contributing about 80 percent of Sabanci Holding’s operating profit. The global downturn shouldn’t hurt earnings at Akbank and other Turkish banks, says Patrick Lemmens, who helps manage more than $3 billion of stocks at ABN Amro Asset Management in Amsterdam, including shares in Akbank’s listed insurance unit Aksigorta AS.

“There’s still good lending growth going on in Turkey,” Lemmens says. “It translates into earnings growth of 15 or 20 percent a year. Globally, there aren’t many banks that can get that — and that are trading at eight or nine times earnings. The longer-term opportunity is there.”

Growth Slows

Akbank increased profit last year even after loan growth slowed in the third quarter and the cost of deposits rose. The lender is better equipped than most of its peers to maintain high growth rates, says Idil Dagdelen, an Istanbul-based analyst at Deutsche Bank AG.

“They have the capital, and they’re not short of equity to fund a growing loan book,” she says. “In a couple of years, we’ll probably be talking about the need for capital injections in the sector, but not at Akbank.”

Lehman Brothers’ October report says that Turkish bank lending will grow by 35 percent in 2008 and 31 percent the following year, as the economy grows and borrowing costs decline along with interest rates. To maintain that pace, Turkey will have to avoid a repeat of the kind of economic meltdown that has disrupted its economy five times in the past two decades.

2001 Crisis

The most recent crisis started in 2001, when the lira lost more than half of its value against the dollar, inflation rose to 73 percent and banks fell deeply into the red. From 1999 to 2003, the government nationalized 21 failing banks. Akbank, which posted the only net loss in its history in 2001, was spared.

Since then, the government of Prime Minister Recep Tayyip Erdogan, who took office in 2003, has transformed Turkey’s economy. He has reined in spending, cutting the budget deficit to less than 3 percent of economic output last year from 16.5 percent in 2001.

Erdogan has reduced expenditures on money-losing state- owned companies by selling off $22 billion of such firms. With budget deficits under control, inflation, which averaged 70 percent per year in the 1990s, fell to 8.2 percent at the end of January, close to a three-decade low.

Lower interest rates have spurred a boom in consumer borrowing by Turkey’s burgeoning middle class. Home loans surged more than 10-fold in the past three years, to 32.2 billion liras from 3.15 billion liras, and overall bank lending rose 25 percent last year to 229.5 billion liras.

`Attractive Market’

“It’s always been a very attractive market, with the size of the population and growth rates,” says Shirish Apte, Citigroup’s head of corporate and investment banking for central and eastern Europe, who negotiated the purchase of the U.S. bank’s 20 percent Akbank stake. “We always knew that at some stage Turkey would get it right, and this government has done all the right things.”

Citigroup isn’t the only international bank looking for profits in Turkey’s financial system. Paris-based BNP Paribas SA, Amsterdam-based ING Groep NV and Milan-based UniCredit SpA have all bought stakes in Turkish banks, betting that the country’s young population and progress toward European Union membership will bolster incomes.

Even after the boom of the past five years, which has seen per-capita income grow to almost $7,000 from $2,160 in 2001, Turks still earn less than one-third of the EU average. Only about half of Turks who buy homes take bank loans — the rest use cash — and a third of Turkey’s autos are purchased with cash.

Consumer Boycott

Given the turmoil in the economy during most of Turkey’s postwar history, it’s no surprise that both borrowers and lenders shunned consumer loans, Sabanci Dincer says.

“We had high inflation, high real interest rates, unstable governments and no proper consumer finance,” she says. “Nobody wanted to lend to individuals at those high rates because it would be very difficult for them to repay the loans. The big banks were just collecting deposits and giving them to the government, which was the main borrower.”

The job of the banker in the era of high inflation was to call the direction of bond markets, something Erol Sabanci was very good at, says Elif Bilgi Zapparoli, CEO of EFG Istanbul Securities and a classmate of Sabanci Dincer’s when she was a student in the Master of Business Administration program at Boston University in the early 1990s. Consumer loans, she says, weren’t a priority.

Tamed Interest Rates

“Interest rates were just too high for the consumer,” says Ozen Goksel, 69, a 45-year Akbank veteran who served as CEO from 1994 to 2000 and now sits on the bank’s board. “Who’d take out a loan at 3 or 4 percent a month? So we wouldn’t lend people money to buy a car or a house. We’d lend money to the companies that sell the cars or build the houses, and they’d carry the risk. Now the banks are carrying it.”

Turkish banks held just 2.31 billion liras in consumer loans at the start of 2002; on Feb. 15 the figure was 68 billion liras. Loans of all kinds made up a quarter of Akbank’s assets in 2002, with government bonds accounting for much of the rest. At the end of 2007, the bank’s loan book had risen to 40 billion liras, more than half of its assets.

“Ten years ago, Akbank was basically a big bond portfolio,” Deutsche Bank’s Dagdelen says. “They’ve done a great job transforming the bank into a proper retail bank. They used that period after the 2001 crisis, when not even a leaf moved in the market, to invest in technology, train their people and transform the bank, and it worked.”

Father-Daughter Contrast

Sabanci Dincer is the executive in charge of that transformation. She’s the right person for the job, says Ilter Turan, a professor of political science at Bilgi University in Istanbul who went to school with Erol Sabanci and advises Suzan on speeches. “The father is a very quiet, very private person,” Turan says. “Suzan is extremely outgoing, very communicative, warm.”

Sabanci Dincer says it’s now important for bankers to get close to their customers. “It’s more of a relations business,” she says. “We have to be more consumer-oriented, catch the trends, understand the clients.” To do that, she visits at least a dozen Akbank branches every month.

Her branch managers are telling her that borrowers don’t entirely trust their bankers and prefer to do business with them quickly and from a distance. So Akbank has begun taking loan applications by mobile phone, with approval or rejection promised within 20 minutes.

“In Turkey, unlike in Europe, it’s a new thing that people get consumer loans from banks to buy whatever they’re going to buy,” Sabanci Dincer says. “Turks were scared to come into a bank’s branch and ask for a loan; they were scared of getting rejected. With a mobile phone, it’s very private.”

British Educated

Sabanci Dincer learned her social skills at the Heathfield School for Girls in north London, where she attended high school. Heathfield also taught her discipline and independence, she says, and she will likely send her son, Haluk, 11, and daughter, Ceyda, 9, to an institution that teaches similar skills.

“It’s really important nowadays that people learn to stand on their own two feet, without their parents,” she says. “It stretches the character.”

Sabanci Dincer got a finance degree from London’s Richmond University and then earned a master’s degree in finance from Boston University before joining Akbank’s joint venture with Dresdner Bank AG and BNP Paribas. In 1994, she moved to Akbank central. She’s been on the bank’s board since 1997.

“She has lots of ideas, she forms good relations with everyone around her and she’ll always consult as many people as possible, at all levels, before making a decision,” former Akbank CEO Goksel says.

Money in a Jar

Bank loans of any kind were virtually unknown in most of Turkey when Haci Omer Sabanci was born, around 1906, in the village of Akcakaya in Kayseri province, on the rocky plateau that stretches across the central part of the country. Turks kept their savings “in a jar buried at the foot of a fig tree,” according to “Haci Omer,” a biography of Sabanci Dincer’s grandfather by Turkish journalist Sadun Tanju.

While still a teenager, Haci Omer set off on foot to seek work in the cotton-growing province of Adana on Turkey’s southern coast. His first job there was trampling cotton to compress it for packaging, which involved jumping up and down on the cotton as it fell from machinery above that separated it from its seeds.

Within a few years, Haci Omer became a labor broker — searching out others to do the jumping — and then a broker of the cotton itself. By the 1940s, he had bought three cotton oil and yarn factories in Adana and the neighboring province of Mersin.

Akbank Founded

In 1948, Sabanci and 82 partners put together $2 million and founded Akbank. Haci Omer was both the founder and one of the first borrowers: He took out a loan of 285,000 liras to expand his business, according to a 1998 history of the lender by Zafer Toprak, a professor at Bogazici University in Istanbul. Over the next decade, Sabanci steadily bought out his partners, becoming the majority shareholder in both Akbank and Bossa TAS, a textile company that now exports to more than 50 countries. Its denim is used by designers at Gap, Tommy Hilfiger and Versace.

Today, the Sabanci family presides over a corporate empire with an unusual distinction: the large number of women in its executive ranks. In addition to managing director Suzan Sabanci Dincer, three deputies to Akbank CEO Zafer Kurtul are women. The chairwoman of Sabanci Holding is Guler Sabanci, daughter of Erol’s oldest brother, Ihsan. Two more of Erol’s nieces are also on the holding company board.

Guler has been an outspoken advocate of keeping Turkey secular. Opposition political parties have accused Erdogan’s government, which has roots in a banned Islamist party, of seeking to expand the role of Islam in public life.

The Headscarf Issue

The government has, for example, eased a ban on the wearing of Islamic-style head scarves at Turkey’s universities. The wives of both Erdogan and President Abdullah Gul wear scarves.

Neither Suzan nor Guler Sabanci do. Guler points to her own career as an example of the strength of Turkey’s secular system.

“I and working women like me are the product of an 83- year-old republic, and secularism and democracy are instilled in our DNA,” she told Bloomberg Television in August.

Guler’s cousin Suzan says the fact that she’s a woman in a society that is increasingly embracing Islamic tradition has not affected her rise.

“I never felt for a moment in the family that there was a boy-girl separation,” she says. “As children, we were all brought up with business; it was in the air.” What her father emphasized, she says, was that there would be no sinecures for family members.

“This was not accepted in the family,” she says. “My father said, ‘Suzan, you don’t need to work, you have everything. But if you are going to work, you have to work with discipline.”’

Credit Crunch Impact

Sabanci Dincer’s challenge for the year ahead is to minimize the impact of the global credit crisis, which is making it harder for emerging-market banks to raise capital abroad and may slow growth.

“Now the big boys are having trouble, and when they start coughing, everyone catches a cold,” Sabanci Dincer says.

Once Akbank recovers from its cold, Sabanci Dincer and her colleagues must make some strategic decisions concerning where to take the bank next. Foreign acquisitions are one possibility.

“I’d give the example of the Spanish banks, like Banco Santander,” she says. Santander has grown sixfold in size over the past 10 years through overseas acquisitions.

“They’ve been an incredible success story, fast moving and dynamic, first in Spain and then in the Latin market, and also in Europe.”

If she can get the math right — and she has been doing that since she was 8 — Sabanci Dincer would like nothing better than to make Akbank the bank to beat in eastern Europe, central Asia and beyond.

To contact the reporter on this story: Ben Holland in Istanbul at bholland1@bloomberg.net

Last Updated: February 25, 2008 19:03 EST

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Goldman, Lehman May Not Have Dodged Credit Crisis (Update1)
By Mark Pittman

Feb. 26 (Bloomberg) — Even Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. may find they haven’t dodged the credit crisis.

The new source of potential losses: so-called variable interest entities that allow financial firms to keep assets such as subprime-mortgage securities off their balance sheets. VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights Inc. Goldman, which hasn’t had any of the industry’s $163 billion in writedowns, said last month it may incur as much as $11.1 billion of losses from the instruments.

The potential for a fire-sale of the assets that would bring another round of charges has “always been our greatest fear,” said Gregory Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest securities firm behind Goldman in terms of market value.

VIEs, known as special purpose vehicles before Enron Corp.’s collapse in 2001, finance themselves by selling short-term debt backed by securities, some of which are insured against default.

Now that Ambac Financial Group Inc. and other guarantors have started to lose their AAA financial-strength ratings, Wall Street firms may be forced to return those assets to their books, recording the declining value as losses. MBIA Inc., the biggest insurer, said yesterday it plans to separate its municipal and asset-backed businesses, a move Peters said would likely result in a lower credit rating for the types of assets owned by VIEs.

`Significant Consequences’

Wall Street’s writedowns stem from a surge in mortgage delinquencies among homeowners with the riskiest subprime-credit histories. The industry’s VIEs, also known as conduits, had $784 billion in commercial paper outstanding as of last week, according to Moody’s Investors Service and the Federal Reserve.

“There’s a big number at work here and it will have significant consequences,” said J. Paul Forrester, the Chicago- based head of the CDO practice at law firm Mayer Brown. “The great fear is that a combination of subprime CDOs, SIVs and conduits result in a flood of assets into an already-stressed market and there’s a price collapse.”

CreditSights has one of the highest projections for additional losses. Moody’s says the fallout from VIEs, collateralized debt obligations, and other deteriorating assets may run to $30 billion. CDOS are packages of debt sliced into pieces with varying ratings.

`Lightning Rod’

One type of VIE that’s already been forced to unwind or seek bank financing is the structured investment vehicle, or SIV. Like SIVs, VIEs often issue commercial paper to finance themselves and may have multiple outside owners that share in the profits and losses. Because banks agree to back VIEs with lines of credit, they have to buy commercial paper or notes when no one else will.

Ambac, the world’s second-biggest bond insurer, and two smaller competitors lost a AAA rating from at least one of the three major ratings companies in recent months. Standard & Poor’s yesterday affirmed the AAA ranking of MBIA, the largest “monoline,” though it said the outlook is “negative.”

The more widespread the downgrades, the more likely the assets in the VIEs will be cut. Some buyers of the debt demand the highest ratings, giving banks a vested interest in helping the insurers salvage their ratings.

New York-based Ambac may get $3 billion in new capital with the help of Citigroup Inc. and Dresdner Bank AG as early as this week, the Wall Street Journal reported yesterday. MBIA raised money by selling common shares and warrants to private-equity firm Warburg Pincus LLC and issuing $1 billion of surplus notes.

“The lightning rod of the monoline fix is so important to so many banks,” said Thomas Priore, chief executive officer of New York-based Institutional Credit Partners LLC, which manages $12 billion in CDOs.

Avoiding the Pain

Accounting rules allow financial firms to keep VIEs off their balance sheets as long as they’re not the ones that stand to gain or lose the most from the entity’s activities. A bank would also have to account for its portion of a VIE if prices for the debt owned by the fund fall too far or if the bank is forced to provide financing.

Goldman, the most profitable Wall Street firm, and Lehman, the biggest commercial-paper dealer, have avoided much of the pain so far.

Goldman, which earned a record $11.6 billion in the year ended in November 2007, said it avoided writedowns by setting up trades that would profit from a weaker housing market. Now the threat is $18.9 billion of CDOs in VIEs, the firm said in a regulatory filing on Jan. 29. Goldman spokesman Michael DuVally declined to comment.

Citigroup to Merrill

Lehman, which wrote down the net value of subprime securities by $1.5 billion, guaranteed $7.5 billion of VIE assets as of Nov. 30, according to a filing also made on Jan. 29.

“We believe our actual risk to be limited because our obligations are collateralized by the VIE’s assets and contain significant constraints,” Lehman said in the filing. Spokeswoman Kerrie Cohen wouldn’t elaborate.

Citigroup, which has incurred $22.1 billion in losses from the subprime crisis, has $320 billion in “significant unconsolidated VIEs,” according to a Feb. 22 filing by the New York-based bank. New York-based Merrill Lynch & Co., which recorded $24.5 billion in subprime writedowns, has $22.6 billion in VIEs, according to CreditSights.

Merrill spokeswoman Jessica Oppenheim declined to comment, as did Citigroup’s Danielle Romero-Apsilos.

`Alphabet Soup’

The securities in the VIEs may be worth as little as 27 cents on the dollar once they’re put back on balance sheets, according to David Hendler, an analyst at New York-based CreditSights. Hendler based his estimate on the recent sale of $800 million of bonds by E*Trade Financial Corp.

Predictions for losses vary widely because banks aren’t required to specify the type of assets being held in the VIEs or how much they are worth, said Tanya Azarchs, managing director for financial institutions at S&P.

“The disclosure on VIEs is hopeless,” Azarchs said. “You have no idea of the structure or how that structure works. Until you know that you don’t know anything. It’s like every day you come into the office and another alphabet soup.”

To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net .

Last Updated: February 26, 2008 05:09 EST

German Prosecutor Offers
Details on Tax Investigation

Associated Press
February 26, 2008 7:33 a.m.

BERLIN — A prosecutor in Germany says that 163 people have admitted wrongdoing in a massive tax evasion investigation.

Bochum prosecutor Hans-Ulrich Krueck says that 91 people targeted in the investigation “have admitted to the facts” and have already made payments totaling €27.8 million ($41.2 million). Another 72 people have turned themselves in to tax authorities.

Copyright © 2008 Associated Press

 

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Liechtenstein Tax-Evasion Probe Widens to 11 Nations (Update4)
By Chad Thomas and Karin Matussek

Feb. 26 (Bloomberg) — The tax-evasion probe linked to Liechtenstein bank accounts widened to at least 11 countries as German authorities said the search is centered on 200 million euros ($297 million) deposited in Liechtenstein.

German investigators have searched the homes and offices of 150 people since the beginning of the raids 12 days ago, the Bochum prosecutor’s office said in a statement. Of those already searched, 91 have confessed and agreed to pay 27.8 million euros in taxes.

Sweden, Germany, the U.S., the U.K., France, Italy, Spain, Canada, Australia and New Zealand all have information on potential tax avoiders using Liechtenstein accounts, Mats Sjoestrand, the Swedish Tax Agency’s director general, said today. Ireland said it would ask Germany for details on any Irish citizens uncovered in its probe.

The nationwide probe has already led to the resignation of Deutsche Post AG Chief Executive Officer Klaus Zumwinkel on Feb. 15. The U.K. has also ordered a crackdown on people channeling money to the European principality and the U.S. Senate is investigating accounts in Liechtenstein.

Bavaria and Lower Saxony, two of the five German states with confirmed raids, said today that 68 people in those two states have amended their tax returns on their own since the probe began, and offered to pay more money. Under German law, citizens who confess to filing an incorrect tax statement prior to being uncovered by authorities are free from prosecution.

Bank Retreat

Bayerische Landesbank, Germany’s second-biggest state bank, said today it may retreat from Liechtenstein by selling its stake in a unit located in the principality. The Munich-based bank bought a majority stake in Austria’s Hypo Alpe Adria Bank International AG last year and through it an indirect holding in Hypo Alpe Adria Liechtenstein AG.

The German government paid as much as 5 million euros ($7.4 million) for information on German account holders in Liechtenstein on a disk provided by an informant to the Federal Intelligence Service. It’s open to sharing this information with other countries, the Finance Ministry said yesterday.

The investigation has centered on information from LGT Group, the Liechtenstein bank owned by the principality’s ruling family, which said yesterday the stolen records passed to Germany contain data from 1,400 clients. Bochum prosecutors now have data from a second Liechtenstein bank and are reviewing whether they need to investigate additional banks in the principality, Gueroff said today.

`Thumb Screws’

Germany has threatened to “tighten the thumb screws” on Liechtenstein if an agreement to stem illegal cash flows can’t be reached, and Chancellor Angela Merkel warned last week that “the clock is ticking.”

Merkel also plans to discuss her concerns that Germans are evading taxes by hiding money in safe havens with Monaco’s Prince Albert during his visit to Berlin tomorrow. Monaco, Liechtenstein and Andorra are on a list of “uncooperative tax havens” published by the Paris-based Organization for Economic Cooperation and Development.

Sweden is investigating about 100 Swedes with questionable accounts, Sjoestrand said in an opinion article published today in the Swedish newspaper Dagens Nyheter that the tax agency later confirmed.

An estimated 46 billion kronor ($7.3 billion), or 3.5 percent of total revenue, in Swedish taxes is lost each year as a result of people putting money abroad or making errors on foreign payments, the Swedish agency estimates.

Sweden didn’t pay for the information and didn’t receive it from Germany, Leif Rosenfeld, head of the Swedish Tax Agency’s foreign division in Stockholm, said in an interview. He declined to say how the agency got the information, or the exact number of people and banks under investigation.

To contact the reporters on this story: Chad Thomas in Berlin at cthomas16@bloomberg.net ; Karin Matussek in Berlin at kmatussek@bloomberg.net .

Last Updated: February 26, 2008 07:20 EST

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$2 billion deal to take Getty Images private

By Kristi Heim

Seattle Times business reporter

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JIMI LOTT / THE SEATTLE TIMES

Jonathan Klein, pictured in 2000, will remain Getty Images chief executive.

ROBERT GIROUX / GETTY IMAGES

A man leaves Getty Images corporate headquarters in Seattle’s Fremont neighborhood Monday.

Related

• Getty Images employee Q&A on the buyout (PDF)
• Getty Images press release (PDF)

Getty Images history

1995

March: Getty Communications is formed through the acquisition of Tony Stone Images, a London stock agency.

1996

April: Buys Hulton Deutsch, private collection of archival photography.

May: Buys Fabulous Footage, provider of contemporary stock footage.

July: Goes public on Nasdaq.

1997

Sept.: Merges with PhotoDisk in Seattle and changes name to Getty Images.

1999

March: Announces move to Seattle.

Sept.: Buys Image Bank from Kodak for $183 million.

May: Pays $135 million for Art.com, a consumer site offering posters and other art.

2004

Aug.: Buys image.net for $20 million.

April: Acquires Digital Vision, estimated to be the world’s third-largest stock-photography company, for $165 million.

June: Launches online store on Amazon.com.

Oct.: Lays off about 30 employees as it restructures; says it will end year with same head count as it had at the end of 2005, about 1,860 employees.

2006

Feb.: Buys iStockphoto, a micropayment site, for $50 million.

April: Buys Pixel Images of Ireland for $135 million in cash.

2007

March: Buys Scoopt, a Scottish company that specializes in citizen photojournalism.

April: Buys its largest competitor, MediaVast, for $207 million.

May: Buys Punchstock, a leading aggregator/distributor

of stock photography.

2008

Jan. 18: Hires Goldman Sachs Group to find a buyer.

Feb. 25: Announces deal to sell company to San Francisco-based Hellman & Friedman.

Seattle Times staff

Getty Images, the photo giant that spent the past 12 years acquiring dozens of smaller companies, has now agreed to be bought by private investors in a $2.1 billion deal.

Faced with declines in its core business and relentless hammering of its stock by Wall Street, the Seattle company said Monday it will revert to private ownership.

Private equity firm Hellman & Friedman has offered to buy Getty for $34 a share in cash, for a total $2.1 billion, and it will assume about $300 million in debt.

Getty’s board has approved the merger agreement and is advising shareholders to do the same.

Its management team and Fremont headquarters wouldn’t change, and no layoffs are expected, said Chief Executive Jonathan Klein, who founded the company in 1995 with Mark Getty, an heir to the J. Paul Getty fortune.

Klein is staying on as CEO and Getty will remain chairman.

“This probably will be a way for them to pursue a reorganization strategy out of the burning spotlight of Wall Street,” said Mike Roarke, an analyst at McAdams Wright Ragen.

Getty’s stock has dropped sharply as dramatic shifts in the media environment eroded its traditional market and made its shares less attractive to investors.

As the world’s largest distributor of pictures and video, Getty’s main business is licensing high-quality images from professional photographers around the world to advertising agencies and media companies.

Its performance is linked to the print media, a sector “in a nuclear winter,” said Frederick Searby, advertising and information-services analyst at JP Morgan, which holds at least 1 percent of Getty Images’ securities.

At the same time, Getty is challenged by new business models such as micropayments, images for sale at a fraction of the usual professional price, and an explosion of content created by a new generation of photographers armed with digital cameras and Internet connections.

Getty has responded by acquiring micropayment sites such as iStockphoto and citizen media companies like Scoopt.

“I think they’re in a transitional period where there’s huge uncertainty both about the macro environment and with the new models,” Searby said.

Getty’s board began last fall “to look at the best way to find additional value for shareholders,” Klein said in an interview. “This one couldn’t be better.”

The offer represents a premium of 55 percent over the closing price Jan. 18, the last trading day before Getty announced it was “exploring strategic alternatives.” Until then, Getty’s shares had dropped 77 percent from their high of $94 in 2005.

The stock closed Monday at $31.67, up $7.22, or 29.5 percent, on news of the sale.

Considering the tight credit market, some analysts thought financing would be difficult to obtain for such a large buy. But San Francisco-based Hellman Friedman said it has commitments from Barclays Capital, GE Commercial Finance and RBS Greenwich Capital.

While Getty probably would have commanded a higher price a year ago, “it’s a pretty decent deal,” said Searby.

“We believe in the vision and execution capabilities of Jonathan Klein and his team, and share their commitment to the company’s stakeholders and customers,” Andy Ballard, managing director of Hellman & Friedman, said in a statement.

“We look forward to working with all of Getty Images’ employees to realize the full potential of its traditional businesses while furthering the evolution of Getty Images into a global digital media company,” Ballard said.

Klein said the deal would enable the company to make further changes and more aggressive investments “without having to worry about quarterly results. I think parts of the business have terrific long-term potential, but the return is not immediate,” he said.

Getty will invest to boost its video capabilities, such as adding storage to upload footage faster, and expand its editorial images beyond English-speaking countries, he said.

Even with the infusion of private cash, Getty will still face the same challenges to its business, Klein added. The investors “will bring to us some expertise. They will bring to us some resources. They are not going to change the dynamics of the industry.”

Hellman & Friedman has invested in other rapidly changing digital businesses, including online advertising company Digitas, acquired by Publicis Groupe, and DoubleClick, whose buyout by Google is pending regulatory approval in Europe.

$2 billion deal to take Getty Images private

By Kristi Heim

Seattle Times business reporter

PREV 2 of 2 NEXT

JIMI LOTT / THE SEATTLE TIMES

Jonathan Klein, pictured in 2000, will remain Getty Images chief executive.

ROBERT GIROUX / GETTY IMAGES

A man leaves Getty Images corporate headquarters in Seattle’s Fremont neighborhood Monday.

Related

• Getty Images employee Q&A on the buyout (PDF)
• Getty Images press release (PDF)

Getty Images history

Tuesday, February 26, 2008 - Page updated at 12:00 AM

http://seattletimes.nwsource.com/html/businesstechnology/2004201700_getty26.html

 

1995

March: Getty Communications is formed through the acquisition of Tony Stone Images, a London stock agency.

1996

April: Buys Hulton Deutsch, private collection of archival photography.

May: Buys Fabulous Footage, provider of contemporary stock footage.

July: Goes public on Nasdaq.

1997

Sept.: Merges with PhotoDisk in Seattle and changes name to Getty Images.

1999

March: Announces move to Seattle.

Sept.: Buys Image Bank from Kodak for $183 million.

May: Pays $135 million for Art.com, a consumer site offering posters and other art.

2004

Aug.: Buys image.net for $20 million.

April: Acquires Digital Vision, estimated to be the world’s third-largest stock-photography company, for $165 million.

June: Launches online store on Amazon.com.

Oct.: Lays off about 30 employees as it restructures; says it will end year with same head count as it had at the end of 2005, about 1,860 employees.

2006

Feb.: Buys iStockphoto, a micropayment site, for $50 million.

April: Buys Pixel Images of Ireland for $135 million in cash.

2007

March: Buys Scoopt, a Scottish company that specializes in citizen photojournalism.

April: Buys its largest competitor, MediaVast, for $207 million.

May: Buys Punchstock, a leading aggregator/distributor

of stock photography.

2008

Jan. 18: Hires Goldman Sachs Group to find a buyer.

Feb. 25: Announces deal to sell company to San Francisco-based Hellman & Friedman.

Seattle Times staff

Getty Images, the photo giant that spent the past 12 years acquiring dozens of smaller companies, has now agreed to be bought by private investors in a $2.1 billion deal.

Faced with declines in its core business and relentless hammering of its stock by Wall Street, the Seattle company said Monday it will revert to private ownership.

Private equity firm Hellman & Friedman has offered to buy Getty for $34 a share in cash, for a total $2.1 billion, and it will assume about $300 million in debt.

Getty’s board has approved the merger agreement and is advising shareholders to do the same.

Its management team and Fremont headquarters wouldn’t change, and no layoffs are expected, said Chief Executive Jonathan Klein, who founded the company in 1995 with Mark Getty, an heir to the J. Paul Getty fortune.

Klein is staying on as CEO and Getty will remain chairman.

“This probably will be a way for them to pursue a reorganization strategy out of the burning spotlight of Wall Street,” said Mike Roarke, an analyst at McAdams Wright Ragen.

Getty’s stock has dropped sharply as dramatic shifts in the media environment eroded its traditional market and made its shares less attractive to investors.

As the world’s largest distributor of pictures and video, Getty’s main business is licensing high-quality images from professional photographers around the world to advertising agencies and media companies.

Its performance is linked to the print media, a sector “in a nuclear winter,” said Frederick Searby, advertising and information-services analyst at JP Morgan, which holds at least 1 percent of Getty Images’ securities.

At the same time, Getty is challenged by new business models such as micropayments, images for sale at a fraction of the usual professional price, and an explosion of content created by a new generation of photographers armed with digital cameras and Internet connections.

Getty has responded by acquiring micropayment sites such as iStockphoto and citizen media companies like Scoopt.

“I think they’re in a transitional period where there’s huge uncertainty both about the macro environment and with the new models,” Searby said.

Getty’s board began last fall “to look at the best way to find additional value for shareholders,” Klein said in an interview. “This one couldn’t be better.”

The offer represents a premium of 55 percent over the closing price Jan. 18, the last trading day before Getty announced it was “exploring strategic alternatives.” Until then, Getty’s shares had dropped 77 percent from their high of $94 in 2005.

The stock closed Monday at $31.67, up $7.22, or 29.5 percent, on news of the sale.

Considering the tight credit market, some analysts thought financing would be difficult to obtain for such a large buy. But San Francisco-based Hellman Friedman said it has commitments from Barclays Capital, GE Commercial Finance and RBS Greenwich Capital.

While Getty probably would have commanded a higher price a year ago, “it’s a pretty decent deal,” said Searby.

“We believe in the vision and execution capabilities of Jonathan Klein and his team, and share their commitment to the company’s stakeholders and customers,” Andy Ballard, managing director of Hellman & Friedman, said in a statement.

“We look forward to working with all of Getty Images’ employees to realize the full potential of its traditional businesses while furthering the evolution of Getty Images into a global digital media company,” Ballard said.

Klein said the deal would enable the company to make further changes and more aggressive investments “without having to worry about quarterly results. I think parts of the business have terrific long-term potential, but the return is not immediate,” he said.

Getty will invest to boost its video capabilities, such as adding storage to upload footage faster, and expand its editorial images beyond English-speaking countries, he said.

Even with the infusion of private cash, Getty will still face the same challenges to its business, Klein added. The investors “will bring to us some expertise. They will bring to us some resources. They are not going to change the dynamics of the industry.”

Hellman & Friedman has invested in other rapidly changing digital businesses, including online advertising company Digitas, acquired by Publicis Groupe, and DoubleClick, whose buyout by Google is pending regulatory approval in Europe.

Roarke said he expects Getty could experience job cuts in the future.

“When you have involvement of private equity willing to pay this price, everything over the next year is going to come under the microscope,” he said. No layoffs “tends to be one of the things said out of the gate, but with an asterisk that things can change.”

Kristi Heim: 206-464-2718 or kheim@seattletimes.com

Information about Hellman & Friedman’s other digital investments was reported by The Associated Press.

Copyright © 2008 The Seattle Times Company

Roarke said he expects Getty could experience job cuts in the future.

“When you have involvement of private equity willing to pay this price, everything over the next year is going to come under the microscope,” he said. No layoffs “tends to be one of the things said out of the gate, but with an asterisk that things can change.”

Kristi Heim: 206-464-2718 or kheim@seattletimes.com

Information about Hellman & Friedman’s other digital investments was reported by The Associated Press.

Copyright © 2008 The Seattle Times Company

 

 

Outlook for U.S. banks just got gloomier

Duncan Mavin, Financial Post Published: Monday, February 25, 2008

 

http://www.financialpost.com/story.html?id=333860

• Whitney slashes Citigroup earnings estimate again

////////////////////////////////////////////////////////////////////////////

 

Getty File

 

 

Getty Images Agrees to Be Acquired by Hellman & Friedman in a …
FOXBusiness - 1 hour ago
Under the terms of the agreement, Getty Images stockholders will receive $34.00 in cash for each outstanding share of common stock they own. …
Getty Images agency is snapped up in £1.2bn buyout by Hellman … Scotsman
Private SF firm to acquire Getty Images San Francisco Chronicle
Getty Images OKs buyout Seattle Post Intelligencer
New York Times - CNNMoney.com
all 369 news articles » GYI - S - MHP

$2 billion deal to take Getty Images private Seattle Times, United States - 4 hours ago By Kristi Heim March: Getty Communications is formed through the acquisition of Tony Stone Images, a London stock agency. April: Buys Hulton Deutsch, …

Getty Images accepte l’offre d’achat du fonds Hellman & Friedman
nouvelobs.com, France - 17 hours ago
AP | 25.02.2008 | 19:52 Getty Images Inc., the leading seller of stock photography and video footage, said Monday it has agreed to a $2.1 billion (€1.42 …

////////////////////////////////////////////////////////////////////////////

 

“As far as consumer credit is concerned, we are in unchartered territory,” said Meredith Whitney, an analyst with Oppenheimer & Co. Inc. “Housing prices, now down 6% across the U.S., have begun to decline …

The U.S. banking sector is headed for a credit downturn that will be “the worst in generations,” featuring widespread defaults on a range of debts and a national house price slide not seen since the Great Depression, says one of the most influential analysts on Wall Street.

The banks face massive loan losses — “far more dramatic” than most bank executives and ratings agencies have forecast — as the next chapter in financial sector turmoil unfolds, said Meredith Whitney, an analyst with Oppenheimer & Co. Inc.

“We believe loss rates will exceed the highest levels since 1990 by a significant margin,” she said in a note Monday. “Bank losses will be the highest in the past 20 plus years as a result of greater numbers of individual defaulting on mortgages and/or other loans and from [loan balances that] are far higher than they were in the last housing cycle.”

Ms. Whitney — who is also a panellist for Fox News and the number two ranked analyst on a Forbes list of top stock pickers for 2007 — shot to global infamy last year after her gloomy, but accurate, predictions about the scale of subprime problems facing Citigroup Inc. led to a worldwide sell-off of banking stocks.

In Monday’s note, the Oppenheimer analyst slashed her already-depressed forecasts of what large U.S. banks will earn in 2008 by 29% and by 13% for 2009, citing concerns about mortgages, credit card balances and other loans.

In contrast to Ms. Whitney’s pessimistic view, there was some good news Monday for big U.S. banks reeling from US$92-billion in collective writedowns tied to investments in the subprime mortgage market.

The U.S. financial sector was buoyed Monday by an announcement from rating agency Standard & Poor’s that it is unlikely to downgrade bond insurer MBIA Inc. any time soon. S&P and other ratings agencies have been reviewing MBIA and its peers after U.S. monolines posted record losses on collateralized debt obligations they guaranteed (CDOs). Banks stood to lose as much as US$70-billion if the CDOs they owned no longer carried an automatic AAA rating because of the insurance.

Financial shares in the S&P 500 gained 1.2% Monday after earlier falling as much as 1.8%. In Canada, financial stocks were down 0.3% on the Toronto Stock Exchange.

Canadian banks have been praised for avoiding the worst lending excesses of their U.S. counterparts. But their first quarter profit reports — released over the next two weeks, starting with Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and National Bank, all due out on Thursday — will be scrutinized for signs of a serious spillover from deteriorating U.S. markets.

The Canadian banks have tens of billions of dollars in indirect exposure to a wide-variety of U.S. loans through various complex investments, such as CDOs and structured investment vehicles. Also, Toronto-Dominion Bank, Royal Bank of Canada, and Bank of Montreal all have extensive retail banking operations in the United States.

According to Oppenheimer’s Ms. Whitney, consumer loans are now the main area of concern for the U.S banking sector.

“As far as consumer credit is concerned, we are in unchartered territory,” said the outspoken analyst. “Housing prices, now down 6% across the U.S., have begun to decline on a national level, a phenomenon not seen since the Great Depression. We are of the belief that over the next 24 months, national home prices will decline by a factor of three times such levels.”

The “sand” really hits the fan because liquidity is drying up as banks stay away from the sort of securitized structured investments that have burned them in recent months, Ms. Whitney noted. Highly-leveraged loan commitments are another source of earnings pressure in early 2008, she said.

Ms. Whitney said the stock prices of big U.S. bank could fall by another 40%.

In a separate note, she also predicted more woes for Citigroup. The world’s largest bank must sell US$100-billion of assets to shore up its balance sheet, but in doing so risks losing profitable operations, she said.

“Under duress, Citigroup will likely be forced to sell what it can and not what it should,” she said. The Oppenheimer analyst slashed her forecast for Citigroup’s earnings from US$2.70 to US$0.75 — the revised estimate “could still prove optimistic,” she said — and predicted the bank’s stock price could fall as low as US$16.00 (compared to a 52-week high of $55.55.)

Financial Post, with a file from Bloomberg News

dmavin@nationalpost.com

 

Close

 

 

Citi’s Hits: 15 Times $100 Million

Adviser Wolfensohn
Faults All Street;
An Analyst: ‘Ouch!’

By DAVID ENRICH and DAVID REILLY
February 26, 2008; Page C2

Talk about a bad day — or 15.

Citigroup Inc. disclosed that traders in its investment bank piled up daily losses of more than $100 million on 15 separate occasions last year.

Those 15 financially disastrous days, which Citigroup disclosed in its annual report filed late Friday but declined yesterday to describe in detail, added to worries the New York bank’s problems are deeper than those that led to about $20 billion in mortgage-related write-downs last year, the ouster of its chief executive and a sinking stock price.

“Ouch!” said David Hendler, an analyst at CreditSights Inc., about the trading losses.

Citigroup shares fell 38 cents, or 1.5%, to $24.74 a share in 4 p.m. New York Stock Exchange composite trading yesterday as investors digested the annual report, more than 200 pages long, not counting attachments. Besides the trading flubs, investors were worried by gloomy Citigroup rhetoric about its 2008 outlook and vulnerability to losses on mortgage investments, leveraged loans and commercial real estate.

“There are just so many things that they’re struggling with,” Mr. Hendler said. “Everybody wants more disclosure, but when they get it, they get more depressed.”

Banks and investment houses typically release data showing the size and frequency of daily trading losses in an attempt to give investors a way to gauge risks being taken in this unpredictable part of their business. The losses partly reflect the highly volatile market conditions that have been whipsawing nearly every financial firm for months.

By those standards, Citigroup’s losing string is far from the most embarrassing. In August, when the mortgage mess first rocked financial markets, Morgan Stanley lost $390 million in one day’s trading. The loss stemmed from a quantitative strategies group, which lost $480 million during that quarter. In its fiscal third quarter, Morgan had four days when it lost more than $125 million-and eight days where it made more than $125 million, according to the firm.

In a statement last night, a Citigroup spokeswoman said the trading disclosure “highlights the volatility that existed in the markets in 2007. There were many days when we saw significant gains, including more than 55 where revenue gains exceeded $100 million.”

Either way, recent write-downs and other losses already had made the company a poster child for slapdash risk management. In November, Citigroup replaced its longtime chief risk officer, Dave Bushnell, with another Citigroup veteran risk manager, Jorge A. Bermudez.

“I think that the managements of many of the financial institutions simply didn’t have a clue of what was going on,” James D. Wolfensohn, a former World Bank president who now holds the title of “senior adviser” at Citigroup, said Sunday evening at a public event in Manhattan.

Mr. Wolfensohn said in an interview yesterday he was referring generally to Wall Street firms, not to Citigroup in particular.

Citigroup’s latest disclosures come as analysts and investors are clamoring for Vikram Pandit, Citigroup’s new chief executive, to unveil his widely anticipated turnaround plan. Mr. Pandit has been mum, but tonight he is hosting 15 to 20 Wall Street analysts in a private “meet and greet” cocktail hour at Citigroup headquarters. The gathering has irked some investors, who weren’t invited and who note that Citigroup hasn’t yet scheduled a public investor day since Mr. Pandit took over.

After sifting through the annual report, Oppenheimer analyst Meredith Whitney slashed her 2008 earnings estimate on Citigroup by more than 70% to 75 cents a share, cautioning that even the lowered projection “could still prove optimistic.” She said the bank’s suffering share price could fall below $16 — or to about 70% of its book value. That level was last seen “during the last credit cycle of 1990-1991,” she added.

At the end of the fourth quarter, Citigroup’s book value was $22.74 a share. Ms. Whitney projected Citigroup will report a net loss in the first quarter.

In its report, Citigroup gave significantly more detail about its exposure to and involvement with off-balance-sheet vehicles. The figures suggested investors still need to worry about what they can’t quite see on the bank’s books.

Citigroup said off-balance-sheet entities connected to it had total assets of $356 billion, compared to $388 billion at the end of 2006. The 2007 figure, however, didn’t include $58 billion in structured investment vehicle, or SIV, assets Citigroup now carries on its own books, which were included in the prior year’s tally.

Of those assets, Citigroup has a maximum possible exposure to loss of about $152 billion, compared to $148 billion the previous year. About $14 billion of this potential loss comes from the bank’s continuing exposure to collateralized-debt obligations, or CDOs, which analysts fear could be in for further downgrades.

At the end of last year, Citigroup consolidated more than $20 billion in such CDO assets, which were previously kept off its books. In extreme circumstances, Citigroup potentially could be required to bring an additional $38 billion in CDO assets onto its books at a time when it is trying to slim down its balance sheet.

Citigroup’s expansion of the information it provided about off-balance-sheet entities followed a December request from the Securities and Exchange Commission that firms with big exposures to these entities give investors more information in their annual reports. Citigroup also disclosed that it is in discussions with the SEC’s division of corporate finance regarding these off-balance-sheet vehicles, as well as “hedging activities.”

Adding to investors’ jitters, Citigroup disclosed in the annual report for the first time that its investment bank is holding about $20 billion of hard-to-value trading positions “that are directly or indirectly tied to the global commercial real estate market.” The filing didn’t elaborate on the types of investments the bank is holding. With concerns mounting that commercial real-estate is likely to lose value in the coming year, Citigroup warned that its trading portfolio may suffer.

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 http://ftalphaville.ft.com/blog/2008/02/25/11144/hedge-funds-

correlation-crises-and-grand-ah-whooms/?source=rss

Hedge funds, correlation crises and grand ah-whooms

Where are all the hedge fund losers?

Hedge fund turmoil is, notably, number nine on Nouriel Roubini’s 12 steps. Commentators are harping back to LTCM at every opportunity and yet, the hedge fund blowups to date have been rather… unfulfilling.

Felix Salmon asks the question, via Option Armageddon:

There have been some nice fortunes made from the spread widening (Paulson, Hayman, Blue Ridge, Lone Pine, etc.) but I have yet to see where the fortunes are being lost on the other side of those trades…
Within six months it’s possible the term “counter-party risk” will have become almost as colloquial as “subprime” has.

First, of course, there’s hedging. Most funds trading in the credit markets aren’t going to be taking a naked position - long or short - against any particular index or financial product. Hedge funds may well be big investors in mezz or equity CDO tranches, but mark-to-market fluctuations in those tranches will have been hedged out - typically by buying protection on a broader index, for example.

Rather than damaging hedge funds, a lot of the current credit spread widening may actually be benefiting them. The FT’s John Dizard noted last week that there were significant profits to be made on any number of glaring arbitrages in the current market. It was just all a (Keynesian) question of markets remaining irrational longer than you can remain solvent.

Onto then, the second point. Remaining solvent. Hedges against mark-to-market losses are costly to maintain, insofar as funds are in hock to their prime brokers - and dreaded margin calls. (Of the iron bar breaking LTCM’s back variety). Are prime brokers allowing hedge funds to remain solvent? This time, so it would seem.

Which all helps towards explaining why few hedge fund blowups have been hitherto forthcoming.

That doesn’t mean, of course, that they won’t be.

In the credit markets, the hedges many funds are performing are correlation driven: that is, the higher implied correlation in the market, the more profitable they are. A typical “delta-hedge” might involve a fund selling protection on an equity tranche of a synthetic corporate CDO, while buying protection on the broader credit index. Mark-to-market losses are hedged out, and the trade becomes more profitable as correlation increases (the relative riskiness of the equity tranche decreases). The current environment of hugely widening spreads but no defaults is very profitable.

As long as there are no defaults, that is. Delta hedging relies on implied correlation being grossly out from actual correlation. Hedge funds will lose money (a lot) if corporates actually default, since they are exposed to equity tranche default risk.

While default risk in investment grade CDS indices is mitigated by the six monthly index roll, it’s still there. And in the current, volatile, extreme market, it’s very much on the agenda. It wouldn’t take much to spark a massive unwind of the correlation trade either, however, as even one default would massively reduce implied correlation.

The danger is then, that liquidity in the CDS markets would dry up in an almost grand ah-whoom kind of way: a repeat of the May 2005 correlation crisis but much worse.

This entry was posted by Sam Jones on Monday, February 25th, 2008 at 12:23 and is filed under Capital markets, Hedge funds.