What Should Happen & What Is Likely To Happen

General Motors

What Should Happen - Allow the company to go into Chapter 11 or what we call bankruptcy. Then the company will have real negotiation leverage and the unions will really have to listen and make concessions. The government can then step in with some funding but call the shots. Force the merger of General Motors and Chrysler. All outstanding car warranties will be guaranteed by the government via a separate vehicle. Following huge concessions made by the union, the selling down and dismantling of parts, the reworking of cost savings with the 2 companies... maybe, just maybe they can survive.

What Is Likely To Happen - Democrats will probably approve a US$25bn bailout when they return on December 8, but a viable plan is expected from the automakers. Expect Chrysler to quicken talks with GM to hash a merger to get the US$25bn bailout plan approved. Short term feel good, but without bankruptcy, the unions and their demand swill stay the same. Its the liabilities and claims by employees on the company's balance sheet which will always bring the company down. The lifeline will give then a few months grace but the end result is bankruptcy. The trouble is that with the US$25bn bailout, the unions will not lower their rights and demands... you need to put the company into bankruptcy to leverage your negotiations. Sink or swim.

Citigroup

What Should Happen - JP Morgan or Morgan Stanley should step up to buy Citigroup, with the Treasury guaranteeing maybe US$30-50bn in losses. That will calm markets. Its not likely Citi will be able to remain independent for long on its own. The amount of toxic assets is US$80bn, and we haven't even looked at the fallout on funds being tied to Lehman Brothers. Citigroup has another shoe to drop, credit card debts, which will implode as well. A merger would see a bid of at least US$20 per share. It will further reduce counterparty risks in dealing with Citigroup.

What Is Likely To Happen - The company will be taken over by FDIC to prevent a bank run, especially from global depositers. Their liquidity ratios are seriously questionable at this point. The result would be a total break-up of the group. JP Morgan may still end up with the commercial banking side in a break up sale. As Citigroup is trading at barely 1/4 book value, a break up sale should see at least a US$10 value to its shares.

Other Potential "Bad Developments" In Coming Weeks & Days
a) GMAC running into deep trouble.
b) GE Capital running into deep trouble.
c) The merger between Bank of America and Merrill Lynch running into problems owing to ML's excessive exposure to toxic assets.
d) Nobody steps in to help Citigroup, and this time global effects will be felt as Citi's exposure is more pervasive globally.
e) Markets switch to look at credit cards implosion, dragging Citigroup and Amex into deeper trouble.

Still, we are seeing possibly the "peak in selling" here, expect 7,000-7,300 to be attract strong buyers for the longer term and should hold up well there. Asian markets should find good buying support now as there is almost zilch holdings by foreign funds - nothing left to sell now literally. Its not hunky-dory, but those with at least a 6 montn view may nibble.


p/s photos: Li Bing Bing

Phew! CDS, Its Just $33.6 Trillion Not $50 Trillion!!!

Dealbook: In the first of a series of weekly reports, the Depository Trust and Clearing Corporation said late Tuesday afternoon that there were a total of $33.6 trillion in credit default swaps outstanding on corporate, government and asset-backed securities. That is less than some earlier estimates of $50 trillion or more.

The company’s data provides a clearer picture of the money bet on the creditworthiness of the world’s companies and governments. The largest dollar amount of credit default swaps were written for protection against the debts of Turkey, Italy, Brazil, Russia and GMAC as of Oct. 31.

Others at the top of the D.T.C.C. list of 1,000 were Merrill Lynch, Goldman Sachs, Morgan Stanley, GE Capital and Countrywide Home Loans. In all those cases, however, the net notional values of the swaps were reduced considerably by hedging.

For example, Turkey was the leader in gross notional credit default swaps, at $188.6 billion, but its net notional exposure after hedging was $7.6 billion.

D.T.C.C.’s figures are available at Deriv/SERV on the D.T.C.C. Web site.

D.T.C.C. said that after this week the data would be shown in two sections. The first section shows the outstanding notional values at a given point in time (the end of each week). Starting next week, the second section will show data relating to the weekly confirmed trade volume, or “turnover,” with respect to the same underlying reference entities and indexes, as well as similar aggregations of such data.

The financial industry is trying to counter lawmakers, regulators and other critics who argue that the lack of transparency in the market for credit default swaps made the financial crisis worse.

“Publishing this data will provide greater transparency in a critical market,” said Tim Ryan, president and chief executive of the Securities Industry and Financial Markets Association, in a statement Tuesday. “This is an important initiative upon which the industry will continue to build.”

The collapse of Lehman Brothers contributed to a sharp drop in financial markets last month because no one knew how many credit default contracts were outstanding on the securities firm. Estimates ranged as high as $400 billion, although the actual amount turned out to be $72 billion, the DTCC said.

Comments: Well, its a very good start. Once you know the figures, its not a guessing game anymore. Then you isolate the top contracts and assess their likelihood of default. As we can see most of the trouble companies have been absorbed by other companies. There is one main danger I see, that is GE Capital, which will work its way back to General Electric. Its still a AAA company but if you were to examine its way of doing business, its a highly leveraged way, and more than 60% of profits are from the 100-200 basis points financing spread that they use to do business with clients, be it funding them or funding the transactions - e.g. consumer loans or even aircrafts (you want to buy an aircraft, let me lend you 90%).

As for country defaults, while its hyped up, only Iceland risk real default and maybe Turkey and Venezuela. The rest have to just tighten their balance sheets, get some billions from IMF and get on with it. Even Russia's demise is not exactly catastrophic, its bad no doubt, but not debilitatingly so.

Just a heads up, I am quite nervous on GE's near term prospects. Its $15 billion capital raising a few weeks back should raise alarm bells. Ratings agencies are again probably too slow to look deeply into how GE's business model is affected by the cascading impact on de-leveraging.

p/s photos: Izumi Mori

Blue Christmas For Finance Staff

CLSA Asia-Pacific Markets, the regional brokerage unit of Credit Agricole, asked 500 senior bankers and executives to accept pay cuts of as much as 25 percent next year to avoid getting rid of jobs.

The voluntary salary reduction program that was proposed for one-third of the staff last week would reduce basic pay by 15 percent to 25 percent starting in January. The participating employees would be paid the salary they forgo and may also receive a bonus payment, when profit meets certain targets. The proposed pay cut package is similar to the one offered by CLSA in 2003 when SARS led to faltering economies in Hong Kong and China.

Merrill Lynch & Co. has laid off 10% of staff in its Asia trading division and 10% of its Hong Kong employees, Ming Pao Daily News reported Tuesday, citing unnamed sources. Merrill Lynch has axed its Asia-Pacific structured finance and structured credit teams as part of its cull of 100 jobs in the region. Merrill Lynch has about 6,000 employees in Asia, hence the cuts have not been severe at all. In May when Merrill cut 4,000 jobs worldwide, Asian offices lost just 100 employees then as well.

Singapore-based Rajiv Garg, Merrill's head of structured finance for Asia ex-Japan, left the bank on October 21 with nine members of his team. Merrill has kept three structured finance bankers in Hong Kong and Korea to manage existing exposures, but they are likely to leave in a few months.

Last month, HSBC slashed 1,100 jobs in its global banking and markets division globally, including 100 jobs in HK, while UBS also made hefty cuts to itsu fixed income and real estate teams and those focused on China IPOs in the past few months.

Merrill Lynch & Co., UBS AG and JPMorgan & Chase Co. are telling senior bankers in Asia to fly coach on short-haul flights and reduce non-essential travel as they step up cost cuts, officials at the firms said.

UBS advised bankers this month to travel economy class for flights of up to five hours, two officials at the biggest Swiss bank said, asking not to be identified because it’s an internal policy. Merrill employees have been told to travel economy for flights of as much as three hours since mid-September, two executives at the firm said.

JPMorgan, the biggest U.S. bank, has requested senior bankers fly economy on flights of less than three hours since late August, said an official who declined to be identified.

Royal Bank of Scotland Plc, which ceded majority control to the UK government this month, in an Oct. 16 memo asked workers worldwide to fly economy on regional routes and to cut back on travel.

HSBC Holdings Plc.’s Asia unit asked its Hong Kong department heads and branch managers to cut travel expenses by 15 percent to 20 percent next year, two officials at the bank said, citing a Sept. 23 memo sent by Chief Operating Officer Jon Addis.

HSBC is recommending China Eastern Airlines Corp., the country’s third-biggest carrier, over Hong Kong Dragon Airlines Ltd. for business trips to Shanghai, the memo said, according to the people. Europe’s biggest bank by market value cut 1,100 jobs at its global banking and markets division last month.

A round-trip business class ticket from Hong Kong to Shanghai with Dragonair costs HK$6,110 (US$788), excluding tax, almost double the best coach fare. An economy class traveler on China Eastern would pay HK$2,650.

p/s photos: Nozomi Sasaki