Our clients' interests always come first.
Our experience shows that if we serve our clients well, our own success will follow.
Our assets are our people, capital and reputation.
If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.
Our goal is to provide superior returns to our shareholders. Profitability is critical to achieving superior returns, building our capital, and attracting and keeping our best people. Significant employee stock ownership aligns the interests of our employees and our shareholders.
We take great pride in the professional quality of our work.
We have an uncompromising determination to achieve excellence in everything we undertake. Though we may be involved in a wide variety and heavy volume of activity, we would, if it came to a choice, rather be best than biggest.
We stress creativity and imagination in everything we do. While recognizing that the old way may still be the best way, we constantly strive to find a better solution to a client's problems. We pride ourselves on having pioneered many of the practices and techniques that have become standard in the industry.
We make an unusual effort to identify and recruit the very best person for every job.
Although our activities are measured in billions of dollars, we select our people one by one. In a service business, we know that without the best people, we cannot be the best firm.
We offer our people the opportunity to move ahead more rapidly than is possible at most other places.
Advancement depends on merit and we have yet to find the limits to the responsibility our best people are able to assume. For us to be successful, our men and women must reflect the diversity of the communities and cultures in which we operate. That means we must attract, retain and motivate people from many backgrounds and perspectives. Being diverse is not optional; it is what we must be.
We stress teamwork in everything we do.
While individual creativity is always encouraged, we have found that team effort often produces the best results. We have no room for those who put their personal interests ahead of the interests of the firm and its clients.
The dedication of our people to the firm and the intense effort they give their jobs are greater than one finds in most other organizations. We think that this is an important part of our success.
We consider our size an asset that we try hard to preserve.
We want to be big enough to undertake the largest project that any of our clients could contemplate, yet small enough to maintain the loyalty, intimacy and the esprit de corps that we all treasure and that contribute greatly to our success.
We constantly strive to anticipate the rapidly changing needs of our clients and to develop new services to meet those needs. We know that the world of finance will not stand still and that complacency can lead to extinction.
We regularly receive confidential information as part of our normal client relationships.
To breach a confidence or to use confidential information improperly or carelessly would be unthinkable.
Our business is highly competitive, and we aggressively seek to expand our client relationships.
However, we must always be fair competitors and must never denigrate other firms.
Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives.
When new hires begin working at Goldman, they are told to follow 14 principles that outline the firm’s best practices. “Our clients’ interests always come first” is principle No. 1. The 14th principle is: “Integrity and honesty are at the heart of our business.”
But some former insiders, who requested anonymity because of concerns about retribution from the firm, say Goldman has a 15th, unwritten principle that employees openly discuss.
It urges Goldman workers to embrace conflicts and argues that they are evidence of a healthy tension between the firm and its customers. If you are not embracing conflicts, the argument holds, you are not being aggressive enough in generating business.
http://www2.goldmansachs.com/our-firm/our-people/business-principles.html
Related:
Clients Worried About Goldman’s Dueling Goals
Wednesday, 19 May 2010
Clients Worried About Goldman’s Dueling Goals
Clients Worried About Goldman’s Dueling Goals
By GRETCHEN MORGENSON and LOUISE STORY
Published: May 18, 2010
Questions have been raised that go to the heart of this institution’s most fundamental value: how we treat our clients.” — Lloyd C. Blankfein, Goldman Sachs’s C.E.O., at the firm’s annual meeting in May
As the housing crisis mounted in early 2007, Goldman Sachs was busy selling risky, mortgage-related securities issued by its longtime client, Washington Mutual, a major bank based in Seattle.
Although Goldman had decided months earlier that the mortgage market was headed for a fall, it continued to sell the WaMu securities to investors. While Goldman put its imprimatur on that offering, traders in the same Goldman unit were not so sanguine about WaMu’s prospects: they were betting that the value of WaMu’s stock and other securities would decline.
Goldman’s wager against its customer’s stock — a position known as a “short” — was large enough that it would have generated at least $10 million in profits if WaMu collapsed, according to documents recently released by Congress. And by mid-May, Goldman’s bet against other WaMu securities had made Goldman $2.5 million, the documents show.
WaMu eventually did collapse under the weight of souring mortgage loans; federal regulators seized it in September 2008, making it the biggest bank failure in American history.
Goldman’s bets against WaMu, wagers that took place even as it helped WaMu feed a housing frenzy that Goldman had already lost faith in, are examples of conflicting roles that trouble its critics and some former clients. While Goldman has legions of satisfied customers and maintains that it puts its clients first, it also sometimes appears to work against the interests of those same clients when opportunities to make trading profits off their financial troubles arise.
Goldman’s access to client information can also give its traders an advantage that many of the firm’s competitors lack. And because betting against a company’s shares or its debt can create an atmosphere of doubt about a company’s financial standing, Goldman because of its size and its position in the market can help make the success of some of its wagers faits accomplis.
Lucas van Praag, a Goldman spokesman, declined to say how much the firm earned on its bets against WaMu’s stock. He said his firm lost money on its bets against the other WaMu securities. In an e-mail reply to questions for this article, he said there was nothing improper about Goldman’s wagers against any of its clients. “Shorting stock or buying credit protection in order to manage exposures are typical tools to help a firm reduce its risk.”
WaMu is not the only Goldman client the firm bet against as the mortgage disaster gained steam. Documents released by the Senate Permanent Subcommittee on Investigations show that Goldman’s mortgage unit also wagered against Bear Stearns and Countrywide Financial, two longstanding clients of the firm. These documents are only related to the mortgage unit and it is unknown what other bets the rest of the firm made.
Goldman also bet against the American International Group, which insured Goldman’s mortgage bonds, and National City, a Cleveland bank the firm had advised on a sale of a big subprime mortgage lender to Merrill Lynch.
While no one has accused Goldman of anything illegal involving WaMu, National City, A.I.G. or the other clients it bet against, potential conflicts inherent in Wall Street’s business model are at the core of many of the investigations that state and federal authorities are conducting. Transactions entered into as the mortgage market fizzled may turn out to have been perfectly legal. Nevertheless, they have raised concerns among investors and analysts about the extent to which a variety of Wall Street firms put their own interests ahead of their clients’.
“Now it’s all about the score. Just make the score, do the deal. Move on to the next one. That’s the trader culture,” said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University and former counsel to the Federal Reserve Board. “Their business model has completely blurred the difference between executing trades on behalf of customers versus executing trades for themselves. It’s a huge problem.”
Goldman has come under particularly intense scrutiny on such issues since the financial and economic downturn began gathering momentum in 2007, in part because it has done so well, in part because of the power it wields in Washington and on Wall Street, and in part because regulators have taken a keen interest in its dealings.
The Securities and Exchange Commission filed a civil fraud suit against the firm last month, contending that it misled clients who bought a mortgage security that the regulators said was intended to fail. Goldman has said it did nothing wrong and is fighting the case. Legislators in Washington are also considering financial reforms that limit potential conflicts of interest in the way that firms like Goldman trade and invest their own money.
Still, Goldman’s many hats — trader, adviser, underwriter, matchmaker of buyers and sellers, and salesperson — has left some clients feeling bruised or so wary that they have sometimes avoided doing business with the bank.
During the early stages of the mortgage crisis, Goldman seems to have unnerved WaMu’s former chief executive, Kerry K. Killinger, according to an e-mail message that Congressional investigators released.
In that message, Mr. Killinger noted that he had avoided retaining Goldman’s investment bankers in the fall of 2007 because he was concerned about how the firm would use knowledge it gleaned from that relationship. He pointed out that Goldman was “shorting mortgages big time” even while it had been advising Countrywide, a major mortgage lender.
“I don’t trust Goldy on this,” he wrote. “They are smart, but this is swimming with the sharks.”
One of Mr. Killinger’s lieutenants at Washington Mutual felt the same way. “We always need to worry a little about Goldman,” that person wrote in an e-mail message, “because we need them more than they need us and the firm is run by traders.”
Mr. Killinger does not appear to have known that Goldman was selling short his company’s shares. His lawyer did not respond to requests for comment. But because Bear Stearns, National City, Countrywide and WaMu all were hammered by the mortgage crisis, any bets Goldman made against each of those firm’s shares were likely to have been profitable.
Even though Goldman had frequently shorted the shares of other firms, it, along with another bank, Morgan Stanley, successfully lobbied the S.E.C. in 2008, at the height of the mortgage collapse, to forbid traders from shorting financial shares, sparing its own stock.
CONFLICT OF PRINCIPLES
As Trading Arm Grows, a Clash of Purpose
When new hires begin working at Goldman, they are told to follow 14 principles that outline the firm’s best practices. “Our clients’ interests always come first” is principle No. 1. The 14th principle is: “Integrity and honesty are at the heart of our business.”
But some former insiders, who requested anonymity because of concerns about retribution from the firm, say Goldman has a 15th, unwritten principle that employees openly discuss.
It urges Goldman workers to embrace conflicts and argues that they are evidence of a healthy tension between the firm and its customers. If you are not embracing conflicts, the argument holds, you are not being aggressive enough in generating business.
Mr. van Praag said the firm was “unaware” of this 15th principle, adding that “any business in any industry, has potential conflicts and we all have an obligation to manage them effectively.”
But a former Goldman partner, who spoke on condition of anonymity, said that the company’s view of customers had changed in recent years. Under Lloyd C. Blankfein, Goldman’s chief executive, and a cadre of top lieutenants who have ramped up the firm’s trading operation, conflict avoidance had shifted to conflict management, this person said. Along the way, he said, the firm’s executives have come to see customers more as competitors they trade against than as clients.
In fact, Mr. Blankfein and Goldman are quick to remind critics that Wall Street deals with sophisticated investors, who they say can protect themselves. At the bank’s shareholder meeting earlier this month, Mr. Blankfein said, “We deal with the most demanding and, in some cases, cynical clients.”
Even Goldman’s mortgage department compliance training manual from 2007 acknowledges the challenges posed by the firm’s clients-come-first rule. Loyalty to customers “is not always straightforward” given the multiple financial hats Goldman wears in the market, the manual notes.
In addition, the manual explains how Goldman uses information harvested from clients who discuss the market, indicate interest in securities or leave orders consisting of “pretrade information.” The manual notes that Goldman also can deploy information it receives from a wide range of other sources, including data providers, other brokerage firms and securities exchanges.
“We continuously make markets and take risk based on a unique window on the market which is a mosaic constructed of all of the pieces of data received,” the manual said.
Mr. van Praag, the Goldman spokesman, said that the “manual recognizes that like many businesses, and certainly all our competitors, we serve multiple clients. In the process of serving multiple clients we receive information from multiple sources.”
“This policy and the excerpt cited from the training manual simply reflects the fact that we have a diverse client base and give our sales people and traders appropriate guidance,” he added.
CREATIVE DESTRUCTION
Fostering a Market Then Abandoning It
Even now, two years after a dispute with Goldman, C. Talbot Heppenstall Jr. gets miffed talking about the firm.
As treasurer at the University of Pittsburgh Medical Center, a leading nonprofit health care institution, Mr. Heppenstall had once been pleased with Goldman’s work on the enterprise’s behalf.
Beginning in 2002, Goldman had advised officials at U.P.M.C. to raise funds by issuing auction-rate securities. Auction-rate securities are stock or debt instruments with interest rates that reset regularly (usually weekly) in auctions overseen by the brokerage firms that sell them. Municipalities, student loan companies, mutual funds, hospitals and museums all used the securities to raise operating funds.
Goldman had helped to develop the auction-rate market and advised many clients to issue them, getting an annual fee for sponsoring the auctions. Between 2002 and 2008, U.P.M.C. issued $400 million; Goldman underwrote $160 million, while Morgan Stanley and UBS sold the rest.
But in the fall of 2007, as the credit crisis deepened, investors began exiting the $330 billion market, causing interest rates on the securities to drift upward. By mid-January 2008, U.P.M.C. was concerned about the viability of the market and asked Goldman if the hospital should get out. Stay the course, Goldman advised U.P.M.C. in a letter, a copy of which Mr. Heppenstall read to a reporter.
On Feb. 12, less than a month after that letter, Goldman withdrew from the market — the first Wall Street firm to do so, according to a Federal Reserve report. Other firms quickly followed suit.
With the market in disarray, the interest rates that U.P.M.C. and other issuers had to pay investors skyrocketed. Rather than pay the rates, U.P.M.C. decided to redeem the securities.
Although Goldman had fled the market, it refused to allow a redemption to proceed, Mr. Heppenstall said, warning that its contract with the hospital barred U.P.M.C. from buying back the securities for at least another month.
U.P.M.C. had to continue paying lofty interest rates — as well as Goldman’s fees, even though the firm was no longer sponsoring the auctions, according to Mr. Heppenstall.
Goldman had been U.P.M.C.’s investment banker for about six years, Mr. Heppenstall noted in an interview, but this incident marked the end of that relationship. He said that the other Wall Street firms that had underwritten U.P.M.C.’s auction-rate securities, Morgan Stanley and UBS, had allowed it to redeem them. Goldman was the only firm that did not.
“This conflict was the last straw in our relationship with Goldman Sachs and we no longer do any business with them,” he said.
Mr. van Praag, the Goldman spokesman, declined in his e-mail message to respond in detail to U.P.M.C.’s complaints, other than to say that a contract is a contract and that governed how Goldman interacted with the hospital.
“The legal agreements that governed U.P.M.C.’s A.R.S. securities did not allow U.P.M.C. to bid for its own securities in the auctions,” he said.
MUNI MANAGEMENT
Brokering State Debt and Advising Against It
A state assemblyman in New Jersey named Gary S. Schaer also has had unsettling encounters with Goldman.
Mr. Schaer, who heads the New Jersey Assembly’s Financial Institutions and Insurance Committee, said he became wary in 2008 when he learned that Goldman, one of the state’s main investment bankers, was encouraging speculators to bet against New Jersey’s debt in the derivatives market. (At the time, a former Goldman chief executive, Jon Corzine, was New Jersey’s governor).
Goldman had managed $4.2 billion in debt issuance for the state since 2004, receiving fees for arranging those deals.
A 59-page collection of trading ideas that Goldman put together in 2008, and which was reviewed by The New York Times, shows the firm recommending that customers buy insurance to protect themselves against a debt default by New Jersey. In addition to New Jersey, Goldman advocated placing bets against the debt of eight other states in the trading book. Goldman also underwrote debt for all but two of those states in 2008, according to Thomson Reuters.
Mr. Schaer complained to Mr. Blankfein in a letter in December 2008. A response came back from Kevin Willens, a managing director in Goldman’s public finance unit; he argued that Goldman maintained impermeable barriers between its unit that had helped New Jersey raise debt and another unit that was urging investors to bet against the state’s ability to repay that debt. Mr. Schaer replied that he doubted the barriers were impenetrable.
“New Jersey taxpayers cannot be expected to pay tens of millions of dollars in investment banking fees while another department of the very same firm — albeit one clearly and strategically walled off — actively or aggressively advocates the sale of the very same or similar bonds in the aftermath,” Mr. Schaer wrote.
Mr. Schaer said in an interview that he tried to get regulations passed to prevent banks from playing such dual roles in state finances, but has made little headway.
“I hope the federal government will undertake this problem, and it is a problem,” he said. “It’s unrealistic to think the wall — no matter how thick or how tall — will be effective.”
Goldman’s many financial roles have raised concerns well beyond the state level. Over the years, it has played the role of adviser and fund-raiser for a diverse range of countries, while occasionally drawing criticism for simultaneously betting against the ability of some countries, like Russia, to repay their debts.
TRADING MATRIX
As Client Positions Sour, Goldman Defends Own
Goldman’s powerful and nimble trading desk has become a reliable fountain of profits for the firm. But it has also instilled fear among some clients who say they believe, as Mr. Killinger and others at Washington Mutual did, that Goldman trades against the interests of some of its clients.
Trading desks make big bets using the firm’s and clients’ money. Goldman’s trading operation has grown so pivotal and influential that many analysts say the firm as a whole now operates more like a hedge fund than an investment bank — another benchmark of the firm’s internal evolution that can create new friction with clients.
For example, if Goldman makes a proprietary bet in a particular market, as it did in early 2007 when it amassed a huge wager against mortgages, what stops it from positioning itself against clients who operate in that market?
Bear Stearns, a now defunct investment bank, is a case in point.
With the housing crisis gathering steam in March 2007, Goldman created and sold to clients a $1 billion package of mortgage-related securities called Timberwolf. Within months, investors lost 80 percent of their money as Timberwolf plummeted.
Bear bought a $300 million slice of Timberwolf through some of its funds, and the investment was disastrous. The funds collapsed under the weight of Timberwolf and other errant investments, beginning a downward spiral for Bear itself that ended a year later with the firm forced into the arms of JPMorgan Chase to prevent a bankruptcy.
Goldman, however, benefited from the problems its securities helped to create, Congressional documents show. Around the same time that Bear was investing in Timberwolf, Goldman was placing a bet that Bear’s shares would fall. Goldman’s short position in Bear was large enough that it would have generated as much as $33 million in profits if Bear collapsed, according to the documents.
Mr. van Praag, a Goldman spokesman, declined in the e-mail message to say how much the firm earned on those bets or whether they were still on when Bear finally collapsed.
Goldman was busy with other clients as well during 2007, including Thornburg Mortgage, a high-end lender. Goldman was one of 22 financial companies that lent money to Thornburg; it was using about $200 million of a Goldman credit line backed by mortgage loans.
In August 2007, Goldman was the first firm to begin aggressively marking down the value of Thornburg assets used as collateral for the loan. Goldman said the assets were not valuable enough to repay the loan if Thornburg defaulted. Goldman demanded more cash to shore up the account.
According to five people briefed on the relationship who requested anonymity because they didn’t want to damage continuing business relationships, Goldman told Thornburg that the request was justified because the value of similar mortgages traded by other parties had been priced at lower levels. But Goldman, according to two people with knowledge of the situation, had not actually seen such trades.
Thornburg officials, however, pushed back on Goldman’s request, questioning the values the firm put on Thornburg’s portfolio. “When we tried to negotiate price, they argued that they were aware of transactions that were not broadly known on the Street,” said a former Thornburg employee briefed on the talks with Goldman. “That was their justification for why they were marking us down as aggressively as they were — that they were aware of things that others were not.”
Even as Goldman pressured Thornburg for cash, a Goldman banker pitched Thornburg to hire the firm to help it raise new funds. Thornburg turned elsewhere.
Thornburg wasn’t the only firm Goldman pressured this way. It made similar demands — using similar arguments — of A.I.G., the insurer that stood behind many of Goldman’s mortgage securities. Ultimately, Goldman’s demands drained the insurer of so much cash that a hobbled A.I.G. required a taxpayer bailout in September 2008. Meanwhile, Goldman had been buying protection against a possible debt default by A.I.G. at the same time that it was pressuring A.I.G. to pay it additional cash. Because Goldman’s own cash demands were weakening A.I.G., Goldman had a front-row seat to the distress the company was experiencing — giving Goldman added insight that buying default insurance on A.I.G. was probably a shrewd investment.
Although Goldman’s financial insight derived from proprietary dealings with A.I.G., and included facts that others in the market most likely didn’t have, Mr. van Praag, the Goldman spokesman, said that his firm was not capitalizing on nonpublic information.
Like A.I.G., Thornburg found that arguing with Goldman was fruitless, because the firm had favorable contracts with Thornburg governing disputes. So Thornburg accepted Goldman’s valuations, but then established credit lines with other banks.
Although Goldman lost a customer, its mortgage unit had gained a victory: the firm could cite the valuations that Thornburg accepted as proper pricing for mortgage securities when it got into similar disputes with other clients.
“If they could move our positions, they could then argue with A.I.G. or some of their other big positions that our marks were where the market was,” the former Thornburg employee said. “They could have this sort of client arbitrage going on.”
Mr. van Praag, the Goldman spokesman, said his firm’s dispute with Thornburg was about differing standards for valuing collateral, nothing more.
“We are a ‘mark to market’ institution and we mark our positions on a daily basis to reflect what we believe is the current value for a security if we decided to sell it,” he said. “Those marks are verified by our controllers department, which is independent from the securities division.”
Goldman said that the mortgage collapse and Thornburg’s financial problems vindicate the posture it took on how to value Thornburg’s collateral. “Subsequent events clearly indicated that our marks were accurate and realistic,” Mr. van Praag said.
Indeed, soon after Goldman demanded more funds from Thornburg, analysts began downgrading its shares on news of the collateral calls. Beaten down by the broader mortgage collapse, Thornburg filed for bankruptcy protection on May 1, 2009.
A version of this article appeared in print on May 19, 2010, on page A1 of the New York edition.
http://www.nytimes.com/2010/05/19/business/19client.html?ref=business&pagewanted=all
By GRETCHEN MORGENSON and LOUISE STORY
Published: May 18, 2010
Questions have been raised that go to the heart of this institution’s most fundamental value: how we treat our clients.” — Lloyd C. Blankfein, Goldman Sachs’s C.E.O., at the firm’s annual meeting in May
As the housing crisis mounted in early 2007, Goldman Sachs was busy selling risky, mortgage-related securities issued by its longtime client, Washington Mutual, a major bank based in Seattle.
Although Goldman had decided months earlier that the mortgage market was headed for a fall, it continued to sell the WaMu securities to investors. While Goldman put its imprimatur on that offering, traders in the same Goldman unit were not so sanguine about WaMu’s prospects: they were betting that the value of WaMu’s stock and other securities would decline.
Goldman’s wager against its customer’s stock — a position known as a “short” — was large enough that it would have generated at least $10 million in profits if WaMu collapsed, according to documents recently released by Congress. And by mid-May, Goldman’s bet against other WaMu securities had made Goldman $2.5 million, the documents show.
WaMu eventually did collapse under the weight of souring mortgage loans; federal regulators seized it in September 2008, making it the biggest bank failure in American history.
Goldman’s bets against WaMu, wagers that took place even as it helped WaMu feed a housing frenzy that Goldman had already lost faith in, are examples of conflicting roles that trouble its critics and some former clients. While Goldman has legions of satisfied customers and maintains that it puts its clients first, it also sometimes appears to work against the interests of those same clients when opportunities to make trading profits off their financial troubles arise.
Goldman’s access to client information can also give its traders an advantage that many of the firm’s competitors lack. And because betting against a company’s shares or its debt can create an atmosphere of doubt about a company’s financial standing, Goldman because of its size and its position in the market can help make the success of some of its wagers faits accomplis.
Lucas van Praag, a Goldman spokesman, declined to say how much the firm earned on its bets against WaMu’s stock. He said his firm lost money on its bets against the other WaMu securities. In an e-mail reply to questions for this article, he said there was nothing improper about Goldman’s wagers against any of its clients. “Shorting stock or buying credit protection in order to manage exposures are typical tools to help a firm reduce its risk.”
WaMu is not the only Goldman client the firm bet against as the mortgage disaster gained steam. Documents released by the Senate Permanent Subcommittee on Investigations show that Goldman’s mortgage unit also wagered against Bear Stearns and Countrywide Financial, two longstanding clients of the firm. These documents are only related to the mortgage unit and it is unknown what other bets the rest of the firm made.
Goldman also bet against the American International Group, which insured Goldman’s mortgage bonds, and National City, a Cleveland bank the firm had advised on a sale of a big subprime mortgage lender to Merrill Lynch.
While no one has accused Goldman of anything illegal involving WaMu, National City, A.I.G. or the other clients it bet against, potential conflicts inherent in Wall Street’s business model are at the core of many of the investigations that state and federal authorities are conducting. Transactions entered into as the mortgage market fizzled may turn out to have been perfectly legal. Nevertheless, they have raised concerns among investors and analysts about the extent to which a variety of Wall Street firms put their own interests ahead of their clients’.
“Now it’s all about the score. Just make the score, do the deal. Move on to the next one. That’s the trader culture,” said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University and former counsel to the Federal Reserve Board. “Their business model has completely blurred the difference between executing trades on behalf of customers versus executing trades for themselves. It’s a huge problem.”
Goldman has come under particularly intense scrutiny on such issues since the financial and economic downturn began gathering momentum in 2007, in part because it has done so well, in part because of the power it wields in Washington and on Wall Street, and in part because regulators have taken a keen interest in its dealings.
The Securities and Exchange Commission filed a civil fraud suit against the firm last month, contending that it misled clients who bought a mortgage security that the regulators said was intended to fail. Goldman has said it did nothing wrong and is fighting the case. Legislators in Washington are also considering financial reforms that limit potential conflicts of interest in the way that firms like Goldman trade and invest their own money.
Still, Goldman’s many hats — trader, adviser, underwriter, matchmaker of buyers and sellers, and salesperson — has left some clients feeling bruised or so wary that they have sometimes avoided doing business with the bank.
During the early stages of the mortgage crisis, Goldman seems to have unnerved WaMu’s former chief executive, Kerry K. Killinger, according to an e-mail message that Congressional investigators released.
In that message, Mr. Killinger noted that he had avoided retaining Goldman’s investment bankers in the fall of 2007 because he was concerned about how the firm would use knowledge it gleaned from that relationship. He pointed out that Goldman was “shorting mortgages big time” even while it had been advising Countrywide, a major mortgage lender.
“I don’t trust Goldy on this,” he wrote. “They are smart, but this is swimming with the sharks.”
One of Mr. Killinger’s lieutenants at Washington Mutual felt the same way. “We always need to worry a little about Goldman,” that person wrote in an e-mail message, “because we need them more than they need us and the firm is run by traders.”
Mr. Killinger does not appear to have known that Goldman was selling short his company’s shares. His lawyer did not respond to requests for comment. But because Bear Stearns, National City, Countrywide and WaMu all were hammered by the mortgage crisis, any bets Goldman made against each of those firm’s shares were likely to have been profitable.
Even though Goldman had frequently shorted the shares of other firms, it, along with another bank, Morgan Stanley, successfully lobbied the S.E.C. in 2008, at the height of the mortgage collapse, to forbid traders from shorting financial shares, sparing its own stock.
CONFLICT OF PRINCIPLES
As Trading Arm Grows, a Clash of Purpose
When new hires begin working at Goldman, they are told to follow 14 principles that outline the firm’s best practices. “Our clients’ interests always come first” is principle No. 1. The 14th principle is: “Integrity and honesty are at the heart of our business.”
But some former insiders, who requested anonymity because of concerns about retribution from the firm, say Goldman has a 15th, unwritten principle that employees openly discuss.
It urges Goldman workers to embrace conflicts and argues that they are evidence of a healthy tension between the firm and its customers. If you are not embracing conflicts, the argument holds, you are not being aggressive enough in generating business.
Mr. van Praag said the firm was “unaware” of this 15th principle, adding that “any business in any industry, has potential conflicts and we all have an obligation to manage them effectively.”
But a former Goldman partner, who spoke on condition of anonymity, said that the company’s view of customers had changed in recent years. Under Lloyd C. Blankfein, Goldman’s chief executive, and a cadre of top lieutenants who have ramped up the firm’s trading operation, conflict avoidance had shifted to conflict management, this person said. Along the way, he said, the firm’s executives have come to see customers more as competitors they trade against than as clients.
In fact, Mr. Blankfein and Goldman are quick to remind critics that Wall Street deals with sophisticated investors, who they say can protect themselves. At the bank’s shareholder meeting earlier this month, Mr. Blankfein said, “We deal with the most demanding and, in some cases, cynical clients.”
Even Goldman’s mortgage department compliance training manual from 2007 acknowledges the challenges posed by the firm’s clients-come-first rule. Loyalty to customers “is not always straightforward” given the multiple financial hats Goldman wears in the market, the manual notes.
In addition, the manual explains how Goldman uses information harvested from clients who discuss the market, indicate interest in securities or leave orders consisting of “pretrade information.” The manual notes that Goldman also can deploy information it receives from a wide range of other sources, including data providers, other brokerage firms and securities exchanges.
“We continuously make markets and take risk based on a unique window on the market which is a mosaic constructed of all of the pieces of data received,” the manual said.
Mr. van Praag, the Goldman spokesman, said that the “manual recognizes that like many businesses, and certainly all our competitors, we serve multiple clients. In the process of serving multiple clients we receive information from multiple sources.”
“This policy and the excerpt cited from the training manual simply reflects the fact that we have a diverse client base and give our sales people and traders appropriate guidance,” he added.
CREATIVE DESTRUCTION
Fostering a Market Then Abandoning It
Even now, two years after a dispute with Goldman, C. Talbot Heppenstall Jr. gets miffed talking about the firm.
As treasurer at the University of Pittsburgh Medical Center, a leading nonprofit health care institution, Mr. Heppenstall had once been pleased with Goldman’s work on the enterprise’s behalf.
Beginning in 2002, Goldman had advised officials at U.P.M.C. to raise funds by issuing auction-rate securities. Auction-rate securities are stock or debt instruments with interest rates that reset regularly (usually weekly) in auctions overseen by the brokerage firms that sell them. Municipalities, student loan companies, mutual funds, hospitals and museums all used the securities to raise operating funds.
Goldman had helped to develop the auction-rate market and advised many clients to issue them, getting an annual fee for sponsoring the auctions. Between 2002 and 2008, U.P.M.C. issued $400 million; Goldman underwrote $160 million, while Morgan Stanley and UBS sold the rest.
But in the fall of 2007, as the credit crisis deepened, investors began exiting the $330 billion market, causing interest rates on the securities to drift upward. By mid-January 2008, U.P.M.C. was concerned about the viability of the market and asked Goldman if the hospital should get out. Stay the course, Goldman advised U.P.M.C. in a letter, a copy of which Mr. Heppenstall read to a reporter.
On Feb. 12, less than a month after that letter, Goldman withdrew from the market — the first Wall Street firm to do so, according to a Federal Reserve report. Other firms quickly followed suit.
With the market in disarray, the interest rates that U.P.M.C. and other issuers had to pay investors skyrocketed. Rather than pay the rates, U.P.M.C. decided to redeem the securities.
Although Goldman had fled the market, it refused to allow a redemption to proceed, Mr. Heppenstall said, warning that its contract with the hospital barred U.P.M.C. from buying back the securities for at least another month.
U.P.M.C. had to continue paying lofty interest rates — as well as Goldman’s fees, even though the firm was no longer sponsoring the auctions, according to Mr. Heppenstall.
Goldman had been U.P.M.C.’s investment banker for about six years, Mr. Heppenstall noted in an interview, but this incident marked the end of that relationship. He said that the other Wall Street firms that had underwritten U.P.M.C.’s auction-rate securities, Morgan Stanley and UBS, had allowed it to redeem them. Goldman was the only firm that did not.
“This conflict was the last straw in our relationship with Goldman Sachs and we no longer do any business with them,” he said.
Mr. van Praag, the Goldman spokesman, declined in his e-mail message to respond in detail to U.P.M.C.’s complaints, other than to say that a contract is a contract and that governed how Goldman interacted with the hospital.
“The legal agreements that governed U.P.M.C.’s A.R.S. securities did not allow U.P.M.C. to bid for its own securities in the auctions,” he said.
MUNI MANAGEMENT
Brokering State Debt and Advising Against It
A state assemblyman in New Jersey named Gary S. Schaer also has had unsettling encounters with Goldman.
Mr. Schaer, who heads the New Jersey Assembly’s Financial Institutions and Insurance Committee, said he became wary in 2008 when he learned that Goldman, one of the state’s main investment bankers, was encouraging speculators to bet against New Jersey’s debt in the derivatives market. (At the time, a former Goldman chief executive, Jon Corzine, was New Jersey’s governor).
Goldman had managed $4.2 billion in debt issuance for the state since 2004, receiving fees for arranging those deals.
A 59-page collection of trading ideas that Goldman put together in 2008, and which was reviewed by The New York Times, shows the firm recommending that customers buy insurance to protect themselves against a debt default by New Jersey. In addition to New Jersey, Goldman advocated placing bets against the debt of eight other states in the trading book. Goldman also underwrote debt for all but two of those states in 2008, according to Thomson Reuters.
Mr. Schaer complained to Mr. Blankfein in a letter in December 2008. A response came back from Kevin Willens, a managing director in Goldman’s public finance unit; he argued that Goldman maintained impermeable barriers between its unit that had helped New Jersey raise debt and another unit that was urging investors to bet against the state’s ability to repay that debt. Mr. Schaer replied that he doubted the barriers were impenetrable.
“New Jersey taxpayers cannot be expected to pay tens of millions of dollars in investment banking fees while another department of the very same firm — albeit one clearly and strategically walled off — actively or aggressively advocates the sale of the very same or similar bonds in the aftermath,” Mr. Schaer wrote.
Mr. Schaer said in an interview that he tried to get regulations passed to prevent banks from playing such dual roles in state finances, but has made little headway.
“I hope the federal government will undertake this problem, and it is a problem,” he said. “It’s unrealistic to think the wall — no matter how thick or how tall — will be effective.”
Goldman’s many financial roles have raised concerns well beyond the state level. Over the years, it has played the role of adviser and fund-raiser for a diverse range of countries, while occasionally drawing criticism for simultaneously betting against the ability of some countries, like Russia, to repay their debts.
TRADING MATRIX
As Client Positions Sour, Goldman Defends Own
Goldman’s powerful and nimble trading desk has become a reliable fountain of profits for the firm. But it has also instilled fear among some clients who say they believe, as Mr. Killinger and others at Washington Mutual did, that Goldman trades against the interests of some of its clients.
Trading desks make big bets using the firm’s and clients’ money. Goldman’s trading operation has grown so pivotal and influential that many analysts say the firm as a whole now operates more like a hedge fund than an investment bank — another benchmark of the firm’s internal evolution that can create new friction with clients.
For example, if Goldman makes a proprietary bet in a particular market, as it did in early 2007 when it amassed a huge wager against mortgages, what stops it from positioning itself against clients who operate in that market?
Bear Stearns, a now defunct investment bank, is a case in point.
With the housing crisis gathering steam in March 2007, Goldman created and sold to clients a $1 billion package of mortgage-related securities called Timberwolf. Within months, investors lost 80 percent of their money as Timberwolf plummeted.
Bear bought a $300 million slice of Timberwolf through some of its funds, and the investment was disastrous. The funds collapsed under the weight of Timberwolf and other errant investments, beginning a downward spiral for Bear itself that ended a year later with the firm forced into the arms of JPMorgan Chase to prevent a bankruptcy.
Goldman, however, benefited from the problems its securities helped to create, Congressional documents show. Around the same time that Bear was investing in Timberwolf, Goldman was placing a bet that Bear’s shares would fall. Goldman’s short position in Bear was large enough that it would have generated as much as $33 million in profits if Bear collapsed, according to the documents.
Mr. van Praag, a Goldman spokesman, declined in the e-mail message to say how much the firm earned on those bets or whether they were still on when Bear finally collapsed.
Goldman was busy with other clients as well during 2007, including Thornburg Mortgage, a high-end lender. Goldman was one of 22 financial companies that lent money to Thornburg; it was using about $200 million of a Goldman credit line backed by mortgage loans.
In August 2007, Goldman was the first firm to begin aggressively marking down the value of Thornburg assets used as collateral for the loan. Goldman said the assets were not valuable enough to repay the loan if Thornburg defaulted. Goldman demanded more cash to shore up the account.
According to five people briefed on the relationship who requested anonymity because they didn’t want to damage continuing business relationships, Goldman told Thornburg that the request was justified because the value of similar mortgages traded by other parties had been priced at lower levels. But Goldman, according to two people with knowledge of the situation, had not actually seen such trades.
Thornburg officials, however, pushed back on Goldman’s request, questioning the values the firm put on Thornburg’s portfolio. “When we tried to negotiate price, they argued that they were aware of transactions that were not broadly known on the Street,” said a former Thornburg employee briefed on the talks with Goldman. “That was their justification for why they were marking us down as aggressively as they were — that they were aware of things that others were not.”
Even as Goldman pressured Thornburg for cash, a Goldman banker pitched Thornburg to hire the firm to help it raise new funds. Thornburg turned elsewhere.
Thornburg wasn’t the only firm Goldman pressured this way. It made similar demands — using similar arguments — of A.I.G., the insurer that stood behind many of Goldman’s mortgage securities. Ultimately, Goldman’s demands drained the insurer of so much cash that a hobbled A.I.G. required a taxpayer bailout in September 2008. Meanwhile, Goldman had been buying protection against a possible debt default by A.I.G. at the same time that it was pressuring A.I.G. to pay it additional cash. Because Goldman’s own cash demands were weakening A.I.G., Goldman had a front-row seat to the distress the company was experiencing — giving Goldman added insight that buying default insurance on A.I.G. was probably a shrewd investment.
Although Goldman’s financial insight derived from proprietary dealings with A.I.G., and included facts that others in the market most likely didn’t have, Mr. van Praag, the Goldman spokesman, said that his firm was not capitalizing on nonpublic information.
Like A.I.G., Thornburg found that arguing with Goldman was fruitless, because the firm had favorable contracts with Thornburg governing disputes. So Thornburg accepted Goldman’s valuations, but then established credit lines with other banks.
Although Goldman lost a customer, its mortgage unit had gained a victory: the firm could cite the valuations that Thornburg accepted as proper pricing for mortgage securities when it got into similar disputes with other clients.
“If they could move our positions, they could then argue with A.I.G. or some of their other big positions that our marks were where the market was,” the former Thornburg employee said. “They could have this sort of client arbitrage going on.”
Mr. van Praag, the Goldman spokesman, said his firm’s dispute with Thornburg was about differing standards for valuing collateral, nothing more.
“We are a ‘mark to market’ institution and we mark our positions on a daily basis to reflect what we believe is the current value for a security if we decided to sell it,” he said. “Those marks are verified by our controllers department, which is independent from the securities division.”
Goldman said that the mortgage collapse and Thornburg’s financial problems vindicate the posture it took on how to value Thornburg’s collateral. “Subsequent events clearly indicated that our marks were accurate and realistic,” Mr. van Praag said.
Indeed, soon after Goldman demanded more funds from Thornburg, analysts began downgrading its shares on news of the collateral calls. Beaten down by the broader mortgage collapse, Thornburg filed for bankruptcy protection on May 1, 2009.
A version of this article appeared in print on May 19, 2010, on page A1 of the New York edition.
http://www.nytimes.com/2010/05/19/business/19client.html?ref=business&pagewanted=all
PPB falls on tax fraud allegations against Wilmar subsidiaries
PPB falls on tax fraud allegations against Wilmar subsidiaries
Written by Surin Murugiah
Wednesday, 19 May 2010 09:47
KUALA LUMPUR: PPB GROUP BHD [] in early trade on Wednesday, May 19 after its related company Singapore-listed Wilmar International's Indonesian subsidiaries were investigated for unlawful tax claims.
At 9.30am, it was down 42 sen to RM17.20 wiith 96,200 shares done.
PPB holds a 18.34% stake in Wilmar.
The Jakarta Post in Indonesia reported that some Indonesian subsidiaries of Wilmar are under probe for alleged unlawful value-added tax-restitution claims made by those subsidiaries in Indonesia.
Analysts said the news were negative as it could be detrimental to the group’s reputation among investors. The group, however, has categorically denied the allegations.
http://www.theedgemalaysia.com/business-news/166326-ppb-falls-after-tax-fraud-allegations-vs-wilmar-intl-.html
Written by Surin Murugiah
Wednesday, 19 May 2010 09:47
KUALA LUMPUR: PPB GROUP BHD [] in early trade on Wednesday, May 19 after its related company Singapore-listed Wilmar International's Indonesian subsidiaries were investigated for unlawful tax claims.
At 9.30am, it was down 42 sen to RM17.20 wiith 96,200 shares done.
PPB holds a 18.34% stake in Wilmar.
The Jakarta Post in Indonesia reported that some Indonesian subsidiaries of Wilmar are under probe for alleged unlawful value-added tax-restitution claims made by those subsidiaries in Indonesia.
Analysts said the news were negative as it could be detrimental to the group’s reputation among investors. The group, however, has categorically denied the allegations.
http://www.theedgemalaysia.com/business-news/166326-ppb-falls-after-tax-fraud-allegations-vs-wilmar-intl-.html
Laggards Maybank, RHBCap more attractive after rate hike
Laggards Maybank, RHBCap more attractive after rate hike
Written by Loong Tse Min & Daniel Khoo
Monday, 17 May 2010 10:54
KUALA LUMPUR: Banks have started to raise interest rates after Bank Negara Malaysia (BNM) raised the overnight policy rate (OPR) by 25 basis points (bps) and big capitalised laggards could be the unexpected beneficiaries, analysts said.
Banks which were considered fully valued and less exciting due to their smaller share of the investment banking market, will now look attractive with an expected growth in net interest margins (NIM) of 10bps.
HwangDBS Vickers Research said other banks, which were laggards, would also benefit include Malayan Banking Bhd and RHB Capital Bhd. It said these banks would also benefit as proxies to economic growth after the first-quarter gross domestic product (GDP) grew at a sizzling 10.1%.
Last Thursday, BNM raised the OPR by 25bps to 2.5%, the second rate increase since March 4 and this has prompted several banks to hike their rates, effective this week.
Last Friday, Malayan Banking Bhd said it would revise upwards its deposit and base lending rate (BLR) from tomorrow with 25bps each. Maybank Islamic Bhd’s base financing rate (BFR) will similarly be increased by 25bps to 6.05%.
Other banks which are raising their rates are CIMB Bank, CIMB Islamic Bank and Bank Islam Malaysia Bhd.
HwangDBS said the OPR hike was positive for most banks as BLR-based loans tend to be re-priced within a week of a rate hike, while deposit rates take longer to adjust due to the various time buckets.
“Our sensitivity analysis shows that every 25bps hike in OPR would raise lending yields by 17bps and increase cost of funds by 7bps, thus widening NIM by 10bps and boosting earnings by 6.5%, on average,” it said.
HwangDBS said Maybank was a good proxy to the higher GDP and OPR hike expectations. It expects Maybank’s loan portfolio to expand 12%-15% from 2010 to 2012 compared with the industry average of 8% to 9%.
“Maybank and RHBCap are high conviction picks and we have buy call and target prices of RM9.10 and RM7.30, respectively,” it said.
The research house said the Alliance Financial Group, with 84% variable rate loans in its portfolio, would be the biggest winner while AMMB Holdings Bhd would be least affected due to its high proportion of fixed rate loans (57%).
AmBank Group’s chief financial officer and deputy group managing director Ashok Ramamurthy said there may be potential for RM15 million to RM20 million of revenue in the next 12 months which would be lost through “margin compression” due to the rising interest rate environment — which would make borrowing costs more expensive.
“Most banks around the world try to borrow short and lend long. And when they do that in a rising interest rate environment, there will be margin compressions. Margin compressions will be capped at RM50 million, 1.5% of our current revenues; but our actual exposure is much smaller, about one third of that,” Ashok said.
“So when you talk about our earnings guidance with profit growth of 16%-20% next year, that is after taking into account any potential impact from rising interest rates — that’s the net growth,” he added.
Maybank’s president and CEO Datuk Seri Abdul Wahid Omar said with inflation expected to rise to 2.3%, and with OPR increasing to 2.5%, the country was now experiencing positive real interest rates (after deducting inflation from interest rate figures).
He said interest rates were currently “not too high nor too low” and that it was accommodative and conducive for business and growth in the economy.
On the possibility of more OPR hikes, HwangDBS expects the rate to rise by another 50bps to 3% by the fourth quarter.
However, CIMB head of economics research Lee Heng Guie said BNM was neutral on the next rate move.
“Based on BNM’s policy statement, it is quite neutral, given the continued uncertainty of external factrors such as Greece’s sovereign debt crisis. We do expect rate change to move at a measured pace,” said Lee.
AmResearch senior economist Manokaran Mottian said the 25bps hike was a preemptive move by BNM. The central bank’s 25bps hike in March had been vindicated by the strong first-quarter GDP data.
Meanwhile, RHB Banking Group will raise the BLR for RHB Bank Bhd and the BFR for RHB Islamic from 5.8% to 6.05% from Wednesday. The new fixed deposit rates will be
This article appeared in The Edge Financial Daily, May 17, 2010.
Written by Loong Tse Min & Daniel Khoo
Monday, 17 May 2010 10:54
KUALA LUMPUR: Banks have started to raise interest rates after Bank Negara Malaysia (BNM) raised the overnight policy rate (OPR) by 25 basis points (bps) and big capitalised laggards could be the unexpected beneficiaries, analysts said.
Banks which were considered fully valued and less exciting due to their smaller share of the investment banking market, will now look attractive with an expected growth in net interest margins (NIM) of 10bps.
HwangDBS Vickers Research said other banks, which were laggards, would also benefit include Malayan Banking Bhd and RHB Capital Bhd. It said these banks would also benefit as proxies to economic growth after the first-quarter gross domestic product (GDP) grew at a sizzling 10.1%.
Last Thursday, BNM raised the OPR by 25bps to 2.5%, the second rate increase since March 4 and this has prompted several banks to hike their rates, effective this week.
Last Friday, Malayan Banking Bhd said it would revise upwards its deposit and base lending rate (BLR) from tomorrow with 25bps each. Maybank Islamic Bhd’s base financing rate (BFR) will similarly be increased by 25bps to 6.05%.
Other banks which are raising their rates are CIMB Bank, CIMB Islamic Bank and Bank Islam Malaysia Bhd.
HwangDBS said the OPR hike was positive for most banks as BLR-based loans tend to be re-priced within a week of a rate hike, while deposit rates take longer to adjust due to the various time buckets.
“Our sensitivity analysis shows that every 25bps hike in OPR would raise lending yields by 17bps and increase cost of funds by 7bps, thus widening NIM by 10bps and boosting earnings by 6.5%, on average,” it said.
HwangDBS said Maybank was a good proxy to the higher GDP and OPR hike expectations. It expects Maybank’s loan portfolio to expand 12%-15% from 2010 to 2012 compared with the industry average of 8% to 9%.
“Maybank and RHBCap are high conviction picks and we have buy call and target prices of RM9.10 and RM7.30, respectively,” it said.
The research house said the Alliance Financial Group, with 84% variable rate loans in its portfolio, would be the biggest winner while AMMB Holdings Bhd would be least affected due to its high proportion of fixed rate loans (57%).
AmBank Group’s chief financial officer and deputy group managing director Ashok Ramamurthy said there may be potential for RM15 million to RM20 million of revenue in the next 12 months which would be lost through “margin compression” due to the rising interest rate environment — which would make borrowing costs more expensive.
“Most banks around the world try to borrow short and lend long. And when they do that in a rising interest rate environment, there will be margin compressions. Margin compressions will be capped at RM50 million, 1.5% of our current revenues; but our actual exposure is much smaller, about one third of that,” Ashok said.
“So when you talk about our earnings guidance with profit growth of 16%-20% next year, that is after taking into account any potential impact from rising interest rates — that’s the net growth,” he added.
Maybank’s president and CEO Datuk Seri Abdul Wahid Omar said with inflation expected to rise to 2.3%, and with OPR increasing to 2.5%, the country was now experiencing positive real interest rates (after deducting inflation from interest rate figures).
He said interest rates were currently “not too high nor too low” and that it was accommodative and conducive for business and growth in the economy.
On the possibility of more OPR hikes, HwangDBS expects the rate to rise by another 50bps to 3% by the fourth quarter.
However, CIMB head of economics research Lee Heng Guie said BNM was neutral on the next rate move.
“Based on BNM’s policy statement, it is quite neutral, given the continued uncertainty of external factrors such as Greece’s sovereign debt crisis. We do expect rate change to move at a measured pace,” said Lee.
AmResearch senior economist Manokaran Mottian said the 25bps hike was a preemptive move by BNM. The central bank’s 25bps hike in March had been vindicated by the strong first-quarter GDP data.
Meanwhile, RHB Banking Group will raise the BLR for RHB Bank Bhd and the BFR for RHB Islamic from 5.8% to 6.05% from Wednesday. The new fixed deposit rates will be
- 2.5% (for one to five months, previously 2.25% for one to 11 months),
- 2.7% (six to 11 months),
- 3% for 12 months (from 2.6%) and
- 3.1% (13 to 35 months).
This article appeared in The Edge Financial Daily, May 17, 2010.
Professor tells investors to sell shares and bonds
Professor tells investors to sell shares and bonds
The New York University professor, Nassim Taleb, who made his name predicting the credit crunch, has told investors to dump equities and government bonds and buy 'hard assets'.
By James Phillips, citywire.co.uk
Published: 10:55PM BST 18 May 2010
The New York University professor, Nassim Taleb, who made his name predicting the credit crunch, has told investors to dump equities and government bonds and buy 'hard assets'.
He has poured scorn on the economic recovery, claiming that the global economy is in worse shape than it was during the subprime crisis and warns that the US could yet lurch into a Greek-style meltdown.
In an interview with Bloomberg TV, Taleb said the fragility in the banking system that he spotted in 2007 is still there and the bail-out of the financial sector has encouraged bankers to continue their 'casino' operations by increasing moral hazard.
"Look at all of the money they made with our backing- it is like they spat in our faces," he said.
His main concern is that the transferal of debt from the private to the public sector has seen the risks within the financial system increase and 'take a much more vicious form.'
Western governments have been issuing record levels of debt to keep the recovery afloat, but Taleb says that it is inevitable that at some point they will struggle to find buyers of these assets.
"It is clearer than ever that we are going to have a failed auction [of government bonds here in the US that will cause contagion," he said. "There will not be enough buyers of Treasuries and the government will have to print money and before you know it you wake up with hyperinflation without having had any inflation."
So how should investors position their portfolios for such a doomsday scenario? Taleb, who made millions betting against financials during the credit crunch, recommends investors dump long-term government bonds and only hold short-dated debt. He also warns against viewing the dollar as a hedge against the ailing euro, pointing out that both currencies face the same underlying problems.
He dismisses the stockmarket, which would be expected to perform badly in a period of hyperinflation, completely,
"I recommend not thinking about the stockmarket," he said. "It is a big hoax that has disappointed people over the last decade making their retirement plans, thinking it would appreciate."
"Use it as something to play with for entertainment and nothing more."
He favours moving into hard assets and advises investors to build exposure to a basket of metals rather than try and second guess which individual hard commodity will outperform. He also likes agricultural land, but said avoid 'speculative real estate'.
Taleb is certainly a controversial figure in investment circles, but he is always intriguing and even if you do not agree with his outlook, he is difficult to ignore.
http://www.telegraph.co.uk/finance/personalfinance/investing/7737050/Professor-tells-investors-to-sell-shares-and-bonds.html
The New York University professor, Nassim Taleb, who made his name predicting the credit crunch, has told investors to dump equities and government bonds and buy 'hard assets'.
By James Phillips, citywire.co.uk
Published: 10:55PM BST 18 May 2010
The New York University professor, Nassim Taleb, who made his name predicting the credit crunch, has told investors to dump equities and government bonds and buy 'hard assets'.
He has poured scorn on the economic recovery, claiming that the global economy is in worse shape than it was during the subprime crisis and warns that the US could yet lurch into a Greek-style meltdown.
In an interview with Bloomberg TV, Taleb said the fragility in the banking system that he spotted in 2007 is still there and the bail-out of the financial sector has encouraged bankers to continue their 'casino' operations by increasing moral hazard.
"Look at all of the money they made with our backing- it is like they spat in our faces," he said.
His main concern is that the transferal of debt from the private to the public sector has seen the risks within the financial system increase and 'take a much more vicious form.'
Western governments have been issuing record levels of debt to keep the recovery afloat, but Taleb says that it is inevitable that at some point they will struggle to find buyers of these assets.
"It is clearer than ever that we are going to have a failed auction [of government bonds here in the US that will cause contagion," he said. "There will not be enough buyers of Treasuries and the government will have to print money and before you know it you wake up with hyperinflation without having had any inflation."
So how should investors position their portfolios for such a doomsday scenario? Taleb, who made millions betting against financials during the credit crunch, recommends investors dump long-term government bonds and only hold short-dated debt. He also warns against viewing the dollar as a hedge against the ailing euro, pointing out that both currencies face the same underlying problems.
He dismisses the stockmarket, which would be expected to perform badly in a period of hyperinflation, completely,
"I recommend not thinking about the stockmarket," he said. "It is a big hoax that has disappointed people over the last decade making their retirement plans, thinking it would appreciate."
"Use it as something to play with for entertainment and nothing more."
He favours moving into hard assets and advises investors to build exposure to a basket of metals rather than try and second guess which individual hard commodity will outperform. He also likes agricultural land, but said avoid 'speculative real estate'.
Taleb is certainly a controversial figure in investment circles, but he is always intriguing and even if you do not agree with his outlook, he is difficult to ignore.
http://www.telegraph.co.uk/finance/personalfinance/investing/7737050/Professor-tells-investors-to-sell-shares-and-bonds.html
Should losses cause worry?
The Star Online
Wednesday May 19, 2010
Should losses cause worry?
PERSONAL INVESTING
By OOI KOK HWA
MANY long-term investors always look for companies that can provide consistent growth in earnings and, more importantly, stable growth in earnings. They dislike companies that appear to be “accident-prone” and have “extraordinary” losses every year or every few years.
Given that they will hold on to their investments for a very long period of time, their key returns from the companies will be highly dependent on the dividend payments.
If a company always shows high “extraordinary” losses every few years, long-term investors may not want to invest in this company since it cannot pay stable dividend payments. Nevertheless, some may still buy the company for trading rather than for long-term investment.
An earnings surprise occurs when there is a material difference between expected and actual financial results. In this article, we will look into earnings surprise as a result of unexpected huge losses incurred.
There are two main types of “extraordinary” losses:
Charles W. Mulford and Eugene E. Comiskey, in their book entitled Financial Warnings, defined non-recurring items as revenues or gains and expenses or losses that are not reasonably consistent contributors to financial results, either in terms of their presence or their amount. Examples of non-recurring items are
In 2009, as a result of low asset prices, a lot of companies reported high impairment losses on their assets. Even though high losses incurred from non-recurring items can affect the dividend payments and write off a portion of shareholders’ funds, most analysts will exclude the above losses in their earnings forecast as they are more concerned with the losses from their normal business operations.
In the computation of intrinsic value, analysts will look into the earnings power of the companies – the companies’ abilities to generate future earnings.
Analysts are less concerned with non-recurring items as the companies are not expected to incur this type of losses every year. For example, if a company incurs huge losses due to the disposal of certain assets, analysts are less worried as the company will not dispose of its assets every year. Furthermore, asset disposal is not part of its normal business operations.
Companies cannot avoid incurring losses from non-recurring items, which might be due to
However, based on our analysis, companies that tend to show frequent losses from non-recurring items in almost every financial year are normally fundamentally unhealthy. The quality of their management is almost always in doubt.
Some companies may claim that they cannot avoid incurring these losses. However, they are unable to provide a satisfactory explanation on why their competitors do not seem to be similarly affected but are instead able to show consistent growth in earnings despite difficult business cycles or environment.
As mentioned earlier, analysts are more concerned with the losses incurred as a result of the normal business operations. If a company incurs high losses due to
If it seems to be the only one that shows losses while its competitors have been performing well, we need to investigate the causes behind these losses and the effect on the bottomline of the company.
It is very important to take note of the subsequent corrective actions suggested by the companies to overcome the issues involved. Besides, we need to check the possibility of the company repeating the same mistake in the near future.
In short, besides focusing on generating higher sales and profits, the company needs to pay attention to risk management on cost control and take the necessary steps to hedge against business risks.
Companies need to understand that investors look for stability and predictability in future earnings.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
Wednesday May 19, 2010
Should losses cause worry?
PERSONAL INVESTING
By OOI KOK HWA
MANY long-term investors always look for companies that can provide consistent growth in earnings and, more importantly, stable growth in earnings. They dislike companies that appear to be “accident-prone” and have “extraordinary” losses every year or every few years.
Given that they will hold on to their investments for a very long period of time, their key returns from the companies will be highly dependent on the dividend payments.
If a company always shows high “extraordinary” losses every few years, long-term investors may not want to invest in this company since it cannot pay stable dividend payments. Nevertheless, some may still buy the company for trading rather than for long-term investment.
An earnings surprise occurs when there is a material difference between expected and actual financial results. In this article, we will look into earnings surprise as a result of unexpected huge losses incurred.
There are two main types of “extraordinary” losses:
- one is related to the recurring items or due to their normal business operations;
- the other to non-recurring items.
Charles W. Mulford and Eugene E. Comiskey, in their book entitled Financial Warnings, defined non-recurring items as revenues or gains and expenses or losses that are not reasonably consistent contributors to financial results, either in terms of their presence or their amount. Examples of non-recurring items are
- gains and losses on asset sales,
- foreign currency and debt retirement gains and losses,
- foreign currency gains and losses as well as
- the costs incurred in restructuring activities.
In 2009, as a result of low asset prices, a lot of companies reported high impairment losses on their assets. Even though high losses incurred from non-recurring items can affect the dividend payments and write off a portion of shareholders’ funds, most analysts will exclude the above losses in their earnings forecast as they are more concerned with the losses from their normal business operations.
In the computation of intrinsic value, analysts will look into the earnings power of the companies – the companies’ abilities to generate future earnings.
Analysts are less concerned with non-recurring items as the companies are not expected to incur this type of losses every year. For example, if a company incurs huge losses due to the disposal of certain assets, analysts are less worried as the company will not dispose of its assets every year. Furthermore, asset disposal is not part of its normal business operations.
Companies cannot avoid incurring losses from non-recurring items, which might be due to
- changes in economic situation or
- changes in business cycles,
- changes in accounting treatments or
- some unforeseen events.
However, based on our analysis, companies that tend to show frequent losses from non-recurring items in almost every financial year are normally fundamentally unhealthy. The quality of their management is almost always in doubt.
Some companies may claim that they cannot avoid incurring these losses. However, they are unable to provide a satisfactory explanation on why their competitors do not seem to be similarly affected but are instead able to show consistent growth in earnings despite difficult business cycles or environment.
As mentioned earlier, analysts are more concerned with the losses incurred as a result of the normal business operations. If a company incurs high losses due to
- cost overrun on certain projects,
- sharp drop in revenue or
- sudden increase in operating costs,
- the overall country economic situation,
- industry specific or
- only unique to that particular company.
If it seems to be the only one that shows losses while its competitors have been performing well, we need to investigate the causes behind these losses and the effect on the bottomline of the company.
It is very important to take note of the subsequent corrective actions suggested by the companies to overcome the issues involved. Besides, we need to check the possibility of the company repeating the same mistake in the near future.
In short, besides focusing on generating higher sales and profits, the company needs to pay attention to risk management on cost control and take the necessary steps to hedge against business risks.
Companies need to understand that investors look for stability and predictability in future earnings.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
Wilmar shares fall as Jakarta Globe reports tax probe
Written by Bloomberg
Wednesday, 19 May 2010 12:06
Wilmar International, the world’s biggest palm-oil trader, fell by the most in 18 months in Singapore trading after the Jakarta Globe said its parent was being investigated in Indonesia.
The parent faces a probe for possible tax fraud involving as much 3.6 trillion rupiah ($548 million), the Jakarta Globe said yesterday, citing documents provided by lawmaker Bambang Soesatyo. Wilmar said the tax claims by media reports, which it didn’t identify, were “untrue and unsubstantiated.”
“This is likely a misunderstanding between Wilmar and the tax authorities,” Credit Suisse Group AG analyst Tan Ting Min wrote in a report today. “We believe that Wilmar’s share price will underperform until the issue is cleared up, which could take months.” Tan downgraded the stock to “underperform” from “neutral.”
Wilmar fell as much as 8.7%, the worst drop since November 2008, to $5.65, and traded at $5.80 at 10:59 a.m. in Singapore. The decline of Singapore’s second-largest stock by market value helped dragged the benchmark index down 1.7%.
“The company is fully confident that its subsidiaries are and have at all times been in full compliance with all relevant Indonesian value-added tax laws,” Wilmar said in a statement yesterday to the Singapore exchange. Its units exported more than US$3 billion ($4.18 billion) worth of palm oil in the last three fiscal years, entitling them to claim 10% value-added tax paid on the cost of the sales, it said.
CHINESE CONCERNS
Wilmar is the largest exporter of palm oil from Indonesia. The company is also the biggest provider of cooking oil in China, with the nation accounting for 55% of sales last year.
“What is more detrimental is the reputational damage to the group,” an AmResearch Sdn. report said. “We wonder if the Chinese government would start scrutinizing Wilmar’s tax payments and accounts due to the allegations in Indonesia.”
CIMB Investment Bank Bhd. analyst Ivy Ng cut her 12-month target to $7.85 from $8.40 “to account for potential weak near-term sentiment” and as the earnings forecast could be reduced by 22% in the “worst-case scenario” of the company returning US$385 million to the government for tax refunds received in the past three years.
http://www.theedgesingapore.com/the-daily-edge/business/15899-wilmar-shares-fall-as-jakarta-globe-reports-tax-probe-update.html
Wednesday, 19 May 2010 12:06
Wilmar International, the world’s biggest palm-oil trader, fell by the most in 18 months in Singapore trading after the Jakarta Globe said its parent was being investigated in Indonesia.
The parent faces a probe for possible tax fraud involving as much 3.6 trillion rupiah ($548 million), the Jakarta Globe said yesterday, citing documents provided by lawmaker Bambang Soesatyo. Wilmar said the tax claims by media reports, which it didn’t identify, were “untrue and unsubstantiated.”
“This is likely a misunderstanding between Wilmar and the tax authorities,” Credit Suisse Group AG analyst Tan Ting Min wrote in a report today. “We believe that Wilmar’s share price will underperform until the issue is cleared up, which could take months.” Tan downgraded the stock to “underperform” from “neutral.”
Wilmar fell as much as 8.7%, the worst drop since November 2008, to $5.65, and traded at $5.80 at 10:59 a.m. in Singapore. The decline of Singapore’s second-largest stock by market value helped dragged the benchmark index down 1.7%.
“The company is fully confident that its subsidiaries are and have at all times been in full compliance with all relevant Indonesian value-added tax laws,” Wilmar said in a statement yesterday to the Singapore exchange. Its units exported more than US$3 billion ($4.18 billion) worth of palm oil in the last three fiscal years, entitling them to claim 10% value-added tax paid on the cost of the sales, it said.
CHINESE CONCERNS
Wilmar is the largest exporter of palm oil from Indonesia. The company is also the biggest provider of cooking oil in China, with the nation accounting for 55% of sales last year.
“What is more detrimental is the reputational damage to the group,” an AmResearch Sdn. report said. “We wonder if the Chinese government would start scrutinizing Wilmar’s tax payments and accounts due to the allegations in Indonesia.”
CIMB Investment Bank Bhd. analyst Ivy Ng cut her 12-month target to $7.85 from $8.40 “to account for potential weak near-term sentiment” and as the earnings forecast could be reduced by 22% in the “worst-case scenario” of the company returning US$385 million to the government for tax refunds received in the past three years.
http://www.theedgesingapore.com/the-daily-edge/business/15899-wilmar-shares-fall-as-jakarta-globe-reports-tax-probe-update.html
A quick look at Berkshire Hathaway (18.5.2010)
5 Years Chart
1 Year Chart
A quick look at Berkshire Hathaway (18.5.2010)
http://spreadsheets.google.com/pub?key=t9N2GnBsVP0AVw8rAIxfDsw&output=html
Berkshire Hathaway vs 5108.KL
5 Years Chart
1 Year Chart
1 Year Chart
A quick look at Berkshire Hathaway (18.5.2010)
http://spreadsheets.google.com/pub?key=t9N2GnBsVP0AVw8rAIxfDsw&output=html
Berkshire Hathaway vs 5108.KL
5 Years Chart
1 Year Chart
Time to let the euro die
Time to let the euro die
May 18, 2010 - 7:10PM
The time for tough decisions is here. In the next few months, the members of the euro area will have to make a choice: create a genuine fiscal and political union or let the euro die a slow death.
The European Union now realizes the Greek crisis has revealed some major flaws in the common currency. There's no point trying to fudge it. The euro can only be rescued by a sweeping centralization of control over tax and spending.
There's just one snag: A single economic government for the euro area isn't going to work. The surrender of national sovereignty is too great. The timing is all wrong. And there is still no realistic mechanism for enforcing whatever new rules are made in Frankfurt or Brussels.
With every step that this crisis takes, the euro moves closer and closer to falling apart. In a few years, we'll be talking again about the deutsche mark, the franc and the peseta.
After dithering for too long, policy makers now recognize that the foundations of the euro weren't strong enough.
The Stability and Growth Pact, which limited budget deficits to 3 per cent of gross domestic product, didn't work. Greece was running fiscal gaps far larger than those during the good years, and plenty of other nations were as well once the global economy turned down. It became a massive free lunch.
Countries could spend like crazy and get their neighbors to bail them out. It was hard to see how the system could survive for long if those were the rules. Everyone had an incentive to do the spending. No one had any incentive to do the bailouts.
EU response
''The Commission proposes to reinforce decisively the economic governance in the European Union,'' the EU said in a statement last week. Member states will have to submit their national budgets to the EU for approval.
It isn't hard to see the implications of that.
''The sovereign-debt crisis could be acting as a catalyst for an ever closer union of European countries,'' Morgan Stanley said in a May 11 note to investors. ''The decisions taken this weekend first by European leaders and then by finance ministers mark a big leap towards a fiscal union in the euro area.''
A fiscal union - in which budgets and taxes are decided centrally - would fix the problem. Member states wouldn't be able to run up unaffordable deficits. When they ran into trouble, money could be diverted from the more successful states to the ones that needed help. That's how it works within countries. It is how the euro should work, too. But here's why it probably won't.
Three reasons
First, the surrender of sovereignty is too great. Countries signed up to a single currency. They didn't sign up for a single government. Once you lose control of fiscal policy, you stop being a nation, and you become a district. It is hard to believe that will ever survive referenda or national elections. It is hard enough to persuade taxpayers to subsidize regions in the same country. Persuading electorates to send their taxes to a central authority, without having any control over where it is spent, will prove impossible.
''The budget law is a matter of national parliaments,'' Guido Westerwelle, Germany's foreign minister, said last week. ''The European Commission doesn't determine the budget. That is the job of the German Bundestag, the national parliament.''
Second, the timing is wrong. For the next five years, the only thing governments will be serving up is pain. Deficits are out of control. Spending has to be cut. Creating any kind of fiscal union was going to be tough enough even in the boom years, when you could hand out lots of cash to build new schools and roads. It will be much tougher when spending is being cut. The EU will take control of national budgets at precisely the moment they get slashed. Does that sound popular? Not really.
Third, there still isn't an enforcement mechanism. The latest proposal is that all the national budgets get submitted to Brussels in advance. The EU will approve them, or it won't.
So what happens if a budget is rejected, and local politicians tell the EU to go take a hike? Euro police aren't about to storm member parliaments and cart politicians away in handcuffs. So far, all that has been proposed is a rewrite of the stability pact, but with some more forms to fill in, and a bit of snarling if you break the rules. It didn't work last time, so why should it work now?
The EU has come up with the only realistic solution to the crisis presented by Greece's mountain of debt. But it's still not going to work. And once that becomes clear, there will be only one option left: let the euro die.
(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)
Bloomberg News
May 18, 2010 - 7:10PM
The time for tough decisions is here. In the next few months, the members of the euro area will have to make a choice: create a genuine fiscal and political union or let the euro die a slow death.
The European Union now realizes the Greek crisis has revealed some major flaws in the common currency. There's no point trying to fudge it. The euro can only be rescued by a sweeping centralization of control over tax and spending.
There's just one snag: A single economic government for the euro area isn't going to work. The surrender of national sovereignty is too great. The timing is all wrong. And there is still no realistic mechanism for enforcing whatever new rules are made in Frankfurt or Brussels.
With every step that this crisis takes, the euro moves closer and closer to falling apart. In a few years, we'll be talking again about the deutsche mark, the franc and the peseta.
After dithering for too long, policy makers now recognize that the foundations of the euro weren't strong enough.
The Stability and Growth Pact, which limited budget deficits to 3 per cent of gross domestic product, didn't work. Greece was running fiscal gaps far larger than those during the good years, and plenty of other nations were as well once the global economy turned down. It became a massive free lunch.
Countries could spend like crazy and get their neighbors to bail them out. It was hard to see how the system could survive for long if those were the rules. Everyone had an incentive to do the spending. No one had any incentive to do the bailouts.
EU response
''The Commission proposes to reinforce decisively the economic governance in the European Union,'' the EU said in a statement last week. Member states will have to submit their national budgets to the EU for approval.
It isn't hard to see the implications of that.
''The sovereign-debt crisis could be acting as a catalyst for an ever closer union of European countries,'' Morgan Stanley said in a May 11 note to investors. ''The decisions taken this weekend first by European leaders and then by finance ministers mark a big leap towards a fiscal union in the euro area.''
A fiscal union - in which budgets and taxes are decided centrally - would fix the problem. Member states wouldn't be able to run up unaffordable deficits. When they ran into trouble, money could be diverted from the more successful states to the ones that needed help. That's how it works within countries. It is how the euro should work, too. But here's why it probably won't.
Three reasons
First, the surrender of sovereignty is too great. Countries signed up to a single currency. They didn't sign up for a single government. Once you lose control of fiscal policy, you stop being a nation, and you become a district. It is hard to believe that will ever survive referenda or national elections. It is hard enough to persuade taxpayers to subsidize regions in the same country. Persuading electorates to send their taxes to a central authority, without having any control over where it is spent, will prove impossible.
''The budget law is a matter of national parliaments,'' Guido Westerwelle, Germany's foreign minister, said last week. ''The European Commission doesn't determine the budget. That is the job of the German Bundestag, the national parliament.''
Second, the timing is wrong. For the next five years, the only thing governments will be serving up is pain. Deficits are out of control. Spending has to be cut. Creating any kind of fiscal union was going to be tough enough even in the boom years, when you could hand out lots of cash to build new schools and roads. It will be much tougher when spending is being cut. The EU will take control of national budgets at precisely the moment they get slashed. Does that sound popular? Not really.
Third, there still isn't an enforcement mechanism. The latest proposal is that all the national budgets get submitted to Brussels in advance. The EU will approve them, or it won't.
So what happens if a budget is rejected, and local politicians tell the EU to go take a hike? Euro police aren't about to storm member parliaments and cart politicians away in handcuffs. So far, all that has been proposed is a rewrite of the stability pact, but with some more forms to fill in, and a bit of snarling if you break the rules. It didn't work last time, so why should it work now?
The EU has come up with the only realistic solution to the crisis presented by Greece's mountain of debt. But it's still not going to work. And once that becomes clear, there will be only one option left: let the euro die.
(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)
Bloomberg News
German short-sell ban shocks markets
German short-sell ban shocks markets
May 19, 2010 - 6:59AM
Germany will temporarily ban naked short selling and naked credit-default swaps of euro-area government bonds at midnight after politicians blamed the practice for exacerbating the European debt crisis.
The ban will also apply to naked short selling in shares of 10 banks and insurers that will last until March 31, 2011, German financial regulator BaFin said today in an e-mailed statement. The step was needed because of "exceptional volatility" in euro-area bonds, the regulator said.
The move came as Chancellor Angela Merkel's coalition seeks to build momentum on financial-market regulation with lower- house lawmakers due to begin debating a bill tomorrow authorizing Germany's contribution to a $US1 trillion bailout plan to backstop the euro. US stocks fell and the euro dropped to $US1.2231, the lowest level since April 18, 2006, after the announcement.
"You cannot imagine what broke lose here after BaFin's announcement," Johan Kindermann, a capital markets lawyer at Simmons & Simmons in Frankfurt, said in an interview. "This will lead to an uproar in the markets tomorrow. Short-sellers will now, even tonight, try to close their positions at markets where they can still do so - if they find any possibilities left at all now."
Merkel, Sarkozy
Merkel and French President Nicolas Sarkozy have called for curbs on speculating with sovereign credit-default swaps. European Union Financial Services Commissioner Michel Barnier this week called for stricter disclosure requirements on the transactions.
Allianz SE, Deutsche Bank AG, Commerzbank AG, Deutsche Boerse AG, Deutsche Postbank AG, Muenchener Rueckversicherungs AG, Hannover Rueckversicherungs AG, Generali Deutschland Holding AG, MLP AG and Aareal Bank AG are covered by the short-selling ban.
"Massive" short-selling was leading to excessive price movements which "could endanger the stability of the entire financial system," BaFin said in the statement.
The European Union last month proposed that the Financial Stability Board, the group set up by the Group of 20 nations to monitor global financial trends, should "closely examine the role" of CDS on sovereign bond spreads. Merkel said earlier today that she will press the Group of 20 to bring in a financial transactions tax.
Merkel's 'Battle'
"In some ways, it's a battle of the politicians against the markets" and "I'm determined to win," Merkel said May 6. "The speculators are our adversaries."
Germany, along with the US and other EU nations, banned short selling of banks and insurance company shares at the height of the global financial crisis in 2008. The country still has rules requiring disclosure of net short positions of 0.2 per cent or more of outstanding shares of 10 separate companies.
The disclosure of the rules drew criticism from lawyers who said that they should have been announced well ahead of time.
"The way it's been announced is very irresponsible, and it's sent many market participants into panic mode," said Darren Fox, a regulator lawyer who advises hedge funds at Simmons & Simmons in London. "We thought regulators had learned their lessons from September 2008. Where is the market emergency that necessitates the introduction of an overnight ban?"
Short-selling is when hedge funds and other investors borrow shares they don't own and sell them in the hope their price will go down. If it does, they buy back the shares at the lower price, return them to their owner and pocket the difference.
Credit-default swaps are derivatives that pay the buyer face value if a borrower -- a country or a company -- defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. Traders in naked credit-default swaps buy insurance on bonds they don't own.
A basis point on a credit-default swap contract protecting $US10 million of debt from default for five years is equivalent to $US1000 a year.
Bloomberg
May 19, 2010 - 6:59AM
Germany will temporarily ban naked short selling and naked credit-default swaps of euro-area government bonds at midnight after politicians blamed the practice for exacerbating the European debt crisis.
The ban will also apply to naked short selling in shares of 10 banks and insurers that will last until March 31, 2011, German financial regulator BaFin said today in an e-mailed statement. The step was needed because of "exceptional volatility" in euro-area bonds, the regulator said.
The move came as Chancellor Angela Merkel's coalition seeks to build momentum on financial-market regulation with lower- house lawmakers due to begin debating a bill tomorrow authorizing Germany's contribution to a $US1 trillion bailout plan to backstop the euro. US stocks fell and the euro dropped to $US1.2231, the lowest level since April 18, 2006, after the announcement.
"You cannot imagine what broke lose here after BaFin's announcement," Johan Kindermann, a capital markets lawyer at Simmons & Simmons in Frankfurt, said in an interview. "This will lead to an uproar in the markets tomorrow. Short-sellers will now, even tonight, try to close their positions at markets where they can still do so - if they find any possibilities left at all now."
Merkel, Sarkozy
Merkel and French President Nicolas Sarkozy have called for curbs on speculating with sovereign credit-default swaps. European Union Financial Services Commissioner Michel Barnier this week called for stricter disclosure requirements on the transactions.
Allianz SE, Deutsche Bank AG, Commerzbank AG, Deutsche Boerse AG, Deutsche Postbank AG, Muenchener Rueckversicherungs AG, Hannover Rueckversicherungs AG, Generali Deutschland Holding AG, MLP AG and Aareal Bank AG are covered by the short-selling ban.
"Massive" short-selling was leading to excessive price movements which "could endanger the stability of the entire financial system," BaFin said in the statement.
The European Union last month proposed that the Financial Stability Board, the group set up by the Group of 20 nations to monitor global financial trends, should "closely examine the role" of CDS on sovereign bond spreads. Merkel said earlier today that she will press the Group of 20 to bring in a financial transactions tax.
Merkel's 'Battle'
"In some ways, it's a battle of the politicians against the markets" and "I'm determined to win," Merkel said May 6. "The speculators are our adversaries."
Germany, along with the US and other EU nations, banned short selling of banks and insurance company shares at the height of the global financial crisis in 2008. The country still has rules requiring disclosure of net short positions of 0.2 per cent or more of outstanding shares of 10 separate companies.
The disclosure of the rules drew criticism from lawyers who said that they should have been announced well ahead of time.
"The way it's been announced is very irresponsible, and it's sent many market participants into panic mode," said Darren Fox, a regulator lawyer who advises hedge funds at Simmons & Simmons in London. "We thought regulators had learned their lessons from September 2008. Where is the market emergency that necessitates the introduction of an overnight ban?"
Short-selling is when hedge funds and other investors borrow shares they don't own and sell them in the hope their price will go down. If it does, they buy back the shares at the lower price, return them to their owner and pocket the difference.
Credit-default swaps are derivatives that pay the buyer face value if a borrower -- a country or a company -- defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. Traders in naked credit-default swaps buy insurance on bonds they don't own.
A basis point on a credit-default swap contract protecting $US10 million of debt from default for five years is equivalent to $US1000 a year.
Bloomberg
New Australian migrant list will hit business
New migrant list will hit business
YUKO NARUSHIMA
May 18, 2010
Restaurant and Catering Australia chief John Hart says the changes will force some restaurants out of business.
THE catering and restaurant industry has hit back at new rules published this week halving the number of skilled migrant places available for chefs and cooks.
Some restaurants would go out of business and others be forced to shorten their trading hours without migrant labour, according to Restaurant and Catering Australia chief executive John Hart.
''It's a nonsense,'' he said. ''Despite every tourism minister in every state calling for chefs to be left on, they took them off. It seems absurd.''
He said the industry was already 3000 cooks short before the federal government halved the number of places for which independent skilled migrants could apply.
Immigration Minister Chris Evans said a trimmed list would draw higher calibre migrants and would stop anyone subverting migration rules by studying ''low-value'' education courses in Australia.
Other jobs dropped were hairdressers, acupuncturists, journalists and naturopaths. Nurses, accountants, teachers and engineers were retained.
The Australian Chamber of Commerce and Industry said the list struck a balance between the immediate and long-term skills needs of the country. Private educators, however, predicted more college closures, thousands of job losses and a flight of international students to other countries.
Chief executive of the Australian Council for Private Education and Training, Andrew Smith, said international students had been given inadequate advice.
''We have to be absolutely honest about what Australia has done over a number of years now, and that was to link immigration and education,'' he said.
''Students invested tens of thousands of dollars on the basis of a clear government policy. It's unfair to them that the rules have changed during their courses.''
A high Australian dollar and widely publicised attacks on Indian students had already affected international colleges, Mr Smith said. Just a 5 per cent slump in student numbers would lead to more than 6000 job losses and $700 million in lost revenue.
A hairdressing tutor for four years at a private college, Vicki Bartlett, said the changes penalised students who were learning the trade legitimately.
''It will weed out the ferals who are rorting the system,'' she said, but added that international students she knew had already paid fees to salons for the equipment they needed to complete unpaid work-experience hours.
''Some are working so hard and it's unfair to move the goalposts on them,'' she said.
One foreign-owned college she knew of had continued to collect course fees until the moment it collapsed, she said.
''It's appalling how these kids are being treated,'' Ms Bartlett said.
Students in India, who have had visa applications cancelled, have reported difficulty in reclaiming millions of dollars in pre-paid fees.
The body that decided on the new list, Skills Australia, will update the list annually. It is scheduled to publish in coming weeks its rationale for exclusions.
Source: The Age
YUKO NARUSHIMA
May 18, 2010
Restaurant and Catering Australia chief John Hart says the changes will force some restaurants out of business.
THE catering and restaurant industry has hit back at new rules published this week halving the number of skilled migrant places available for chefs and cooks.
Some restaurants would go out of business and others be forced to shorten their trading hours without migrant labour, according to Restaurant and Catering Australia chief executive John Hart.
''It's a nonsense,'' he said. ''Despite every tourism minister in every state calling for chefs to be left on, they took them off. It seems absurd.''
He said the industry was already 3000 cooks short before the federal government halved the number of places for which independent skilled migrants could apply.
Immigration Minister Chris Evans said a trimmed list would draw higher calibre migrants and would stop anyone subverting migration rules by studying ''low-value'' education courses in Australia.
Other jobs dropped were hairdressers, acupuncturists, journalists and naturopaths. Nurses, accountants, teachers and engineers were retained.
The Australian Chamber of Commerce and Industry said the list struck a balance between the immediate and long-term skills needs of the country. Private educators, however, predicted more college closures, thousands of job losses and a flight of international students to other countries.
Chief executive of the Australian Council for Private Education and Training, Andrew Smith, said international students had been given inadequate advice.
''We have to be absolutely honest about what Australia has done over a number of years now, and that was to link immigration and education,'' he said.
''Students invested tens of thousands of dollars on the basis of a clear government policy. It's unfair to them that the rules have changed during their courses.''
A high Australian dollar and widely publicised attacks on Indian students had already affected international colleges, Mr Smith said. Just a 5 per cent slump in student numbers would lead to more than 6000 job losses and $700 million in lost revenue.
A hairdressing tutor for four years at a private college, Vicki Bartlett, said the changes penalised students who were learning the trade legitimately.
''It will weed out the ferals who are rorting the system,'' she said, but added that international students she knew had already paid fees to salons for the equipment they needed to complete unpaid work-experience hours.
''Some are working so hard and it's unfair to move the goalposts on them,'' she said.
One foreign-owned college she knew of had continued to collect course fees until the moment it collapsed, she said.
''It's appalling how these kids are being treated,'' Ms Bartlett said.
Students in India, who have had visa applications cancelled, have reported difficulty in reclaiming millions of dollars in pre-paid fees.
The body that decided on the new list, Skills Australia, will update the list annually. It is scheduled to publish in coming weeks its rationale for exclusions.
Source: The Age
Not suitable for work: why businesses fail
Not suitable for work: why businesses fail
DAVID WILSON
May 13, 2010
Many small business owners struggle finding the right staff, says start-up strategist Jack Garson.
Everyone bungles sometimes. If you are lucky, you only make a few trivial mistakes that can easily be fixed, enabling you to regroup fast.
If not, especially in a volatile post-downturn economy, your small business might wind up in the crowded enterprise graveyard. The number that fail is pegged at between 50 and 80 per cent: proof how easy it is to lose direction, if any existed in the first place.
Often, entrepreneurs launch start-ups on a gut instinct basis, without gauging the market. Only after investing, do they realise the gravity of the mistake. Then, if the venture limps on, there are plenty more to make.
Learn about the worst and how to correct them. A cohort of experts sheds some light.
Six critical small business blunders and how to fix them
1. Blind hiring
Misfire: Assuming they are smart enough to delegate in the first place, many small business owners have trouble hiring the right person for the right role, says start-up strategist Jack Garson. Over-confident about their interviewing skills, they are disappointed by the result.
Fix: First, establish what traits beyond experience, training, and enthusiasm the role demands. Also grasp how the applicant will perform in the position - if you like with the help the Predictive Index (www.predictiveresults.com), which Garson claims raises the successful hiring ratio from 33 per cent to over 90 per cent: "a critical improvement for any company - small or large".
2. Fuzzy logic
Misfire: A fuzzy partnership can be disastrous, according to legal analyst Kim Wright (www.cuttingedgelaw.com). Wright has witnessed many entrepreneurs choose partners circumstantially then fail to hammer out an agreement. Both sides invest heavily. Then, pushed by pressure, they focus purely on work. When an issue emerges, stress and resentment kick in: "Both names are on the website and they can't sit in a room together," Wright says.
Fix: Knuckle down - nut out a set of agreements that factors in how conflicts will be resolved.
3. Slack attack
Misfire: The worst mistake is to get comfortable and coast along on cruise control, failing to challenge or continuously analyse each department, says business coach Chris Chapman.
Fix: Recruit web-based tools - for instance social networking platforms like LinkedIn. Free or cheap, they are easy to use with strong return on investment. No MBA or IT department needed.
4. Me me me
Misfire: "By far, the biggest small business mistake I see is that too frequently owners focus on what they do, what they want to do, why they're so great at what they do," says consultant Barry Maher (www.barrymaher.com).
Fix: "The way to fix this is every bit as obvious as the problem," Maher says. Businesses must become "customer-centric", focusing on the customer. "It's not about you. It's about them."
5. Marketing phobia
Misfire: Marketing is the Achilles heel of small businesses, according to business launch expert Karin Abarbanel (www.birthingtheelephant.com). Based on her interviews with entrepreneurs across a range of businesses, Abarbanel concludes that the worst mistake small business owners make is undervaluing marketing. "They take a 'build it and they will come' attitude that can seriously hamper their chances of success."
Fix: The thrust is to redefine marketing. Think of it as sharing your passion rather than selling.
6. Feast or famine
Misfire: Failure to "manage the pipeline" is the cardinal sin, according to project management expert Martin VanDerSchouw - a member of the US President's Business Advisory Council. "Many small business leaders get so wrapped up in trying to keep the business afloat today, they fail to think about tomorrow. In a tight economy, these pressures get even greater."
Fix: Look ahead. Spend an hour a day managing the business three to six months down the track.
Source: theage.com.au
DAVID WILSON
May 13, 2010
Many small business owners struggle finding the right staff, says start-up strategist Jack Garson.
Everyone bungles sometimes. If you are lucky, you only make a few trivial mistakes that can easily be fixed, enabling you to regroup fast.
If not, especially in a volatile post-downturn economy, your small business might wind up in the crowded enterprise graveyard. The number that fail is pegged at between 50 and 80 per cent: proof how easy it is to lose direction, if any existed in the first place.
Often, entrepreneurs launch start-ups on a gut instinct basis, without gauging the market. Only after investing, do they realise the gravity of the mistake. Then, if the venture limps on, there are plenty more to make.
Learn about the worst and how to correct them. A cohort of experts sheds some light.
Six critical small business blunders and how to fix them
1. Blind hiring
Misfire: Assuming they are smart enough to delegate in the first place, many small business owners have trouble hiring the right person for the right role, says start-up strategist Jack Garson. Over-confident about their interviewing skills, they are disappointed by the result.
Fix: First, establish what traits beyond experience, training, and enthusiasm the role demands. Also grasp how the applicant will perform in the position - if you like with the help the Predictive Index (www.predictiveresults.com), which Garson claims raises the successful hiring ratio from 33 per cent to over 90 per cent: "a critical improvement for any company - small or large".
2. Fuzzy logic
Misfire: A fuzzy partnership can be disastrous, according to legal analyst Kim Wright (www.cuttingedgelaw.com). Wright has witnessed many entrepreneurs choose partners circumstantially then fail to hammer out an agreement. Both sides invest heavily. Then, pushed by pressure, they focus purely on work. When an issue emerges, stress and resentment kick in: "Both names are on the website and they can't sit in a room together," Wright says.
Fix: Knuckle down - nut out a set of agreements that factors in how conflicts will be resolved.
3. Slack attack
Misfire: The worst mistake is to get comfortable and coast along on cruise control, failing to challenge or continuously analyse each department, says business coach Chris Chapman.
Fix: Recruit web-based tools - for instance social networking platforms like LinkedIn. Free or cheap, they are easy to use with strong return on investment. No MBA or IT department needed.
4. Me me me
Misfire: "By far, the biggest small business mistake I see is that too frequently owners focus on what they do, what they want to do, why they're so great at what they do," says consultant Barry Maher (www.barrymaher.com).
Fix: "The way to fix this is every bit as obvious as the problem," Maher says. Businesses must become "customer-centric", focusing on the customer. "It's not about you. It's about them."
5. Marketing phobia
Misfire: Marketing is the Achilles heel of small businesses, according to business launch expert Karin Abarbanel (www.birthingtheelephant.com). Based on her interviews with entrepreneurs across a range of businesses, Abarbanel concludes that the worst mistake small business owners make is undervaluing marketing. "They take a 'build it and they will come' attitude that can seriously hamper their chances of success."
Fix: The thrust is to redefine marketing. Think of it as sharing your passion rather than selling.
6. Feast or famine
Misfire: Failure to "manage the pipeline" is the cardinal sin, according to project management expert Martin VanDerSchouw - a member of the US President's Business Advisory Council. "Many small business leaders get so wrapped up in trying to keep the business afloat today, they fail to think about tomorrow. In a tight economy, these pressures get even greater."
Fix: Look ahead. Spend an hour a day managing the business three to six months down the track.
Source: theage.com.au
A quick look at Xidelang (18.5.2010)
A quick look at Xidelang (18.5.2010)
http://spreadsheets.google.com/pub?key=tEtEdBnT28KID_KqaDJqu3g&output=html
http://spreadsheets.google.com/pub?key=tEtEdBnT28KID_KqaDJqu3g&output=html
Tuesday, 18 May 2010
Padini plans to spend RM7.55m on stores this year
Written by Melody Song
Sunday, 16 May 2010 23:28
SHAH ALAM: Fashion retailer PADINI HOLDINGS BHD [] plans to spend about RM7.55 million on existing and new stores by year-end, according to executive director Cheong Chung Yet.
Cheong, who is also Padini's creative director, told The Edge Financial Daily the average capital expenditure (capex) per square foot for its outlets was around RM200, while capex for its Brands Outlet store was around RM100.
"This year our major projects include a flagship Vincci store in Fahrenheit 88 Kuala Lumpur where customers will be able to get bags, shoes and accessories in-store, and a new 15,880-sq ft Brands Outlet store in Sunway Pyramid," he said, adding the company was also undertaking renovations in its Bandar Utama 2 and Pavilion Padini Concept Store (PCS) outlets.
At present, the company has 20 PCS outlets and is also eyeing East Malaysia and regional markets for expansion opportunities, said Cheong.
He also said sales from PCS outlets contributed about 40% of total group turnover in 2009, adding that some 150 new designs were introduced every month across its brands.
Padini has a total of seven primary brands, 197 outlets and consignment counters, and 72 franchise and dealer stores overseas.
"The next level for us would be to bring the company regional and to have more market recognition there," he said, noting that Padini already had some exposure in Asean countries including Thailand, the Philippines and Brunei, with 23 outlets in Saudi Arabia and nine in the United Arab Emirates (UAE).
According to the company's financial statements, its export market contributed about 10% of total revenue, which was RM128.4 million in the second quarter ended Feb 25, 2010.
Cheong said most of Padini's expansion plans were funded by internally generated funds.
He said Padini was cautiously optimistic on the outlook for the rest of the year, although the board of directors had not set a sales target.
"We have been maintaining earnings growth of around 18% year-on-year, which is impressive because sustaining this growth is challenging," he said.
On other challenges that lay ahead, Cheong said rising costs of raw material especially cotton yarns and labour costs in China where a large portion of garments and items were sourced from were areas the company was keeping an eye on.
"It is becoming difficult to sustain our retail prices, but we don't really revise our prices upwards," he said, explaining the company preferred to compromise with its suppliers on costs.
Padini was among OSK Research's top 50 Malaysian small-cap companies, which the research house said it liked for its robust return on equity (ROE) which it anticipates would hover above industry average at around 20% for the next two years, consistent earnings growth and strong balance sheet with net cash of RM25 million.
OSK has a neutral call on the stock with a target price of RM4.25. Padini closed five sen lower last Friday at RM3.75 with 6,400 shares done.
http://www.theedgemalaysia.com/business-news/166134-padini-plans-to-spend-rm755m-on-stores-this-year.html
Sunday, 16 May 2010 23:28
SHAH ALAM: Fashion retailer PADINI HOLDINGS BHD [] plans to spend about RM7.55 million on existing and new stores by year-end, according to executive director Cheong Chung Yet.
Cheong, who is also Padini's creative director, told The Edge Financial Daily the average capital expenditure (capex) per square foot for its outlets was around RM200, while capex for its Brands Outlet store was around RM100.
"This year our major projects include a flagship Vincci store in Fahrenheit 88 Kuala Lumpur where customers will be able to get bags, shoes and accessories in-store, and a new 15,880-sq ft Brands Outlet store in Sunway Pyramid," he said, adding the company was also undertaking renovations in its Bandar Utama 2 and Pavilion Padini Concept Store (PCS) outlets.
At present, the company has 20 PCS outlets and is also eyeing East Malaysia and regional markets for expansion opportunities, said Cheong.
He also said sales from PCS outlets contributed about 40% of total group turnover in 2009, adding that some 150 new designs were introduced every month across its brands.
Padini has a total of seven primary brands, 197 outlets and consignment counters, and 72 franchise and dealer stores overseas.
"The next level for us would be to bring the company regional and to have more market recognition there," he said, noting that Padini already had some exposure in Asean countries including Thailand, the Philippines and Brunei, with 23 outlets in Saudi Arabia and nine in the United Arab Emirates (UAE).
According to the company's financial statements, its export market contributed about 10% of total revenue, which was RM128.4 million in the second quarter ended Feb 25, 2010.
Cheong said most of Padini's expansion plans were funded by internally generated funds.
He said Padini was cautiously optimistic on the outlook for the rest of the year, although the board of directors had not set a sales target.
"We have been maintaining earnings growth of around 18% year-on-year, which is impressive because sustaining this growth is challenging," he said.
On other challenges that lay ahead, Cheong said rising costs of raw material especially cotton yarns and labour costs in China where a large portion of garments and items were sourced from were areas the company was keeping an eye on.
"It is becoming difficult to sustain our retail prices, but we don't really revise our prices upwards," he said, explaining the company preferred to compromise with its suppliers on costs.
Padini was among OSK Research's top 50 Malaysian small-cap companies, which the research house said it liked for its robust return on equity (ROE) which it anticipates would hover above industry average at around 20% for the next two years, consistent earnings growth and strong balance sheet with net cash of RM25 million.
OSK has a neutral call on the stock with a target price of RM4.25. Padini closed five sen lower last Friday at RM3.75 with 6,400 shares done.
http://www.theedgemalaysia.com/business-news/166134-padini-plans-to-spend-rm755m-on-stores-this-year.html
A quick look at Maybulk (18.5.2010)
A quick look at Maybulk (18.5.2010)
http://spreadsheets.google.com/pub?key=t_FY7rgxhGIW7AtIVKbgRig&output=html
http://spreadsheets.google.com/pub?key=t_FY7rgxhGIW7AtIVKbgRig&output=html
A quick look at Dutch Lady (18.5.2010)
A quick look at Dutch Lady (18.5.2010)
http://spreadsheets.google.com/pub?key=tSZUfBh6sqlDuzF6mlZwd1w&output=html
A quick look at JobStreet (18.5.2010)
A quick look at JobStreet (18.5.2010)
http://spreadsheets.google.com/pub?key=t_gp8dCkSwqnr86sAMKPM8g&output=html
A quick look at United Plantations (18.5.2010)
A quick look at United Plantations (18.5.2010)
http://spreadsheets.google.com/pub?key=tYSv8r0V5jZUslGQTEGKyYQ&output=html
Fed to Blame for Gold Surge, Currency Woes: Ron Pau
Fed to Blame for Gold Surge, Currency Woes: Ron Paul
The Associated Press
| 17 May 2010 | 10:07 AM ET
The Federal Reserve's practice of indiscriminately printing money is the chief culprit that has led to the surge in gold and demise of the euro, Rep. Ron Paul (R-Texas) told CNBC Monday.
As gold hits a succession of all-time highs and the euro struggles for mere survival, Paul said debt overloads at the base of the recent currency trends can be traced directly to the US central bank.
"The Federal Reserve behind the scenes has the power to create money out of thin air. It's very bizarre," Paul said. "They can bail out their friends and let the people they don't like fail, and create a trillion dollars or more out of thin air in order to prop up some companies at the expense of others ... It's absolutely bizarre and, yes, the American people right now I think are waking up to it."
Paul linked the disruptions to the departure in 1971 from the old Bretton Woods global currency system. He said he has been anticipating the surge in gold as confidence in currency wanes, and after the Bretton Woods collapse.
"This is the unwinding of a system," he said. "Until we replace it with something else you're going to continue to see this."
But Paul predicted that the system will be changed as more and more people begin to see its fundamental flaws.
"The gold surge recently has people discovering they're really printing money," Paul said. "They're just kidding themselves and kidding the American people that the Fed can keep doing what they're doing, because the economic laws will bring this to an end and probably in the not-too-distant future."
URL: http://www.cnbc.com/id/37189251/
The Associated Press
| 17 May 2010 | 10:07 AM ET
The Federal Reserve's practice of indiscriminately printing money is the chief culprit that has led to the surge in gold and demise of the euro, Rep. Ron Paul (R-Texas) told CNBC Monday.
As gold hits a succession of all-time highs and the euro struggles for mere survival, Paul said debt overloads at the base of the recent currency trends can be traced directly to the US central bank.
"The Federal Reserve behind the scenes has the power to create money out of thin air. It's very bizarre," Paul said. "They can bail out their friends and let the people they don't like fail, and create a trillion dollars or more out of thin air in order to prop up some companies at the expense of others ... It's absolutely bizarre and, yes, the American people right now I think are waking up to it."
Paul linked the disruptions to the departure in 1971 from the old Bretton Woods global currency system. He said he has been anticipating the surge in gold as confidence in currency wanes, and after the Bretton Woods collapse.
"This is the unwinding of a system," he said. "Until we replace it with something else you're going to continue to see this."
But Paul predicted that the system will be changed as more and more people begin to see its fundamental flaws.
"The gold surge recently has people discovering they're really printing money," Paul said. "They're just kidding themselves and kidding the American people that the Fed can keep doing what they're doing, because the economic laws will bring this to an end and probably in the not-too-distant future."
URL: http://www.cnbc.com/id/37189251/
US faces one of biggest budget crunches in world – IMF
US faces one of biggest budget crunches in world – IMF
By Edmund Conway Business Last updated: May 14th, 2010
98 Comments Comment on this article
Earlier this week, the Bank of England Governor, Mervyn King, irked US authorities by pointing out that even the world’s economic superpower has a major fiscal problem -“even the United States, the world’s largest economy, has a very large fiscal deficit” were his words. They were rather vague, but by happy coincidence the International Monetary Fund has chosen to flesh out the issue today. Unfortunately this is a rather long post with a few chunky tables, but it is worth spending a bit of time with – the IMF analysis is fascinating.
Read the details here:
http://blogs.telegraph.co.uk/finance/edmundconway/100005702/us-faces-one-of-biggest-budget-crunches-in-western-world-imf/
So does all of this mean the US is Greece? The answer, you might be surprised to hear, is no. Now, it is true that the US has some similar issues to Greece – the high debt, the need to roll over quite a lot of debt each year, the rising healthcare costs and so on. But it has two secret (or not so secret) weapons.
Finally, some might be tempted at this point to cite the fact that the US has the world’s reserve currency in the dollar as another bonus. I am less sure. There is no doubt that this has made the US a safe haven destination (people buy US bonds when freaked out about more or less anything), and has meant that America has been able to keep borrowing at low levels throughout the crisis. However, the flip side of this is that because it has yet to feel the market strain, the US also has yet to face up properly to the public finance disaster that could befall it if it does not do anything about the problem. America is not Greece, but if it does not start making efforts to cut the deficit within a few years, it will head in that direction. The upshot wouldn’t be an IMF bail-out, but a collapse in the dollar and possible hyperinflation in the US, but it would be horrific all the same. America has time, but not forever.
By Edmund Conway Business Last updated: May 14th, 2010
98 Comments Comment on this article
Earlier this week, the Bank of England Governor, Mervyn King, irked US authorities by pointing out that even the world’s economic superpower has a major fiscal problem -“even the United States, the world’s largest economy, has a very large fiscal deficit” were his words. They were rather vague, but by happy coincidence the International Monetary Fund has chosen to flesh out the issue today. Unfortunately this is a rather long post with a few chunky tables, but it is worth spending a bit of time with – the IMF analysis is fascinating.
Read the details here:
http://blogs.telegraph.co.uk/finance/edmundconway/100005702/us-faces-one-of-biggest-budget-crunches-in-western-world-imf/
So does all of this mean the US is Greece? The answer, you might be surprised to hear, is no. Now, it is true that the US has some similar issues to Greece – the high debt, the need to roll over quite a lot of debt each year, the rising healthcare costs and so on. But it has two secret (or not so secret) weapons.
- The first is that unlike Greece it is not trapped in a monetary union. The US, like Britain and Japan, can independently control its monetary policy; it can devalue its currency. These are hardly solutions in and of themselves, but they do help make the adjustment a lot easier and more gradual.
- Second, the US has growth. It remains one of, if not the, world’s most dynamic economies. It is growing at a snappy pace this year (in comparison to other countries). And a few percentage points of GDP make an immense difference, since they make those debts much easier to repay.
Finally, some might be tempted at this point to cite the fact that the US has the world’s reserve currency in the dollar as another bonus. I am less sure. There is no doubt that this has made the US a safe haven destination (people buy US bonds when freaked out about more or less anything), and has meant that America has been able to keep borrowing at low levels throughout the crisis. However, the flip side of this is that because it has yet to feel the market strain, the US also has yet to face up properly to the public finance disaster that could befall it if it does not do anything about the problem. America is not Greece, but if it does not start making efforts to cut the deficit within a few years, it will head in that direction. The upshot wouldn’t be an IMF bail-out, but a collapse in the dollar and possible hyperinflation in the US, but it would be horrific all the same. America has time, but not forever.
UK economy is stuffed – but not as badly as Greece
UK economy is stuffed – but not as badly as Greece
You can hardly blame George Osborne for over-egging the point. Gordon Brown was still trying to blame the Tories for all the ills of the world 13 years after they were swept from power, as if his own mismanagement of the economy in the meantime might not have had a little something to do with it.
By Jeremy Warner, Assistant Editor
Published: 10:22PM BST 17 May 2010
So it seems reasonable enough that still less than a week into office, Mr Osborne should use the opportunity of his first Treasury press conference to blame the last lot for all the pain he's about to inflict. It's what incoming governments do.
But it's rare indeed that an incoming governments gets such manna from the last lot.
"Dear chief secretary, I am afraid to have to tell you the money has run out, yours, Liam." This single-line letter from the outgoing Chief Secretary, Liam Byrne, to his successor at the Treasury, David Laws, was apparently meant as a joke, but it serves equally well as New Labour's final epitaph. Had Mr Byrne said: "we've spent the lot, and frankly, you're stuffed", he could scarcely have been more blunt about the true horror of Labour's legacy.
Things are much worse than you think, Mr Osborne said on Monday in an attempt to soften us up for the blows to come. In an interview, he said: "By the end, the previous government had become completely irresponsible and has left this country with terrible public finances, worse as a proportion of our economy than Greece."
Mr Osborne is hardly the first to say it, and strictly speaking he is right on both counts. I've written myself at length about the pork barrel spending that took place in the run up to the election, with ministers showering money on the regions as if it was confetti. It is also true that the UK has one of the biggest Budget deficits in Europe. But Britain is not yet Greece, and the new Chancellor should take care not to frighten the markets into believing it is.
The public finances are possibly in worse shape than the previous Government was letting on, and obviously there are a whole range of public liabilities that should properly be brought back on balance sheet. Public Finance Initiative liabilities alone have rocketed from £60.5bn in 2000 to £206.8bn (nearly 15 per cent of GDP).
But I would be astonished if Mr Brown had actually lied, a la Greque, about the true state of the books. Much of the smoke and mirrors that took place under Labour were almost childishly transparent. The real problem lies rather in the use of overly optimistic assumptions about growth and tax receipts. These may be unrealistic, but Britain is hardly alone in assuming a possibly unrealistic rebound to above trend growth.
There are a number of reasons why comparisons with Greece are ill-founded and possibly quite dangerous. Greece, too, it will be recalled showed no lack of enthusiasm for tackling the deficit. It was only after the Papandreou government announced its first austerity programme that the real damage to confidence occurred. This was primarily because the markets fast realised that the scale of the consolidation was so extreme that it was likely to condemn the country to years of economic contraction, thus making the medium term debt burden worse, not better. Greece would thus be incapable of repaying its debts without help.
This doesn't have to be the case in Britain, which in any case has a much larger and more robust tax base. What's more, the UK mercifully still has control of its own currency and interest rates, so can counter the fiscal medicine with accommodative monetary policy. The eurozone's reluctance to apply any kind of inflationary counterweight condemns much of the Club Med to extreme deflationary contraction over the years ahead.
Mr Osborne's task is similar to that of applying chemotherapy; in seeking to kill off the cancer of the deficit he must be careful not to lose the confidence of markets and end up killing off the patient too. It's a balancing act between too little and too much. On Monday, he said a little too much.
Even so, the new Chancellor's first day at school was on the whole an encouraging one. The establishment of an Office for Budget Responsibility under Professor Sir Alan Budd is an important innovation which promises to restore credibility, destroyed under Mr Brown, in the Government's handling of the public finances.
Sir Alan is right to view his task as more important than the establishment of the Monetary Policy Committee by the incoming Labour Government in 1997. Inflation was yesterday's enemy by the time Labour came to power. To me, it seems unlikely the Government's judgments on interest rates would have been significantly different from the Bank of England's.
Indeed, the idea that economic policy was somehow safe in the Bank of England's hands lulled everyone into a false sense of security, thereby allowing Mr Brown a degree of leeway on tax and spend he might not otherwise have enjoyed. Rather than pump-priming the feel-good factor with interest rate therapy, the Government did it instead with debt and public spending.
Mr Brown cynically manipulated the "golden rule" to the point of laughable irrelevance. By the end, Britain was running the sort of deficit you would normally expect from a recession, not an economy in the midst of a consumer boom.
Mr Brown was not just judge and jury, he was prosecution and defence too. By calibrating the Government's tax and spending plans against genuinely independent forecasts for growth and the economic cycle, the OBR should do for management of the public finances what the Bank of England did for monetary policy.
Sir Alan was a key player at the birth of independent inflation targeting. He rightly regards his latest task as an altogether bigger challenge. The scale of it is laid bare in the International Monetary Fund's latest "Fiscal Monitor". Across advanced economies there needs to be an adjustment amounting to 8.75pc of GDP on average to primary Budget balances to get overall debt down to pre-crisis levels of around 60pc.
More work still needs to be done to deal with projected increases of 4 to 5pc of GDP in health and pensions spending over the next 20 years. Those countries that fail to achieve fiscal sustainability will see their growth potential permanently and seriously impaired.
But Mr Osborne shouldn't be too downhearted. Things could be worse. The ruinous deflation that Britain might be facing now if it were in the euro hardly bears thinking about. On this level at least, comparisons with Greece are justified. Whatever Mr Byrne says, we are not as badly stuffed as they are.
http://www.telegraph.co.uk/finance/economics/7734494/UK-economy-is-stuffed-but-not-as-badly-as-Greece.html
You can hardly blame George Osborne for over-egging the point. Gordon Brown was still trying to blame the Tories for all the ills of the world 13 years after they were swept from power, as if his own mismanagement of the economy in the meantime might not have had a little something to do with it.
By Jeremy Warner, Assistant Editor
Published: 10:22PM BST 17 May 2010
So it seems reasonable enough that still less than a week into office, Mr Osborne should use the opportunity of his first Treasury press conference to blame the last lot for all the pain he's about to inflict. It's what incoming governments do.
But it's rare indeed that an incoming governments gets such manna from the last lot.
"Dear chief secretary, I am afraid to have to tell you the money has run out, yours, Liam." This single-line letter from the outgoing Chief Secretary, Liam Byrne, to his successor at the Treasury, David Laws, was apparently meant as a joke, but it serves equally well as New Labour's final epitaph. Had Mr Byrne said: "we've spent the lot, and frankly, you're stuffed", he could scarcely have been more blunt about the true horror of Labour's legacy.
Things are much worse than you think, Mr Osborne said on Monday in an attempt to soften us up for the blows to come. In an interview, he said: "By the end, the previous government had become completely irresponsible and has left this country with terrible public finances, worse as a proportion of our economy than Greece."
Mr Osborne is hardly the first to say it, and strictly speaking he is right on both counts. I've written myself at length about the pork barrel spending that took place in the run up to the election, with ministers showering money on the regions as if it was confetti. It is also true that the UK has one of the biggest Budget deficits in Europe. But Britain is not yet Greece, and the new Chancellor should take care not to frighten the markets into believing it is.
The public finances are possibly in worse shape than the previous Government was letting on, and obviously there are a whole range of public liabilities that should properly be brought back on balance sheet. Public Finance Initiative liabilities alone have rocketed from £60.5bn in 2000 to £206.8bn (nearly 15 per cent of GDP).
But I would be astonished if Mr Brown had actually lied, a la Greque, about the true state of the books. Much of the smoke and mirrors that took place under Labour were almost childishly transparent. The real problem lies rather in the use of overly optimistic assumptions about growth and tax receipts. These may be unrealistic, but Britain is hardly alone in assuming a possibly unrealistic rebound to above trend growth.
There are a number of reasons why comparisons with Greece are ill-founded and possibly quite dangerous. Greece, too, it will be recalled showed no lack of enthusiasm for tackling the deficit. It was only after the Papandreou government announced its first austerity programme that the real damage to confidence occurred. This was primarily because the markets fast realised that the scale of the consolidation was so extreme that it was likely to condemn the country to years of economic contraction, thus making the medium term debt burden worse, not better. Greece would thus be incapable of repaying its debts without help.
This doesn't have to be the case in Britain, which in any case has a much larger and more robust tax base. What's more, the UK mercifully still has control of its own currency and interest rates, so can counter the fiscal medicine with accommodative monetary policy. The eurozone's reluctance to apply any kind of inflationary counterweight condemns much of the Club Med to extreme deflationary contraction over the years ahead.
Mr Osborne's task is similar to that of applying chemotherapy; in seeking to kill off the cancer of the deficit he must be careful not to lose the confidence of markets and end up killing off the patient too. It's a balancing act between too little and too much. On Monday, he said a little too much.
Even so, the new Chancellor's first day at school was on the whole an encouraging one. The establishment of an Office for Budget Responsibility under Professor Sir Alan Budd is an important innovation which promises to restore credibility, destroyed under Mr Brown, in the Government's handling of the public finances.
Sir Alan is right to view his task as more important than the establishment of the Monetary Policy Committee by the incoming Labour Government in 1997. Inflation was yesterday's enemy by the time Labour came to power. To me, it seems unlikely the Government's judgments on interest rates would have been significantly different from the Bank of England's.
Indeed, the idea that economic policy was somehow safe in the Bank of England's hands lulled everyone into a false sense of security, thereby allowing Mr Brown a degree of leeway on tax and spend he might not otherwise have enjoyed. Rather than pump-priming the feel-good factor with interest rate therapy, the Government did it instead with debt and public spending.
Mr Brown cynically manipulated the "golden rule" to the point of laughable irrelevance. By the end, Britain was running the sort of deficit you would normally expect from a recession, not an economy in the midst of a consumer boom.
Mr Brown was not just judge and jury, he was prosecution and defence too. By calibrating the Government's tax and spending plans against genuinely independent forecasts for growth and the economic cycle, the OBR should do for management of the public finances what the Bank of England did for monetary policy.
Sir Alan was a key player at the birth of independent inflation targeting. He rightly regards his latest task as an altogether bigger challenge. The scale of it is laid bare in the International Monetary Fund's latest "Fiscal Monitor". Across advanced economies there needs to be an adjustment amounting to 8.75pc of GDP on average to primary Budget balances to get overall debt down to pre-crisis levels of around 60pc.
More work still needs to be done to deal with projected increases of 4 to 5pc of GDP in health and pensions spending over the next 20 years. Those countries that fail to achieve fiscal sustainability will see their growth potential permanently and seriously impaired.
But Mr Osborne shouldn't be too downhearted. Things could be worse. The ruinous deflation that Britain might be facing now if it were in the euro hardly bears thinking about. On this level at least, comparisons with Greece are justified. Whatever Mr Byrne says, we are not as badly stuffed as they are.
http://www.telegraph.co.uk/finance/economics/7734494/UK-economy-is-stuffed-but-not-as-badly-as-Greece.html
Defend your investments from the eurocrisis
Defend your investments from the eurocrisis
Most investors couldn't be blamed for feeling nervous. We consult the experts on where they should turn.
By Emma Wall
Published: 12:30PM BST 14 May 2010
Investors needed nerves of steel over the past week. Uncertainty over who would take over at No 10 and a euro crisis have given the British and global stock markets the jitters.
The FTSE 100 lost more than 10pc of its value, down to 5,123 last Friday, only to pile the points back on again on Monday morning, even though many expected shares to fall in value.
Markets continued to hold steady, but fund managers are warning investors not to be complacent in light of the coalition Government – uncertainty prevails in Europe and a sovereignty crisis looms, and that's where danger lies.
The European Central Bank is steadying itself for further contagion effects of the Greek crash, Italy's banks are looking unstable and Germany is suffering a crisis of confidence as a recent regional vote undermined Angela Merkel's government.
"Eurozone uncertainty is having a much greater impact on the markets than British politics," said Tom Ewing, manager of Fidelity's UK Growth fund.
To avoid the ramifications of the Eurozone difficulties you do not have to flee the country for opportunities overseas – simply pick domestic stocks or British funds with global exposure.
"The UK market is a global market," Mr Ewing said. "Two thirds of the FTSE 100's earnings come from outside of the UK and the 20 biggest companies, the megacaps, have the minority of their business here.
"Very few of these larger-cap companies are UK focused, Tesco and Centrica remain Britain-centric but the FTSE is not UK plc"
Public perception may be influenced by the businesses that we are aware of in our everyday lives, such as Punch Taverns and M & S, but many British businesses generate the lion's share of their earnings from outside the country.
What's more, the prospect for dividend growth on British companies is looking brighter. According to Capita Registrars, more companies are paying out. Some 186 companies paid a dividend between January and March, up from 161 a year ago. Furthermore, the number of companies increasing payouts outnumbered those who cut. While 56 companies cut or cancelled their dividends, 30 held them unchanged and 102 increased or reinstated their payments.
Cash is doing nothing and gilts are paying 1pc or 2pc, but traditionally defensive stocks, such as Vodafone, Imperial Tobacco and BP are paying at least 5pc.
As you can see from our graphic, only 13pc of Vodafone's 2009 revenue came from Britain. British American Tobacco gained 23pc of its earnings from the Asia-Pacific region, nearly half of AstraZeneca's earnings are from North America and 100pc of Antofagasta's revenue is from three mines in Chile.
The FTSE megacaps seem to offer the best of both worlds. Mr Ewing said: "I am bearish on the UK, but UK stocks offer better corporate governance, better accounting and I can more easily engage with the management. At the same time I can easily tilt my UK stock picks to get exposure to China, India and the rest of Asia."
The British market has shown significant recovery from the low of 3,460 in March last year. Despite setbacks recently and in February this year, we are now nearly 2,000 points higher a year on.
Nigel Thomas, the UK Select Opportunities manager at AXA Framlington, believes this has been an industrial recovery, rather than a consumer one.
"The recovery in the market is due to urbanisation, the introduction of infrastructure and developments in the transport and energy sectors. The VAT increase was helped too, but I don't think consumers are spending over here."
In emerging markets, however, both phenomenons are occurring. As the middle classes expand, consumers are buying more – white goods, electricals and branded food and drinks. GlaxoSmithKline, for example, has moved its focus from the Western world to the developing one, selling toothbrushes, vaccines and Lucozade to India, China and Brazil.
Mr Thomas cites Andrew Whittington, at Glaxo, as prominent in this move and also notes competitor Unilever is doing the same.
There are some areas to avoid when picking megacap stocks. Commodities, in particular, draw criticism from Mr Ewing. "I would stay out of commodities, they are very volatile," he said.
Utilities come under scrutiny from Mr Thomas – he fears that Bank Rate might soon start to tick up and is concerned about the consequences.
"If interest rates go up, utilities, which are linked to gilts, will be hit," he said. "The sector is heavily regulated and, apart from National Grid and maybe some water companies, I would give them a wide berth for a while."
Of course, individual stock picking is always tricky unless you are a hardened day trader. Rather than building up a portfolio of megacaps yourself, why not leave it to the experts? There are plenty of funds that specialise in this sector – both for British and US companies that draw earnings from less-developed economies, and they spread the risk within their holdings, so you don't have to.
Brian Dennehy, of independent advisers DWC, said: "The UK economy and most developed economies have some years of pain ahead as sovereign debt and persistent deficits are tackled. The obvious call to avoid this is to focus on funds invested into UK companies with the bulk of earnings overseas, Newton Higher Income and Psigma Income both have this kind of focus."
Mick Gilligan, of Killik & Co, tips Invesco Perpetual Income, which holds Tesco, Imperial Tobacco, and AstraZeneca, among others. He also highlights Mr Thomas's Axa Framlington UK Select Opportunities fund and Artemis Income, which has stakes in HSBC, Vodafone and GlaxoSmithKline. BlackRock UK Dynamic is also on his list, with holdings in Compass Group, British American Tobacco, and Rio Tinto.
If there are particular stocks you want exposure to, check funds' holdings lists. A fund's fact sheet showing its 10 largest holdings is available from websites such as www.trustnet.co.uk and www.citywire.co.uk
http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/7722489/Defend-your-investments-from
Most investors couldn't be blamed for feeling nervous. We consult the experts on where they should turn.
By Emma Wall
Published: 12:30PM BST 14 May 2010
Investors needed nerves of steel over the past week. Uncertainty over who would take over at No 10 and a euro crisis have given the British and global stock markets the jitters.
The FTSE 100 lost more than 10pc of its value, down to 5,123 last Friday, only to pile the points back on again on Monday morning, even though many expected shares to fall in value.
Markets continued to hold steady, but fund managers are warning investors not to be complacent in light of the coalition Government – uncertainty prevails in Europe and a sovereignty crisis looms, and that's where danger lies.
The European Central Bank is steadying itself for further contagion effects of the Greek crash, Italy's banks are looking unstable and Germany is suffering a crisis of confidence as a recent regional vote undermined Angela Merkel's government.
"Eurozone uncertainty is having a much greater impact on the markets than British politics," said Tom Ewing, manager of Fidelity's UK Growth fund.
To avoid the ramifications of the Eurozone difficulties you do not have to flee the country for opportunities overseas – simply pick domestic stocks or British funds with global exposure.
"The UK market is a global market," Mr Ewing said. "Two thirds of the FTSE 100's earnings come from outside of the UK and the 20 biggest companies, the megacaps, have the minority of their business here.
"Very few of these larger-cap companies are UK focused, Tesco and Centrica remain Britain-centric but the FTSE is not UK plc"
Public perception may be influenced by the businesses that we are aware of in our everyday lives, such as Punch Taverns and M & S, but many British businesses generate the lion's share of their earnings from outside the country.
What's more, the prospect for dividend growth on British companies is looking brighter. According to Capita Registrars, more companies are paying out. Some 186 companies paid a dividend between January and March, up from 161 a year ago. Furthermore, the number of companies increasing payouts outnumbered those who cut. While 56 companies cut or cancelled their dividends, 30 held them unchanged and 102 increased or reinstated their payments.
Cash is doing nothing and gilts are paying 1pc or 2pc, but traditionally defensive stocks, such as Vodafone, Imperial Tobacco and BP are paying at least 5pc.
As you can see from our graphic, only 13pc of Vodafone's 2009 revenue came from Britain. British American Tobacco gained 23pc of its earnings from the Asia-Pacific region, nearly half of AstraZeneca's earnings are from North America and 100pc of Antofagasta's revenue is from three mines in Chile.
The FTSE megacaps seem to offer the best of both worlds. Mr Ewing said: "I am bearish on the UK, but UK stocks offer better corporate governance, better accounting and I can more easily engage with the management. At the same time I can easily tilt my UK stock picks to get exposure to China, India and the rest of Asia."
The British market has shown significant recovery from the low of 3,460 in March last year. Despite setbacks recently and in February this year, we are now nearly 2,000 points higher a year on.
Nigel Thomas, the UK Select Opportunities manager at AXA Framlington, believes this has been an industrial recovery, rather than a consumer one.
"The recovery in the market is due to urbanisation, the introduction of infrastructure and developments in the transport and energy sectors. The VAT increase was helped too, but I don't think consumers are spending over here."
In emerging markets, however, both phenomenons are occurring. As the middle classes expand, consumers are buying more – white goods, electricals and branded food and drinks. GlaxoSmithKline, for example, has moved its focus from the Western world to the developing one, selling toothbrushes, vaccines and Lucozade to India, China and Brazil.
Mr Thomas cites Andrew Whittington, at Glaxo, as prominent in this move and also notes competitor Unilever is doing the same.
There are some areas to avoid when picking megacap stocks. Commodities, in particular, draw criticism from Mr Ewing. "I would stay out of commodities, they are very volatile," he said.
Utilities come under scrutiny from Mr Thomas – he fears that Bank Rate might soon start to tick up and is concerned about the consequences.
"If interest rates go up, utilities, which are linked to gilts, will be hit," he said. "The sector is heavily regulated and, apart from National Grid and maybe some water companies, I would give them a wide berth for a while."
Of course, individual stock picking is always tricky unless you are a hardened day trader. Rather than building up a portfolio of megacaps yourself, why not leave it to the experts? There are plenty of funds that specialise in this sector – both for British and US companies that draw earnings from less-developed economies, and they spread the risk within their holdings, so you don't have to.
Brian Dennehy, of independent advisers DWC, said: "The UK economy and most developed economies have some years of pain ahead as sovereign debt and persistent deficits are tackled. The obvious call to avoid this is to focus on funds invested into UK companies with the bulk of earnings overseas, Newton Higher Income and Psigma Income both have this kind of focus."
Mick Gilligan, of Killik & Co, tips Invesco Perpetual Income, which holds Tesco, Imperial Tobacco, and AstraZeneca, among others. He also highlights Mr Thomas's Axa Framlington UK Select Opportunities fund and Artemis Income, which has stakes in HSBC, Vodafone and GlaxoSmithKline. BlackRock UK Dynamic is also on his list, with holdings in Compass Group, British American Tobacco, and Rio Tinto.
If there are particular stocks you want exposure to, check funds' holdings lists. A fund's fact sheet showing its 10 largest holdings is available from websites such as www.trustnet.co.uk and www.citywire.co.uk
http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/7722489/Defend-your-investments-from
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