Newsletter 4

THIS ISSUE
The UBS scandal p.2

Dear Friends,
September is almost over and Y2s are getting acquainted with financial instruments and exchange markets, whereas Y1 rush to complete their EBP projects and are preparing for their first exam in Mathematics. Lots to do, isnt it? Well, nobody has told that life at SSER gonna be easy, but everybody deserves some good rest. So distract a little bit from the hard studies and enjoy already the 4th Newsletter of the Investment Fund. This week the financial world was struck by an unprecedented scandal in the past few years concerning a 2.3 billion loss in the so-called rogue-traderism (trading under fraudulent schemes) of a Swiss investment bank UBS. Such cases are very rare, yet extremely massive in their scale, so we will try to elaborate on that in one of the articles. Our second article is devoted to the Frankfurt auto show, particularly to one of its largest participants Volkswagen. The company is currently undergoing rapid expansion, so will try to see what are the problems and prospects facing the company. As always, comments and suggestions are more than welcome, so we hope you will enjoy reading the newsletter. Yours financially, iFund

This weeks case with UBS proves that rogue-traderism is still alive, and traders an exploit loopholes even in times when everything is tightly regulated. We present a short recap of what happened and the potential causes for such huge losses incurred in such a short period of time. VW and its prospects p.3

The German auto maker VW has experienced notable expansion during the last years mostly owing to its agressive takeover strategy (like Audi, koda, Seat, and Porsche). Now it seems as though the company may encounter some difficulties both with its current and past deals. Board updates Upcoming Events p.4 p.4

Rogue Trader: The UBS edition

By Igors Pauks

Learn more about the topic

A more detailed coverage of what really happened (from UBSs perspective) is available here: http://online.wsj.com/article/SB100 01424053111904106704576578591 624722276.html The news has triggered widespread investigations within the banks system. The rumor has it that the guy was not the only person ivolved: http://www.newsdaily.com/stories/tr e78i5do-us-ubs-shares/ More strikingly, the employees now complain that their annual bonsues could be cut as a result of the rogue trading scandal: http://business.newsplurk.com/201 1/09/ubs-bonuses-at-risk-as-23billion.html Even though there have been several calls on the CEOs soon resignation, surpirisingly, no measures are to be taken despite the huge financial and prestige losses: http://news.yahoo.com/ubs-ceonot-resigning-loss-mounts-2-3144918477.html Some speculations arise that the companys investment banking devision may halt its operations as a result of the scandal. Heres a good opinion on this matter:

Almost every person with deep knowledge or interest in finance has heard about the great story of Nick Leeson, the first rogue trader who had been put into light after unauthorized derivative trading in the midnineties. Although many cheaters then learned the lesson that fraud is punishable, there have still been numerous (even more grand) cases of when one person can make a difference by distorting financial markets and accumulating huge losses, regardless of whether this is done in personal interest or in favour of the bank. This weeks case with UBS proves that rogue-traderism is still alive, and traders an exploit loopholes even in times when everything is tightly regulated. We present a short recap of what happened and the potential causes for such huge losses incurred in such a short period of time. A 31-year-old Ghanaian UBS employee Kweko Aduoboli working in the London office has been charged on charges of abuse of power in the fraud and false accounting, Stock Market Today reports. The case was immediately followed in the London Central court, where the guy burst in tears of his past commitments. In the first hearing he was brought accusations of fraud and false accounting. Even though the bank blamed a rogue trader, some inside the firm knew enough to question his trading fairly early on in the alleged scheme, according to a person familiar with the situation. However, either for fear they might be accused themselves or for some other reason the disaster had not been prevented earlier. UBS in its first press release on Sunday said that the loss resulted from unauthorized speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months. However, the UK authorities and invited auditor companies have strong reason to think that the fraudulent scheme dated back to 2008 and they are completely in contra to UBSs views that the rogue trader acted alone, rather than being covered by his co-workers who in fact knew about his dealings. Interestingly, the bank then announced in its

statement that the positions taken by the trader were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio, but the risk of them was masked because the trader also took out fictitious offsetting exchangetraded-funds positions. It all started with a small loss during a speculative action around two months, which Mr. Adoboli then tried to cover by entering a series of risky trading covering the positions with ETF futures. As WSJ explains the situation that to avoid showing naked or revealing his hedging strategy with ETF futures, or unhedged, trades that would have gotten him in trouble, he needed to show that his trades were offset with bets in the opposite direction of his real trades, according to people familiar with the matter. To do so, he recorded on the companys books transactions that never took place, according to people familiar with the situation. Yet the market overturn in the past months severely undermined his situation which soon became uncontrollable. In other words, he faced the same fate as Nick Leeson who betted on the rise of NIKKEI 225 stocks, yet his plans were devastated after the earthquake in Japan bringing a total of 800 Million pound sterling losses to Barrings, one of the oldest British banks. More interestingly, the guy did not just conform with the classical Im sorry note (as Nick Leeson did. UBS said the rogue trader, following inquiries from bank officials who were reviewing his positions, revealed his unauthorized activities Wednesday. Around midday that day, he went home and wrote an email from his personal account to his boss, John Hughes, admitting to the unauthorized trades and providing Mr. Hughes with details of what he had done, according to a person familiar with the events. The issue is still investigated, so we can expect further updates coming on what really happened in this witty financial scheme. iFund will be the first to inform you so stay tuned for the news.

http://bankonaire.com/?p=72

Volkswagens [almost] spectacular plans.

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Meanwhile, discussions arise with the alleged VW-Porsche merger, which has not yet occurred. Will the companies merge or VW will completely buy out Porsche? http://www.reuters.com/article/2011 /09/16/us-porsche-volkswagenidUSTRE78F46W20110916 http://www.bloomberg.com/news/2 011-09-13/vw-plan-b-for-porschecould-trigger-asset-freeze-plaintifflawyer-says.html Meanwhile, discussions arise with the alleged VW-Porsche merger, which has not yet occurred. Will the companies merge or VW will completely buy out Porsche? http://www.reuters.com/article/2011 /09/12/volkswagen-suzukiidUSL5E7KB0QP20110912 Heres a fine expert opinion on the case of Suzuki vs. VW: http://www.ft.com/intl/cms/s/3/2da d57bc-dd33-11e0-b4f200144feabdc0.html The company has got really ambitious plans as confirmed by its future expansion paths and extended models suiting the customers of emerging markets: http://www.bloomberg.com/news/2 011-09-16/volkswagen-supervisoryboard-said-to-vote-on-five-yearinvestment-plans.html The case with Suzuki is still under way, and it appears that there may be some signs of dirty games between the two companies, as seen from the latest accusations and company announcements: http://www.bloomberg.com/news/2 011-09-22/suzuki-demandsvolkswagen-retract-allegation-ofinfringement-1-.html http://www.bloomberg.com/news/2 011-09-18/volkswagen-open-tosuzuki-takeover-if-tie-up-endsspiegel-says.html

The German auto maker VW has experienced notable expansion during the last years mostly owing to its agressive takeover strategy (like Audi, koda, Seat, and Porsche). Now it seems as though the company may encounter some difficulties both with its current and past deals.
The Frankfurt Auto Show, one of the worlds largest motor shows, has just ended so we decided to have an article dedicated to one of the carmakers. The automotive industry represents a relatively large share of the worlds economy as such companies as Toyota, Volkswagen, GM, Daimler and Ford are among the worlds top companies by revenue. This weeks focus is Volkswagen. The Wolfsburg, Germanybased automaker currently owns 10 economy and luxury brands, including Audi, Seat, Skoda, Lamborghini and Bentley. miss. It seems that the Porsche merger is not the only thing that is failing. In December 2009 VW has bought a 19.9% stake in Suzuki, a Japanese automaker, to form an alliance in hopes of combining Suzukis leading position in India and Volkswagens global reach. The 20-month-old partnership that was supposed to help Volkswagen become the worlds largest carmaker by 2018 is now falling through as investment failed to deliver any significant results. Suzuki is ready for a peaceful divorce and promised to sell back the 1.5% stake in VW and buy the German-controlled 19.9% of Suzuki shares with cash. Although Volkswagen claims that Suzuki has violated the partnership by signing an agreement to buy diesel engines from Fiat, VW denied having any intentions to end the partnership or sell its stake in Suzuki. Despite the problematic Porsche merger and the fact that the Suzuki partnership is not working out as well as expected Volkswagen has approved its plan to invest more than 60 billion euros through 2016 to overtake Toyota as the worlds largest carmaker.

Since December 2009, after Porsches failed hostile takeover attempt to gain control of Volkswagen, the company has been in the process of merging with the German based luxury carmaker. Recent reports indicate that the deal which was supposed to have been completed by the end of 2011 was put on hold and, as some analysts claim, may be completely called off due to uncertainty caused by the pending lawsuits against Porsche. Volkswagen is now considering its Plan B using call options to purchase the remaining 51% stake in Porsche for 3.9 billion euros in cash. The options can be exercised starting from November 2012, meaning that the Porsche merger will not be completed for at least a year. To complicate the matter further, Plan B would not only have significant tax implications, but may also result in Porsche asset freeze as investors have filed a suit claiming losses due to market manipulation as Porsche shares tumbled 13% in a week. Only one thing is for sure, the VW-Porsche merger drama is something you do not want to

By Justinas ukys

Board updates
Here the iFund board posts weekly updates on what has been done or achieved during the week by the board: 1. The website of the Investment Fund has been slightly refurbished and aupdated in terms of some content. From now on, newsletters will also be posted on the website. E-learning platform shall not be used for the time being. Linedata Services has expressed its willingness to support us during the Investment Game. Renewed negotiations with Swedbank about sponsorship for this years iGame. Last week the programmers presented the technical concept of the new Investment Game. This year it will be built from scratch with completely new features and optimized user interface Provided that everything goes on as planned, the Investment Game will start on the 1st of November

2.

3.

Upcoming Events
Seminar 2: Introduction to Financial Markets II
October 3, 15.00-16.00 in 311
4.

Seminar 3: Introduction to Financial Markets III

October 10, 16.00 17.00 in 303 or 311 (TBA)

5.

Movie Night: Rogue Trader (1997)

September 19, 17.00 19.00 in Soros (TBA)
6.

Seminar 4: Fundamental Analysis

October 27, 16.00 17.00 in 311 (TBA)

SSE Riga Investment Fund

Strlnieku iela 4a, Rga LV-1010, Latvia Ifund.sseriga@gmail.com http://www.ifund.lv