28JAN09:
Q1-09 DOW: 8900
Q2-09 DOW: 7250
Q3-09 DOW: 5810
Q4-09 DOW: 3960
CITI NATIONALIZED
OBAMA GETS SICK 27AUG09:
Mini Crash 21SEP09 Predicted correctly:
Bailout=Bonuses
Demise of Bear Stearns
Demise of Lehman Bros.
Demise of AIG
Subprime would cause problems
Date of 2007 crash
CRAs were to blame
G20 riots were a party
Northern Rock run
Northern Rock Nationalization
HBOS and RBS demise
UBS really was Useless
In times like this, a bag of sweets does the trick.
A rush of sugar through the blood stream helps, temporarily, fight off the gloom and doom that permeates every media crack and cranny today. It is bad out there, really bad, and maybe just too bad for us simple human beings to be able to contemplate.
As we know Citi is bankrupt and the US treasury don't know what to do. They have seen the farce of Northern Rock and how Basel 2 is forcing the banks back to basics. The oil countries are taking over the world, the ECB pumps harder and harder, and worse of all most hedge fund founders earn less than their staff.
This week I have listened to a plethora of financial folk, from Goldman gods, UBS product structurers, niche credit players, real estate operators and DB fixed income failures - and the message is the same.
Job preservation.
If this means more staff on the market then it is good for us. Perhaps I will be able to buy some Christmas presents this year. In the meantime, where did I put that stash of uneaten Halloween candies?
The European Central Bank has promised to supply the money markets with an extra EUR30bn (£22bn) in one-week funds, in another indication that the credit crisis is far from over. The ECB sold EUR178bn of these funds to eurozone financial institutions, compared with the EUR148bn it had previously said the banks would need for routine business.
Such an injection of liquidity is consistent with the ECB's approach since the credit squeeze started in the summer. The move follows the ECB's warning last week that tensions in the credit markets were "re-emerging".
Addressing a forum in Tokyo yesterday, the Governor of the Bank of France and ECB Governing body member, Christian Noyer, sought to reassure the markets. He quoted estimates of around $250bn (£120bn) for the direct cost of defaults on US mortgages. "It is significant but bearable, especially starting from a point of very favourable economic conditions and high profitability," he said.
However, such soothing words may not fit easily with the ECB's remit, which is geared to limiting eurozone inflation to 2 per cent. Last month, the eurozone inflation rate hit a two-year high of 2.6 per cent, and the latest data from Germany points to further acceleration in November.
The ECB is not alone in trying to prevent the credit markets from seizing up again and giving a fresh twist to the credit squeeze, symptomised by high short to medium-term interest rates in the money markets. Yesterday, three-month euro rates rose to 4.72 per cent, unusually far above the ECB's 4.0 per cent policy rate; this was their biggest single-day rise since August, and the equivalent dollar rates were at a one-month peak.
Fintag says The ECB, to its credit (boom , boom) is doing a sterling job but they can only do this for so long. Being torn between fighting inflation and keeping rates high and keeping markets liquid is a tall order. But let us not get carried away.
Inflation is less than 3%. This is nothing. Look at the double digit inflation of the 1970's - now that was a problem.
independent says " US home prices see worst fall in 20 years "
independent says " Sharp rise in rate of borrower insolvency "
commonsense says " It is Official, It is Now a Correction "
bloomberg says " Three-Month Libor for Dollars Increases for 10th Day "
Creditors in the $7 billion structured investment vehicle formerly known as Cheyne Finance are moving closer to a deal that would allow them to avoid being forced to realize hundreds of millions of dollars of potential losses in the short term, people familiar with the situation said.
The proposed deal would involve transferring the assets to a new vehicle, with senior creditors being offered the opportunity to refinance their debt into longer-term instruments or to take a discounted cash pay-out, the people said.
Fintag says Shuffling cards doesn't solve anything. Propping up SIV's and hoping things get better is like looking at a broken leg and hoping it heals itself. [Editor: uh?]
HEDGE FUND TAKES BIGGEST STAKE IN NORTHERN ROCK'S FATE
A hedge fund controlled by Jon Wood, the former star trader at investment bank UBS, has become the biggest shareholder in Northern Rock. The fund raised its stake to 8.5%, it emerged yesterday, indicating Wood's determination to play a pivotal role in deciding the bank's fate.
SRM Global, which first appeared on the crisis-stricken bank's shareholder register in October, has joined other investors in calling for the Northern Rock auction to be scrapped to prevent a fire sale of assets. Along with the previous biggest shareholder, RAB Capital, and a significant number of smaller investors, it wants a vote on the sale of all or part of the bank.
A filing to the stock exchange yesterday showed SRM had bought 6.97m shares on Monday at around 109p each, taking its total stake to 35.8m shares.
Northern Rock's shares rallied again. Despite rival bidders' claims that Sir Richard Branson had undervalued the company and failed to answer many key questions about its financing, the shares rose 28% on Monday and another 7.8% yesterday to £1.18. Some in the markets put at least part of this week's rise down to hedge funds that had been betting on share price falls closing their short positions.
Despite Branson's assurances, there are signs that savers are continuing to defect. It is thought deposits at the Newcastle-based bank may have halved since mid-year, when they stood at more than £24bn. The bank is reported to be losing about £200m in deposits a day.
Fintag says I still believe 15p is the price it will go for. Northern Rock is eroding everyday as wind and rain continue to batter it into dust. Is it really losing USD2bn in deposits a week? I am surprised it has any left.
FORMER LITIGATOR HIRED TO INVEST $100M IN COURT CASES FOR UK HEDGE FUND
A British hedge fund has hired a former litigator to invest $100 million (£48 million) in European legal disputes in what is believed to be the first formal arrangement of its kind.
MKM Longboat, a Jersey-based, London-run hedge fund that manages $2.3 billion in assets, has hired Susan Dunn, formerly managing director of IM Litigation Funding, to explore litigation-based investments.
Hedge funds seeking novel ways to invest spare cash are already involved in third-party litigation funding - whereby investors cover the costs of a court dispute in return for a share of any eventual winnings - on an ad hoc basis. MKM Longboat is believed to be the first to have hired a dedicated fund manager with a specific pool of money to invest.
Ms Dunn, one of the pioneers of the litigation funding market in the UK, has been given an initial $100 million to invest in British and European legal disputes. She expects more money to be made available as necessary.
A founder of IM Litigation Funding, Ms Dunn was involved in backing a £90 million negligence claim against Moore Stephens, the accountant, the highest-value claim known to have been funded by a third party in the UK courts. In her new role, the former litigator with the law firm Wragge & Co will seek to invest in disputes worth upwards of £3 million.
John Godden, a hedge fund consultant at IGS Group, said that hedge funds were becoming increasingly interested in funding legal disputes. He said: “If you can get a strong legal opinion to say the case is likely to be successful, then it can be a favourable investment with a hedge fund willing to stake the money up front.”
Flush with petrodollars, oil-producing countries have embarked on a global shopping spree.
With a bold outlay of $7.5 billion, the Abu Dhabi Investment Authority is about to become one of the largest shareholders in Citigroup.
The bank had already experienced the petrodollar's power this month when another major shareholder, Prince Walid bin Talal of Saudi Arabia, cleared the way for the ouster of its chief executive, Charles O. Prince III.
The Dubai stock exchange, meanwhile, is negotiating for 20 percent of a newly merged company that includes Nasdaq and the operator of stock markets in the Nordic region. Qatar, like Dubai a sheikdom in the Persian Gulf, might compete in that deal..
In late October, Dubai, which has little oil but is part of the region's energy economy, bought part of Och-Ziff Capital Management, a hedge fund in New York. Abu Dhabi this month invested in Advanced Micro Devices, the chip maker, and in September bought into the Carlyle Group, a private equity giant.
Fintag says OPEC may still be pricing its asset in USD, and is very unhappy about Bernanke, but they are having the last laugh.
The oil barrons are taking over the world. In the past they consumed luxury. Today they are consuming institutions and swathes of countries.
Imperialism - you no longer need tanks and guns; you need Bernanke and oil.
usmajors tell us its bad in the mortgaged up USA (pdf).
BLACKSTONE DEFENDS PRIVATE EQUITY ROLE IN BUSINESS
Private equity firms have enjoyed exceptional growth over the past few years, thanks to abundant credit.
But they have drawn harsh criticism from unions, politicians and the public for stripping companies of their assets and burdening them with debt.
"We are viewed as a destructive force with a short-term perspective, levering companies and stripping their assets to enrich a few nasty people like me, who then don't even pay taxes on all that they get in such an unsavory manner," he told a conference.
"I suspect that private equity's current image has been coloured by myths and fears that have more to do with anxiety about changes in the global economy," he told the annual event by the Confederation of British Industry.
Schwarzman said private equity firms were not open enough and had to communicate more to improve their public image.
Philip Yea, chief executive of British private equity firm 3i Group Plc (III.L: Quote, Profile , Research), echoed Schwarzman's views
Fintag says Never to be trusted. The Pirates enjoyed the credit boom and for most have locked away their funds for 10 to 15 years so they have nothing to complain about and yet they still have a need to apologise and ask for forgiveness. The damage is done.
ts not always that both the venerable FT and the Wall Street Journal dive into a story and miss the point so absolutely that you have to question their sanity. The Alphaville chaps have summarised the two articles relating to the Citi financing deal with the AbuDhabi Investment authority under "Junk Citi" as the headline.
Selected quotes include:
"The securities will also pay a fixed coupon of 11 percent per year, payable quarterly. That may seem steep, but after accounting for the fact that 60 percent of that coupon is tax-deductible, the coupon rate is similar to the dividend rate on Citi's shares, a person familiar with the matter said."
"Citi is paying a higher interest rate than companies that borrow on the high-yield, or junk-bond, market; currently they pay roughly 9% for straight bonds. Typically, convertible bonds pay lower interest rates than straight bonds, although a particular bond's structure could affect the interest rate paid."
The Alphaville post ends up by noting:
"And why this highlighting of the fact that interest payments on the notes will be tax deductible (like most forms of debt)? And does 11 per cent represent a “slight premium” to a seven per cent yield on Citi stock? That's actually a premium of 57 per cent. Even after the spurious tax argument, it is difficult to see how this funding can be costing much less than 9 per cent."
Oh dear. Oh dearie dearie me. Gentlemen, there was a clue in first quote. ....."although a particular bond's structure could affect the interest rate paid". You bet it can. Lets take a look at the key features of the deal termsheet.
* Size: $7.5bn * Type: Mandatory convertible (DECS is the Citi brand for these ubiquitous instruments, otherwise known as reverse convertibles) * Payment rate: 11%, quarterly * Term: Approx 4 years * Settlement amount: (a) 235m citi shares if stock below 31.83 (b) 201.39m shares if stock above 37.24 (c) straight line interpolation between these numbers.
The 235m shares @ 31.83 is, indeed, equivalent to a $7.5bn equity financing. But ADIA has effectively sold a call option as well. It doesn't participate (much) in the rise from the low strike to the high strike. Perhaps, just perhaps, the value of this call option is equal to the 4 year additional yield premium on the DECS. Lets break down the deal into alternative components which have an identical cashflow profile (assuming pricing the day the deal was struck at 31.83):
* ADIA pays $7.5bn for 235m shares of citi stock at 31.83, at, say, 7% yield * ADIA sells 235m (ish) calls Citi stock strike 31.83 expiry 2010-11 (staged) * ADIA receives 201m calls on Citi stock strike 37.24 expiry 2010-11 (staged) * ADIA receives 4% pa dividend enhancement for 2.5-3.75 years (staged)
The dividend enhancement is probably worth 12% of the deal amount of $7.5bn. With sensible assumptions, the value of the call options sold back to Citi is around 8%, so the cost to Citi is around 4% or about 1.5% pa over the weighted average life of the deal. Put another way, Citi has raised tax deductible, upper tier capital funds for 4 years at a cost equivalent to another financing source of Libor+150. Smart business. It may even be that Citi's stock has suffered since the deal was struck in part due to Citi itself hedging out its long callspread position.
The FT and the Wall Street Journal are guilty of sensationalist journalism and have totally missed the point in their quest to find the worst possible slant on any investment bank's activities. I suppose this is in vogue at the moment. Perhaps if they had wanted to batter ADIA instead of Citi, the headline might have been "Unsophisticated Arab financiers write massive put option on US investment bank".
Fintag says Maybe it is because the US Treasury is at a loss and cannot bail out Citi?
The world's two biggest banks, HSBC and Citi are in serious trouble, and I mean really serious trouble and they are crossing their fingers hoping that because they are so big the authorities will let them breach their capital adequacy and hope nobody minds.
Barclays led big bank shares up yesterday as it issued a reassuring trading statement with no more bad news from its investment bank.
The bank's shares rose 5.4 per cent after it updated the market on its retail and commercial banking operations. Barclays rushed out details of credit crunch writedowns at its investment bank nearly two weeks ago to ease market jitters. The lack of more bad news in yesterday's statement calmed investors.
The news lifted shares of Royal Bank of Scotland 2.2 per cent. Investors have been concerned about RBS's exposure to US mortgages and leveraged loans. HBOS shares also rose, climbing 2.9 per cent.
Barclays is acting as a bellwether for UK lenders exposed to the capital markets because its Barclays Capital investment bank was involved in the booming credit markets and has given the most information about its exposure. BarCap wrote down £1.3bn in the four months to the end of October. A fund manager said Barclays' statement "gives a degree of comfort" but said the UK's banks needed debt markets to reopen to avert a big hit to earnings and the economies that feed their growth.
Chris Lucas, the bank's finance director, told analysts 2008 would bring "a greater range of uncertainty". Barclays reported little impact from the credit crunch on its retail banking operations in the first nine months of the year. Bad-debt performance in unsecured lending and at Barclaycard improved and charges "remained negligible" in mortgages, it said.
Fintag says I think there is a great opportunity for someone to publish how wrong these press releases are. The Buy / Hold /Sell recommendations should be based purely on the spinning techniques of the corporate communications departments.
Obviously Merrill would be at the top (liars) and to be fair I think HSBC would be at the bottom (truth tellers). BarCap are pretty good liars. The best liar of all is Goldman.
State Street Corporation has launched a private equity index which the Boston-based custodian bank said is the first not to rely on voluntary reporting from general partners in order to calculate returns.
The State Street Private Equity Index is based on the latest quarterly statistics from State Street Investment Analytics' Private Edge Group, which provides detailed analyses of customers' private equity portfolios through a fully automated web-enabled environment.
The data covers 1,300 private equity partnerships with a total fund size in excess of $1.1 trillion (€742bn) including public and private pensions, endowments and foundations. At the end of June, the index had a long term internal rate of return of 15.3%.
Chris Ailman, chief information officer of the California State Teachers' Retirement System, said: “The industry has long awaited a third party private equity index based on consistent and reliable data. State Street's index will be a tremendous asset in evaluating our holdings which will provide us the information necessary to make strategic business decisions.”
Fintag says 2 years too late? Since nearly all PE is private and offshore, I have no idea how this can represent the PE world.
A shortage of talented staff is forcing hedge fund management firms to give away more of their profits.
Hedge fund managers seem assured of high rewards for the foreseeable future, according to Sir John Gieve, a deputy-governor of the Bank of England, who said last week: “The fundamental drivers behind hedge fund growth are there.
The splitting and repackaging of risk, together with internationalization, has created opportunities. A high value has been placed on those who have the expertise to make the most of this process.”
But the division of the spoils is changing. Adam Zoia, managing partner of recruitment company Glocap Search, said senior employees were able to demand more money. He said: “Staff costs used to be considered a variable cost but the imbalance between supply and demand for talent has meant it is hard to make material reductions in compensation and it has become more of a fixed cost.”
This contrasts with the business model used by hedge fund managers for at least the past three decades, which gave most of the revenue to founders of a firm.
Early managers such as George Soros, Julian Robertson and Michael Steinhardt were the leading investment decision-makers at their groups and members of their teams gained experience until they were ready to leave and set up on their own.
If a firm using this model generated poor investment returns one year and earned no performance fees, members of the investment team went without bonuses. Any excess of annual management fees over fixed costs, such as office rental, went to the founders.
Fintag says It is tough out there. My operations people earn more than I do.
The hedge fund RAB Capital came under pressure after a downgrade from Landsbanki.
The broker noted that RAB's stake in Northern Rock accounted for 2 per cent of the special situations fund, which has fallen 9 per cent since the start of the third quarter.
Analyst Katrina Preston cut the stock to "hold" and slashed earnings guidance for this year and next.
She said the fall in RAB shares "reflects the market's anticipation of performance fee downgrades and fears of brand damage from the Northern Rock situation".
Fintag says That may explain why RAB will not vote for the Virgin bid. I have to respect RAB for taking such a long position - most other hedgies made their profits on the shorts. Good luck.
telegraph says " Wood's SRM becomes biggest shareholder in Rock "
8 comments
anonymous said ...
Godden the gob is back
28 Nov 07 - 08:28 gmt
anonymous said ...
...death?
28 Nov 07 - 09:17 gmt
anonymous said ...
Citi and Bank of America to merge rumors? Do you still get synergy if both are full of subprime toxic waste?
28 Nov 07 - 13:03 gmt
ozgerbobble said ...
You could say they're both infected and therefore "SIV" positive...........
28 Nov 07 - 14:48 gmt
anonymous said ...
...and no known cure either
28 Nov 07 - 17:29 gmt
anonymous said ...
Just a note to above, a broken leg might "heal" itself, but the bad news is the leg might be deformed and crooked and might never be able to support your weight as you try to walk again...hmmm
29 Nov 07 - 00:00 gmt
Demystifier said ...
Oil to be USD103 on 1 Nov 2007. And look what it is today?
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