Tuesday, December 11, 2007

Mullen reassures Israel on Iran

By Peter Spiegel, Los Angeles Times Staff Writer

TEL AVIV -- The top U.S. military officer attempted to reassure Israeli defense leaders Monday that the United States still views Iran as a serious threat to the Jewish state, even as the Israelis disagree with an American intelligence finding that Tehran ceased its nuclear weapons program in 2003. Adm. Michael G. Mullen, chairman of the Joint Chiefs of Staff, discussed the National Intelligence Estimate of Iran's nuclear program with Defense Minister Ehud Barak and the head of Israel's military in back-to-back meetings here, where the report has provoked widespread debate over American intentions. Participants in the meetings said Israeli officials took issue with the U.S. view that the weapons program had stopped, saying Iran's continued enrichment of uranium was aimed at developing a nuclear bomb. The U.S. assessment, issued last week, says the enrichment program has continued unabated, even as the weapons program was shut down. Iran has insisted that it is producing only low-grade uranium to drive civilian power plants, not highly enriched uranium for bombs. Mullen said after the meetings that both Barak and Lt. Gen. Gabi Ashkenazi, the new head of the Israeli defense staff, expressed a desire to work with the U.S. on analyzing American intelligence on the Iranian program. Mullen said he expressed similar U.S. concerns about the enrichment program, calling it the "center of gravity" of the Iranian program that needs to be stopped with the help of international pressure. He also reiterated American views that Iran continues to mislead nuclear regulators about the extent and intentions of its program.

"I wanted to reassure them that I still consider Iran a threat," Mullen said in an interview with The Times aboard his aircraft. "Their hegemonic views, their regime's rhetoric, still speaking to the elimination of Israel, is all very disturbing to me. I intended to leave the impression with them that I wasn't taking my eye off the mark."

The timing of the intelligence estimate, coming in the midst of Bush administration efforts to garner international support for a third round of U.N. Security Council sanctions, has forced the White House to scramble to reassure allies such as Israel that it has not changed its view of the Iranian government and remains committed to eliminating its enrichment program. Defense Secretary Robert M. Gates, during a weekend stop in Bahrain to address a group of Arab leaders, acknowledged that President Bush and his foreign policy aides felt frustration with the timing and content of the report, but noted that such decisions are made by intelligence professionals, not policymakers. "The estimate clearly has come at an awkward time," Gates said. "It has annoyed a number of our good friends. It has confused a lot of people around the world in terms of what we're trying to accomplish." Sunni Muslim-led states in the region have grown increasingly concerned about Shiite Muslim-dominated Iran's strengthening position in the Persian Gulf, fearing it is using chaos in Iraq to boost its influence.

UBS's Subprime Hit Deepens Credit Worries


UBS AG became one of the biggest casualties of the U.S. subprime-mortgage meltdown yesterday, announcing that it would take a $10 billion write-down and sell a chunk of itself to the government investment arm of Singapore and an unnamed Middle Eastern investor.

The disclosures stoked anxiety about potential losses lurking on the books of other banks. That UBS, long known as a conservative lender, could take such a financial hit suggests that the wave of industry write-downs, which so far total about $50 billion, may be far from over.

In recent weeks, UBS began using a more conservative method for valuing complex debt securities tied to U.S. subprime mortgages. As a result, the bank said it might record a net loss for the year. The "ultimate value of our subprime holdings...remains unknowable," the bank said yesterday.

The news came as other financial institutions announced moves to shore up their balance sheets. Washington Mutual Inc. said it plans to cut its dividend, slash jobs and sell preferred stock to raise $3.7 billion in capital. Bond insurer MBIA Inc. said it will receive up to $1 billion from private-equity firm Warburg Pincus LLC.

Earlier this fall, as banks disclosed a first round of write-downs due to subprime problems, some investors expressed optimism that the worst was over -- that banks had used the third quarter as an opportunity to clean up their balance sheets. But the continuing erosion of the value of the mortgage securities now appears to be bringing another round of pain.

UBS, which had already taken a $4.4 billion third-quarter write-down, said that as mortgage data worsened, it changed the way it fed data into its model for valuing mortgage securities. Among other things, it began factoring in higher projections of homeowner defaults and comparing its loss projections with indexes that track the value of mortgage securities. It concluded that it needed to assign a lower value to its holdings.

UBS's decision to sell as much as 12.4% of the company to Singapore and the Middle Eastern investor for $11.5 billion is the latest in a string of deals in which state funds or banks in Asia and the Middle East have taken stakes in Western financial firms. Government "sovereign-wealth funds" have invested about $46.8 billion in European and U.S. financial firms since January 2006, according to Morgan Stanley estimates. The UBS deal comes just a few weeks after Citigroup Inc., also hobbled by subprime problems, received a $7.5 billion investment from the Abu Dhabi Investment Authority, which will ultimately own a 4.9% Citigroup stake.

"It is a further sign of how the balance of the world economy is changing," says Gerard Lyons, chief economist at Standard Chartered PLC in London. "Also it is a reflection of the current fragile state of the financial sector in the West."

At the heart of UBS's problems are collateralized debt obligations, or CDOs. These complex securities are created when pools of debt, some of it tied to subprime mortgages, are sliced into pieces carrying different levels of risk and return, then sold to investors. UBS's exposure is through a combination of internal, or proprietary, trading positions, as well as its underwriting business.

Like other banks, including Citigroup and Merrill Lynch & Co., UBS ended up with CDO slices considered the safest. But in recent weeks, banks have had to write down even those senior slices. Merrill Lynch and Morgan Stanley also took write-downs on such securities.

Using computer models to figure out how much such securities are worth is an inexact science. November mortgage data showed that mortgage delinquencies and defaults were increasing, which contributed to UBS's decision to take a large write-down.

Merrill, which has $15.2 billion in CDO exposure remaining, could also need to take a further write-down, as could Morgan Stanley, according to analysts. Merrill already disclosed a third-quarter write-down of $7.9 billion, and it has $20.9 billion in remaining exposures to CDO assets and subprime mortgages. Morgan Stanley has already taken a hit of $3.7 billion in the first two months of the fourth quarter, which could grow based on its $6 billion in remaining subprime and CDO exposure.

In a speech to Morgan Stanley employees last Monday, Chief Executive John J. Mack said the firm is still trying to clarify the extent of the subprime losses. The subprime losses, he said, aren't easy to quantify because the markets keep changing. He said the firm expects to have a better read in the next week and a half.
[From East to West]

Merrill Lynch and Morgan Stanley declined to comment.

As U.S. homeowner-default data worsened in recent weeks, it became clear that UBS might need to mark down its subprime assets further, which could in turn put pressure on its capital base. Starting about two weeks ago, it approached a handful of potential investors, says one person familiar with the situation. The Middle East was an obvious place to look, because many Gulf states and their ruling families have money at the Swiss bank. Asia also made sense because UBS's investment bank is active there.

UBS Chairman Marcel Ospel called Singapore government officials he knows, according to another person familiar with the matter. The Asian city-state is an increasingly important market for UBS's core business of private banking for wealthy individuals. It took only about a week to put together the deal. The Government of Singapore Investment Corp. agreed to invest 11 billion Swiss francs ($9.75 billion) for a stake that could range from 7.3% to 10.5%, depending on the terms of the convertible-stock purchase. The deal makes Singapore UBS's largest shareholder.

UBS didn't disclose the name of the second investor, which it said will invest two billion Swiss francs for a stake of between 1.3% and 1.9%. One person familiar with the deal identified the second investor as one based in Saudi Arabia.

The bank is continuing to talk with other investors around the globe in an effort to raise additional funds, Mr. Ospel said yesterday.

For sovereign-investment funds, investing in banks and financial institutions is attractive because of their depressed stock prices. UBS shares, for example, are down 24% this year. Such deals also are opportunities to link with firms offering expertise in financial services such as private banking.

UBS joins a growing list of Western banks, including Barclays PLC and HSBC Holdings PLC, that have received capital injections from Asia and the Middle East this year. The sovereign funds "are really smart and are getting to see a huge number of opportunities around the globe at the moment," says Guy Cornelius, a managing director in Lehman Brothers Holding Inc.'s fixed-income department. "They see so many opportunities because they have the best growth in capital right now, are highly sophisticated and know that they can be in the driving seat."

Such deals, however, could spark more governmental inquiries in the U.S. and Europe. Last month, the U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing on sovereign-wealth funds. In addition, the Group of Seven leading industrial nations is taking steps to address the increasing influence of sovereign-wealth funds. G7 officials are concerned the funds may become a source of volatility in financial markets or cause national-security problems if they seek stakes in companies that are sensitive from a national-security standpoint.

Zurich-based UBS, formed from the 1998 merger of SBC Corp. and Union Bank of Switzerland, has about 83,000 employees and is one of the largest wealth managers in the world. Last year, it reported a net profit of 12.26 billion Swiss francs. But it has struggled with its identity in recent years. It pushed aggressively into investment banking, but at times its investment bankers chafed at the Swiss bankers' historically conservative culture. It reached a boiling point earlier this year when several high-level investment bankers left.

Soon after, losses began to mount at UBS's internal hedge fund, Dillon Read Capital Management. Chief Executive Marcel Rohner is now pulling back in some areas of investment banking, cutting bankers in fixed income and toughening its lending requirements to hedge funds and leveraged-buyout houses.

UBS has never posted a full-year loss, mainly due to the strength of its wealth-management operations, which in 2006 accounted for about 40% of the company's profits.

UBS's holdings tied to subprime mortgages eroded its core "tier 1" capital to about 10.6% at the end of September and came close to falling below a UBS internal target of keeping capital in double-digit figures. Traditionally, the bank has tried to maintain a high level of capital relative to peers because some of its wealth-management clients tend to be sensitive about its financial health, the bank said. The capital-raising measures announced yesterday will raise the bank's tier 1 capital to 12%, the company said in a statement.

In recent weeks, as the mortgage data deteriorated, the bank made changes to the way it crunched the numbers, including lowering the time it assumed it would take for a loan to default.

Mr. Ospel said UBS decided to "calibrate our models to an extreme distressed scenario." That ultimately led to the write-down.

"This is a very bleak outlook" for the U.S. housing market, Mr. Rohner said.

Washington Mutual Will Take $1.6 Billion Writedown

By Elizabeth Hester(Bloomberg)

Washington Mutual Inc., the biggest U.S. savings and loan, will write down the value of its home- lending unit by $1.6 billion in the fourth quarter and cut about 6 percent of its workforce as mortgage-market losses increase.

Washington Mutual, led by Chief Executive Officer Kerry Killinger, also slashed its quarterly dividend to 15 cents a share from 56 cents and forecast a loss for the quarter, according to a statement yesterday from the Seattle-based bank. Provisions for bad loans will be $1.5 billion to $1.6 billion, more than the $1.3 billion the company previously predicted. It plans to shutter 190 of 336 home-loan centers.

Fitch Ratings and Moody's Investors Service Inc. lowered Washington Mutual's credit rating, citing the firm's deteriorating mortgage assets. The bank has lost 56 percent of its market value this year, the worst performance in the 24- member KBW Bank index, amid declining U.S. housing prices and record home loan delinquencies. Washington Mutual said it plans to sell $2.5 billion of convertible stock to shore up capital.

``They're clearly concerned the industry will stay in a negative mode for an extended period,'' said Richard Bove, an analyst at Punk Ziegel & Co. in Lutz, Florida. ``The fact they're laying off so many people indicates they're concerned this is not just a one-time event.'' He rates the stock ``market perform.''

Washington Mutual fell 10 percent to $17.90 as of 11:40 a.m. today in Frankfurt trading. The stock rose 4.5 percent to $19.88 in New York yesterday before the announcement.

2010 Recovery

Fitch downgraded the firm's rating to A- from A, because of ``worsening asset quality,'' and ``extremely challenging conditions in the U.S. residential mortgage market.'' Moody's cut its rating two levels to Baa2 from A3. ``Credit losses from WaMu's mortgage operations will be noticeably higher than previously estimated,'' and the company's profitability won't ``begin to recover'' until 2010, Moody's said in a statement. Washington Mutual offered a bleak assessment of the mortgage market, estimating that industrywide home loan originations will probably shrink 40 percent in 2008 to $1.5 trillion, down from about $2.4 trillion this year. The company said it plans to cease lending through its subprime mortgage channel, and predicted that its provision for bad loans in the first quarter of next year will be $1.8 billion to $2 billion.

UBS, Citigroup

Mortgage losses have driven some of the world's biggest lenders to seek cash infusions. UBS AG, Europe's largest bank by assets, said yesterday that it would write down its subprime investments by $10 billion and raise 13 billion Swiss francs ($11.5 billion) by selling stakes to investors in Singapore and the Middle East. Citigroup Inc., the largest U.S. bank by assets, said last month that it would get $7.5 billion from the emirate of Abu Dhabi. Countrywide Financial Corp., the biggest U.S. mortgage lender, sold $2 billion of preferred stock to Bank of America Corp. in August. Washington Mutual said it would eliminate 2,600 jobs in its home-loans unit, or about 22 percent of that division. The remaining job cuts will come from corporate and support staff. The reductions will cost the bank about $140 million in the fourth quarter, according to the company's statement. The restructuring is expected to be completed by March 31, the bank said in a separate regulatory filing yesterday. Washington Mutual also plans to close WaMu Capital Corp., its broker-dealer business, as well as its mortgage banker warehouse lending unit. Lehman Brothers Holdings Inc., Morgan Stanley, Credit Suisse Group and Goldman Sachs Group Inc. are managing the convertible stock sale, Washington Mutual said.

Black Given Prison Term Over Fraud


CHICAGO, Dec. 10 — In the months since his convictions in July on fraud and obstruction of justice charges, Conrad M. Black, the fallen press baron who once presided over the world’s third-largest newspaper empire, was not above poking fun at himself as he waited to see how long he would spend in prison.

He received his answer Monday as Judge Amy J. St. Eve of United States District Court sentenced Mr. Black to 6 1/2 years in prison on three fraud charges and one charge of obstruction of justice for removing 13 boxes of documents from the Toronto offices of his media company, Hollinger International, an infraction caught on videotape.

“Mr. Black, you have violated your duty to Hollinger International and its shareholders,” Judge St. Eve told Mr. Black. “I frankly cannot understand how someone of your stature could engage in the conduct you did.”

While the sentence means Mr. Black could be nearly 70 when he is released, the amount of time he received was much less than hoped for by prosecutors, who at one time sought a sentence of 24 to 30 years.

Mr. Black, who will most likely serve his sentence at a federal prison camp at Eglin Air Force Base about 500 miles from his home in Palm Beach, Fla., was allowed to remain free on bail until March 3.

On the sidewalk outside the courthouse, he told the throng of reporters, “I think the fact we’re appealing speaks for itself.”

In some ways, Mr. Black is just another in a long line of white-collar criminals sentenced for corporate fraud. In other ways, he was — as he himself might say in casual conversation — sui generis.

Instead of keeping a low profile after his conviction, Mr. Black became even more public, if possible, in the last few months. He managed to publish and publicize a 1,152-page biography, “Richard M. Nixon: A Life in Full,” that contained at least one error: the brief author’s biography says that Mr. Black divides his time between London and Toronto. By the time the book was published, he had already turned over his passport and spent most of his time holed up his mansion in Palm Beach.

Still, that did not prevent Mr. Black from doing television interviews or from participating in a Toronto book signing, thanks to a high-tech device called the LongPen, which allowed him to sign books remotely. During the signing, one questioner even suggested a parallel between that video that sank Mr. Black and the recordings that doomed the Nixon presidency.

In a segment for the satirical Canadian television show “The Rick Mercer Report,” Mr. Black did his best Martha Stewart impression, teaching viewers how to properly wax a maple leaf for decorating. Pressing a maple leaf between two of the hefty biographies he has written, Mr. Black said, “Here we have a perfectly waxed maple leaf, a great solace to everyone and especially to those who, for complicated reasons, can’t at first hand observe the changing of the seasons this autumn in Canada.” (The segment has a second life on YouTube.)

But those fun and games are now largely over. It will now be almost seven years until Mr. Black, who was barred from leaving the United States after his conviction, can return to his native Canada.

In July, nearly four years after the case began, Mr. Black was convicted on four charges — three fraud charges stemming from taking improper noncompete fees and an obstruction of justice charge for removing boxes of documents from his Toronto office, an infraction that was caught on videotape. Mr. Black will have to pay a fine of $125,000.

Mr. Black’s downfall began in November 2003 when the board found that he and other executives had improperly taken about $32 million in payments. The jury, however, found that Black improperly gained $6.1 million, a figure he must now forfeit. Much of the case was centered on noncompete payments from selling newspapers that should have gone to shareholders but instead lined the pockets of Mr. Black and several other executives, who were to be sentenced later in the afternoon.

Mr. Black, who once declared he would “not re-enact the French Revolutionary renunciation of the rights of the nobility” when criticized for using shareholder money to pay for a vacation to Bora Bora, and charged a lavish birthday party for his wife at La Grenouille restaurant in New York to his company, was acquitted of charges stemming from those incidents.

The sentencing hearing lasted for more than two hours, as Mr. Black’s defense team cited letters testifying to Mr. Black’s character from friends like Elton John (whose AIDS foundation received a donation from Mr. Black), and the political columnist George F. Will, a longtime friend who wrote of Mr. Black, “He loves this country with a deeply informed passion.”

Mr. Black’s sentencing consultant, Jeffrey Steinbach, even mentioned a letter from a man, not famous, who was once drunk at a party and got a ride home from Mr. Black.

When Eric Sussman, the prosecutor, responded, he noted that the donation to Mr. John’s foundation came from the coffers of The Daily Telegraph.

“Does Elton John really know Conrad Black?” Mr. Sussman said. “The fact of the matter remains that when Mr. Black was asked to go in to his pocket he said no.”

Mr. Black, often described as a millionaire who lived like a billionaire, built a single newspaper in Sherbooke, Quebec, which he bought in 1976, into what was at one time the third-largest newspaper company in the world. Its flagship properties were The Daily Telegraph and The Chicago Sun-Times.