Bank losses from SNB surprise seen mounting as ripples spread

The Deutsche Bank AG headquarters stands in front of commercial and residential property in Frankfurt, Germany, on Monday, on Mar 24, 2014.

PHOTO: BLOOMBERG

19 Jan8:43 AM

[NEW YORK] The US$400 million of cumulative losses that Citigroup Inc, Deutsche Bank AG and Barclays Plc are said to have suffered from the Swiss central bank's decision toend the cap on the franc may be followed by others in coming days.

"The losses will be in the billions - they are still being tallied," said Mark T Williams, an executive-in- residence at Boston University specializing in risk management. "They will range from large banks, brokers, hedge funds, mutual funds to currency speculators. There will be ripple effects throughout the financial system."

Citigroup, the world's biggest currencies dealer, lost more than US$150 million at its trading desks, a person with knowledge of the matter said last week. Deutsche Bank lost US$150 million and Barclays less than US$100 million, people familiar with the events said, after the Swiss National Bank scrapped a three-year-old policy of capping its currency against the euro and the franc soared as much as 41 per cent that day versus the euro. Spokesmen for the three banks declined to comment.

Marko Dimitrijevic, the hedge fund manager who survived at least five emerging-market debt crises, is closing his largest hedge fund, which had about US$830 million in assets at the end of the year, after losing virtually all its money on the SNB's decision, a person familiar with the firm said last week.

FXCM Inc, the largest US retail foreign-exchange broker, got a US$300 million cash infusion from Leucadia National Corp after warning that client losses threatened its compliance with capital rules. FXCM, which handled US$1.4 trillion of trades for individuals last quarter, said it was owed US$225 million by customers.

Popular Trade Shorting the franc was a popular trade and most firms would leverage their positions some 20 times or more, said Mr Williams, who consults for hedge funds. With such leverage a 5 per cent move against the position wipes out all the value, yet the trades were seen as relatively low-risk by models used by financial institutions because volatility of the franc was reduced by the SNB's cap, he said.

Citigroup had reported an average total trading value-at-risk, a measure of how much the company could lose in trading in one day, of US$105 million in the third quarter, of which US$32 million was attributed to foreign-exchange risks. Deutsche Bank's so-called stressed value-at-risk, which measures possible daily losses in market turmoil, averaged 109 million euros (US$126 million) in the first nine months, with 27 million euros related to foreign-exchange risks.

"The banks' losses aren't large but what it does show is that they are still gambling by taking positions," said Gordon Kerr, a former banker and consultant at London-based Cobden Partners, an adviser to governments. "Brokers that lost money will worry about being shunned by clients, which might pull liquidity." Banks may also suffer because of prime brokerage services, which include activities such as securities lending, trade execution and cash management for hedge funds. Citigroup's losses aren't tied to its relationships with FXCM and other retail trading platforms, the person, who asked not to be identified because the information hasn't been disclosed publicly, said last week.

Swiss banks, which haven't announced any losses so far, will probably also suffer in the longer term, said Arturo Bris, a professor at the Lausanne-based IMD business school.

"The negative effects for the Swiss banks come in two ways," Prof Bris said. "First, it will reduce the flow of assets from the outside and will encourage the exit of Swiss money to other countries. Secondly, they will be hurt by the negative impact on the Swiss economy." Pain from wrong-way bets may not be limited to just the financial industry.

"We're just hearing about financial institutions now," Philip Guarco, global head of fixed-income strategy at JPMorgan Private Bank, said in an interview on Bloomberg Television. "Remember what happened back in 2009, when the dollar rallied? You actually had major corporates in Mexico and Brazil, where the treasury departments were taking positions in FX. So we haven't heard the end of it yet."

BLOOMBERG

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Obama targets foreign profits with tax proposal, Republicans skeptical

President Barack Obama's fiscal 2016 budget will seek new taxes on trillions of dollars in profits accumulated overseas by US companies, and a new approach to taxing foreign profits in the future, but Republicans were skeptical of the plan on Sunday. 

PHOTO: REUTERS

2 Feb6:51 AM                                          www.google.com/+EricAu118

[WASHINGTON] President Barack Obama's fiscal 2016 budget will seek new taxes on trillions of dollars in profits accumulated overseas by US companies, and a new approach to taxing foreign profits in the future, but Republicans were skeptical of the plan on Sunday.

Reviving a long-running debate about corporate tax avoidance, Obama will target a loophole that lets companies pay no tax on earnings held abroad, the White House said. But his proposal was certain to encounter stiff resistance from Republicans.

In his budget plan to be unveiled on Monday, Obama will call for a one-time, 14 per cent tax on an estimated US$2.1 trillion in profits piled up abroad over the years by multinationals such as General Electric, Microsoft, Pfizer Inc and Apple Inc.

He will also seek to impose a 19 per cent tax on US companies' future foreign earnings, the White House said.

At present, those earnings are supposed to be taxed at a 35-per cent rate, but many companies avoid that through the loophole that defers taxation on active income that is not brought into the United States, or repatriated.

The US$238 billion raised from the one-time tax would fund repairs and improvements to roads, bridges, transit systems and freight networks that would replenish the Highway Trust Fund as part of a US$478 billion package, the White House said.

The annual budget proposal is as much a political document as a fiscal roadmap, requiring approval from Congress. Given Washington's current political division, much of what will be laid out on Monday is unlikely to become law.

Obama's budget will set a spending target of US$4 trillion for fiscal year 2016, including a US$474 billion deficit, which would represent a manageable 2.5 per cent of US Gross Domestic Product, The New York Times reported on Sunday. The budget also includes US$105 million for "trade adjustment assistance" to help workers who have been affected by free trade pacts, it said.

Obama's latest tax proposals are part of a broad tax reform package that he says is meant to help middle-income Americans.

On proposed tax increases for the wealthy and large companies that are part of that package, Paul Ryan, the top Republican tax writer in the House of Representatives, said on NBC's "Meet the Press": "What I think the president is trying to do here is to, again, exploit envy economics." Republicans, who took control of the Senate and boosted their House majority after November's congressional elections, have said tax reform is one area where they hope to find compromises with Democrats and the White House, although Obama's proposals have so far received a lukewarm reception.

On the foreign profits proposal specifically, Ryan aide Brendan Buck said in an emailed reply to questions that tax reform should be about simplifying the code and lowering rates. "If that's the approach the administration is willing to take, there may be room to find common ground," he said. "There won't be, however, if the president instead tries to sock American businesses with big tax hikes just to increase spending and add even more complexity to the code." Tax reform has eluded Washington for decades. There has been renewed talk about it this year, but consensus is still far from evident. Obama has already offered to cut the corporate income tax, but he wants to offset the revenue losses that would result by closing loopholes. Republican proposals have varied, while generally seeking deeper cuts in the rate and fewer loophole closings.

The White House said that under the new approach to foreign earnings companies would have to pay a 19 per cent tax on all foreign earnings as they earn them, while continuing to get tax credits for foreign taxes paid. After this payment, foreign earnings could be reinvested in the United States without added tax.

The president's proposal also includes cracking down on corporations that shift profits to tax havens to avoid paying their fair share or undertake "inversion" deals in which they reincorporate abroad to avoid paying US taxes.

The one-time tax "would mean that companies have to pay US tax right now on the US$2 trillion they already have overseas, rather than being able to delay paying any US tax indefinitely," a White House official said. "Unlike a voluntary repatriation holiday, which the president opposes and which would lose revenue, the president's proposed transition tax is a one-time, mandatory tax on previously untaxed foreign earnings, regardless of whether the earnings are repatriated." Corporations have been pushing for years for a tax holiday that would let them repatriate such earnings at a discounted tax rate. This was tried in 2004 under former Republican President George W Bush. Framed as an economic stimulus, the Bush measure did result in a substantial portion of deferred profits being repatriated, but studies showed it did little for the economy.

REUTERS