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August 30, 2012

FT Alphaville » Charting sovereign bond holdings across the eurozone

Charting sovereign bond holdings across the eurozone
So which European country might be seeing foreign investors fleeing its sovereign bond market, leaving domestic banks to take up the slack?
Spain of course.
Much has been made of the eurozone sovereign/banking crisis loop, especially in Spain’s case where the banks are taking on more sovereign risk just as the banks themselves are being bailed out.
But we actually have very little hard data to look the picture over time and across Europe in a directly-comparable way.
Helpfully, Jean Pisani-Ferry and Silvia Merler at Bruegel, a Brussels-based think tank, have painstakingly put together a dataset of sectorial sovereign bond holdings for eleven EU countries as well as the US. They break down a country’s debt issues into holdings by resident banks, the central bank, other public institutions, other residents and non-residents. The research follows on from their ‘Who’s afraid of sovereign bonds?’ paper in February, which looked the role of eurozone banks in holding domestic government bonds.
The data goes back to the late 1990s in most cases and is broken down — the full dataset and methodology is up on the Bruegel’s website.
Pisani-Ferry and Merler have charted bond holdings by a country’s domestic banks along with holdings by non-residents, showing both the build-up of sovereign debt on the books of local banks and the “flight to safety” by non-residents.
Let’s start with the peripherals:
The cases of Spain, and then Germany and Finland are perhaps the most striking with the lines inverting in the former, and very much diverging in the latter:
The ‘flight to safety’ is easy to see in the core countries as well as in the UK.
A quick note on the UK in case you are wondering why the line dips below zero:
The break-down can be reconstructed for long-term government bonds issued by the UK central government, looking at the UK’s sector financial accounts. To isolate the Bank of England we relied on data on the bank’s holding of sterling securities issued by the public sector, provided by the Bank of England itself. For some years, MFIs’ [Monetary Financial Institutions] holdings of securities are recorded with a negative sign. This is the result of the accounting practice chosen, as holdings of gilts are reported net of long and short positions.
Pisani-Ferry and Merler conclude:
These observations raise a question about the effectiveness of ECB provision of liquidity to banks as a means to alleviate the sovereign crisis. At a point when government bonds are considered risky assets, euro-area banks are faced with both balance sheet and reputational risks compared to their non-euro area counterparts, and may prove reluctant to increase this exposure further.
Related links:Who’s afraid of sovereign bonds? – Bruegel
State-backed bond-buyers? – FT Alphaville
This entry was posted by Masa Serdarevic on Wednesday, August 29th, 2012 at 13:15 and is filed under Capital markets.
Read the article online here: FT Alphaville » Charting sovereign bond holdings across the eurozone

August 14, 2012

I Love U Dad!! (BN) Carl #Icahn Hands Son Brett $3 Billion to Prove His Mettle

Carl Icahn Hands Son Brett $3 Billion to Prove His Mettle

Carl Icahn agreed to allocate as much as $3 billion to a management duo composed of his son Brett and David Schechter, expanding their role in running the 76- year-old's investments.

Under a 46-page legal agreement filed with federal regulators last month, Brett Icahn and Schechter will get to invest their boss's capital in companies with stock market values between $750 million and $10 billion. The deal may free the elder Icahn, who still has final say over many aspects of the portfolio, to focus on larger targets for shareholder activism.

Brett, who turns 33 this month, along with Schechter has been running $300 million for his father, who owns more than 90 percent of Icahn Enterprises LP, a holding company with $24 billion in assets including activist investing partnerships as well as the Tropicana casinos, an oil refiner and an auto-parts maker. The arrangement expires after Carl turns 80 in 2016, giving Brett the chance to both prove his mettle as a successor and develop a track record to start his own hedge fund.

"It's a pretty nice gesture by the old man," said Michael McAllister, a partner at Satterlee Stephens Burke & Burke LLP in New York who specializes in employment law within the securities industry. "If the son doesn't meet the standard Carl is looking for, it gives Brett an opportunity to go out and earn his own."

After hiring Brett as an investment analyst a decade ago, Icahn allocated the $300 million to his son and Schechter in April 2010 to invest in loans and securities of companies with less than $2 billion in equity value. Their investments, internally dubbed the Sargon portfolio, generated a gross cumulative gain of 96 percent by the end of June, according to a July 27 filing with the U.S. Securities and Exchange Commission.

'Can't Complain'

Schechter joined the firm in 2004 after working at a Citigroup Inc. unit that used the bank's capital to invest in distressed companies. Schechter, who earned an economics degree from the University of Pennsylvania, serves on the boards of several companies in which Icahn holds stakes, including WebMD Health Corp. (WBMD) and auto-parts supplier Federal-Mogul Corp. (FDML)

"These two guys doubled our money over the last two years," the elder Icahn said in an interview. "You can't complain about that." Brett didn't return an e-mail seeking comment.

The filing included a new accord that Icahn reached on July 24 with Brett and Schechter. Icahn Enterprises will allocate as much as $2.4 billion in its investment unit to the duo, including the money they already have under management, while High River LP, one of the elder Icahn's personal investment vehicles, will chip in $600 million.

The agreement stipulates that Carl will set the investment strategy and maintain oversight of the managers, who must get their boss's approval for certain investments.

Hedging Tools

The two can hedge their investments using futures and options on the Standard & Poor's 500 (SPX) and Russell 2000 Indexes, and enter into short sales on securities they already hold. Such hedges are limited to $80 million of invested capital on any one security or index, and their total short positions can't exceed the combined value of their investments, or long positions. Short sales, used to profit from or protect assets against market declines, involve borrowing a stock or bond and then selling it in anticipation of a price decline.

When the agreement expires, Brett Icahn and Schechter will be able to disclose the track record they've established at Sargon to "market a permitted fund," according to the SEC filing. Should they decide to start their own fund, Icahn Enterprises and High River would be entitled to receive 15 percent of their gross management and incentives fees "in perpetuity," in return for an investment of at least $20 million in the fund.

Cohen, Robertson

"You see this in the larger investment houses," said Gary Goldstein, the chief executive officer of New York-based Whitney Group LLC, an executive search firm that focuses on financial services. "Steven Cohen does a very similar construct and Julian Robertson had a very similar concept," Goldstein said, citing two hedge-fund managers known for hiring young traders who go on to form their own firms.

Under terms of the new Icahn agreement, the managers are entitled to a lump-sum payment equaling 7.5 percent of any profits that exceed an annual 4 percent compounded hurdle rate.

Icahn Enterprises' investment unit had net assets of about $5.6 billion as of June 30, including $1.3 billion in cash, according to a Form 10-Q that the holding company filed Aug. 7 with the SEC. Icahn ran it as an activist hedge fund until 2011, when he returned the capital he had received from outside clients.

Activist Strategy

Icahn primarily takes stakes in companies he deems under- performing and then lobbies management to take steps to boost their share prices, such as stock buybacks, asset divestitures, or putting the entire enterprise up for sale. His previous targets have included Time Warner Inc., Motorola Inc., Biogen Idec Inc. (BIIB) and Yahoo! Inc.

Brett also has served on the boards of several companies that Icahn invested in, including Take-Two Interactive Software Inc. (TTWO) and Hain Celestial Group Inc. (HAIN) He is a graduate of Princeton University, where his father earned a philosophy degree.

To contact the reporter on this story: Miles Weiss in Washington at

To contact the editor responsible for this story: Christian Baumgaertel at

Robert Samuelson: Why U.S. economic policy is paralyzed - The Washington Post

This piece from last month sums up well the mess we're in with regards to the deficit.

Why U.S. economic policy is paralyzed

Wondering why government can’t restart the sluggish economy? Well, one reason is that we are still paying the price for the greatest blunder in domestic policy since World War II. This occurred a half-century ago and helps explain today’s policy paralysis. The history — largely unrecognized — is worth recalling.
Until the 1960s, Americans generally believed in low inflation and balanced budgets. President John Kennedy shared the consensus but was persuaded to change his mind. His economic advisers argued that, through deficit spending and modest increases in inflation, government could raise economic growth, lower unemployment and smooth business cycles.
None of this proved true; all of it led to grief.
Chapter One involved inflation. Increases weren’t modest; by 1980, they approached 14 percent annually. Business cycles weren’t smoothed; from 1969 to 1981, there were four recessions. Unemployment, on average, didn’t fall; the peak monthly rate — reached in the savage 1980-82 slump — was 10.8 percent. Americans lost faith in government and the future, much as now. Confidence revived only after high inflation was quashed in the early 1980s.
Now comes Chapter Two: How the retreat from balanced budgets has weakened America’s response to today’s downturn, the worst since the Great Depression. It has limited government’s ability to “stimulate” the economy through higher spending or deeper tax cuts — or, at least, to have a meaningful debate over these proposals. The careless resort to deficits in the past has made them harder to use in the present, when the justification is stronger.
The balanced-budget tradition was never completely rigid. During wars and deep economic downturns, budgets were allowed to sink into deficit. But in normal times, balance was the standard. Dueling political traditions led to this result. Thomas Jefferson thought balanced budgets would keep government small; Alexander Hamilton believed that servicing past debts would preserve the nation’s credit — the ability to borrow — when credit was needed.
Kennedy’s economists, fashioning themselves as heirs to John Maynard Keynes (1883-1946), shattered this consensus. They contended that deficits weren’t immoral and could be manipulated to boost economic performance. This destroyed the intellectual and moral props for balanced budgets.
Norms changed. Political leaders and average Americans noticed that continuous deficits did no great economic harm. Neither, of course, did they do much good, but their charm was “something for nothing.” Politicians could spend more and tax less. This appealed to both parties and the public. Since 1961, the federal government has balanced its budget only five times. Arguably, only one of these (1969) resulted from policy; the other four (1998-2001) stemmed heavily from the surging tax revenue of the then-economic boom.
We are now facing the consequences of all these permissive deficits. The recovery is lackluster. Economic growth creeps along at 2 percent annually or less. Unemployment has exceeded 8 percent for 41 months. But economic policy seems ineffective. Since late 2008, the Federal Reserve has kept interest rates low. And budget deficits are enormous, about $5.5 trillion since 2008.
Only one group of economists has a coherent response: Keynesians. Led by New York Times columnist Paul Krugman, they argue that the deficits haven’t been large enough. If consumers and businesses aren’t spending enough to revive the economy, government must substitute. Its support would be temporary until more jobs and profits strengthened private spending. Sounds convincing.
But it collides with the 1960s’ legacy. Running routine deficits meant that the federal debt (all past annual deficits) was already high before the crisis: 41 percent of the economy, or gross domestic product (GDP), in 2008. Huge deficits have now raised that to about 70 percent of GDP; Krugman-like proposals would increase debt further. It would approach the 90 percent of GDP that economists Kenneth Rogoff of Harvard and Carmen Reinhart of the Peterson Institute have found is associated with higher interest rates and slower economic growth.
Since 1800, major countries have experienced 26 episodes when government debt has reached 90 percent of GDP for at least five years, they find in a study done with Vincent Reinhart of Morgan Stanley. Periods of slower economic growth typically lasted two decades.
Now, imagine that the country had adhered to its balanced-budget tradition before the crisis. Some deficits would have remained, but the cumulative debt would have been much lower: plausibly between 10 percent and 20 percent of GDP. There would have been more room for expansion. Balancing the budget might even have forced Congress to face the costs of an aging society.
The blunder of the Sixties has had a long afterlife. Economic policy is trapped between weak demand and the fears of too much debt. Yesterday’s Keynesians undercut today’s Keynesians. “In the long run we are all dead,” Keynes said. But others are alive — and suffer from bad decisions made decades ago.

 Robert Samuelson: Why U.S. economic policy is paralyzed - The Washington Post

-- The MasterFeeds

Currency Flows Reversing #China to #Colombia as #Trade Slows - Bloomberg #forex

Currency Flows Reversing China To Colombia As Trade Slows

Just three months after the biggest developing economies sold dollars to support their currencies, policy makers from Colombia to China are moving to weaken exchange rates and revive exports as the International Monetary Fund forecasts the slowest trade growth in three years.
Colombian Finance Minister Juan Carlos Echeverry urged the central bank on Aug. 3 to boost minimum dollar purchases from $20 million a day, saying the country needs “more ammunition” to drive down the peso in the global “currency war.” The Philippines banned foreign funds from deposit accounts and unexpectedly cut interest rates in July as the peso hit a four- year high. In China, authorities lowered the yuan reference rate to the weakest since November, which according to Citigroup Inc. will create “headwinds” for other Asian currencies.
After spending more than $59 billion in foreign reserves in May and June to stem currency depreciation, developing nations are reversing policies as the European debt crisis outweighs the risk of faster inflation. South Korea and Chile may weaken exchange rates to make their exports cheaper, according to UBS AG. The IMF estimates global trade will expand at the slowest pace since 2009.
“Policy makers will become more aggressive,” said Bhanu Baweja, a London-based strategist at UBS. “The currency strengthening is in contrast with the state of the economy. That argues for much weaker foreign-exchange rates.”

Currency Swings

Options traders are bracing for wider currency swings in some emerging markets in coming months. The gap between implied volatility on one-year and three-month options for the South Korean won widened to a 10-year high of 2.85 percentage points on July 12, from 1.96 percentage points two months earlier, according to data compiled by Bloomberg.
Bank of America Corp. lowered its end-September forecast for the yuan on July 25 to 6.45 per dollar from 6.30, saying “downside growth and disinflationary risks” may prompt China to let its currency depreciate. The new forecast represents a 1.4 percent decline from yesterday’s close.
“People aren’t expecting currency appreciation from emerging Asia anymore,” said Albert Ma, a Taipei-based bond fund manager at PineBridge Investments LLC, which oversees $67 billion of assets globally. “These countries are mainly export- oriented. They’d want their currencies to be weak when the global economy is going this bad.”
Just three months ago, policy makers were taking steps to prop up exchange rates when emerging-market currencies, as measured by JPMorgan Chase & Co.’s ELMI+ Index, lost 5.9 percent in May, the most since September.

Debt Crisis

As the deepening European debt crisis led investors to retreat from developing nations, central banks drew on foreign- exchange reserves to limit declines, causing a combined $19.7 billion drop that month in Brazil, Russia and India, official data show. China’s holdings, the world’s largest at $3.24 trillion, fell $65 billion in the second quarter.
Since May, the ELMI+ index has climbed 4.4 percent as European policy makers pledged to tackle the crisis and record- low yields on U.S. Treasuries and German bunds spurred demand for riskier assets. Emerging-market bond funds have taken in more than $46 billion this year, surpassing the $43 billion of inflows in the whole of 2011, according to JPMorgan.

Central Banks

Chile’s peso advanced to the strongest level since September on Aug. 9, approaching levels that prompted the central bank to buy dollars in 2008 and 2011. The peso declined for a second day yesterday, falling 0.6 percent.
The won, which reached a four-month high on Aug. 9, strengthened 0.1 percent today. Malaysia’s ringgit gained 0.2 percent after touching its strongest level since May on Aug. 7.
The currencies are rebounding as slowing exports drag down economic growth in developing countries. The global trade expansion will ease to 3.8 percent this year, from 5.9 percent in 2011 and 12.8 percent in 2010, according to the IMF. China’s export growth collapsed to 1 percent in July from an average 18 percent over the past seven years as demand from Europe, the country’s largest trading partner, declined.
“We have a growth problem in the global economy,” Michael Ganske, the head of emerging-market research at Commerzbank AG in London, said in a phone interview. “Emerging-market central banks can’t let their currencies appreciate on the back of portfolio flows to the point it kills exports.”

‘More Diverged’

With Asian and Latin American currencies down about 9 percent since their peak in July 2011, policy makers aren’t worried about their nations’ losing competitiveness, said Kieran Curtis, who helps oversee $4 billion in emerging-market debt at Aviva Investors Ltd. in London.
“We haven’t seen particularly broadly based intervention,” Curtis said. “I don’t think they are all seriously concerned about the currency strength. It’s more diverged.”
All except four of 25 emerging-market currencies tracked by Bloomberg have weakened over the past 12 months. Brazil’s real lost 20 percent against the dollar in that period as the Hungarian forint fell 15 percent.
In Colombia, it’s a different story. The 26 percent gain in the peso since 2008 threatens to undermine local industry and farmers. Flower growers cut 30,000 jobs in the past seven years because of the peso’s rally, according to the Association of Colombian Flower Exporters. Echeverry said Aug. 8 that he has asked the central bank to double its daily dollar purchases to $40 million.
“We are in a currency war, and those who don’t fight lose,” he said in an interview in Bogota on Aug. 3.

Philippine Regulations

In the Philippines, the central bank tightened rules on capital inflows last month by prohibiting foreigners from parking funds in so-called special deposit accounts. Policy makers also cut the benchmark interest rate by a quarter- percentage point on July 26 to a record 3.75 percent, a move that Deputy Governor Diwa Guinigundo said will help “temper” peso gains. The currency’s 4.6 percent advance versus the dollar this year is the best performance in Asia. The peso fell 0.1 percent today.
South Korea, which sent a combined 44 percent of its overseas shipments to China, the U.S. and the European Union last year, will step up monitoring foreign purchases of won- denominated debt, Shin Hyung Chul, director general of the treasury bureau at the Ministry of Strategy and Finance, said in an Aug. 8 interview in Seoul.

Overseas Holdings

Overseas investors boosted bond holdings by 1.4 trillion won ($1.2 billion) to a record 89.7 trillion won in July, or 17 percent of the total outstanding, government figures show.
After keeping its currency little changed during the 2008-2009 financial crisis, China has allowed the yuan to depreciate this year. The central bank set a reference rate of 6.3456 on Aug. 13, the weakest level since November. The daily fixing, around which the currency is allowed to fluctuate by as much as 1 percent, was reduced 0.7 percent in the past three months, the most since a peg ended in 2005.
The Czech Republic’s central bank may weaken the koruna by about 10 percent against its trading partners to help the export-led economy recover from recession, according to Bank of America. A 10 percent depreciation will lead to as much as a 5- percentage-point increase in exports, Mai Doan, a London-based economist, wrote in a report to clients on Aug. 6.

Fed Purchases

Pressure for emerging-market currencies to appreciate may persist as central banks in developed nations boost monetary stimulus to revive growth, according to Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong.
The Federal Reserve said Aug. 1 it will pump fresh funds into the economy if necessary to bolster growth. European Central Bank President Mario Draghi said the following day that policy makers will buy shorter-maturity government securities to help quell turmoil in the region’s debt markets.
The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt from December 2008 to June 2011 in two rounds of so-called quantitative easing, sending the dollar to record lows against its trading partners. In response, countries from Brazil to China bought dollars to curb their currency rallies, boosting foreign reserves in the eight largest developing economies 46 percent in the three years through 2011, according to data compiled by Bloomberg.
Developing countries “don’t want a strong currency, losing export momentum and losing domestic momentum,” said Phillip Blackwood, who oversees $2.9 billion in emerging-market debt as a managing partner at EM Quest Capital LLP in London. “They want to boost GDP as much as possible. A weaker currency is another measure they can use.”
To contact the reporter on this story: Ye Xie in New York at; Andrea Wong in Taipei at
To contact the editors responsible for this story: Laura Zelenko atlzelenko@bloomberg.netJames Regan at

Read the article online here: Currency Flows Reversing China to Colombia as Trade Slows - Bloomberg

August 5, 2012

Fund file: why China’s cash pile is not enough | beyondbrics

Fund file: why China’s cash pile is not enough

Political leaders in the west have been keeping their eye on Beijing’s $3tn in foreign exchange reserves. If all else fails that amount of money could go a long way, they reason.
But Edward Chancellor, writing in Monday’s FTfm, says China’s forex reserves provide no shelter for anyone, least of all China.
Chancellor, a member of the asset allocation team at GMO, has been bearish on China for some time. He points to the fact that China has just produced its first quarterly balance of payments deficit since 1998. Although, at $12bn, it looks inconsequential compared to the massive reserves, Chancellor thinks if the balance of payments were to deteriorate rapidly China’s situation could take a drastic turn for the worse.
The real threat to China’s balance of payments, he writes, doesn’t come from shifts in China’s international competitiveness. Rather, it emanates from Beijing’s desire to maintain the country’s high rate of economic growth.
Changsha has just announced a $130bn investment programme to build more redundant airports, subways and bridges, he notes.
Why this bodes ill is best explained by Andy Lees of AML Macro, says Chancellor. Lees thinks the level of Chinese investment effectively creates a Ponzi scheme in its economy.
The argument goes like this: since 2007, investment has grown by nearly 6 per cent a year faster than China’s gross domestic product. If Bejing decides to further boost investment within a year, investment would exceed current savings – which stand at 52 per cent of GDP – and China’s current account would turn negative. If Beijing continued on the same path, Mr Lees reckons that within five years all of China’s forex reserves would have been expended.
If you think that this gives at least five years for Chinese policy makers to realise their folly and turn things around, think again. Foreign exchange reserves are also under threat of capital flight as wealthy Chinese find ways to take their money abroad.
Chancellor refers to the work of an academic who estimates that due to the concentration of wealth in China, the collective fortunes of the top 1 per cent of Chinese households is larger than the total foreign exchange reserves.
In addition, there is a direct connection between China’s forex reserves and liquidity in the credit system, says Chancellor. He points out that recent capital outflows have coincided with slowing deposit growth, which in turn has been forcing banks to fund themselves on the short-dated loans and interbank markets.
Massive foreign exchange reserves cannot shelter China forever, he says.
If Chancellor is right, western political leaders had better ask soon if they want some Chinese spending to go in their direction.
Related reading:Fund file, beyondbrics

Fund file: why China’s cash pile is not enough | beyondbrics

August 4, 2012

(BN) #Knight Survives Another Day With Short-Term Financing

Bloomberg News reports on Knight's #trading fiasco, 

"We are understanding that speed is not always better."NYSE Euronext (NYX) Chief Executive Officer Duncan Niederauer said during a conference call after the company reported earnings Aug. 3. 

Knight Survives Another Day With Short-Term Financing

Knight Capital Group Inc. (KCG), fighting to stay afloat after a $440 million loss spurred by a software bug, scrambled with its advisers to find a buyer or investor.

The market maker responsible for about 10 percent of American equity volume turned to Goldman Sachs Group Inc. (GS) on Aug. 1 to buy the firm out of trading positions acquired by mistake when a computer program malfunctioned, a person with knowledge of the matter said. It has until the close of business on Aug. 6 to complete the transaction.

"There's a lot of questions about their liquidity -- do they have the money to get through the trade settlement on Monday?" Patrick O'Shaughnessy, an analyst at Raymond James & Associates Inc., said in an interview with Pimm Fox on Bloomberg Television's "Taking Stock." "They have to find somebody to either invest capital into the company or somebody who's just going to buy the company outright."

Knight made it to the weekend after receiving short-term financing for market making, according to a person familiar with the matter who requested anonymity. TD Ameritrade Holding Corp. and Scottrade Inc., which sent trades elsewhere for execution after Knight's software bug, said they were routing orders back. Knight's stock surged 57 percent to $4.05 in New York after tumbling 75 percent in the previous two sessions.

Private Equity

As the company opened its books to potential saviors, people with knowledge of the matter said KKR & Co., TPG Capital and Silver Lake were among buyout firms that had an initial interest -- although one said chances of a private-equity deal are small. Citadel LLC, the Chicago-based hedge fund, expressed interest, as has Two Sigma Securities LLC, a New York-based market maker, people with direct knowledge of the matter said.

"I seriously doubt they will go out of business," Kenneth Pasternak, who co-founded Knight in 1995, said in a phone interview from his Ridgefield Park, New Jersey, private equity firm Kabr Real Estate Investment. "I just hope they can maintain the innovation. My fear is they will be bought by some big bank and become consumed."

Kara Fitzsimmons, a Knight spokeswoman, didn't return calls and e-mails requesting comment Aug. 3. David Wells, a spokesman for New York-based Goldman Sachs, said he couldn't comment. Representatives at Silver Lake, TPG, KKR, Citadel and Two Sigma declined to comment.

Adviser Aid

Knight is working with Sandler O'Neill & Partners LP as advisers in the rescue talks, said one of the people, who spoke on condition of anonymity because the discussions are private.

The trading fault, which caused stocks to move as much as 151 percent, left the firm with a "large error position," Knight Chief Executive Officer Thomas Joyce told Bloomberg Television Aug. 2.

"We're talking to a lot of capable people, people who are in touch with situations like this," Joyce said. "This was an anomaly, not one we're proud of."

Scottrade spokesman Whitney Ellis said the online retail brokerage began routing orders to Knight Aug. 3. TD Ameritrade resumed routing with Knight after testing its systems.

"After considerable review and discussion, we are resuming our order routing relationship with Knight," said Fred Tomczyk, president and chief executive officer at TD Ameritrade, in a statement. "Knight is one of many order routing destinations for us and has long been a good and trusted partner."

John Woerth, of Vanguard Group Inc., said in an e-mail that the company continued to avoid routing brokerage orders through Knight. Fidelity Investments, the second-largest mutual-fund company, is sending orders elsewhere, according to a person familiar with the matter, who asked not to be identified because the information is private.

'Biggest Risk'

"Knight may or may not have the ability to withstand this on a balance sheet basis, but their biggest risk is if people decide not to do business with them," Keith Wirtz, who oversees $14.7 billion as chief investment officer for Fifth Third Asset Management in Cincinnati, said in a telephone interview. Fifth Third is a client of Knight's. "Your confidence with a counterparty like a Knight is only as strong as their skills as well as their balance sheet."

About 23 percent of Vanguard's market orders in NYSE-listed securities were routed to Knight last quarter, according to a filing. The figure was 41 percent at Scottrade, 38 percent at Fidelity's National Financial Services LLC unit and 9 percent at TD Ameritrade.

'Break Down'

Fitch Ratings said in a statement that it does not expect any major counterparties of Knight to suffer large losses even in a bankruptcy scenario since many have already switched to other market makers. The issue still may lead to a structural change in the business, the ratings firm said.

"The events of the last two days again pose risks for equity trading volume as many investors become more concerned about seemingly unforeseeable risks related to trading technology problems and the broader market impact of high- frequency trading systems that periodically break down," Fitch said in the statement.

The number of exchange-listed securities changing hands on average each day fell 11 percent to 6.12 billion in July from a year ago, according to data compiled by Bloomberg.

Peak Valuation

Knight's $440 million loss compares with net income of $115.2 million in 2011 and is more than the company's market value as of Aug. 3, data compiled by Bloomberg show. The company was worth as much as $4.8 billion in 2000 and valued at more than $1 billion before the trading mistakes, according to data compiled by Bloomberg.

The loss represents about 40 percent of Knight's book value and would "exhaust" the firm's cash, according to CLSA Credit Agricole Securities. Knight had $365 million of cash as of the end of June, with about $70 million in its revolving credit line, Robert Rutschow, a New York-based analyst with CLSA, wrote in a report.

Knight's market-making unit executed a daily average of $19.5 billion worth of equities in June, according to its website. The unit traded 711 million exchange-listed shares a day in June, according to data compiled by the company and Bloomberg.

The NYSE reviewed trading in 140 stocks from Molycorp Inc. to AT&T Inc. as the market's Aug. 1 open was disrupted. Trades that occurred during the height of the volatility were canceled in six securities, where prices swung at least 30 percent in the first 45 minutes. Trades in all of the other stocks were allowed to stand.

Regulations Coming

The software malfunction was the latest black eye for the computer infrastructure of an equity market still haunted by the May 2010 market crash, the botched initial public offering of Facebook Inc. (FB) and failed IPO of Bats Global Markets Inc.

George Smaragdis, spokesman for the Financial Industry Regulatory Authority, said Finra has examiners at Knight and is working with the firm and other regulators to review the impact of the incident.

Securities and Exchange Commission Chairman Mary Schapiro, whose agency is the main market overseer in Washington, described the Knight event as "unacceptable," and promised to issue regulations to help prevent similar mishaps.

"I have asked the staff to accelerate ongoing efforts to propose a rule to require exchanges and other market centers to have specific programs in place to ensure the capacity and integrity of their systems," she said in a statement. The chairman also said the agency will hold a public meeting with industry participants in the coming weeks "to discuss further steps that can be taken to address these critical issues."

'Inexorable Fragmentation'

The error highlighted the fragility of an industry spread across about 50 trading venues. The head of the New York Stock Exchange said the firm's crisis is a "call to action" to fix a market that's grown too complex to explain to regulators.

"The structure that has evolved over the last decade in the U.S. has led to inexorable fragmentation, really an emphasis on speed, a feeling that if something is faster than by definition it's better," NYSE Euronext (NYX) Chief Executive Officer Duncan Niederauer said during a conference call after the company reported earnings Aug. 3. "We are understanding that speed is not always better."

To contact the reporters on this story: Nina Mehta in New York at; Whitney Kisling in New York at

To contact the editor responsible for this story: Lynn Thomasson at

August 1, 2012

(BN) #Singapore’s GIC Boosts #Cash to Levels Exceeding 2008 Crisis

Cash is King 
Bloomberg News reports
Singapore's GIC Boosts Cash Amid Europe Crisis, U.S. Slowdown
Government of Singapore Investment Corp., manager of more than $100 billion of the city-state's reserves, said it almost quadrupled its cash allocation and cut investments amid Europe's debt crisis and slowing U.S. growth.
Cash made up 11 percent of its portfolio in the year ended March, up from 3 percent a year earlier, GIC, as the sovereign wealth fund is known, said in its annual report today. Stocks declined to 45 percent from 49 percent as it pared equities in developed markets, it said, and bonds were reduced to 17 percent from 22 percent.
"Risk aversion returned to global financial markets in the last financial year," GIC said in its annual report. "There will be greater uncertainties in the future."
Policy makers across the world are preparing for a deeper impact from Europe's debt woes, with Singapore's economy unexpectedly contracting last quarter and China and South Korea cutting interest rates this month. Europe was plunged into fresh market turmoil as calls for bailout aid sent borrowing costs surging, while Moody's Investors Service lowered Germany's rating outlook to negative.
GIC's holdings in Europe fell to 26 percent from 28 percent, with those in the U.K. unchanged at 9 percent, it said. Within Europe, GIC's assets in Portugal, Ireland, Italy, Greece and Spain made up 1.4 percent of its portfolio, mainly held in real estate and stocks in Italy and Spain, it said.
Assets in the Americas were unchanged at 42 percent, with 33 percent of the total portfolio in the U.S., it said. It raised its allocation to Asia to 29 percent from 27 percent.
Annualized Return
The so-called 20-year annualized real return was 3.9 percent as of March 2012, unchanged from the previous fiscal year, it said. The annualized nominal rates of return in U.S. dollar terms was 3.4 percent over 5 years, 7.6 percent over 10 years and 6.8 percent over 20 years, it said. The fund doesn't report an annual return or disclose the actual size of its portfolio.
Holdings in so-called alternative assets increased to 27 percent from 26 percent, it said, with a gain in private equity and infrastructure investments. Real estate was unchanged at 10 percent of its portfolio, it said.
"Due to the heightened uncertainty in global markets, we allowed the cash inflow from investment income and fund injection to accumulate during the year in preparation for better investment opportunities," GIC said.
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