Finance

UBS will pay a $1.4 billion settlement over “legacy” misconduct related to the bank’s offer and sale of residential mortgage-backed securities, federal prosecutors said.
It’s the final case brought by prosecutors over misconduct by the big banks.
The Justice Department alleged that the banks knew the mortgages underneath the securities were problematic or noncompliant but sold them anyway.

General view of the UBS building in Manhattan, New York, June 5, 2023.
Eduardo Munoz Alvarez | View Press | Corbis News | Getty Images

Swiss bank UBS agreed to pay a combined $1.4 billion in civil penalties over fraud and misconduct in its offering of residential mortgage-backed securities dating back to the global financial crisis, federal prosecutors announced Monday.
The bank, in its own statement Monday, described the settlement as dealing with a “legacy matter” dating from 2006 to 2007, leading up to the financial crisis.

The settlement concludes the final case brought by the U.S. Department of Justice against several of the largest financial institutions over misleading statements made to the purchasers of those mortgage-backed securities. The cumulative recoveries in the cases now total $36 billion, according to the Justice Department.
UBS’ settlement is nearly the same as the value of the residential mortgages it originated between 2005 and 2007, the year it stopped issuing residential mortgage-backed securities. UBS originated $1.5 billion in residential mortgages in those three years, the bank previously said in a 2018 statement challenging the Justice Department allegations.
“The vast majority of loans underlying the 40 RMBS listed in the complaint were originated by other financial institutions,” UBS said at the time.
In the years leading up to the financial crisis, investment banks packaged, securitized and sold bundles of mortgages to institutional buyers. Those securities were rated and graded according to quality, with various “tranches” of mortgages hypothetically safeguarding against the risk of complete default.
But unbeknownst to the buyers, those mortgages were not as high quality as their ratings suggested. UBS, similar to other banks who settled with the Justice Department, were aware that the mortgages underneath the mortgage-backed securities didn’t comply with underwriting standards.

UBS conducted “extensive” due diligence on the underlying loans before it created and sold the securities to its clients, prosecutors alleged, and despite knowing of the significant issues with the products, continued to sell them to financial success.
UBS had previously said that it had “fulfilled” its obligations to its clients, which the bank said were “highly sophisticated investors” and “some of the biggest financial institutions in the world.
The Justice Department has secured settlements with 18 other financial institutions over mortgage-backed security issues, including Bank of America, Citigroup, General Electric, Goldman Sachs, JPMorgan and Wells Fargo.
Credit Suisse, the defunct Swiss bank now owned by UBS, also settled with the Justice Department over misconduct related to MBS offerings. More

Russia’s rouble is now worth less than a solitary cent: on August 14th it slipped past the value of 100 to the American dollar. The currency is at its cheapest since the immediate aftermath of the invasion of Ukraine, and has become one of the world’s worst performers this year, outdone only by perennially troublesome peers like the Argentine peso, Venezuelan bolivar and Turkish lira. By the end of the day, the Bank of Russia had announced it would hold an emergency meeting on August 15th. Officials are expected to raise interest rates. It was the first time policymakers have had to scramble since the early stages of the invasion. Why has the currency collapsed, and what does it mean for Vladimir Putin’s ability to wage war? Often currency collapses are prompted by nervous international investors or fleeing domestic capital. Yet trading in the rouble, especially against the dollar, remains thin. Sanctions and capital controls have left Russia isolated from the international financial system. Therefore instead of reflecting the aggregated opinions of thousands of speculators, the behaviour of the rouble reflects the textbook economic model, acting as a barometer for the relative flow of exports out of the country (which earn foreign currency), against imports (which must be paid for with these earnings). Since the g7 group of large rich countries imposed a $60 price cap on Russian oil in December, the value of exports has slumped. Russia’s earnings were 15% lower in dollar terms from January to July than during the same period last year, a fact only partly explained by a lower global oil price. Imports have surged as the government prosecutes its war, and buys the goods to do so. In the first seven months of the year Russia’s current-account surplus, a measure of how much more foreign currency the country receives than spends, fell by 86%, to $25bn. On the one hand, this suggests the oil-price cap is having an impact. Attempts to dodge the policy—via wheezes involving the cost of shipping or transferring cargoes in “dark fleets”—are not making up for being forced to sell some oil at a discount. Yet on the other hand, it suggests Russia is finding ways to continue importing goods. German exports to Russia’s friendlier neighbours, for instance, have shot up suspiciously.A cheap currency raises the rouble value of the government’s oil revenues, but it also raises the cost of the imports. In June Andrei Belousov, Russia’s deputy prime minister, said the value at the time of 80-90 roubles a dollar was best for the country’s budget, exporters and importers. When the rouble was far stronger last year, thanks to oil revenues, the Russian government was happy to tout it as evidence Western sanctions were failing. That confidence has now been replaced by concern. On August 14th Maxim Oreshkin, an adviser to Mr Putin, wrote a column stressing the importance of a strong rouble and blaming the currency’s fall on the central bank. It is not clear that the Bank of Russia can do much in the short term. The country’s isolation means higher interest rates are unlikely to tempt “hot money” (speculative funds seeking short-term returns). Instead, the focus will be on the Russian capital that is now at risk of fleeing. Strengthening capital controls, introduced in 2022 and weakened a little this year, could staunch the flow, but would take time to have an impact. Direct intervention in currency markets is another option. The central bank has already scaled back purchases of foreign currency. Under a budgetary rule, Russia used to buy other currencies in exchange for roubles if it had a surplus of oil and gas revenue, in order to build up reserves. On August 9th this rule was abandoned. According to official figures, the country had foreign-currency reserves of $587bn at the start of August, suggesting the central bank has the firepower to prop up the rouble’s value should it wish. The problem is that some $300bn of these reserves are frozen by the West.That leaves the government with a choice. It could cut back on spending, including on its armed forces, to reduce imports. Alternatively, and in all likelihood, the civilian economy will take the pain. Rising inflation and higher interest rates will weaken the purchasing power of ordinary Russians, forcing them to buy fewer foreign goods. Thus the fate of Russia’s economy will not be decided by the judgments of international financiers but by the depths of Mr Putin’s aggression. It is a far more unhappy situation in which to be trapped. ■ More

Traders work on the floor of the New York Stock Exchange, Aug. 22, 2022.
Brendan McDermid | Reuters

Check out the companies making headlines in midday trading.
AMC — Shares of the movie theater stock sank almost 35% after a judge late Friday approved AMC Entertainment’s plan to convert its preferred shares to common stock. AMC’s preferred units, or APEs, surged about 17%.

PayPal — PayPal stock added 2% after the company announced Intuit’s Alex Chriss would take over as chief executive beginning in September.
U.S. Steel, Cleveland-Cliffs — The steel maker founded by Andrew Carnegie and J.P. Morgan climbed nearly 32% after rejecting a buyout offer from peer Cleveland-Cliffs on Sunday, with the company asserting plans to consider other offers. Cleveland-Cliffs stock, meanwhile, climbed more than 8%.
Tesla — Shares slipped 2% after the company announced lowered prices on some models in China.
Hawaiian Electric — Shares plummeted more than 33% after Wells Fargo lowered its target price on the stock earlier and maintained an underweight rating Monday, citing wildfires in Maui as a looming risk.
Nikola — The stock lost 9% after the green truck maker announced a recall of 209 electric trucks following an independent investigation of a June fire. The company, which is coming off blows from complicated second-quarter earnings and news of a CEO departure, said this doesn’t affect its hydrogen fuel cell trucks.

Okta — Stock in the identity management firm added 2.4% in midday trading after an upgrade to buy from Goldman Sachs over an improving risk/reward ratio.
Teledyne Technologies — The conglomerate climbed 4% after Goldman Sachs upgraded the stock to a buy from neutral. Goldman called the company a cash compounder.
— CNBC’s Samantha Subin, Alex Harring, Pia Singh and Hakyung Kim contributed reporting. More

Workers replace a roller that compresses steel at the A&T Stainless steel plant in Midland, Pennsylvania, March 2, 2020.
Michael Rayne Swensen | Bloomberg via Getty Images

Check out the companies making headlines in premarket trading.
U.S. Steel — Shares of the steel producer surged more than 26% premarket after it rejected a $7.3 billion buyout proposal on Sunday from rival Cleveland-Cliffs and said it’s reviewing “strategic alternatives.” Cleveland-Cliffs shares were flat.

Tesla — The electric vehicle stock fell 2.2% in premarket trading. The move comes after Tesla lowered the price in China on its Model Y long-range and performance models by 14,000 yuan, according to a company post on Chinese social media platform Weibo.
Okta — The identity management company’s stock popped 5% before the bell. Goldman Sachs upgraded shares of Okta to a buy rating, citing a favorable risk reward and expectations for an inflection in subscription revenues.
Hawaiian Electric — The power stock slipped 2.2% before the bell after Wells Fargo pulled back its target price for shares and reiterated its underweight rating. Wells Fargo tied the price target cut to the wildfires risk.
Keysight Technologies — The tech stock dropped 2.2% following a Bank of America downgrade to underperform from neutral, citing the likelihood of worsening order trends. Keysight’s earnings report for the fiscal third quarter is slated for release Thursday.
Urban Outfitters — The clothing retailer shed 2.5% following a downgrade by Citi to neutral from buy. While the Wall Street firm expects an earnings beat when Urban Outfitters reports next week, it believes the risk/reward is more balanced at current levels. The Urban Outfitters brand will be slower to turn around, ultimately limiting possible upside to earnings per share, the firm wrote.

Parsons Corporation — The technology stock climbed 2.5% in premarket trading following a rare double-upgrade in rating to buy from underperform by Bank of America. The firm said Parsons has better growth than expected.
EPR Properties — The real estate stock shed 1.3% before the bell after a downgrade to neutral from buy by Bank of America. The firm said EPR can face pressure on its multiple as a result of the Hollywood strikes given its exposure to movie theaters.
Nikola — Shares of the green truck maker dropped 15% to $1.65 after it announced a recall of 209 electric trucks following an independent investigation of a June fire. The company said this doesn’t impact its hydrogen fuel cell trucks.
— CNBC’s Samantha Subin, Hakyung Kim, Sarah Min, Tanaya Macheel and Michelle Fox contributed reporting More

Credit data for July released Friday showed a slump in demand from businesses and households to borrow money for the future.
On Tuesday, China is set to release July economic data that’s expected to show no change from June in the pace of growth for industrial production and fixed asset investment, according to a Reuters poll.  
Developer Country Garden announced over the weekend it was suspending trading in at least 10 of its mainland-China traded yuan bonds.

A woman walks at the Bund in front of the financial district of Pudong in Shanghai, China.
Aly Song | Reuters

BEIJING – China’s economy is running into more challenges.
Credit data for July released Friday showed a slump in demand from businesses and households to borrow money for the future. Real estate problems persist with once-healthy developer Country Garden now on the brink of default. Consumer sentiment is weak.

“The weak July credit data suggest the downward spiral of the property sector continues, and worsening geopolitical tensions add to the uncertainty,” Lu Ting, chief China economist at Nomura, and a team said in a report Friday.
“In Japan during the 1990s, corporates might have paid down their debt to improve their chances of survival, but in today’s China, corporates and households are cutting their borrowing due to a lack of confidence (and trust),” the report said.

All the factors just cannot mask how weak credit demand is and how low risk appetite is.

Xiangrong Yu
chief China economist, Citi

New local currency bank loans plunged by 89% in July from June to 345.9 billion yuan ($47.64 billion), less than half the 800 billion yuan analysts had forecast in a Reuters poll.
The July new yuan loan number was the lowest since late 2009, according to Reuters.
Those figures “should mark a low” since policy moves in June could have moved up some demand, Xiangrong Yu, chief China economist at Citi, and a team said in a note.

“Yet all the factors just cannot mask how weak credit demand is and how low risk appetite is,” the analysts said, noting expectations for rate cuts by the end of September. Without such cuts, they expect a greater risk that China misses its growth target of around 5% this year.
On Tuesday, China is set to release July economic data that’s expected to show no change from June in the pace of growth for industrial production and fixed asset investment, according to a Reuters poll.  
Retail sales are expected to rise 4.7% year-on-year pace in July, slightly faster than in June, the poll showed.

Real estate drag

China’s massive real estate sector, where the majority of household wealth is parked, has reemerged as an area of concern that it could drag down the broader economy.
Developer Country Garden announced over the weekend it was suspending trading in at least 10 of its mainland-China traded yuan bonds.
Last week, the company missed coupon payments on two U.S. dollar-denominated bonds, according to Reuters.
Country Garden’s U.S. dollar bonds account for just under half of outstanding high-yield U.S. dollar-denominated bonds, according to Goldman Sachs analysis.
China U.S. dollar bonds that are of investment grade account for 43% of the total, the analysis showed.
“Given that the majority of [high-yield] developers have either defaulted or conducted bond exchanges, we believe rising stresses amongst the remaining [high yield] developers are unlikely to have broader impact on the offshore bond market,” the Goldman analysts said in a report Friday.
“We believe of greater concern is whether rising stresses will spillover to [investment grade] developers, most of whom are state owned enterprises [SOEs].”

The more the government tries to help the real estate industry, the longer it takes for the industry to find a reasonable bottom.

Brandes Investment Partners

State-owned companies have generally found it easier to obtain loans in China, where state-owned banks dominate. State-owned developers have also fared better in terms of recent sales than non-state-owned developers, data show.
However, China’s entire real estate sector still needs to contract by about 10 percentage points to reach a similar level of GDP contribution as Japan or South Korea, said Louis Lau, director of investments and emerging markets portfolio manager at Brandes Investment Partners.
He pointed out that while real estate has contributed to about 30% of GDP in China, that share is in the lower 20 percentage points in South Korea and Japan.

Read more about China from CNBC Pro

In 2020, Beijing began an earnest crackdown on developers’ high reliance on debt for growth. Authorities have eased their stance in recent months, with a notable shift in late July, but stopped short of large-scale stimulus.
“The more the government tries to help the real estate industry, the longer it takes for the industry to find a reasonable bottom,” Lau said.
He is underweight China, with selective investments in some consumer names and industries he expects will outperform. More

Advancements in investment products and trading platforms haven’t altered long-standing investing fundamentals, according to neurologist and best-selling financial author William Bernstein.
Bernstein, who released the second edition of his 21-year-old classic investment guidebook “The Four Pillars of Investing” this summer, joined CNBC’s Bob Pisani on “ETF Edge” this week.

The first pillar of investing according to Bernstein is theory, in which he stressed that risk and return are “joined at the hip.”
“If you want a perfectly safe portfolio, you’re not going to have high returns,” Bernstein said. “If you want the high returns that come with equities, you’re going to have to sustain bone-crushing losses.”
His second pillar is history. It plays off the idea markets overshoot on the upside and the downside, and only bottom in retrospect.
“Markets don’t get either very expensive or very cheap without a good reason,” Bernstein said. “You have to just be able to keep your discipline and understand that the expected market return has to do with the perceived risk of the market, and the perceived risk of the environment you’re in.”
The third pillar is psychology. Bernstein believes investors tend to be overconfident about their ability to pick stocks.

“The metaphor I like to use [for investing] is that you’re playing tennis with an invisible opponent, and what you don’t understand is the person on the other side of the net is Serena Williams,” Bernstein said.
Bernstein also emphasizes that investors tend to be overconfident on their own risk tolerance.
“One of the things I learned both in 2008 and more recently during the March 2020 Covid swoon was that how you behave in the worst 2% of the markets probably describes 90% of your overall investment performance,” he said.
Bernstein’s final investing pillar is business. It’s the notion the primary business of most fund companies is collecting assets rather than managing money.
This idea is one of the reasons Bernstein feels positive about the exchange-traded funds business and its role in reducing fees.
“One can purchase a lot of investment products now for next to nothing in terms of expenses — a couple of basis points,” Bernstein said.

Disclaimer More

An Alibaba Group sign is seen at the World Artificial Intelligence Conference in Shanghai, July 6, 2023.
Aly Song | Reuters

Check out the companies making headlines in midday trading.
News Corp — The media company’s shares jumped nearly 7% after reporting an earnings beat in the fiscal fourth quarter. News Corp posted adjusted earnings of 14 cents per share, while analysts polled by Refinitiv had estimated 8 cents per share. Meanwhile, the company’s revenue of $2.43 billion missed analysts’ forecast of $2.49 billion.

UBS — Shares rose 5% on news that UBS ended a roughly $10 billion loss protection agreement and a public liquidity backstop with Credit Suisse. The company also confirmed that Credit Suisse fully repaid a 50 billion Swiss franc emergency liquidity loan to the Swiss National Bank.
Chip stocks — Semiconductor shares dropped more than 2% Friday, putting the sector on pace for a weekly decline of 4.5%. The VanEck Semiconductor ETF (SMH) fell 2.3%. NXP Semiconductors, Applied Materials, Nvidia and On Semiconductor each tumbled more than 3% Friday. Lam Research declined 4.5%.
Maxeon Solar Technologies — Shares plummeted 31.9% after the company reported a revenue miss in the second quarter amid weakening demand. The company posted $348.4 million in revenue last quarter, short of the $374.3 million anticipated by analysts polled by FactSet. Maxeon forecasts revenue to range between $280 million and $320 million in the third quarter, while analysts called for $394.8 million.
China-based companies — The U.S.-traded shares of Chinese companies tumbled after Chinese property giant Country Garden issued a profit warning amid a decline in real estate sales, adding to negative sentiment surrounding China’s economy. JD.com and Alibaba lost 5.2% and 3.5%, respectively. Nio declined 2.6%. 
Wynn Resorts — The casino operator’s shares retreated 3.5%. The decline comes after shares rose nearly 3% in the previous session on the back of the company’s earnings announcement. Casino and hospitality peer Caesars Entertainment lost nearly 3% in sympathy.

Krispy Kreme — The doughnut maker popped 4.1% after JPMorgan reiterated its overweight rating, noting that shares are cheap.
Coinbase — The crypto exchange’s stock dipped 2.8% after Mizuho reiterated its underperform rating on the stock. The Wall Street firm said retail crypto traders are flocking to Robinhood to trade cryptocurrencies and away from Coinbase.
Tapestry — Shares gained 1.3% Friday, partly recouping losses of 16% from Thursday’s trading session. Tapestry announced Thursday morning it would acquire Capri Holdings in an $8.5 billion deal. 
Kura Oncology — The biotech company’s shares rose 7.4% after Bank of America initiated coverage of Kura with a buy rating in a Friday note. 
DigitalOcean Holdings — Shares added 2.2% following an upgrade from Morgan Stanley to equal weight from underweight. The firm said its underweight thesis on DigitalOcean has largely played out.
— CNBC’s Alex Harring and Yun Li contributed reporting. More

Optimism about the potential of AI to drive future profits has powered the tech-heavy Nasdaq Composite to gains of more than 31% year to date.
Nvidia stock closed Thursday’s trade up 190% so far this year, while Facebook parent Meta Platforms has gained more than 154% and Tesla 99%.
In a recent research note, Morningstar drew parallels between the concentration of huge valuations and the dotcom bubble of 1999, though Coop said the differentiating feature of the current rally is that the companies at its center are “established giants with major competitive advantages.”

An AI (Artificial Intelligence) sign is seen at the World Artificial Intelligence Conference (WAIC) in Shanghai, China July 6, 2023. 
Aly Song | Reuters

Market participants are “overconfident” about their ability to predict the long-term effects of artificial intelligence, according to Mike Coop, chief investment officer at Morningstar Investment Management.
Despite a pullback so far this month, optimism about the potential of AI to drive future profits has powered the tech-heavy Nasdaq composite to add more than 31% year-to-date, while the S&P 500 is up by more than 16%.

Some analysts have suggested that a bubble effect may be forming, given the concentration of market gains in a small number of big tech shares. Nvidia stock closed Thursday’s trade up 190% so far this year, while Facebook parent Meta Platforms has risen more than 154% and Tesla 99%.
“If you look back at what’s happened over the last year, you can see how we’ve got to that stage. We had the release of ChatGPT in November, we’ve had announcements about heavy investment in AI from the companies, we’ve had Nvidia with a knockout result in May,” Coop told CNBC’s “Squawk Box Europe” on Friday.
“And we’ve had a dawning awareness of how things have sped up in terms of generative AI. That has captured the imagination of the public and we’ve seen this incredible surge.”

In a recent research note, Morningstar drew parallels between the concentration of huge valuations and the dotcom bubble of 1999, though Coop said the differentiating feature of the current rally is that the companies at its center are “established giants with major competitive advantages.”
“All of our company research suggests that the companies that have done well this year have a form of a moat, and are profitable and have sustainable competitive advantages, compared with what was happening in 1999 where you had lots of speculative companies, so there is some degree of firmer foundations,” Coop said.

“Having said that, the prices have run so hard that it looks to us that really people are overconfident about their ability to forecast how AI will impact things.”
Drawing parallels to major technological upheavals that have re-aligned civilization — such as electricity, steam and internal combustion engines, computing and the internet — Coop argued that the long-run effects are not predictable.
“They can take time and the winners can emerge from things that don’t exist. Google is a good example of that. So we think people have got carried away with that, and what it has meant is that the market in the U.S. is very clustered around a similar theme,” he said.
“Be mindful of what you can really predict when you’re paying a very high price, and you’re factoring in a best case scenario for a stock, and be cognizant of the fact that as the pace of technological change accelerates, that also means that you should be less confident about predicting the future and betting heavily on it and paying a very high price for things.”
In what he dubbed a “dangerous point for investors,” Coop stressed the importance of diversifying portfolios and remaining “valuation aware.”
He advised investors to look at stocks that are able to insulate portfolios against recession risks and are “pricing in a bad case scenario” to the point of offering good value, along with bonds, which are considerably more attractive than they were 18 months ago.
“Be cognizant of just how high a price is being paid for the promise of what AI may or may not deliver for individual companies,” Coop concluded.
Correction: This story was updated to reflect the year-to-date change of the Nasdaq Composite stood at 31% at the time of writing. More