There is something wrong with the bailout

Image courtesy of NYT

I am having trouble reconciling the numbers here:

Goldman Sachs 2007 bonus pool: 18.8bn USD

Warren Buffet to invest 5bn USD in Goldman Sachs with option to invest another 5bn USD more, apparently to give the company a 'vote of confidence'.

Goldman Sachs to receive part of 250bn USD capital injections from the US government.

I wonder what GS bonus pool for 2008 would be? Why didn't these GS folks save more for a rainy day - these guys were supposed to have foreseen the subprime meltdown!

Winners' Curse

When the trio of RBS, Fortis and Santander won the US70 billion breakup of ABN Amro last year (during a period where almost every bank was getting pissed drunk on leverage), few would have envisioned the state they have ended up in now.

RBS suffered an almost 65% drop in its share price since the announcement of their take over of ABN investment banking services, on fears that the bank would have to find it increasingly difficult to boost its capital reserve ratio.

Fortis, a European banking and insurance giant had to be bailed out by the governments of the Netherlands, Belgium and Luxembourg. And worst still, as part of the plan, Fortis would have to sell off their stake in ABN Amro, most likely at a third of the price they had originally paid.

Only Santander remained in the clear, having sold part of their stake in ABN at a profit of USD 1 billion and keeping the South American operations. Currently, they are buying up assets on the cheap in UK - Abbey, A&L and B&B.

Indeed, a victorious bid in an auction may be great for the ego, but winners beware, the curse can be deadly.

Were MiniBonds/DBS Notes 'Safe' ?

Pictured above is DBS credit ratings.

I am trying to put myself into the shoes of the Bank's relationship managers who sold the MiniBonds or the DBS Notes. What would I have said back in 2007 given the market conditions?

Back in 2007, Lehman's Long term credit rating by Fitch is AA- (DBS is now AA-). So the rating agencies are assigning an equal probability of default to DBS and Lehman back in 2007. To put it simply, placing a fixed deposit with DBS would be just as risky as selling protection on Lehman (if we discount the Deposit Insurance Act in Singapore).

So what does an AA- rating by Fitch mean? On their website, it says:
Very high credit quality. 'AA' ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

So to a lay person (no access to credit market data), given the information available in 2007, it is not impossible for one to judge that Lehman was indeed a 'safe' counterparty and the risk undertaken then was miniscle.

The turn of events over the last month was truely astounding. To this date, Lehman's credit rating by S&P is still A, four notches above junk status.

Retail Investors - More handholding needed?

The current debacle concerning retail investors due to the Lehman's bankruptcy brings to my mind a conversation I overhead in August last year.
Was on the trading floor of a Scandinavian bank back in August 2007 when the credit crisis first reared it's ugly head. Global equities suffered a 15% drop, credit markets froze, the bank's corporate clients started getting jittery and began calling in, presumably taken a larger than expected hit.

Head Trader: What are we gonna do with this xxx (client's name). They have been calling us non-stop.
Chief Trader: What do they expect us to do? Hand hold 'em? They are big boys and markets can go down. They should know the risks they are taking.

Do retail investors need hand-holding or in some cases, a bailout by citing ignorance? Are retail investors really that gullible? If someone gives more money for deposits, shouldn't one ask where the 'catch' is? If something is too good to be true, shouldn't one ask why it is so?

There will always be risks involved when dealing with money. Bonds issued by the Singapore government is good only if the government does not go bankrupt. Fixed deposits placed with a bank is only as good as long as the bank does not go bankrupt. There is always a probability that things will not go the way we expect, which is why we have to be prepared for the worst scenario.

Lehman Bankruptcy - Scenes from IT Ops

I was onsite at a bank today and the IT Operations was slightly more busy than usual due to the demise of Lehman. So what happens when a bank's counterparty fails? Heres' a brief insight from the IT perspective:

a. They stop all payments sent out to Lehman - via their payment systems, SWIFT, CLS, etc.
b. They start filtering out Lehman trades in their P&L reports or meddle with the reports to reflect restructuring fees

There was relatively calm across the department as they appeared ready for this eventuality and were reporting back to work day before yesterday. Not exactly sure what's happening in their trading desks or the risk departments, must be quite a scene ;-)

Temasek - A closed-end sovereign wealth fund?

Was just reading Temasek Holdings annual report for year ending March 2008. A couple of notable insights into the workings of this investment vehicle whose sole shareholder is the MOF (Ministry of Finance):

a. It's becoming harder and harder to make money - first time in five years where Temasek had a negative wealth added figure (Wealth added is a benchmark which measures the return against cost of capital) Bearing in mind that as the portfolio value increases, the absolute cost of capital increases as well, so Temasek has to make even more money in order to beat this benchmark.

b. Divestment out of 'emerging' Asia into 'stable' Europe. Guess the Asian economies are looking a tad forthy?

c. MOF does not inject capital regularly but instead on an ad-hoc basis. I wonder if Temasek allows any withdrawal of funds by MOF? From the report, it seems that MOF has never drawn-down any funds from Temasek so it could imply that the capital injections by MOF are excess funds after paying down CPF, pensions, dividends?

d. Would Temasek be better off paying a bigger dividend (to Singaporeans) if there are no worth-while investments, rather than chasing investments which on hindsight look a bit too expensive at the current climate?

The investment report is definitely worth a read - especially if you want some insight on Temasek's investment strategies, based upon value investing principles.

Reykjavik, Iceland - My First Marathon

Yeap that's me across the finishing line. Thanks darling!

31 years, 8 months later, I finally fulfilled my dream of finishing a marathon. Braving the notoriously wet and windy weather in August in Reykjavik, Iceland, I trudged wearily across the finishing line, with a time of 4hrs 38mins.

This accomplishment is dedicated to my loving wife, a logistic supremo navigating the course effortlessly to provide much needed replenishment both for the mind and my body.
Darling, you were never far from me in this 26mile journey.

And not forgetting my family in Singapore, where in my darkest moments, the thoughts of you all carried me further than I could imagine.

The RMT workers go on strike

On days like this, I wish I was travelling with them.
Let's hope the eurostar is not affected, else I will have to swim back to London...

Olympics Medals Count - A matter of perspective

From the BBC:From the NY times:

Terminal 5 is working

Gallant efforts by British Airways to dispel the negativity surrounding Terminal 5. Interesting to note that this effort is piloted by BA and not BAA Heathrow.

The Great Britain Sale - Every Pound has to go!!

Over the last couple of days, the sterling pound dropped like a sinking anchor due to some really negative remarks by the Bank of England in the latest inflation report. The UK's GDP main contributors are financial services and construction, both are in a deep funk right now and is looking to get even worse. With the weakening pound, imports will get even more expensive, exacerbating the rate of inflation.
When wife and I came over, the GBPSGD exchange rate was 3.10 - Now, it has dropped over 20% to 2.63. Ouch!

Room for improvement - Straits Times Interactive

Have been taking advantage of the two week free passes to the Singapore Straits Times online website to do some reading up. Unfortunately the whole experience was quite a let-down.

Having been fed high quality content websites like the NY times or the bbc online, I found it difficult to appreciate the online version of the Straits Times.

Some comments about the Straits Times online edition:

a. I cannot fathom why they wanted a print version of the SS. Hardly anyone would want to zoom in/zoom out of a 15inch computer screen to see a print version normally printed in broadsheet size. I found the whole experience tedious and was put-off by all the print-ads. My guess is that this is more likely for advertisers - SPH is using this as another avenue to entice potential advertisers.

b. Un-customisable front page. Start working on allowing users to customise what they want to see on the front page! Well, at the very least, allow a change of colours?!!!

c. Content, Content, Content. Organising the available content into a user-friendly user-platable online platform requires much thought and design. Here the online SS fails miserably - both in terms of the quality and the delivery. Quality-wise, well we can acknowledge that our writers appeal only to a relatively small market so it is acceptable. But delivery-wise, surely we can take a leaf out of the other websites? Why can't they embed streaming video together with the news article instead of directing me to another website?

d. Integration, Integration, Integration. The online SS content is distributed across various 'hip' sounding platforms like RazorTV, Stomp, Urban, DigitalLife, etc. To me at least, it is all very confusing. I want to read articles relating to lifestyle and I find content distributed across RazorTV, Stomp and Urban. They should be integrated into a single access point for the online user.

A poor effort indeed. Try harder Straits Times. Take a leaf out from BBC and NY Times.