Gulf Finance House - Financial Delusions

GFH held its Ordinary General Shareholders' Meeting 24 March.  

Or as GFH described it: "successfully conducted and concluded its Annual General Meeting (AGM) and has secured its shareholders’ support and agreement to the Bank’s strategy to return to profitability."

There were some press reports that the shareholders' had not voted for the customary discharge of the board of directors for their conduct during 2009.  This is not correct.  Apparently, one shareholder refused to vote "yes" on this agenda item.  Under Bahraini Company Law, such a shareholder needs to ensure that his objection is formally recorded in the minutes for it to have legal standing.  Failure to do so means that later he cannot take any action against the Board.  Registering his objection provides him a theoretical legal "base" for any subsequent action he wishes to take in the courts or with regulators.   However, if only one shareholder has so objected, it's unlikely this will result in anything threatening to GFH.

One quote did catch my eye.  

The Gulf Daily News quoted Dr. Janahi on the difference between real and and what I guess he considers imaginary losses.

He said that while last year was particularly difficult across the globe, and particularly for GFH, the bank had in fact only suffered real losses of $72 million if you stripped out asset right downs.

Those who read GFH's 2009 Annual Report will recall that the net loss for 2009 was some US$728 million.   With a bit of financial engineering, Dr.Janahi has transformed this loss into just a mere US$ 72 million.

I thought I'd highlight this quote because there are a lot of people out there who think that non cash write downs of assets are losses.  And without the benefit of Dr. Janahi's theory of corporate finance these people may be needlessly suffering.

So you really didn't take a loss if you took a non cash charge on:

1. That Lehman Brothers or Bear Stearns stock you bought.
2. Those "AAA" related mortgage backed securities you bought.  This will I believe be particularly comforting to shareholders of GIB and ABC.
3. That apartment or house you bought which isn't worth what you paid for it.
4. Or those GFH shares you bought for KD1.000 in February 2008 which now trade at KD0.068.  (That's right 6.8% of what your cash outlay was).  Especially these.  Under Dr. Janahi's new corporate finance theory, you really haven't lost at all because the decline in value was non cash.

At least that's what the good Doctor would have you believe.   It's an application to matters financial of the theory that if you don't recognize a problem it doesn't exist. 

Not sure I'd buy any investments from a firm that believes this.