World Economic News

Rumors of Financial Restructurings Abound

Some of the latest developments:

* Bank of America is said to be interested in acquiring Barclays. B of A, with $1.5 billion in assets, is the second largest bank in the U.S., and Barclays, according to the most recent Forbes ranking, was the largest financial institution in the world by assets, with $1.6 billion.

* Citigroup, which had $1.75 billion in assets as of Sept. 30, saw its stock rise last week on speculation of major changes, possibly involving restructuring, asset sales, and management changes.

* Venice's Assicurazioni Generali is rumored to be both a takeover target, and looking to buy another insurer to make it too big to swallow. AIG and Dutch insurer Aegon are said to be interested in "Mother" Generali, and Generali is said to be fighting with German insurer Allianz over Swiss Life.

Traders frequently use rumors to raise or drop the value of a particular stock in order to make money, and sometimes rumors are used to force certain desired moves; sometimes they are true, sometimes they are not, but the level of rumors in the market is a useful window into the overall state of agitation. Whether any of these deals go through or not, the consolidation among financial institutions will continue, as the proverbial drunks prop each other up.

Warnings Multiply on Junk Debt Collapse

Bank of England deputy governor Sir John Gieve issued a warning of a jump in leveraged debt defaults, in a Bank release on Dec. 15. Reuters links the warning to the previous day's Standard and Poor's report, and S&P's conference call on which it predicted 1.5 trillion euros ($2 trillion) in takeover attempts in Europe alone in 2007.

The Cerberus hedge fund, along with Goldman Sachs' hedge fund Goldman Capital Partners, both based in New York, are moving to the top as world's biggest hedge fund devils in the inferno of leveraged takeovers; Cerberus will now own two banks and a major finance company (GMAC), after its current takeover of BAWAG bank in Austria. BAWAG was the trade union-owned bank that defrauded investors of nearly $1 billion in the RefCo hedge fund fraud and collapse in 2005. As Cerberus's "piggische bank" for takeovers in Europe, it will effectively be run by Kenneth Leet from Goldman Sachs (now a Cerberus senior executive under former U.S. Treasury Secretary Jack Snow).

Swiss Financial Daily Issues Caution on Credit Derivatives

In its weekly "Eurobond" column, the Dec. 11 Neue Zuercher Zeitung warned of the gigantic growth of credit derivatives, which are being increasingly used by bond funds as hedging instruments. According to the world's largest investment fund manager, Pimco, whereas the volume of CDs in 2005 stood at $17,000 billion, that could double next year to $35,000 billion. NZZ also mentions the very (exotic) popular "Constant Proportion Debt Obligation" (CPDO), which is also being used as some kind of derivative instrument and which, as NZZ writes, could become catalyst for greater market volatility and systemic risks.

Hedge Funds Seen as Systemic Risk; Controls Not Mooted

The German government, in line with recommendations in a new report by the European Central Bank, renewed its July 2005 G-8 initiative for more hedge-fund transparency.

But German Finance Minister Peer Steinbrueck made clear, after a meeting with his Dutch minister colleague Gerrit Zalm at The Hague Dec. 11, that they are not aiming at any real controls, but rather a central register for fund activities and share ownership, of traded volumes and risks. The fact alone that the issue has won enough support also in Washington D.C./New York and London to be put on the G-8 agenda in 2007, is seen as "progress" by Steinbrueck.

Surveys produced in a number of central banks and governments most recently, address the systemic risk posed by funds, as for example in the recent Amaranth default; but so far, they fall short of any forceful commitment to restore control of the speculation markets.

Oil Producers Shifting Away from Dollar

The latest quarterly report of the Bank for International Settlements notes a pattern of oil-producing countries fleeing the dollar and gradually shifting their oil income into other currencies, such as the euro, yen, and pound. The Financial Times Deutschland remarks that this could increase the pressure on the dollar. According to the BIS, in the second quarter of 2006, Russia and OPEC decreased their dollar holdings against the previous quarter by 2% (to 65%) and increased euro holdings from 20% to 22%. Qatar and Iran reduced their dollar positions by $2.4 billion and $4 billion. Ecuador and Indonesia reduced their position by $2 billion, and Saudi Arabia by $3 billion.