F1 faces split as eight teams break away

F1 faces split as eight teams break away

By Roger Blitz

Published: June 19 2009 08:32 | Last updated: June 19 2009 09:43

Formula One was plunged into its worst crisis in its 60-year history on Friday after eight teams announced they would set up a rival championship, saying Max Mosley, the head of motorsport’s regulator, had ignored their demands over his controversial budget cap plans and had tried to drive a wedge between them.

The dramatic decision, announced in a lengthy statement from the Formula One Teams Association (Fota) came on the eve of practice for Sunday’s British Grand Prix and a deadline for entries for next year’s championship.

Mr Mosley, president of the Fédération Internationale de l’Automobile, demanded a £40m budget cap on teams to prevent what he called a ”financial arms race”. But the plan, which involved two sets of regulations for teams, depending on whether they spent above or below the budget cap, threatened the business models of leading teams such as Ferrari and McLaren.

Formula One money

In its statement, Fota said it had ”genuinely sought compromise” with the FIA and Bernie Ecclestone, F1’s commercial supremo, against a backdrop of a ”campaign to divide” the Fota members.

”It has become clear, however, the teams cannot continue to compromise on the fundamental values of the sport and have declined to alter their original conditional entries to the 2010 world championship,” Fota said.

Its rival championship would have ”transparent governance” and a single set of regulations, as well as offer ticket prices lower than those in F1.

Fota claimed its series would attract ”the major drivers, stars, brands, sponsors, promoters and companies historically associated with the highest level of motorsport”.

Though many in the sport have reservations about the ability of the teams to run a rival series, few would question how entrenched the positions of the two sides have become.

The negotiations have been plagued by a series of leaks of correspondence between Fota and the FIA and rows over whether or not the teams were already legally committed to next year’s championship.

Fota’s members are Brawn GP, Ferrari, McLaren, Renault, Toyota, BMW Sauber, Red Bull Racing and Toro Rosso. Williams and Force India were thrown out of Fota after they signed unconditional terms with the FIA.

Three new teams will join F1 next year, though several more will now look to fill the gaps left by the Fota members if they follow through with their breakaway plans.

FIA said the deadline for 2010 entries expired on Friday evening and the list for next season would be announced on Saturday.

”We are disappointed but not surprised by Fota’s inability to reach a compromise in the best interests of the sport,” the FIA said in response.

”It is clear that elements within Fota have sought this outcome throughout the prolonged period of negotiation and have not engaged in the discussions in good faith.

“The FIA cannot permit a financial arms race in the championship nor can the FIA allow Fota to dictate the rules of Formula One.”

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Switzerland looks at cutting size of banks

By Jennifer Hughes and Patrick Jenkins in London and Tony Barber and George Parker in Brussels

Published: June 18 2009 13:31 | Last updated: June 19 2009 08:59

Switzerland upped the ante in a global regulatory assault on the banking industry on Thursday as its central bank warned that Zurich was examining the forced shrinkage of banking groups such as UBS and Credit Suisse to contain the risks posed by their size.

The central bank is looking at imposing constraints on the size of its biggest domestic banks unless global policymakers can come up with a new system to deal with large banks when they fail.

Philipp Hildebrand, vice-chairman of the Swiss National Bank, said: “There can be no more taboos, given our experiences of the last two years.”

“There are advantages to size . . . [but] in the case of the large international banks, the empirical evidence would seem to suggest that these institutions have long exceeded the size needed to make full use of these advantages,” Mr Hildebrand said as the central bank unveiled its stability report.

UBS and Credit Suisse prompted alarm among authorities about the risks their size posed to the Swiss economy when they reported heavy losses as a result of the financial crisis. Last year, their collective assets were equivalent to six times Swiss GDP.

The central bank envisaged “direct and indirect measures to limit [large banks’] size,” said Mr Hildebrand.

His comments on Thursday caused unease among Swiss banks, which said that the SNB did not have direct responsibility over banking regulation and therefore lacked powers to implement any such controls.

“This is strong language,” said one bank executive. “But the SNB doesn’t have a direct say in the regulation of the banks.” Another said Mr Hildebrand’s comments were “little more than sabre-rattling”.

However, the remarks will be scrutinised by policymakers and investors on both sides of the Atlantic. They come as central bankers and regulators around the world are ratcheting up language on banking reform.

Mr Hildebrand called for regulators to work together to develop an international process for the orderly wind-down of a broken bank. But he warned that, if that process could not be designed in a “reasonable” time frame, then more direct measures should be examined.

He did not spell out exactly how he wished to curb banks’ size. However, the ideas being looked at involve crude limits on the absolute size of balance sheets or discouraging growth into risky areas by raising capital requirements.

On Wednesday, the governor of the Bank of England Mervyn King fired a warning shot across the bows of the industry, pointing out that regulators could not tolerate a situation where numerous banks were deemed “too big to fail.” And the debate could intensify in Washington in the coming weeks, since politicians are due to start debating a series of reform measures that the Obama administration hopes to implement to clean up the banks.

In Brussels on Thursday, the European Union’s 27 member states were poised to approve plans to strengthen financial supervision in Europe amid British reservations about yielding certain national powers to EU authorities.

Gordon Brown, UK prime minister, on Thursday night secured a guarantee from EU leaders that the new supervisory system would not include powers to force national governments to bail out banks. Diplomats said the summit communiqué would say that any EU-level decision would “not impinge in any way on the fiscal responsibilities of the member states”.

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Mafia blamed for $134bn fake Treasury bills

By FT reporters

Published: June 18 2009 19:52 | Last updated: June 18 2009 19:52

One summer afternoon, two “Japanese” men in their 50s on a slow train from Italy to Switzerland said they had nothing to declare at the frontier point of Chiasso.

But in a false bottom of one of their suitcases, Italian customs officers and ministry of finance police discovered a staggering $134bn (€97bn, £82bn) in US Treasury bills.

Whether the men are really Japanese, as their passports declare, is unclear but Italian and US secret services working together soon concluded that the bills and accompanying bank documents were most probably counterfeit, the latest handiwork of the Italian Mafia.

Few details have been revealed beyond a June 4 statement by the Italian finance police announcing the seizure of 249 US Treasury bills, each of $500m, and 10 “Kennedy” bonds, used as intergovernment payments, of $1bn each. The men were apparently tailed by the Italian authorities.

The mystery deepened on Thursday as an Italian blog quoted Colonel Rodolfo Mecarelli of the Como provincial finance police as saying the two men had been released. The colonel and police headquarters in Rome both declined to respond to questions from the Financial Times.

“They are all fraudulent, it’s obvious. We don’t even have paper securities outstanding for that value,’’ said Mckayla Braden, senior adviser for public affairs at the Bureau of Public Debt at the US Treasury department. “This type of scam has been going on for years.’’

The Treasury has not issued physical Treasury bonds since the 1980s – they are handled electronically – though they still issue savings bonds in paper format.

In Washington a US Secret Service official said the agency, which is working with the Italian authorities, believed the bonds were fake.

Officials in Tokyo were nonplussed. Takeshi Akamatsu, a Japanese foreign ministry press secretary, said Italian authorities had confirmed that two men carrying Japanese passports had been questioned in the bond case but Tokyo had not been informed of their names or whereabouts.

“We don’t know where they are now,” Mr Akamatsu said.

Italian officials, while pointing out that hauls of counterfeit money and Treasury bills were not unusual, were stunned by the amount involved. Investigators are looking into the origin and destination of the fakes.

Italian prosecutors revealed last month that they had cracked a $1bn bond scam run by the Sicilian Mafia, with the alleged aid of corrupt officials in Venezuela’s central bank. Twenty people were arrested in four countries.

The fake bonds were to have been used as collateral to open credit lines with banks, Reuters news agency reported. The Venezuelan central bank denied the accusations.

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Half Italian banks face ratings cut

By Vincent Boland

Published: June 19 2009 03:00 | Last updated: June 19 2009 03:00

The credit ratings of nearly half of Italy's banks and financial institutions could be cut as the country's steep recession bites into profits and companies find it harder to service their debts.

Moody's Investors Service said yesterday it could downgrade the financial strength ratings of 21 banks and financial institutions, though the impact would in most cases be limited to one "notch" in its tier of creditworthiness ratings.

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Ecuador default could set precedent

By Naomi Mapstone in Lima

Published: June 9 2009 18:24 | Last updated: June 9 2009 18:24

Ecuador is expected to announce this week that 95 per cent of the holders of $3.2bn of defaulted debt are willing to accept an offer of 35 cents on the dollar, in a move that could set a precedent for emerging market sovereign bond holders.

Analysts fear that the government’s deliberate default on two bonds – almost a third of its foreign debt – could prompt other countries to follow suit as they seek to navigate the financial crisis.

Though Ecuador has the capacity to pay its foreign debt obligations, its foreign exchange reserves have fallen and it has limited access to financial markets.

The government’s expected announcement on Friday will leave investors nursing big losses – or a 65 per cent haircut on the par value of 100 on the bonds.

It is also likely to reduce the chances of legal action against the default through the US courts as there will be very few so-called holdouts left to pursue the case.

“What’s really going to hurt is when a big country blows up and they’re going to have this as a template,” Hans Humes, chief executive of Greylock Capital, said.

Ecuador’s move was a “brilliantly run and managed process. They nailed the timing”.

The decision to default on the bonds by Rafael Correa, the country’s president, has been seen domestically as a triumph, winning him support among voters.

Mr Correa, a US-trained economist, insisted that the bonds were illegitimate because of the way they were negotiated after the country defaulted in 2000, accusing the hedge funds that mainly bought the debt of exploiting the financial system.

Mr Correa has been able to stand by his pledge to relieve the country of the “stultifying burden” of its foreign debt obligations.

In what appears to be a clever tactic, Mr Correa opted for an auction for holders of the defaulted bonds, which mature in 2012 and 2030, instead of forcing a price on them.

Investors could choose to accept the government’s buy-back price or ask for a higher price.

The full cost to the government of the default remains to be seen. Investors are likely to be deterred from buying Ecuadorian bonds.

Alberto Bernal, head of emerging market macro-economic strategy at Bulltick Capital Markets, said: “There is no market access and there will be no access as long as the current administration stays in power.”

Ecuador continues to receive funds from multilaterals such as the Andean Development Fund and the Inter-American Development Bank.

Ramiro Crespo, of Quito-based Analytica securities, said the only Ecuadorian government bond in issue, which matures in 2015, could eventually act as a bridge back to the markets.

Some analysts believe that Ecuador is prepared to service the debt of the 2015 bond because Venezuela, a close political ally, has exposure to these securities.