Gulf Finance House - A Deconstruction of Its 14 February 2009 Press Release

GFH issued a press release today on the Bahrain Stock Exchange titled "GFH Announces Further Liquidity Initiatives".

Sometimes when I read things in the financial press, I wonder what were they thinking?   In many cases more precisely were they thinking?

Today is a prime example so let's take a closer look at GFH's press release.

First, in the opening paragraph we're told that GFH is "the leading Islamic investment bank".  Not "a leading Islamic investment bank" but rather "the leading" one.  For an institution whose business model has proven inadequate, that has been downgraded by rating agencies to below sub-zero status, whose last GM resigned after a scant stay, which has no discernible operating earnings, I would have expected a bit of humility.   Unless of course this is a rather adverse assessment on the state of the "Islamic" investment banking industry? Perhaps, not that unreasonable an assumption.

Second, the Chairman of GFH continues by highlighting the strength of "our innovative business model" and the "continued support" from "our investors and partners".   Again one might question how GFH's admittedly innovative business model is a strength since it is precisely the major factor responsible for its current predicament.  And until the LMC syndicate agrees to a rescheduling it is a bit premature to speak of "their confidence and support".   And, if like the West LB syndicate, the LMC syndicate's only choice is between an extension and a default, it may also be a bit of a stretch to speak of "confidence and support".  A decision taken with a gun to one's head is usually not considered a "free will" decision.

 

Third, Acting CEO Ted Pretty refers to the "support received from the Central Bank of Bahrain on our new product initiatives and also their advice on strengthening our position".   Clearly, the CBB doesn't want GFH to fail.  No reasonable person or firm does.  But this seems to be another stretch.  I'll bet that the support the CBB is giving GFH in terms of "advice" on strengthening its position is to get its house in order.  Not sure that strictly speaking that qualifies as "support".  Cynics might refer to it as a "warning".

With respect to new products, one would expect that any CBB approval would be subject to two very important conditions.  

1. That GFH resolve its liquidity issues prior to any such sale to ensure that it is a going concern able to manage the investments to be made and to look after the interests of its customers.
2. And probably more importantly that if GFH is taking investor funds today for disbursements in the future that those funds are legally segregated from GFH.  That is, investor deposits are placed with another financial institution and not with GFH so that investors do not become trapped as creditors at GFH should something untoward happen.

Fourth, and perhaps the most striking quote is that by the CEO of LMC:  "We are in an era where ratings and rating agencies sometimes have not comprehensively and adequately reflected the true standing of entities specifically the positive outcomes of GFH’s strategy and capital management program."  As I read this Mr. Abbas' view is that rating agencies really aren't capable of doing their jobs with at least sufficient frequency that we can rely on them.   

That raises quite an interesting question. GFH mentions the possibility of a ratings upgrade twice in its press release as though this were a good thing.

But if, Mr. Abbas is right and the rating agencies in effect don't know what they're doing, why should we trust them if they upgraded GFH?  Or is his position that they only make mistakes when downgrading issuers?

BTW, if like me, you're watching GFH's disclosure of its ratings, you'll notice they have yet to update their website for the first downgrade 26 November 2009 a scant eighty days ago.   More on that topic in another post.  Until then, we'll add the label كلام شريف  to this post.