Derivatives Hit Austrian Railroad With Record Loss

Derivatives Hit Austrian Railroad With Record Loss (Update1)

By Zoe Schneeweiss

April 29 (Bloomberg) -- OeBB-Holding AG, Austria’s state- owned railroad company, reported a record 966 million-euro ($1.3 billion) loss after writing down the value of derivatives that went awry.

OeBB’s 2008 loss compared with a profit of 42.4 million euros a year earlier after the company wrote down the entire 613 million-euro notional value of synthetic collateralized debt obligations. The Vienna-based company, which bought the contracts from Deutsche Bank AG in 2005 and 2006, is appealing a February court ruling dismissing a claim that the lender didn’t disclose the risks associated with the derivatives.

State-owned companies and local authorities from Germany to Italy reported more than 1.13 billion euros of losses on derivatives that allow buyers to speculate or protect against risk, leaving taxpayers to pick up the tab.

“There was a climate that pressured publicly owned companies to look for creative ways to finance themselves,” said Thomas Hofer, the Vienna-based owner of H&P Public Affairs, which advises political campaigns. “They were given the feeling of being financially negligent if they didn’t invest in derivatives.”

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates or weather. CDOs, which package other bonds and loans into notes of varying risk and yields, are losing money as their holdings get downgraded.

‘Didn’t Fully Disclose’

“Deutsche Bank didn’t fully disclose all the risks attached to the CDOs,” Bettina Gusenbauer, an OeBB spokeswoman, said in a phone interview from Vienna.

The derivatives and the risks were fully reviewed with OeBB, a Deutsche Bank spokesman, who declined to be identified, said in an e-mail. OeBB initiated the transaction, not Deutsche Bank, the e-mail said.

Taxpayers shouldn’t “have to pick up the bill for speculative investments,” said Susanne Enk, a spokeswoman for Austria’s Federal Ministry of Transport, when asked about OeBB’s investment.

OeBB’s CDOs package credit-default swaps tied to debt including asset-backed securities and company bonds and expire between 2013 and 2015, the company said. OeBB made provisions on the securities of 420 million euros in 2008, and 157 million euros the year before, it said today.

‘Precautionary Measure’

The provisions are a “precautionary measure,” OeBB Chief Financial Officer Josef Halbmayr said at a press briefing in Vienna today. “We’ve taken all relevant measures to ensure that deals of this kind won’t take place again,” he said.

Credit-default swaps are derivatives used to protect against debt losses or speculate on credit quality, and pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to meet its obligations.

Municipal authorities across Europe are reporting losses from derivatives since credit markets unraveled in the slump triggered by the collapse of the U.S. subprime mortgage market in August 2007.

Milan’s financial police seized 476 million euros of assets from UBS AG, Deutsche Bank, JPMorgan and Depfa Bank Plc this week in an investigation into alleged fraud linked to the sale of interest-rate swaps, which are designed to protect buyers against losses caused by fluctuations in borrowing costs.

The city is suing the banks after losses on derivatives purchased in 2005, and alleges the lenders misled municipal officials on the advantages of the securities. Officials at the banks declined to comment, as did a spokesman for Milan’s city council.

Interest-Rate Swaps

In Germany, the Wuerzburg Regional Court ordered Deutsche Bank in March 2008 to cover a third of the 2.6 million euros city utilities lost in interest-rate swaps bought from the lender. A court reduced a loss claim against Frankfurt-based Deutsche Bank in July by the city of Hagen, Germany, to 1 million euros, from 47 million euros. Both decisions are being appealed.

A Deutsche Bank spokesman said the bank disclosed all risks and informed the municipalities “comprehensively” when selling derivatives in Germany.

“Swaps are like anything else where there’s a sophisticated seller and a simple-minded client,” said Anthony Neuberger, Professor of Finance at Warwick Business School in Warwick, England. “Anything complex can have effects that are different from those anticipated.”

French local authorities are susceptible to buying derivatives because the country’s rules are lax, according to a July report by Fitch.

French Rules

“The French rules, which do not limit the risk taken by local authorities using structured debt, favored the growth” of derivatives, the ratings company said.

About 25 percent of the 132 billion euros of debt owed by local public administrations in France was tied to derivatives as of January, according to Christophe Parisot, a Fitch analyst in Paris.

French Budget Minister Eric Woerth said in February that structured finance holdings don’t pose “a systemic financial and budgetary threat.”

“Structured credits are proposed only to certain clients with significant borrowings and with teams capable of following them,” Dexia SA, which received a 6.4 billion-euro bailout last year by France, Belgium and Luxembourg and which is the biggest lender to local governments, said in a January report to clients.

Derivatives Banned

Losses on derivatives led some European governments to ban local authorities or state-owned companies from investing in derivatives.

The U.K. High Court ruled that about 3.2 billion pounds ($4.7 billion) of swap contracts entered into by Hammersmith and Fulham Council were unenforceable in the 1980s. The 1997 Local Government (Contracts) Act banned investment in the derivatives, according to a spokeswoman at the Department for Communities and Local Government.

Polish municipalities can’t use derivatives, according to local-government Web site bazagmin.pl, which cites the Finance Ministry’s May 2008 interpretation of the Law on Public Finances.

In Finland, “city fathers learned it the hard way -- there’s no speculation” in the derivatives market because, “in the previous recession, some municipalities speculated on currencies” and lost, said Reijo Vuorento, planning manager at the Association of Finnish Local and Regional Authorities.

Wall Street, Banks, and American Foreign Policy

Wall Street, Banks, and American Foreign Policy
By Murray N. Rothbard, Center for libertarian Studies, 1995

Introduction by Justin Raimondo

Murray Rothbard's 1984 analysis of modern American history as a great power struggle between economic elites, between the House of Morgan and the Rockefeller interests, culminates in the following conclusion: "the financial power elite can sleep well at night regardless of who wins in 1984." By the time you get there, the conclusion seems understated indeed, for what we have here is a sweeping and compressed history of 20th century politics from a power elite point of view. It represents a small and highly specialized sample of Rothbard's vast historical knowledge coming together with a lifetime devoted to methodological individualism in the social sciences. It appeared first in 1984, in the thick of the Reagan years, in a small financial publication called World Market Perspective. It was printed for a larger audience in by the Center for Libertarian Studies in 1995, and appears in 2005 online for the first time. Theoreticians Left and Right are constantly referring to abstract "forces" when they examine and attempt to explain historical patterns. Applying the principle of methodological individualism— which attributes all human action to individual actors—and the economic principles of the Austrian School, Rothbard formulated a trenchant overview of the American elite and the history of the modern era. (more)

GLOOM, DOOM AND DEMOCRACY

GLOOM, DOOM AND DEMOCRACY by Brother Gregory Williams April 30, 2009 NewsWithViews.com The last thing people want to read is another article on gloom and doom. Sure, the world is poised on the brink of one of the worst economic collapses in history. Sure, people are losing their jobs, businesses, homes and even their life savings, followed by hyperinflation to get what's left. Sure, political leaders have sold the people out to special interests. But lets look on the bright side. (more)

UE: istituti di moneta elettronica

Risoluzione legislativa del Parlamento europeo del 24 aprile 2009 sulla proposta di direttiva del Parlamento europeo e del Consiglio riguardante l'avvio, l'esercizio e la vigilanza prudenziale dell'attività degli istituti di moneta elettronica, che modifica le direttive 2005/60/CE e 2006/48/CE e che abroga la direttiva 2000/46/CE (COM(2008)0627 – C6-0350/2008 – 2008/0190(COD))
(segue)

MONETA MONDIALE UNICA? TREMONTI, SI' MA...

CRISI: MONETA MONDIALE UNICA? TREMONTI, SI' MA CON DOPPIA CIRCOLAZIONE

(ASCA) - Roma, 30 apr - Una moneta unica mondiale? Perche' no, ma prevedendo una ''doppia circolazione''. E' la posizione del ministro dell'economia, Giulio Tremonti, che giudica ''di straordinario interesse'' l'idea del governatore della banca della Cina. In effetti, e' stato il Fondo Monetario Internazionale ad introdurre il tema dei cosiddetti 'diritti speciali di prelievo' attraverso una specie di 'moneta sintetica' uguale per tutti i Paesi e il governatore della Cina si e' detto d'accordo. Il tema e' stato discusso nella presentazione del libro di Tommaso Padoa Schioppa 'La veduta corta''.

Tremonti ha spiegato che ''il mondo e' unico, il mercato e' unico. Possiamo avere monete diverse?''. Il Ministro ha pero' fatto presente che ''in Paesi come il Canada e il Belgio, la parola 'paniere' non sarebbe capita''. Ma una ''soluzione'' si puo' trovare. E cosi' il ministro ha lanciato la proposta di una ''doppia circolazione'', con qualche allusione alla vicenda dell'euro. Seduto accanto a lui, Padoa Schioppa, componente del board della Bce ai tempi dell'introduzione dell'euro, ha mostrato un atteggiamento piuttosto freddo. ''E' meglio avere una moneta unica mondiale per denominare le transazioni mondiali e, raso terra, conservare le nostre vecchie e nuove monete per le operazioni locali''.

lsa/cam/rob

Italy backs idea of new global currency

• Reuters, Thursday April 30 2009

ROME, April 30 (Reuters) - Italian Economy Minister Giulio Tremonti backed on Thursday the idea of a new global currency for international transactions, while keeping existing currencies for domestic use.

Tremonti applauded a proposal made last month by China's central bank governor Zhou Xiaochuan to create a new global reserve currency, but he said this should not mean the end of existing domestic units.

"The Chinese governor's idea is of extreme interest, an idea that evokes a single world currency," Tremonti said at a book presentation in Rome, adding that it may nonetheless be too complicated for ordinary citizens. "It would be better to have dual circulation, a global currency for international operations and local currencies for local operations," Tremonti said.

The Real Source of Prosperity is You

The Real Source of Prosperity is the Human Soul

by Richard Cook, April 30, 2009

This page contains my blog on current events from the perspective of monetary and economic reform. This is a huge topic that connects with the material presented in my new book, We Hold These Truths: The Hope of Monetary Reform. To order the book, please contact my publisher, Tendril Press. Order Here

Since I began to write on economics and monetary policy I have argued that we should abolish our bank-centered, debt-based monetary system and replace it with a system where credit is viewed as a public utility. This would lead to money controlled by the people’s elected government and issued both for common needs, such as education, health care and infrastructure, and as a citizens’ dividend reflecting our fair share in the bounty of our producing economy.

With such reforms a decent living could be assured for everyone on the planet. But neither this nor any other reform would be the cause of our prosperity. Rather good public policy can only be a reflection of the goodness, faith, honesty, commitment and trust of the virtues that lie within the hearts and souls of “We the People.” From an economic standpoint, the monetary system should reflect the productivity of the economy, its ability to produce goods and services, and the need to move those goods and services in trade. But even this productivity originates with the creative spark within ourselves.

If we manifest positive qualities, we will naturally create systems and institutions that assure our sustenance. If, on the other hand, we are selfish, mean-spirited, and wracked with greed and fear, we will create dysfunctional systems and institutions like many of those we are afflicted with today. We will create a world where the biggest and most ornate building in town is a bank run by officers and shareholders who make their living through usury and debt-extortion. Surrounding the bank will be a police station, a prison, and a military base. The finest homes in town will belong to the executives of these institutions. The rest of the population will be ranked according to their usefulness to the system with an unemployed underclass available to fight society’s wars.

But if we want the world to change, we all need to work at being better and more complete and balanced people. Only then will we have a right to hold others to account. And I do mean work. We need to find those qualities within ourselves that reflect light, peace, harmony, and love, then bring them to birth through action. As Jesus said, we need to “love our neighbor as ourselves.” But he also drove the money-changers from the temple. He stood for both peace and justice.

Who then is this “ourselves”? It is who we really are. Our primal being. It is that naked sense of peace and goodness that comes from living in the Now, as Eckhart Tolle describes it. That is where our real prosperity comes from. The feeling of happiness just to BE, not lost in regret for the past or worry about the future, is what counts on a day-to-day basis. When we experience this state, we will want others to experience it also. Then the world will change once and for all. Then we will have Heaven on earth. Economic and monetary reform will then take place naturally without any kind of struggle. Credit viewed as a public utility will be part of any such reform because it corresponds to natural law, the law Jefferson referred to when he wrote the Declaration of Independence. Another key aspect of natural law is that human beings can only reach their potential in an environment of social, political, and economic freedom.

Some readers do not like spiritual references when reading about economics. If it bothers you, I apologize. But man is above all a spiritual being, not just a thinking animal, as the Founding Fathers understood. Of course we must continue to promote social and economic reform so people will understand there is a better way and not be discouraged or seduced by the antics of the evildoers.

Here’s a quote from Eckhart Tolle’s The Power of Now: “For example, many people are waiting for prosperity. It cannot come in the future. When you honor, acknowledge, and fully accept your present reality—where you are, who you are, what you are doing right now—when you fully accept what you have got, you are grateful for what you have got, grateful for what is, grateful for Being. Gratitude for the present moment and the fullness of life now is true prosperity. It cannot come in the future. Then, in time, that prosperity manifests for you in various ways.” (p. 86-87)