I have been thinking for more than a few weeks now, that the Dec 31, 2008 results of most large international banks will be pretty dire. Unfortunately, my thoughts are kind of becoming real. I am fearing that when results of all financial institutions and other industry leaders are announced for the full year 2008, the story will be much rough and pretty bad for all. The coming few quarters will not be good as well. Rising unemployment, bad financial system with no lending, falling retail sales are not good signs for all of us! However, today's banking news is going to go into history as one of baddest news day of them all, especially for the large well known banks.
UBS ex-Global Head of Private Banking is announced as a fugitive by US courts in a case for helping Americans evade US taxes (that's a big no, no!, to fight IRS!)
Ex-UBS Executive Raoul Weil Declared a Fugitive by U.S. Judge
HSBC announces lower profit guidance, halving its dividend and expectation to raise almost USD 30 billion as capital
HSBC Falls on Report It May Need to Raise $30 Billion (Update3)
Citibank sells Smith Barney, announces withdrawal from China, has received over USD 700 billion funding
Can Pandit save Citigroup?
Breaking Up the Citi
Deutsche announces a huge loss of EUR 4.8billion (USD 6.4 billion)
Deutsche Stumble Poses New Capital Questions
2nd UPDATE: Deutsche Bank Warns Of 4Q Loss Around EUR4.8 Billion
Standard Chartered loses its CEO who will become UK Trade Minister
StanChart's Davies steps down for government role
Barclays to cut over 2,100 jobs
Barclays plans to cut another 2,100 jobs
RBS bank sold its China stake under pressure from its new owners - the UK Govt
British bank RBS says has sold Bank of China stake
So much news on one day that it makes your head spin......Can it get any more worse?
Thursday, January 15, 2009
Tuesday, January 6, 2009
The Financial World: How it Collapsed and How to Repair It?
The End of the Financial World as We Know It
By MICHAEL LEWIS and DAVID EINHORN
Published: January 3, 2009
How to Repair a Broken Financial World
By MICHAEL LEWIS and DAVID EINHORN
Published: January 3, 2009
These are 2 very well research and insightful articles and a must read to understand the ways and means of how the financial world collapsed and the how the seeds of the crisis were sown in the early years. The comments on SEC are actually disparaging. SEC was informed over the years, multiple times, that Madoff was a fraud. However, their political undertones did not allow them to investigate Madoff and help consumers protect their savings! It is kind of true that laws are made to protect the rich! While SEC slept, investors lost money and the main reason why SEC was created was lost to the very people who were under oath to uphold the laws of the country and the people to whom they were meant to serve.
The ratings agencies, in my opinion, have been pretty useless and do not have a very independent track record. But most investors do get guidance from them without using other analytical tools and sound judegement which is a must.
Excerpt:
"Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”
The second part proposes solutions in order to come out of the current crisis and the ineptitude of the various players in the crisis i.e. Govt, regulators, banks. All the players did not play the role they were supposed, and instead all of them went after short term gains which kept on turning into long term gains for a few years, until everyone hit a brick wall and brought down the entire edifice of the world's financial system.
One of the solutions is to close the ratings agencies and I totally agree with it. There should be a Govt entity, like the UN, or from each country's Govt that has a debt market to evaluate risks instead of a private company, funded by the investment companies causing a serious conflict of interest. If someone who understood this previously and was an investor would normally take all ratings with a pinch of salt but most investors, which is talking about more than 70-80% of all investors do not understand this simple concept or simply refuse to accept a logical explanation that rating agencies have always had a vested interest.
By MICHAEL LEWIS and DAVID EINHORN
Published: January 3, 2009
How to Repair a Broken Financial World
By MICHAEL LEWIS and DAVID EINHORN
Published: January 3, 2009
These are 2 very well research and insightful articles and a must read to understand the ways and means of how the financial world collapsed and the how the seeds of the crisis were sown in the early years. The comments on SEC are actually disparaging. SEC was informed over the years, multiple times, that Madoff was a fraud. However, their political undertones did not allow them to investigate Madoff and help consumers protect their savings! It is kind of true that laws are made to protect the rich! While SEC slept, investors lost money and the main reason why SEC was created was lost to the very people who were under oath to uphold the laws of the country and the people to whom they were meant to serve.
The ratings agencies, in my opinion, have been pretty useless and do not have a very independent track record. But most investors do get guidance from them without using other analytical tools and sound judegement which is a must.
Excerpt:
"Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”
The second part proposes solutions in order to come out of the current crisis and the ineptitude of the various players in the crisis i.e. Govt, regulators, banks. All the players did not play the role they were supposed, and instead all of them went after short term gains which kept on turning into long term gains for a few years, until everyone hit a brick wall and brought down the entire edifice of the world's financial system.
One of the solutions is to close the ratings agencies and I totally agree with it. There should be a Govt entity, like the UN, or from each country's Govt that has a debt market to evaluate risks instead of a private company, funded by the investment companies causing a serious conflict of interest. If someone who understood this previously and was an investor would normally take all ratings with a pinch of salt but most investors, which is talking about more than 70-80% of all investors do not understand this simple concept or simply refuse to accept a logical explanation that rating agencies have always had a vested interest.
Risk Mismanagement and VaR
This article in the NYT is a fascinating, although a long, read if you want to understand how the financial experts got it so wrong despite all the tools they had and were unable to protect even themselves.
Money managers use a concept called VaR (Value at Risk). This formula helps determine if there is any 'value' i.e. amount at risk in a portfolio of holdings, be it a bank's total portfolio, mutual fund holding portfolio or any other bundle of investments and how much is the 'value' at risk.
Most top notch investment banks use this concept and claim that 99% of the times they are able to predict the VaR and this helps them manage risks. but the uncertainty and unpredictability of the 1% is what breaks the back especially because these events have never occurred before and more importantly, have not been planned for. Therefore, such highly improbable events cause the greatest damage including the current financial crisis. Such events are earthquakes, depression due to bank failures, depression due to housing prices (current crisis) and are usually catastrophic.
Excerpt:
“VaR is a useful tool,” he said as our interview was nearing its end. “The more liquid the asset, the better the tool. The more history, the better the tool. The less of both, the worse it is. It helps you understand what you should expect to happen on a daily basis in an environment that is roughly the same. We had a trade last week in the mortgage universe where the VaR was $1 million. The same trade a week later had a VaR of $6 million. If you tell me my risk hasn’t changed — I say yes it has!” Two years ago, VaR worked for Goldman Sachs the way it once worked for Dennis Weatherstone — it gave the firm a signal that allowed it to make a judgment about risk. It wasn’t the only signal, but it helped. It wasn’t just the math that helped Goldman sidestep the early decline of mortgage-backed instruments. But it wasn’t just judgment either. It was both.
Why Goldman Sachs avoided the brunt of the crisis unlike other major investment banks:
"So Goldman called a meeting of about 15 people, including several risk managers and the senior people on the various trading desks. They examined a thick report that included every trading position the firm held. For the next three hours, they pored over everything. They examined their VaR numbers and their other risk models. They talked about how the mortgage-backed securities market “felt.” “Our guys said that it felt like it was going to get worse before it got better,” Viniar recalled. “So we made a decision: let’s get closer to home.”
Alan Greenspan said last year during a Congress testimony: “The whole intellectual edifice, however, collapsed in the summer of last year because the data input into the risk-management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.”
However, the writer of the book "The Black Swan" and "Fooled by Randomness", Nicholas Taleb who is a Professor and an author of widely read and followed books claims that the concept of VaR is pretty useless.
Taleb: Yet even faulty historical data isn’t Taleb’s primary concern. What he cares about, with standard VaR, is not the number that falls within the 99 percent probability. He cares about what happens in the other 1 percent, at the extreme edge of the curve. The fact that you are not likely to lose more than a certain amount 99 percent of the time tells you absolutely nothing about what could happen the other 1 percent of the time. You could lose $51 million instead of $50 million — no big deal. That happens two or three times a year, and no one blinks an eye. You could also lose billions and go out of business. VaR has no way of measuring which it will be.
VaR is a guide to at least some future trend forecasts. It may not be the best tool but it is the best that experts have come out with thus far over the course of history to get a future trend line on what to expect. Of course, it must be used with intelligent inputs from other mediums as well, as the article explains.
Excerpt:
One risk-model critic, Richard Bookstaber, a hedge-fund risk manager and author of “A Demon of Our Own Design,” ranted about VaR for a half-hour over dinner one night. Then he finally said, “If you put a gun to my head and asked me what my firm’s risk was, I would use VaR.” VaR may have been a flawed number, but it was the best number anyone had come up with.
Risk Mismanagement
By JOE NOCERA
Published: January 2, 2009
Money managers use a concept called VaR (Value at Risk). This formula helps determine if there is any 'value' i.e. amount at risk in a portfolio of holdings, be it a bank's total portfolio, mutual fund holding portfolio or any other bundle of investments and how much is the 'value' at risk.
Most top notch investment banks use this concept and claim that 99% of the times they are able to predict the VaR and this helps them manage risks. but the uncertainty and unpredictability of the 1% is what breaks the back especially because these events have never occurred before and more importantly, have not been planned for. Therefore, such highly improbable events cause the greatest damage including the current financial crisis. Such events are earthquakes, depression due to bank failures, depression due to housing prices (current crisis) and are usually catastrophic.
Excerpt:
“VaR is a useful tool,” he said as our interview was nearing its end. “The more liquid the asset, the better the tool. The more history, the better the tool. The less of both, the worse it is. It helps you understand what you should expect to happen on a daily basis in an environment that is roughly the same. We had a trade last week in the mortgage universe where the VaR was $1 million. The same trade a week later had a VaR of $6 million. If you tell me my risk hasn’t changed — I say yes it has!” Two years ago, VaR worked for Goldman Sachs the way it once worked for Dennis Weatherstone — it gave the firm a signal that allowed it to make a judgment about risk. It wasn’t the only signal, but it helped. It wasn’t just the math that helped Goldman sidestep the early decline of mortgage-backed instruments. But it wasn’t just judgment either. It was both.
Why Goldman Sachs avoided the brunt of the crisis unlike other major investment banks:
"So Goldman called a meeting of about 15 people, including several risk managers and the senior people on the various trading desks. They examined a thick report that included every trading position the firm held. For the next three hours, they pored over everything. They examined their VaR numbers and their other risk models. They talked about how the mortgage-backed securities market “felt.” “Our guys said that it felt like it was going to get worse before it got better,” Viniar recalled. “So we made a decision: let’s get closer to home.”
Alan Greenspan said last year during a Congress testimony: “The whole intellectual edifice, however, collapsed in the summer of last year because the data input into the risk-management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.”
However, the writer of the book "The Black Swan" and "Fooled by Randomness", Nicholas Taleb who is a Professor and an author of widely read and followed books claims that the concept of VaR is pretty useless.
Taleb: Yet even faulty historical data isn’t Taleb’s primary concern. What he cares about, with standard VaR, is not the number that falls within the 99 percent probability. He cares about what happens in the other 1 percent, at the extreme edge of the curve. The fact that you are not likely to lose more than a certain amount 99 percent of the time tells you absolutely nothing about what could happen the other 1 percent of the time. You could lose $51 million instead of $50 million — no big deal. That happens two or three times a year, and no one blinks an eye. You could also lose billions and go out of business. VaR has no way of measuring which it will be.
VaR is a guide to at least some future trend forecasts. It may not be the best tool but it is the best that experts have come out with thus far over the course of history to get a future trend line on what to expect. Of course, it must be used with intelligent inputs from other mediums as well, as the article explains.
Excerpt:
One risk-model critic, Richard Bookstaber, a hedge-fund risk manager and author of “A Demon of Our Own Design,” ranted about VaR for a half-hour over dinner one night. Then he finally said, “If you put a gun to my head and asked me what my firm’s risk was, I would use VaR.” VaR may have been a flawed number, but it was the best number anyone had come up with.
Risk Mismanagement
By JOE NOCERA
Published: January 2, 2009
Saturday, January 3, 2009
India versus China
I believe that the current economic slump will cause more economic harm to China than India in the near term. One of the reasons for this line of thought is because China is mostly the 'manufacturer' for the world whereas India distinguishes itself as the 'service provider' of the world. As we have known that over the last 20-30 years, the computer 'revolution', the phone 'revolution' and the travel 'revolution' has changed the way we, the people of the world, deal with each other and made all of us more integrated and hence more easily 'service oriented".
Compared to 50 years ago, more companies have opened and succeeded in the 'service providing' retail industry sector than any other. For example, coffee chains, hotel chains, tourism related companies, airlines, insurance sector, banks, health care, cafes, supermarkets, telecom companies, software and outsourcing industries are all in the service sector and all of them have come out of nowhere in the past 50 years. And by the way, in today's world, most of them are necessities more than anything else. If they are not for some people, they will become so, in the next couple of years. This continues to create additional demand on an almost daily basis. If such industries have cropped up in the last few decades in addition to manufacturing or in support of manufacturing, then more such companies will get created and succeed in the future. Another distinct advantage of the service industry is that some of them do not have to be geographically close to the consumer, i.e. outsourcing, tax return specialists, research in almost every industry, telecom, insurance among others, thus saving on long term expensive fixed costs and providing them flexibility of adapting to changes. With the advent of health care tourism in places such as Thailand and India and coming up in Dubai in the near future, service oriented industries will continue to prosper, partly due to exchange rate benefits in the emerging markets and wait list problems or availability of sufficient providers in their home countries. I also believe that any company CEO is more than willing to 'outsource' business keeping in mind the bottom line in order to maximise profits, which is the most important reason a corporation exists.
Over the long term, however, I believe that both countries will become superpowers over the coming decades, at least economically speaking, while politically they may share some of the burden of international decision making.
Despite many issues in both India and China that are emerging market economies, it has been rightly pointed out in the NYT article that both countries have grown using different models and are yet successful.
2009 may be an opportune time to invest slowly and in selective companies or industries in each of them.
A very interesting read.
The Next World Order
By GURCHARAN DAS
Published: January 1, 2009
Compared to 50 years ago, more companies have opened and succeeded in the 'service providing' retail industry sector than any other. For example, coffee chains, hotel chains, tourism related companies, airlines, insurance sector, banks, health care, cafes, supermarkets, telecom companies, software and outsourcing industries are all in the service sector and all of them have come out of nowhere in the past 50 years. And by the way, in today's world, most of them are necessities more than anything else. If they are not for some people, they will become so, in the next couple of years. This continues to create additional demand on an almost daily basis. If such industries have cropped up in the last few decades in addition to manufacturing or in support of manufacturing, then more such companies will get created and succeed in the future. Another distinct advantage of the service industry is that some of them do not have to be geographically close to the consumer, i.e. outsourcing, tax return specialists, research in almost every industry, telecom, insurance among others, thus saving on long term expensive fixed costs and providing them flexibility of adapting to changes. With the advent of health care tourism in places such as Thailand and India and coming up in Dubai in the near future, service oriented industries will continue to prosper, partly due to exchange rate benefits in the emerging markets and wait list problems or availability of sufficient providers in their home countries. I also believe that any company CEO is more than willing to 'outsource' business keeping in mind the bottom line in order to maximise profits, which is the most important reason a corporation exists.
Over the long term, however, I believe that both countries will become superpowers over the coming decades, at least economically speaking, while politically they may share some of the burden of international decision making.
Despite many issues in both India and China that are emerging market economies, it has been rightly pointed out in the NYT article that both countries have grown using different models and are yet successful.
2009 may be an opportune time to invest slowly and in selective companies or industries in each of them.
A very interesting read.
The Next World Order
By GURCHARAN DAS
Published: January 1, 2009
Thursday, January 1, 2009
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