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Humiliation of UBS

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Robert Peston | 08:00 UK time, Monday, 1 October 2007

UBS is famed for being one of the world’s most conservative financial institutions. So it is both humiliating for it and troubling for us that it is the first of the world’s top-flight banks to disclose a substantial loss from this summer’s turmoil in credit markets.

ubs_ap.jpgTake it as a warning that the relatively strong performance disclosed last week by some of the leading Wall Street investment banks does not mean all banks will emerge almost unscathed from the debacle triggered by the collapse of the market in US sub-prime residential loans.

The mess is doubly embarrassing for UBS since it took a substantial hit in the dry-run for this summer’s market mayhem, the crisis afflicting the giant hedge fund, Long Term Capital Management, in 1998.

The statement that UBS put out this morning is a little opaque, but the headlines are:

1) It will make a pre-tax loss for the quarter of just under $700m, its first quarterly loss for nine years;

2) The main culprit is the fixed-income, rates and currencies division of its investment bank, which made “negative revenues” of around $3.4bn;

3) The source of the losses are the “legacy positions” of its now-closed hedge-fund and proprietary trading business, Dillon Read Capital Management, together with holdings in its mortgage-backed securities trading business;

4) It has taken significant though unspecified write-downs on positions in “super senior AAA-rated tranches” of collateralised debt obligations.

The losses on CDOs are particularly piquant and are further proof that these manufactured securities do not always do what they say on the label: triple-A rated bonds are not supposed to incur “significant” losses.

Here’s UBS’s predictable explanation. It says that the underlying cause of most of this mess is “the deterioration in the US sub-prime residential mortgage-backed securities market” which was “more sudden and more severe than in recent history” – and the ensuing illiquidity that led to “substantial valuation losses”.

To its credit, UBS is doing less of the “not our fault, guv” routine than you might expect of a famously stuffy global bank. The chairman and chief executive of the investment bank, Huw Jenkins, is stepping down, to be replaced “for the foreseeable future” by the chief executive of the whole bank, Marcel Rohner. Jenkins will however be retained as “senior advisor” to Rohner. And there are various other senior management changes, all designed to improve the bank’s control of risk.

Also, it has begun that process of shedding staff which I warned about a few weeks ago (see Scything the City). UBS’s employee numbers will be cut by 1,500 before the end of the year.

And there is an ill-augury for its competitors. It has taken a loss on its relatively small exposure of loans to private-equity buyouts. With somewhere between $300bn and $400bn of these loans sitting on other banks’ books, that implies its rivals may be sitting on losses of between $20bn and $40bn just on the private-equity or leveraged buyout debt they have been unable since July to place in the market.

UBS is big enough to more than weather this storm. For the year as a whole, it will make a substantial pre tax profit of somewhere around $8.5bn. But other banks likely to be damaged by the sub-prime fallout are not quite as big and robust.

UPDATE 12.50: Citigroup has now joined UBS in the roll-call of sub-prime shame. It has announced that it expects third quarter post-tax profits to slump by 60 per cent. Why? Well there is $1.3bn of losses on sub-prime mortgage backed securities and $600m of losses on fixed-income trading.

But the big story, which I hinted at above, is $1.4bn of pre-tax writedowns on private equity loans. This is cringe-making for Citi’s chief executive, Chuck Prince, who in July told the FT – using notoriously hubristic language – that his bank was “still dancing” in the private equity market, long after it was obvious that the private-equity bubble had been pricked and was deflating at an alarming rate.

Comments   Post your comment

  • 1.
  • At 08:57 AM on 01 Oct 2007,
  • Paul Martin wrote:

Surely they should blame the BoE and Mervin King like you have been for the last 2 weeks.

Anyway, I think this is a telling sign. The job losses and thought of future job losses in the City will also halt the London housing market. This could add further impetus to the slowing housing market and cause a crash. We'd then be left with a similar mess that the Americans have, not to mention that our housing market is significantly more over valued so the losses stand to be greater.

  • 2.
  • At 09:02 AM on 01 Oct 2007,
  • JonA wrote:

If UBS has taken significant writedowns on super senior AAA-rated tranches of CDOs, what does this mean for holders of the more junior tranches? Who are they?

  • 3.
  • At 09:09 AM on 01 Oct 2007,
  • David wrote:

I reckon this is the tip of the iceberg!

  • 4.
  • At 09:14 AM on 01 Oct 2007,
  • Russ W wrote:

Oh dear, what a shame.

Only goes to show that even 'conservative financial institutions' are as greedy as the rest of them.

No doubt the senior executives of this pillar of financial competence will ensure that their generous remuneration packages won't take too much of a hit.

  • 5.
  • At 09:22 AM on 01 Oct 2007,
  • VK wrote:

The article in the business section reports UBS' loss as "the first loss for the bank in nine QUARTERS" (at least that was the case at 9.20am); in his point 1. above, Mr. Peston reports it as the "first quarterly loss for nine YEARS": which is correct?? There is quite a substantial difference, after all...

  • 6.
  • At 10:16 AM on 01 Oct 2007,
  • john thomas wrote:

If this crisis is liked to the Titanic, then we are that point in the story where the bemused passengers are throwing snowballs at each other while the ship comes slowly to a halt. From here on in events begin to pick up pace do they not?

  • 7.
  • At 10:21 AM on 01 Oct 2007,
  • Niall O'Connor wrote:

Everything is relative and as of 10am
shares in UBS were trading down a mere 2.46%.

One can read from this, firstly, that the market was not that surprised by the reported loss and, secondly, that it does not see the loss as impacting that much on UBS's business going forward.

Accordinly, one has to wonder just how humiliated the chaps at UBS will be.

  • 8.
  • At 10:24 AM on 01 Oct 2007,
  • Quaestor wrote:

Hawekeye...'VK' post no. 5.

From UBS press release today:

..."In fact, conditions remained turbulent, so we will make an overall pre-tax loss at Group level for the quarter.

Our first quarterly loss in nine YEARS is an unsatisfactory result, especially after such a strong first half."...

  • 9.
  • At 10:27 AM on 01 Oct 2007,
  • Paul Robinson wrote:

The trigger for a housing market downturn in the UK will not be rises in interest rates, but bonus cuts and job losses in the City once the full extent of sub-prime losses is known.

  • 10.
  • At 10:48 AM on 01 Oct 2007,
  • Andrew wrote:

It is the first quarterly loss in nine years. And to affirm Mr Martin's views, there is never one cockroach - expect a raft of similar disclosures.

  • 11.
  • At 10:52 AM on 01 Oct 2007,
  • Tim Bergel wrote:

You wrote:

"unspecified write-downs on positions in “super senior AAA-rated tranches” of collateralised debt obligations"

I didn't realise that the ratings system for debt had performed so badly. What I would like to know is what will happen to the firms that rated this debt so very carelessly - surely they are liable for the mis-rating or in some other way provide financial guarantees to back their ratings? If not then the debt\credit ratings system is patently useless.

  • 12.
  • At 10:58 AM on 01 Oct 2007,
  • Scamp wrote:

I wonder whether in the same way as in the USA lenders are auctioning off houses where the mortgagees have defaulted we'll soon be able to buy the odd bank on the cheap.

Housing market collapse in London due to City job losses? Sounds like really good news to me.

But this of course raises another interesting question... What happens if the entire housing market falls by say 20%.. The old negative equity thing will hit hard.. But who bears the responsibility and who picks up the tab?

Interesting times ahead.. Think I'll retrain as a lawyer :-)

  • 13.
  • At 11:00 AM on 01 Oct 2007,
  • GSM wrote:

Much more of this to come. Dont stand near the exits. Obviously UBS want to get into a clear field here away from the competition, first into the valley= first out?What has yet to come is the public mark to market (MTM) of these toxic derivatives and other ABP (asset backed paper). One suspects that behind the scenes frantic machinations have been and are afoot trying to avod this fact of market processes.The UBS response seems to indicate that they beleive such machinations will ammount to nowt, thus ushering in a very humbling period of bank performance and general public humiliation. Brought on by their greed and cavalier approach to managing the money of others. With its resultant share markdown no doubt.More fallout to come, for certain.

  • 14.
  • At 11:07 AM on 01 Oct 2007,
  • Juan C wrote:

Whilst it is true that UBS has taken a hit, I don't think the wall street banks that reported mid Sep have given a true and fair picture of the losses they incurred. Probably because they knew that everyone was going to be waiting for those figures. I think there might be a couple of skeletons in a fair ammount of cupboards.
The property buble is well and truly burst, we just haven't woken up to that fact. Sadly for many the awakening will be a rude one. A recesion is now a signifficant probability. how long will it take for people for people to realise this? and for banks to report the true and full impact of this fiasco? (oh dear! I just saw a pig fly-by)

  • 15.
  • At 12:03 PM on 01 Oct 2007,
  • ian wrote:

And who will be next, we have just scratched the surface. But as we have seen its takeing some time to shake these losses out of the trees that form the forest of the lending world

  • 16.
  • At 12:04 PM on 01 Oct 2007,
  • TRUST_NO_1 wrote:

Withdraw your cash,if you've got any,sell FTSE,and buy Gold,Silver, and stocks of mining companies or natural gas...while you can afford it.
Meltdown is coming.

  • 17.
  • At 12:36 PM on 01 Oct 2007,
  • KV wrote:

Good point Juan C. Housing figures are stagnating and with city job cuts ahead there could be weakness. The other factor going unnoticed is that Oil prices are continually rising, as is food. With interest rates rising to combat this inflation, homes will have to be sold due to lack of liquidity and higher repayments. The last few months' u.s. figures have been so poor, it looks like it's in a recession already but the markets not seeing this. All waiting for the big reversal. Bernankes rate cut will help short-term but these commodity rises will catch up.

  • 18.
  • At 01:12 PM on 01 Oct 2007,
  • GSM wrote:

Given that Central Banks worldwide have no choice but to ensure the longevity of this creation of theirs (the debt monster now masquerading as world economic growth) I would expect IR's to continue within a range that ensures their benign if not benevolent effect will continue as well . The recent behaviour of BoE and the USFed certainly bears this out. This almost assures the commodities VK mentions will continue to rise in nominal "value" as the paper currencies that measure them continue on their path of debasement. What a virtuous circle?

  • 19.
  • At 01:19 PM on 01 Oct 2007,
  • warren wrote:

The first bank to make an announcement about losses?

Didn’t HSBC say something about billions in write off's several months ago?

More tabloid journalism Mr P?

  • 20.
  • At 01:30 PM on 01 Oct 2007,
  • Deepak Chawla wrote:

Unlike US banks who report and value there assets every quarter UK/Europe banks value every six months or so.

The last one being June 07 before credit crunch burst out.

Next will be Dec 07 when legally they will have to audit and value there assets "Mark To Market" (Value them based on what you can get in the market when you sell it)
This is when they will have to value their sub prime so expect a crash boom bang in Dec-Jan.

Now for mere mortals who don't keep track day in day out will get stung but the big boys in the market would have sold there positions by them..

You do hear now that these companies balance sheets look good. This is because they have not revalued their asset's losses. Give it a few more months and you will stop hearing this excuse for th FTSE to rise also.

  • 21.
  • At 05:38 PM on 01 Oct 2007,
  • ian wrote:

Ummm Citigroup.... wow, another one, if this keeps up i'll fill my net in no time....

How many more are scurrying around looking at the security of their writedowns....

Well maybe they have just found out where to look for the risk!

Oil price up, food costs increasing, city jobs on the line, less cash in the pocket overinflated house prices and income not inflating proportionally what next

And why is house price inflation NOT included in the quoted inflation figures.....

  • 22.
  • At 07:53 PM on 01 Oct 2007,
  • Toni wrote:

UBS is not as conservative as they would like their pivate banking clients to believe. I may be wrong but I think the team at UBS structured the first synthetic CDO, (which uses a portfolio of credit default swaps rather than actual bonds)! I agree with most of the posters here that this is surely the tip of the iceberg and I imagine Citi had a range of credit losses to announce based on how much UBS was prepared to admit to. What is extra-ordinary is how the US market has reacted to this. The nations largest lender announced significant trading losses and effectively a woeful risk management approach and they have been rewarded by the stock market on the basis that "the worst is over" Citibank, (and UBS), exist to manage risk if they cannot do this, and they clearly cant, why should investors buy their stock? The US market has lost all rationality.

  • 23.
  • At 08:00 PM on 01 Oct 2007,
  • Bedd Gelert wrote:

Pride comes before a fall, and this is the second most cheering news I've heard today. Number 1 was the story in the Telegraph about buy-to-let entrepreneurs getting a roasting..

  • 24.
  • At 09:46 PM on 01 Oct 2007,
  • Jack London wrote:

Good move by UBS to announce losses. You should read their release though...this really cleans house...this was not just Dillon Read (IN FACT THAT WAS A SMALL PERCEBTAGE) this was across the entire fixed income division and the prop equity desk.....this really cleans the slate for the new UBS Stock!!

  • 25.
  • At 09:49 PM on 01 Oct 2007,
  • Ted Hodgson wrote:


You are confused about the purpose of ratings. A "AAA" security still has an extremely high likelihood of being repaid in full (albeit that the maturity may be some years off). So, no loss will occur and the rating agency rating will prove to have been valid.

The losses which UBS et al. have suffered are "mark to market" losses which recognise today that there is no market in some AAA securities, or, if there is, only at a substantially reduced price equivalent to the price at which it is now held by the bank taking the writedown.

Don't berate the rating agencies for volatility in market sentiment....they only opine on the likelihood of full return of investment.

  • 26.
  • At 09:56 PM on 01 Oct 2007,
  • Simon Stephenson wrote:

Further to JonA's comment no 2 (9.02AM - 01.10.07), it's not only who's holding the more junior ranks of CDO, but the size of their exposure, graded according to different levels of property price decline. I'm not an insider, but what I read is that there is a possibility of an economic disintegration if there is a serious collapse in property values. So what I'd like to know are the answers to the following questions:-

1. Is this over-alarmist? Could it be that even a fairly significant fall in property prices will not result in Armageddon, but will be able to be dealt with as an organised, if painful, period of adjustment, even if everything that needs to happen is allowed to happen during this timescale?

2. Is it possible that the problem of toxic CDO default losses can be avoided by the maintenance of a high-enough level of property prices, through the concerted action of financial institutions and central authority? Can this sort of preventative action maintain in perpetuity a property price level sufficiently high to prevent major toxic CDO default losses? Or long enough, at least, for the current problematic CDOs to have run out?

3. If this can be done, can it co-exist with a "new" regime of mortgage lending where it is no longer possible to camouflage contingent future risks to create artificial current profit?

4. Am I one (or more) steps behind here? Has the possibility of CDO default losses already been "insured" against with other long-term instruments? So that the market has created a means whereby bad news can always be deferred to a later date.

  • 27.
  • At 01:07 PM on 02 Oct 2007,
  • C.M.Mason wrote:

How conveneient that Gordon Brown has left the hot seat as Chancellor of The Exchequer just as the financial melt-down is happening!What a shame that he emptied our coffers of gold so quickly, knowing even then that confrontations with Iraq and Afghanistan were imminent!It is inconceivable that the top man at the treasury did not know of the financial losses that were building up due to the collapse of the American sub-prime market"!Now, in the midst of this mess, Brown has been promoted to Prime Minister!His pension has increased by 50%, unlike the poor miscreants who lost their pensions on his watch, with very little compassion shown to them by him in his Budgets! We need more than one miracle now..

  • 28.
  • At 09:53 PM on 02 Oct 2007,
  • anonymous wrote:

I agree with the comments in post#22. It was suprising to see how the US market reacted positively to the news of UBS's loss.Clearly the market has lost all rationality.The stock markets have recovered their losses over the past few weeks.The question is "is there any lessons that need to be learnt"

  • 29.
  • At 07:53 AM on 03 Oct 2007,
  • HarshV wrote:

I think the best bet would be to hope the Chinese consumer takes over from the US consumer, unlikely from those save, invest peasants so yeah crash expected in 3-6 months. Innovative US economy to recover within the year, which is enough time to make over heated China to suffer for the next decade. Go America!

  • 30.
  • At 09:10 AM on 04 Oct 2007,
  • Mayur wrote:

I think in future we will not have fixed income option.


ClubMed Banks (France, Italy, Spain, Greece, Portugal) will have loaded up on the junior debt and equity tranches.

They will lose tens of billions. The Germans were caught out for Pete's sake, so that means the French are losing even more.

Worse yet, is the horror of Synthetic CDOs. These are effectively sales of naked calls as default insurance on bonds.

  • 32.
  • At 06:21 AM on 07 Oct 2007,
  • Dion Per Sona wrote:

UBS is a radical Hayek-inspired outfit, maverick and arrogant not "conservative" at all. It follows the "free-market" book and is usually partners with JP Morgan and Deutsch: hardcore cynicism and irresponsibility is they keynote here. Bear in mind that there have been several attempts to regulate hedge funds, private equity buyouts and usurious lending practices in the last ten years, and that central bankers warned of serious "clearing problems" right up until the proverbial hit the fan. The banks wouldn't hear of public-interest regulation; all they were prepared to do to toe an imaginary regulatory line was abandon client confidentiality. Now it's the large law firms (and small, vulnerable high street firms)which shepherd hot money through the system - which means it still transits profitably through London.

Think bucket shops shovelling low-quality/fraudulent loans into the securization pipeline; think organised crime; think blackmail as commercial rivals balk at financing each other's refi of "teaser" ARMs.

The fun part is that their formula adopted for offloading (aka "spreading") risk has come back to bite. If a nation's banks serve a public purpose, they must be under public control. The value of a fiat currency cannot be left to the likes of the lot which manipulated and skimmed the economies of several countries. It is a monumental outrage.

UBS bought Enron's worthless "trading book" at top dollar, during Enron's collapse, and quitely ditched it 18 months later. My guess is UBS shorted Enron stock into the pink sheets, by means of an off-balance sheet hedge fund. Enron has been rebaptised.

While the Treasury is throwing good money after bad, I hope it is at least buying low-priced shares in these dodgy banks, for later use in the control and management of rogue bankers everywhere.

  • 33.
  • At 11:22 PM on 07 Oct 2007,
  • wildbill wrote:

A view from the other side of the pond:

First I think that those in the UK are much more savvy, both to language and finance, than anyone over here. In short, the comment on this article is intelligent.

Yes, it is the tip of the iceberg and there is surely more bad news to come

I have no idea why a potentially devastating economic problem is being treated with relish and bliss, but this seems to be the position of the majority of the financial analysts.

The consensus of John Q. Public, myself included, is negative. I can only presume that we are fools and our counterparts on the other side of the Atlantic are little better.

The definition of "sub prime" in the U.S. does not fit the normally held belief that these are loans made to first time buyers or those with shaded credit. Instead, it reflects to the loan itself. The vast majority of these loans were made to people with good credit who used the "cheap" money in the same manner as "buying short" in the stock markets.

This is a serious problem as most of the default is as yet an "unknown" as it is being hidden by dubious accounting practice.

The UK, Europe and the U.S. have been trading partners for hundreds of years and when one "catches a cold", the others begin to sneeze.

  • 34.
  • At 01:17 PM on 09 Oct 2007,
  • Steve Cahill wrote:

From a personal, vindictive point of view, I'm delighted to see that UBS has hit hard times. As a FORMER employee I regard them as distrustful and mendacious, certainly as far as their employees are concerned. I only hope that my former colleagues are not adversely affected by this development, but knowing their past record and my bitter experience I wouldn't be too optimistic about that.

  • 35.
  • At 06:28 AM on 10 Oct 2007,
  • Jim wrote:

I think the board at UBS needs a good spanking from a mini-skirted 40-year old blonde.

  • 36.
  • At 05:08 PM on 17 Oct 2007,
  • Soapers wrote:

The issue is the huge $350 trillion derivitives debt - repackaged home mortgages - RMBS - that are re-packaged and resold - creating a global pyramid of debt hundreds of tims the value of the underlying asset values, which will continue to reduce in value as the residential home market collapses. Banks will have to again restate writedowns this time next year.

Derivitive debt is now 8 times the Gross Domestic product of the ENTIRE WORLD - and based on falling asset values.

This will put some banks out of business, some hedgefunds will collapse, and the Chinese will be sniffing around for name brand banks to buy.

This will all happen as quickly as the dot com crash and subsequent telcom crashes of the late 1990' and early 2000!

  • 37.
  • At 08:06 AM on 22 Oct 2007,
  • dom wrote:

The markets seem to be "rewarding" the banks disclosing the write downs simply because when (or if) the situation improves in the coming quarters those write-downs should translate into significant gains - the stock markkt is simply a forward pricing mechanism - buy the rumour, sell the fact thinking here - If i was a huge top-tier investment bank the best thing right now is to try and throw anything and everything into a write down - take the losses now (heck the market is in an understanding mood) and when things normalise (hopefully they do) it will be profits galore.

  • 38.
  • At 10:28 AM on 23 Oct 2007,
  • Fi wrote:

Comment 37 is spot on. Surely best to go all out on the write-downs now. Stating that you may not know the extent of the losses ruins confidence but not to down-write as much as possible when confidence is low surely ruins it more.

  • 39.
  • At 09:30 AM on 29 Oct 2007,
  • Jack wrote:

Remember that these writedowns are the result of marking to market the various debt instruments.
The real test of their value will come when they are liquidated, and I suspect they will fetch even less than the current estimates.

  • 40.
  • At 05:56 PM on 01 Nov 2007,
  • SG wrote:

UBS have restated the perceived value of some debt - that is the amount another bank would be willing to pay for taking on the debt right now, in the current market.

The perceived value is based upon the amount of interest that the debtors have to pay to service that debt, as well as the amount of actual borrowing.

Investment banks are interested in buying and selling debt packages, rather than making money from interest. Bundle up a load of loans, add some marketing and hey presto, the perceived value has increased.

The underlying borrowing in question is AAA rated, so has a very good chance of being repaid. If the markets don't rebound and UBS were to hang onto the debt until it falls due, then they would very likey still make a profit, all be it much reduced.

If the markets rebound, then the perceived value increases, and UBS can restate the value once more, making a "Profit".

That's why the markets aren't really that bothered.

  • 41.
  • At 08:26 AM on 02 Nov 2007,
  • Sandy wrote:

The issue we face is whether the banks have enough 'market data' to value their portfolio. In other words are these AAA and BBB pieces of debt (ha, ha) actually trading in the open market place in volumes large enough for all participants to mark their whole position and 'value it' correctly. I doubt it. I also doubt that they could afford to. Some of the AAA debt has traded well below 50% and that would mean a valuation write down of all their holdings by half their face value.
Many of the banks hold billions of $ worth of CDO's and so a write down of 4-8 billion that we have seen so far is nothing compared to the reality. I fear a great deal more bad news if about to come out. And the systemic shock waves from this are terrifying.

  • 42.
  • At 12:56 PM on 05 Nov 2007,
  • stewart wrote:

Hold on to your hats - we are heading for a recession. A big one!

  • 43.
  • At 05:55 PM on 05 Nov 2007,
  • a.brooks wrote:

Why the surprise at Banks having to admit losses. Capitalism is based on greed and sooner or later someone has to pay for their irresponsible greed and stupid bonuses that these firms pay themselves. Trouble is its always the people at the bottom who suffer most

  • 44.
  • At 07:46 PM on 05 Nov 2007,
  • Danny wrote:

Per Sona #32, UBS didn't "quietly ditch" Enron's portfolio, it made a 2bn USD profit but why lets facts stand in the way of your assault on "hayek-inspired", "rogue" banks.

As for the AAA rating that is simply a reflection of the probability of the promised coupons being met. If the coupons is a function of market variables - as the usually are - then that could be substantially less than expected or it could have an adverse effect on the principal repaid. This is not a default and so technically the holder of these tranches could get far less interest and far less principal without a default and hence make a loss on the originally booked value.

As for junior tranches - pension funds anyone?

  • 45.
  • At 08:37 PM on 05 Nov 2007,
  • x wrote:

Please explain what these
Collateral Damage Obligations means

  • 46.
  • At 01:44 AM on 06 Nov 2007,
  • lemonadesoda wrote:

There's a lot of comment about the global universal banks taking write downs on their AAA credit enhanced senior CDO tranches. But what about the poor investment funds (esp. pension funds) that have suckered into yield-enhancing junior subordinated tranches? Oh dear. Some letting of blood and falling on swords will be this winter's Christmas fare.

We are listening to the AAA stories today. But the big boys can "take it". But the more serious fallout will be in the leveraged funds: A stock market fall together with write downs on subordinated CDO trances, are going to leave fund liquidity/reserves very dry. THANK GOODNESS so many of these exposures are not marked-to-market. If they were, they'd be bust already.

Regulators are going to have to start breathing deeply. It's going to be a busy time the next Q. And they must use every influential string to keep interest rates low and stock markets high.

A little political instability would be very unwelcome in this hour.

Volatility is UP.

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