Tuesday, September 30, 2008

Selamat Hari Raya

TARPaulining All Over

I think they got the name wrong in the first place, that's why it did not get passed. TARP or Troubled Asset Relief Program, it sounded like tarpaulin, the heavy duty netting for lifting heavy goods onto the ships ... no wonder la, the safety net has too many gaping holes in them.

1) Seriously, this will bring back a tighter plan, one that is more accountable and responsible - so, gotta be good right.

2) The original plan did not specify at what price levels will the fund buy the distressed assets at. If they are buying at market, its no use to the banks and financials because it does not add to their capital base. Its the capital that needs to be enlarged. Hence they have to buy at higher than market prices for the whole thing to make sense, or don't buy the assets but give insurance for the assets as a major comfort factor.

3) The biggest obstacle has to be that the naysayers do not want the fund to buy these assets.

4) The release in batches is good to maintain a sense of integrity to the whole process. Shows that the team is managing the lending/injection well before given new parcels of fund. $250bn first, then another $100bn if results are positive. Plus the government will have the option to block the remaining $350m. This will send the message of more accountability at all levels.

5) The other message to the markets is that the US government will NOT just roll over in any future financial crisis. The major financial firms will now know that they cannot simply knock on the doors of Fed or Treasury to help them get rid of the mess they may create in the future. That is very clear.

6) There probably will be structured equity exposure to companies that take money from the fund as the fund is likely to be paying higher than market prices for the assets.

7) The mark to market accounting may be the pink elephant in the room. The rule may be suspended for the time being so that financials which sell those assets may not need to write down the full amount, which would have reduced their capital availability. The rule may be suspended till 2010 (when the fund expires) but only for those instruments affected and taken up by the fund. This seemingly inane accounting move actually may lift the gloom and difficulty of rescuing the affected companies brilliantly by just the stroke of an accounting entry.

All in, its actually not that bad that the bailout fund was voted down, although I did not expect that at all. A tighter second plan will send the right message and drill down on proper and responsible restructuring plans and ramifications. The fact that major equity markets may have lost 5%-8% may actually be good. When the second plan is approved, regaining just 3%-4% of what was lost may then be a big sigh of relief.
Still, its a very long road for equities in general. Not yet to get back in.

p/s photos: Mami Yamasaki

Oops, Iron Ore Dips

As I have highlighted a few times, iron ore prices, which are not traded on a daily basis, is a very good indicator of real demand and health of an economy, especially in property and construction. I was led to believe the trend is still firm when BHP and Rio Tinto got 93% year on year hikes for their iron ore a couple of months back. The recent deal signed with Vale caused me to change my views.

The head of China's leading steel company says the Chinese economy and steel industry are both "heading for a downward slide", as hopes fade that China can insulate Australia's resource-dependent economy from the widening global downturn. The comments by Baosteel's chairman, Xu Lejiang, coincide with new evidence that a contraction in Chinese building construction is seriously crimping demand for iron ore. "The economy is heading for a downward slide, so the steel industry is certainly heading for a downward slide," Mr Xu said at a Baosteel conference in Shanghai.

China recently emerged as the engine of the global economy after seven years of uninterrupted, accelerating growth. But severe credit rationing by the Chinese Government, which has helped to quell an inflation break-out, has coincided with the worsening global financial crisis to smash the confidence of Chinese real-estate investors and the building plans of residential construction companies. Residential construction accounts for about one-fifth of Chinese steel demand.

The research house Mysteel said yesterday the Chinese steel industry was in recession. Prices for steel products had fallen 15 to 20 per cent since July. The Tangshan spot market price for imported Indian iron ore has plunged below $US110 per tonne, down from $US195 in early July. Yesterday, the falling Chinese demand for imported iron ore had cut Australia-China bulk freight rates to as low as $US13 per tonne, from as much as $US50 midyear.

Reading the Chinese economy is even more complicated than usual because the Government shut down a large proportion of industrial and mining activity across northern China for the Olympic Games. But property sales have declined steadily since early this year and property developers are struggling to raise finance for new projects and to complete existing ones, while China's export sector has been weak since early this year.

Most seasoned analysts remain confident about China's long-term growth trajectory. But the next few months are likely to be bumpy, particularly for companies and sectors linked to its building industry. Mr Xu said he had no plans to cut production but warned that steel prices were "plummeting". "A very large number of small steel mills are cutting production," he said. For the first time in more than five years, Chinese buyers can purchase spot market Indian iron ore as cheaply as Australian iron ore on long-term contracts, including freight costs.

Some observers believe contract iron ore prices will fall next year, for the first time in seven years. When yearly contracts were made in February at an 86% increase on last year's prices, China's steel producers were flabbergasted but took the price hike. But that wasn't the end of it. Both Rio Tinto and BHP renegotiated their contracts a couple of months back for even higher yearly percentage increase. Has the tide changed?

The latest indicator was a couple of weeks back when steelmakers in China just announced that Vale, the world's largest iron ore producer, wants to raise prices only 13% above the company's 2008 contract prices. The tide has certainly changed. The critical part was that Vale's share price eased significantly following the news - indicating that demand and hike potential were lesser than expected. Chinese steelmakers are now buying their iron ore from Vale, not only at lower prices than Western companies were paying, but also at lower prices than Rio Tinto and BHP Billiton were charging. Very significant indeed.

While I think the mid term outlook for steel and materials prices would be affected on the downside, I do think that Beijing is turning on the tap as I expect a few rapid rate drops in SRR and BLR in the coming months. However, the whole process could take at least 6 months before projects get re-started and things get re-ignited there. Last word, stay out of building materials for the mid term.

p/s photo: Nguyen Thuy Lam

Monday, September 29, 2008

Petaling Street Hawkers Calling You Back With Deeper Discount!

Maybank had been due to complete its purchase on Friday of a 55.5% stake in BII, for US$1.5 billion. Maybank stood to lose more than 400 million ringgit if it should walk away from the deal. The regulator "changed" the rules for the deal when it come to approving the deal. The changes alter the deal strategy significantly.

I DID NOT HEAR OF SELLERS THEN OFFERING TO renegotiate the deal, or return the deposit if Maybank wanted to walk away, they held onto the terms of the deal.
Since then the share price of BII has fallen enormously. NOW THE SELLERS OFFERED to reduce the deal by 480 million ringgit. The rebate is more than the 400 million ringgit deposit Maybank stands to lose by walking away from the acquisition yesterday.

Moral of the story, how many idiots are running around in this deal? Why do the idiots think there are stupider idiots running around as well in this deal?

Bank Negara had previously blocked the acquisition after Indonesian regulators said Maybank would have to sell part of its stake in the future to comply with new rules designed to raise the shareholdings of Indonesian investors. The central bank then gave the deal the green light on September 16 after Indonesia's capital markets regulator agreed to extend the deadline for Maybank to cut its stake. In the latest move, it told Maybank that the terms needed to be revised – that is, the price reduced – because of turbulence in the global financial markets.

The concern of investors and also Bank Negara Malaysia (BNM) is that Maybank would end up losing a pile if it were to pare down its stake by 20% within two years. This is because it is acquiring the shares at Rp510 while it is less than Rps330 now.

Maybank said in a statement dated Sept. 25 the Malaysian central bank ordered it to reduce the price or scrap the transaction, sparking a dispute with Indonesian authorities and a record slump in Bank Internasional's share price. Temasek said Maybank first asked for a one-month extension and a price reduction on Sept. 24, which it turned down a day later. It was informed of the objections by Bank Negara, or the central bank, on Sept. 25 at 11:32 p.m. local time, it said.

Khazanah Nasional Bhd., Malaysia's sovereign wealth fund, is paying 2.5 times the book value of PT Bank Niaga and three times book for PT Bank Lippo as it buys the remaining shares of the two Indonesian banks in a proposed merger. Khazanah and its unit, like Temasek, are either selling one of the two banks they own or merging them to meet an Indonesian central bank deadline limiting ownership to just one local bank by 2010. (Maybank's purchase price for BII was 4.7 times book value, which was a lot more than the 1.98 times book value of Indonesia’s leading bank, Bank Mandiri, and of Maybank's own price-to-book multiple of 2.3 times.). Bank Internasional's shares traded at 310 rupiah yesterday, compared to the deal price of 510 rupiah.

''You can't do this,''
Achmad Fuad Rahmany, chairman of Indonesia's market regulator, said in an interview in Jakarta yesterday. Renegotiating the price ``will cause losses to investors.'' OH YES WE CAN, just like the way you enforced a "selling down clause" in your approval for the Maybank deal. That clause basically altered the strategic value behind the deal. The deal terms may be agreed upon, but always upon the deal being approved by the relevant authorities. Now the authorities have "materially changed" the strategic value of the deal. Maybank can walk away and lose their deposit. What do you mean "you can't do this", Encik Achmad???

When Maybank was faced with the embarrasing situation of losing the deposit for having to walk away - the sellers DID NOT offer a way out for Maybank, knowing full well that Bank Negara was making life hell for Maybank with the additional clause inserted by the Indonesian authorities. Maybank was getting slammed (correctly) for not tightening the deal terms (e.g. deal off if approval is not gotten from the Indonesian authorities, or if there are conditional "changes" to the deal when being approved by the Indonesian authorities).

Make no mistake, i am not siding with Maybank here - in fact the people responsible for the deal should sent back to school.

So to the buggering sellers offering the 480 million ringgit discount - go fly my wau! Too little too late.

Maybank, take your medicine and walk away, lose 400 million ringgit OK what... but surely SOME BLOODY heads must roll - who were the advisors, who were the legal advisors, who were the managers in charge of negotiating the deal???

Temasek and Kookmin, go find your Alan Bond scalp somewhere else!

... and its a celebratory Raya at Bank Negara after all...

p/s photo: Jamie Yeo

Selamat Hari Raya

The exodus has begun. Drive safely.

Sunday, September 28, 2008

Goldman Sachs & Nomura's Strategy

Finance Asia: As Goldman Sachs exits stand-alone investment banking, Nomura doubles down on the model by buying the Lehman Brothers franchise in Asia and Europe.

Who is taking the right approach?
Some observers argue that the high-leveraged investment banking era is over, and that Goldman Sachs has made a graceful exit from stand-alone investment banking to a bank holding company (BHC) model at just the right time. If they are right about Goldman, it would seem difficult to be bullish on Nomura’s expansion of that same investment banking model in Asia and Europe.
The weakness of the investment banking model embodied by Goldman Sachs and Morgan Stanley is nicely summarised in the September 20 issue of The Economist as stemming from: the higher risk of insolvency, due to higher leverage and the reliance on the short-term wholesale markets; the requirement to mark-to-market; and weaker future demand for their services, especially in structured finance.

Reiko Toritani, chief banking analyst at Fitch Ratings in Japan agrees: “investment banking is facing difficulties due to an overall reduction in risk appetite and a reduction in the leverage to stimulate returns. Morgan Stanley and Goldman have had to become more risk averse after being forced to change to bank holding companies (BHCs), and by more difficult markets," she says.

Goldman’s woes seem to reflect those problems. The bank has gone through an expensive capital raising exercise with Warren Buffett of Berkshire Hathaway. Buffett will invest $5 billion in perpetual preference shares with a 10% annual dividend and retain an additional $5 billion worth of warrants. And on Wednesday, the bank raised another $5 billion through an accelerated book-build.
BHCs are closely regulated by the Federal Reserve, and leverage levels will be capped closer to commercial bank levels (around 10 times for the sector, compared to 30 times for the non-commercial bank sector pre-crisis). That will make it hard to maintain previous earnings levels.

The exit of Morgan Stanley and Goldman leaves Nomura as the last major stand-alone investment bank in the world. Nomura is fiercely proud of its independence from Japan’s mega-banks, and it is likely that it is hoping its raid on Lehman Brothers will give it the international scale to sustain that independent model. The question is, has Nomura just put off the fateful day when it is wrapped in the arms of a mega-bank, or at least changes its status?

One sceptic of the stand-alone model points out how close even Goldman may have come to disaster, despite its high reputation.
“Goldman has a similar business model in many ways to Lehman and Bear Stearns. It’s a tribute to its franchise and mystique that it managed to retain investor confidence,” he says.

One could argue that Goldman played its cards wrong and that it could have avoided its exit from stand-alone investment banking by raising capital much earlier. Indeed, the firm famously made a lot of money shorting the mortgage-backed market in 2007 and early 2008. Goldman must have understood the negative macro-economic implications of the development of these instruments, and should have spent less money on the famously lavish bonuses, and more on plumping its equity cushion.
But, says a former Goldman banker “not paying bonuses (almost a year ago) would have resulted in people leaving the firm; raising capital would (even though it would have been cheaper then than now) have sent a danger signal to investors at a time when sentiment was jittery.

Raising money now from Buffett is the right thing to do, as is adopting the BHC model. People are more accepting of the need to do so, and it will help the firm ride out the downturn,” he says.
It isn’t clear if there is anything preventing Goldman from reverting to independent status when it finds the right moment.

In the meantime, over in Tokyo, Nomura has taken the opposite tack. It saw some investment banking assets going cheap and couldn’t resist. The $225 million Nomura reportedly spent on the Lehman operations in Asia, and the ‘nominal price’ paid (according to senior Nomura advisor Sadeq Sayeed, as quoted by Bloomberg) for its European operations, is low – and buying cheap is always the best hedge.

In addition, Nomura has bought people and IT platforms, and not assets or liabilities.
Yet the Nomura strategy looks paradoxical: it is buying into an investment banking model which has been abandoned by arguably its finest exponents. Can Nomura turn it around? That, says Takeo Sumino, a managing director responsible for private equity at Nomura Securities in Tokyo, is not the right question. “We are not trying to be like Goldman or Morgan Stanley. We are seeking to return to the days of the ‘independent, trusted advisor.’ We are emphasising the traditional investment banking model - before it was transformed by Goldman and others using high leverage and high risk.”

He’s not alone in this view. Says David Marshall, head of Fitch Ratings in Hong Kong: “securities brokerage and related services will still be needed in future, as will arranging sales of corporate debt and equity. Provided they maintain conservative balance sheets and plenty of liquidity - which in practice securities firms in Asia tend to do - they are much less vulnerable to liquidity problems than the highly leveraged US investment banks proved to be.”
Nomura’s Sumino reinforces his point by arguing that Goldman was moving its focus away from “the capital markets, advisory, and wealth/asset management business - those traditional investment banking businesses - and was increasingly focusing on the capital-intensive proprietary trading business, similar to the hedge fund and principal investment businesses, and also close to the private equity business. The consequences of that new strategy led to a relatively highly leveraged balance sheet.”

In addition, Sumino says “unlike US I-banks, we will not be trying to compete with hedge funds and the private equity funds and this should reassure our client base.” Sumino says that one of the main advantages of Nomura’s model is that “the role of the trusted advisor becomes all the more important at a time when commercial banks have investment banking operations. They can use their balance sheets to unduly influence their corporate clients. We can provide an alternative service and independent advice. As the last remaining independent investment bank, we can provide a special service to our clients.” A serious issue concerns the 5,000 new staff Nomura has acquired.

The Lehman staff, accustomed to the higher leverage, high-risk model may not take kindly to Nomura’s more conservative approach. Privately, sources at Nomura acknowledge this, but say they hope they can retain as much talent as possible, even if the Lehman staff find their trading capital cut back considerably. It is certainly difficult to see this marriage working easily.
Even granted Nomura (the plan is to drop the Lehman name) sticks to the ECM, DCM and M&A businesses, how profitable can it be in today’s environment? Those areas are all suffering in the ongoing credit crunch: indices across the region are falling and business activity is drying up due to a lack of positive news.

For Fitch’s Toritani, however, this is not a sign the Nomura strategy is bad. “It just means the payoff will take time. (It will come) during the next upturn, rather than immediately.”
One might argue that Nomura’s financial position is not that strong in the first place either, and it has $6 billion in subordinate debt and loans to service. Nomura lost $67 million last year, and its stock price has dropped by almost half from its 12-month peak. It can’t afford to lose money for too long.

However, Sumino counters by pointing out that Nomura is ‘well capitalised, with relatively low gearing and extensive foreign experience."
In addition, he believes synergies can be extracted from the combined business: “We have the best brokerage client base in Japan – and they have an appetite for uridashi bonds (foreign currency bonds held by Japanese investors) as well as foreign equity. We will, of course, explore cross-fertilisation between our domestic platform and our international platform.” Shinichi Tamura, banking analyst at Deutsche Securities in Japan sees other opportunities for Japanese banks in Asia. “The Japanese will likely not be replicating the ultra-high ROE (return on equity) model used by Western banks in Asia. Rather it’s possible they will acquire operations, as in the case of Nomura and Lehman, to service the international operations of their Japanese corporate clients. Japanese firms need to match assets and liabilities in non-Japanese markets and carry out M&A. Such an operation can help them do that.”

If Nomura becomes a successful and genuine ‘trusted adviser’ internationally, it will be ironic for Wall Street banks. Before the go-go culture emerged following the deregulation of the banking industry in the UK and the US in the 1980s, that was their role too. They then moved away from relationship banking to the more profitable (at least in the short term) transactional banking, as described in Jonathan Knee's 2006 The Accidental Investment Banker.

So who is smarter then? The question is tongue in cheek, of course. But at the moment, Nomura looks better placed. They are buying assets rather than trimming their balance sheets, and they are expanding their operations rather than laying people off. They have not made the profits of Goldman, but their long term strategy is clearly articulated. At the moment, that’s not the case with Goldman: Goldman has its reinvention to the next stage of investment banking still before it.

p/s photos: Hannah Tan

Saturday, September 27, 2008

Reassessing Indonesia (Part 1)

Malaysia and Singapore have a unique relationship. We are like squabbling in-laws, but we know we cannot and will never divorce each other.

You live with the tension and exchange of barbs. The ties between Malaysia and Indonesia are quite different. The animosity at times can boil over. Grudges are harboured and allowed to fester. There is a genuine fear of, and sometimes loathing for, each other.

Most of that is at the political and policy levels. Many Malaysians and Indonesians love to visit each other’s country. Indonesia to Malaysians in general, is a bit of an underachiever. Naturally, Malaysia to Singaporeans, is also a bit of an underachiever.

It’s time to reassess Indonesia. In many ways, the country is moving in the right direction business-wise.

Recently, Qatar and Indonesia set up a US$1bil fund to invest in energy and infrastructure. Qatar is the world’s largest exporter of liquefied natural gas (LNG), while Indonesia is third. Both countries are also members of the Organisation of the Petroleum Exporting Countries (OPEC), though Indonesia has just opted out.

Qatar will contribute 85% of the funds for the new fund and Indonesia the remainder. Qatar’s state investment fund, the Qatar Investment Authority (QIA), has teamed up with Abu Dhabi state enterprise International Petroleum Investment Co in March to launch a US$2bil fund.

The QIA has also set up joint funds with Oman and Dubai.

Indonesia is pro-Western, much like Malaysia, and could be a model for a modern Muslim nation, provided nationalist Islam (not radical Islam) doesn’t become too powerful a force in Indonesian society.

Following the aftermath of the Sept 11 attacks, many were outspoken on the various failings of Muslim nations. Indonesia is a dominantly Muslim nation, with the largest Muslim population in the world, but it also has small but strong Hindu, Christian and Buddhist communities.

Malaysia has generally enjoyed a better perception in the eyes of international travellers and global investors.

Indonesia has had to contend with thorny events such as the Bali bombings and the East Timor massacre. If investors are to be influenced just by these events, they would be doing Indonesia and themselves a disservice.

There is still pockets of “nationalistic fervour” among the political voices in Indonesia.

Health Minister Siti Fadilah Supari commented in April that regional governments in Indonesia should be on their guard whenever they dealt with international investment proposals.

She said the following should be considered by provincial governors and regents in respect of foreign investment plans:

· Would the international investors take control of Indonesian resources?

· Would the foreigners be prepared to be on an equal footing with Indonesian partners, or would they adopt a lordly, colonialist stance?

· Would a particular foreign investment benefit Indonesians or harm them?

· To what extent would Indonesians gain from the investment? Foreign investors often lie about this matter.

For example, South Kalimantan’s coal needs were less than 1 million tons per year and there was an electricity shortage crisis. Yet, at the same time, 70 million tons of coal was taken out of the province and sold internationally.

Indonesia has been beset by an autocratic regime for a long time. We need to reassess the country now as the country is certainly moving away from the authoritarian system to a more democratic one.

It is still taking baby steps but press freedom and the media’s brutal honesty and bravery has paved the way for a more civil society. This is an important aspect of a decentralised power system, which accords more voice to a wider spectrum of leaders and the disenfranchised.

Meanwhile, according to an AT Kearney study of the top 25 most attractive investment destinations in the world, Indonesia ranks 21st. The rankings for 2007 are based on a survey of 1,000 CEOs around the world. In 2006, Indonesia did not make the top 25. Thanks to a well-respected Finance Minister in Sri Mulyani Indrawati, there has been significant economic liberalisation.

Quasi-monopolies have not been protected and are expected to compete with new foreign companies.

The boom in commodities over the last five years has helped the country infuse more strength into its underlying economy. Indonesia is at or near the top in palm oil, rubber, base metals, coffee and cocoa.

Sustainability of global investments

Corporate investors across all regions are concerned about the sustainability of the global economic order. Is Indonesia the flavour of the month only because of the commodities boom? I think not, as most experts can see a sea of change enveloping the country.

The commodities boom only hastens the benefits of such changes.

The country is confident enough to implement several years of mandated increases in minimum wages. While some industries may have shifted or closed operations because of these new rules, these measures have also forced investors and businesses to move up the value-add curve.

There has also been a decentralisation of budgetary systems, which has allowed local leaders to better manage resources and spending to their localities.

Over the last three years, Indonesia has managed to enjoy more stability politically, in its currency and in economic viability. This lessens the discount on businesses in valuation models, thus resulting in better confidence among foreign investors going forward.

Corruption is still a problem but one can easily see a more transparent era for Indonesia. More bigwigs have been hauled up and tainted politicians have lost their seats with greater frequency.

Major business entities

Since beginning of 2007, there has been more than US$20bil in mergers and acquisitions and capital raising, which drove the corporate sector to new levels.

The corporate sector is no longer dominated by seasoned players from the Suharto era. If you put the top business groups next to Malaysia, the latter pales in comparison.

The Salim group tops the ladder with US$7.3bil (RM24.8bil) in revenues annually and is in agriculture, distribution, property management, financial services and telecommunications in Indonesia, Hong Kong, China and Singapore.

Next is the Sinar Mas group with revenues of US$4.77bil (RM16.2bil), which was forced to sell Bank Internasional Indonesia (BII) following the 1997 financial crisis but has since rebuilt itself in banking with the acquisition of Bank Shinta.

The Sinar Mas group can be said to have been most affected by the 1997 financial implosion as their Asia Pulp & Paper had a staggering debt load of US$14bil. Following years of negotiations and restructuring, the company has thrived. It is also the biggest national player in palm oil, with land bank of more than 1 million hectares.

I could go on and on, but a summary of local companies with annual revenue of at least US$1bil each would be better for now (major assets/annual revenues):

Salim: consumer goods, agriculture/US$7.3bil

Sinar Mas: pulp and paper, agriculture/US$4.7bil

Djarum: cigarette, Bank Central Asia, Cipta Karya Bumi Indah/US$3.7bil

Gudang Garam: cigarette, plantations, paper packaging/US$3.5bil

Bakrie: coal, Bakrie Brothers/US$3.1bil

Lippo: regional property developer, healthcare, financial services/US$2.7bil

Raja Garuda Mas: pulp & paper, plantations, energy/US$2.4bil

Triputra: coal, agro-industry, manufacturing/US$2.3bil

ABC: consumer goods, battery/US$2.1bil

Saratoga Capital: coal, Adaro, palm oil, infrastructure/US$1.9bil

Para: consumer goods, property, mining, financial services/US$1.6bil

Sampoerna: agro-industry, telecommunications, forestry and property/US$1.4bil

Ometraco: animal feed/US$1.2bil

Khazanah Nasional Bhd has a hefty profile in Indonesia. The businesses under Khazanah has an annual revenue of US$1.8bil. Its stakes include those in Bank Lippo, Bank Niaga, Excelmindo Pratama and infrastructure joint ventures (JVs).

Surprisingly, Temasek’s holdings in Indonesia has only a total annual revenue of US$1.5bil. It has stakes in Bank Danamon, BII, and various property and energy JVs.

Still, the key point here is the number of business entities that have substantial revenues. How many Malaysian businesses have combined revenue of more than RM3.4bil annually? Size matters, especially when they are headed in the right direction with the proper masterplan.

State-owned enterprises (SOEs)

The government has also planned to privatise a number of SOEs, which in itself is a grand plan to better manage resources, inject competition and promote efficiency in government. All in, 37 SOEs have been identified for privatisation and/or restructuring. There has been some delay in that certain factions of the government have been delaying the process.

Last year, 10 SOEs were scheduled for privatisation. However, only five are now ready to go to IPO this year: Krakatau Steel, Bank Tabungan Negara, and National Plantation Enterprises III, IV and VII. Needless to say, intense lobbying by the affected SOEs and maybe even “vested interests” must have been a large part of the delay.

Still, it’s hard to deny that the country is moving in the right direction.

p/s photo: Son Ye Jin

Friday, September 26, 2008

AIG's Love Letter

Surprised to get this in the mailbox. I know they send this out en masse, but still a nice touch to "go to the public" and engage the alternative media. Times have certainly changed.


I hope this email finds you doing well. I know you and the Malaysia-Finance Blog have covered quite closely the unfolding financial market news this past week and I wanted to quickly send you some new information.

I want to share the facts with you and your blog’s readers about AIG’s strong commitment to Asia - and to all of our insurance policy holders globally.

AIG’s Chairman and CEO Ed Liddy made the company’s position clear when he reaffirmed that our insurance assets are “sacrosanct.” Take a look at his CNBC interview here: http://www.cnbc.com/id/15840232?video=864181431&play=1

In addition, The New York State Insurance Department recently released a statement reassuring policy holders about the security of their AIG policies. According to the State of New York Insurance Department, “AIG’s insurance companies are financially strong and fully able to honor all policyholders' claims.” The link to the press release can be found here: http://www.ins.state.ny.us/press/2008/p0809222.htm

Yesterday, Joel Ario, the Insurance Commissioner of the Commonwealth of Pennsylvania released a statement declaring that his department’s most recent examination of the AIG Companies that are domiciled in Pennsylvania are financially sound and that policyholders’ insurance policies are safe. The link to that press release can be found here: http://www.ins.state.pa.us/ins/cwp/view.asp?A=11&Q=549447

Additionally, as you most likely have read, AIG has signed a definitive agreement with the Federal Reserve Bank of New York. This important step allows the company to move forward in implementing our strategic initiatives

Finally, I know your readers are following this story literally minute by minute as it unfolds. I’ll continue to post more information in the days and weeks ahead.

Peter Tulupman

AIG Media Relations

70 Pine St., 2/72

New York, NY 10270



p/s photo: Rianti Cartwright

Financials Market Cap Decimated

Many of you would have received the "scary" email on how financials have been decimated in value. When there has been a bloody earthquake, its easy for bystanders to shout, "look at the many dead bodies". Is that a sincere warning, or just panic stricken obsevers talking? Gor those who missed the email, here's the gist:

Here's a list of the losses in market capitalization for 25 of the biggest financials since their rough peaks in October 2007. Keep in mind that these companies are not exactly emerging small cap coys but rather blue chips.

These losses include:

* A I G -Then: $178.8 billion... Now: $5.46 billion. Down 96.95%
* Bank of America -Then: $236.5 billion... Now: $123.4 billion. Down: 47.82%
* Citigroup -Then: $236.7 billion... Now: $76.34 billion. Down 67.75%
* Merrill Lynch - Then: $63.9 billion... Now: $30.2 billion. Down 52.74%
* Fannie Mae - Then: $64.8 billion... Now: $0.45 billion. Down 99.3%
* Morgan Stanley - Then: $73.1 billion... Now: $41.1 billion. Down 43.78%
* Wachovia - Then: $98.3 billion... Now: $19.44 billion. Down 80.22%
* JP Morgan Chase - Then: $161 billion... Now: $130.2 billion. Down 19.13%
* Capital One Financial - Then: $29.9 billion... Now: $16.9 billion. Down 43.48%
* Washington Mutual - Then: $31.1 billion... Now: $3.64 billion. Down 88.3%
* Lehman Bros. - Then: $34.4 billion... Now: $0.80 billion. Down 97.6%
* Goldman Sachs - Then: 97.7 billion... Now: $40.6 billion. Down 58.7%
* Wells Fargo - Then: $124.1 billion... Now: $111.25 billion. Down 10.35%
* National City - Then: $16.4 billion... Now: $2.8 billion. Down 83%
* Fifth Third Bancorp - Then: $18.8 billion... Now: $7.9 billion. Down 57.6%
* American Express - Then: $74.8 billion... Now: $37.5 billion. Down 49.87%
* Freddie Mac - Then: $41.5 billion... Now: $0.16 billion. Down 58.7%
* Suntrust Banks - Then: $27 billion... Now: $16.07 billion. Down 58.7%
* BB&T - Then: $23.2 billion... Now: $18.4 billion. Down 20.69%
* Marshall & Ilsley - Then: $11.6 billion... Now: $4.48 billion. Down 61.3%
* Keycorp - Then: $13.2 billion... Now: $5.68 billion. Down 56.97%
* Legg Mason- Then: $11.4 billion...Now: $4.96 billion. Down 56.49%
* Comerica- Then: $8.3 billion...Now: $4.74 billion. Down 42.89%
* Countrywide Financial: Then: $11.1 billion...Now: $0.00 billion. Down 100%
* Bear Stearns- Then: $14.8 billion...Now: $ 0.00 billion. Down 100%

Together these 25 companies alone have lost investors a total of $992,690,000,000 over the last 12 months... or nearly 1 trillion dollars. The email ends with the smart warning to keep buying gold and keep USD.

The above warning is too broad-stroke for my liking. Yes, we have seen great wealth destruction. The basis for the destruction are two-fold:

One, the leveraged exposure to derivatives relative to capital at risk. Some went as high as 25x leverage, hence when these instruments got whacked by 50% of more, your capital may almost disappear. Many of these are hard to mark to market, which again sent investors and analysts guessing the ultimate carnage.

Two, its a crisis of confidence as fellow financial firms do not even trust dealing with each other. There is still ample liquidity but no one is willing to lend to anybody, thus the Fed and Treasury had to step in, they did not want to, but they have little choice.

Are any of the major firms still in trouble or in danger of collapsing like Lehman and Bear Stearns? Well, many have missed a critical indicator. Back in September 14, 2008 ten of the world's largest banks will form a fund with a value of $70 billion, each putting in $7 billion to help restore lending to troubled firms. The banks are Bank of America (BAC), Barclays (BCS), Citigroup (C), Credit Suisse Group (CS), Deutsche Bank AG (DB), Goldman Sachs (GS), JPMorgan Chase (JPM), Merrill Lynch (MER), Morgan Stanley (MS) and UBS AG (UBS). You will find that many major banks did not participate. One can conclude that these ten banks are themselves most at risk - hence they are willing to pony up to shore up confidence and hope to buy time and save their own skins. Its actually not so altruistic but desperate.

If you want to know who might fail, well, look at the ten. Some are in more trouble and could not even participate to lend, such as Wachovia.
Of the ten, some are better placed because they have managed to sell more shares or have more capital injections. Goldman Sachs is safe for obvious reasons. JP Morgan is also OK and may actually be buying another firm or two for the right price. Merrill Lynch is now under Bank of America. Bank of America is not completely out of the woods as it now has Merrill's toxic assets, and will need to sell units and shore up capital, but still better placed than most. Morgan Stanley bought a lifeline by selling 20% to Mitsubishi UFJ, but also not entirely safe. Barclays is relatively OK and should be looking to buy one of the major distressed firms.

The European ones have been relatively quiet and may have escaped the carnage by being more global than the rest and having relatively low exposure to toxic US assets. The most at risk still should be UBS. Citigroup is a unique animal. I still think they have grave problems but their banking side is very solid. In fact, during the heightened uncertainty over the last 2 weeks, Citibank has seen an enormous jump in deposits as switched their brokerage accounts over to Citi's bank deposits. The bank is OK, its the investment banking side that is still up in the air.

Following is the list of 10 largest banks in the world in terms of market capitalization size, as released by Bloomberg on February 2008. Market capitalization is a way of measuring the corporate or economic size of a public listed company. The market capitalisation now may be significantly different since then but these are the banking giants. They are the new leaders, will they be able to grab the opportunities in front of them given the gaps created by the financial implosion?

Industrial & Commercial Bank of China, ICBC (China)

ICBC BankThe Beijing based ICBC Bank underwent one of the most remarkable faces of growth barely 2 years after going public, which gives a clear indication of investors’ preference in the emerging China market. ICBC offers a wide range of personal and corporate banking services which include loan, deposit, credit card, underwriting, trading and currency settlement.

ICBC was listed simultaneously on two exchanges - the Shanghai Stock Exchange and Hong Kong Stock Exchange in 2006, making it the first and only company to do so. ICBC has won numerous accolades and awards from various international magazines including Bankers, Global Finance, The Assets and Finance Asia.

Market capitalization - US277.514 billion.

HSBC Holdings (UK)

Earlier this year, HSBC was named as the world’s most valuable banking brand by The Banker Magazine. The bank was incorporated in England and Wales, with its main office located in London. In 1992, HSBC was involved in one of the world’s largest banking acquisition, after assuming full ownership of Midland Bank.

The merger also saw the beginning of HSBC setting up strong market presence, particularly in Europe. Apart from United Kingdom HSBC now also has significant operation in France, Czech Republic, Germany, Ireland, Switzerland, Turkey as well as Malta.

China Construction (China)

The bank was first established as the People’s Construction Bank of China and was changed to the current name in 1996. The bank’s rise to prominence is also helped with the involvement of Bank of America which injected some significant amount of investment for the past few years. In 2005, the China Construction bank landed into a scandal that involved the Chairman of the company, Zhang Enzhao.

Zhang was alleged to have received one million dollars bribe from an American company, which in return asked for an award of contract. Zhang eventually resigned from his post. The bank has more than 13,000 branches across its native country China, as well as active operation in Singapore, Hong Kong, German, Africa, Japan and Korea.

Market capitalization - US165.234b.

Bank of China (China)

Bank of ChinaThe third and final bank from China to make it to the top 10. In China, there is the term referred as the ‘Big Four’ banks and Bank of China is one of them.

Bank of China is the first bank established in the land of the dynasties. In the earlier years, the bank acted as the Central Bank but then its role was replaced and then converted into a full-fledge commercial bank. While the bank has overseas operation in Australia, United Kindom, Canada, United States, Brazil, Japan, Philippines, Malaysia and Korea, the overseas business only accounts for less than 5 percent of the company’s overall revenues.

Market capitalization - US165.087b.

JPMorgan Chase (US)

JPMorgan Chase BankJPMorgan Chase offers investment banking, financial services, wealth and asset management, and private equity. The current entity is a result of a series of mergers, with its original name did not sound anything like the current, which was the Chemical Banking Corporation.

JPMorgan is based in the downtown of New York, Manhattan. Additionally, the investment wing of the bank operates a number of offices around the world, with major presence in the United States, London, Tokyo, Singapore and Hong Kong. BusinessWeek ranked JPMorgan in the Top 10 Best Places to Launch a Career in 2006.

Market capitalization - US159.615b.

Banco Santander (Spain)

Banco Santander BankBanco Santander is the largest bank in Spain, and the second largest in Europe. The bank, which involves in retail banking, asset management and insurance, and global wholesale banking, employs more than 120,000 people worldwide, serving 68 million customers, a figure higher than the whole population of Spain.

Altogether, the group operates in more than 10,000 branches worldwide. The group is also one of the premium sponsors for McLaren-Mercedes F1 team. Banco has strong market presence in Portugal, United Kingdom and in Latin America including Brazil, Mexico, Chile, Argentina, Venezuela, Uruguay, Colombia, Peru and Puerto Rico.

Market capitalization - US109.862b.

Mitsubishi UFJ Financial, MUFG (Japan)

MUFG BankMitsubishi UFJ Financial groups runs The Bank of Tokyo-Mitsubishi UFJ, which is a result of a merger between The Bank of Tokyo-Mitsubishi and UFJ Bank Limited in 2006. The group, which is listed in five stock exchanges - Tokyo, Osaka, Nagoya, New York and London, is presently the largest financial services company in Japan in terms of size of assets.

Headquartered in Tokyo, Japan, the company holds a total asset of US1.2 trillion and is one of the biggest companies in the Mitsubishi Group. MUFG is now headed by the the President and CEO, Nobuo Kuroyanagi, an MIT business graduate.

Final word is that the "scary email" is too broad-stroke. In a proper restructuring process following a bubble implosion, we need to see companies failing. Why so scared? The gratifying thing is the speed with which this is happening, which will mean a swifter return to financial health. What you don't want to see is the Japanese experience where bad debts and bloated assets were not restructured since early 1990s. Till today Japan is still struggling with the "non-restructuring" dragging the economy along. Over the last 5 years we have seen a bit more restructuring in Japan. If only they did what the American are doing now, the economy would have recovered by 1995/1996 easily. It took them 18 years or so to get from 30,000 to 12,000. They could have gone from 30,000 to 10,000 in 2 years and get rid of the excesses and bad debts and recapitalise.

While many are harping on the $700bn fund and how the taxpayers are on the hook for it, taxpayers may actually benefit in two ways: better confidence so that the financial system works again thus eliminating the contagion effects spreading to other non-financial sectors which may result in even more staggering job losses for the broader economy; by pumping in capital now into troubled firms in exchange for higher rates and preference shares, the fund may actually make money after a few years when things normalise. We have to remember amidst all the carnage, a lot of the housing assets are trading at below replacement value, its just that there is no buyer now as fear grips everyone. While there had been a $1 trillion being wiped from the market cap of financials, there are also $7 trillion residing in money market deposits and checking accounts. Its a matter of ensuring the money cycle flows again. You don't want what the Japanese went through - till today there is still massive sums in deposits there, if it does not move (spend or invest) its brings everything to a halt. At the end, chances are good that the $700bn may actually make some money after 3-4 years.

While I think the Fed & Treasury have little choice but to go ahead with the plan, the negative is that we are seeing liquidity being pumped to arrest market falls, which will make us go through the cycle again of asset reflation. What can you do?

p/s photos: Song Jina

Wednesday, September 24, 2008

King Roubini Speakth

By Nouriel Roubini

Published: September 21 2008 17:57 | Last updated: September 21 2008 17:57

Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders.

Like banks, most members of this system borrow very short-term and in liquid ways, are more highly leveraged than banks (the exception being money market funds) and lend and invest into more illiquid and long-term instruments. Like banks, they carry the risk that an otherwise solvent but liquid institution may be subject to a self­fulfilling and destructive run on its ­liquid liabilities. (The known business model is that brokers-dealers run with a 25 to 1 leverage on capital to do their business. Following this debacle, we can expect a tightening on capital leverage, maybe down to 5-6 times. This will make it more difficult to generate fees on limited capital, and will limit the ability to fund deals. I expect the financial industry will be looking to rely more on SWF, private equity and hedge funds to fund any kind of substantial deals. No one can really hope to go it alone.)

But unlike banks, which are sheltered from the risk of a run – via deposit insurance and central banks’ lender-of-last-resort liquidity – most members of the shadow system did not have access to these firewalls that ­prevent runs.

A generalised run on these shadow banks started when the deleveraging after the asset bubble bust led to uncertainty about which institutions were solvent. The first stage was the collapse of the entire SIVs/conduits system once investors realised the toxicity of its investments and its very short-term funding seized up.

The next step was the run on the big US broker-dealers: first Bear Stearns lost its liquidity in days. The Federal Reserve then extended its lender-of-last-resort support to systemically important broker-dealers. But even this did not prevent a run on the other broker-dealers given concerns about solvency: it was the turn of Lehman Brothers to collapse. Merrill Lynch would have faced the same fate had it not been sold. The pressure moved to Morgan Stanley and Goldman Sachs: both would be well advised to merge – like Merrill – with a large bank that has a stable base of insured deposits.

The third stage was the collapse of other leveraged institutions that were both illiquid and most likely insolvent given their reckless lending: Fannie Mae and Freddie Mac, AIG and more than 300 mortgage lenders.

The fourth stage was panic in the money markets. Funds were competing aggressively for assets and, in order to provide higher returns to attract investors, some of them invested in illiquid instruments. Once these investments went bust, panic ensued among investors, leading to a massive run on such funds. This would have been disastrous; so, in another radical departure, the US extended deposit insurance to the funds.

The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years. (This has not happened yet, and I suspect with the US$700bn facility, I doubt there would be a run on hedged funds' leveraged positions. We have to know that hedge funds have already seen an exodus by clients taking their money away from them for more than 6 months. The unwinding and so-called run have actually been happening in stages already.)

Even private equity firms and their reckless, highly leveraged buy-outs will not be spared. The private equity bubble led to more than $1,000bn of LBOs that should never have occurred. The run on these LBOs is slowed by the existence of “convenant-lite” clauses, which do not include traditional default triggers, and “payment-in-kind toggles”, which allow borrowers to defer cash interest payments and accrue more debt, but these only delay the eventual refinancing crisis and will make uglier the bankruptcy that will follow. Even the largest LBOs, such as GMAC and Chrysler, are now at risk. (I tend to disagree with Roubini here as I think private equity firms are actually going to come out on tops here. Yes, some of them have borrowed to the hilt to takeover companies and may be suffering now, but generally its the last few deals which look troublesome - such as GMAC and Chrysler, the majority are still OK and they won't be coming back to the markets till conditions have improved. PE firms will play an important role going ahead because they still have large pots of uninvested monies. As mentioned above, this type of capital is going to be seen in a more important light for funding purposes.)

We are observing an accelerated run on the shadow banking system that is leading to its unravelling. If lender-of-last-resort support and deposit insurance are extended to more of its members, these institutions will have to be regulated like banks, to avoid moral hazard. Of course this severe financial crisis is also taking its toll on traditional banks: hundreds are insolvent and will have to close.

The real economic side of this financial crisis will be a severe US recession. Financial contagion, the strong euro, falling US imports, the bursting of European housing bubbles, high oil prices and a hawkish European Central Bank will lead to a recession in the eurozone, the UK and most advanced economies. (I also doubt if a severe recession is in store if you note the billions they central banks are throwing at the problem. While I agree that its something the Fed/Treasury should do, I also think that it will actually maintain an excessive amount of liquidity in the world, which will rear its head in high commodity, high food prices, and reignite inflationary concerns... lesser of two evils?)

European financial institutions are at risk of sharp losses because of the toxic US securitised products sold to them; the massive increase in leverage following aggressive risk-taking and domestic securitisation; a severe liquidity crunch exacerbated by a dollar shortage and a credit crunch; the bursting of domestic housing bubbles; household and corporate defaults in the recession; losses hidden by regulatory forbearance; the exposure of Swedish, Austrian and Italian banks to the Baltic states, Iceland and southern Europe where housing and credit bubbles financed in foreign currency are leading to hard landings.

Thus the financial crisis of the century will also envelop European financial institutions. (Its bad, but not as bad as King Roubini makes it out to be. Global treasuries and central banks have never worked closer before. We should not underestimate the power of collusion. I also think Roubini still believe the economic engine and power of the world reside solely in the US and Europe, well not really anymore. If the last 5 years have shown us anything, its that the balance of economic power and engine for growth have shifted substantially to China and India, together with Latam, parts of Africa and most of emerging Asia. While the shift is not a tectonic shift, it is a substantive one. One which is altering the equation of global markets continually. The doom and gloom over USA and Europe painted by Roubini is correct, but don't miss the nice landscape and background of the other "bigger" emerging economies.)

The writer, chairman of Roubini Global Economics, is professor of economics at the Stern School of Business, New York University (The blogger is not a professor, not a graduate of economics, and although he enroled for a Masters course in business, he rarely attended classes ... and the closest he got to NYU is wearing the fake t-shirt he bought from Petaling Street)

p/s photos: Janice Man

Tuesday, September 23, 2008

Too Many USD Holders / Peg Revisited

Blogger Charles Chong said...

i don't fully agree on your statement. Mind you that China is a big adopter of US treasury bills, trillions of them. With China holding so much of US treasury bill, they will do their best to protect the value of USD, not to mention that HKD is in fact pegged to USD. China, being one of the wealthiest nation in Asia currently, will not allow their wealth to be swept away over night.

Comments: charles, we cannot hide, i mean the USA cannot hide behind the skirt that many countries are holding Treasuries hence they won't let the USD collapse... yes, politically, China and some of the Middle East nations have that objective as well... even China complained strongly on the GSE to paulson recently, basically hinting that they might STOP buying GSE debts if they do not go and rescue Fannie & Freddie... I ask you this, are the central banks in China, Japan, UK and US strong enough to stop a slide in USD ...think, I don't think they can, they may temporarily halt the slide with sentiment change n intervention... u cannot stop it if enough ppl think the same line ... if they can, u think the USD would have lose 30% in a few days back in 1987 ... if they can, u think the British pound would have lost 20% in a few days in the 90s... and thats with a lot of help from all major central banks

Blogger solomon said...

I do have the feel that the recent USD strengths and weaknesses are engineered by Central Bankers. Not quite sure whether it is for the bailouts, but they are tale signs about it, like dali's said.

How about reaffirming and applying the Brenton Wood II (renminbi - dollar peg) into more international currencies?

Having saying that, it reaffirmed my believe that the next target will shift to currencies speculation. The speculators(wolves) will camouflage behind the Central Bankers (tigers), you could hardly differentiate the currencies movements by who then.

My opinion is ringgit should consider the fixed peg to USD now. I am sure most of the local businesses will welcome this. At least, it have remove some business uncertainties in forex movement.

we should not go back to the peg because a peg gives a false sense of security ... you have limited room to move with monetary policy and yr fiscal policy are restricted... look at HK, they have a silly negative interest rate now, while their economy is tied to China, their monetary policy mirrors that of USA by virtue of the peg
most importantly a peg kinda stops a country and its industries from moving up the value chain in industrial efficiency and product competitiveness
you also want the country to benefit from a stronger currency for better purchasing power when the country does well
the peg would favour all exports again... and mostly very basic exports on the lower food and production chain, why debase our industries again ... i think the cpo planters and electronics exporters have had a gleeful run when the peg was instituted... looking at it another way, the rest of the country suffered but the these exporters were laughing, we had to contend with diminishing purchasing power and much of our loss went to support the bottomline of these exporters... thats why i think cpo buggers should be the first in line for a windfall tax...

p/s photo: Song Min Ji

Rebalancing The Twins

The first short position on oil was at US$139 (June 8, 2008), the double up position was taken at US$119.90 (August 5, 2008). The shorts were covered at US$112.90.

New positions (August 19, 2008)
Long oil futures $113.20
Long gold futures $802


The time has come to neutralise the oil position and take a small gain there. While I was bullish on oil, it was too much linked to the movements in USD.

I am very bearish on USD but I am more bearish on the destruction of demand from recent events. The liquidity injections from various central banks are good, but may not push oil past the US$115-120 region.

Sell oil futures $117.80 (gain 4.7%)

However I would be doubling up on Gold exposure. The destruction of wealth, and the reinjection of tons of liquidity by all central banks will stoke inflationary pressures again. In particular I am very much keen to be in real assets in this kind of era. I believe gold can even break US$1,000 this year and is headed for higher grounds. Key words, real assets.

Long gold futures US$900.60

(Double Long position in Gold with average price 900.6 + 802/2 -=

p/s photos: Pace Wu Pei Ci

Staff Cuts: Lehman Brothers, Asia Relatively Dicey

Finance Asia: Whitney Group is a global executive search firm focused exclusively on financial services, with offices in North America, Europe and Asia-Pacific. Russell Kopp, a Hong Kong-based director who heads the firm’s wealth management practice in Asia, shares his thoughts on the impact on Asia’s job market of the latest turmoil on Wall Street.

What do the Lehman layoffs and the consolidation of Merrill Lynch and Bank of America mean to the job market in Asia?

Lehman's demise is a serious hit to the markets in Asia. Barclays appears to be quite savvy in its approach, as in the US and Europe it's getting the pieces of the Lehman business it wants, without a black hole, and possibly with few liabilities at all. This should mean there is a fair amount of money set aside to lock in the Lehman employees that it ultimately hires.
However, it’s a different picture in Asia, as there are a multitude of legal entities and geographic operations which adds some major complexity to any potential deal. As much as every competitor is looking at the talent there, every person in the industry is 'feeling' for the Lehman guys, as it was a good solid shop in Asia and it apparently had a decent 2008 P&L. All of us just potentially lost a career option (as an employer) for some stage of our careers. In contrast, the Merrill Lynch and Bank of America combination is nothing but a trifle.

Does the turmoil present good opportunities for other banks and asset management companies to scoop up Lehman and Merrill talent?

As yet, we haven't seen large pools of talent come out of Merrill Lynch, but they and virtually everyone else will be trimming people before year-end. Yes, it helps to some degree, but the investment banking/capital markets/wealth management industry is always evolving. Sure, any large influx of talent helps those who are growing, but more importantly, the industry continues to evolve.
We saw all the British brokers – Barings, Jardine Fleming, Smith NewCourt, etcetera – disappear in the 1990s into global players, we saw the rise of the hedge funds over the past five years, and now we are starting to see other players grow. The Chinese and Korean brokers, the inter-broker dealers, a handful of boutiques, etcetera are all growing. On a longer-term basis, disintermediation will continue, Asian growth will propel the region's GDP, FX rates will loosen, interest rate policies will become more market driven and the financial markets will continue to broaden and deepen around the region. On a relative basis, much of the US and Europe is mature, so, there are still real opportunities for growth in Asia.

Will this mean compensation packages will be reduced?

Broadly, and on average, yes. However, there will always be pockets of the market with shortages of talent. In addition, niche product areas, and first movers will earn supernormal profits and senior players in these areas will not only be highly sought out, but highly paid - and likely, seriously guaranteed.

Which types of employees at Lehman will be able to find jobs more quickly here in Asia?

Clearly the Lehman people who will move quickly will be the ones who produce revenue, as no one's looking to add to their cost bases. Key investment bankers, traders, derivatives staff, etcetera are likely to be the most well bid. We'd also expect risk, compliance, COOs (chief operating officers), CAOs (chief accounting officers) and some IT people to be well bid. Although, Lehman staff in general are probably well above average, so hopefully, many will find new jobs.

Do you expect more of the people who have been laid off in the US to come knocking in Asia? Is there room for them here?

We continue to see a regular flow of candidates from both the US and Europe looking to come to Asia. Given the maturity of markets and the financial services industry fallout in both, it’s no surprise that we're seeing so many people turn up on 'spec' out here – both Asians wanting to return and Westerners looking for a better employment environment. There will be room for some of them, but certainly not all.

p/s photo: Andrea Fonseka

China's Base Building

The Standard: Many mainland investors are saying they will think twice before jumping back in to the stock market, despite the generous market-saving measures unveiled by Beijing last week. "It's good the government has come in to rescue the market, but I'm afraid that we haven't hit rock bottom yet," said Zhan Ye, a driver for a property company who used to order stock trades from his car as he listened to the radio news. "As soon as people see prices falling, they'll just get scared and pull their money out again." Middle-class dreams have been buried by the stock-market declines, according to Zhang Qi, an analyst at Haitong Securities in Shanghai. "Life savings have vanished just like smoke," said Zhang said. "Looking ahead, more family investors will stay far away from the stock market." Zhou Yu, 25, a Shanghai office worker, cashed his stocks in earlier this year, picking up a laptop, an iPhone and a camera with his profits. "I'm not planning to go back in right now," he said. "With the overseas market conditions ... who knows what the next big trouble will be?" To lure investors back, the government will have to offer even more sweeteners, some analysts believe. "How much confidence can be restored ... all depends on how generous the government will be," said Cao Xuefeng, an analyst at Western Securities in Chengdu.

Comments: Last week I have reiterated a couple of times that the Chinese stock markets could look very interesting over the immediate future. Once Beijing decides to do something, they will be very persistent to bring it to fruition. We should remember when the markets was above 5,000 and the way they have been raising SRR and interest rates to quash market activity. Safe to say, Beijing had been terribly successful at that. Hence when global event converge to further force Beijing's hand, I would side with Beijing.

The other major point to note is that market crashes are a bit different for China compared to other markets. Yes, the markets in China have a high percentage of individual participation, but that is much like the trend in most Asian markets. The good thing is that buying on margin is still in its infancy in China, which is good. There is still a lot of money in deposits. During crashes, many investors do not only lose their shirts but owe more than their net assets. This is not the case for the majority of share players in China. Yes, its painful, if you have 50,000 yuan and you lose 30,000 yuan it really hurts. In most other Asian markets if you have 50,000 dollars, chances are many will be losing all of that and more. In that sense, it is easier to rebuild momentum in China markets than you'd think.

I do think there will be a run even up to 3,000 level.

p/s photo: Taw-Natoporn Taemeeru

Monday, September 22, 2008

Silly To Peg

Tony has left a new comment on your post "Wither Dollar": Can you explain what Muhyuddin Yassin meant when he said pegging the Ringgit would cushion off the impact of the weakening USD against other currencies? First the USD was not weakening but strengthening. Secondly what happens should the USD fall say 30%. RGT would be 3 to the SGD, 8 to the Pound, 7 to the Euro?
Latest News: Najib in his first task as Finance Minister came out quickly to say there will be no pegging, now or in the future. All things being equal, that is what the Finance Minister should be doing - see a stupid issue boiling, quickly come out and stamp it out.
Comments: I think what Muhyiddin is trying to say is the volatility vis-a-vis the USD, with a general downtrend in USD. To say that pegging it would cushion ill effects is a shallow argument. Why do we still have the mentality that we can only compete on currency distortions. If we have this kind of policy continuously, we will end up NEVER moving our industries up the value chain. Why are we so afraid to compete? I don't even hear Indonesia contemplating that, nor Thailand, so what gives?

There is a time and place to put the peg in, when there are drastic outflow of capital which the central bank could not control, such as following the events of 97 implosion. The original Ringgit peg in Sep98-Jul05 helped the Malaysian government to buy time for it to restructure bad debts in the economy. Are we seeing such calamities now? Firstly, we are not part of the subprime, CDO, CDS problems. Secondly, our banks have almost no exposure to those instruments. This is so different to the 97 problem where hot foreign money was wreaking havoc on reckless lending and pumping up liquidity no end - then we were part of the problem. We are not now.

I mean the ringgit is still not transactable overseas yet. We are supposedly nursing our financial reputation back with a strong balance sheet, why take an overdose of sleeping pills now? There are tons of economies bigger than us who are not perturbed, and what is more galling is that there are even more smaller economies than us who are not perturbed! Whatcha' talkin' about Willis?!!

Why even put up such an idea now? It infantile and almost absurd because the central bank has tried to build back the reputation of Malaysia for the last 8 years, and has nursed our balance sheet back to health, then remove the peg. If we even voice out haphazardly that we should consider the peg now - in the eyes of global investors it amounts to more uncertainty. This country does not know what it is doing, suka-suka put in peg, suka-suka pull the peg, suka-suka lagi reinstate the peg. In the eyest of investors everywhere, people will put a discount when investing in Malaysia. The Dells, HPs, Unilevers will have to present budgets with a gaping "deviations" in potential currency gains/losses in budgeting even.

Global MNCs can understand the peg for 97, not now certainly. What are Muhyiddin and Mahathir so afraid of. That our ringgit will be too strong at 3.0 to the dollar? Global currencies had been appreciating en-bloc for the last 3 years against the USD, why no opinion when we were close to 3.1 to the USD, and thats all the way from 3.8. From 3.8 to 3.1 you don't scream ... why scream when its at 3.4?? Even if it goes to 3.0 over the next 6 months, it will be a global appreciation against the USD alone. The ringgit will probably maintain its status quo with other currencies. So, why the fear. Every other nation does not fear having a stronger currency against the USD, why should Malaysia?

Volatility, is it about lessening volatility? How volatile can it be? Can someone track the volatility of the ringgit over the last 2 weeks, is it that bad?

There is a risk that this move will be seen in a political context, as a precursor to drastic domestic political action by the government, and the peg itself would minimized the event’s cascading negative effects. That might be a plausible reason, but would be very unwise and desperate.

Put it another way. Pegging is like being wheeled into ICU, you are very sick and you want time to recuperate. There will always be volatility in international currency markets. What you can do, is what Zeti has been doing well, shore up your balance sheet and prevent excesses, promote growth with minimal inflation. Once you do that, you will always come out better in times of global crises. Don't go and hide under the tempurung, go and lift weights instead. If you are not sick but healthy, you should not be worried about 'viruses'. Unless you are are planning to do something 'sickening'.

Tony, if USD drops 30%, the ringgit would be at 2.4 la. If the global currencies all appreciate against the USD. It would make US exports more affordable, make them buying foreign goods a lot more expensive, thus reducing their trade deficit. Them buying less would affect those countries who are major trading partners. A rapid drop in USD value would put the US economy into high inflationary mode, and at the same time boost their equity markets. Commodities will all get more expensive. Central banks all booking losses on their foreign reserves and Treasuries. Its really not that bad a thing, the Americans just need to learn to buy less.

On further clarification by Tony, he has a strong point here in that if we peg at 3.4 to the USD NOW... what will you do if after the pegging, the USD falls 30%. That would mean the ringgit would be effectively 3 to the Singapore dollar, 8 ringgit to the British pound, 6.5 to the Euro ... what then Muhyiddin and Mahathir? Break the peg again... or re-peg to a new level. We are not playing wash the clothes and take them out to dry, no need to peg here or peg there. Hate to say it but people calling for the peg now do not not have strong or valid arguments to support their call... and I am being very nice here!!!

Final word, don't do it, it will be disastrous and unnecessary.

p/s photos: Linda Chung Ka Yan