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Pastimes : The Naked Truth - Big Kahuna a Myth -- Ignore unavailable to you. Want to Upgrade?

To: Giordano Bruno who wrote (61205)	9/10/1999 9:58:00 AM
From: Tim McCormick	Respond to of 86076

Fed drains-WTF? biz.yahoo.com

To: Giordano Bruno who wrote (61205)	9/10/1999 10:05:00 AM
From: Tim McCormick	Respond to of 86076

I love how none of the financial press picked up this story- New York, Sept. 9 (Bloomberg) -- Investors are facing losses on 325 million deutsche marks (US$176 million) of derivatives linked to Ecuadorean bonds sold by Credit Suisse First Boston. The derivatives, sold between 1997 and 1999, paid annual interest rates of as much as 14 1/4 percent -- twice as much as U.S. Treasury securities -- to compensate investors for the risk Ecuador could default on its debt. The country missed a $96 million interest payment on its foreign debt last month, triggering default provisions that have led to CSFB calling, or redeeming, the derivative securities that the firm sold through a special trust. Losses to the investors are likely to be substantial. Holders of Ecuadorean derivatives sold by Merrill Lynch & Co. were told last week they would be paid an amount equivalent to 1.6 percent of the money they invested. ''A credit event has occurred with respect to the deutsche mark bond issues,'' a Credit Suisse spokeswoman said. ''As a result of such determinations, the Notes will be redeemed,'' Credit Suisse Financial Products said in a letter to investors. The amount investors will recover for two of the three derivatives will be set by a formula based on the price of Ecuadorean Brady bonds due 2015, known as past-due interest securities. The bonds fell to about 21 cents on the dollar this week from 45 cents on the dollar in May. Unlike many Brady bonds, which are backed by U.S. Treasury zero-coupon bonds, PDIs carry no Treasury backing. Higher Yields Investors were attracted to the derivatives because they offered yields of about 200 basis points more than Ecuadorean Brady bonds, the securities created in a debt restructuring in 1995. The country has about $6 billion of Brady debt outstanding. The third derivative that Credit Suisse redeemed, known as a global synthetic sovereign, is linked to a basket of 12 bonds from developing countries including Ecuador, Brazil, Nigeria, Thailand and Russia. Ecuador accounted for 10 percent. The global issue's coupon will be reduced according to a formula in its offering memorandum, though those figures weren't immediately available. The annual coupon was reduced once before in May to 7.6 percent from 9 percent because of another credit event. The terms of that credit event weren't immediately available. Russia defaulted on some of its debt last August. Ecuador hasn't yet defaulted on its Brady debt because of a 30-day grace period. Still, the missed payment has triggered default provisions in many derivatives linked to Ecuador. So far, at least six credit-linked notes, including those announced today, have been redeemed, and traders expect more to follow. Dresdner Kleinwort Benson and J.P. Morgan & Co. said yesterday that two Ecuador-linked credit derivatives they sold will be called next week and could lose their entire value, depending on the value of PDIs. Dresdner Kleinwort Benson and J.P. Morgan sold the derivatives in 1996 and 1997 through two separate issues totaling 250 million deutsche marks. The derivatives included provisions allowing them to be called, or redeemed early, if Ecuador defaulted on its Brady bonds or its eurobonds. HSBC Trinkaus, a unit of HSBC Holdings Plc, and Morgan Stanley Dean Witter & Co. are among other firms that sold credit derivatives with call provisions linked to declines in Ecuadorean Brady bonds or payment defaults. Morgan Stanley's only such issue, sold in 1998, was unwound before the Ecuador default.