The "Developed" West - A New Kind of Forthrightness

A quote from the Financial Times on JPMorgan Chase's 3Q10 earnings conference.

Switching between annoyance at one analyst’s use of a “squawk box” to terse replies on JPMorgan’s soaring reserves against litigation and passionate perorations about the bank’s role in society, Mr Dimon displayed his customary forthrightness even if he was not always forthcoming about some of the details.

This was just too good a quote to let pass without comment.  Positively brilliant. 

And, I'd note it sets a high standard for this blog's favorite investment bankers in Kuwait and Bahrain to aspire to.  (And, yes, each word in that sentence has been deliberately chosen).

The "Developed" West - Burger King Kids Banking

"First-Class Business in a First-Class Way"

It's got to be gratifying to work for a first-class firm that labels you a "Burger King kid".

Also on the subject of documentation, which is a frequent rant here, the rule should be very simple:  No note, no foreclosure.    

If making a mistake in drafting a contract is  rookie behavior, losing one's contract is below the level of incompetence.  The Burger King Kids, as the bright executive had it, may be in the executive suite.

CitiGroup and Its Magical US$50 Billion in Deferred Tax Assets

While many in the Developed West are liable to ascribe magical powers to those from the East, the Hindu Fakir, a guru at an Ashram, a bank in Bahrain, there is magic aplenty - particularly of the accounting sort- all over the world.

Today we look at one of the USA's major banks with US$50 billion worth of  DTAs (roughly one-third its capital).  Under accounting standards, Citi has to earn some US$99 billion in taxable income over the next 20 years to fully utilize the DTAs.

Like me I'm sure you're thinking surely there must be an "Islamic" equivalent.  Perhaps a Deferred Zakat Asset.  I'll be watching my favorite financial institutions in Bahrain and Kuwait to see if this shows up in their financials.

In response to a comment from Chapter 11, I'd note that of Citi's US$50 billion in tax credits, approximately US$31.5 billion are disallowed from computation of regulatory capital.  See Note #4 on page 36 of its 2Q10 10-Q.

Global Investment House Hiring - Opportunity of a Lifetime

From one of our readers.

Hello there...

Love the blog, and thought you would find the following email rather amusing, someone I know received an email from Global Investment House, asking them if they'd be interested in joining? I've heard from others that they're madly hiring too, bet creditors are happy with that from a cashflow perspective...

Note, this person has ZERO financial experience, and had not shared their details with any recruiters for over 2 years. It is a blatant cold call!

The email is copied below (names removed)


Dear XXXX,

Good day and greetings.

We had come across your contact in our database, and here at Global Investment House we are looking to hire Kuwaiti professionals. If you are interested to have new opportunity please send me your update profile so we can take it further.


Looking forward to hear from you.



Best Regards,

XXXXXXX
Senior Officer - Recruitment
Human Resources & General Administration

E-mail:
Tel:
Fax:
P. O. Box:
Website:XXXX
(965) 22951
(965) 22951
28807 Safat, 13149 Kuwait
www.globalinv.net

This is what we in the developed West would call more evidence of the "War for Talent".

Transparency: The Missing US$400 Billion in Derivatives

As we in the "developed" (make that "highly developed") West like to do, it's time to preach the virtues of transparency and care in preparing data to those less enlightened and skilled out there.

In that vein, here's a quote from the BIS Publication "Provisional International Banking Statistics First Quarter 2010"  Footnote #5  Page3:

In previous reports, some US reporting banks have failed to fully account for the risk transfers associated with protection bought using credit derivatives. This has been corrected for Q1 2010 only. Therefore, the current data for Q4-2009 and Q1-2010 suggest a much larger increase in US banks' cross-border ultimate risk claims and inward risk transfers than will be shown when the Q4-2009 data have also been revised. The amount of this additional reporting is estimated to be close to $400 billion in the Q1 data.

Apparently, the BIS noticed this when reconciling reports on a country by country basis - there were US$400 billion more of transactions reported with the USA than its own institutions reported. 

The culprits have been identified as the non banks that transformed themselves into bank holding companies in the wake of the global financial crisis (all lower case, especially the first word), e.g., Goldman, Morgan Stanley, etc.

Presumably the result of a failure to understand how to fill up the forms.

Kuwaiti Listed Companies – Who’s on the Boards?

Augustus Pugin Senior and Thomas Rowlandson - Public Domain

In a recent article, Eissa Abdul Salaam at AlQabas published a study on the board seats held by various Kuwaiti families. Here's the more important link to the detailed results.  

The study considers families with 5 or more board seats on listed companies.  It also notes the legal and regulatory requirements to be eligible to be a director as well as restrictions.

At first blush, this report might be considered a way of getting an insight into economic influence in the country, though one has to recall that owners often have a corps of dedicated retainers known in local parlance as رجال النعم who serve in a variety of functions, including as board members. As well, one would expect that certain prominent families, especially those with a particularly noble and regal presence, might be asked to adorn the board of this or that company as happens in the "developed" West.

In any case there is some utility to the report. It gives a snapshot of the prominent families. And perhaps to a limited extent a relative ranking of wealth.

Here's a quick summary.  Note:  I'm using the numbers in the details not the article.  Below is only a partial list.  Those families with  14 seats and above.  As noted above, the AlQabas list extends to  five seats and above - giving a grand total of  583 seats.

Family	# Seats
AlSabah	42
Cadet Branches	37
AlGhanem	30
AlKhorafi	23
AlOsaimi	19
AlBahar	19
Behbehani	19
AlMutairi	18
AlShaya	16
AlWazzan	15
AlKhalid	15
AlHomaidi	15
AlMarzouk	14

Cadet Branches are identified as Sultan, Bin Eissa, AlBadr, AlMutawa by AlQabas.

AlQabas also provides a breakdown of the number of directors, though again it seems there is a difference in totals. The article refers to 192 listed companies. Excluding Non Kuwaitis and parallel market stocks, I believe 198 companies are listed on the KSE. Unless I've done the maths wrong, the total companies accounted for are 186.

 

# Directors	# Companies	Total Directors
4	4	16
5	74	370
6	14	84
7	65	455
8	10	80
9	16	144
10	3	30
TOTAL	186	1179

 

Gulf Finance House - S&P Downgrades GFH Terminates Ratings Services

5 July S&P downgraded GFH to CC.   This should come as no surprise as they had said that if GFH needed to restructure again they would do so.

More importantly, GFH requested that S&P no longer rate them.  S&P has complied.  It's website  shows NR for the rating. To add insult to injury - but not without cause - S&P expressed a negative view at this ratings action. 

GFH's termination of the ratings relationship is more telling than the rating action itself.   It is clear  that  they do not see near term potential for an upgrade.

Asa Fitch over at The National observes:

The move may mark a reversal for what has been one of the region’s most remarkable turnaround stories during the financial crisis. Since being brought in last year, Ted Pretty, GFH’s Australian chief executive, has aggressively marked down the company’s assets, restructured debts and announced plans to sell stakes in property projects and banking subsidiaries to raise cash. Under Mr Pretty, GFH posted $728m of losses for last year and revealed plans to raise $250m this year from asset sales.

In my view the story of any "turnaround" at GFH was largely a work of fiction.  And remarkable only because some believed it.

1. The cold hard fact is that debts are repaid by cold hard cash.  Not "pretty" words or unrealistic scenarios.   GFH's recovery, if any, will come when it is able to generate sufficient cash to service its debt and pay operating expenses.  
2. On that score it does not have a functioning business model and there has been no real cash generation from operations for over a year now.  It's also unclear whether the new model - at this point only an undeveloped plot - is any more viable.
3. That leaves asset realisations, largely sales to repay debt.   But make no mistake asset sales - particularly at the levels required in this particular case - do not build businesses.  They dismantle them.  Few if any companies have shrunk their way to greatness. Not more than a few months ago, GFH told quite a "fish" story of US$420 million in asset sales.  And often as happens in such stories the "big one" got away.  That reflects not only the state of the markets as well the quality of the assets on offer.  
4. As a case in point, you may also remember the "remarkable story" of GFH's US$262 million asset "sale" of its interests in Bahrain Financial Harbour Company to Emar Bahrain.  A sale which garnered only US$40 million in cash.  The remainder of the sale proceeds were land in the neighborhood of the BFH which will be "sold later" or so the story goes.  Interesting to speculate whether the land was owned by BFHC or perhaps by a local royal personage. 
5. A close scrutiny of other assets reveals the majority of the Company's liquidity is pledged for stalled projects.  Perhaps, itself less than a happy indication of GFH's ability to sell the project related "assets".   Besides the blocked liquidity,  there is the real danger that GFH will have to recognize some rather substantial losses when and if it extricates itself from these projects.  Not a cash drain, but something that would definitely cripple its balance sheet.  Possibly cause a breach of its Sukuk covenant to maintain a minimum US$400 million in equity and, thus,  a potential acceleration of  US$138 million.  Drive its Capital Adequacy Ratio below 12%.
6. Liabilities are in little better shape.  GFH's talent for rescheduling also appears to be another work of "remarkable" fiction.  The US$100 million stub on the US$300 million West LB syndicate was "rescheduled" for the lengthy period of six months.  Either because GFH's creditors wanted to keep it on a short leash.  Or because someone believed in an asset sales story which in light of asset quality and market conditions may make Dotcom irrational exuberance look like sober thinking.  Last February it was clear that barring a miracle there was no way that GFH was going to be able to make that payment.  Yet, quite a different story was spun.  And one has to really wonder about the use of precious liquidity to buy treasury shares and buyback portions of the Sukuk whose maturity is in terms of GFH's life span the equivalent of a decade away.

Credibility is a very key asset at any time for a financial institution.  During a restructuring it is even more so.  A cardinal rule of the restructuring process is for the debtor to never promise more than it can deliver as its credibility with creditors, shareholders, regulators and other market participants is eroded.

At some point even the most credulous audience will see through repeated tale tales and yarns.  When that day comes the debtor is in a much worse position that if it had stuck to reality. 

As always, we'll be up bright and early to read GFH's disclosure of this piece of  material information to its shareholders and other market parties via its website and announcements on the various exchanges it is listed on.  Based on past performance, I'm sure we won't be disappointed.

SAMA Governor Denies Saudi Bank "Settlement Deal" with Saad

In an interview with the Saudi Newspaper, Al Iqtisad, HE Dr. Mohammad Bin Sulayman Al Jassir, Governor of the Saudi Arabian Monetary Agency denied that there had been any settlement among the Saad Group and Saudi banks.

Continuing he noted that since AlGosaibi and Saad were commercial enterprises SAMA had not right of supervision - either directly or indirectly.  Thus, it had to rely on the banks for information.  They told SAMA that they had offset the collateral they held against their loans.  The article does not  contain any comment on how much of the exposure was collateralized/offset.   Governor Al Jassir noted that this was something that foreign banks had been doing as well.  His point being that offsetting collateral is a normal banking practice.

He also said that the uncovered portion of both local and foreign banks' exposure remained a problem and that as far as SAMA knew there had been no settlement between Saad and its creditors.

Some observations:

1. Banks get to choose on what basis to lend their clients:  secured or unsecured.
2. Lenders with security (and properly drafted legal documents) have the right to take possession of and realize the security upon the occurrence of certain defined events.
3. It may be that Saudi banks were relatively more collateralized then foreign lenders.  As a side note, one of the interesting patterns in lending is that often foreign lenders impose fewer conditions on borrowers than local lenders.  Generally, those foreign lenders, often Western, justify this by their greater sophistication in underwriting and their more developed risk management skills.  Of course, competition plays a role.  Pricing and requirements are the two ways to compete for a borrower's business.
   

Manifest Delusions - The West, The Developed West

Having commented yesterday on continuing manifest delusions in Dubai, it is only fair to cast an eye outside the region.

Today's FT regular feature "The Short View" contains the following lead paragraphs:

"There was a sense of relief in the markets yesterday. Abu Dhabi's $10bn bail-out of Dubai was cheered while Greece, the wobbliest eurozone member, strove to reassure investors of its plans to manage its own parlous finances.

Put them together and they look like a calming of the sovereign risk fears that arose last month. Of the two, Greece is the more important as an example of the danger posed by the market's lack of faith in a government's ability to manage its spending."

The FT has captured the market's reaction quite well.

One wonders (well, at least AA does) what the "efficient" markets are thinking.  Or precisely if they are thinking.

A borrower with by some accounts $100 billion in debt has avoided a default by the timely kindness of the Shaykh up the road.  But the charitable contribution was for only for one-tenth the sum.  Upcoming debt maturities still loom.  The value of the borrower's largely debt-financed assets - which are composed primarily of overpriced and extravagant domestic and foreign adventures - are still depressed and unlikely to rise in value to their original cost in the next few years.   Operating cashflow remains weak - ignoring of course unrequited transfers as defined in balance of payments terminology. 

As far as I can see, there has been no fundamental change in that borrower's debt position or its financial resources., including cashflow which according to my experience is what most debtors use to settle their obligations.    There is even some disturbing indication that the borrower has yet to put aside its own delusions.  Yet markets are euphoric.

A politician from another borrower in the "developed West" has stated what everyone with a modicum of intelligence has known about his country for years.  He has vowed to do something about it. 

Yet again markets are relieved and calmed.

Developing a severe case of financial euphoria based on last minute bailouts and the apparent magical belief that they will continue seems a bit of an over reaction, one potentially hazardous to financial health.  Though I suppose there is something to be said for consistency.  After all by and large the  original commitments seem to have been based on the same sober theory.

Even more puzzling is what charitably might be described as naive credulity in the promises of politicians. While as the mandated warming on finance literature says "past performance is no guarantee of future results", it does seem that a careful investor would scan the historical record for some insight into probabilities.  In AA's experience a politician's promise generally has less worth than the famous implicit guarantee.

All this  I suppose explains the Cobalt IPO.   A company with a postulated market value of US$5.3 billion despite the lack of any current revenues and no prospects for revenue for the next two years. The shares of which are described by one wag as a lottery ticket.  

Sadly, I'll have to turn this down.  I've just received a compelling email investment proposal from a chap in Nigeria.  And not only will I be making myself rich but I will be helping out someone retrieve his father's ill gotten gains temporarily blocked by unsympathetic authorities.  But prudent investor that I am, I'm not putting all my money in just one bright idea.  I've got another email today and for a small sum, I can buy a share in ElGordo ticket.

I see an apartment in the Palm in my future.  High floor only.  A very high floor.  AA does read more than just the financial press.

Aidan Birkett - Dubai World - Chief Restructuring Officer - Cultural Biases

An article from Maktoob Business on the cultural and other constraints to be faced by Birkett in Dubai.

If you read the article closely, you'll notice a strong undercurrent:  having made such a hash of things, the locals obviously can't be trusted to work their way out of the problem.   Culturally, they are just not up to it is the message.

So naturally we need to find an ex-region savior - preferably an expert from the West wearing a business suit.  To come in and sort things out.  To set the locals straight.  But will these incompetent locals let him save them from their follies goes the story?  Hence, the hand wringing over the obstacles in Mr. Birkett's path.  

But what should we then make of the recent "performance" in the more sophisticated financial centers  - the  subprime crisis, covenant lite loans, and assorted other manifest absurdities?  Where it should be  noted the amount of funds at risk in the Dubacle is but a rounding error in relation to the larger Western sums.

Will we soon be hearing calls for the dispatch of some sober looking chap in a thaub and ghutra to set the benighted fools in New York, London and other financial capitals straight?  Ever sensitive to the psychology of the less developed world, AA could suggest two Arab bankers who would arrive wearing business suits so as not to disturb local sensibilities in Europe or the States too much.  Dr. Naaman Al Azhari or Hassan Juma.   Let's hope that the locals' quaint but irritating folkways don't get in the way of  either of these khabir's work. 

It's important to be very clear about two things.

First, Mr. Birkett's position. 

He was hired as the Chief Restructuring Officer to come up with a restructuring plan. 

He is not the CEO to whom the CRO reports.  He is not the Board of Directors to whom the CEO reports.  He is not the shareholders to whom the Board reports.

He was not hired as a replacement for Shaykh Mohammad.  Nor did Shaykh Mohammad give him his shares in the company.

He is an employee.  He will give his advice and his client will either accept it or reject it.   In effect he is a mustashaar. 

Second, the capabilities of the locals in the GCC.

It's also important to understand that the people in the region and those in Dubai are no more a collection of incompetent fools than the financial titans in the West.  And no less able to take sage and sound advice.  And, yes, also subject to the same constraints that sometimes result in compromises between what should be done and what can be done.