SOVERIGN # DEBT # RATINGS

Sept. 15 (Bloomberg) -- Richard Sulik, chairman of the Freedom and Solidarity party, a member of Slovakia’s coalition government, talks about the European sovereign-debt crisis and the possiblity of a default by Greece. Sulik said his party will vote in parliament against the European bailout system.

He spoke with Bloomberg's Radoslav Tomek in Bratislava, Slovakia, on Sept. 13. (Source: Bloomberg)

UBS losses hidden by ‘fictitious’ trades

ZURICH

Mr Oswald Grubel, a veteran banker who was lured out of retirement to rescue UBS two years ago, told the Swiss weekly,

Explaining the events that led to Adoboli being charged with fraud and false accounting on Friday, less than 48 hours after being arrested by the police, UBS said the losses had been incurred in the past three months through “unauthorised speculative trading” in futures on stock indices — the S& P 500 in New York, Germany’s DAX and the Euro Stoxx.

“The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio.

However, the true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash exchange-traded-fund positions, allegedly executed by the trader.

“These fictitious trades concealed the fact that the index futures trades violated UBS’ risk limits,” the bank said.

— The chief executive of UBS is under fresh pressure after the Swiss bank on Sunday increased the amount of losses from the alleged rogue trading by Kweku Adoboli to US$2.3 billion (S$2.9 billion) from US$2 billion, and claimed his activities had been hidden by “fictitious” trades.Der Sonntag, that he had no intention of resigning despite calls to take responsibility for the alleged rogue trading.AGENCIES

Merkel loses Berlin vote over euro bailouts

BERLIN

The Social Democrats, the main opposition party nationally, extended their 10-year rule in the German capital after taking 28.3 per cent of the vote.

Mrs Merkel’s Christian Democrats took second place in Sunday’s election with 23.4 per cent, preliminary results showed.

The liberal Free Democrats, Mrs Merkel’s coalition partner, crashed out of a regional assembly for the fifth time this year, while the Pirate Party — which campaigned on open access to technology and Internet freedom — won its first seats.

The results in Berlin cap a year in which voters punished Mrs Merkel’s coalition over its handling of the debt crisis and add to her pressure as she struggles to balance domestic fatigue over shouldering euro region rescues with international calls that she do more to stem the contagion.

That is widening fissures in her government as the ruling coalition descends into open conflict over the euro’s future and financial aid for Greece.

“The issue now is how long the liberals hold onto the coalition, whether they break it off ahead of time,” said Mr Nils Diederich, a politics professor at Berlin’s Free University.

“The FDP are being pushed into the corner more and more, so you can’t rule out that they could pull off something like that to gain from it politically.

why  shOuld  BERLIN  peOple  sUffer  fOr  GREECE  ? ? ? ?— German Chancellor Angela Merkel’s party was defeated in a Berlin state election and her coalition ally lost all its seats, after scepticism over euro-area bailouts turned into a campaign theme, stoking government infighting over the debt crisis.

G-20 must get serious

G7  wAs alreAdy  enOUgh  nO nEEd  fOr bIggEr  pArtIEs

+G13 is jUst a TAG ALONG  ? ? ? ?

Doomed to fail unless IMF made more independent

GORDON BROWN, FELIPE GONZÁLEZ AND ER NESTO ZED ILLO

The   summer jitters, which brought memories from the panicky fall of 2008, have left little doubt about how fragile the recovery from the great crisis has been and how rocky the road ahead will continue to be.

This should not be entirely surprising given the magnitude of the shock endured in 2008-2009. But it is also in good measure due to the failure by leaders of the major economies to deliver on key commitments to pursue coordinated action.

The Group of 20 (G-20) was formed to undertake the collective responses deemed necessary to tackle the root causes of economic crises. At its summit meeting in November 2008, G-20 leaders themselves admitted that inconsistent and insufficiently coordinated policies propelled the catastrophe.

Then, and at two subsequent meetings, the leaders made concrete commitments to bring about that purported cooperation.

But reform of financial systems has proceeded unilaterally, not cooperatively.

The one cooperative effort, Basel III [#WHITE ELEPHANT#], which sets stricter capital reserve requirements for banks, is still full of holes. Transformation of the Bretton Woods institutions has not moved along significantly. The Doha Round is even more of a zombie than it was before the G-20 pledged to conclude it.

[## MONTHLY  TOURS & PARTIES  WASTING  OTHER PEOPLE's  MONEY##]

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In retrospect, the framework announced at Pittsburgh in 2009 was doomed to fail, given the way the leaders called for it to be implemented. They opted for a mutual assessment process, relegating the International Monetary Fund (IMF) to a purely advisory and secretariat role. Thus, the content of the framework was at once made hostage to a complex and possibly unsolvable negotiation among the key players.

It should have been obvious at the outset that the largest contributors to the global macroeconomic imbalances — such as the United States, China and Germany — would try all along the way to influence the process in order to minimise their respective share of correcting those imbalances which are standing in the way of sustained growth. Given this approach, it took more than a year-and-a-half just to agree on a general methodology to assess the sustainability of national economic policies, and the outcome is overly prescriptive on some aspects and ambiguous on others.

Considering that the pending task — identifying the causes of imbalances and agreeing on the policies to fix them — is much harder than agreeing on basic methodological questions, it is highly doubtful that an action plan can be agreed at the Cannes summit in early November.

Paul A Volcker was chairman of the Federal Reserve from 1979 to 1987.

PAULA VOLCKER 

Eat the Rich

Over the weekend, hundreds of angry protesters gathered at Liberty Plaza in New York. It is there they set up their home base for a demonstration intended to “interrupt the flow of Wall Street.”

One protester who happened to have about $5,000 worth of Japanese koi tattooed on his arms said he was tired of working for peanuts while the rich continue to get richer, insisting that Wall Street redistributes what he called “stolen wealth.”

Now, I certainly won't argue that there is a select group of folks that's directly responsible for much of the economic burdens we bear today. (I could write volumes on the banks.) What we've seen unfold over the past few years has been despicable.

And I would have no problem pilfering the mansions of the scum who profited off the backs of honest, hard-working taxpayers, most of whom can be found spending their days on Capitol Hill...

That being said, you can't blame a bunch of bureaucratic bums and Wall Street suits for everything.

Truth is, no one forced consumers to buy homes they knew they couldn't afford, and there has never been a law that requires Americans to bury themselves in debt while saving nothing.

Look, the world ain't perfect.

And yes, there are snakes and cockroaches lingering around every corner.

That's life.

But here's something you'll never hear a self-made millionaire say...

GIC should disclose details of UBS position

Letter from Chua Soo Kiat

I refer to the article “Rogue trader at UBS racks up S$2.48b loss” (Sept 16).

The Government of Singapore Investment Corporation (GIC) became the largest shareholder in UBS last year when it converted notes it bought in the bank into ordinary shares at a conversion price of 47.7 Swiss francs (S$67.6) a share.

UBS shares closed at 9.75 Swiss francs the day the loss was announced. Given GIC’s original 11-billion Swiss franc investment in 2008 and the 2 billion Swiss francs it received in interest in the first two years, its paper loss was about 6 billion to 7 billion Swiss francs at Thursday’s price.

GIC is one of three key institutions managing reserves and investments for Singapore.

The other two, the Monetary Authority of Singapore and Temasek Holdings, adopt a high level of disclosure, including the value of their portfolios.

The same cannot be said of GIC, which has relied on the argument that disclosure of its numbers would weaken Singapore’s ability to fend off speculators.

However, in view of the erosion of the value of Singapore’s investments in Western banks such as UBS, it will be increasingly challenging to expect Singaporeans to accept GIC’s position of non-disclosure.

After all, Singaporeans are generally prudent with money and have, in the two recent elections, rejected candidates with campaign promises of more spending. It is only fair that they are kept updated on the value of GIC’s holdings, the last piece of the reserves puzzle.

GIC should not underestimate the negative fallout that eroded investments might have on its reputation and, ultimately, on the Government, which has pledged more engagement and openness with the people.

No doubt, there are conflicting interests and needs, so I am keen to also hear from our newly-elected President on this matter.

Such a crisis is now a distinct possibility and the outcome for the EU too terrible to consider.

Obama to seek higher tax rate for the rich

WASHINGTON

According to administration officials, the proposal will be called the “Buffett Rule”, in a reference to Mr Warren Buffett, the billionaire investor who has complained repeatedly that the richest Americans generally pay a smaller share of their income in federal taxes than do middle-income workers, because investment gains are taxed at a lower rate than wages.— A new minimum tax rate for individuals making more than US$1 million (S$1.24 million) a year — to ensure that they pay at least the same percentage of their earnings as middle-income taxpayers — will be the centrepiece of United States President Barack Obama’s measures to reduce the country’s deficit, which he will unveil today.

As United States President Barrack Obama meets Australia Prime Minister Julia Gillard in November, it will be hard not to wonder about the weak leadership imperilling not only their economies, but also the world at large.

More disclosure, please, for property purchases

Letter from Jensen Chong

I RECENTLY became a proud home owner and, as a foreigner, I am used to a certain level of detail in sales and purchase contracts.

But property developers here do not seem to share the same practices as in neighbouring countries.

The most notable difference is the lack of dimension measurements in the layout of my condominium unit. This makes it difficult to estimate the size of each room or to verify, upon completion, that my unit was within the agreed size.

While the overall unit size was provided, this led me to feel that developers can manipulate the sizes in the floor plan. For example, making the air-con area a lot bigger than that in drawings.

Also, the estimated temporary occupation permit date is two years later than what the property agent estimated, which leaves no room to protect home owners in the event of a delay in completion.

Are these common practices in Singapore?

How are home owners protected as consumers when it comes to buying property?

Why private banks are struggling

KEVIN BROWN

Specific numbers for individual businesses are hard to find because most wealth managers in Asia are privately owned or subsidiaries of larger banks. But data in confidential industry surveys provide a proxy for the sector as a whole.

BCG puts last year’s costs at 81 per cent of revenues, up from 57 per cent in 2007.

PricewaterhouseCoopers, in yet another survey, says it is likely to hit 90 per cent this year compared with 70 per cent in Switzerland.

“If your cost/income ratio is 90 per cent, you cannot be making any money,” says PwC’s Asia-Pacific private banking leader Justin Ong. Of course, this is an average.

Some banks will be doing better, others worse. But it illustrates the scale of a series of industry problems.

First, competition is intense. As growth in Europe has slowed, many banks have opened or expanded wealth management operations in Asia, keen to tap the local market and retain European clients by offering the Asian exposure many demand.

Switzerland’s Julius Baer, Lombard Odier, BSI and Clariden Leu are among these banks, along with Barclays Wealth and Standard Chartered of the UK, and Rothschild, the European bank. Banks that might have closed have been rescued, such as the Asian private bank of ING, acquired by Oversea-Chinese Banking Corporation after a fight with HSBC.

Second, many banks are finding it hard to squeeze revenues out of Asian clients, who tend to be savvy first- or second-generation entrepreneurs, used to making their own decisions. Many are unwilling to buy the banks’ preferred model of discretionary portfolio management, where a manager invests the customers’ money for an annual percentage fee.

That pushes the banks towards overreliance on transaction fees, which makes it hard to sustain revenues when markets are volatile or falling. Clients’ trust is also damaged by attempts to push them towards complex high-margin products.

RISING COSTS

Third, the banks are being squeezed by rising costs. One chief executive says remuneration for relationship managers, who deal directly with clients, has more than doubled in less than a decade. A shortage of talent means relationship managers are often poached from other banks, inflating salaries. But the business they bring in has fallen to 30 per cent of the assets they manage from 80 per cent 20 years ago.

Regulatory costs have surged since the financial crisis. Product compliance requirements are tougher in the wake of mis-selling scandals, and anti-money laundering regulations are tightly enforced.

Impending implementation of the United States Foreign Account Tax Compliance Act, which will force foreign banks to police accounts held by US citizens, is causing significant concern.

There is a lot the banks can do. A prime candidate for cost-cutting is the back office, where a lot of work could be automated.

PwC found that a fifth of Asian banks were capable of totally automated processing of some 80 per cent of non-complex equity trades, compared with almost two-thirds in Switzerland.

The second is to get a grip on the cost and quality of key staff. Very few relationship managers have advanced financial qualifications, and more than half have less than five years’ experience. Bonus systems encourage many to chase transaction income rather than build long-term relationships with clients. Hiring more financial graduates and linking pay to long-term performance would help build trust and cut costs.

Some banks are tackling these issues.

But insiders think many top executives are blinded by forecast revenue growth. “Everyone wants a piece of the pie, especially the European banks, which have to diversify out of their own markets,” says a senior banker with experience in Singapore and Hong Kong.

“But there are too many private banks here now.

Eventually, some will have to close down.”

THE FINANCIAL TIMES

Kevin Brown is Asia regional correspondent at The Financial Times.

Many banks are finding it hard to squeeze revenues out of Asian clients, who tend to be savvy first- or second generation entrepreneurs, used to making their own decisions. Many are unwilling to buy the banks’ preferred model where a manager invests the customers’ money for an annual percentage fee.

Despite the rich pickings in Asia, competition is intense and the costs mounting

“So the solution is immigration ... and as we age, and there are not enough young people to look after the old, then maybe the population will be receptive to taking in more immigrants,” Mr Lee said, and added Singapore could add about 20,000 to 25,000 immigrants annually to grow the population.