tag:blogger.com,1999:blog-51248576237667245132024-03-13T07:04:26.475+00:00Suq Al MalThe Financial Sector in the GCCAbu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.comBlogger1620125tag:blogger.com,1999:blog-5124857623766724513.post-65067809361972744332022-12-27T17:51:00.002+00:002022-12-29T14:01:59.551+00:00CRYPTO: The Manifest Absurdity and Danger of Proposed "Regulation"<p><br /> <br /></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiu6D6vEs6zLQMapIFz078CbNW0fe39hBcSFpZgWjnlwOlcEex1MszMvbu-9bfcPQbmzXQjgoenwpMbEQqn34uiVBRhbLrAvW3e5HQxATZ1uuCTX6nCxu-zbTZYlDZoBdwHQkax2GhM3u2wYUi1UcIoyPZluPXpKHrv5t9SdtuDBLnfEe-xCXoRl286/s275/Running%20with%20Scissors.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="183" data-original-width="275" height="183" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiu6D6vEs6zLQMapIFz078CbNW0fe39hBcSFpZgWjnlwOlcEex1MszMvbu-9bfcPQbmzXQjgoenwpMbEQqn34uiVBRhbLrAvW3e5HQxATZ1uuCTX6nCxu-zbTZYlDZoBdwHQkax2GhM3u2wYUi1UcIoyPZluPXpKHrv5t9SdtuDBLnfEe-xCXoRl286/s1600/Running%20with%20Scissors.jpg" width="275" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Some Problems Can be Avoided at the Outset<br /></td><td class="tr-caption" style="text-align: center;"><br /></td></tr></tbody></table><p></p><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;"><b>This is the follow-on to my
previous post today on crypto “assets”.</b></span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;"><b>A look at the second and more
absurd manifestation of advocating the wrong sort of regulation.</b></span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Why is regulation a “bad” idea?</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">First, the regulation advocated will
give the appearance that “crypto” is an “asset”.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Second, it is<i> </i>major step in
entangling our financial system in risks it would be better off
avoiding. It may also be the first step on the slippery slope of
governmental support/insurance for crypto.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;"><b>Conveying the Appearance of
Approval and thus Value</b></span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">A very simple analogy. </span></span>
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Crypto is like patent “medicines”
or illegal drugs.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Just as these are not medicines,
crypto is not an asset.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">An asset has inherent value. A
medicine generally helps improve health.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">No responsible physician nor
government agency/regulator would give the appearance that patent
“medicines”, miracle cures, or narcotic drugs are “good” for
one’s health.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Similarly, no responsible finance
professional or government agency/regulator should do the same with
crypto.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Regulation can of course be of two
types:</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><ul style="text-align: left;"><li>
<span style="font-size: medium;"><span style="font-family: arial;">Prohibition </span></span></li><li><span style="font-size: medium;"><span style="font-family: arial;">Establishing standards</span></span></li></ul><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">In the case of dangerous substances,
only the first type is good. </span></span>
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">That is the prohibition of their sale.
</span></span>
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">This will not eliminate their sale,
but will limit the potential damage.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;">Banks
and other financial institutions are not permitted to provide banking
services to drug dealers. </span></span></p><p align="justify" style="line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;">Investment advisors and exchanges do not
list or trade in securities for these companies</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%;">
<span style="font-size: medium;"><span style="font-family: arial;">Similarly, they should not be allowed
to do so for crypto.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">The second type of regulation
advocated by some pundits is not good, because it gives an appearance
of official sanction of a product. </span></span>
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">“<span style="font-style: normal;"><span style="font-weight: normal;">To
the best of my understanding” neither HMG or the US Government
prescribe purity </span></span>standards for street heroin, cocaine
or crystal meth. Nor do they establish requirements for
manufacturing, packaging, etc. </span></span>
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;">To
do so would imply some sort of approval.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;">So
would setting similar <i>regulatory </i>requirements on crypto
exchanges and stablecoins.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;"></span></span><p align="justify" style="line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;"><b>Entangling
the Financial System and Government</b></span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-weight: normal; line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;">This
is <i>potentially </i>the most dangerous outcome</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-weight: normal; line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;">If
these imaginary assets are “validated” through regulations, then
it is highly likely that our and other countries’ banks and
investment companies will throw open the doors to crypto
intermediaries and transactions. </span></span></p><p align="justify" style="font-weight: normal; line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;">Other service providers – audit
and accounting firms, law firms-- as well. </span></span></p><p align="justify" style="font-weight: normal; line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;">Adding to the appearance
of value.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-weight: normal; line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;">When
the gullible who have brought crypto find that their “assets” are
worthless or worth less than they paid for them, it’s likely they
will turn to our banks and investment companies for recompense and
perhaps even to the government for failure to regulate. A potential backdoor to government support.<br /></span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-weight: normal; line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;">But there is more.</span></span></p><p align="justify" style="font-weight: normal; line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;">The
world financial system is already freighted with enough risks. </span></span></p><p align="justify" style="font-weight: normal; line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;">We don't need to pile on any more. </span></span>
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-weight: normal; line-height: 150%;"><span style="font-size: medium;"><span style="font-family: arial;">This
is one that we can take a pass on.</span></span></p>
<p></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-59046951777055163552022-12-27T16:57:00.002+00:002022-12-29T14:01:29.552+00:00CRYPTO: Keep the Faith, Baby <p></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaH0T0jTmWr-UPzxbQOu50JtYbg4pGWs5MhMoCeYMT64ExJesYR3p2vxZvakHueUQJn1jbUWUDmJneGbzSzjFljUl4PRZJxgdeYfKbwky1-prcEVLdv7L_UM9jCB0-RsH8rj5usixt5djqsaRbIU3jvOktxjWeAJKGIV-mSdRl97YOuszFC_YZG5vr/s290/Colander%20on%20Head.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="174" data-original-width="290" height="174" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaH0T0jTmWr-UPzxbQOu50JtYbg4pGWs5MhMoCeYMT64ExJesYR3p2vxZvakHueUQJn1jbUWUDmJneGbzSzjFljUl4PRZJxgdeYfKbwky1-prcEVLdv7L_UM9jCB0-RsH8rj5usixt5djqsaRbIU3jvOktxjWeAJKGIV-mSdRl97YOuszFC_YZG5vr/s1600/Colander%20on%20Head.jpg" width="290" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">All Colander, No Spaghetti Monster<br /></td></tr></tbody></table><br /> <br /><p></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
</p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">One
might have thought that recent unraveling of the crypto-con space
might have shaken faith in this <i>imaginary “asset” class.</i></span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">But alas, it has not.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Aside from the diehard crypto
believers whose faith cannot be shaken, there has been what is an
interesting and troubling—at least to AA—reaction among financial
commentators.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Sadly even from the august salmon
coloured pages of The Financial Times!!</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Now pundits—even those of the
financial persuasion—must “pun” on a regular basis to justify
their employment.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">On topics of current concern, even
when they don’t really understand the basic issues involved. </span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">As usual, there are others--financial types, politicians, etc.--who add their voices to the mix.<br /></span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">Two central failures:</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><ul style="text-align: left;"><li>
<span style="font-size: medium;"><span style="font-family: arial;">Clinging to the “sacraments” of
crypto after abandoning the faith. </span></span></li><li><span style="font-size: medium;"><span style="font-family: arial;">A naive belief that imposition of
certain standards on the industry via greater regulation will solve
the problem.</span></span></li></ul><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;"><b>A look at the first manifestation of this
syndrome in this post.</b></span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Like the Pastafarian who loses faith
in the FSM but still sports his/her colander, these pundits cling to
Blockchain. And to DeFi. </span></span>
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Taking these in order.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;"><b>Blockchain</b></span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">The assumption is that Blockchain will allow the quicker and nearly frictionless completion of transactions. </span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">That is no doubt true for certain transactions conducted at certain volumes. </span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">But the overall utility may be modest like super yachts for oligarchs and the like. <br /></span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">However, if we are looking to process payments, a system's capacity is paramount. </span></span>
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><ul style="text-align: left;"><li>
<span style="font-size: medium;"><span style="font-family: arial;">How many transactions
the system can process per unit of time. </span></span></li><li><span style="font-size: medium;"><span style="font-family: arial;">The cost of processing a
transaction.</span></span></li></ul><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;"></span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Parties interested in system economics
can explore this further by looking at volume comparisons between the
old and therefore presumably “bad” Visa card and the new and
therefore “good” Blockchain. </span></span>
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Similar for average transaction costs
and their variance. </span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">The latter of particular importance if speed
is of the essence. </span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">And if one of the key goals is providing financial services to the "unbanked". <br /></span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;"><b>DeFi</b></span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">According to crypto dogma, the current
financial system is centralized and therefore “bad”. </span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">DeFi will
eliminate centralization and is therefore “good”.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">But like crypto, DeFi has proven to be
a lot less than claimed.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">It has merely replaced one set of
intermediaries with another. </span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">And in doing so it has reduced the number of intermediaries. </span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">There are a lot more banks than crypto exchanges.</span></span>
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><p>
</p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">But some may argue that true DeFi
–peer to peer transactions--can be implemented.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Let’s look at that a bit closer.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Practically how does one connect with someone to find a counterparty for
one’s ”transaction”? Generally via the internet as opposed to "in person".<br /></span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">I can’t think of any example of that sort of contact which does not take place through an intermediary.</span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">Whether that’s sharing your wisdom
with the rest of the world via tweets or blogposts, searching for information, looking for a
rental, etc.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">If you were to attempt a <i>direct</i> peer
to peer contact without using an intermediary platform, it would be theoretically possible. It would also be costly and time consuming. </span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">And you would
probably not reach all the potential “peers” you wanted to reach.</span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-size: medium;"><span style="font-family: arial;">That is important because
you want to go where there is sufficient supply or demand to
accommodate your “transactional” need as well as an
infrastructure to facilitate your transaction quickly at the lowest
cost. </span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;">If you're selling 1,000 Bitcoin, Joe might buy a couple, but that would require finding a lot of other Tom's, Richard's, Harry's. </span></span></p><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;"><b>In the next post I'll look at the second manifestation which is more dangerous and pernicious.</b><br /></span></span></p><span style="font-size: medium;"><span style="font-family: arial;">
</span></span><p align="justify" style="font-style: normal; font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p><span style="font-size: medium;"><span style="font-family: arial;"></span></span><span style="font-size: medium;"><span style="font-family: arial;"></span></span>
Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com1tag:blogger.com,1999:blog-5124857623766724513.post-77069413245174116682022-12-27T15:30:00.002+00:002022-12-27T17:53:34.161+00:00Twitter: Unanswered Questions & Logical Conclusions (?)<p></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhj0-f-iWqGO0KFwp1oVE-W7Qjb5BJy1uql1pEopF6zTCq5N6__f9AgGXKMyeWXR5MQHg9FyMKqxNcvMBPlCDJ_Gf5q8qqNr8JyYCM3jfNFz_2bSM267vSdtmeRtn6zfJ7kVYUwHlxH2y3Sf2Msct-PX5mDiDLM9CfpJ_ZxIXrM5wZPu1V-oovScWly/s290/Geometric%20Logic.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="174" data-original-width="290" height="174" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhj0-f-iWqGO0KFwp1oVE-W7Qjb5BJy1uql1pEopF6zTCq5N6__f9AgGXKMyeWXR5MQHg9FyMKqxNcvMBPlCDJ_Gf5q8qqNr8JyYCM3jfNFz_2bSM267vSdtmeRtn6zfJ7kVYUwHlxH2y3Sf2Msct-PX5mDiDLM9CfpJ_ZxIXrM5wZPu1V-oovScWly/s1600/Geometric%20Logic.jpg" width="290" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">SAM's Consultant Logician Philip Francis Queeg<br /></td><td class="tr-caption" style="text-align: center;"> </td><td class="tr-caption" style="text-align: center;"><br /></td><td class="tr-caption" style="text-align: center;"><br /></td><td class="tr-caption" style="text-align: center;"><br /></td></tr></tbody></table> <p></p><p style="text-align: justify;"><span style="font-family: arial;"><span style="font-size: medium;">The press has reported that someone who is in an excellent position to know has stated that a replacement CEO for Twitter would have to be "foolish". </span></span></p><p style="text-align: justify;"><span style="font-family: arial;"><span style="font-size: medium;">I believe the exact words were "foolish enough to take the position" or some variant.<br /></span></span></p><p style="text-align: justify;"><span style="font-family: arial;"><span style="font-size: medium;">However, there was no reported assessment about the state of mind of the recent purchaser of Twitter who it would seem to me--and perhaps to you--would have a lot more at stake than a "hired hand".<br /></span></span></p><p style="text-align: justify;"><span style="font-family: arial;"><span style="font-size: medium;">Does logic, perhaps geometric logic, enable us to draw a reasonable conclusion?<br /></span></span></p><p style="text-align: justify;"><span style="font-family: arial;"><span style="font-size: medium;">As a side note, most successful businessmen and their bankers report that rigorous up front due diligence generally--but not always--leads to better decisions than that conducted after the closing.<br /></span></span></p><p style="text-align: justify;"><span style="font-family: arial;"><span style="font-size: medium;"> </span></span> <br /></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-66793837207485795522021-11-13T01:00:00.003+00:002022-12-27T15:38:15.737+00:00One Call You Don't Want to Miss<p></p><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="266" src="https://www.youtube.com/embed/vV-uEU588cI" width="320" youtube-src-id="vV-uEU588cI"></iframe></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br /> <p></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-22323501277281288122021-11-12T12:56:00.001+00:002021-11-12T12:56:31.686+00:00Hommage a Hubert Germain -- dernier Compagnon de la Libération 11 November 2021<p></p><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="266" src="https://www.youtube.com/embed/3DjwosxWR7I" width="320" youtube-src-id="3DjwosxWR7I"></iframe></div><br /> <p></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-42314216651367979742021-11-12T12:46:00.000+00:002021-11-12T12:46:02.432+00:00Remembrance Day 11 November 2021 Menin Gate<p></p><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="266" src="https://www.youtube.com/embed/gQFeB2vNs54" width="320" youtube-src-id="gQFeB2vNs54"></iframe></div><br /> <p></p><p>Remember to remember.</p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-33844706655791121852021-10-04T12:19:00.000+01:002021-10-04T12:19:44.404+01:00Tag der Deutschen Einheit <p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKvFIXDp0uktw3KNgWZF0iP8rTgit6gBkd3R3ap_Q9Ne8-uhyphenhyphenVE17hjAZ4AeNu2WEa5wJawAydmSGWzXFH09YVV7_LvcSUNaGBWE6S1Rq_mt7A1vr0HDAQMRVPkatrljeF4s1bGSjxrjs/s275/Tag+der+Deutschen+Einheit.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="183" data-original-width="275" height="183" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKvFIXDp0uktw3KNgWZF0iP8rTgit6gBkd3R3ap_Q9Ne8-uhyphenhyphenVE17hjAZ4AeNu2WEa5wJawAydmSGWzXFH09YVV7_LvcSUNaGBWE6S1Rq_mt7A1vr0HDAQMRVPkatrljeF4s1bGSjxrjs/s0/Tag+der+Deutschen+Einheit.jpg" width="275" /></a></div><br /> <p></p><p><span style="font-family: arial; font-size: medium;">Much accomplished, much yet to be done.</span></p><p><span style="font-family: arial; font-size: medium;"><br /></span></p><p></p><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="266" src="https://www.youtube.com/embed/ProxZARJdfs" width="320" youtube-src-id="ProxZARJdfs"></iframe></div><br /><span style="font-family: arial; font-size: medium;"><br /></span><p></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-27105031084834416732021-10-04T11:46:00.001+01:002021-10-08T21:49:28.907+01:00“Wir denken selten an das, was wir haben, aber immer an das, was uns fehlt.”<p> </p><p><span style="font-family: arial; font-size: medium;">Don't it always seem to go that you don't know what you've got till it's gone.</span></p><p><span style="font-family: arial; font-size: medium;">... beispielsweise</span></p><p><span style="font-family: arial; font-size: medium;"><br /></span></p><p></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdpcqIvM1YPU-SQBLsJlRONfowOY4ogftE0xVCam6BlDttReyeL4Gg8Wg38WwWEE-eSxOu7Vv9MY0rybsrVrxD9R07CCNea3jjn2xo7OLNCjI2K2oJGh6YGeu7mvs-e13VIV8LkmMXMfc/s299/Merkel+Rhombus.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="168" data-original-width="299" height="168" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdpcqIvM1YPU-SQBLsJlRONfowOY4ogftE0xVCam6BlDttReyeL4Gg8Wg38WwWEE-eSxOu7Vv9MY0rybsrVrxD9R07CCNea3jjn2xo7OLNCjI2K2oJGh6YGeu7mvs-e13VIV8LkmMXMfc/s0/Merkel+Rhombus.jpg" width="299" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Vielen Dank, Mutti</td></tr></tbody></table><br /><br /><br /><br /><span style="font-family: arial; font-size: medium;"><br /></span><p></p><p></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8G6YslzYUG3_uFbnhMO3SR8488Ji-OgrqDDNE8izPa8ZLcc7j942Xfl3o3twaJ6raCdUgno48UaWKmhqMhX7BSG59zmCW3i0GA6Dx-iYN6DhDX6Lq_8-7dYINDgZ5LdhOhbEop60KKpQ/s982/wenger+out.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="726" data-original-width="982" height="237" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8G6YslzYUG3_uFbnhMO3SR8488Ji-OgrqDDNE8izPa8ZLcc7j942Xfl3o3twaJ6raCdUgno48UaWKmhqMhX7BSG59zmCW3i0GA6Dx-iYN6DhDX6Lq_8-7dYINDgZ5LdhOhbEop60KKpQ/s320/wenger+out.jpg" width="320" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">The Sporting Equivalent of Brexit</td></tr></tbody></table><br /><span style="font-family: arial; font-size: medium;">20 years. Finished out of the top four <b>twice</b>.</span><p></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-54254573765149677862021-09-17T12:19:00.000+01:002021-09-17T12:19:17.306+01:00Dramatic Irony? The FT “Nods”<p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilj56asnxwivJud-UyCRY-1YhWLyMPbSzCZr5inFfN2jvCLmTMb_bsY4AMyvC8e4n9K69CSgMCmUpP7wvMhcA6bAb-q1jv57IjOJwPC8fxQSlJ7Y1mhrVmwFlVpSbtrnXwN6N0Ip3gpeY/s239/Homer.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="239" data-original-width="211" height="239" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilj56asnxwivJud-UyCRY-1YhWLyMPbSzCZr5inFfN2jvCLmTMb_bsY4AMyvC8e4n9K69CSgMCmUpP7wvMhcA6bAb-q1jv57IjOJwPC8fxQSlJ7Y1mhrVmwFlVpSbtrnXwN6N0Ip3gpeY/s0/Homer.jpg" width="211" /></a></td></tr></tbody></table></p><p style="line-height: 150%; margin-bottom: 0in;"></p><div style="text-align: center;"><span style="font-family: Arial, sans-serif;">Those
oft are stratagems which errors seem,</span></div>
<span style="font-family: Arial, sans-serif;"><div style="text-align: center;">Nor is it Homer nods, but
we that dream</div></span><p></p><p> <br /></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">If
you read this blog, you generally detect a strong admiration for the
FT.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">But
like Homer sometimes the FT nods.</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><b><span style="font-family: arial; font-size: medium;">Today’s
(17 September) Lex had this bon mot to lead off its column.</span></b></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;"></span></span></p><blockquote><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">China’s
recent push to regulate the country’s fastest growing sectors begs
the question of whether the market is still investable.</span></span></p></blockquote><p align="justify" style="line-height: 150%; margin-bottom: 0in;"></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;">“<span>Still
investable”????</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Given
the legal and political issues with investments in the PRC—e.g.,
Peking University Founder Group bonds, Evergrande Group, and stock
investments via VIEs-- I’d argue there is a strong case that the
PRC market was never “investable” if that term is used in a
normative rather than descriptive sense.</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><b><span style="font-family: arial; font-size: medium;"><span style="text-align: left;">September
13 the FT ran an article today about the crackdown of South Korea’s
Financial Services Commission on digital currency exchanges in the
RoK. Some US$2.6 billion in losses were expected for wise investors
in this </span><i style="text-align: left;">imagined</i><span style="text-align: left;"> asset class.</span></span></b></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;"></span></span></p><blockquote style="text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Industry
data showed that digital coins other than bitcoin made up about 90
per cent of South Korean crypto trading, highlighting the market’s
highly speculative nature.</span></span></blockquote><p></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Isn’t
investing in sh*tcoins highly speculative regardless of their
provenance?</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Or
in other words is jumping from the top floor of the Lotte World Tower
more deadly than jumping from the top floor of the Parc 1?</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">I
hold that statistically the results are likely to be the same.</span></span></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-4365267644830704842021-08-14T13:07:00.002+01:002021-08-14T13:08:42.546+01:00Happy Qi Xi Festival!<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcySDYS_YlhHe9zJdjDcC7Vya6ydyXjKMxF5ObwunvZRpGldRre4-PQMV4Ja8JnlvOwnHyg50RsB_ej9zsPRRMP8M5wJMGZZV5njR3j7zBQNTs5ECf1F2_p_HsW6oRqHF-0_A-tf7aJ1g/s320/double-seventh.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="226" data-original-width="320" height="226" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcySDYS_YlhHe9zJdjDcC7Vya6ydyXjKMxF5ObwunvZRpGldRre4-PQMV4Ja8JnlvOwnHyg50RsB_ej9zsPRRMP8M5wJMGZZV5njR3j7zBQNTs5ECf1F2_p_HsW6oRqHF-0_A-tf7aJ1g/s0/double-seventh.jpg" width="320" /></a></div><br /> <p></p><p><br /></p><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="266" src="https://www.youtube.com/embed/4R0N48wmdA8" width="320" youtube-src-id="4R0N48wmdA8"></iframe></div><br /><p><br /></p><p style="text-align: center;"></p><p style="line-height: 150%; margin-bottom: 0in; text-align: center;">
<span style="font-family: arial; font-size: medium;"><span face="Arial, sans-serif"><span>Nach
all dem Weg, nach all der Zeit </span></span>
</span></p>
<p style="line-height: 150%; margin-bottom: 0in; text-align: center;"><span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">Bist
du die Frau in meinen Träumen</span></span></p>
<p style="line-height: 150%; margin-bottom: 0in; text-align: center;"><span style="font-family: arial; font-size: medium;"><span face="Arial, sans-serif"><span>Und
meine Heldin in der Wirklichkeit </span></span>
</span></p><div style="text-align: center;"><br /></div><p></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-89011504958976949232021-08-06T08:49:00.011+01:002021-08-06T08:56:05.058+01:00The “Big Boys’ Market” VIEs—The “Myth” of Foreign “Ownership” of PRC Stocks<p></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiN9ICVRnOiMyk_sV4oEj0jrmpHS-G-wnnrLid_NjeiMJBRG9advrYKj-w7gJwNlEi90R9IXUe9iyhNjQu40K17FfV_ECpsy0KzuUSRhgi5J01WosYzidjrQeIXv98I89kUw-bFZrc5rAA/s1500/Cow+Chips.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="928" data-original-width="1500" height="198" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiN9ICVRnOiMyk_sV4oEj0jrmpHS-G-wnnrLid_NjeiMJBRG9advrYKj-w7gJwNlEi90R9IXUe9iyhNjQu40K17FfV_ECpsy0KzuUSRhgi5J01WosYzidjrQeIXv98I89kUw-bFZrc5rAA/s320/Cow+Chips.jpg" width="320" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">"Choose Your Investment Wisely<br />Not All Chips are Blue"</td></tr></tbody></table><span style="font-family: arial; font-size: medium;"><br /><span> </span></span><p></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>If I'm not mistaken (and as Madame Arqala could tell you, I often am), in his seminal work, Benjamin Graham made the observation above. Along with the advice to carefully analyze a proposed investment before you commit funds. </span></span></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span>If you’ve been following recent financial news about the PRC
government’s clampdown on private educational companies, you’ve
probably seen comments about the Variable Interest Entity (VIE)
structure which is typically used by companies in the PRC to access
equity from foreign investors. </span>
</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">The
VIE is used because under PRC law foreigners may NOT own stock i</span><span style="font-family: arial; text-align: left;">n
some sectors</span><span style="font-family: arial; text-align: left;">
within the PRC. Lots to be exact.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">How
does the VIE work or more accurately </span><span style="font-family: arial; text-align: left;"><i>claim</i></span><span style="font-family: arial; text-align: left;">
to work?</span></span></p>
<ol><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;">A
PRC company wishing to access foreign equity markets establishes an
offshore company with the same name as its own. The Cayman Islands
is a “favorite” location.</span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>The
offshore company and the PRC-based company sign contracts that
</span><span><i>ostensibly
(note that word) </i></span><span><span style="font-style: normal;">grant
the offshore company legally enforceable rights to a share of
profits of and a measure of control over the PRC company. These are
portrayed as providing “the equivalent to ownership”. </span><i>If you’re
interested you’ll find a detailed discussion of the structure and
the agreements in the two “warning” articles cited below.</i></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="font-style: normal;">The
offshore company then issues shares to investors. </span><i>Note these are
shares in the offshore company not in the PRC company.</i></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="font-style: normal;">Net
proceeds from the issue are upstreamed to the PRC company typically as
loans in consideration for the contracts and agreements in point #2
above.</span></span></p>
</li></ol>
<p align="justify" class="western" style="font-style: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">What
are the issues with the structure?</span></p>
<ol>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-style: normal;">As
with other structures based on complex legal agreements that attempt
to “work around” (or perhaps more accurately </span></span><span><i>circumvent</i></span><span><span style="font-style: normal;">)
law, they are</span></span><span><i>
inherently </i></span><span><span style="font-style: normal;">fragile.</span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="font-style: normal;">The
investors’ ownership rights are in the assets of the offshore
company – those are solely the contracts and agreements with the
PRC company—not in the assets of the PRC company. </span><i>That is, the
investors have no direct claim against the assets of the PRC
company.</i></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-style: normal;">To
enforce their</span></span><span><i>
constructive (or more accurately imaginary) </i></span><span><span style="font-style: normal;">ownership
rights in the PRC company, the investors have to enforce the
underlying contracts against the assets of the PRC company.</span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="font-style: normal;">That
legal action has to take place in the courts and under the laws of
the jurisdiction where the PRC company holds assets. </span><i>In both cases
that is in the PRC.</i></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;">
“<span><span style="font-style: normal;">Small”
problem with that. Under PRC law, foreign ownership of PRC companies
is illegal. </span></span>
</span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-style: normal;">Therefore,
mechanisms that</span></span><span><i>
attempt</i></span><span><span style="font-style: normal;">
to “get around” PRC law—the VIE and the various contracts and
agreements that </span></span><span><i>purport</i></span><span><span style="font-style: normal;">
to give the rights of ownership-- are illegal. </span></span>
</span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-style: normal;">And,
thus, are </span></span><span><span style="font-style: normal;"><b>not
enforceable</b></span></span><span><span style="font-style: normal;">
in the PRC.</span></span></span></p></li></ol>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>This
legal situation is analogous to the Peking University Founders Group
offshore bonds debacle, chronicled </span><span style="color: navy;"><span lang="zxx"><u><a href="https://suqalmal.blogspot.com/2021/04/foreign-investors-face-critical-test.html"><span>here</span></a></u></span></span><span>
for Part 1 and </span><span style="color: navy;"><span lang="zxx"><u><a href="https://suqalmal.blogspot.com/2021/04/foreign-investors-face-critical-test_14.html"><span>here</span></a></u></span></span><span>
for Part 2</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">While
for some time, the PRC authorities have turned a “blind” eye to
the use of VIEs, that does not change the fact that these structures
are illegal.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">Whenever
the authorities </span><span style="color: black; font-family: arial; text-align: left;"><span lang="en-US">choose</span></span><span style="font-family: arial; text-align: left;">,
they can enforce the law.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">This
month the PRC turned its “good” eye toward education companies.
They will no longer be able to use VIEs.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">That
lead to a substantial drop in PRC “equities” listed on non
Chinese markets.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">As
well as much angst among investors, some of them charter members of
the “big boys” club that frankly should have known better.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial;"><span lang="en-US">The
31 July FT article </span></span><span style="font-family: arial;"><span lang="en-US"><i>Equities
Watchdogs Bite. Investors Rethink China Stocks Strategy After
Regulatory Shock</i></span></span><span style="font-family: arial;"><span lang="en-US">
(Harriet Agnew, Tabby Kinder and Hudson Lockett) contains a rather
chilling quote.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in; margin-left: 0.49in;"><span style="font-family: arial; font-size: medium;">
“<span>The
VIE structure, which allows global investors to get around controls
on foreign ownership in some Chinese sectors, has never been legally
recognised in China, despite underpinning about $2tn of investments
in companies like Alibaba and Pinduoduo on US markets.” </span></span></p>
<p align="justify" class="western" style="line-height: 100%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><br />
</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><b>First</b></span><span>,
you will note that there are some </span><span><b>US$
2 trillion</b></span><span>
in stock investments on US markets that use the VIE structure. </span>
</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;"><b>Second</b></span><span style="font-family: arial; text-align: left;">,
that suggests that the </span><span style="font-family: arial; text-align: left;">FT
journalists’</span><span style="font-family: arial; text-align: left;">
reference to a “rethink” is wrong because clearly there was no
“thinking” at the time of investment.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Rather
it was “faith-based” investment.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">To
be fair, some of this amount is via passive investing by funds
seeking to track various global indexes that include these companies.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><i style="text-align: left;"><span style="font-family: arial; font-size: medium;">I’ve
always thought it was a good idea for an index to only include
investable stocks.</span></i></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">What
is distressing about all of this is the simple fact that neither the
FT article nor this post constitute an “overdue wake-up call” nor
a “sobering fact”.</span></p>
<p align="justify" class="western" style="line-height: 100%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">There
have been many warnings about VIEs.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Here
are just two:</span></p>
<ul>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="color: navy;"><span lang="zxx"><u><a href="https://www.chinalawinsight.com/2012/02/articles/foreign-investment/variable-interest-entity-structure-in-china/"><span>2012
King and Wood Mallesons</span></a></u></span></span><span>
– A PRC/Australian law firm which described the structure as a
“Sword of Damocles over their [foreign investors’] heads”.</span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="color: navy;"><span lang="zxx"><u><a href="https://www.cii.org/files/publications/misc/12_07_17%20Chinese%20Companies%20and%20the%20VIE%20Structure.pdf"><span>2017
Council of Institutional Investors</span></a></u></span></span><span>
– a “buyer beware” alert.</span></span></p>
</li></ul>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><br />
</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>If
you look within these two articles, you will see further warnings in
the form of prior actions taken by PRC authorities against VIE
structures as well as some rogue activities, e.g., T2CN and
GigaMedia. Or </span><span><i>perhaps
(?) </i></span><span><span style="font-style: normal;">more
benign – Alipay and Alibaba.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">All
of these “wake-up calls” and “sobering facts” were clearly
ignored.</span></p>
<ul>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="font-style: normal;">Over
a prolonged period.</span></span></p>
</li></ul>
<ul>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="font-style: normal;">To
the tune of US $2 trillion.</span></span></p>
</li></ul>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Remind
me again about the efficient market theory.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Don’t
forget to also mention the role of the “sophisticated” investor
in the markets.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">I
do really love a good laugh</span></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-38560296367066010442021-08-04T13:33:00.003+01:002021-08-12T07:50:25.387+01:00Fourplay Silverado Tokyo Jazz Festival 2020 - All Three Lead Guitarists in One Session<p></p><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="266" src="https://www.youtube.com/embed/KhkvPRZJgSU" width="320" youtube-src-id="KhkvPRZJgSU"></iframe></div><br /> <p></p><p style="text-align: justify;"><span style="font-family: arial; font-size: medium;">Fantastic set: all three of Fourplay's lead guitarists from inception with their order of participation as follows Lee Ritneour, Larry Carlton, Chuck Loeb.</span></p><p style="text-align: justify;"><span style="font-family: arial; font-size: medium;">Since Chuck's death, Fourplay has been without a lead guitarist. </span></p><p style="text-align: justify;"><span style="font-family: arial; font-size: medium;">In 2018, they announced a "hiatus" which seems to have been prolonged by Covid. </span></p><p style="text-align: justify;"><span style="font-family: arial; font-size: medium;">Hurry Back!</span></p><p style="text-align: justify;"><span style="font-family: arial; font-size: medium;"><a href="https://www.youtube.com/watch?v=KhkvPRZJgSU">Fourplay - Silverado - YouTube</a></span></p><p style="text-align: justify;"><span style="font-family: arial; font-size: medium;">From left to right:</span></p><p style="text-align: justify;"></p><ol><li><span style="font-family: arial; font-size: medium;">Larry Carlton next to Nathan East (bass guitar) </span></li><li><span style="font-family: arial; font-size: medium;">Chuck Loeb (RIP) </span></li><li><span style="font-family: arial; font-size: medium;">Lee Ritenour </span></li></ol><div><br /></div><p></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-16279112329505193462021-08-03T12:36:00.004+01:002021-08-03T12:40:37.819+01:00MENA IB Fees by Country - Bring Out Your LHC<p></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXmPqa2BYI1pfXxUab2t_RBoRmYDvilLAwgV2E3hFaXg5eMAY9ECeR1aYOdy0S3eO2a5EEkCzpB8masjGQU8kK_JU9cO1nK5tzgOA0QXmKxFK-fRVA7SSJAB3qOjDa0bRfkQx4fuKavIY/s274/Large+Hadron+Collider.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="184" data-original-width="274" height="184" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXmPqa2BYI1pfXxUab2t_RBoRmYDvilLAwgV2E3hFaXg5eMAY9ECeR1aYOdy0S3eO2a5EEkCzpB8masjGQU8kK_JU9cO1nK5tzgOA0QXmKxFK-fRVA7SSJAB3qOjDa0bRfkQx4fuKavIY/s0/Large+Hadron+Collider.jpg" width="274" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Just the Equipment to Detect Small Amounts or Particles<br /><br /></td></tr></tbody></table> <p></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">In
my <a href="https://suqalmal.blogspot.com/2021/08/mena-investment-banking-fees-still.html">previous
post</a>, I showed that MENA IB fees are pretty much a rounding error
in relation to global IB fees.</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">I
thought it would be interesting to use the estimates in the Refinitiv
MENA IB reports mentioned in that post to take a look at the “major”
countries in this rather “minor” total amount of fees.</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">Just
a short technical note.</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Refinitiv
estimates total IB fees for a country, a regional area, and globally. </span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">The free reports that I am using here and in the previous post are
summaries. </span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Full details are available from Refinitiv for a modest
fee.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">I’ve
prepared two tables:</span></p>
<ul>
<li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">USD
amount of MENA IB fees by identified countries.</span></span></p>
</li><li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">MENA
IB fees by country as a percentage of global IB fees.</span></span></p>
</li></ul><div style="text-align: justify;"><span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;"><br /></span></span></div><div style="text-align: justify;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOHrRgsOSLMEb7Uzx6FVC99eqzBps01iN9RMJ8VSSafirF0pX6IVuC0gph_5ievFtsO_wImeWC3-9fmbLNHEv14v7EuNyZV8oj2H4MiEfchFYXeEulkle9XfPQnAP_t0s1kixeZYbLOWY/" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: arial; font-size: medium;"><img alt="" data-original-height="307" data-original-width="430" height="228" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOHrRgsOSLMEb7Uzx6FVC99eqzBps01iN9RMJ8VSSafirF0pX6IVuC0gph_5ievFtsO_wImeWC3-9fmbLNHEv14v7EuNyZV8oj2H4MiEfchFYXeEulkle9XfPQnAP_t0s1kixeZYbLOWY/" width="320" /></span></a></div><div style="text-align: justify;"><span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;"><br /></span></span></div><span style="font-family: arial; font-size: medium;">In my illustrious career on the sellside, I have worked on single transactions that generated fees equal to these yearly fees. Often multiples.</span></div><div style="text-align: justify;"><span style="font-family: arial; font-size: medium;"><br /></span></div><div style="text-align: justify;"><span style="font-family: arial; font-size: medium;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgppE2q0aiCsW0YRL_0ph5Im6eEPb5Ql2nWKKOlAXmFltV-DBUHpuo3XlS0aEQMGs1ZRzhDWLbaRr9ouPuKTHoMInueYT7JT-LHk4lz-sdNgwniRZllIz2RgQhFVrZ__EPTzedhe2fiIZU/" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="307" data-original-width="430" height="228" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgppE2q0aiCsW0YRL_0ph5Im6eEPb5Ql2nWKKOlAXmFltV-DBUHpuo3XlS0aEQMGs1ZRzhDWLbaRr9ouPuKTHoMInueYT7JT-LHk4lz-sdNgwniRZllIz2RgQhFVrZ__EPTzedhe2fiIZU/" width="320" /></a></div><br /><i>Note that the amounts above are expressed as percentages. The decimal equivalent of Saudi IB fees for FY 2020 is therefore 0.0030.</i></span></div><div style="text-align: justify;"><span style="font-family: arial; font-size: medium;"><br /></span></div><div style="text-align: justify;"><span style="font-family: arial; font-size: medium;">A
stark and bleak picture.</span></div><div style="text-align: justify;">
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">Dreams
of IB fee “riches” in Saudi or the UAE seem a rather a long
distance off.</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;">Vielleicht
am Tag danach Sankt Nimmerleinstag.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span face="Arial, sans-serif"><span>For
the other countrie</span></span><span face="Arial, sans-serif"><span>s
even further </span></span><span face="Arial, sans-serif"><span>in
the future</span></span><span face="Arial, sans-serif"><span>.</span></span></span></p></div>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-13079353794559154082021-08-03T09:23:00.003+01:002021-08-03T09:29:18.885+01:00MENA Investment Banking Fees Still a Sideshow<p></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwWjtWHFlNagiaDqiGjLTI5ja31VcG_PEH_xd3pN2t9fRDPZCkBpgmCXTndMNVamfRUUYxjPsWV_fOoTYTQnne3KVTQWHnpwvGpMP87ABDQwJAclkEkmmK5dBiSY6DzvQxF0KkQ9wG498/s231/Hobby+Lobby.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="231" data-original-width="218" height="231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwWjtWHFlNagiaDqiGjLTI5ja31VcG_PEH_xd3pN2t9fRDPZCkBpgmCXTndMNVamfRUUYxjPsWV_fOoTYTQnne3KVTQWHnpwvGpMP87ABDQwJAclkEkmmK5dBiSY6DzvQxF0KkQ9wG498/s0/Hobby+Lobby.jpg" width="218" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Aisle 3 for MENA IB</td></tr></tbody></table><span style="font-family: arial; font-size: medium;"><br /></span><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span><span>Back
in 2017, I posted that the prospect of </span></span><span style="color: navy;"><span lang="zxx"><u><a href="https://suqalmal.blogspot.com/2017/03/saudi-investment-banking-fee-riches.html"><span><span>“rich”
Saudi investment banking fees </span></span></a></u></span></span><span><span>would
remain a prospect not become a reality </span></span><span><span>for
some time</span></span><span><span>.
And quoted some rather minuscule numbers for KSA fees </span></span><span><span>as
support for that contention</span></span><span><span>.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span>In
2018, I took a </span></span><span style="color: navy;"><span lang="zxx"><u><a href="https://suqalmal.blogspot.com/2018/01/2017-middle-east-investment-banking.html"><span><span>look
at 2017 MENA IB fees</span></span></a></u></span></span><span><span>
and noted that at US$ 912 million they were an estimated 0.88%
(0.0088 in decimal terms) of global IB fees of US$ 104 billion. What
might be charitably described as a rounding error. </span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span style="font-family: arial; font-size: medium;">It’s
time to revisit the topic to see what’s happened since then. </span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span style="font-family: arial; font-size: medium;"><b>Summary</b></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">The
picture above tells the story.</span></p>
<ol>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span><span style="font-family: arial; font-size: medium; font-weight: normal;">In
terms of IB fees and transactions, MENA IB remains a rounding error
in the global IB market.</span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span><span style="font-weight: normal;">It
is not </span></span></span><span><span><u><span style="font-weight: normal;">currently</span></u></span></span><span><span><span style="font-weight: normal;">
particularly remunerative for major global investment banks. It’s
more a hobby business or “dabbling”.</span></span></span></span></p>
</li></ol>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Source
and Technical Note</span></b></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">I am
using Refinitiv’s (in a previous incarnation owned by Blackstone
and Thomson Reuters) reports.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>You
can access these reports </span></span><span style="color: navy; text-align: left;"><span lang="zxx"><u><a href="https://www.refinitiv.com/en/products/deals-intelligence#global-ib"><span><span>here</span></span></a></u></span></span><span style="text-align: left;"><span>
for the price of giving them your email address and some bits of
personal data.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Note
that these reports are based on R’s analysis and estimates.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>On
the latter </span></span><span style="text-align: left;"><span>point</span></span><span style="text-align: left;"><span>,
take a look at the 2019 Global IB Report, that year’s fees are some
US$ 100.974 billion. In the 2020 Report, 2019 fees (the comparative
figure) are USD 107.762 billion.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Due
no doubt to additional data available to R.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>I
have estimated 2018 MENA and Global IB fees using 2019 Reports and
the </span></span><span style="text-align: left;"><span>percent</span></span><span style="text-align: left;"><span>
changes shown </span></span><span style="text-align: left;"><span>from
the past year (i.e., 2019)</span></span><span style="text-align: left;"><span>.
So an estimate of </span></span><span style="text-align: left;"><span>an</span></span><span style="text-align: left;"><span>
estimate.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">The
same with individual bank fees.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">So
the usual caution about the numbers in those reports and in this
analysis.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;"><i>While
they look precise, they aren’t. More directional than locational.</i></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Analysis</span></b></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><i style="text-align: left;"><b><span style="font-family: arial; font-size: medium;">MENA
IB Fees Still a Rounding Error</span></b></i></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">In
the first chart, a comparison of MENA versus Global IB fees.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><br />
</span></p><table cellpadding="3" cellspacing="0" style="width: 507px;">
<colgroup><col width="103"></col>
<col width="96"></col>
<col width="96"></col>
<col width="96"></col>
<col width="85"></col>
</colgroup><tbody><tr>
<td colspan="5" height="20" style="border: none; padding: 0in;" width="501"><p align="justify" class="western"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjCce98Cii1hNZ9GYoHOxXcvEO5wBEakFAHRp3GvAJRD-VwycsxMKJ4fETXuhfqHNs18J-ZnyOTO5oanGVdVDLxV-y4V_euu19zYdv4II6xhMGkEO5qVcTjBnJyLFGFP6F6MSx8AQlhMs/" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: arial; font-size: medium;"><img alt="" data-original-height="205" data-original-width="504" height="130" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjCce98Cii1hNZ9GYoHOxXcvEO5wBEakFAHRp3GvAJRD-VwycsxMKJ4fETXuhfqHNs18J-ZnyOTO5oanGVdVDLxV-y4V_euu19zYdv4II6xhMGkEO5qVcTjBnJyLFGFP6F6MSx8AQlhMs/" width="320" /></span></a></div><span style="font-family: arial; font-size: medium;"><br /></span><p></p></td></tr></tbody></table>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span style="font-family: arial; font-size: medium;">Small
beer.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">But
are there IB areas where MENA fees shine?</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><br />
</span></p>
<table cellpadding="3" cellspacing="0" style="width: 507px;">
<colgroup><col width="103"></col>
<col width="96"></col>
<col width="96"></col>
<col width="96"></col>
<col width="85"></col>
</colgroup><tbody><tr>
<td colspan="5" height="20" style="border: none; padding: 0in;" width="501"><p align="justify" class="western" style="orphans: 0; widows: 0;"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9D2TXXFYaZIxi72WZ2ayR0V8FqQaw9s0pbGZMIe7FCQD3U-RHoyEIBQzUC-Ut4hqoUYYUn9pjSFzxDl328RGQCabIoLYDcEZ_2rfzuQHn8YDdeACc8vErhEOt1yMuYiBLz2050nvqrNw/" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: arial; font-size: medium;"><img data-original-height="179" data-original-width="504" height="114" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9D2TXXFYaZIxi72WZ2ayR0V8FqQaw9s0pbGZMIe7FCQD3U-RHoyEIBQzUC-Ut4hqoUYYUn9pjSFzxDl328RGQCabIoLYDcEZ_2rfzuQHn8YDdeACc8vErhEOt1yMuYiBLz2050nvqrNw/w320-h114/image.png" width="320" /></span></a></div><span style="font-family: arial; font-size: medium;"><br /><br /></span><p></p></td></tr></tbody></table><p align="justify" class="western" style="line-height: 100%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Not
really.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Relatively
and charitably speaking, syndicated loans are a “brighter” spot.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">But
that’s not more than just saying that a 10 watt light bulb is
“brighter” than a 5 watt one.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">The
MENA IB landscape reflects</span></p>
<ul>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span>the
state sector’s dominant role in regional economies – a sector
that has both </span></span><span><span>economic
and non economic </span></span><span><span>drivers,
</span></span><span><span>with
the latter often being more important in motivating corporate
actions than the former</span></span><span><span>
</span></span>
</span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span style="font-family: arial; font-size: medium;">a
generally risk adverse rentier/comprador mentality in the private
sector</span></span></p>
</li></ul>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">The
results are</span></p>
<ul>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span style="font-family: arial; font-size: medium;">a
greater orientation to debt (syndicated loans and DCM) than equity
(ECM)</span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span style="font-family: arial; font-size: medium;">a
limited market for corporate control (M&A)</span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span style="font-family: arial; font-size: medium;">the
state sector’s ability to command low fees</span></span></p>
</li></ul>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
</p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span style="font-family: arial; font-size: medium;">The
above are broad generalizations. One could respond that these
conditions exist in other markets.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Indeed!</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">But
in the most significant markets there are sufficient other customers
to generate transaction volume at relatively higher fees.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span style="font-family: arial; font-size: medium;">In
MENA this is not the case.</span></span></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span><span style="font-family: arial; font-size: medium;"><br /></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span style="font-family: arial; font-size: medium;"><i><b>Importance
of the MENA Market to Global Banks</b></i></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">In
regard to Global M&A MENA is a small fish.</span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Clearly,
for regional banks it is an important market not only because it is
part of their natural market, but also because the fees represent
significant earnings.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span><span style="font-family: arial; font-size: medium; font-weight: normal;">But
what about the big boys?</span></span></span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">I’ve
selected four global banks based on their consistent position at the
top of Refinitiv’s MENA IB fee tables.</span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>Three
of the banks typically are also in the five top positions in the
Refinitiv’s Global IB tables. They are JPMC and Goldman Sachs who
generally </span></span><span style="text-align: left;"><span>trade
places</span></span><span style="text-align: left;"><span>
in the top two </span></span><span style="text-align: left;"><span>slots</span></span><span style="text-align: left;"><span>
Citi which is typically in the top five.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">The
final bank, HSBC, is typically in the third tier global position:
ranking eleven to fifteen. Within MENA it has a stronger position.
most often in the first position.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
</p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span><span style="font-family: arial; font-size: medium;"></span></span></p><div class="separator" style="clear: both; text-align: center;"><span><span style="font-family: arial; font-size: medium;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqYUpY12sDwn14cxOjSHVPjFnqJLuf2MkoJHEyl-6Bftyk5GJqXDY7KExHHKlL7LW8-na_kDsPEIm5Z_VGWjW1sR9pQVS_3QWWDBjQBdyKIPaOmNEdNeaOL3HDM3RBgIHucfvEcowKMa8/" style="margin-left: 1em; margin-right: 1em;"><img data-original-height="205" data-original-width="369" height="178" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqYUpY12sDwn14cxOjSHVPjFnqJLuf2MkoJHEyl-6Bftyk5GJqXDY7KExHHKlL7LW8-na_kDsPEIm5Z_VGWjW1sR9pQVS_3QWWDBjQBdyKIPaOmNEdNeaOL3HDM3RBgIHucfvEcowKMa8/w320-h178/image.png" width="320" /></a></span></span></div><span><span style="font-family: arial; font-size: medium;"><br /><br /></span></span><p></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span><span style="font-family: arial; font-size: medium;"></span></span></p><div class="separator" style="clear: both; text-align: center;"><span><span style="font-family: arial; font-size: medium;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipAqMuPa2TJOpnT3mOfe1eHXA4DDdlLnn1IYqa3WggKX9jUWMuBzgxupYWwwPE4qDpJn8eeWQNsB3l4HmXhuST1hNm9BWupTOz8OXQxFOanNNJQxxIUzay12-Z11pvnBV13dx7sdrKbXs/" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="205" data-original-width="369" height="178" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipAqMuPa2TJOpnT3mOfe1eHXA4DDdlLnn1IYqa3WggKX9jUWMuBzgxupYWwwPE4qDpJn8eeWQNsB3l4HmXhuST1hNm9BWupTOz8OXQxFOanNNJQxxIUzay12-Z11pvnBV13dx7sdrKbXs/" width="320" /></a></span></span></div><span style="font-family: arial; font-size: medium;"><span><span><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8IjOhJzD-whnGEtpNFHVimNcFEFAdKmD3AdnK8rO4OGcjqe6Uwent9Hld0ArV8cHLi_9cEdii_zClIUixqwxqv7tRncQ3B_-8oeW7WUfTgdF3oQjgzNfyouhVNqy3FXF0G4d0KfZFZA8/" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="205" data-original-width="369" height="178" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8IjOhJzD-whnGEtpNFHVimNcFEFAdKmD3AdnK8rO4OGcjqe6Uwent9Hld0ArV8cHLi_9cEdii_zClIUixqwxqv7tRncQ3B_-8oeW7WUfTgdF3oQjgzNfyouhVNqy3FXF0G4d0KfZFZA8/" width="320" /></a></div><br /></span></span><span style="text-align: left;">From
the charts above, it’s clear that MENA is a hobby business for
these banks.</span></span><p></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>HSBC
as a third tier IB is no doubt happy to take </span></span><span style="text-align: left;"><span>IB</span></span><span style="text-align: left;"><span>
fees wherever it can.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">In
my two earlier posts, I mentioned the drivers of IB participation in
a market:</span></p>
<ul style="text-align: left;">
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span>Fees
– Not only for the IB and its bankers’ remuneration but also as
a “marker” of IB prowess in </span></span><span><span>sales
</span></span><span><span>pitch</span></span><span><span>es</span></span><span><span>.</span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span style="font-family: arial; font-size: medium;">Transaction
Volume – A similar market prowess badge for one’s pitchbook.</span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span>Market
Development – The hope that today’s loss leader will lead to a
higher volume of higher priced transactions. </span></span><span><span>Dream
on in MENA.</span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span>Global
Positioning – Using transaction expertise/presence in one market
with clients from another. </span></span>
</span></p>
<ul>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;">
“<span><span>We
are a global firm with experience and knowledge across the globe”.</span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;">
“<span><span>We
can help you in the UAE, KSA, etc.”</span></span></span></p>
</li></ul>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span><span style="font-family: arial; font-size: medium;">Inward
Marketing – Using one’s position in a market to sell product
(debt, equity, etc) into that market. </span></span></p></li></ul><span><span style="font-family: arial; font-size: medium;">These factors probably explain the continuance of the MENA hobby.</span></span>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-86288521313303629282021-07-24T11:12:00.007+01:002021-07-24T11:13:56.494+01:00Estimate of Tesla’s Bitcoin Holding and Analysis of 1Q2021 Bitcoin Sale<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglQxgB1U57MYj1caydowLNmlUmBMWH_ThUNpznXaIt0D2et-ms_TFNLKmP7VKAxjYI_R1GZ_ctqFSGK3xHTTYtY55t2plMITTCvtimEKeJRLZXKAUxHeXIOycspb-HVYpxZwgASru1gWE/s274/Belvedere%2527s+Scales.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="184" data-original-width="274" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglQxgB1U57MYj1caydowLNmlUmBMWH_ThUNpznXaIt0D2et-ms_TFNLKmP7VKAxjYI_R1GZ_ctqFSGK3xHTTYtY55t2plMITTCvtimEKeJRLZXKAUxHeXIOycspb-HVYpxZwgASru1gWE/s0/Belvedere%2527s+Scales.jpg" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">AA Uses Only the Most Accurate Equipment<br />for His Estimates</td></tr></tbody></table><br /><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-size: 14pt;">I
thought I’d throw my chapeau into the ring of those analyzing
Tesla’s Bitcoin Holdings.</span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-size: 14pt;">And
then for good measure provide my own analysis of the 1Q sale.</span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-size: 14pt;"><u><b>Summary</b></u><b>
</b></span></span>
</p><ul>
<li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-size: 14pt;">Numbers
of BTC and original costs are estimates.</span></span></p>
</li></ul><ul style="text-align: left;">
<li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-size: 14pt;">Tesla
<b>originally purchased</b> <b>BTC
</b><b>46,561.73</b>
at an <b>average</b>
<b>original
cost of </b><b>US$
32,215.</b><b>30</b>
per
“coin”. (<i>My
Scenario #2).</i></span></span></p>
</li><li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-size: 14pt;">Using
averages of my Scenario #1 and #2, <b>i</b><b>n
March </b><b>it</b><b>
sold </b><b>4,466.64
</b><b>BTC
at an average price </b><b>of</b><b>
</b><b>US$
60,895.95 </b>per
coin.
</span></span>
</p>
</li><li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-size: 14pt;"><b>As
of 31 March </b>Tesla
held<b>
BTC
42,901.81
</b>at
an <b>average
cost of
US$ 31,621.36</b>
per
coin.</span></span></p>
</li><li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-size: 14pt;">Under
US accounting “rules” once Tesla takes an “impairment” on
its BTC holdings, it cannot reverse it if fair value increases
later.
The only way to “capture” the increase is to
sell BTC
in
which case the higher fair value over carrying cost is a component
of net profit.
</span></span>
</p>
</li><li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-size: 14pt;"><b>Because
of these accounting “wrinkles”</b></span></span></p>
<ul>
<li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-size: 14pt;"><b>Tesla
may have
an economic incentive to support BTC’s price because
impairments flow through the income statement.</b></span></span></p>
</li><li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-size: 14pt;"><b>Or
to sell BTC to generate
a profit to
offset impairment charges.</b></span></span></p></li></ul></li></ul><span face="Arial, sans-serif"><span style="font-size: 18.6667px;"><b><br /></b></span></span><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-size: 14pt;"><b>Introductory
Comments</b></span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Don’t
be followed by the apparent precision in my numbers below.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">There
isn’t sufficient information to achieve precision.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">So
my numbers and those of others cited below can only be rough
estimates.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">You’ll
find those other estimates here and you can compare methodology and
results.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="text-align: left;"><span style="font-size: 14pt;">First
up is <a href="https://fortune.com/2021/04/27/tesla-tsla-bitcoin-btc-bet-how-much-has-it-made-elon-musk-profits/">Shawn
Tully at Fortune</a>: 38,300 BTC held </span></span><span face="Arial, sans-serif" style="text-align: left;"><span style="font-size: 14pt;">at
31 March 2021</span></span><span face="Arial, sans-serif" style="text-align: left;"><span style="font-size: 14pt;">.</span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="text-align: left;"><span style="font-size: 14pt;">Second
is <a href="https://www.forbes.com/sites/chuckjones/2021/05/23/teslas-bitcoin-holdings-in-reverse/?sh=1bc55a34364e">Chuck
Jones at Forbes</a>: 42,902 BTC </span></span><span face="Arial, sans-serif" style="text-align: left;"><span style="font-size: 14pt;">held.</span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">I’ll
be using </span><a href="https://www.sec.gov/Archives/edgar/data/1318605/000095017021000046/tsla-20210331.htm" style="font-family: Arial, sans-serif; font-size: 14pt; text-align: left;">Tesla’s
1Q2021 10Q</a><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;"> as the source document for data.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">If
you’re interested in the US accounting treatment for digital
assets, here’s a link to an </span><a href="https://www.aicpa.org/content/dam/aicpa/interestareas/informationtechnology/downloadabledocuments/2104-39790-da-pda-update-web.pdf" style="font-family: Arial, sans-serif; font-size: 14pt; text-align: left;">AICPA
publication on ASC-350</a><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><br />
</p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-size: 14pt;"><b>What
are Tesla’s BTC Holdings as of 31 March 2021?</b></span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">From
Note 3 in Tesla’s 10Q the fair market value of their BTC as of 31
March 2021 is some US$ 2.48 billion.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-size: 14pt;">Using
<a href="https://finance.yahoo.com/quote/BTC-USD/history?period1=1609459200&period2=1626998400&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true">Yahoo
</a><a href="https://finance.yahoo.com/quote/BTC-USD/history?period1=1609459200&period2=1626998400&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true">Finance</a>
data, the closing price of BTC on 31 March was US$ 58,918.83.</span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-size: 14pt;">That
equals BTC 42,901.81.
US$2.48
billion divided by US$ 58,918.83.</span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">That
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">number
is in</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
agreement with Chuck Jones’ calculation.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">S</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">hawn’s
number differs because he’s using a profit of US$ 101 million </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">on
the March BTC sale, due to his including</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
the US$ 27 million </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">impairment</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
as a component of the sales proceeds. </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Therefore,
his cost of sale is US$ 171 million not US$ 144 million.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">By
my calculation </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">the
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">carrying
value</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
of Tesla’s BTC portfolio is US$ </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">31,621.3</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">6</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
as of 31 March 2021. </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">US$1.331
billion divided by 42,091.81 </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">coins</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><b style="font-family: Arial, sans-serif; font-size: 14pt; text-align: left;">But</b><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
that is an adjusted cost </span><u style="font-family: Arial, sans-serif; font-size: 14pt; text-align: left;">after</u><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">the</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
US$ 27 million impairment. </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">(Also
disclosed in Note 3).</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">First
cut.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">T</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">o
determine </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">the
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">original
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">purchase
price of the remaining BTC </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">we
have to add back the US$ 27 million impairment charge. That means
the original cost </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">of
the Bitcoin remaining after the March 2021 sale </span><i style="font-family: Arial, sans-serif; font-size: 14pt; text-align: left;">but
before impairment</i><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">is</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
actually US$ 1.358 billion.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><i style="font-family: Arial, sans-serif; font-size: 14pt; text-align: left;">Note
the implicit assumption that the impairment was taken <u>after</u>
the March sale.</i></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">On
this basis</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
the </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">historic</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
cost per Bitcoin is </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">US$
32, 262.81.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><b style="font-family: Arial, sans-serif; font-size: 14pt; text-align: left;">But
</b><b><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">another
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">wrinkle</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">.</span></b></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">As
Shawn Tully points out, reconciling the balance of the BTC holdings
results in a US$ 2 million difference.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">That
is, Tesla purchased US$ 1.5 billion sometime between 1 January 2021
and early February. The last purchase would have had to occurred some time prior to 8 February.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Why?</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Tesla
first announced the purchase in its 2020 10-K which is dated 8
February.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">As
per note #3 in Tesla’s 10Q Tesla recognized gains of US$ 128
million on the BTC sale and took a US$ 27 million impairment.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">As
per my understanding of the required accounting, the impairment is
unrelated to the sale.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">From
the </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Consolidated
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Statement
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">of
Cash Flows, we see that Tesla received proceeds of US$ 272 million
from the BTC sale. If the recognized gain on the sale was US$ 128
million, then the cost of the BTC must be US$ 144 million.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">(</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Note
that is 9.6% of the original purchase amount and would seem confirm
Tesla’s 1Q statements that it sold 10% of its original holding)</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">US$
144 million plus US$ 27 million equals an expected US$ 171 million
decrease in the balance of BTC from first purchase through 31 March
2021</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">But
that amount is US$ 2 million more than the net change in BTC
holdings—US$ 169 million.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Is
this due to rounding? Or to vehicle purchases using BTC? </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Or
a combination of both?</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">We
don’t know. Sadly, a question that might have shed light on this issue was not selected for the Q&A on Tesla's 1Q Call.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">We
also don’t know what the US$ 27 million impairment charge relates
to.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Is
it the original BTC purchase? Or BTC received for car purchases? Or
both? Or something else?</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><i style="font-family: Arial, sans-serif; font-size: 14pt; text-align: left;"><u><span style="text-decoration-line: none;">S</span><span style="text-decoration-line: none;">cenario
#1</span></u></i></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-size: 14pt;">If
we assume
there were no material
car purchases
with
BTC and use the US$ 1.358 billion figure above, the original historic
purchase cost per
“coin”
is
US$
32,262.81.
</span></span>
</p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Tesla
would have had to sell 4,463.34 BTC to equal the US$ 144 million cost
of BTC sold in March.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-size: 14pt;">The
original number of BTC bought would then be 46,555.15
</span></span>
</p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-size: 14pt;">You’ll
notice this equals US$ 1.502 billion at
the estimated historic cost above. Thus
it includes the unexplained US$ 2 million “difference”</span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><i style="font-family: Arial, sans-serif; font-size: 14pt; text-align: left;"><u>Scenario
#2</u></i></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-size: 14pt;">Same
assumptions as Scenario #1, but US$
2 million assumed
rounding differences is excluded. The
original cost of the BTC purchase is
US$ 1.356 billion. That gives an original purchase cost
of US$ 32,215.30
per
“coin”.</span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">In
this case Tesla sold some 4,469.93 BTC.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Under
this second scenario, it would have originally bought </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">46,561.73
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">BTC</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><b style="font-family: Arial, sans-serif; font-size: 14pt; text-align: left;"><br /></b></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><b style="font-family: Arial, sans-serif; font-size: 14pt; text-align: left;">Key
Accounting
Considerations</b></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Under
ASC-350 and ASC-820, once fair value is lower than carrying value,
Tesla must make a one way adjustment in carrying value via an
impairment charge.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">If
fair value later increases, the impairment can </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">not</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
be reversed. (Question #6 pages 6-7 in the AICPA publication linked
above)</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">However,
on sale of </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">BTC</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
in the future, the difference between carrying value (reflecting any
impairments) and sale proceeds will be recognized as “profit”. </span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-size: 14pt;">Thus,
if
fair market value has increased but not carrying cost, Tesla would
recapture
the difference between FMV and carrying cost in additional profit on
the sale.</span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-size: 14pt;"><br /></span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-size: 14pt;"><b>Implications
of
Accounting Rules</b></span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">It
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">w</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">ould
be interesting to see if Tesla or any of its senior officers announce
BTC initiatives or tout BTC when the price of BTC appears in “danger”
of declining below the carrying value </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">i</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">n
Tesla’s financials:</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">US$
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">31,621.3</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">6
</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">as
of 31 March 2021</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">It
will also be interesting to see if Tesla conducts any additional
sales to offset any </span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">future</span><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">
impairments.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><br />
</p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-size: 14pt;"><b>March
2021 BTC Sale</b></span></span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">The
Scenario #1 and Scenario #2 estimates for the number of BTC sold are
very close. So let’s use the arithmetic average of both. That’s
4,466.64.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">Using
this number, the average price received on the March sale was roughly
US$ 60,895.95. US$ 272 million divided by 4,466.64.</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">If
you look at the </span><a href="https://finance.yahoo.com/quote/BTC-USD/history/" style="font-family: Arial, sans-serif; font-size: 14pt; text-align: left;">Yahoo
Finance historic prices for BTC</a><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">, you’ll see several days that
might be candidates for a sale, e.g. March 14</span><sup style="font-family: Arial, sans-serif; text-align: left;">th</sup><span face="Arial, sans-serif" style="font-size: 14pt; text-align: left;">.</span></p><p>
</p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-32441151740301931882021-07-24T08:56:00.002+01:002021-07-24T08:58:05.210+01:00The Sad State of BCP and Cyber Risk Planning at Financial Market Infrastructure Institutions<p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCcq3yhBiYKTvqiir5hyphenhyphenRT3fcYn20zTv2xxkDXqwF9XbHxUS2Gsb_5PlJ5aLPoDisW3dpwcLsADdk41kQDoWYNdZpNK4RlHYEvKGGl7vIoPdTlWNKLde9oWYLyGZ9jKgbPBncHP6urYf4/s259/Titfield+Thunderbolt.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="194" data-original-width="259" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCcq3yhBiYKTvqiir5hyphenhyphenRT3fcYn20zTv2xxkDXqwF9XbHxUS2Gsb_5PlJ5aLPoDisW3dpwcLsADdk41kQDoWYNdZpNK4RlHYEvKGGl7vIoPdTlWNKLde9oWYLyGZ9jKgbPBncHP6urYf4/s0/Titfield+Thunderbolt.jpg" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Nine Years Thundering Toward the Station<br />Alas, Yet to Arrive</td></tr></tbody></table><br /></p><div style="text-align: justify;"><span style="font-family: arial; font-size: medium;">Here I am again making what no doubt could be labeled as an “overdue
wake up call” by the <i>chronically somnolent</i> or perhaps as a
“sobering fact” by the <i>habitually intoxicated</i>.</span></div><p></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>On
21 July the BIS Committee on Payment and Market Infrastructures
published a </span></span><span style="color: navy; text-align: left;"><span lang="zxx"><u><a href="https://www.bis.org/cpmi/publ/d197.pdf"><span>joint
report</span></a></u></span></span><span style="text-align: left;"><span>
with the Board of International Organization of Securities
Commissions on a level 3 evaluation of implementation of </span></span><span style="text-align: left;"><span><i>Principles
for Financial Market Infrastructures </i></span></span><span style="text-align: left;"><span>(PFMI).</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">Before
beginning my rant, a couple of notes.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">The
PFMI were issued in 2012, which would appear to be some nine years
ago, if my arithmetic is correct.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">The
PFMI were issued to set standards for Business Continuity Planning (BCP) and Recovery of Operations for systemically important and <i>therefore
critical</i> financial market infrastructure institutions:</span></p>
<ul>
<li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">payment
systems (PS)
</span></p>
</li><li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">central
securities depositories (CSD)</span></p>
</li><li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">central
counterparties (CCP),
</span></p>
</li><li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">securities
settlement systems (SSS) and
</span></p>
</li><li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">trade
repositories (TR).</span></p>
</li></ul>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><br />
To
be clear we’re talking about payment systems, e.g., CHIPS, CHAPS,
Fedwire not individual banks. For the other categories, some US
examples: DTCC, NSCC, FICC, etc.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">The
rationale is to require these critical market infrastructure
institution to have effective BCPs to
restore service in the event of disruptions. In that regard think of
power blackouts, 9-11, and yes cyber attacks.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span>Here
is </span><span style="color: navy;"><span lang="zxx"><u><a href="https://www.bis.org/cpmi/info_pfmi.htm?m=3|16|598"><span>the
link</span></a></u></span></span><span>
to the BIS CPMI page on the PFMI which contains additional details.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">In
addition to the PFMI, you will notice that there are also an
additional<b> eight </b>guidance papers on implementation of the
PFMI.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">Among
those there is a 2016 guidance paper on cyber risks. Applying the
same arithmetic as above, that would appear to be five years ago.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">The
July joint BIS CPMI/IOSCO-OICU IMSG (Implementation Monitoring
Standing Group) reviewed the business continuity planning practices
at a sample of 38 FMIs from 29 jurisdictions during 2019-2020.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">The
sample comprised 14 PSs, 15 CSDs/SSSs, five CCPs and four TRs.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">The
study was conducted by reviewing responses to a questionnaire.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">That
is, based on assertions made by the respondents rather than an on
site investigation.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">If
you’re like me, you might find that a bit chilling given the
results. </span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">If you're willing to self-certify to failure, isn't it likely the the failure is even more egregious?</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">So
what were the findings?</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><b><span style="font-family: arial; font-size: medium;">1.2.1
Timely recovery in the event of a wide-scale or major disruption</span></b></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"></span></p><blockquote><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">The
IMSG has identified <b>one serious issue of concern</b>, which is
that the business continuity management of some, and potentially
many, FMIs does not seem to “aim for timely recovery of operations
and fulfilment of the FMI’s obligations, including in the event of
a wide-scale or major disruption”, as expected by the Operational
Risk Principle (Principle 17). Furthermore, based on the information
provided by the participating FMIs, there are doubts about whether
their business continuity plans are designed to “ensure that
critical information technology (IT) systems can resume operations
within two hours following disruptive events” and “enable the FMI
to complete settlement by the end of the day of the disruption, even
in case of extreme circumstances” as expected by KC6. [<i>That’s
Key Consideration 6 in Principle 17]. </i>Given this is a serious
area of concern, the CPMI and IOSCO expect the relevant FMIs and
their supervisors to address this as a matter of the highest
priority.</span></p></blockquote><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><i>Given
that the PFMI were issued some 9 years ago and implementation is
still deficient, the use of the term “highest priority” is
perhaps both an indication of importance as well as a bit of sarcasm.
That being said, the IMSG only “expects” this to be done. No
doubt as they have </i><i><u>expected</u></i><i> implementation over
the past nine year.</i></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><span style="font-style: normal;">The
IMSG’s findings continue:</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><span style="font-style: normal;"></span></span></p><blockquote><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="font-style: normal;">While
almost all of the surveyed FMIs indicated that they have business
continuity plans (BCPs) </span>designed to meet this requirement,
there is evidence that leads the IMSG to question this. In terms of
specific evidence:</span></p>
<ul>
<li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">A
few of the surveyed FMIs do not explicitly aim for the 2hRTO, even
for wide-scale physical (noncyber) disruptions.
</span></p>
</li><li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">One
of the surveyed FMIs acknowledges that its secondary site does not
have a distinct risk profile from that of its primary site.
</span></p>
</li><li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">A
small number of FMIs stated that they did not have alternative
arrangements to allow for the processing of time-critical
transactions. Of those that did have such arrangements, some relied
solely on manual and paper-based alternative arrangements.
</span></p>
</li><li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">A
few FMIs indicated that they do not have specific plans to mitigate
potential widespread staff unavailability. This suggests that these
FMIs may have difficulty completing settlement if this were <span style="font-style: normal;">to
occur.</span></span></p></li></ul></blockquote>
<p class="western" style="font-style: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">“<span>Mighty
disappointing” to use a technical financial market term.</span></span></p>
<p class="western" style="font-style: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">Inverse
kudos to the respondent that apparently will rely on manual
paper-based systems. Systemically important FMIs are likely to be
ones that process “lots” (that’s another technical financial
term) of transactions.</span></p>
<p class="western" style="font-style: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">But
you ask what about cyber attacks?</span></p>
<p class="western" style="font-style: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><b><span style="font-family: arial; font-size: medium;">1.2.2
Cyber risk</span></b></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"></span></p><blockquote><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">Principle
17 states that “[a]n FMI should identify the plausible sources of
operational risk, both internal and external, and mitigate their
impact through the use of appropriate systems, policies, procedures,
and controls…” The IMSG has identified one issue of concern,
which is that a few FMIs in the sample did not provide specific BCP
objectives with respect to cyber risk. Among the FMIs that have
specific BCP objectives with respect to cyber risk, only a few
explicitly acknowledged the breadth and depth of potential cyber
attacks and the complexities of cyber risks that their BCPs may not
be able to cover.</span></p></blockquote><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">While
not as serious as the previous risk <i>in the assessment</i> of the
IMSG, I think this qualifies as very serious.</span></p>
<ul>
<li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">The
probability of a cyber attack may be higher than some of the other
risks of disruption and the impact much greater.</span></p>
</li><li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">If
computer networks are hacked, critical information even that at
backup sites may be unavailable or destroyed.</span></p>
</li></ul>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">Particularly,
if the attack is the work of a state actor.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">That
would be a different kettle of fish than a natural disaster. Or even
a 9-11 style attack.</span></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com1tag:blogger.com,1999:blog-5124857623766724513.post-40812064705820973242021-06-27T02:51:00.006+01:002021-07-21T11:27:06.567+01:00Analyzing GFH's 1Q2021 “Incredible” Performance<p></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUratz0eBOAQnVbsnA5uyHS5iFHJi3lf55y_OqxmghMp404UrRN3T9BgXb1uTvI8akj1RIPPHdK1oHz6tSWBE1bFp1j1Ged7RM1gx-Udsn8nkLpl_j9ntn2yWr_ApuPkEExVoEvPZlwZc/s240/The+Count+2.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="240" data-original-width="210" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUratz0eBOAQnVbsnA5uyHS5iFHJi3lf55y_OqxmghMp404UrRN3T9BgXb1uTvI8akj1RIPPHdK1oHz6tSWBE1bFp1j1Ged7RM1gx-Udsn8nkLpl_j9ntn2yWr_ApuPkEExVoEvPZlwZc/s0/The+Count+2.jpg" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Whether It is Counting or acCounting<br />AA Helps You Keep the Numbers Straight<br />(Professional Actor - Not AA)</td></tr></tbody></table><br /><p></p><div style="text-align: justify;"><span style="font-family: arial; font-size: medium;"><span>According
to the headline numbers from </span><span style="color: navy;"><span lang="zxx"><u><a href="https://bahrainbourse.com/sysimages/companyannouncement/documents/BHB%20Specimen%202%20En.pdf_52503.pdf?637595341928354710&tick=1623926593873"><span>GFH’s
short form press release</span></a></u></span></span><span>
on its 1Q2021 performance, GFH had an “incredible” quarter.</span></span></div><p></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">Net
profit including Non Controlling Interests (NCI) share was some US$
19.3 million compared to US$ 6.8 million for the comparable period
last year.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Profit
attributable to GFH’s shareholders (excluding NCI) was some US$
16.1 million versus US$ 5.1 million the year earlier.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">That’s
3.2x last year!</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Wow!</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">But
strangely GFH’s equity attributable to its shareholders only
increased US$ 4 million from FYE 2020.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Similarly
total equity including NCI was up US$ 8 million from FYE 2020.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">What
happened?</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">What
accounts for the “missing” US$ 11 to 12 million?</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Normally
we would begin by looking at the Statement of Comprehensive Net
Income which usually follows the Statement of Net Income.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Examples
from Conventional Banks in Bahrain.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><span style="color: navy;"><span lang="zxx"><u><a href="https://www.bbkonline.com/_documents/FR04052021.PDF"><span>BBK
1Q2021</span></a></u></span></span><span>. </span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span></span><span style="color: navy;"><span lang="zxx"><u><a href="https://www.investcorp.com/wp-content/uploads/2021/05/Investcorp-Financial-Statements-E-March-2021.pdf"><span>Investcorp</span></a></u></span></span><span>
3Q2021. (Recall the Investcorp’s FYE is June for no doubt some
excellent reason which I was told was to prevent having to issue
audited financials some years back when the results would have been
“mighty disappointing” to use a technical financial term.)</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">But
it seems that Islamic Banks in Bahrain are not obligated to provide a
separate Comprehensive Income statement.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>See
Al Baraka’s </span></span><span style="color: navy; text-align: left;"><span lang="zxx"><u><a href="https://albaraka.bh/getmedia/80ecc3f6-5e74-4283-9ce6-39d5f9127931/ABIB-Q1-31-March-2021-BD.pdf.aspx"><span>1Q2021
report here</span></a></u></span></span><span style="text-align: left;"><span>.
And note their auditors are a different firm than GFH’s.</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">So what to do?</span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Off we go to the Consolidated Statement of Changes in Shareholders
Equity where those sort of entries would be recorded.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">There
you will notice two amounts US$ 4.479 million (fair value changes)
and US$ 8.280 million (disposal of sukuk) for a total of $12.759
million being deducted from net income.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">You
will notice that after these transactions there is a line labeled
“Total recognized income and expense”.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">This
is the equivalent of “comprehensive income”. But “buried”
where you might miss it.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">That
is why as I have argued before it is critically important to look at
Consolidated Statement of Changes in Shareholders’ Equity. </span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Not
only to catch “comprehensive income” when there is no separate
income statement for that. But also to see what other entries are
affecting equity which are the economic equivalent of “income”
and “expense”.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">What’s
behind these entries?</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">For
those assets that are carried on the balance sheet at “fair value”
as opposed to historic cost, accounting standards allow banks to
recognize changes in fair value of those assets in two ways:</span></span></p>
<ul>
<li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><span>The
first is to recognize the change in value (whether plus or minus) in
the income statement (FVTIS) </span>
</span></p>
</li><li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">The
second is to recognize the change directly in equity (FVTE). So the
change does not appear in the income statement.</span></p>
</li></ul>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">In
1Q2021, the assets that GFH holds as FVTE had an aggregate net “loss”
of fair value prompting a US$ 4.479 million charge to equity. This
charge is non discretionary. It is an “expense” in "comprehensive income".</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">However,
the US$ 8.280 million was discretionary.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">GFH
decided to sell the sukuk</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span>When
a FVTE asset is sold, the profit or loss on the sale </span><span><i>must</i></span><span>
be recognized in the income statement.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">In order to
prevent “double counting” of profit or loss already recorded in the fair value reserve when an asset is sold, the <i>previously recorded</i> profit or loss must be subtracted from the fair value
reserve. </span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">As hopefully is clear from these entries, the impact on shareholders' equity is nil when those two amounts are equal.</span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">When the profit or loss on sale differs from that already recorded in the fair value reserve, then the impact on equity will reflect that difference. </span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">For example, let's suppose GFH sells an asset for a US$ 8 million profit but has (already) recorded only US$ 7 million increase in the fair value reserve. </span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">In this case, GFH's equity will increase by US$ 1 million. If the situation is reversed, GFH's equity will decrease by US$ 1 million.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">To
be fair by selling the asset, GFH has “locked in” the profit on
the sale.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Removing
the US$ 8.280 million from the reported US$ 16.1 million in net
income lowers net income attributable to GFH shareholders to some US$
7.8 million.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">But
what’s the point of all this?</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Income
is income, isn’t it?</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Yes,
but.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">As
noted above, GFH has the “discretion” to decide when to sell an
asset. And thus when to declare a profit.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Even
though moving the profit to income has no real impact on
shareholders’ equity. The needle doesn’t move as they say.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Having
that option can be quite handy. Particularly if one expects that one's shareholders aren't bright or industrious enough to see that the "profit" has already been booked.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">To
be fair, we don’t know if GFH was taking advantage of particularly
favorable market circumstances that might not occur again to sell the
sukuk.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Or
if it was seeking to manage its earnings upwards.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">If
we then remove the US$ 4.479 million change in fair value from reported income, that
further lowers income to US$ 3.321 million.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">As
you will notice, there were no items in comprehensive income in GFH’s
1Q2020 financials.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">On this basis 1Q2021 wasn’t “incredible” at least in
the positive sense of that word.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Based
on Comprehensive Income, it was actually lower than the previous
year.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">However, we're not done yet with the analysis. </span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">If we look beyond “Comprehensive Income” to other items that I
have argued are economically income and expense. we will see
additional entries in both periods which further affect economic
income.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
</p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">1Q2020
was particularly brutal – net charges of US$ 25.8 million. </span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">1Q2021
had a gain of US $ 4.8 million.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">On
that basis, 1Q2021’s positive result looks much better compared to
a rather disappointing 1Q2020 negative performance.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: center;"><span style="font-family: arial; font-size: large;"><b><span style="text-align: left;">“ </span><span style="text-align: left;">كل لبيب بالإشارة يفهم</span><span style="text-align: left;"> </span><span style="text-align: left;"><span lang="hi-IN">“</span></span></b></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<br />
</p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-32638794788232547082021-06-25T08:31:00.008+01:002021-07-21T11:33:04.387+01:00Why Hasn’t GFH “Grown” Its Equity Since FYE 2016?<p></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8AZhdbUPfxmly6p1TI_tia5ZNbq4P-okGMuxjQGb9bC-BX_0Ftxn_whyLCfE890dLuhra_zzTv20ZIVLyQgZbzWXdkEYk5TTXNoZ42Xi7mmX3wOeqEs55rMPGJr8jpjKbJzcHhFrdN8Q/s301/Bahrain+Barren+Field.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="168" data-original-width="301" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8AZhdbUPfxmly6p1TI_tia5ZNbq4P-okGMuxjQGb9bC-BX_0Ftxn_whyLCfE890dLuhra_zzTv20ZIVLyQgZbzWXdkEYk5TTXNoZ42Xi7mmX3wOeqEs55rMPGJr8jpjKbJzcHhFrdN8Q/s0/Bahrain+Barren+Field.jpg" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Sometime it's the quality of the soil<br />Sometimes the climate or lack of water<br />And sometimes the farmer himself</td></tr></tbody></table><br /> <b><span style="font-family: arial; font-size: medium;">Key
Points</span></b><p></p>
<ul>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-weight: normal;">GFH’s
equity has </span></span><span><b>“grown”
a mere</b></span><span><span style="font-weight: normal;">
</span></span><span><b>US$
5 million</b></span><span><span style="font-weight: normal;">
between FYE 2016 and FYE 2020, </span></span><span><b>despite
GFH having earned US$ 90 million</b></span><span><span style="font-weight: normal;">
</span></span><span><b>net
of </b></span><span><span style="text-decoration: none;"><b>cash
dividends. </b></span></span><span><span style="text-decoration: none;"><span style="font-weight: normal;">US$
292 million in net income less US$ 202 million (cash dividends).</span></span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><b>Market
making activity and Treasury Share Accumulation cost</b></span><span><span style="font-weight: normal;">
GFH’s shareholders </span></span><span><b>US$
146 million</b></span><span><span style="font-weight: normal;">.
</span></span>
</span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-weight: normal;">GFH
also </span></span><span><b>canceled
US$ 50.5 million in Treasury Shares</b></span><span><span style="font-weight: normal;">
</span></span><span><b>leading
to another economic loss not captured in its financials</b></span><span><span style="font-weight: normal;">
though the vagaries of accounting.</span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-weight: normal;">Beyond
that, other transactions, largely related to </span></span><span><b>losses
incurred on acquisitions totaled US$ 88.5 million, not including
the US$ 60 million charge</b></span><span><span style="font-weight: normal;">
</span></span><span><b>related
to KHCB’s BD 60 million AT1.</b></span></span></p>
</li></ul>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>On
22 May </span></span><span style="color: navy; text-align: left;"><span lang="zxx"><u><a href="https://bahrainbourse.com/sysimages/companyannouncement/documents/Q1%202021%20Webcast%20Results.pdf_52668.pdf?637597722082354355&tick=1624164609037"><span>GFH
announced</span></a></u></span></span><span style="text-align: left;"><span>
that its live webcast on 20 May on 1Q2021 results had been
successful.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">During
the Q&A session the moderator read a question from an unnamed
shareholder.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;"></span></span></p><blockquote><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">The
next question is, while the group has managed to increase its assets,
liabilities, and AUM, but not its equity, could you shed some light
on the declining equity? </span></span></p></blockquote><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><a name="page1257R_mcid7"></a>
<span>Suryanarayanan
Hariharan, GFH’s CFO responded:</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;"></span></span></p><blockquote><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">There
has been a marginal increase in the equity as of 31st March 2021.
Despite the profit, there’s also a fair value movement of our
treasury portfolio, which is captured on the equity, and for Q1 2021,
there was a drop in the fair value movement, and that touched on the
equity for the group. </span></span></p></blockquote><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>That
didn’t seem like a completely satisfactory answer to me. </span>
</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">It
omits the fact that the US$ 8.280 million in profit on the disposal
of a sukuk was already reflected in equity. And, so, even though it
appeared on the income statement, it did not increase equity. </span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">And
also that the shareholder seemed to be asking a question about more
than the change in equity from FYE 2020 which as noted by GFH’s CFO
was positive..</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">But
I didn’t “attend” the webcast so perhaps this is summary of a
longer exposition with details “lost in condensation”.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">In
any case, I thought it would be an interesting topic to look at the
“evolution” of GFH Group Shareholders’ Equity.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">I
chose the period 2017 through 2020.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Some
methodological notes:</span></span></p>
<ol>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">GFH’s
Consolidated Statements of Changes in Shareholders’ Equity is the
primary source document for information.</span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>The
focus is on changes in the equity belonging to shareholders of GFH
Financial Group. </span><span><span style="font-weight: normal;">To
be clear that excludes the NCI.</span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">Calculations
reconcile to the changes in that equity. And so as outlined below
miss one rather large economic loss</span></p>
</li></ol>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">So
let’s start with an overview of changes in Group shareholders’
equity over the period.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
</p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrdrki-KjT3VWJXnH-IdSoSqzEMOYw9mHdzIETUv1yf4YKRCkB7VfloHW0-ukE7vidThfQwwyoxHyQ5iv2aPkWxUQ05AHS3eZUA0qtoG5AZfTNshjXn05d2e6UjU9uu6XAUQr2gi8wCgE/" style="margin-left: auto; margin-right: auto;"><img alt="" data-original-height="364" data-original-width="648" height="225" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrdrki-KjT3VWJXnH-IdSoSqzEMOYw9mHdzIETUv1yf4YKRCkB7VfloHW0-ukE7vidThfQwwyoxHyQ5iv2aPkWxUQ05AHS3eZUA0qtoG5AZfTNshjXn05d2e6UjU9uu6XAUQr2gi8wCgE/w400-h225/image.png" width="400" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;"></td></tr></tbody></table><br /><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>There
really has not been much of a change over the period. </span></span><span style="text-align: left;"><span><u>US$
5 million only</u></span></span><span style="text-align: left;"><span>.</span></span></span><p></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>Over
the four year period, GFH has declared </span></span><span style="text-align: left;"><span><i>US$
292 million in comprehensive income</i></span></span><span style="text-align: left;"><span>
and has paid </span></span><span style="text-align: left;"><span><i>cash
dividends of US$ 202 million</i></span></span><span style="text-align: left;"><span>.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>That
should lead to a </span></span><span style="text-align: left;"><span><i>US$
90 million</i></span></span><span style="text-align: left;"><span>
increase in equity.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">From
the chart above it clearly has not.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">GFH
is ’“short” some US$ 85 million.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">So
what accounts for the difference? </span></span></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjOHWVCEzxSrI_3803eTBYXeAOSbmFkPmtkLmvY0WgoepqZV72gxOml9RYYq5ogXExu8BQ9CTilRNZTYvAyWwSGrlH2HyQqH8LgwmUzoX7AnLhNU7jvpFERDIPOHsxJSnyN1wuIhV_7u0/" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="500" data-original-width="895" height="224" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjOHWVCEzxSrI_3803eTBYXeAOSbmFkPmtkLmvY0WgoepqZV72gxOml9RYYq5ogXExu8BQ9CTilRNZTYvAyWwSGrlH2HyQqH8LgwmUzoX7AnLhNU7jvpFERDIPOHsxJSnyN1wuIhV_7u0/w400-h224/image.png" width="400" /></a></div><br /><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Let’s
go through the categories starting from the bottom.</span></span><p></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><b>TS
Loss</b></span></span><span style="text-align: left;"><span>
– Is the loss incurred on selling Treasury Shares.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in; margin-left: 0.5in;"><span style="font-family: arial; font-size: medium;"><span><i>Note
this does NOT include the economic loss on GFH’s cancellation of
some US$ 50.5 million of Treasury Shares in 2019. </i></span>
</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in; margin-left: 0.5in;"><i style="text-align: left;"><span style="font-family: arial; font-size: medium;">Why
not, after all my ranting and raving about this being a totally
incomprehensible act that was to the detriment of the shareholders?</span></i></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in; margin-left: 0.5in;"><i style="text-align: left;"><span style="font-family: arial; font-size: medium;">It’s
not included because this transaction was netted against outstanding
shares so the effect on shareholders’ equity was nil. In a master
stroke of financial skill, GFH then issued US$ 55 million in bonus
shares so that paid in capital remained unchanged. And I am
reconciling to the equity as presented.</span></i></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in; margin-left: 0.5in;"><i style="text-align: left;"><span style="font-family: arial; font-size: medium;">Despite
that, it is still a loss to shareholders because GFH could have sold
those shares in the market. It probably wouldn’t have recovered all
of the US$ 50.5 million. But it would have recouped a good portion.
That would have been of more benefit to shareholders than canceling
the shares.</span></i></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in; margin-left: 0.5in;"><i style="text-align: left;"><span style="font-family: arial; font-size: medium;">Or
alternatively, it could have foregone issuing bonus shares by just
distributing the Treasury Shares to its shareholders<span>.</span></span></i></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><b>Net
+/- TS</b></span></span><span style="text-align: left;"><span>
– Is the net change in the US$ value of Treasury Shares, that is,
purchases (a negative) against sales (a positive). Again this
doesn’t include the share cancellation mentioned above for the same
reconciliation reasons.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><b>Emp
Shares</b></span></span><span style="text-align: left;"><span>
– Are purchases of Treasury Shares for GFH’s employee stock
incentive program. A negative number is an acquisition of shares, a
positive number the issuance of shares to employees.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><b>Other</b></span></span><span style="text-align: left;"><span>
– Is a collection of all other entries to Group Shareholders’
Equity.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">As
you’d expect this includes recurring items such as zakat and
charity contributions. But there are some one-off items.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Let’s
step through each year looking at major entries in the Other category
to see if anything else catches our eye.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Each
year’s total for Other is given should you want to explore for more
detail on your own.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><u><b>2017</b></u></span></span><span style="text-align: left;"><span>
(Total for the Year </span></span><span style="text-align: left;"><span><b>US$
252 million</b></span></span><span style="text-align: left;"><span>)</span></span></span></p>
<ul>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>US$
293 million in new stock issued. Some shareholders in GFH projects
(Tunis Bay and India) gave GFH their shares in those assets in
exchange for equally good GFH shares. This is a </span><span><i><span style="font-weight: normal;">non
cash</span></i></span><span><span style="font-weight: normal;">
transaction</span></span><span><b>.</b></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="color: #c9211e;"><span>US$
37.5 million charge</span></span><span>
related to acquisition of increased share of the projects acquired
in the stock exchange. Not broken down. KHCB and MGIC (Morocco)
appear to be responsible. Probably primarily MGIC.</span></span></p>
</li></ul>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><u><b>2018</b></u></span></span><span style="text-align: left;"><span>
(Total for the Year </span></span><span style="color: #c9211e; text-align: left;"><span><b>US$
20 million charge</b></span></span><span style="text-align: left;"><span>)</span></span></span></p>
<ul>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="color: #c9211e;"><span><span style="text-decoration: none;"><span style="font-weight: normal;">US$
17 million in charges</span></span></span></span><span><span style="text-decoration: none;"><span style="font-weight: normal;">
(via restatement) for adoption of FAS 30.</span></span></span></span></p>
</li></ul>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><u><b>2019</b></u></span></span><span style="text-align: left;"><span>
(Total for the Year </span></span><span style="color: #c9211e; text-align: left;"><span><b>US$
39 million charge</b></span></span><span style="text-align: left;"><span>)</span></span></span></p>
<ul>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="color: #c9211e;"><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">US$51
million charge</span></span></span></span></span><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">
for acquisition of additional interests in pre-existing investment
with no change of control. Related to Tunis Bay and Residential
South Real Estate Development Company (RSRED).</span></span></span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">US$
14 million credit related to FX rate changes.</span></span></span></span></p>
</li></ul>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><u><b>2020</b></u></span></span><span style="text-align: left;"><span>
(Total for the Year </span></span><span style="color: #c9211e; text-align: left;"><span><b>US$
89 million charge</b></span></span><span style="text-align: left;"><span>)</span></span></span></p>
<ul>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="color: #c9211e;"><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">US$
60 million charge</span></span></span></span></span><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">
related to KHCB AT1 purchase.</span></span></span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="color: #c9211e;"><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">US$
14 million charge</span></span></span></span></span><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">
related to revision of financing terms. Likely KHCB related.</span></span></span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="color: #c9211e;"><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">US$
18 million</span></span></span></span></span><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">
charge related to FX rate changes.</span></span></span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">US$
4 million grant from Govt of Bahrain related to Covid and probably
to KHCB.</span></span></span></span></p>
</li></ul>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Looking
at items in Other, the US$ 88.5 million in charges related to Tunis
Bay, RSRED, KHCB, and MGIC have yet to prove their value.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Some
general observations;</span></span></p>
<ul>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">It’s
not generally considered a sign of success when you wind up buying
an i</span></span></span></span><span><i><span style="text-decoration: none;"><span style="font-weight: normal;">ncomplete</span></span></i></span><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">
project investment back from a client at a higher price than you
sold it. Particularly when there’s no real “market” price.</span></span></span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">If
the project has really increased in value since the initial sale,
why would the investor want to sell now? Presumably that value will
continue to increase as the project completes. </span></span></span></span>
</span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">If
the seller is motivated to sell for liquidity or other reasons,
wouldn’t that tend to decrease its pricing “power” in
negotiations?</span></span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">If
the buyer alone can unlock the value of the asset, then shouldn’t
he or she have some leverage over the purchase price? After all,
the buyer hopefully intends to make a profit on the project. If the
re-acquisition price is too high, then the profit will be smaller
than envisioned.</span></span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">The
identity of the investor can also play a role in the price
negotiations. Big fish or VIS, whatever you might like to call them, probably have more leverage.</span></span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">As
I’ve noted before when a sale is concluded via the exchange of
boot (non cash items), value can be rather hard to “pin down”.
But perhaps </span></span></span></span><span><i><span style="text-decoration: none;"><span style="font-weight: normal;">easier
to manage</span></span></i></span><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">.</span></span></span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">GFH
shares are no doubt more liquid that TBC, RSRED, MGIC. Thus,
offering an investor a much easier way to exit. Particularly, if
attempts were made to keep the share price “stable”. That might
also explain why GFH “experienced” a persistent</span></span></span></span><span><i><span style="text-decoration: none;"><span style="font-weight: normal;">
</span></span></i></span><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">considerable
and </span></span></span></span><span><i><span style="text-decoration: none;"><span style="font-weight: normal;">uncharacteristic</span></span></i></span><span><span style="font-style: normal;"><span style="text-decoration: none;"><span style="font-weight: normal;">
loss on its “market making” activities.</span></span></span></span></span></p>
</li></ul>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Among
the remaining items only the US$ 60 million charge related to the
KHCB AT1 sticks out. This was probably unavoidable. GFH didn’t
have any good options in the situation.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Summary</span></b></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><b>If
we assume that the employee stock incentive is a worthwhile endeavour
and not just another way to accumulate Treasury Shares, then the loss
on market making of US$81 million and US$ 65 million in net TS
purchases—totaling US$ 146 million—were probably not in the best
interests of shareholders </b></span></span><span style="text-align: left;"><span><i><b>in
general. </b></i></span></span><span style="text-align: left;"><span><b>Though
perhaps some big fish may have benefited.</b></span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">When
the 2019 cancellation of the US$ 51 million in Treasury Shares is
added in, we’re talking about some real money. Roughly equal to
the cash dividends GFH paid over the period.</span></b></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Adding
the items from Other, particularly the US$ 88.5 million that I’ve
flagged above, and it’s not a “pretty picture” to use a
financial term of art as well as an homage of sorts for a former GFH
senior officer.</span></b></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">All
that said, the question for shareholders is how they evaluate GFH’s
management’s performance.</span></b></p>
<p align="justify" class="western" style="font-style: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left; text-decoration-line: none;"><span><span lang="fr-FR"><i><b>C'est
bien dit, mais il faut cultiver </b></i></span></span></span><span style="text-align: left; text-decoration-line: none;"><span><span lang="fr-FR"><i><u><b>leur</b></u></i></span></span></span><span style="text-align: left;"><span><span lang="fr-FR"><i><b>
jardin.</b></i></span></span></span></span></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-89598497651706822112021-06-20T04:26:00.013+01:002021-06-25T08:51:06.843+01:00What are GFH’s Motives for Acquiring KHCB Shares?<p></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgG1aYvuxbbgGyEfQYCFeT2r_mMpHJZ6xrPXPMELJok_dv0_NCKXEF45GG72t4vZP6EpqREM-NEI8D7Mc_Vm4nChwdnp1W7z2uE7jX5_zT1PtqUWufEDfizJ_Oz7KCA8QqsyAuqC4pt2kk/s259/Midhat+Pasha+Bazaar+Damascus.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="194" data-original-width="259" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgG1aYvuxbbgGyEfQYCFeT2r_mMpHJZ6xrPXPMELJok_dv0_NCKXEF45GG72t4vZP6EpqREM-NEI8D7Mc_Vm4nChwdnp1W7z2uE7jX5_zT1PtqUWufEDfizJ_Oz7KCA8QqsyAuqC4pt2kk/s0/Midhat+Pasha+Bazaar+Damascus.jpg" /></a></td></tr></tbody></table><p></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: center;">
<span style="font-family: Arial;"><span style="font-size: 12pt;"><span lang="hi-IN">لولا
اختلاف النظر، لبارت السلع </span></span></span>
</p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td class="tr-caption" style="text-align: center;"></td></tr></tbody></table><div style="text-align: justify;"><span style="font-family: arial; font-size: large;"><br /> </span><span style="font-family: arial; font-size: medium;">Summary
of key points in this post.</span></div><p></p>
<ul>
<li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><span>45%
premium over market on </span><span>13.64%
of</span><span>
shares from Shuaa and Goldilocks.</span></span></p>
</li><li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">Tender
offer proposed for remaining 30.95% of shares</span></p>
</li><li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">Favorable
Impact on GFH’s Consolidated Shareholders’ Equity</span></p>
</li></ul>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><br />
</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><b>Background</b>
</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>On 6
June GFH </span></span><span style="color: navy; text-align: left;"><span lang="zxx"><u><a href="https://www.bahrainbourse.com/sysimages/companyannouncement/documents/Increase%20of%20Ownership%20in%20KHCB.PDF_52759.PDF?637593612050513490&tick=1623753607498"><span>announced</span></a></u></span></span><span style="text-align: left;"><span>
it had increased its shareholding in KHCB from 55.41% to 69.05% as
part of the “Group’s strategy to increase its ownership in KHCB.”</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>On 7
June GFH </span></span><span style="color: navy; text-align: left;"><span lang="zxx"><u><a href="https://www.bahrainbourse.com/sysimages/companyannouncement/documents/Increase%20of%20Ownership%20in%20KHCB.PDF_52779.PDF?637593609241210441&tick=1623753326526"><span>provided</span></a></u></span></span><span style="text-align: left;"><span>
further details as follows:</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;"></span></span></p><blockquote><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">With
reference to GFH Financial Group’s announcement dated 6th June 2021
pertaining to the subject matter, GFH would like to announce that the
increase of ownership in Khaleeji Commercial bank was pursuant to a
sale and purchase agreement between GFH along with Shuaa Capital and
Goldilocks Investment Company, to acquire their stake of 121,726,795
shares for a total of BD 8,764,329.240 equating to BD 0.072 per
share.</span></span></p></blockquote><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><a name="page3R_mcid72"></a>
<span>On
8 June </span><span style="color: navy;"><span lang="zxx"><u><a href="../../../../Documents/pursuant%20to%20the%20requirements%20of%20the%20Takeover,%20Mergers%20&%20Acquisition%20Module%20under%20Volume%206%20of%20the%20Central%20Bank%20of%20Bahrain%E2%80%99s%20Rulebook."><span>GFH
announced</span></a></u></span></span><span>
that </span><span>pursuant
to </span><span>Central
Bank of Bahrain </span><span>requirements
</span><span>regarding
takeover and mergers,</span><span>
it had approached KHCB’s Board to make a proposed voluntary
takeover offer for the remainder of KHCB’s shares.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Deal Analysis</span></b></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>A</span></span><span style="text-align: left;"><span>ccording
to the trading data from the Bahrain Bourse, during the period 4
January through 3 June 2021, the average price of a KHCB share was BD
0.050 (rounded to 3 decimal places). </span></span><span style="text-align: left;"><span>Typically
the share trades at roughly 50% of book value.</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>The
BD0.0720 acquisition price</span></span><span style="text-align: left;"><span><b>
represent</b></span></span><span style="text-align: left;"><span><b>s</b></span></span><span style="text-align: left;"><span><b>
a 45% premium</b></span></span><span style="text-align: left;"><span>
to the average trading price.</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Since
the GFH acquisition, the price has increased to just below BD 0.070
perhaps in anticipation of GFH offering the same BD 0.0720 price to
remaining shareholders.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Apparently,
KHCB is quite a valuable asset.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Though
one might not have thought so from the fact that</span></span></p>
<ul>
<li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">KHCB
required an additional BD 60 million in capital to meet CBB
requirements</span></p>
</li><li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">GFH
had to buy the entire AT1 instrument</span></p>
</li></ul>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>Or
maybe you read </span></span><span style="color: navy; text-align: left;"><span lang="zxx"><u><a href="https://www.fitchratings.com/research/non-bank-financial-institutions/fitch-affirms-gfh-at-b-outlook-stable-14-06-2021"><span>Fitch
Ratings</span></a></u></span></span><span style="text-align: left;"><span>
comment on KHCB in their reaffirmation of GFH’s B credit rating.
(That rating is below investment grade, if you didn’t know)</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><i style="text-align: left;"><span style="font-family: arial; font-size: medium;"></span></i></p><blockquote><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><i style="text-align: left;"><span style="font-family: arial; font-size: medium;">Following
a balance sheet clean-up exercise in recent years KHCB's asset
quality has been improving but is still weak and lags higher-rated
peers'.</span></i></p></blockquote><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><span>In
any case I hope you are confident that the fact that Shuaa and
Goldilocks are related parties had no effect on the 45% premium. </span>
</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">That being said, the
size of the premium is perhaps perplexing. </span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Neither Shuaa nor
Goldilocks were inclined to participate in the AT1. That would seem to evidence a lack of faith in KHCB's future.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">One
might think of them as perhaps motivated sellers of KHCB. </span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">It is
perhaps also difficult to imagine that there were other serious
bidders interested in acquiring a minority stake in company where a
single shareholder had control.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">But
then the ways of the market are mysterious and magical. Especially in the land of flying carpets.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>Despite
the premium, if you look at </span></span><span style="color: navy; text-align: left;"><span lang="zxx"><u><a href="https://suqalmal.blogspot.com/2020/03/goldilocks-investment-fund-midas-touch.html"><span>this
earlier post on Goldilocks</span></a></u></span></span><span style="text-align: left;"><span>,
you will see that Goldilocks acquired its stake in KHCB from Shuaa
for BD0.096 a share. You will also note that KHCB didn’t pay any
dividends since Goldilocks’ purchase.</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">So
on this transaction Goldi has a roughly 25% loss from original cost.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>No
wonder Shuaa doesn’t publish data on Goldilocks’ </span></span><span style="text-align: left;"><span>performance</span></span><span style="text-align: left;"><span>,
contrary to previous years.</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>In
the post referenced above I </span></span><span style="text-align: left;"><span>also
</span></span><span style="text-align: left;"><span>wondered
if Shuaa had held on to its then 3.88% stake.</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">It
certainly appears so because GFH says it bought shares from both
Shuaa and Goldilocks and Goldilocks shareholding was 9.76% according
to KHCB’s announcement.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Motives for the Transaction</span></b></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">So what
is motivating GFH’s acquisition of KHCB?</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Only GFH knows for sure but we can explore
some possible rationales. </span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">I've selected two for discussion:</span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"></p><ul><li style="text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Overlooked gem</span></span></li><li style="text-align: justify;"><span style="font-family: arial; font-size: medium;">Increase in GFH equity beyond the purchase price</span></li></ul><p></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Other possible reasons for the transaction
could be “civic duty”, etc. And more than one motive may be
operative.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">As you read, you can decide for yourself
which, if either, is the more compelling one.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><i style="text-align: left;"><u><span style="font-family: arial; font-size: medium;">Overlooked
Gem</span></u></i></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">The
market has fundamentally undervalued KHCB.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">The
canny folks at GFH are about to get KHCB “on the cheap”.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Thereby
reaping rich rewards long into the future.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><u style="text-align: left;"><i><span style="font-family: arial; font-size: medium;">Accounting
Magic</span></i></u></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">The
key drivers of the appeal of this motive are two “facts”:</span></span></p>
<ul>
<li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><span>KHCB’s
book value per share </span><span>exceeds
the acquisition price</span></span></p>
</li><li><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><span>GFH
uses </span><span>t</span><span>he
</span><span><i>book</i></span><span>
value—</span><span>not
the market or fair value—</span><span>of
KHCB’s assets and liabilities (and thus </span><span>by
the process of subtraction also </span><span>KHCB’s</span><span>
</span><span>equity)
</span><span>to</span><span>
prepar</span><span>e</span><span>
its consolidated financials.</span></span></p>
</li></ul>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>A</span></span><span style="text-align: left;"><span>s
of 1Q 2021 </span></span><span style="text-align: left;"><span>KHCB’
s Book Value </span></span><span style="text-align: left;"><span>was
roughly BD 0.160</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">By
acquiring the shares GFH stands to benefit from the difference
between book value (BD 0.16) and the purchase price (BD 0.072) and
the happy application of rules for consolidated financial statements.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>121,726,795
shares at BD 0.088 equals roughly </span></span><span style="text-align: left;"><span><i>BD
10.7 million</i></span></span><span style="text-align: left;"><span>
or </span></span><span style="text-align: left;"><span><i>US$
28.4 million</i></span></span><span style="text-align: left;"><span>.</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
</p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><span>Co</span><span>mpare
that to the BD 8.8 million purchase price. </span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">A not inconsiderable gain on purchase.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">You
might well ask:</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;">“</span><span style="text-align: left;"><span>How
can that be? The P/B ratio is well below one. This can’t make
economic sense.”</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">As
I’ve posted here before, accounting does not always reflect
economic reality.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><i style="text-align: left;"><span style="font-family: arial; font-size: medium;"><span>Here’s
how it would work </span><span>in
detail</span><span>.</span></span></i></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>Recall
that i</span></span><span style="text-align: left;"><span>n
its consolidated financials GFH records 100% of KHCB’s assets and
liabilities </span></span><span style="text-align: left;"><span>in
its (GFH”s) balance sheet</span></span><span style="text-align: left;"><span> using the values </span></span><span style="text-align: left;"><span>appearing
in</span></span><span style="text-align: left;"><span>
KHCB’s balance sheet. Their book values.</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Therefore,
net assets (equity) are also reflected in GFH’s financials at book
values.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>A</span></span><span style="text-align: left;"><span>s</span></span><span style="text-align: left;"><span>
the final step </span></span><span style="text-align: left;"><span>GFH
allocates those net assets between shareholders in the Group and Non
Controlling Interests (NCI) in the Consolidated Statement of Changes
in Shareholders’ Equity </span></span><span style="text-align: left;"><span><i><u>based
on their respective ownership/voting rights</u></i></span></span><span style="text-align: left;"><span>.</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">With
the acquisition of an additional 13.64% in KHCB shares, GFH’s share
of the net assets (total assets minus total liabilities) in KHCB will
increase.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">This
increase in equity attributable to shareholders of GFH will be
accompanied by a corresponding decline in equity attributable to NCI in GFH's financials.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">If
its tender offer for the remaining shares is accepted and completed,
an additional increase in Group shareholders’ equity will occur.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;">Depending
on the percent take up on the take over offer, the component in NCI
related to KHCB may disappear from GFH’s financials.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><i style="text-align: left;"><span style="font-family: arial; font-size: medium;">But
there is indeed more!</span></i></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>You
will recall (and if you don’t here’s </span></span><span style="color: navy; text-align: left;"><span lang="zxx"><u><a href="https://suqalmal.blogspot.com/2021/04/gfh-2020-financials-another-festivus.html"><span>the
link</span></a></u></span></span><span style="text-align: left;"><span>
to that post) that </span></span><span style="text-align: left;"><span>in connection with its 2020 purchase of KHCB’s AT1, GFH was
required to reduce its consolidated equity attributable to
shareholders of the Group by US$ 59.9 million in its FY 2020
financials.</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">The
US$ 59.9 million reflects the excess (positive difference) between
(a) GFH’s “contribution”--the amount of the AT1-- and (b) GFH’s
share of KHCB’s net assets based on its percentage shareholding in
KHCB.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><i>Now
that GFH owns 69.05% of KHCB, it </i></span></span><span style="text-align: left;"><span><i>is
</i></span></span><span style="text-align: left;"><span><i>entitled
to “recover” </i></span></span><span style="text-align: left;"><span><i>some
of that amount.</i></span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>Similarly,
</span></span><span style="text-align: left;"><span>it
will also have to absorb some of the </span></span><span style="text-align: left;"><span>US$
14.3 million share of issuance cost</span></span><span style="text-align: left;"><span>s</span></span><span style="text-align: left;"><span>
levied against the NCI </span></span><span style="text-align: left;"><span>in
2020. Perhaps as much as</span></span><span style="text-align: left;"><span>
US$ 4.4 million.</span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">We
should see the impact of the 13.64% KHCB share acquisition most
likely in GFH’s 2Q2021 financials.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><i style="text-align: left;"><span style="font-family: arial; font-size: medium;">Keep
your eye on GFH’s financials to see if my prediction comes true and
how the related entries are handled.</span></i></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><i style="text-align: left;"><span style="font-family: arial; font-size: medium;">Are
they disclosed separately as in 2020?</span></i></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><i>Booked
directly to e</i></span></span><span style="text-align: left;"><span><i>quity?</i></span></span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><i>O</i></span></span><span style="text-align: left;"><span><i>r
</i></span></span><span style="text-align: left;"><span><i>perhaps
to</i></span></span><span style="text-align: left;"><span><i>
income?</i></span></span></span></p><p style="text-align: justify;"><br /></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-39727101560271747892021-06-19T07:43:00.003+01:002021-06-19T07:43:33.971+01:00She Just Can't Get Any Respect<p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDmOIz8nq_cBMqxFwMLc-RQGwRljOH1u2w-89qb7HXn-X-STwKM33g2jWFZm_8R_UPvr6nR30OcwrIBuNZkMSWLWzsonmh5psvZ8Zhsjt1vCygbhcTA7l_TCLTSdwgU_xQY3lIuDJF0qo/s311/Von+Leyden+Erdogan.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="162" data-original-width="311" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDmOIz8nq_cBMqxFwMLc-RQGwRljOH1u2w-89qb7HXn-X-STwKM33g2jWFZm_8R_UPvr6nR30OcwrIBuNZkMSWLWzsonmh5psvZ8Zhsjt1vCygbhcTA7l_TCLTSdwgU_xQY3lIuDJF0qo/s0/Von+Leyden+Erdogan.jpg" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">At Least She Got a Seat in Istanbul<br />Not Even a Mention in the FT<br /></td></tr></tbody></table><br /> </p><span style="font-family: arial; font-size: medium;"><div style="text-align: justify;">Robert Armstrong had an absolutely brilliant article in Saturday’s FT: <b>Rumpled Boris, Macron's mistake and other G7 sartorial missteps.</b></div></span><div><div style="text-align: justify;"><span style="font-family: arial; font-size: large;"><br /></span></div><span style="font-family: arial; font-size: medium;"><div style="text-align: justify;">But one very glaring flaw.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">He failed to mention one of the nine leaders at the summit.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">At least President Erdogan had a seat for Ms. Von Leyden, albeit not in the front row.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">But a seat nonetheless.</div></span><div style="text-align: justify;"><br /></div></div>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-379608280161810672021-06-16T09:59:00.006+01:002021-06-18T09:12:14.012+01:00Ransomware Prioritize Prevention Then Pursue Prosecution – Part 2<p></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5jBAXUzUwhwqiaIOER-B4eNH9PVf5kRxc4xulHjrmlOB6p6Wz2Mw27NUEVekKnzuMDWE3yqXc0AOJZM3gx0kgtMmSRzQ1YTByTam7XIA-FAGTKR8DiAQgJnGQlHO083gm_zk4hLRoESA/s300/Drunk+%25232.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="168" data-original-width="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5jBAXUzUwhwqiaIOER-B4eNH9PVf5kRxc4xulHjrmlOB6p6Wz2Mw27NUEVekKnzuMDWE3yqXc0AOJZM3gx0kgtMmSRzQ1YTByTam7XIA-FAGTKR8DiAQgJnGQlHO083gm_zk4hLRoESA/s0/Drunk+%25232.jpg" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">When You're This Far Gone<br />It's No Wonder You Don't Hear the Wake-Up Call<br />And a "Sobering Fact" Is Likely to Have No Effect</td></tr></tbody></table><br /><span style="font-family: arial; font-size: medium;"><span>In
</span><span style="color: navy;"><span lang="zxx"><u><a href="https://suqalmal.blogspot.com/2021/06/ransomware-prioritize-prevention-pursue.html"><span>Part
1</span></a></u></span></span><span>,
I outlined (yet again) the above point: hardening the target should be the priority.</span></span><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>In
this post, I will </span><span>hit
that downed horse several more times. </span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">Hopefully
demonstrating that with respect to prevention there is quite a bit of
low hanging fruit.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;">Please note that only the first point below directly
relates to Mr. Younger’s opinion piece in the FT. </span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><b>Russia</b></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>Mr.
Younger had and perhaps still has access to secret information that
makes him better placed than me to make an assessment about the links
between ransomware hackers and the Russian Federation. </span>
</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">And
as well to draw the conclusion that securing the cooperation of the
RF will be a key element in stopping attacks.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>His
comment </span></span><span style="text-align: left;"><span>may
be read to imply</span></span><span style="text-align: left;"><span>
that the Russian Government</span></span></span></p>
<ul>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">is
more capable of controlling crime originating inside its borders
than other countries are within theirs (that, I’d note, would be a
remarkable achievement), or</span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">that
there are bonds between the hackers and certain organs of RF state
security or</span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">perhaps
both</span></p>
</li></ul>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span>In
any case, if the hackers were expelled </span><span>and
are motivated by profit</span><span>,
wouldn’t they simply pack up and go elsewhere?</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>Or
</span></span><span style="text-align: left;"><span>in
a demonstration of the intense competition in the “free market”, </span></span><span style="text-align: left;"><span>
wouldn’t other countries’ enterprising hackers step up to fill
the void?</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>From
time to time, </span></span><span style="text-align: left;"><span>countries
are “ranked” for the amount of “male</span></span><span style="text-align: left;"><span>volent”
internet traffic </span></span><span style="text-align: left;"><span>they
originate. </span></span></span></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Perhaps, these reports may identify potential candidates? </span></span></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">I didn't include all the countries named. </span></span></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">You can look at the reports cited below for additional country names. </span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">One point to keep in mind. </span></span></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">It’s
unclear if these reports are based solely in IP addresses or if there are other
metrics.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>Like
VPNs proxy servers can make one appear to be in a country when one is
not. Proxy server chains can create even more difficulty in locating
a person or entity. </span>
</span></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="color: red;">Matthew 7:7 Just one day after I posted this, Auntie answered. Still a great deal even at GBP 159 a year! </span></span><a href="https://www.bbc.com/news/technology-57504007" style="text-align: left;"><span style="font-family: arial; font-size: medium;">https://www.bbc.com/news/technology-57504007</span></a></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>According
to </span></span><span style="color: navy; text-align: left;"><span lang="zxx"><u><a href="https://www.govtech.com/security/hacking-top-ten.html"><span>this
report</span></a></u></span></span><span style="text-align: left;"><span>
in 4Q2012, the PRC was responsible for 41% of “global attack
traffic” on the internet, the US second with 10%, and the RF in
fourth place with 4.3%.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>According
to </span></span><span style="color: navy; text-align: left;"><span lang="zxx"><u><a href="https://securitytoday.com/Articles/2017/03/03/Top-5-Countries-Where-Cyber-Attacks-Originate.aspx?p=1"><span>another
report</span></a></u></span></span><span style="text-align: left;"><span>,
in 2016 China led the pack with 27.2% of cyber attacks (this is a
subset of malicious traffic) the US with 17.12%, Turkey 10.24%,
Brazil with 8.6%, and Russia with 5.14%.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>According
to </span></span><span style="color: navy; text-align: left;"><span lang="zxx"><u><a href="https://www.countryipblocks.net/blog/top-10-most-malicious-countries-for-cyberthreats-may-2019/"><span>this
report</span></a></u></span></span><span style="text-align: left;"><span>
for May 2019, “China, Russia and Ukraine appear to be active in a
wide variety of hack attempts, including root kits, ransomware, brute
force attacks and a wide variety of malware.”</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">State
Intelligence Operations versus For Profit Criminal Hacking</span></b></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">It’s
important to keep this distinction in mind when looking for
solutions.</span></span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">While
finance is my provenance, I’d venture to guess that eliminating
spying is even harder than eliminating organized crime.</span></span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">According
to what I read in the media, even allies spy on one another.</span></span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">I’d
also venture that countries are not going to allow the extradition of
their intelligence operatives to a foreign country. </span></span></p><p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">What about criminals?</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>The definition of “criminal” </span></span><span style="text-align: left;"><span>can
be</span></span><span style="text-align: left;"><span>
tricky—to use a shared finance and legal term --</span></span><span style="text-align: left;"><span>p</span></span><span style="text-align: left;"><span>articularly
when it comes to matters of state security.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Unauthorized
access to state secrets, secret internet or communications systems
and physical sites is a crime.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">In
such a case one might revise the statement about “terrorists” and
“freedom fighters” to: </span></span></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"></p><blockquote><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">One country’s cyber spy is another
country’s cyber criminal.</span></span></blockquote><p></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">So
what is to be done?</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Prevention
may offer a higher prospect of reducing risk than after the fact
prosecution. Though prosecution should not be abandoned.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">The
Sophisticated “Hacker”</span></b></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">There
seems to be a general perception that hackers are an incredibly
brilliant lot.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="font-weight: normal;">Think
of an evil twin from a soap opera.</span></span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">A
“rogue” Bill Gates, Linus Torvalds, or Larry Page.</span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">That’s
not always the case.</span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Much
of the hacking takes place by the equivalent of opening an unlocked
door or open window.</span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Those
tools are fairly simple to program.</span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">And
for the lazy available for purchase on the web, or so I am told.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;">Here
is a CISA alert from </span><a href="https://us-cert.cisa.gov/ncas/analysis-reports/ar21-126a" style="text-align: left;">6
May of this yea</a><span style="text-align: left;">r.</span></span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">More
sophisticated hacking software is often developed from undisclosed
flaws in existing software or systems that the hacker has purchased
from someone else clever enough to discover them.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">Here’s
</span><span style="color: navy; font-family: arial; text-align: left;"><span lang="zxx"><u><a href="https://www.wired.com/story/untold-history-americas-zero-day-market/">an
article</a></u></span></span><span style="font-family: arial; text-align: left;">
these “flaws” or zero day exploits.</span></span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">Here’s
another on how </span><span style="color: navy; font-family: arial; text-align: left;"><span lang="zxx"><u><a href="https://appleinsider.com/articles/21/03/18/hackers-used-7-zero-days-compromised-websites-to-infiltrate-ios">these
sort of exploits were used to hack IOS</a></u></span></span><span style="font-family: arial; text-align: left;">
in February 2020.</span></span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">And
there are other ways.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">According
to </span><span style="color: navy; font-family: arial; text-align: left;"><span lang="zxx"><u><a href="https://www.ft.com/content/f6cd3e38-388a-11e7-821a-6027b8a20f23">security
experts</a></u></span></span><span style="font-family: arial; text-align: left;">
the WannaCry ransomware attack was made possible by using information
from some NSA software that Shadow Brokers illegally acquired and
then put up for sale.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">The
Somnolent/Negligent Target</span></b></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">H</span><span style="font-family: arial; text-align: left;">ere’s
where we get to the really uncomfortable part – taking
responsibility.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Lot
of attacks are successful because targets left their doors unlocked
and windows open.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">WannaCry
was facilitated because many users hadn’t upgraded from Windows XP.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">As
is common practice, after a certain amount of time, software vendors
stop “supporting” old software. That includes providing security
patches for known vulnerabilities.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">You’ll
see that same </span><span style="color: black; font-family: arial; text-align: left;"><span lang="en-US">failure</span></span><span style="font-family: arial; text-align: left;">
mentioned regarding some of the 2018 ransomware attacks in the USA.</span></span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Another
is failure to install patches and updates that are provided by the
vendor. </span></p><p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">That is, perhaps even more egregious. One doesn’t have to
plunk down money for a new bit of software, but merely install a
“patch” from the vendor.</span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Pulse
Secure VPN appears to be our poster child here.</span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;">First,
an </span><a href="https://apnews.com/article/government-and-politics-hacking-technology-business-7350235e07d46ba5afc1238b553ea4b9" style="text-align: left;">article
from AP </a><span style="text-align: left;">about breaches this year.</span></span></p>
<p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;">Here
is a CISA alert from </span><a href="https://us-cert.cisa.gov/ncas/alerts/aa20-010a" style="text-align: left;">15
April 2020</a><span style="text-align: left;"> which is an update from 10 January 2020. </span></span></p><p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Take a look
at the timeline outlined in this report.</span></p><p align="justify" class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">You’ll notice the vendor made its first
wake-up call in January 2019. That was followed by several “sobering
facts” from a variety of sources.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">Both
of these incidents</span><span style="font-family: arial; text-align: left;">
may be a salutary caution to those whose mobile phones no longer
receive software updates or security patches. </span><span style="font-family: arial; text-align: left;">Or
those who have ignored a message to update their phones.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>I’ll
upgrade </span><span>this
comment</span><span>
later to “</span><span>a
</span><span>wake-up
call” </span><span>or</span><span>
“sobering fac</span><span>t" later.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
</p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span><span style="font-weight: normal;">As
you will notice from th</span></span><span><span style="font-weight: normal;">e</span></span><span><span style="font-weight: normal;">
FT article </span></span><span><span style="font-weight: normal;">cited
above</span></span><span><span style="font-weight: normal;">,
WannaCry was </span></span><span><span style="font-weight: normal;">described
as </span></span><span><span style="font-weight: normal;">a</span></span><span><span style="font-weight: normal;">
“wake-up call”.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-weight: normal;">That
</span></span><span><span style="font-weight: normal;">the
somnolent didn't and don’t answer.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-weight: normal;">Perhaps
the solution is a louder ring tone? Voice mail?</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><span style="font-weight: normal;">Not
bloody likely! </span></span><span><span style="font-weight: normal;">(See
picture at the head of this post).</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span style="font-weight: normal;"><i>Stricter
government requirements and robust penalties for failure to adhere to
them are likely to get more attention and responses.</i></span></span></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-29314176318281301282021-06-15T07:00:00.009+01:002021-06-16T09:40:13.059+01:00Ransomware Prioritize Prevention Then Pursue Prosecution – Part 1<p> </p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjePiEl3AHCDlPhckrRcr1AZU3afCSIScTuVQpsmoKWvThco4eskXQMarnvKr1jcvJ0PpL8Ip9on9GnxRgz6SYsvJ-nj8mzXAYwLev6VfEuBJtDjWVJgG8w4aFtqyvJ3a2yM_7UpwIUuro/s318/An+Ounce+of+Prevention.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="159" data-original-width="318" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjePiEl3AHCDlPhckrRcr1AZU3afCSIScTuVQpsmoKWvThco4eskXQMarnvKr1jcvJ0PpL8Ip9on9GnxRgz6SYsvJ-nj8mzXAYwLev6VfEuBJtDjWVJgG8w4aFtqyvJ3a2yM_7UpwIUuro/s0/An+Ounce+of+Prevention.jpg" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Noted Internet Security Expert, B. Franklin<br />Interesting Fact: <br />Colonial Pipeline Earlier Management Ignored His Advice</td></tr></tbody></table><br /><p></p><p></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>Alex
Younger, former head of the Secret Intelligence Service, penned an
opinion piece in Saturday’s FT </span><span><b>Ransomware
attacks have to be stopped — here’s how</b></span><span>.
</span>
</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Some
898 words long. Lots of good advice and interesting points.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">However,
he had but these 37 words (4%) on what I consider to be one of the
key steps to resolving the problem.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"></p><blockquote style="text-align: justify;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">It
follows that governments can and should do more but not to the point
of absolving individuals and firms of their own responsibilities. A
surprisingly large amount of this is about getting the cyber security
basics right.</span></span></blockquote><p></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">The
last sentence “names the issue exactly”.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>I
think this is the </span></span><span style="text-align: left;"><span><b>major</b></span></span><span style="text-align: left;"><span>
problem.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><b>By
way of analogy, let’s assume a town where no one locks their doors,
where people leave valuables in plain sight, where it’s common to
leave the keys to one’s Maybach in the ignition, and the car in the
driveway.</b></span></span><span style="text-align: left;"><span>.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Now
we could crackdown on those who buy stolen goods even those in other
cities.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">We
could station a policeman by each house to keep guard.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><i><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>Or</span></span><span style="text-align: left;"><span>,
we could get as many citizens as possible to lock their doors and
secure their property.</span></span></span></i></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>What
this latter step hopefully </span></span><span style="text-align: left;"><span>would
do</span></span><span style="text-align: left;"><span>
is lessen the opportunity for crime.</span></span></span></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">And the amount of crime that
takes place.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">It
also lessens the number vulnerable targets that one has to guard.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">If
we can take the above steps, then resources can be more
focused.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span><i>Also
and perhaps more importantly, with national security issues, one
would I hope <u>prefer to prevent an attack over a </u></i></span></span><u><span style="text-align: left;"><span><i>successful response to </i></span></span><span style="text-align: left;"><span><i>the</i></span></span></u><span style="text-align: left;"><span><i><u>
attack</u>.</i></span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Is
this the case with ransomware? That doors are unlocked, valuables
unsecured?</span></b></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;">First,
some macro examples from an </span><a href="https://suqalmal.blogspot.com/2021/05/ft-exposes-dirty-secrets-on.html" style="text-align: left;">earlier
post</a><span style="text-align: left;">.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Two
quotes from the FT. Italics mine.</span></span></p>
<ol><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span><span style="font-weight: normal;">Just
</span></span><span><i><span style="font-weight: normal;">a
quarter of companies</span></i></span><span><span style="font-weight: normal;">
in traditional infrastructure businesses, including oil and gas,
utilities and healthcare, were properly braced for an attack,
estimated Matias Katz, chief executive of the cyber security group
Byos.</span></span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>The
oil and gas sector has been criticised for </span><span><i>lax
cyber security regulation</i></span><span>.
</span>
</span></p>
</li></ol>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">The
above points are estimates not facts.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">But
it should be not only an “overdue wake up call” but also a
“sobering fact” even if these are overestimates by a factor of
two.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>T</span></span><span style="text-align: left;"><span>he
companies making these estimates are </span></span><span style="text-align: left;"><span>companies</span></span><span style="text-align: left;"><span>
selling security products </span></span><span style="text-align: left;"><span>and
so may have a profit dog in the fight.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;"><span>So
</span></span><span style="text-align: left;"><span>let’s
turn to recent comments by US Secretary of Energy. She is </span></span><span style="color: navy; text-align: left;"><span lang="zxx"><u><a href="https://www.cnn.com/2021/06/06/politics/us-power-grid-jennifer-granholm-cnntv/index.html"><span>reported
to have said that </span></a></u></span></span><span style="text-align: left;"><span>“hackers”
could shut down the US energy grid.</span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="color: #2a2a2a; text-align: left;"><span style="font-family: arial; font-size: medium;">Second,
some individual examples.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Colonial
Pipeline was penetrated through a VPN which was “not intended to be
used” but not turned off. That system had single factor
authentication.</span></span></p>
<p align="justify" class="western" style="line-height: 150%;"><span style="font-family: arial; font-size: medium;"><span>In
February 2020, CISA (Cybersecurity and Infrastructure Security
Agency) published an </span><a href="https://us-cert.cisa.gov/ncas/alerts/aa20-049a"><span style="color: navy;"><span lang="zxx"><u><span>alert
on a ransomware attack on a</span></u></span></span><span style="color: navy;"><span lang="zxx"><u><span>n
unnamed US</span></u></span></span><span style="color: navy;"><span lang="zxx"><u><span>
pipeline</span></u></span></span></a><span>.
</span>
</span></p>
<p align="justify" class="western" style="line-height: 150%;"><span style="font-family: arial; font-size: medium;"><span>That
alert mentions some of the same security failures </span><span>as
with Colonial Pipeline</span><span>.
</span>
</span></p>
<p align="justify" class="western" style="line-height: 150%;"><span style="font-family: arial; font-size: medium;"><span>Lessons
learned? </span>
</span></p>
<p align="justify" class="western" style="line-height: 150%;"><span style="font-family: arial; font-size: medium;"><span>Wake-up
calls unanswered? </span>
</span></p>
<p align="justify" class="western" style="line-height: 150%;"><span style="font-family: arial; font-size: medium;"><span>Sobering
facts insufficiently “sobering” to overcome the state of
intoxication?</span><span>
</span>
</span></p>
<p align="justify" class="western" style="line-height: 150%;"><span style="font-family: arial; font-size: medium;"><span>A</span><span>s
well,</span><span>
you will note that many of the other failures mentioned in that alert
are “basic cybersecurity”. </span><span>The PC equivalent of locking doors, securing valuables, etc.</span></span></p>
<p align="justify" class="western" style="line-height: 150%;"><span style="font-family: arial; font-size: medium;"><span>You
will see this pattern </span><span>of
“rookie” mistakes</span><span>
in many of their alerts</span></span></p>
<p align="justify" class="western" style="line-height: 150%;"><span style="font-family: arial; font-size: medium;"><span>Another
study </span><span>that
</span><span style="color: navy;"><span lang="zxx"><u><a href="https://www.comparitech.com/blog/vpn-privacy/cybersecurity-by-country/"><span>ranks
cybersecurity by country</span></a></u></span></span><span style="color: navy;"><span lang="zxx"><span><span style="text-decoration: none;">
</span></span></span></span><span>seems
to confirm the above.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>The
US ranks 46</span><sup><span>th
</span></sup><span>out
of 75 countries.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">Some
caveats:</span></span></p>
<ol>
<li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><i>This
isn’t an </i></span><span><i>apples
to apples </i></span><span><i>comparison</i></span><span>.
</span><span>Rather
it</span><span>
is an overall ranking across a broad gauge of metrics not just for
ransomware. It includes attack attempts, infection rates on
personal devices, etc.</span></span></p>
</li><li><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span><i>But
despite that drawback it does highlight t</i></span><span><i>he
Willy Sutton Principle</i></span><span>:
One would expect the USA to be of more interest to hackers than many
of the other countries on the list. And so more targeted. </span><span><i>And
so more in need of defense.</i></span></span></p>
</li></ol>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="text-align: left;"><span style="font-family: arial; font-size: medium;">In
Part 2, we’ll look at some other issues, not all of which relate directly to Mr. Younger's opinion piece.</span></span></p><br /><p></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-67582582419840462292021-06-13T06:34:00.011+01:002021-06-18T09:14:33.323+01:00Collateral: Great Expectations vs Sobering Facts<p></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEge_nzxSp3xt6U7qtnHQttufEOJturjS4dRbGypag4mEGKW_pVeyUMX5khpNmfiK75TLsipTYBzeMsOeGA-lxb30nmzdTRrPdbSpfpHJXR1JGsgcN-SHQjHjfwBvfCGUp2pUCG-FBx8z0w/s242/Charlie+Brown+Football.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="208" data-original-width="242" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEge_nzxSp3xt6U7qtnHQttufEOJturjS4dRbGypag4mEGKW_pVeyUMX5khpNmfiK75TLsipTYBzeMsOeGA-lxb30nmzdTRrPdbSpfpHJXR1JGsgcN-SHQjHjfwBvfCGUp2pUCG-FBx8z0w/s0/Charlie+Brown+Football.jpg" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Expectations Often Are Not Fulfilled</td></tr></tbody></table><br /> <p></p><p align="justify" style="line-height: 150%; margin-bottom: 0.2in;">
<span style="font-family: arial; font-size: medium;">Ellen
Carr has an article in the 10 June FT “Linus from Peanuts has risk
lessons for high-yield investors”</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0.2in;"><span style="font-family: arial; font-size: medium;">Two
quotes from that article to set the stage for some additional
observations.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"></span></p><blockquote><span style="font-family: arial; font-size: medium;"><span>When
we get the chance to buy bonds with collateral backing them up, we
feel, well, more secure.</span></span></blockquote><p></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><br />
</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span></span></span></p><blockquote><span style="font-family: arial; font-size: medium;"><span>Secured
bondholders anticipate that, if their research fails them and the
issuer ends up in bankruptcy court, they are likely to be paid in
full before unsecured lenders get a dime.</span></span></blockquote><p></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span>There
is truth in these statements. </span>
</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><i style="text-align: left;">But</i><i style="text-align: left;">
note that in both of the quotes </i><i style="text-align: left;">Ms. Carr</i><i style="text-align: left;"> speaks about
“feelings” and “anticipations”</i><span style="text-align: left;">.</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Sadly
these “wishes” don’t always turn into “horses” that bond
holders can ride.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Some
inconvenient and perhaps even “sobering” facts.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">(H/T
for the latter phrase to Joseph Blount, President and CEO of Colonial
Pipeline).</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">The
nature of the collateral drives its value in a liquidation.</span></b></p>
<ol>
<li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>Property,
plant, and equipment generally </span><span>are
sold for a fairly low</span><span>
percent</span><span>age</span><span>
of historic cost </span><span>in
collateral realisation</span><span>,
</span><span>particularly if they
are highly specific to an industry</span><span>.
</span><span>Or are costly to move.</span></span></p>
</li><li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>As
you’d expect items nearer to cash have higher sales values,
</span><span>assuming they are
liquid in nature and trade in liquid markets.</span></span></p>
</li><li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>Holders
of collateral in the form of 100% of the shares of capital stock in
a subsidiary are effectively junior in legal priority to all other
creditors in th</span><span>at</span><span>
subsidiary. </span><span> Last in
the line </span><span>in the cash
waterfall from the subsidiary’s estate.</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"></p>
<p align="justify" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;">
</p>
</li><li><p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span>Such shares are generally less liquid than listed shares.</span></span></p></li></ol>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><b>The
nature of the corporate distress drives collateral values in
liquidation.</b></span></p>
<ol>
<li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>If
one company in an industry is failing but the industry itself has
reasonable prospects, the sales price of collateral is likely to be
more than if the entire industry is tanking. </span>
</span></p>
</li><li><p align="justify" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">This
will also depend on whether there is existing excess capacity in the
industry.</span></p>
</li></ol>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">The
form of the corporate distress resolution can
affect access to collateral.</span></b></p>
<ol>
<li><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>In
a US Chapter 11, one may find one’s position changed </span><span>under
</span><span>the reorganization
plan.</span><span> </span>
</span></p>
</li><li><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>Realisation
of collateral can be legally stopped. </span>
</span></p>
</li><li><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">The
reorg plan may change tenors, rates, and in some cases even the
collateral itself.</span></p>
</li><li><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">In
that regard DIP financing can create a new and higher priority class
of secured creditors.</span></p>
</li></ol>
<p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Laws
and transaction structures
can affect collateral.</span></b></p>
<ol>
<li><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>Be
sure that </span><span>you </span><span>legally </span><span>have
and can </span><span>enforce your
collateral rights.</span><span> </span>
</span></p>
</li><li><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>Be
sure the legal structure is sound. </span><span>Complex
structures involving multiple national laws may be fragile. You enforce your collateral rights in the jurisdiction where the collateral "resides".</span><span></span></span></p>
</li><li><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>Read
the Offering Memo. </span><span>T</span><span>he
</span><span>deficiencies </span><span>outlined
in points #1 and #2 above</span><span>
</span><span>are often</span><span>
clearly spelled out in the Offering Memoranda. </span><span>
</span><span>(S</span><span>ee
</span><span>earlier posts on
Golden</span><span> Belt Sukuk </span><span>and
P</span><span>eking </span><span>U</span><span>niversity
</span><span>F</span><span>ounders
</span><span>G</span><span>roup</span><span>)</span><span>,
</span>
</span></p>
</li><li><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">Be
sure you will get a fair shake in courts if you have to enforce your
rights. For example, you don’t really want to be a foreign lender
in Saudi Arabia. (See Al Gosaibi, TIBC, AlAwal Bank, AlSanea. Or
Redec for those with long memories or access to the internet.)</span></p>
</li><li><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>Be
sure there are no quirks in local law </span><span>or
advantages for well connected individuals</span><span>.
(See Dana Gas </span><span>posts</span><span>).
</span>
</span></p>
<p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
</p>
</li></ol>
<p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">With
that as background, let’s take a look at the transactions she
mentioned in her article.</span></p>
<p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;"><br /></span></b></p><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;"></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgpFdKbhQko-RaodG7pwgLE8zw3_Tmco1D226T4oIzG-V3OeJm1uUhb099BmbhfhVSHwTGr5YmXfVFyjA0-t5ouTQyh6D_KpEBud6KapH9EzptDIeXYCdiDZ7BaSxbHQ0UuGAb9wAKkV20/s275/Cruise+Ship+Breaking.jpg" style="margin-left: auto; margin-right: auto;"><span style="font-family: arial; font-size: x-small;"><img border="0" data-original-height="183" data-original-width="275" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgpFdKbhQko-RaodG7pwgLE8zw3_Tmco1D226T4oIzG-V3OeJm1uUhb099BmbhfhVSHwTGr5YmXfVFyjA0-t5ouTQyh6D_KpEBud6KapH9EzptDIeXYCdiDZ7BaSxbHQ0UuGAb9wAKkV20/s0/Cruise+Ship+Breaking.jpg" /></span></a></td></tr><tr><td class="tr-caption" style="text-align: center;"><span style="font-family: arial;">What's the Scrap Value of a Cruise Ship?</span></td></tr></tbody></table><p></p><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><br /></span></p><p align="justify" style="font-style: normal; line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><b style="text-align: left;">Royal
Caribbean Line: </b><b style="text-align: left;">US$ 3</b><b style="text-align: left;">.</b><b style="text-align: left;">320 billion senior secured
notes maturing in 2023 (US$ 1 billion) and 2025 (US$ 2.320 billion)</b></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span>You’ll
find the Indenture <a href="https://www.sec.gov/Archives/edgar/data/884887/000110465920063849/tm2020182d1_ex4-1.htm">here</a>.
</span>
</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Collateral
– pages 7-8</span></b></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">“</span><span style="font-family: arial; text-align: left;">Collateral”
is defined as:</span></span></p>
<ol>
<li><p align="justify" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">shares
of capital stock in subsidiaries that own the pledged “vessels”</span></p>
</li><li><p align="justify" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>28
pledged vessels </span>
</span></p>
</li><li><p align="justify" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;">the
Collateral Account and any “Trust Moneys” within</span></p>
</li><li><p align="justify" style="font-weight: normal; line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span>the
material trademarks owned by the Issuer and Celebrity Cruises Inc.
on the Issue Date, including the Royal Caribbean and Celebrity brand
trademarks and (y) all intellectual property rights of the Issuer in
and to marketing databases, customer data and customer lists, except
to the extent prohibited by contractual obligation existing on the
Issue Date or applicable law, rule or regulation., </span>
</span></p>
</li></ol>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;">You
may have read that the </span><i style="text-align: left;">book value</i><span style="text-align: left;"> of the pledged collateral is
some US$ 12 billion.</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Sounds
great!.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">That’s
roughly four times coverage of the Secured Notes.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">But
let’s look a bit closer.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><b style="text-align: left;">First,
this collateral is industry specific</b><span style="text-align: left;">.</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Ask
yourself what is the value of cruise related collateral if RCL is
failing because it cannot generate sufficient cash to repay its debt.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Then
ask how the fact that the cruise industry in general is “facing
rough seas” may depress collateral values even more.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">A
falling tide lowers all boats.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">And
their related values. And that of their customer lists, trademarks,
etc.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;">
</p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span><b>Second,
note that the US$ 12 billion is </b><b>based on</b><b> historic cost</b>.
</span>
</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">It’s
an old rule of the market that one sells assets at the current market
price which may be significantly different than historic cost or book
value.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">If
you are a motivated seller, bidders are more likely to bid low than
high. If indeed, they bid at all.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">But
as they say on late night TV, “but wait there’s more”.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Third, Collateral
Cap – pages
8 and 99</span></b></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">T</span><span style="font-family: arial; text-align: left;">hat’s
not a sartorial </span><span style="font-family: arial; text-align: left;">accessory
</span><span style="font-family: arial; text-align: left;">for the collateral,</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">B</span><span style="font-family: arial; text-align: left;">ut
a way to deal with indentures in existing bonds which limit </span><span style="font-family: arial; text-align: left;">the
amount of</span><span style="font-family: arial; text-align: left;"> “new
indebtedness” </span><span style="font-family: arial; text-align: left;">that
RCL can incur.</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">So
what is a collateral cap?</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Let’
turn to the Indenture for the legal meaning of this term.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">First,
the amount of the collateral that is available to the secured
creditors solely is limited.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"></span></p><blockquote><span style="font-family: arial; font-size: medium;">“<u>Collateral
Cap</u>” means, on the Issue Date, $1,662.0 million, as it may be
increased pursuant to Section 4.13. </span></blockquote><span style="font-family: arial; font-size: medium;">
</span><p></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Second, on page 99 there is an explanation as to what happens to amounts above
the “cap”.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;"></span></p><blockquote style="text-align: justify;"><span style="font-family: arial; font-size: medium;">In
no event shall Collateral Proceeds in excess of the Collateral Cap or
any other limitation on the extent of Collateral Proceeds
contemplated by the Security Documents be applied in accordance with
this Section 6.10, and such excess amounts shall be returned to the
Issuer, any Guarantor or any other obligor of the Notes, as their
interests may appear, or as a court of competent jurisdiction may
direct.</span></blockquote><p></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">So
in the <i>best case</i> the collateral will not repay more than roughly 50%
of the outstanding debt.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Any
proceeds from the collateral sales over US$ 1.662 billion would go to
RCL’s “estate” to be shared by all creditors.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;">Thus,
the secured note holders are not going to be </span><i style="text-align: left;">repaid in full before
the unsecured creditors get a dime </i><span style="text-align: left;">in
the event that the collateral needs to be realised.</span></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">There’s
more.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;">As
is typical the Indenture permits certain liens against the collateral
that have legal priority to the secured note holders’ position.
</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Once
one takes possession of collateral like a vessel, one incurs maintenance and costs associated with berthing, including any
required crew salaries and expenses, plus insurance until the sale.
These out of pocket costs would then represent a deduction from the
proceeds of any realisation.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><br />
</span></p><p align="justify" style="line-height: 150%; margin-bottom: 0in;"></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGQAob-C9H3TuTx2JtjbRqEThcaoGBfgQz3Sa3ZoyMUfpaRwZtfBt4d0dA8OlnaWe7GrPmNcgbSF1hTzVsiam3jnu73wGm69dLha07Q663d1zM45GyDJUENuybR95xaHVCRMTUCUJJosM/s736/Macy%2527s.jpg" style="margin-left: auto; margin-right: auto;"><span style="font-family: arial; font-size: medium;"><img border="0" data-original-height="469" data-original-width="736" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGQAob-C9H3TuTx2JtjbRqEThcaoGBfgQz3Sa3ZoyMUfpaRwZtfBt4d0dA8OlnaWe7GrPmNcgbSF1hTzVsiam3jnu73wGm69dLha07Q663d1zM45GyDJUENuybR95xaHVCRMTUCUJJosM/s320/Macy%2527s.jpg" width="320" /></span></a></td></tr><tr><td class="tr-caption" style="text-align: center;"><span style="font-family: arial;">Admittedly An Extreme Case<br />But Who Is Going to Want to Buy Stores Now?</span></td></tr></tbody></table><span style="font-family: arial; font-size: medium;"><br /></span><p></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><b>Macy’s
</b><b>US$ 1.3 billion 8.375% </b><b>senior secured </b><b>notes
maturing 2025</b></span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">The
notes are secured by first liens/deeds of trust on real estate.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">If
Macy’s hits the wall to use a technical financial term, does that
perhaps indicate that retail is in real trouble?</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">I’d
argue that it does.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Macy’s
is indeed a different “fish” than say Sears or K Mart.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">If a name like this is in trouble, then the sector is in trouble.</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;">Who
then is the expected buyer of these real estate assets or as we might
more realistically call them “empty stores”?</span></p>
<p align="justify" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Dollar
General? Maybe if the price is a dollar?</span></p>
<p style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">What
is their value in alternative uses? </span></p><p style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">Amazon fulfillment centers?
Homeless shelters? Schools?</span></p>
<p style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">If
you’re interested, Fitch assigned this issue a BB+ rating.</span></p>
<p style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">That
is below investment grade, a good indication that full repayment is
not assured.</span></p>
<p style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><br />
</p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-87703503811792086682021-06-12T08:41:00.007+01:002021-06-12T08:57:51.006+01:00Colonial Pipeline CEO’s 8 June Testimony -- Annotated<p> </p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifYGA6hqEKMHt81_XXItKHCD44aPUeqdxp0pfMsGG_DVMzSPsescWcqf6V85_EhN9BbAHAvSn6lVQRriFkf033mfdJPYJBg6iUCuN-WZE1P98vaz1kQqZqjwVuh3CwbnwTWz96uesTrSs/s270/The+Bellman+-+Snark.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="270" data-original-width="187" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifYGA6hqEKMHt81_XXItKHCD44aPUeqdxp0pfMsGG_DVMzSPsescWcqf6V85_EhN9BbAHAvSn6lVQRriFkf033mfdJPYJBg6iUCuN-WZE1P98vaz1kQqZqjwVuh3CwbnwTWz96uesTrSs/s0/The+Bellman+-+Snark.jpg" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">No Need for an Extensive Hunt<br />Just Read Below</td></tr></tbody></table><p></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">On
June 8<sup>th</sup> Joseph E. Blount, Jr., President and CEO of
Colonial Pipeline testified before the US Senate Committee on
Homeland Security and Governmental Affairs.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial;"><span face="Arial, sans-serif"><span style="font-size: medium;">I
have annotated quotes from his </span></span><span style="color: navy;"><span lang="zxx"><u><span face="Arial, sans-serif"><span style="font-size: medium;"><a href="https://www.hsgac.senate.gov/imo/media/doc/Testimony-Blount-2021-06-08.pdf">prepared
statement</a> </span></span></u></span></span><span style="color: navy;"><span lang="zxx"><span style="color: black;"><span face="Arial, sans-serif"><span style="font-size: medium;"><span style="text-decoration: none;">before
the Committee</span></span></span></span></span></span><span style="color: black;"><span face="Arial, sans-serif"><span style="font-size: medium;">
to provide further context and set the stage for a following post on
the Committee’s reaction.</span></span></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;"><b>Quote
1</b></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;"></span></span></p><blockquote style="text-align: justify;"><span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">Colonial
Pipeline is cognizant of the important role we play as critical
infrastructure. We recognize our significance to the economic and
national security of the United States and know that disruptions in
our operations can have serious consequences. </span></span></blockquote>
<p></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><br />
</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">That
certainly sounds promising, Colonial acknowledges its “significance
to the economic and national security of the United States”.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">Based
on that we can expect a description of the robust measures that
Colonial took to <i>prevent</i> hacking and ransomware attacks.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;"><b>Quote
2</b></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;"></span></span></p><blockquote><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">I
recognize that the attackers were able to access our systems. While
that never should have happened, it is a sobering fact that we cannot
change. </span></span></p></blockquote><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span face="Arial, sans-serif"><span>Indeed
it should never have happened. </span></span>
</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">It
is as well a “sobering fact”.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">While
great philosophers have debated whether a “sobering fact” is more
urgent than a “wake-up call”, I think it’s safe to say that
they largely agree that for a fact to be “sobering” one must not
have been a “sober” state prior thereto.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;"><b>Quote
3</b></span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;"></span></span></p><blockquote><span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">We
take our role in the United States infrastructure system very
seriously.</span></span></blockquote><p></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">With
a previously reported 30%+ <b>net</b> profit margin, very seriously no doubt.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">That
aside, I guess we’re about to hear about Colonial’s robust
preventive measures and the millions spent on cybersecurity.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">I’d
note that I take my role as a parent very seriously with respect to
the safety of my children while traveling in our car.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">That
means of course that the Prince of Wails is secured in a baby seat
and the two other little ones are buckled in before we embark.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Madame
Arqala generally rides “shotgun” in these cases. </span></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span face="Arial, sans-serif" style="text-align: left;">And makes ample
use of the “phantom” brake and periodic verbal warnings to
moderate any </span><i style="text-align: left;">perceived </i><span face="Arial, sans-serif" style="text-align: left;">excesses in my speed.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Note that those steps are undertaken <i>before not after</i> a crash.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">So
you’re probably as excited as I am to hear from Joe.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;"><b>Quote
4</b></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;"></span></span></p><blockquote><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">Colonial
Pipeline is an accountable organization, and that starts with taking
proactive steps to prevent an attack like this from happening again.</span></span></p></blockquote><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">It
seems that CP’s “accountability” is focused on the future. </span></span></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">They're looking "forward not backward."</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span face="Arial, sans-serif" style="text-align: left;">Unspoken
is the extent of accountability for </span><i style="text-align: left;">pro-actively </i><span face="Arial, sans-serif" style="text-align: left;">securing the
stable gate before the horses bolt.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">That
can’t be quite right after all Joe of his statements so far about
Colonial’s attitude to protecting critical infrastructure.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">There’s
got to be more to come.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Quote
5</span></b></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;"></span></p><blockquote><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Although
the investigation is ongoing, we believe the attacker exploited a
legacy virtual private network (VPN) profile that was not intended to
be in use.</span></p></blockquote><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">Ah,
the answer.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">When
you hear the word “legacy”, you immediately know that its not
current management’s failure. </span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">It’s
like the fraternity or college that has to accept an applicant
because he’s a “legacy”. Neither can be blamed if the “legacy”
doesn’t work out.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">Or
“legacy” can also mean something unwanted that you inherited,
like your Aunt Stella’s collection of glass figurines. Just stick
them in a box and forget about them.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">With
a name like “Colonial” you might well expect that John Murray,
Fourth Earl of Dunmore, George Washington, or Alexander Hamilton
probably set up the VPN.</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span face="Arial, sans-serif"><span style="font-family: arial; font-size: medium;">Before
you rush to blame any of them, let me remind you that internet
security was not as advanced then as it is now. </span></span></p><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Also
we learn that the system “was not intended” for use.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">But it certainly seems that it was “left on”.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">So
Colonial’s management is filled with good intentions among other
things.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">I
guess in some quarters that counts for more than “effective
actions”.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">But
that doesn’t mean that Colonial isn’t taking action now.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Quote
6</span></b></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;"></span></p><blockquote><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">We
have worked with our third-party experts to resolve and remediate
this issue; we have shut down the legacy VPN profile, and we have
implemented additional layers of protection across our enterprise. We
also recently engaged Dragos’ Rob Lee, one of the world’s leading
industrial and critical infrastructure and OT security specialists to
work alongside Mandiant and assist with the strengthening of our
other cyber defenses. We have also retained John Strand from Black
Hills Information Security, another leader in the cybersecurity
space, who will provide additional support to strengthen our
cybersecurity program.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><br />
</span></p></blockquote><p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;">
<span style="font-family: arial; font-size: medium;"><span face="Arial, sans-serif"><span>Clearly
quite a bit work is being done now—that is to remind you <i>after the
hack. </i></span></span><i>
</i></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium;"><span face="Arial, sans-serif" style="text-align: left;">Can
we infer from the long list of remedial items that there were </span><i style="text-align: left;">widespread</i><span face="Arial, sans-serif" style="text-align: left;"> and </span><i style="text-align: left;">serious</i><span face="Arial, sans-serif" style="text-align: left;">
security weaknesses pre-hack?</span></span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">It
sure sounds like it.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">With
this as backdrop, you probably expect that Joe is about to get a
quite grilling from the Senators on the Committee.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Let
me remind you that “expectations” just like “intentions”
don’t always deliver the wished for results.</span></p>
<p align="justify" class="western" style="line-height: 150%; margin-bottom: 0in;"><span style="font-family: arial; font-size: medium; text-align: left;">Once
the transcript of the hearing is published we’ll take a closer
look.</span></p><p></p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0tag:blogger.com,1999:blog-5124857623766724513.post-45669369711500520052021-06-11T09:03:00.012+01:002021-06-18T09:09:50.930+01:00Games Fund Managers and Investment Advisors Play and How to Avoid Getting Played<p></p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXp6jbrpC1tP0klAKfwfTKHoSvWO2wZwyQlUqoxbZTHn_hKnr9t7IFaF9-EyfLthdW9k53EMgmQa2fzWo4BoFjURWofiwI3Gg95G1q_8Lp41U4kOvuAluA8ESU6oZ-IdGhiySs0HcRKQU/s385/Three+Card+Monte.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="131" data-original-width="385" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXp6jbrpC1tP0klAKfwfTKHoSvWO2wZwyQlUqoxbZTHn_hKnr9t7IFaF9-EyfLthdW9k53EMgmQa2fzWo4BoFjURWofiwI3Gg95G1q_8Lp41U4kOvuAluA8ESU6oZ-IdGhiySs0HcRKQU/s320/Three+Card+Monte.jpg" width="320" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Sometimes the Best Way to Avoid Being Played<br />Is Not to Play</td></tr></tbody></table><br /><div style="text-align: justify;"><span style="font-family: arial; font-size: medium;">Among
other things, Alicia McElhaney at II keeps a close eye on academic
research on the “investment space”.</span></div><p></p>
<p class="western" style="line-height: 150%; text-align: justify;"><span style="font-weight: normal;"><span style="font-family: arial; font-size: medium;">She’s
had quite a run with outlining the games fund managers play.</span></span></p>
<p class="western" style="line-height: 150%; text-align: justify;"><span style="font-weight: normal;"><span style="font-family: arial; font-size: medium;">Here
are just two examples.</span></span></p>
<p class="western" style="line-height: 150%; text-align: justify;"></p><ul><li style="text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="font-weight: normal;">27
May - </span><span><span style="font-weight: normal;">VC
Firms ‘Inflate’ Portfolio Valuations Ahead of Fundraising, Study
Shows </span></span></span></li><li style="text-align: justify;"><span style="font-family: arial; font-size: medium;">9
February - Private Equity Firms ‘Try to Manipulate Their
Performance’ When Raising Money</span></li></ul><p></p>
<p class="western" style="line-height: 150%; text-align: justify;"><span style="font-weight: normal;"><span style="font-family: arial; font-size: medium;">Anyone
who is sentient on the buyside has experienced this. </span></span></p><p class="western" style="line-height: 150%; text-align: justify;"><span style="font-weight: normal;"><span style="font-family: arial; font-size: medium;">But it is
nice to see academics confirm what we've learned.</span></span></p>
<p class="western" style="line-height: 150%; text-align: justify;"><span style="font-weight: normal;"><span style="font-family: arial; font-size: medium;">So
how does one minimize getting “played”?</span></span></p>
<p class="western" style="line-height: 150%; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="font-weight: normal;">The
</span><b>first</b><span style="font-weight: normal;">
thing to understand is that similar to other sellers of goods fund
managers are looking to make a sale and a profit. Sales pitches run
from “puffery” to outright misrepresentation.</span></span></p>
<p class="western" style="line-height: 150%; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="font-weight: normal;">The
</span><b>second</b><span style="font-weight: normal;">
is that these PE and VC and similar products are sold to
“sophisticated” investors--the so-called “big boys”. </span></span></p><p class="western" style="line-height: 150%; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="font-weight: normal;">Regulators make the laughable presumption that the “big boys”
don’t need the usual protections given retail investors. </span>
</span></p>
<p class="western" style="line-height: 150%; text-align: justify;"><span style="font-weight: normal;"><span style="font-family: arial; font-size: medium;">That
means disclosures and sales materials are allowed to be less robust and less detailed. One example
relates to presentation of past returns, modelling, etc.</span></span></p>
<p class="western" style="line-height: 150%; text-align: justify;"><span style="font-weight: normal;"><span style="font-family: arial; font-size: medium;">Professional
standards of care are also lesser because the imaginary big boys are
imagined to be able to take care of themselves. </span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<span style="font-family: arial; font-size: medium;"><span style="font-weight: normal;">Careful
investors will draw the following conclusions from those “facts”.</span></span></p>
<p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Healthy
skepticism is warranted.</span></b></p>
<p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">Verify
first, then give provisional trust, but keep verifying.</span></p><p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">If it seems to be too good to be true, you're probably right. </span></p><p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Begin
by carefully reading the prospectus/offering memorandum.</span></b></p>
<p class="western" style="font-weight: normal; line-height: 150%; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;">I
have had representatives of major firms </span><i style="text-align: left;">misrepresent</i><span style="text-align: left;">
products to me.</span></span></p>
<p class="western" style="line-height: 150%; text-align: justify;"><span style="font-weight: normal;"><span style="font-family: arial; font-size: medium;">During
one pitch, I commented that apparently their prospectus was wrong and
cited “chapter and verse” from the prospectus to contradict the
statement an earnest sales rep had just made.</span></span></p>
<p class="western" style="line-height: 150%; text-align: justify;"><span style="font-weight: normal;"><span style="font-family: arial; font-size: medium;">Whenever
I’m given a 1,000 page offering memorandum for all the seller’s
products with a central definitions section separate from the product
description so that the reader has to jump from here to there to make
sense of a product, my antennae get more sensitive. </span></span></p><p class="western" style="line-height: 150%; text-align: justify;"><span style="font-weight: normal;"><span style="font-family: arial; font-size: medium;">Complexity is not the friend of the investor.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span><b>Be sure you understand the product.</b></span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span>That means you need to do your own research if this is your first "rodeo" with a product.</span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span>But also ask the sales rep to explain the product. </span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span>Be wary of excessive use of jargon which is sometimes designed to deflect questions. Who wants to admit that they don't really understand "vol" or the "greeks" on derivatives?</span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span>As well be wary of vague phrases, waving of hands, and then the implication that a miracle occurs and you get rich.</span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span>The risk section and product/transaction description in the prospectus/offering memorandum can provide a good source of questions. And a check on the what is said in the "pitch".</span></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><b><span style="font-family: arial; font-size: medium;">Presentation
of results that do not comply with CFA Institute GIPS (Global
Investment Performance Standards) should not be relied on.</span></b></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">Non GIPS results can generally be managed to show whatever the seller wants.</span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">GIPS also requires certain disclosures and prohibits certain practices.</span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><b>Make sure benchmarks and historic performance make sense.</b></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">No one beats the market consistently.</span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;">Benchmark selection can affect relative performance.</span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium;"><span style="text-align: left;">See my earlier post on Infinity Q Diversified Alpha Fund.</span></span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;">
<b><span style="font-family: arial; font-size: medium;">If
you do not understand how financial models may be “gamed”, you
really should NOT invest in Level 2 and Level 3 assets.</span></b></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">This
isn’t just about growth and discount rates, but also how
“multiples” that are used to “determine” terminal value can disguise unrealistic assumption about those two previous factors.</span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;"><b>If return is tied to or dependent on derivatives, you would be well advised to make certain you understand the downside risks. </b></span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">Ask the utilities in Texas who found derivatives a rather costly tuition. </span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">Or you could ask the good folks at JBS Spain about the derivatives they purchased.</span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Upward
revisions of valuation should be examined carefully.</span></b></p>
<p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">If
one is being pitched, a very simple question is when the last
revaluation took place and what the direction and impact was.</span></p>
<p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">Amounts,
timing, and the basis for the upgrade.</span></p>
<p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">New
funding provided by the fund manager at a higher valuation should not
be considered as definitive proof the value has actually risen.</span></p>
<p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">Sales
of investments from one of the fund manager’s investment vehicles
to another should be questioned, especially when the sale results in
increasing the IRR of the selling fund. </span></p><p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">Or
sloughing off a dog into a fund that can bear a subsequent loss of
value.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">Yes
this occurs.</span></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><b style="text-align: left;"><span style="font-family: arial; font-size: medium;">Watch
out for debt financing tricks that drive IRRs and presumed value. Oh
and just incidentally affect the fund manager’s compensation.</span></b></p>
<p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">On the “outgoing” cash flow from
LPs: funding LP drawdowns with debt to delay capital calls.</span></p>
<p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">On the “incoming” cash flows to
LPs: refinancing equity with debt to generate a “return of capital”
without any realisation of the investment, e.g., trade sale or IPO.</span></p><p class="western" style="line-height: 150%; margin-bottom: 0in; text-align: left;"><span style="font-family: arial; font-size: medium;"><b>Be sure you understand the skill set of the fund manager and how deals are accessed.</b></span></p><p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">When the fund manager's primary skill seems to be the use of leverage, you may want to consider fund managers with skills in developing the underlying business. </span></p><p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">If the fund manager is buying assets from other funds or via auctions, ask whether he or she is getting a good price? </span></p><p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">If the fund manager is buying an investment from another fund, why does he or she think they can turn another fund manager's "cast off" into gold? And is it credible?</span></p>
<p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;"><b>Be
sensitive to </b></span><span style="font-family: arial; text-align: left;"><b>offers
of</b></span><span style="font-family: arial; text-align: left;"><b>
preferential treatment.</b></span></span></p>
<p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">Once
we had a major </span><span style="font-family: arial; text-align: left;">fund
management </span><span style="font-family: arial; text-align: left;">firm
tell us that they were poised to revalue (upwards) investments in
their existing fund. </span></span></p><p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-size: medium;"><span style="font-family: arial; text-align: left;">We could invest in that fund </span><span style="font-family: arial; text-align: left;">now
</span><span style="font-family: arial; text-align: left;">and
take advantage of the lower current </span><span style="font-family: arial; text-align: left;">(entry)</span><span style="font-family: arial; text-align: left;">
price before mark-up. Thus, earning a "guaranteed" return.</span></span></p>
<p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">Needless
to say, we not only declined the invitation for this investment
opportunity but put them on our “blacklist” on the basis that if
they were going to “screw” their existing LPs, we would be better
off not becoming one.</span></p>
<p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;"><span style="font-family: arial; font-size: medium; text-align: left;">Sometime
later that fund had what might be charitably described as
“disappointing” returns.</span></p>
<p class="western" style="font-weight: normal; line-height: 150%; margin-bottom: 0in; text-align: justify;">
<br />
</p>Abu 'Arqalahttp://www.blogger.com/profile/01296250358695456059noreply@blogger.com0