Lehman Brothers, the bank that bust the boom
A year after the collapse of Lehman Brothers, the key players reveal for the first time their nail-biting attempts to avoid disaster - and how the UK and US governments refused to help
By Dominic Crossley-Holland
Published: 7:00AM BST 06 Sep 2009
Comments 4 | Comment on this article
Richard Fuld, chief executive officer of Lehman Brothers Holdings Inc., outside a hearing into the bank's collapse in October 2008 Photo: Mannie Garcia/Bloomberg News The collapse of Lehman Brothers, a year ago this week, was the biggest bankruptcy in corporate history. It was 10 times the size of Enron and, more crucially, the tipping point into the global crash, provoking panic in an already battered financial system, freezing short-term lending, and marking the start of the liquidity crisis.
Yet searching questions remain unanswered. Authorities had intervened on both sides of the Atlantic to rescue a litany of stricken institutions, from Northern Rock to Bear Stearns, and mortgage companies Fannie Mae and Freddie Mac, so why let Lehman go down? And was a rescue by Barclays effectively blocked by the UK authorities?
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A TV debate could be sudden political death - bring it on! Now, for the first time, many of the key players involved reveal what really happened on that extraordinary weekend last September. Their accounts provide a unique window into the closed world of how politicians, central bankers and CEOs battled to stave off what one of those involved called "Armageddon"…
Friday, September 12, 2008
"So it was Friday afternoon. I was in Merrill's midtown offices," recalls John Thain, then chief executive of Merrill Lynch. "It was raining hard and I got a phone call at 5pm – 'Be at the Fed at 6pm this evening'. Those type of calls are always bad."
The American Treasury Secretary Hank Paulson, known as "The Hammer", had just swept into town, and with little more than an hour's notice was summoning the chief executives of America's leading banks, the so-called Masters of the Universe, to the Federal Reserve.
The Fed, a granite fortress just around the corner from Wall Street, has seen many dramas, but nothing to match what was to come over the next 48 hours. As the billionaire investor Christopher Flowers, who was at the Fed, says: "I think, in the history of business in the last 50 years, it was the most extraordinary weekend there has been."
For months Lehman had been the subject of Wall Street rumour, with the markets worried about its risky assets and exposure to the sub-prime property crash. By early September the bank was having trouble borrowing and its share price was in freefall, closing at $16.13 on September 2, down from a high of $82 in 2007. Ten days later, as Paulson summoned the CEOs, it closed at just $3.65.
At the Fed it was clear from the start that huge forces were at play. Rodgin Cohen, corporate lawyer for Lehman Brothers, says: "I don't think there was a person there who didn't understand the stakes we were playing for."
Treasury Secretary Hank Paulson and the New York Fed chief Tim Geithner were running the show, and John Thain says they were startlingly clear from the start: "They said to us, 'This is the problem: Lehman needs to be rescued. You have to come up with a solution; we the government are not gonna help.' "
The assembled CEOs were incredulous that there would be no government bail‑out.
Paulson and Geithner took up residence on the 13th floor of the Fed, with other banks – potential buyers – setting up teams on different floors to go through Lehman's books. Principal among the suitors was the South Carolina-based Bank of America and the British bank, Barclays.
In London, Chancellor Alistair Darling was being kept in touch with events. "We knew Lehman was in trouble. Remember, there was constant traffic between our Treasury and the US Treasury, between the regulators, and during that time I spoke to Hank Paulson pretty regularly. On the Friday evening we knew they would have to do something about Lehman."
Barclays had been eyeing Lehman for months, and moved quickly, its team led by the president of Barclays, Bob Diamond. "We certainly didn't know what we were going to find," Diamond recalls, "but we wouldn't have boarded the plane if we weren't that serious."
So how had Lehman, America's fourth largest investment bank, fallen so far – and so fast? Its success was largely down to one man, Richard Severin Fuld, who would go on to become the longest-serving chief executive on Wall Street. Starting his career as a paper trader, he determinedly worked his way up a slew of senior jobs before becoming CEO in 1993.
Under Dick Fuld, Lehman expanded quickly, grabbing the opportunities presented by the waves of deregulation with soaring profits and a share price that rose from $4 in 1994, to $82 in 2007.
How had Fuld done it? In a word: risk. "Dick Fuld essentially said to our head risk-taker in commercial mortgage-backed securities, 'You've got to take more risk,' " says Larry MacDonald, vice‑president of securities at Lehman. " 'Risk, risk, risk, risk, risk, and that risk leads to the bottom line.' "
Lehman then did something that more cautious banks shied away from: it borrowed more and more money. By August 2007, the bank's leverage ratio is believed to have gone as high as 44 to 1 – far beyond competitors like Goldman Sachs and Morgan Stanley, which had ratios in the 20s or 30s.
Huge rewards followed for those who took the risk. By 2007 turnover was more than $19 billion and staff took home $9 billion in pay and bonuses. Between 2000 and 2008 Dick Fuld took home between $310 and $500 million, although the precise figure is disputed.
Back at the Fed, Dick Fuld's wealth and lofty status counted for nothing. Extraordinarily, he hadn't even been invited, with even some on his own side fearing that his combative nature may be a hindrance.
As the night wore on, most of the CEOs headed back to their corporate apartments, leaving their teams of accountants and lawyers to work through the small hours on Lehman's books.
The Barclays' team, led by Bob Diamond, was getting frustrated: "To be frank, we had trouble getting traction. It was clear to us that the management of Lehman Brothers were spending an awful lot of time with at least one firm going through due diligence."
That other firm was Bank of America, and as the night wore on what its team found in the books appalled them. Just a month before, the bank believed its portfolio was worth $40 billion; now it had fallen to around $25 billion.
"When you started adding all those losses up from this property and that property, it ended up a very big number," says Christopher Flowers, who was also advising Bank of America. "A number that was so large, the losses were so large, that it really meant the company was bankrupt unless it got support from the US government."
Saturday, September 13, 2008
What happened next took everyone by surprise.
Returning to the Fed on Saturday morning, Merrill Lynch's John Thain began to fear attention might switch to his bank, as it too was hugely exposed. Standing on the pavement outside the Fed, he made an audacious move, calling Ken Lewis, boss of Bank of America, at his home in South Carolina. "The conversation was relatively short," says Thain. "I said to him I thought it made sense for us to explore some strategic options."
It was this move that led to the announcement on Monday, just as Lehman finally collapsed, that Bank of America had bought Merrill Lynch for $50 billion. The whirlwind romance was proof – if any were needed – of the Wall Street maxim: kill or be killed.
As rumours of the Merrill deal swirled around the Fed that Saturday, all the attention shifted to Barclays. "We got a very positive sign," says Bob Diamond. "We got moved into a much bigger conference room in the Fed and there was a sign on the door that said 'Buyer'."
Sunday, September 14, 2008
Sunday morning started with a sense of optimism that a deal with Barclays was close. Lehman had called in America's most famous bankruptcy lawyer, Harvey Miller, just in case, but the mood remained upbeat.
"I was actually thinking that it might be a fire drill," says Miller. "That there was going to be a deal and they'd announce it some time that afternoon and then I'd be free to go and do the things I had planned."
At the Fed, negotiations had again gone through the night, and Bob Diamond was keeping the Barclays board up to date. "Frankly, we were feeling cautiously optimistic."
Outside, the media had caught on and the rolling news and business channels were giving the story of the embattled bank more and more attention.
By the early afternoon, as the fine print of the deal was being worked on by the teams, the British bank, like Bank of America before it, wanted guarantees for Lehman's debts so it could open for business the next day. A deal was within spitting distance, but who would underwrite it? The British? The Americans? This underwriting was necessary because a bridging loan was needed until the bank was formally bought, and since that would take time, and the markets opened on Monday morning, it meant that in the meantime the British or American governments had to underwrite any business or trading Lehman did.
"The tone of the conversations was beginning to change," says Harvey Miller. "You could hear in the voices of the Lehman representatives a higher level of doubt that things were going to work out."
Telephone calls across the Atlantic were strained as efforts were made to break the deadlock. "Midway through the Sunday afternoon we, the Financial Services Authority, informed the New York Fed categorically that from our perspective we couldn't see how this deal could go forward, given that they were not willing to offer any liquidity guarantees," says FSA chief executive Hector Sants.
The tension was palpable – Lehman would go down unless the US Treasury Secretary authorised the guarantee, and time was running out, as the European markets opened in 12 hours' time.
"We were asked to come to the main floor," says Lehman's lawyer Rodgin Cohen, "where the group of the major banks was closeted behind these very heavy doors, and we were asked to wait. We spent hours waiting there."
Hank Paulson was on the phone to London. "I spoke to him on the Sunday afternoon," recalls Chancellor Alistair Darling, "and he said, 'Look, your regulators are asking hundreds of questions.' I made the point that they were asking them with very good reason. I think the Americans recognised that the game was up. We couldn't possibly get ourselves into a situation where effectively we were guaranteeing an American bank."
Eventually Paulson called Lehman and declared that the British government was not prepared to let Barclays continue with the transaction, explains Cohen. The Lehman team asked Paulson whether anything could be done. He replied: "I'm not going to cajole or plead with the British government, nor am I going to threaten the British government in terms of a relationship."
The bank's bankruptcy team was summoned and told to be ready to file for bankruptcy by midnight.
"What we wanted wasn't available," says John Varley, the CEO of Barclays. "We walked, end of story." Diamond, who'd been working round the clock, admits he felt "gutted".
Rodgin Cohen now had the unenviable task of reporting back to Dick Fuld. "It was as difficult a call as I have ever made in my life," says Cohen. "He said, 'This is just unbelievable; how can this be happening?', and we spent a few minutes going back over the same ground. Then he shifted to, 'Right, is there anything else we can do?' "
Back on Seventh Avenue at Lehman's HQ there was one last act of desperation. It so happened that a second cousin of President Bush worked at Lehman Brothers. What happened next remains a matter of dispute, but Lehman's securities vice-president, Larry MacDonald, was told by colleagues who were there that they tried to get the President to intervene, although this is denied by George Herbert Walker.
"The President is [George's] cousin, but to reach out to the White House under duress is a very stressful situation for everybody. Finally he agreed to make that call to the White House," says MacDonald, "and the operator put him on hold, which to the people in the room seemed like an eternity. As the seconds ticked, everybody's pulses were racing. Finally the operator came back on the line and she said, 'I'm sorry, the President cannot take your call at this time.' There was just a horrific, blood‑curdling feeling in the room of potential destruction and potential despair."
Dick Fuld and the board of directors had one last task to perform: to pass a resolution winding up the bank. At their peak, Lehman shares had been worth $85; now they were 3 cents. "It was very dark outside," remembers Miller, "and Dick Fuld looked up, clearly a man in turmoil, and said, 'I guess this is goodbye.' "
In the middle of the night the bankruptcy lawyers had completed the preparations and were ready to file the petition.
"It is like sending an email," explains Harvey Miller. "So, yes, we filed it and it was the end of an institution that had been one of the originators of Wall Street. Here it was, all coming to an end by pressing a button on a computer."
By the end of trading on Monday, September 15, about $700 billion had been wiped off global stock markets. The next day the experiment of leaving the market to decide the fate of major financial institutions was over, as the US authorities intervened with an $85 billion bail-out of insurer AIG. Within a week, scores of companies were fighting for survival, and Hank Paulson was asking Congress for a $700 billion bail-out package.
Historians will debate whether the crash could have been avoided if Lehman had been saved. One of Paulson's deputies at the Treasury, Neel Kashkari, concedes that everyone underestimated the consequences of letting Lehman go down. "It obviously turned out to be very bad; it was worse than we feared. And as you know, while the credit markets basically shut down two days later, the real depth of the damage was not seen for weeks – or even months."
In London, too, the Governor of the Bank of England, Mervyn King, now admits the scale of the consequences took everyone by surprise. "I don't think any of us easily anticipated that we would see the sort of financial panic that we saw after the failure of Lehman Brothers," he says.
Having witnessed the rise and fall of so many institutions over the past four decades, America's leading bankruptcy lawyer Harvey Miller may be among the better placed to judge what brought Lehman Brothers' proud 158-year history crashing down. "When I went to college, I learnt in economics that you do not finance long-term investments with short-term money, and that is what happened," he says. "And I believe it happened because greed took over and the returns were so big.
"So many people were making so much money that they lost all fear, and risk did not become a factor in doing anything."
* The Bank That Bust the World, the first part of BBC2's series The Love of Money is on Thursday at 9pm. Dominic Crossley-Holland is head of business programming at the BBC
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6143297/Lehman-Brothers-the-bank-that-bust-the-boom.html
Friday 2 October 2009
Long bear market for stocks not yet over
Long bear market for stocks not yet over
Equity investors can be forgiven for wishing that the third quarter would last forever.
By Edward Hadas, Breakingviews.com
Published: 3:47PM BST 01 Oct 2009
Stock markets ignored the deep recession during the last three months, rising by double-digit percentages almost everywhere except Japan. The MSCI World equity index was up 15pc.
That was enough to bring a definitive end to the bear market which started in 2007. But the long bear market for stocks – the one that began in 2000 – may not be over yet.
For the last decade, stock markets in fact have underperformed the economy. While retail prices and real GDP have risen at a 2-3pc annual rate in most countries, most indices are still at levels seen in 1998 or 1999.
Stocks were a bargain when markets bottomed in March – driven down by a combination of fear and squuzed liquidity. Now, though, the case for buying is much less clear.
The global stock market is selling at 14 times expected 2010 earnings, according to Société Génerale estimates. That is not particularly cheap by long-term standards. And those earnings expectations rely on assumed improvements in profit margins. Unless the recovery takes a sharp V-shape, earnings could disappoint and drag down stocks.
Equity investors taking the long view don’t have too much to worry about. Bear markets don’t last forever, although they can go on for a long time if Japan is any guide. The recession will not continue indefinitely. As long as deflation is averted, stock prices should be up substantially a decade from now. But that does not mean stocks will rise in a straight line from here.
Holders of government bonds, the apparently safer alternative to stocks, have much more to fear. Yields of around 3.5pc on 10-year paper leave almost no room for unexpected inflation. But with central banks and governments all pushing hard to get money flowing – including some interventions that keep bond yields down – the risk of an inflationary outburst is high.
Investors may not like the notion that stocks aren’t great but bonds look worse. There are grim periods, though, when almost all investors do poorly. Despite a few good months, this may be one of them.
http://www.telegraph.co.uk/finance/breakingviewscom/6251374/Long-bear-market-for-stocks-not-yet-over.html
Equity investors can be forgiven for wishing that the third quarter would last forever.
By Edward Hadas, Breakingviews.com
Published: 3:47PM BST 01 Oct 2009
Stock markets ignored the deep recession during the last three months, rising by double-digit percentages almost everywhere except Japan. The MSCI World equity index was up 15pc.
That was enough to bring a definitive end to the bear market which started in 2007. But the long bear market for stocks – the one that began in 2000 – may not be over yet.
For the last decade, stock markets in fact have underperformed the economy. While retail prices and real GDP have risen at a 2-3pc annual rate in most countries, most indices are still at levels seen in 1998 or 1999.
Stocks were a bargain when markets bottomed in March – driven down by a combination of fear and squuzed liquidity. Now, though, the case for buying is much less clear.
The global stock market is selling at 14 times expected 2010 earnings, according to Société Génerale estimates. That is not particularly cheap by long-term standards. And those earnings expectations rely on assumed improvements in profit margins. Unless the recovery takes a sharp V-shape, earnings could disappoint and drag down stocks.
Equity investors taking the long view don’t have too much to worry about. Bear markets don’t last forever, although they can go on for a long time if Japan is any guide. The recession will not continue indefinitely. As long as deflation is averted, stock prices should be up substantially a decade from now. But that does not mean stocks will rise in a straight line from here.
Holders of government bonds, the apparently safer alternative to stocks, have much more to fear. Yields of around 3.5pc on 10-year paper leave almost no room for unexpected inflation. But with central banks and governments all pushing hard to get money flowing – including some interventions that keep bond yields down – the risk of an inflationary outburst is high.
Investors may not like the notion that stocks aren’t great but bonds look worse. There are grim periods, though, when almost all investors do poorly. Despite a few good months, this may be one of them.
http://www.telegraph.co.uk/finance/breakingviewscom/6251374/Long-bear-market-for-stocks-not-yet-over.html
Thursday 1 October 2009
Maybank poised to expand in Indonesia
Maybank poised to expand in Indonesia
Written by Ellina Badri
Thursday, 01 October 2009 11:14
KUALA LUMPUR: MALAYAN BANKING BHD [] (Maybank) is poised to expand its Indonesian operations after its bottom line took a hit in an impairment charge in its last financial year ended June 30, 2009 pursuant to its acquisition of Bank Internasional Indonesia (BII).
Maybank president and chief executive officer Datuk Seri Abdul Wahid Omar said the banking group would expand its Indonesian operations as part of its aspiration to become the leading financial services group by 2015.
He said BII would be developed aggressively over the next three years, with its branch network to be expanded to 450 from 250 branches currently, and by doubling the presence of its automated teller machines (ATMs) to 1,500.
“We are targeting to have a sizeable presence in all areas in Indonesia,” Wahid told reporters after Maybank’s AGM yesterday. He said capital expenditure for its expansion was, however, still being finalised, with the amount of money spent to depend on the size of each branch.
Wahid said the bank would focus on improving BII’s fundamentals via loans and revenue growth, rather than achieving growth through mergers and acquisitions.
Maybank took a RM1.62 billion impairment charge on its 97.5%-owned BII in FY09 and an impairment loss of RM353 million in its 20%-owned MCB Bank in Pakistan that resulted in its net profit falling 76% year-on-year to RM691.88 million.
Wahid (left) and chief financial officer Khairusalleh Ramli at the AGM yesterday. Photo by Chu Juck Seng
Wahid added Maybank did not expect further impairment charges in FY10, with BII set to record profitable results in the current fiscal year.
He also said loan-loss provisions at its Indonesian unit would be “normal” moving forward, with nothing “out of the ordinary” expected.
Maybank’s total loan-loss provisions had risen 109.7% to RM1.7 billion in FY09, with the consolidation of BII’s loan-loss provisions for the first time by RM366.2 million.
Wahid is confident of an improved performance in FY10, though the current financial year would still be challenging, with the bank seeing a gradual recovery in tandem with the residual recession.
“Our improved performance will stem from the lack of impairment charges on our overseas acquisitions, the economic recovery which is expected to bring broad-based growth, results delivered from our overseas operations, and higher revenue and cost optimisation from our Leap30 transformation programme,” Wahid said.
He also said the bank was maintaining its FY10 headline key performance indicator of achieving 8% revenue growth and an 11% return on equity. On its Singapore operations, which contributed to S$248 million (RM613 million) in profit in FY09, he said Maybank’s presence there was far ahead of other Malaysian banks located there.
He said while Malaysian banks provided additional competition in the Singapore market, Maybank was viewed as a local player there and possessed a significant brand presence.
SMOOTH TRANSITION... Maybank’s outgoing chairman Tan Sri Mohamed Basir Ahmad (left) with his successor Tan Sri Megat Zaharuddin Megat Mohd Nor at a ceremony marking the handover of the chairmanship during the bank’s AGM in Kuala Lumpur yesterday. Photo by Chu Juck Seng
Elaborating on the bank’s Middle Eastern presence, with one branch located in Bahrain and a small stake in an investment company in Riyadh, Wahid said these were used as “listening posts” to help the bank capture greater capital flows between the Middle East and Malaysia.
On the bank’s dividend policy, he said it would maintain its payout at between 40% and 60% of net profit.
Asked on the impact of the flooding in the Philippines on its 45 branches there, he said of its branches, five were located in Manila, but they had not seen any major impact from the catastrophe. He added the bank had put in place contingency measures, and that it was “all under control”.
On Maybank’s outlook for the Malaysian economy, Wahid said the worst was over, with Maybank having revised its gross domestic product (GDP) forecast to a contraction of 2.9% from a previous projection of a 3.8% decline, while its 2010 GDP forecast had been revised upwards to 4.5% from 4.2%.
He also said inflation was expected to come in at 1% this year, and 1.5% in 2010, with upside risks, while the overnight policy rate was expected to be maintained at 2% in 2010.
Maybank also projected the ringgit to strengthen against the US dollar going forward, at RM3.50 to the greenback in end-2009 and RM3.40 to the dollar in end-2010.
During the AGM, Tan Sri Mohamed Basir Ahmad handed over the chairmanship of Maybank’s board to Tan Sri Megat Zaharuddin Megat Mohd Nor, who takes over today.
Mohamed Basir retired as chairman after 16 years of service, the longest-serving chairman on the bank’s board.
Megat Zaharuddin had served as an independent, non-executive director on Maybank’s board from July 2004 before resigning in February 2009.
He has returned as chairman upon being appointed by the bank’s largest shareholders. He also served as chairman of its remuneration and establishment committee, and was a member of its nomination committee.
He possesses over 30 years of experience in the oil and gas industry, and had been regional business CEO/MD of Shell Exploration and Production International BV (Netherlands), before retiring in January 2004.
Megat Zaharuddin is also currently chairman of the Malaysian Rubber Board, director of the Capital Market Development Fund, the International Centre for Leadership in Finance, and Australia’s Woodside Petroleum. He was also chairman of Maxis Communications Bhd from January 2004 until November 2007.
This article appeared in The Edge Financial Daily, October 1, 2009.
Written by Ellina Badri
Thursday, 01 October 2009 11:14
KUALA LUMPUR: MALAYAN BANKING BHD [] (Maybank) is poised to expand its Indonesian operations after its bottom line took a hit in an impairment charge in its last financial year ended June 30, 2009 pursuant to its acquisition of Bank Internasional Indonesia (BII).
Maybank president and chief executive officer Datuk Seri Abdul Wahid Omar said the banking group would expand its Indonesian operations as part of its aspiration to become the leading financial services group by 2015.
He said BII would be developed aggressively over the next three years, with its branch network to be expanded to 450 from 250 branches currently, and by doubling the presence of its automated teller machines (ATMs) to 1,500.
“We are targeting to have a sizeable presence in all areas in Indonesia,” Wahid told reporters after Maybank’s AGM yesterday. He said capital expenditure for its expansion was, however, still being finalised, with the amount of money spent to depend on the size of each branch.
Wahid said the bank would focus on improving BII’s fundamentals via loans and revenue growth, rather than achieving growth through mergers and acquisitions.
Maybank took a RM1.62 billion impairment charge on its 97.5%-owned BII in FY09 and an impairment loss of RM353 million in its 20%-owned MCB Bank in Pakistan that resulted in its net profit falling 76% year-on-year to RM691.88 million.
Wahid (left) and chief financial officer Khairusalleh Ramli at the AGM yesterday. Photo by Chu Juck Seng
Wahid added Maybank did not expect further impairment charges in FY10, with BII set to record profitable results in the current fiscal year.
He also said loan-loss provisions at its Indonesian unit would be “normal” moving forward, with nothing “out of the ordinary” expected.
Maybank’s total loan-loss provisions had risen 109.7% to RM1.7 billion in FY09, with the consolidation of BII’s loan-loss provisions for the first time by RM366.2 million.
Wahid is confident of an improved performance in FY10, though the current financial year would still be challenging, with the bank seeing a gradual recovery in tandem with the residual recession.
“Our improved performance will stem from the lack of impairment charges on our overseas acquisitions, the economic recovery which is expected to bring broad-based growth, results delivered from our overseas operations, and higher revenue and cost optimisation from our Leap30 transformation programme,” Wahid said.
He also said the bank was maintaining its FY10 headline key performance indicator of achieving 8% revenue growth and an 11% return on equity. On its Singapore operations, which contributed to S$248 million (RM613 million) in profit in FY09, he said Maybank’s presence there was far ahead of other Malaysian banks located there.
He said while Malaysian banks provided additional competition in the Singapore market, Maybank was viewed as a local player there and possessed a significant brand presence.
SMOOTH TRANSITION... Maybank’s outgoing chairman Tan Sri Mohamed Basir Ahmad (left) with his successor Tan Sri Megat Zaharuddin Megat Mohd Nor at a ceremony marking the handover of the chairmanship during the bank’s AGM in Kuala Lumpur yesterday. Photo by Chu Juck Seng
Elaborating on the bank’s Middle Eastern presence, with one branch located in Bahrain and a small stake in an investment company in Riyadh, Wahid said these were used as “listening posts” to help the bank capture greater capital flows between the Middle East and Malaysia.
On the bank’s dividend policy, he said it would maintain its payout at between 40% and 60% of net profit.
Asked on the impact of the flooding in the Philippines on its 45 branches there, he said of its branches, five were located in Manila, but they had not seen any major impact from the catastrophe. He added the bank had put in place contingency measures, and that it was “all under control”.
On Maybank’s outlook for the Malaysian economy, Wahid said the worst was over, with Maybank having revised its gross domestic product (GDP) forecast to a contraction of 2.9% from a previous projection of a 3.8% decline, while its 2010 GDP forecast had been revised upwards to 4.5% from 4.2%.
He also said inflation was expected to come in at 1% this year, and 1.5% in 2010, with upside risks, while the overnight policy rate was expected to be maintained at 2% in 2010.
Maybank also projected the ringgit to strengthen against the US dollar going forward, at RM3.50 to the greenback in end-2009 and RM3.40 to the dollar in end-2010.
During the AGM, Tan Sri Mohamed Basir Ahmad handed over the chairmanship of Maybank’s board to Tan Sri Megat Zaharuddin Megat Mohd Nor, who takes over today.
Mohamed Basir retired as chairman after 16 years of service, the longest-serving chairman on the bank’s board.
Megat Zaharuddin had served as an independent, non-executive director on Maybank’s board from July 2004 before resigning in February 2009.
He has returned as chairman upon being appointed by the bank’s largest shareholders. He also served as chairman of its remuneration and establishment committee, and was a member of its nomination committee.
He possesses over 30 years of experience in the oil and gas industry, and had been regional business CEO/MD of Shell Exploration and Production International BV (Netherlands), before retiring in January 2004.
Megat Zaharuddin is also currently chairman of the Malaysian Rubber Board, director of the Capital Market Development Fund, the International Centre for Leadership in Finance, and Australia’s Woodside Petroleum. He was also chairman of Maxis Communications Bhd from January 2004 until November 2007.
This article appeared in The Edge Financial Daily, October 1, 2009.
Tuesday 29 September 2009
'The Taxman Always Rings Twice'
10 golden rules to survive a tax investigation
Taxpayers have good reason to fear investigation by HM Revenue & Customs. Now Daniel Dover, a partner at accountants BDO Stoy Hayward LLP, and financial writer Tim Hindle have written a book – 'The Taxman Always Rings Twice' – explaining the process, showing what is at stake and how to get through it. Here are their 10 golden rules.
Published: 9:42AM BST 25 Sep 2009
Comments 21 | Comment on this article
Quit while you are behind: there is no point trying to put one over the HMRC
1. KEEP CALM!
An investigation often provokes a number of violent emotions in those under scrutiny – not least sheer terror at the thought of ending up in jail. In reality, very few cases end in a custodial sentence. So there's no need to expect the worst.
2. GET EXPERT ADVICE AT THE OUTSET
If you are being investigated by HMRC, it is highly recommended that you seek out independent financial advice from a reputable accountant or adviser who specialises in this field. You will need somebody on your side who understands the jargon and knows how HMRC operates who can take some of the emotional strain from your shoulders. It's also likely to be cheaper in the long run.
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Cut inheritance tax bills
3. DON'T DISCUSS YOUR TAX AFFAIRS WITH ANYONE BUT A TIGHT CIRCLE OF TAX ADVISERS
Tempting though it might be to offload your woes at the pub or the golf club, it's never a good idea – unless you want the whole town to know the details of your case; and that might include a taxman. It's also almost certain that what your friends advise you will be wrong and therefore detrimental to your chances of reaching a settlement with HMRC.
4. DON'T LIE TO HMRC
This is the simplest and most reliable way of avoiding that jail sentence!
5. DON'T ASSUME HMRC IS IGNORANT OF ANYTHING
An HMRC investigator has a huge number of resources at his disposal and is not afraid to ask questions. As the book says "Stick with the wartime advice: 'Careless Talk Costs Lives'. Letting a former flatmate know that you paid for your house in the Dordogne in cash is not literally going to kill you. But it may cost you the chance of getting a good deal with the taxman should he begin investigating your affairs."
6. BE WELL PREPARED FOR ANY MEETINGS
Remember the motto "no one prepares to fail – they fail to prepare". It is pointless trying to evade the HMRC's questions with insufficient preparation – the investigator will simply use his statutory powers to force you to give him the answers he seeks and your lack of preparation will be deemed to be "lack of co-operation".
7. MAKE SIGNIFICANT (BUT RELEVANT) PAYMENTS ON ACCOUNT
HMRC sees this as an important sign of a willingness to co-operate. It may also save you a huge amount in interest, which accrues from the date when the tax should have been paid to the day it is actually paid. On the other hand, overpayment of the outstanding liabilities may lead HMRC to an unrealistic expectation of the amount you owe.
8. DON'T TRY TO DESTROY EVIDENCE
It's usually unhelpful. If you don't have the appropriate records, HMRC may assume you are trying to hide something when you are not.
9. NEVER MAKE A PARTIAL DISCLOSURE
Do not suffer from selective amnesia when disclosing information involuntarily – this is particularly distasteful to HMRC and is likely to lead to a more punitive settlement since the HMRC will take into account your lack of co-operation when determining the penalty you have to pay as part of your settlement.
10. ONCE YOU HAVE REACHED A SETTLEMENT, DON'T OFFEND AGAIN
HMRC will view those who offend a second time in a much more serious light.
If you follow these rules you should survive a tax investigation – and may even do so with your sanity intact!
'The Taxman Always Rings Twice', published by Profile Books at £6.99, is available to order now from http://www.amazon.co.uk/
http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/6229873/10-golden-rules-to-survive-a-tax-investigation.html
Taxpayers have good reason to fear investigation by HM Revenue & Customs. Now Daniel Dover, a partner at accountants BDO Stoy Hayward LLP, and financial writer Tim Hindle have written a book – 'The Taxman Always Rings Twice' – explaining the process, showing what is at stake and how to get through it. Here are their 10 golden rules.
Published: 9:42AM BST 25 Sep 2009
Comments 21 | Comment on this article
Quit while you are behind: there is no point trying to put one over the HMRC
1. KEEP CALM!
An investigation often provokes a number of violent emotions in those under scrutiny – not least sheer terror at the thought of ending up in jail. In reality, very few cases end in a custodial sentence. So there's no need to expect the worst.
2. GET EXPERT ADVICE AT THE OUTSET
If you are being investigated by HMRC, it is highly recommended that you seek out independent financial advice from a reputable accountant or adviser who specialises in this field. You will need somebody on your side who understands the jargon and knows how HMRC operates who can take some of the emotional strain from your shoulders. It's also likely to be cheaper in the long run.
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3. DON'T DISCUSS YOUR TAX AFFAIRS WITH ANYONE BUT A TIGHT CIRCLE OF TAX ADVISERS
Tempting though it might be to offload your woes at the pub or the golf club, it's never a good idea – unless you want the whole town to know the details of your case; and that might include a taxman. It's also almost certain that what your friends advise you will be wrong and therefore detrimental to your chances of reaching a settlement with HMRC.
4. DON'T LIE TO HMRC
This is the simplest and most reliable way of avoiding that jail sentence!
5. DON'T ASSUME HMRC IS IGNORANT OF ANYTHING
An HMRC investigator has a huge number of resources at his disposal and is not afraid to ask questions. As the book says "Stick with the wartime advice: 'Careless Talk Costs Lives'. Letting a former flatmate know that you paid for your house in the Dordogne in cash is not literally going to kill you. But it may cost you the chance of getting a good deal with the taxman should he begin investigating your affairs."
6. BE WELL PREPARED FOR ANY MEETINGS
Remember the motto "no one prepares to fail – they fail to prepare". It is pointless trying to evade the HMRC's questions with insufficient preparation – the investigator will simply use his statutory powers to force you to give him the answers he seeks and your lack of preparation will be deemed to be "lack of co-operation".
7. MAKE SIGNIFICANT (BUT RELEVANT) PAYMENTS ON ACCOUNT
HMRC sees this as an important sign of a willingness to co-operate. It may also save you a huge amount in interest, which accrues from the date when the tax should have been paid to the day it is actually paid. On the other hand, overpayment of the outstanding liabilities may lead HMRC to an unrealistic expectation of the amount you owe.
8. DON'T TRY TO DESTROY EVIDENCE
It's usually unhelpful. If you don't have the appropriate records, HMRC may assume you are trying to hide something when you are not.
9. NEVER MAKE A PARTIAL DISCLOSURE
Do not suffer from selective amnesia when disclosing information involuntarily – this is particularly distasteful to HMRC and is likely to lead to a more punitive settlement since the HMRC will take into account your lack of co-operation when determining the penalty you have to pay as part of your settlement.
10. ONCE YOU HAVE REACHED A SETTLEMENT, DON'T OFFEND AGAIN
HMRC will view those who offend a second time in a much more serious light.
If you follow these rules you should survive a tax investigation – and may even do so with your sanity intact!
'The Taxman Always Rings Twice', published by Profile Books at £6.99, is available to order now from http://www.amazon.co.uk/
http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/6229873/10-golden-rules-to-survive-a-tax-investigation.html
Money figures show there's trouble ahead
Money figures show there's trouble ahead
Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise.
By Ambrose Evans-Pritchard
Published: 8:48PM BST 26 Sep 2009
Comments 92 | Comment on this article
Unemployment benefits have masked social hardship unto now but these are starting to expire with cliff-edge effects.The jobless army in Spain will be reduced to €100 a week; in Estonia to €15.
Whoever wins today's elections in Germany will face the reckoning so deftly dodged before. Kurzarbeit, that subsidises firms not to fire workers, is running out. The cash-for-clunkers scheme ended this month. It certainly "worked".
Car sales were up 28pc in August, but only by stealing from the future. The Center for Automotive Research says sales will fall by a million next year: "It will be the largest downturn ever suffered by the German car industry."
Fiat's Sergio Marchionne warns of "disaster" for Italy unless Rome renews its car scrappage subsidies. Chrysler too will see some "harsh reality" following the expiry of America's scheme this month. Some expect US car sales to slump 40pc in September.
Weaker US data is starting to trickle in. Shipments of capital goods fell by 1.9pc in August. New house sales are stuck near 430,000 – down 70pc from their peak – despite an $8,000 tax credit for first-time buyers. It expires in November.
We are moving into a phase when most OECD states must retrench to head off debt-compound traps.
Britain faces the broad sword; Spain has told ministries to slash 8pc of discretionary spending; the IMF says Japan risks a funding crisis.
If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China's exports were down 23pc in August; Japan's were down 36pc; industrial production has dropped by 23pc in Japan, 18pc in Italy, 17pc in Germany, 13pc in France and Russia and 11pc in the US.
Call this a "V-shaped" recovery if you want. Markets are pricing in economic growth that is not occurring.
The overwhelming fact is that private spending has slumped in the deficit countries of the Anglosphere, Club Med, and East Europe but has not risen enough in the surplus countries (East Asia and Germany) to compensate. Excess capacity remains near post-war highs across the world.
Yet hawks are already stamping feet at key central banks.
Are they about to repeat the errors made in early 2007, and then again in the summer of 2008, when they tightened – or made hawkish noises – even as the underlying credit system fell apart?
Fed chairman Ben Bernanke spoke in April 2008 of "a return to growth in the second half of this year", and again in July 2008 that growth would "pick up gradually over the next two years".
He could only have thought such a thing if he was ignoring the money data. Key aggregates had been in free-fall for months.
I cited monetarists in July 2008 warning that the lifeblood of the Western credit was "draining away". For whatever reason (the lockhold of New Keynesian ideology?) the Fed missed the signal.
So did the European Central Bank when it raised rates weeks before the Lehman collapse, blathering about a "1970s inflation spiral."
Yes, the money entrails can mislead. The gurus squabble like Trotskyists. But you ignore the data at your peril.
Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14pc since early Summer: "There has been nothing like this in the USA since the 1930s."
M3 money has been falling at a 5pc rate; M2 fell by 12pc in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1pc rate since April.
Private loans have fallen by €111bn since January. Whether you see a credit crunch in Euroland depends where you sit. It is already garrotting Spain. Germany's Mittelstand says it is "a reality", even if not for big companies that issue bonds. The Economy Ministry is drawing up plans for €250bn in state credit, knowing firms will be unable to roll over debts.
Bundesbank chief Axel Weber sees no crunch now, yet fears a second pulse of the crisis this winter. "We are threatened by stress from our domestic credit industry through the rise in the insolvency of firms and households," he says.
Draw your own conclusion. Western central banks will have to "monetize" deficits on a huge scale to stave off debt deflation. The longer they think otherwise, the worse it will be.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6234939/Money-figures-show-theres-trouble-ahead.html
Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise.
By Ambrose Evans-Pritchard
Published: 8:48PM BST 26 Sep 2009
Comments 92 | Comment on this article
Unemployment benefits have masked social hardship unto now but these are starting to expire with cliff-edge effects.The jobless army in Spain will be reduced to €100 a week; in Estonia to €15.
Whoever wins today's elections in Germany will face the reckoning so deftly dodged before. Kurzarbeit, that subsidises firms not to fire workers, is running out. The cash-for-clunkers scheme ended this month. It certainly "worked".
Car sales were up 28pc in August, but only by stealing from the future. The Center for Automotive Research says sales will fall by a million next year: "It will be the largest downturn ever suffered by the German car industry."
Fiat's Sergio Marchionne warns of "disaster" for Italy unless Rome renews its car scrappage subsidies. Chrysler too will see some "harsh reality" following the expiry of America's scheme this month. Some expect US car sales to slump 40pc in September.
Weaker US data is starting to trickle in. Shipments of capital goods fell by 1.9pc in August. New house sales are stuck near 430,000 – down 70pc from their peak – despite an $8,000 tax credit for first-time buyers. It expires in November.
We are moving into a phase when most OECD states must retrench to head off debt-compound traps.
Britain faces the broad sword; Spain has told ministries to slash 8pc of discretionary spending; the IMF says Japan risks a funding crisis.
If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China's exports were down 23pc in August; Japan's were down 36pc; industrial production has dropped by 23pc in Japan, 18pc in Italy, 17pc in Germany, 13pc in France and Russia and 11pc in the US.
Call this a "V-shaped" recovery if you want. Markets are pricing in economic growth that is not occurring.
The overwhelming fact is that private spending has slumped in the deficit countries of the Anglosphere, Club Med, and East Europe but has not risen enough in the surplus countries (East Asia and Germany) to compensate. Excess capacity remains near post-war highs across the world.
Yet hawks are already stamping feet at key central banks.
Are they about to repeat the errors made in early 2007, and then again in the summer of 2008, when they tightened – or made hawkish noises – even as the underlying credit system fell apart?
Fed chairman Ben Bernanke spoke in April 2008 of "a return to growth in the second half of this year", and again in July 2008 that growth would "pick up gradually over the next two years".
He could only have thought such a thing if he was ignoring the money data. Key aggregates had been in free-fall for months.
I cited monetarists in July 2008 warning that the lifeblood of the Western credit was "draining away". For whatever reason (the lockhold of New Keynesian ideology?) the Fed missed the signal.
So did the European Central Bank when it raised rates weeks before the Lehman collapse, blathering about a "1970s inflation spiral."
Yes, the money entrails can mislead. The gurus squabble like Trotskyists. But you ignore the data at your peril.
Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14pc since early Summer: "There has been nothing like this in the USA since the 1930s."
M3 money has been falling at a 5pc rate; M2 fell by 12pc in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1pc rate since April.
Private loans have fallen by €111bn since January. Whether you see a credit crunch in Euroland depends where you sit. It is already garrotting Spain. Germany's Mittelstand says it is "a reality", even if not for big companies that issue bonds. The Economy Ministry is drawing up plans for €250bn in state credit, knowing firms will be unable to roll over debts.
Bundesbank chief Axel Weber sees no crunch now, yet fears a second pulse of the crisis this winter. "We are threatened by stress from our domestic credit industry through the rise in the insolvency of firms and households," he says.
Draw your own conclusion. Western central banks will have to "monetize" deficits on a huge scale to stave off debt deflation. The longer they think otherwise, the worse it will be.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6234939/Money-figures-show-theres-trouble-ahead.html
The dollar is dead - long live the renminbi
The dollar is dead - long live the renminbi
Whatever happens at the G20, the days of Western dominance are at an end, says Jeremy Warner.
By Jeremy Warner
Published: 7:42PM BST 25 Sep 2009
Comments 70
Comment on this article
The balance of global economic power has shifted Photo: PA Sometimes it takes a crisis to restore reason and equilibrium to the world, and so it is with the trade and capital imbalances that were arguably the root cause of the financial collapse of the past two years.
To economic purists, the changes now under way in demand and trade are inevitable, necessary and even desirable. Even so, dollar supremacy and the geo-political dominance of the West are both likely long-term casualties.
One, almost unnoticed, effect of the downturn is that past imbalances in trade and capital flows are correcting themselves of their own volition, the simple consequence of lower demand in once profligate consumer nations.
Current-account surpluses in China, Germany and Japan are narrowing, as are the deficits of the major consumer nations – primarily America, but also smaller profligates such as Britain and Spain.
The key question for G20 leaders as they meet in Pittsburgh is not bankers' bonuses, financial regulation and other issues of peripheral importance, but whether this correction in trade might be used as the basis for a permanently more balanced world economy.
In direct contradiction of US objectives, Angela Merkel, the German Chancellor, accuses Britain and America of using the issue of trade imbalances to backtrack on financial reform and bankers' bonuses. "We should not start looking for ersatz [substitute] issues and forget the topic of financial market regulation," she said before boarding the plane to Pittsburgh.
To the big export nations, the primary cause of the crisis was Anglo Saxon financiers, whose wicked and avaricious ways created a catastrophe in the financial system, which led to a collapse in world trade. Once bankers are tamed, this one-off shock can be put behind us and the world will return to business as usual.
Blaming bankers is politically popular – Ms Merkel has an election to fight on Sunday – but the idea that the world economy will return to the way it was once this supposed cancer is removed is fanciful.
A seminal shift in behaviour is being forced on the deficit nations where, despite massive fiscal, monetary and financial system support, there is a continuing scarcity of credit and a growing propensity to save. Neither of these two constraints on demand will reverse any time soon.
This, in turn, is forcing change on surplus countries, whether they like it or not. Export-orientated nations can no longer rely on once profligate neighbours to buy their goods. Against all instinct, they are having to stimulate their own domestic demand.
The most startling results are evident in China, where retail sales grew an astonishing 15.4 per cent in August. Fiscal action has succeeded in boosting consumption in Germany, too, despite mistrust of what one German politician has dubbed "crass Keynesianism".
Unfortunately for him, Germany will have to persist with its Keynesian medicine for some time yet if it is to avoid a collapse back into recession. Tax cuts and perhaps the removal of fiscal incentives to save are essential to the process of supporting domestic demand.
The challenge for a developing nation such as China is a rather different one. In China, the propensity to export and save is driven by an absence of any meaningful social security net, in combination with the legacy of its oppressive one child policy, which has deprived great swathes of the population of children to fall back on for support in old age.
What's more, most Chinese don't earn enough to buy the products they are producing, so in what has become the customary path for developing nations, they export the surplus and save the proceeds.
Yet even in China the establishment of a newly affluent, free-spending middle class may now have gained an unstoppable momentum. In any case, the country can no longer rely on American consumers to provide jobs and growth. It needs a new growth model, which means ultimately adopting the Henry Ford principle that if you want a sustainable market for your products, you have to pay your workers enough to buy them.
These trends – all of which pre-date the crisis but which, out of necessity, are being greatly accelerated by it – will eventually drive a move away from the dollar as the world's reserve currency of choice. As China takes control of its economic destiny, spends more and saves less, there will be less willingness both to hold dollar assets and to submit to the domestic priorities of US monetary policy.
None of this will happen overnight. Depressed it might be, but US consumption is still substantially bigger than that of all the surplus nations put together. All the same, that the dollar's reign as the world's dominant currency is drawing to a close is no longer in doubt.
http://www.telegraph.co.uk/finance/comment/jeremy-warner/6232623/The-dollar-is-dead---long-live-the-renminbi.html
Whatever happens at the G20, the days of Western dominance are at an end, says Jeremy Warner.
By Jeremy Warner
Published: 7:42PM BST 25 Sep 2009
Comments 70
Comment on this article
The balance of global economic power has shifted Photo: PA Sometimes it takes a crisis to restore reason and equilibrium to the world, and so it is with the trade and capital imbalances that were arguably the root cause of the financial collapse of the past two years.
To economic purists, the changes now under way in demand and trade are inevitable, necessary and even desirable. Even so, dollar supremacy and the geo-political dominance of the West are both likely long-term casualties.
One, almost unnoticed, effect of the downturn is that past imbalances in trade and capital flows are correcting themselves of their own volition, the simple consequence of lower demand in once profligate consumer nations.
Current-account surpluses in China, Germany and Japan are narrowing, as are the deficits of the major consumer nations – primarily America, but also smaller profligates such as Britain and Spain.
The key question for G20 leaders as they meet in Pittsburgh is not bankers' bonuses, financial regulation and other issues of peripheral importance, but whether this correction in trade might be used as the basis for a permanently more balanced world economy.
In direct contradiction of US objectives, Angela Merkel, the German Chancellor, accuses Britain and America of using the issue of trade imbalances to backtrack on financial reform and bankers' bonuses. "We should not start looking for ersatz [substitute] issues and forget the topic of financial market regulation," she said before boarding the plane to Pittsburgh.
To the big export nations, the primary cause of the crisis was Anglo Saxon financiers, whose wicked and avaricious ways created a catastrophe in the financial system, which led to a collapse in world trade. Once bankers are tamed, this one-off shock can be put behind us and the world will return to business as usual.
Blaming bankers is politically popular – Ms Merkel has an election to fight on Sunday – but the idea that the world economy will return to the way it was once this supposed cancer is removed is fanciful.
A seminal shift in behaviour is being forced on the deficit nations where, despite massive fiscal, monetary and financial system support, there is a continuing scarcity of credit and a growing propensity to save. Neither of these two constraints on demand will reverse any time soon.
This, in turn, is forcing change on surplus countries, whether they like it or not. Export-orientated nations can no longer rely on once profligate neighbours to buy their goods. Against all instinct, they are having to stimulate their own domestic demand.
The most startling results are evident in China, where retail sales grew an astonishing 15.4 per cent in August. Fiscal action has succeeded in boosting consumption in Germany, too, despite mistrust of what one German politician has dubbed "crass Keynesianism".
Unfortunately for him, Germany will have to persist with its Keynesian medicine for some time yet if it is to avoid a collapse back into recession. Tax cuts and perhaps the removal of fiscal incentives to save are essential to the process of supporting domestic demand.
The challenge for a developing nation such as China is a rather different one. In China, the propensity to export and save is driven by an absence of any meaningful social security net, in combination with the legacy of its oppressive one child policy, which has deprived great swathes of the population of children to fall back on for support in old age.
What's more, most Chinese don't earn enough to buy the products they are producing, so in what has become the customary path for developing nations, they export the surplus and save the proceeds.
Yet even in China the establishment of a newly affluent, free-spending middle class may now have gained an unstoppable momentum. In any case, the country can no longer rely on American consumers to provide jobs and growth. It needs a new growth model, which means ultimately adopting the Henry Ford principle that if you want a sustainable market for your products, you have to pay your workers enough to buy them.
These trends – all of which pre-date the crisis but which, out of necessity, are being greatly accelerated by it – will eventually drive a move away from the dollar as the world's reserve currency of choice. As China takes control of its economic destiny, spends more and saves less, there will be less willingness both to hold dollar assets and to submit to the domestic priorities of US monetary policy.
None of this will happen overnight. Depressed it might be, but US consumption is still substantially bigger than that of all the surplus nations put together. All the same, that the dollar's reign as the world's dominant currency is drawing to a close is no longer in doubt.
http://www.telegraph.co.uk/finance/comment/jeremy-warner/6232623/The-dollar-is-dead---long-live-the-renminbi.html
Sunday 27 September 2009
Price and Dividend Growth Trends of Share
Esso
in 1975
$1.5 Per share
end of 1983
$12.7 Per share
Capital gain
747%
Malayawata
in 1975
$1.5 Per share
end of 1983
$2.32 Per share
Capital gain
55%
Why is there such an enormous difference in the capital gain?
http://spreadsheets.google.com/pub?key=t43WD4CWVAy-DW46q0q892Q&output=html
What can we learn from the above table?
1. We can see that both shares seem to sell at prices which fall within a range of dividend multiples which is fairly stable for each of the shares.
2. We can see that the occasional freak year can take place when the prices move well out of the normal range.
3. We can see very clearly that the sharp increase in the price of Malayawata during 1981 was almost certainly due to speculation or manipulation.
4. We can see quite clearly that the Malaysian/Singaporean stock market is not an efficient one (i.e. one which prices shares correctly).
5. In eight years, the DPS of Esso increased from 18 cents to 140 cents, an increase of 678%. It experienced an increase in the share price of about 747%. This means that, nett of the dividend effect, the price of Esso went up by about 70% for the period examined.
In contrast, there had been a decrease in the DPS of Malayawata of about 25% and the price went up by about 55%. This means that the nett of the dividend range, there was a price increase of 80%.
This is roughly in line with the increase experienced by Esso after the dividend effect has been excluded.
Conclusion:
A careful study of the table provides evidence that the long term growth in a share's price is closely related to the amount of dividend it pays out.
Over the short run, there may be temporary market aberrations which cause the price to reach unreasonable levels.
But such madness is usually of short duration and within a year or two, the price will go back to its usual level.
Ref:
Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean
in 1975
$1.5 Per share
end of 1983
$12.7 Per share
Capital gain
747%
in 1975
$1.5 Per share
end of 1983
$2.32 Per share
Capital gain
55%
Why is there such an enormous difference in the capital gain?
What can we learn from the above table?
1. We can see that both shares seem to sell at prices which fall within a range of dividend multiples which is fairly stable for each of the shares.
- If we ignore the freak year of 1975, Esso appears to sell for a price that is between five and eleven times its dividend.
- Malayawata, in contrast, seems to sell at a price that is between fifteen and forty times its dividend, except for the freak year of 1981.
2. We can see that the occasional freak year can take place when the prices move well out of the normal range.
- In 1975, Esso was selling at a price that was far too low by its historical standard.
- In 1981, Malayawata was selling at a price that was far too high.
- In the event, both prices have corrected themselves and moved back into the usual range within a year.
3. We can see very clearly that the sharp increase in the price of Malayawata during 1981 was almost certainly due to speculation or manipulation.
- The price rise could not be sustained in the absence of a big increase in dividend and the price fell back very sharply.
- In sharp contrast, the price of Esso could be sustained even though the overall market dropped. This was because of the very high dividend which was being paid out.
4. We can see quite clearly that the Malaysian/Singaporean stock market is not an efficient one (i.e. one which prices shares correctly).
- By all usual standards, Esso is a far superior company compared with Malayawata and yet, it continuously sells at a dividend multiple that is well below that of the latter.
- This is very strong evidence that Malaysian investors do not always consider the fundamentals when purchasing shares. To them, the stock market is more a place for a gamble than an investment.
5. In eight years, the DPS of Esso increased from 18 cents to 140 cents, an increase of 678%. It experienced an increase in the share price of about 747%. This means that, nett of the dividend effect, the price of Esso went up by about 70% for the period examined.
In contrast, there had been a decrease in the DPS of Malayawata of about 25% and the price went up by about 55%. This means that the nett of the dividend range, there was a price increase of 80%.
This is roughly in line with the increase experienced by Esso after the dividend effect has been excluded.
- Thus it is clear that dividend increase accounts for much of the price increase experienced by Esso while some other factors account for a small part of the increase.
- Although Malayawata has experienced no increase in dividend, its price went up nevertheless due to the same factors which caused Esso price to go up more than the increase in dividend.
- As to what factors these are, we are not yet in a position to answer.
Conclusion:
A careful study of the table provides evidence that the long term growth in a share's price is closely related to the amount of dividend it pays out.
Over the short run, there may be temporary market aberrations which cause the price to reach unreasonable levels.
But such madness is usually of short duration and within a year or two, the price will go back to its usual level.
Ref:
Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean
Some rights issues are good, others can be very bad
Like most things in investment, rights issues are not simple matters.
Rights are not automatically "good things" from the shareholders' point of view. Some of the rights are good, others can be very bad.
Investors have to be careful and they should not rush in every time there is an annoucement of rights. They should classify the rights issue they are considering in accordance with the three categories indicated below:
(1) The case of the improperly managed companies
(2) The case of moving into new business area
(3) The case of the very fast growing company
They should purchase only those of the last category.
Many will protest that they have neither the time nor the knowledge to carry out a detailed analysis of the company which announces the rights.
It is not possible for each and every one to carry out a careful analysis but there is an easier way out for the small timers. The dividend yield approach to stock valuation can be readily used to value a rights issue.
Rights are not automatically "good things" from the shareholders' point of view. Some of the rights are good, others can be very bad.
Investors have to be careful and they should not rush in every time there is an annoucement of rights. They should classify the rights issue they are considering in accordance with the three categories indicated below:
(1) The case of the improperly managed companies
(2) The case of moving into new business area
(3) The case of the very fast growing company
They should purchase only those of the last category.
Many will protest that they have neither the time nor the knowledge to carry out a detailed analysis of the company which announces the rights.
It is not possible for each and every one to carry out a careful analysis but there is an easier way out for the small timers. The dividend yield approach to stock valuation can be readily used to value a rights issue.
New capital requirement of a growing company
A hypothetical example to understand the above more clearly. The following reasonable assumptions can be made based on this example:
Sales to Assets Ratio = 2x
Profit after Tax to Sales = 6%
Debt to Equity Ratio = 1.2
Dividend Payout Ratio = 0.5
Sales in Year 0 = $10 million
Growth Rate = 10% pa
Simplified Balance Sheet ($M)
At End of Year 0
Assets 5.00
Financed by:
Shareholders' Equity 3.33
Borrowing 1.67
Simplified P&L Statement ($M)
For Year 1
Sales 11.00
Profit after Tax 0.66
Dividend 0.33
Retained Profit 0.33
Simplified Balance Sheet ($M)
At End of Year 1
# Assets 5.50
Financed by:
@ Shareholders' Equity 3.66
** Borrowing 1.84
Notes on Balance Sheet at Year 1
# Increase at the same rate as sales
@ = 3.33 (at Year 0) + 0.33 (Retained Profit of Year 1)
** By difference = 5.50 - 3.66
----------
Under the normal circumstances, a company should be able to finance its additional purchase of assets from either
(1) The company is improperly managed such that it is either not very profitable (or even losing a lot of money) such that the incoming cash is not adequate to support the need to purchase more assets. Or owing to poor management of its assets, it now requires a lot more assets to support its operations.
(2) The company is moving into another line of business which is large relative to its current size and it requires a great deal of additional capital to start up the new venture.
(3) The company is in a very fast growing business. In fact, it is so fast growing that retained earnings and new borrowing alone are insufficient to sustain the growth.
In order to be a prudent investor, we must analyse the situation of the company which has announced a rights issue carefully to see which category it falls into in the first place.
Sales to Assets Ratio = 2x
Profit after Tax to Sales = 6%
Debt to Equity Ratio = 1.2
Dividend Payout Ratio = 0.5
Sales in Year 0 = $10 million
Growth Rate = 10% pa
Simplified Balance Sheet ($M)
At End of Year 0
Assets 5.00
Financed by:
Shareholders' Equity 3.33
Borrowing 1.67
Simplified P&L Statement ($M)
For Year 1
Sales 11.00
Profit after Tax 0.66
Dividend 0.33
Retained Profit 0.33
Simplified Balance Sheet ($M)
At End of Year 1
# Assets 5.50
Financed by:
@ Shareholders' Equity 3.66
** Borrowing 1.84
Notes on Balance Sheet at Year 1
# Increase at the same rate as sales
@ = 3.33 (at Year 0) + 0.33 (Retained Profit of Year 1)
** By difference = 5.50 - 3.66
- From the above example, by maintaining the D/E ratio at around 1:2 (3.66 = 2 x 1.83), the company has no difficulty in financing a 10 percent increase in sales in one year.
- By having a zero dividend payout, it can in fact grow at 18 percent per year without increasing its D/E ratio.
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Under the normal circumstances, a company should be able to finance its additional purchase of assets from either
- retained earnings or
- new borrowing or
- a combination of the two.
(1) The company is improperly managed such that it is either not very profitable (or even losing a lot of money) such that the incoming cash is not adequate to support the need to purchase more assets. Or owing to poor management of its assets, it now requires a lot more assets to support its operations.
(2) The company is moving into another line of business which is large relative to its current size and it requires a great deal of additional capital to start up the new venture.
In order to be a prudent investor, we must analyse the situation of the company which has announced a rights issue carefully to see which category it falls into in the first place.
Why Companies Have to Make Rights Issue?
To put it bluntly, a company only needs to make a rights issue when it is short of money.
A business, any business, requires investment in various forms of assets in order to carry out its operations. A company is usually required to continually buy new assets in order to carry on its business either because its old assets have to be replaced or its expanding business requires more assets. To buy new assets, it will need new capital.
A company can obtain necessary money to purchase its assets from any one of three sources or a combination of all three.
Under the normal circumstances, a company should be able to finance its additional purchase of assets from either retained earnings or new borrowing or a combination of the two. There are many examples of very fast growing businesses in Malaysia that have prospered without recourse to issuing rights (for examples: Nestle and BAT )
But, companies may have to raise new capital by making rights issues under three types of abnormal circumstances. These three cases are:
(1) The company is improperly managed such that it is either not very profitable (or even losing a lot of money) such that the incoming cash is not adequate to support the need to purchase more assets. Or owing to poor management of its assets, it now requires a lot more assets to support its operations.
(2) The company is moving into another line of business which is large relative to its current size and it requires a great deal of additional capital to start up the new venture.
(3) The company is in a very fast growing business. In fact, it is so fast growing that retained earnings and new borrowing alone are insufficient to sustain the growth.
In order to be a prudent investor, we must analyse the situation of the company which has announced a rights issue carefully to see which category it falls into in the first place.
Depending on which category of rights it is issuing, we can then carry out a further analysis to decide whether the rights issue is a good or a bad one.
A business, any business, requires investment in various forms of assets in order to carry out its operations. A company is usually required to continually buy new assets in order to carry on its business either because its old assets have to be replaced or its expanding business requires more assets. To buy new assets, it will need new capital.
A company can obtain necessary money to purchase its assets from any one of three sources or a combination of all three.
- It can borrow the money,
- retain part or all of its profit or
- it can sell new shares.
Under the normal circumstances, a company should be able to finance its additional purchase of assets from either retained earnings or new borrowing or a combination of the two. There are many examples of very fast growing businesses in Malaysia that have prospered without recourse to issuing rights (for examples: Nestle and BAT )
But, companies may have to raise new capital by making rights issues under three types of abnormal circumstances. These three cases are:
(1) The company is improperly managed such that it is either not very profitable (or even losing a lot of money) such that the incoming cash is not adequate to support the need to purchase more assets. Or owing to poor management of its assets, it now requires a lot more assets to support its operations.
(2) The company is moving into another line of business which is large relative to its current size and it requires a great deal of additional capital to start up the new venture.
(3) The company is in a very fast growing business. In fact, it is so fast growing that retained earnings and new borrowing alone are insufficient to sustain the growth.
In order to be a prudent investor, we must analyse the situation of the company which has announced a rights issue carefully to see which category it falls into in the first place.
Depending on which category of rights it is issuing, we can then carry out a further analysis to decide whether the rights issue is a good or a bad one.
- Through examining each type of rights issue, an intelligent investor can tell the wolves from the sheep.
- Pricing the rights also requires proper evaluation.
Not all right issues are the same; ought to treat them with a bit more suspicion
Many companies are making rights issues in this recent bull market..
Whenever a company announces that it is making a rights issue, the market in Malaysia/Singapore, on the whole, does not react adversely especially when the right issues are accompanied by a bonus issue.
In Britain and more in particular, the US, the market seldom reacts so kindly to rights issues.
Though not all rights are automatically bad, local investors could do with a good dose of cynicism and ought to treat rights issues with a bit more suspicion.
If we blindly follow the market without knowledge what we are doing, we can so easily be taken advantage of.
In order to understand why the Western investors are so suspicious of rights, we must go back to the first principle and try to understand:
Whenever a company announces that it is making a rights issue, the market in Malaysia/Singapore, on the whole, does not react adversely especially when the right issues are accompanied by a bonus issue.
- The price of the company's shares usually moves up and seldom does one come across cases where rights are badly undersubscribed.
In Britain and more in particular, the US, the market seldom reacts so kindly to rights issues.
- Most rights issues are treated with great suspicion.
- The market usually takes a "wait and see" attitude and will only react favourably if it is convinced that the new capital obtained from the rights issue is put to good use and that the profit of the company can increase as a result of the rights issue.
- In fact, the market in the US is so suspicious of rights issues that it is most unusual for a large US corporation to make a right issue.
Though not all rights are automatically bad, local investors could do with a good dose of cynicism and ought to treat rights issues with a bit more suspicion.
- Local investors ought to be aware of the fact that not all rights issues are the same.
- Each rights issue should be treated on its own merit and if it is truly good, then there is a case for bidding up the price of the shares and taking up the rights issues.
If we blindly follow the market without knowledge what we are doing, we can so easily be taken advantage of.
- Opportunists, insiders and rumour-mongers are abound in the local market.
- Here, as with everywhere else, Caveat Emptor (Latin for "let the buyer beware") is the key.
In order to understand why the Western investors are so suspicious of rights, we must go back to the first principle and try to understand:
- what is so bad about a right issue and
- the reason a company has for making a rights issue.
The concept of valuing a share according to its dividend
Hypothetical Company A:
EPS 30 cents (1987) 36 cents (1988)
DPS 15 cents (1987) 18 cents (1988)
Annual increase in dividend 20%
Assuming the intrinsic value of the share = 25 times its dividend (i.e. the dividend yield of a share should be 4%), what should be the correct price of a share of Company A in 1987 and 1988?
Correct market price:
1987: 25 x 15 cents = $ 3.75
1988: 25 X 18 cents = $ 4.50
The intrinsic value of Company's A shares increased from $3.75 to $4.50 in a year, thus giving a capital gain of 75 cents or 20% on the 1987 price.
To recapitulate:
Question: "But why should the price go up just because the dividend of a share has increased?"
Summary:
The concept of valuing a share according to its dividend is a very alien one to most of the investors.
Most would find it difficult to accept and may even think that it is too simple a concept to be true.
However, the dividend yield approach works well as an investment tool over the long term.
It is beyond doubt that over the long run, the price of a share is dependent on the amount of dividend it pays out. The higher the growth rate of the dividend, the higher the growth rate of the share.
EPS 30 cents (1987) 36 cents (1988)
DPS 15 cents (1987) 18 cents (1988)
Annual increase in dividend 20%
Assuming the intrinsic value of the share = 25 times its dividend (i.e. the dividend yield of a share should be 4%), what should be the correct price of a share of Company A in 1987 and 1988?
Correct market price:
1987: 25 x 15 cents = $ 3.75
1988: 25 X 18 cents = $ 4.50
The intrinsic value of Company's A shares increased from $3.75 to $4.50 in a year, thus giving a capital gain of 75 cents or 20% on the 1987 price.
- This is exactly the same as the increase in dividend.
- So long as the dividend of Company A goes on rising, its intrinsic value would continue to rise, thus providing its shareholders with continuous opportunity for capital gain.
To recapitulate:
- This does not mean that the market price would indeed be at these levels.
- It merely means that the price would be oscillating around these prices in the respective years.
Question: "But why should the price go up just because the dividend of a share has increased?"
- The reason is quite simple. If the price does not go up while the dividend keeps on increasing, the dividend yield of the share will become higher and higher.
- Since the shares of Company A are traded in the same market as many other shares, its shares cannot sell at a dividend yield that is much higher than its competitors. If its dividend yield is very attractive (i.e. very high) it will attract more buyers and its price would go up.
- Similarly, there is no reason at all why the price of a share should rise unless it has a prospect of paying more dividend in the future. Otherwise, its dividend yield would get out of place compared with the other shares.
- This is why all too often, the speculative shares which are bidded up to stratospheric levels will eventually decline to their previous level.
Summary:
The concept of valuing a share according to its dividend is a very alien one to most of the investors.
Most would find it difficult to accept and may even think that it is too simple a concept to be true.
However, the dividend yield approach works well as an investment tool over the long term.
It is beyond doubt that over the long run, the price of a share is dependent on the amount of dividend it pays out. The higher the growth rate of the dividend, the higher the growth rate of the share.
Saturday 26 September 2009
Importance of dividend yield in the evaluation of the worth of a share.
Shares should sell at prices which will provide their owners with a reasonable return.
As an investment, shares have 3 characteristics:
1. They are relatively illiquid.
2. The return is uncertain.
3. A large part of the return is in the form of capital gains.
Even the most inexperienced investor is aware of the last characteristic.
Question: We should buy shares in accordance with their expected dividend yield (DY). "If we buy a share for its dividend, why should its price go up so that we can get capital gains?"
Question: "Why should the price of a share, any share for that matter, go up in the first place?"
Here are some reasons for share not to go up:
Share price should not go up as a result of reorganization.
Share price should not go up as a result of share split or bonus.
Share price should not go up as a result of property injection.
Share price should not go up as a result of rights issues.
There is only one good reason why a share's price should go up in the first place:
If one accepts the dividend yield approach to share valuation, the only reason why the price of a share should increase is that the share
As an investment, shares have 3 characteristics:
1. They are relatively illiquid.
2. The return is uncertain.
3. A large part of the return is in the form of capital gains.
Even the most inexperienced investor is aware of the last characteristic.
Question: We should buy shares in accordance with their expected dividend yield (DY). "If we buy a share for its dividend, why should its price go up so that we can get capital gains?"
Question: "Why should the price of a share, any share for that matter, go up in the first place?"
Here are some reasons for share not to go up:
Share price should not go up as a result of reorganization.
Share price should not go up as a result of share split or bonus.
Share price should not go up as a result of property injection.
Share price should not go up as a result of rights issues.
There is only one good reason why a share's price should go up in the first place:
If one accepts the dividend yield approach to share valuation, the only reason why the price of a share should increase is that the share
- now pays a higher dividend than before or
- has the prospect of paying a higher dividend.
- That is, the intrinsic value tends to be a constant multiple (i.e. so many times) of the dividend.
- "How many times?" - this is a very complex subject which will be looked at later.
Dividend yield prevents investors from being side-tracked by irrelevant events.
The Malaysian/Singaporean stock market can be characterised by the occurrence of events which are of no real benefit to the existing shareholders and yet which excite them greatly.
This is referring to the large numbers of bonus announcements, rights issues, property injections, take-overs and mergers which have made their appearnace in many years.
Most of these events are of little, if any, real economic benefit to the existing shareholders of the companies involved. Despite this, the price of shares of a company involved in an event of this nature tends to rise sharply. These events are, in the main, irrelevant and some of them may even be damaging.
According to the dividend yield approach to share valuation, a share can have increased value only if there is a likelihood that its dividend will rise faster than originally expected.
In what way can events like bonuses, rights, mergers and reorganizations in themselves improve the future dividend picture of a company. If these events cannot lead to such an increase, the share surely does not deserve a higher valuation.
Here is an often quoted advice to first time share buyers:
A cow for its milk,
Bees for their honey,
And shares, by golly,
For their dividend.
This is referring to the large numbers of bonus announcements, rights issues, property injections, take-overs and mergers which have made their appearnace in many years.
Most of these events are of little, if any, real economic benefit to the existing shareholders of the companies involved. Despite this, the price of shares of a company involved in an event of this nature tends to rise sharply. These events are, in the main, irrelevant and some of them may even be damaging.
According to the dividend yield approach to share valuation, a share can have increased value only if there is a likelihood that its dividend will rise faster than originally expected.
In what way can events like bonuses, rights, mergers and reorganizations in themselves improve the future dividend picture of a company. If these events cannot lead to such an increase, the share surely does not deserve a higher valuation.
Here is an often quoted advice to first time share buyers:
A cow for its milk,
Bees for their honey,
And shares, by golly,
For their dividend.
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