From Volume 5, Issue Number 3 of EIR Online, Published Jan. 17, 2006

World Economic News

Deutsche Bank Suspends Trader After Derivatives Losses

Unnamed London sources recently revealed that Deutsche Bank had suffered from a significant derivatives problem during December, according to the German financial press Jan. 13. The leaks, which have not been confirmed by Deutsche Bank but are being reported prominently throughout the European media, state that a young trader in London, Anshul "Rusty" Rustagi, was running very complex types of credit derivatives, in particular, bets on certain indices of credit default swaps. As none of the senior managers at Deutsche Bank in London fully understood such contracts and their implications, the trader was basically given a free hand to operate. However, at one point it turned out that the trader had deliberately overstated his derivatives position by about 50 million euros in order to cover up losses. He was then suspended in mid-December and an internal inquiry into the affair was launched.

In a nervous lead editorial on Jan. 12, headlined "Back to basics for derivatives traders," London's Financial Times demanded that, in the wake of the 1995 Barings collapse and the most recent derivatives trouble at Deutsche Bank, executives of derivatives desks "tread a wary line in financial markets between stifling innovation and protecting against trading losses."

The FT warns: "Since these [derivatives] products are relatively new, evolving rapidly in a fast-moving market, it is hard to find many senior managers, let alone investors, who fully understand them. They have also evolved almost exclusively in a benign credit environment and have yet to be tested in a wider downturn. The temporary dislocation in the market and hedge fund losses that occurred last year after the downgrade of General Motors and Ford showed how difficult it is to get the right hedges in place."

Fears Spread in Europe as Avian Flu Spreads in Turkey

Preliminary tests showed that a 15th person in Turkey has contracted the avian flu, according to the Wall Street Journal and Russian TV reports Jan. 10. The number of people hospitalized is about 70, with parents taking youngsters to the hospital in fear that their children have the disease if they develop any flu-like symptoms. The European Union has sent its own experts to Turkey, and numerous countries are instituting bans of imports of various poultry-related and other agricultural products.

A senior World Health Organization official warned that "the more humans [become] infected ... the more chance [the virus] has to adapt." To monitor mutations of the virus, and to test to see if it is resistant to anti-viral drugs, WHO labs are mapping the virus's genetic code. According to the Journal, the EU will sponsor a donors' conference next week in Beijing, to raise $1 billion to fight the spread of the flu.

For Europeans, including Russians, Turkey is a very popular tourist destination, which may also be a complicating factor.

Meanwhile, Russian President Putin held a televised Cabinet session Jan. 10 to hear a report from Russia's chief public-health official, Gennadi Onishchenko, on measures being taken in preparation for the mass return of migratory fowl across the territory of the Russian Federation, which threatens renewed outbreaks of bird flu this spring.

Volkswagen Plans Restructuring

Volkswagen takes twice as much time to assemble a car as its most efficient competitors, according to the financial press in the U.S. and Europe Jan. 9. VW head Wolfgang Bernhard said at the North American International Auto Show that "substantial things must be done," namely restructuring, outsourcing, and plant closings, to overcome "issues with regard to competitiveness."

Bernhard said VW must cut vehicle costs in China by as much as 30%, in order to be competitive.

VW has also announced that it intends to assemble cars in Russia, eventually producing 250,000 a year there, raising its share of the Russian market from 2-3% to 10%.

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