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Swiss Re Has $1.07 Billion Credit-Default Swaps Loss

by : Warren Giles
Monday November 19, 2007 - 16:30
2 comments

Swiss Re Has $1.07 Billion Credit-Default Swaps Loss

By Warren Giles

Nov. 19 (Bloomberg) — Swiss Reinsurance Co., the world’s biggest reinsurer, lost 1.2 billion-Swiss francs ($1.07 billion) on derivatives in October after the U.S. subprime mortgage crash roiled debt markets.

Swiss Re fell the most in more than 4 1/2 years in Zurich trading after the loss, which amounts to 981 million francs after tax. Losses occurred on two credit-default swaps Swiss Re sold to protect clients against declines in investments backed mostly by mortgages, the Zurich-based company said today.

``We clearly made some poor choices,’’ Roger Ferguson, the former U.S. Federal Reserve governor who runs Swiss Re’s financial-services division, told analysts on a conference call. The loss comes less than two weeks after the company, headed by Chief Executive Officer Jacques Aigrain, reported third-quarter profit that surpassed analysts’ estimates.

The 144-year-old Swiss Re earns almost two-thirds of its premium income from helping shoulder property-and-casualty risks for insurers such as Allianz SE. The company’s financial-services unit, which provides risk and capital management, structured investments and investment-banking services, had a 113 million- franc loss in the third quarter, it said Nov. 6.

``Since they can make tons of money in reinsurance, what were they doing with all this stuff?’’ said Tim Dawson, an analyst with Helvea in Geneva who’s reviewing his ``buy’’ recommendation.

`Exhaustive Review’

Swiss Re shares fell as much as 9.3 percent, the biggest drop since March 2003, and were down 8.95 francs to 88.6 francs by 2:36 p.m. in Zurich. The stock has declined 14 percent this year, outpacing the 12 percent slump in the 28-member Bloomberg Europe 500 Insurance Index.

Record foreclosures on U.S. home loans to borrowers with poor credit histories rattled debt markets and caused about $50 billion of trading losses and investment writedowns at the world’s biggest financial institutions.

After October investment markdowns by Citigroup Inc. and other financial companies, Swiss Re carried out ``a very detailed and exhaustive review to ensure that we don’t have any further exposure, and we do not,’’ Chief Financial Officer George Quinn told reporters on a conference call.

Quinn said the company is planning to integrate the financial-services unit within its other divisions by the first quarter of 2008.

The investment portfolios involved consist mostly of mortgage-backed securities, and include some subprime and asset- backed holdings in the form of collateralized debt obligations, or securities made by bundling together bonds, Swiss Re said.

Investment Downgrades

Those investments lost value in October following ``unprecedented downgrades’’ by credit-rating companies amid a ``lack of any liquid market’’ for the securities, Quinn said.

Swiss Re cut its estimates of the value of the CDOs to zero and the subprime securities to 62 percent of their original value, bringing the market value of the portfolio to 3.6 billion francs, the company said. Quinn said the majority of the holdings are investment grade, though further downgrades are possible.

``What is disappointing is that they’ve always insisted their CDS business is written with a very low likelihood of default,’’ Helvea’s Dawson said.

Credit-default swaps are contracts designed to protect bondholders from nonpayment. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

``I do not believe that we sold these CDS’s aggressively,’’ Quinn told reporters. ``The transactions were properly approved and included in our risk monitoring. What you see is the result of a very extreme market environment.’’

Share Buybacks

Aigrain said in a statement that ``improvement and reinforcement of our financial risk taking process is appropriate and we have taken immediate action to make the necessary changes.’’

Swiss Re plans to stick with its share buyback program and reiterated targets for earnings-per-share growth of 10 percent and return on equity of 13 percent over the course of the reinsurance pricing ``cycle.’’

Munich Re, the second-largest reinsurer, ``doesn’t have any news to report’’ following Swiss Re’s statement, spokesman Christian Lawrence said. Chief Financial Officer Joerg Schneider on Nov. 5 said ``subprime is no longer an issue at Munich Re.’’

To contact the reporter on this story: Warren Giles in Geneva at wgiles@bloomberg.net Last Updated: November 19, 2007 09:24 EST

http://www.bloomberg.com/apps/news?...



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Write-Downs Exhibit the Level of Exploitation by Financial Institutions
Monday November 19 - 22:31 - Posted by 8edd7203bd934035...

There was a heated argument about five years ago, which still persists regarding ATM fees, as well as other services such as returning canceled checks to customers that have been retired, claiming that the banks don’t work for free. It’s remarkable to see so many middle class people making that argument without knowing just how much financial institutions have sucked out of the public’s collective purse with outrageous usery (18% minimum rate on credit cards compounded), fees for maintaining "savings" accounts that have been idle, Adjustable Rate Mortgages that hike rates beyond the capacity of new home owners’s ability to pay, etc. And then there are the new financial instruments - the CDO, the SIV, the derivative, the hedge fund - based on capitalizing on debt as opposed to fueling projects that are productive.

When this subprime story is over, and it’s far from being over, let’s hope that the public gets a good look at exactly how their financial institutions have been at odds with social interests for at least 10, if not 20 years. More precisely, these enormous write-downs, as well as the standard practice of huge end-of-the-year bonuses for brokers and others who not only sell stocks and bonds but shift debt from one column to another soley for the sake of maximizing their own profits, prove that higher ATM fees, not sending out canceled checks, unethically high rates of interest, much of it hidden in small print, prove that despite the current difficulties experineced by the banks, they are, like the oil companies, remarkably successful.

That doesn’t mean the system isn’t imperiled and couldn’t fall. It could. And if things don’t change, particularly in DC, then they probably will. In the meantime, however, the captains of industry and finance have their hands in your pocket, much more deeply than the government does (especially because they’ve got their hands in the government’s pockets as well), and you’re allowing it to happen. How?

You keep voting for the same people, e.g., Liberman, Hillary, not to mention the shameless Republicans who have openly protected these sectors. You keep voting for the same party (they’re both equally bad at this point). You don’t write enough letters. You don’t register enough formal complaints. You don’t rebel. You just keep taking it. And so do they.




Swiss Re Has $1.07 Billion Credit-Default Swaps Loss
Thursday November 22 - 09:10 - Posted by fc0c7f18f72a9743...

" ...Roger Ferguson, the former U.S. Federal Reserve governor who runs Swiss Re’s financial-services division"

If the employ those crooks at Swiss Re they have invited the burglars.







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