Post by Sapphire Capital on Oct 23, 2008 5:49:47 GMT 4
Mexico attacks ‘unethical’ derivatives selling
By Stephen Fidler and Adam Thomson in Mexico City and Jonathan Wheatley in São Paulo
Published: October 23 2008 00:11 |
Mexico’s central bank chief has accused investment banks of behaving irresponsibly and unethically in marketing derivative products to companies – warning that the problem extended far beyond Mexico.
In recent weeks, many of Mexico’s biggest corporate names have admitted billions of dollars of mark-to-market losses through exchange-rate derivatives, sold by banks as a form of insurance against currency movements.
Companies in other emerging economies, such as South Korea and Brazil, have also suffered big losses.
Mexico’s central bank has spent about $11bn (€8.6bn, £6.8bn) to prop up its peso, which came under pressure as companies scrambled to cover dollar exposures. On Wednesday the peso fell again, closing at 14 to the dollar.
Guillermo Ortiz, the central bank governor, who has just returned from a meeting in Chile with Latin American counterparts, said he was struck by how similar their problems were.
“In Brazil, the hedging positions that firms took were much larger than in Mexico and it is all on the corporate side,” he told the FT. But he added that many other emerging markets would suffer related problems. “This is just beginning to flourish. It is going to be a big issue – in the world.”
The presidential office in Brazil has said that more than 200 companies may be affected. Aracruz, one of the world’s biggest paper and pulp manufacturers, is now asking banks to renegotiate its currency derivative positions after Moody’s, the credit rating agency, downgraded the company and estimated it held $6.26bn in such contracts.
The CVM, Brazil’s securities commission, has given companies until November 14 to reveal the extent of their exposures.
Mr Ortiz was highly critical of investment banks that sold the derivatives and, in particular, how they often claimed to be unaware of their clients’ overall risk exposure. He declined to name them. “What I have been told is that they did not [know their clients’ risk positions], which at the least can be construed as poor practice,” he said.
More worrying, perhaps, was an “ethical” issue of whether the banks were acting in their clients’ best interests. “There were firms essentially selling volatility, and if you are a banker there should be at least an issue of whether the products you are offering the firms are part of the core business . . . or if they are just helping the firm put their balance sheet on the casino.”
Mr Ortiz admitted that the companies ultimately had to shoulder much of the responsibility. But he also said that many of the products that investment banks sold were highly complex.
He cited so-called knock-out options as a particular problem. These instruments ostensibly offer companies a low-cost way of protecting themselves from adverse currency movements – but leave them exposed to potentially devastating losses if the currency moves beyond a pre-set limit.
He predicted that some companies would seek legal redress for their losses.
By Stephen Fidler and Adam Thomson in Mexico City and Jonathan Wheatley in São Paulo
Published: October 23 2008 00:11 |
Mexico’s central bank chief has accused investment banks of behaving irresponsibly and unethically in marketing derivative products to companies – warning that the problem extended far beyond Mexico.
In recent weeks, many of Mexico’s biggest corporate names have admitted billions of dollars of mark-to-market losses through exchange-rate derivatives, sold by banks as a form of insurance against currency movements.
Companies in other emerging economies, such as South Korea and Brazil, have also suffered big losses.
Mexico’s central bank has spent about $11bn (€8.6bn, £6.8bn) to prop up its peso, which came under pressure as companies scrambled to cover dollar exposures. On Wednesday the peso fell again, closing at 14 to the dollar.
Guillermo Ortiz, the central bank governor, who has just returned from a meeting in Chile with Latin American counterparts, said he was struck by how similar their problems were.
“In Brazil, the hedging positions that firms took were much larger than in Mexico and it is all on the corporate side,” he told the FT. But he added that many other emerging markets would suffer related problems. “This is just beginning to flourish. It is going to be a big issue – in the world.”
The presidential office in Brazil has said that more than 200 companies may be affected. Aracruz, one of the world’s biggest paper and pulp manufacturers, is now asking banks to renegotiate its currency derivative positions after Moody’s, the credit rating agency, downgraded the company and estimated it held $6.26bn in such contracts.
The CVM, Brazil’s securities commission, has given companies until November 14 to reveal the extent of their exposures.
Mr Ortiz was highly critical of investment banks that sold the derivatives and, in particular, how they often claimed to be unaware of their clients’ overall risk exposure. He declined to name them. “What I have been told is that they did not [know their clients’ risk positions], which at the least can be construed as poor practice,” he said.
More worrying, perhaps, was an “ethical” issue of whether the banks were acting in their clients’ best interests. “There were firms essentially selling volatility, and if you are a banker there should be at least an issue of whether the products you are offering the firms are part of the core business . . . or if they are just helping the firm put their balance sheet on the casino.”
Mr Ortiz admitted that the companies ultimately had to shoulder much of the responsibility. But he also said that many of the products that investment banks sold were highly complex.
He cited so-called knock-out options as a particular problem. These instruments ostensibly offer companies a low-cost way of protecting themselves from adverse currency movements – but leave them exposed to potentially devastating losses if the currency moves beyond a pre-set limit.
He predicted that some companies would seek legal redress for their losses.