spikegifted.net - Home of Benjamin Siu

Updates

October 2008:
Home: The 'Indian summer' has come to an end. Moreover, it would appear that autumn has been skipped and we were thrust straight into winter! As it was still only October, we resisted putting on the central heating - we usually tried not to turn on the central heating until November. However, the final week of October has been really cold. So on the Tuesday night, we switched the heating on. After around ten minutes, the Ruler_of_spike alerted me that the boiler was leaking. She wasn’t far wrong, there was water coming from the inside of the boiler and it was cascading down the pipes under the boiler and down to the floor. After switching the boiler off, I checked the internal pressure of the boiler and the reading was in excess of 4 bars! Typically, the pressure should be around 1 to 1.5 bars. Something has gone wrong. I called the emergency helpline but was told that the office was closed so I could not book an appointment until Wednesday. However, the lady on the phone advised me that I should turn off the water mains as it was feeding directly into the boiler so the pressure inside the boiler would not come down with the mains still on. So, not only did we not have central heating and hot water, we had no running cold water. We were down to the water that we could hold in buckets and jugs. It would be difficult until the boiler was fixed.
Work: The merger/acquisition of the bank I work for and another bank has been announced for a while. However, there has been very little information regarding our on-going operations and eventual integration. There was uncertainty at the senior level and amongst the troops. All these have not been useful in maintaining the morale of the troops. Communication has been really lacking. There was probably not a single party that was at fault. I suspect, and this is my personal view, that our new owner/partner didn't know what they've gotten themselves into. I think that when they carried out their due diligence on our business, they asked the wrong questions to the wrong people and gotten the wrong answers. None of the 'misinformation' was deliberate. It was just a case that the people who answered the questions simple didn't have a clue the kind of activities our bank was/is involved in. If they didn't know, they couldn't give an accurate answer. It's fair to say that our new partner/owner is heavily focus in our home market. There is nothing wrong with that - that's their business. However, when they bought into us, they didn't look at our business careful enough - I don't think anyone from their side actually came to see us in London and most of our bank's investment banking activities was/is based in London. As a result, they bought into this thing that they didn't what to do with. Since discovering that, they've been struggling to come up with a solution that would destroy the least amount of shareholders' value. Instead of being decisive and made business decisions that took advantage of our strengths and targeted the growth areas, our new masters took their time to discover what they have really gotten themselves into and leave the troops waiting. The troops being restless was hardly an unexpected result.
Home: It was my birthday... I have never really liked my birthday - I have never mentioned it to anyone and I certainly haven't done any celebrating. I never had a birthday cake for any of my birthdays, and I don't usually bother about my 'special day', I don't expect much in any given year. However, the Ruler_of_spike has other things in mind. After this year's birthday, I can say that I have had a birthday cake and my birthday was not always a painful experience. In her way, the Ruler_of_spike has helped me 'exorcize a ghost' that has been 'haunting' me since I was a little kid (something to do with my folks when I was little). I won't say that I look forward to my next birthday - that would be a step too much, but I don't think I fear it as much as my last one. Thanks, my dear!
Work: Credit crunch?! Global financial crisis!! Meltdown!!! This was just going mad! Being a credit analyst in an investment bank here in London, I, and my colleagues, was sitting in the middle of the storm. In the first couple of weeks of October, there was not a single bit of good news that would make the markets better. Everyday, there was bad news from one country or another: US banking bail out, Icelandic banking crisis, UK banks under pressure, European banks getting government cash... All the 'great names' in international banking had been hit, one by one or in groups. Volatility, which has been going up and up in the second half of September, has now gone through the roof. There was a time when it was big news if a particular stock market dropped by 2-3%, now 5% or even 10% were not unknown. We were just being hit by big numbers and we have become accustomed to them. Some of my counterparties have just stocks as collaterals for loans. Typically, we'd charge hefty discounts on these stocks to protect ourselves. Now, however, these discounts were not longer enough - we were witnessing falls of over 50% in very short periods of time. You could tell our clients were going around scrambling for funding and liquidity, and there weren't much of them around. Everybody, and I do mean every single one of them, were doing the same thing. The interbank market, which has been struggling since the beginning of the credit crunch in the autumn of 2007, has practically seized up. No-one trusted anyone any more. There were bonds issued by big name financial institutions that had no prices for days on end. The credit spreads on these very same institutions were trading so wide that it was becoming scary. Everything just seemed so surreal... A friend was telling me he was humming 'It's The End Of The World As We Know It' by R.E.M. Was this the end of the world? More important, what would be waiting for us at the other end?

September 2008:
Home: I think we'd all agree that the summer of 2008 has been another wash-out, just like the previous year. However, September has turned out to be really, really nice. The days were still relatively long, which means that we could see our garden before we went to work and after we came back (if we get back early enough). The temperature was just perfect - warm enough to spend time outside without the need of a coat but cool enough that we didn't sweat much when we do things. To add to all that, it didn't rain much. Don't get me wrong, it rained during the month of September, it was just that it rained during the week when we were at work but the weekends were just nice. We could leave our washing outside to dry without any problems. We even had a couple of barbeques during the month. While it was not an ideal summer, an Indian summer in September was in a way a nice compensation.
Opinion: Question: How much is US$700bn? I have to be completely honest here, even though I deal with big numbers on a daily basis, I don't have any understanding of the concept of US$700bn, never mind a real-life meaning of such large amount of money. While it sounded like a lot of money to you and I, this amounted to just a mere drop in the ocean of banking assets that were causing the credit crunch / financial crisis. When it was first announced by Hank Paulson, the market breathed a sigh of relieve - the US Treasury was going to do something to help the market out. However, while the headline was there, the details were not; and in the absence of details, people went back to what they were doing before - panic. To add on top of that, there were all kinds of noises coming from the US about 'Main Street bailing out Wall Street' and about 'fat bankers sucking dry the rest of the US economy'. Hysterical hubris aside, people need to recognize that we are all in this together. We live in a a globalized economy. What happens in Wall Street affect everyone, unless you live in isolation in Papua New Guinea or in the depth of the Amazon basin. Then, when the rescue details finally came out for the legislators for approval, it was a disappointment for me - it lacked fire power. Using the money to buy bad assets from US banks would not solve any problems, boosting bank capital would help stabilize the situation and suppress the fear that was so prevalent in the market. Anyway, the US Congress, for whatever reason, rejected the proposal, evaporating what little optimism the markets had built up, sending global stock markets back on another nose dive. If things didn't look bad before, it did now.
Work: With the bankruptcy of Lehman, the financial markets went into a tail-spin. Confidence, something that has held up so well since the beginning of the credit crunch, has now completely gone. Investors simply just didn't know what value to place in their investments. The stock markets had been particularly hard hit as the "traditional" methods of valuation, typically by earning multiples, have been replaced by something else - fear! In the bond markets, all credits have been ditched in a massive flight to safety. The only bonds worth owning were US Treasuries, UK gilts, German Bunds, French govies and JGBs. All the other bonds were ditched, spreads widened to unprecedented levels. At the same time, the credit derivative market also went into an overdrive. The amount of CDS outstanding on Lehman Brothers were just staggering. Although a great deal of the protection would have off-set each other, some in the market feared that despite that, many players would be forced into bankruptcy themselves. Then there were the commodities, which have done so well on the back of massive expansion and demand in China. Now that there was talk of a global recession, demand for Chinese export naturally would be lower and all commodity prices have come off their peaks and started sliding. In the second half of September, there was not a single big of good news in the market. We were just lurching from one day to the next, hoping that any news would be less negative than what we've heard. Work has been a rather surreal experience as we went about trying to limit any damages the falling markets would have caused us. We effectively had to reduce our funding commitment, to insulate ourselves from liquidity problems that were spreading in the market. All-in-all, it was messy, but I thought we came out unscathed.
Opinion: While the problems at Lehman was being closely followed by the whole market, confidence in all financial firms was hit. Share prices were just falling in such a way that the only question that could be asked was: Is there a bottom to this thing? Merrill Lynch, another pillar of American investment banking, has ran into the arms of Bank of America. That was probably the only sensible thing to do. Merrill, like Lehman and a whole host of other firms, have been battered by the falling asset prices. It looked like no matter how much capital it managed to raise, it continued to hemorrhage more through losses and asset write downs. It was a case when, not if, the market would no longer listen to its story, the management better had another rabbit to pull out of the hat. That was exactly what happened. At first, it was a strange deal, seeing that it was only last year that Ken Lewis (chairman/CEO of Bank of America) famously said that he had all of the fun he can stand in investment banking, yet less than a year later, he bought one of the biggest names on Wall Street. How a change in price makes such a difference. So three out of the Big Five US broker/dealers have either been bought or has gone to the wall. How long can Goldman Sachs and Morgan Stanley remain independent?
Opinion: The end, as it usually happens, came as a shock. All week, Lehman Brothers has been under a great deal of pressure. The pressure came from the market - a complete loss of confidence in the firm's management to deal with its problem. At one point, there was talk that some Korean consortium was going to make a significant investment in the firm but, for one reason or another, no deal came. Then there were rumors that one of the British banks was going to make pay. Well, nothing happened there, either. The obvious question was a simple one: Why? Anyone who looks at Lehman's books would have seen a list of difficult-to-value assets which will make even the bravest acquirer thinking twice. It may have been a pot of gold (it would have taken a long time to find out if it was the case) or a pile of rubbish (which is what everyone in the market dare not call because they have piles of this stuff). In the end, the investors just didn't want to risk their money and Lehman had nowhere to run except to the wall. So it filed for creditor protection. The end was here and it was not pretty. Overnight, thousands of people lost their jobs and their investments (employees owned more than 40% of the firm). One of the best known franchise on Wall Street was gone. The sad thing was that there were deals that could be done earlier to save the firm, but they weren't done because of pricing - the buy's and seller's expectations didn't match. All that was left were for former rivals to pick over the carcass of a once-great firm. What a shining example of destruction of shareholders' value!
Work: The pressure was now really on!! Lehman Brothers, one of the oldest names on Wall Street, was having a tough time - its share price was dropping like a stone. The fundamentals of the company appeared to be sound - earnings was ok, franchise was good and the balance sheet, while strained by the difficult-to-value assets, was not a total loss. Additionally, the Fed has opened up a special liquidity facility to support Lehman and other broker/dealers, so funding should not be a problem. However, the confidence in the company appeared to have gone. The last time something like this happened to a broker/dealer, it was back in March this year. At the time I was pre-occupied by my mom's failing health. So while all the storms were breaking around Bear Stearns, I was pretty much oblivious to them. This time round, though, I was following events very closely. The whole deal was frightening - the stock market went crazy (fell like a stone), the credit market went mad (CDS spreads widened), the whole inter-bank lending and money markets seized up (rates were way over the benchmarks) and central banks pumped billions into the market to ease liquidity. All along, people who knew understood that Lehman was not another Bear Stearns - it appeared to have been in better shape and liquidity was available. However, clients and counterparties began to ask themselves questions and it seemed the game was up. We guessed that there were ways to get pass the problem, by selling whole or part of the business to get more capital from somewhere. Alternatively, a 'white knight' has to appear somewhere to pick the whole thing up. But the question is: who would make such an investment in this climate and with what conditions. Talks appeared to be in progress but how long can the firm last?
Opinion: The cornerstones of US housing finance have crumbled! Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) have been put into conservatorship. This effectively meant the US government would guarantee the debt issued by these 'government sponsored enterprises', replacing the existing management and gradually buying newly issued preferred stock (which also massively diluting existing shareholders). In effect, this was nationalization in all but name. Why would the US government make such drastic intervention? And this was drastic - in a country that shuns public ownership and its fundamental believe in market economy, effective nationalization of these two privately owned but government sponsored companies runs completely contrary to the country's economic philosophy and it will potentially cost the tax payers a lot of money. Moreover, the US government would now directly support the US housing market by buying these GSEs mortgage-backed securities. On the other hand, we need to take a cold hard look at what has been happening in the US housing market and the reason for such intervention was immediately evident - as house prices continued to fall, the confidence in Fannie Mae and Freddie Mac was eroding fast and not a moment too soon, these two GSEs would not be able to finance themselves in the market. If such a case happens, while the US government has previously announced liquidity arrangements to support these companies, clearly such action would just be curing the symptoms without addressing the causes of the problem in confidence. However, if these entities were allowed to get into such position (inability to finance themselves in the market), the loss in confidence would be even more severe. By acting now, I think the administration was trying to send a powerful signal to the market and hopefully rebuild confidence and bring some measure of stability.
Home: While we’re in the topic of mending things, I booked my car into the garage to have the bottom panel fixed. Needless to say, it has to be replaced, especially with the gaping hole in it after it was dragged for a kilometer. The folks over at the garage were very good - they put their hands up and offered to fix the problem for free. After the boiler was fixed, I got a call from the garage informing me they’ve done their work. When I went to pick the car up, they confirmed that the panel was probably not correctly re-installed after they fixed the leak. As a result, the wind generated while driving was gradually loosening the screws and forcing the panel away from the rest of the undercarriage of the car. When the force was large enough and the screws affixing the panel to the undercarriage were loosen enough, the panel was just ripped away by the wind. Anyway, that was quickly fixed and it was free of charge, so I had not more to complain about. Happy endings!
Home: While it was a heck of trip coming back from Portsmouth to our house and a heck of a shock finding out what's going on in Germany, surprises continued to come up. The boiler, which was only fixed back in June, was given us trouble again. It was a good job that I took out the insurance cover when it gave us trouble last time round back in June. I just made a phone call and a couple of days later a technician showed up to fix the boiler. He took a while to locate the fault in the boiler and it turned out it was the thermistor that was causing the problem - it was not giving the right reading. The thermistor was located in a trickily concealed part of the boiler and it took some rather fancy finger dancing to get the part installed. Nevertheless, it was a job well done, and we have a working boiler again.
Work: What a day to come back to work after a two-week vacation. Wow!! A couple of months back, there was a lot of talk about consolidation in the German banking sector. To be completely honest, at least from a retail banking angle, Germany is "over-banked" - to many institutions around chasing the same pot of retail business. The credit crunch that has started last year has clearly demonstrated how important a stable funding base is for banks and there is no source more stable than a large retail deposit client base. As such, German commercial banks had been hampered by this lack of a solid base to more forward and expand internationally, with the possible exception of Deutsche Bank. A couple of months back, there was a lot of talk about Commerzbank linking up with Dresdner Bank. Commerzbank has spent the past few years trimming down its investment banking activities and really tidied up its balance sheet. As a result, it has not exposed itself to the US sub-prime RMBS and CDOs that have hurt other banks so bad in the past three quarters. On the other hand, Dresdner Bank was under the umbrella of Allianz (an insurance company) which only saw the potential of Dresdner Bank as a way of distributing its insurance products via the banks retail channel. On the other hand, Allianz has never really figured out how and what to do the investment banking division, Dresdner Kleinwort. During the good times, Dresdner Kleinwort never made enough money for its parent to justify bigger investments. Now that the bad times have come, it has became a drag on Allianz's performance. There had been talk a couple of months back that Commerzbank and Allianz were talking about a tie-up with Dresdner, before going for the really big one - Deutsche Postbank. For whatever reason, Deutsche Postbank seemed to have left the picture, but the Commerzbank/Dresdner Bank deal was negotiated. I won't say this tie-up presented a seismic shift in German banking (Deutsche Bank was still twice the size of the newly combined bank), but the fact that the deal got done at all. Allianz paid 24 billion Euros for Dresdner Bank back in 2001 at the top of the market, but sold it for less than 10 billion Euro in 2008 in the middle of one of the biggest banking crisis in over half a century - that a loss of 59% in value in just seven years. That did not include all the losses accumulated over the years. No much of the a return of investment. Actually, I would call it a massive destruction of shareholders' value. Worst of all, that is not the end of the story for Allianz in terms of losses at Dresdner Bank - it will have a stake of around 30% in the new combined bank - future losses in the new entity will continue to affect Allianz's bottom line. Smart move folks.

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