The credit crunch and its effects

MONEY MONEY Here in Switzerland Switzerland’s largest banks were among many in Europe to suffer major losses from the bad loans in the U.S. sub-prime housing market. Daniel Zuberbühler, head of the Swiss banking commission, said the risks “are no longer limited to sub-prime mortgages. They are spilling over into credit cards, retail and commercial loans.” UBS, after writing off SFr 20 billion, says it will reduce its investment banking business and probably slash more jobs. Credit Suisse reduced its exposure to the sub-prime market by 40 per cent in 2006. But last year’s third-quarter earnings fell 31 per cent, year-on-year. Losses for both banks were mainly in the investment banking division. To add to the market turmoil, it is believed that the alleged failure of the French authorities to warn Americans about the fraud at Société Générale and the unwinding of the bank’s massive trading positions, led to the U.S. Federal Reserve’s panicky 75-basis-point rate cut on January 22. The credit crunch and its effects If the newspapers are to be believed, the mood at the recent 2008 World Economic Forum in Davos was nothing like the upbeat atmosphere of days past. By Brien Donnellon ⏐ Despite assurances Brien Donnellon Brien Donnellon is the owner of KEY INVESTMENT, a financial services company providing unbiased financial advice and solutions for Swiss-based expats, HR departments and foreign investors. The company, formed in 1997, is authorised and regulated by the Swiss Federal Banking Commission. For further information please visit www.keyinvestment.ch or write to bd@keyinvestment.ch or call 081 257 13 14 The case for optimism There is no question that this is an unnerving time for investors. However, veteran investors are also eyeing possible gains in the many under-valued companies whose stock prices have been eroded in a falling market. Many economists also believe the crisis could ultimately rebalance the U.S. economy, which has become overly dependent on consumer spending, financed by cheap credit and government borrowing. An increase in household savings, encouraged by a rise in interest rates to reward savers, could lead to a healthier ratio of long-term investment. Finally, a mild economic slowdown in the United States, coupled with a gradual reduction in the value of the dollar, could help to rebalance a world economy that has become overly dependent on the United States as its engine of growth. from U.S. Secretary of State Condoleezza Rice as to the resilience of the American economy, many people left this year’s WEF with the belief that a U.S. recession was not only a strong possibility, but likely to result in a global slowdown. Last autumn it seemed the financial markets were beginning to recover from a turbulent year, but 2007 ended with lagging investor confidence as the troubled American housing market exposed huge banking deficits. In December leading banks attempted to revive the markets. The European Central Bank loaned 350 billion Euros to banks at a below-market interest rate in a bid to ease tight credit markets and reduce the cost of lending between retail and commercial banks. The ECB confirmed that 390 European banks sought the funding. Most analysts didn’t believe this to be enough and, sure enough, the stock market experienced its biggest downward correction since 2002. Worse, mortgage brokers had been paid for writing loans but weren’t docked if those loans failed. The system of lending had become less transparent because sub-prime mortgages were ‘bundled’ by finance companies and sold to financial institutions around the world – including pension funds and hedge funds. Many of these miscalculated the likelihood of defaults in a housing downturn; they’ve been left with a slew of bad loans that no one wants to buy. Moody’s, Fitch, and Standard & Poors are overhauling their procedures in an effort to quell the mounting regulatory pressure. An investigation is already planned in the United States. “Rating agencies are like the gatekeepers of the capital markets so it is very important that we do a thorough examination, now, and see if there is an appropriate regulatory response,” said Mary Shapiro, head of the Financial Industry Regulatory Authority in New York. Transparency “Rating agencies are like the gatekeepers of the capital markets.” – Mary Shapiro, calling for a “thorough investigation” of rating agencies, as head of New York’s financial industry regulator The sub-prime debacle One of the contributing factors in the turmoil has been the sub-prime mortgage problem. These mortgages were granted to borrowers with a poor credit report, who had missed or been late with payments on a debt. Lenders charged an inflated interest rate to compensate for potential losses from default. At first, this enhanced the lenders profits. But then the borrowers couldn’t pay. Hundreds of thousands of borrowers were forced to default and several major American sub-prime lenders filed for bankruptcy. Ratings In recent weeks, investors were shocked to see leading credit rating agencies downgrade tens of thousands of mortgagebased securities. They were especially upset that many of the plunging securities had carried the agencies’ ultra-safe, ‘triple A’, tag. Investors believe the rating agencies failed in their duty to foresee, and help them avoid, sub-prime housing losses. This is fuelling political pressure for American and European regulators to clamp down on the agencies, which are subject to less-than-stringent regulation. It is still unclear which banks are liable, and to what extent. Therefore every bank is suspect and uncertainty is reflected in a volatile market. Big names like Citibank, UBS and Merrill Lynch face losses, investigations and possible lawsuits. Fear has been fuelled by a dearth of information, resulting in money-market funds closing up shop. This, in turn, has cut off the main source of cash for the interbank markets and killed the evolving market for risky mortgage-backed derivatives – separate investments created from the cash flow of pooled mortgages. An economy burdened by mortgage and credit-card debt is being starved of funds by banks hoarding liquidity and capital. And it could escalate if the moneymarket funds withdraw longer-term lending to the banks, because the banks will then put even more capital aside, resulting in recessionary declines that are unlikely to be limited to the United States. It is a complex scenario and market players appear truly worried because they’ve suddenly realised they don’t understand the financial system they created. Our close to 5’000 employees help to make us the leading business aviation services company in the world. Today, we manage a fleet of over 150 aircraft and our global growth continues with the addition of new and expanded facilities. With an ever-broadening menu of complementary services, we strive to deliver the highest level of customer support. Welcome to our world at www.jetaviation.com. Manager PR and Communications EMEA & Asia With an affinity to North America Your mission: You write media releases and coordinate the worldwide approval process and media release schedule.You maintain close relationship to the media and organize facility tours for journalists. Internal and external communication includes the company’s customer magazine, internal newsletters and announcements. In addition, you organize photo shootings and the development of collateral material, direct mail, online and promotional campaigns and edit our various web sites and Intranet. In your position you are reporting directly to the Senior VP Group Marketing & Communications. Yourself: Responsible for the EMEA & Asia region, you will cooperate closely with our U.S. marketing department. We are therefore looking for someone whose native language is English with excellent writing skills. Fluency in German and knowledge in French would be an asset. You are a team player, people oriented and a cooperative person who is accustomed to delivering top quality and on-time services in a fast-paced environment. Previous experience in a similar position or journalistic background is an advantage. We offer you: You are working in a global environment for the leading business aviation company in the world, with more than 20 facilities worldwide. Your custoPlease send us your complete application by e-mail to bern.ch@mercuriurval.com, Ref. No CH-301.17531-MUH or to Mercuri Urval AG, Gutenbergstrasse 18, P.O. Box 7208, 3001 Bern/Switzerland. For additional information please call +41 (0)31 390 13 13. Mercuri Urval offices in Zürich, Nyon, Basel and Bern as well as 65 branches worldwide. www.mercuriurval.ch mers are the senior managers of our daughter companies. You are in constant contact with professionals who lead the various lines of business and with external partners, offering you the opportunity to utilize your creativity. Your workplace is located near Zurich airport. We are looking forward to your application. Please include writing and collateral samples. 12 swiss news ⏐ march 2008 swiss news ⏐ march 2008 13