GFH Bahrain: What’s Changed Since 2010?

Heading Up But Still Lots to Climb

I last posted about GFH in 2010. 

At that point, its financials were a mess.

Along with Global Investment House and The Investment Dar it was part of the trio of once high-flying regional investment banks that hit the wall at high speed. 

What’s happened since then?   

On a positive note, GFH escaped the fate of Global Investment House.  Its shareholders remain in control, cases have been lodged to recover funds, additional capital has been raised, and assets have not been stripped off to creditors. 

Nor is GFH in what would appear to be the nearly persistent vegetative state of The Investment Dar –a chronic condition punctuated by infrequent bouts of apparent lucidity in which TID announces yet another restructuring plan. Sadly during those periods TID is insufficiently lucid to issue financials, the last to see daylight being from FYE 2009, or to even update its website.  Love the Board members’ pictures.  Despite the difference in surnames, three of them look remarkably similar.

So how has GFH performed since 2010?  

Short answer:  not so well. 

On page 36 of its 2015 Annual Report, GFH kindly provide five years of financial highlights.     

GFH ROE 2011-2015
	2011	2012	2013	2014	2015
GFH	0.22%	3.26%	-4.00%	4.79%	1.80%
AA	0.22%	3.26%	-4.01%	2.62%	-0.83%

As you see from the above, AA has a different analysis of the last two years’ ROE.

1.      For 2014 and 2015 GFH used total net income— both GFH shareholders and those of non-controlling interests (NCI)—and equity attributable only to shareholders of GFH (excluding NCI’s share of equity) to determine ROE. 

2.      AA used net income—actually a loss of US$5.5 million—attributable only to shareholders of GFH and like GFH used equity attributable only to GFH shareholders.   Why? Because the point is GFH’s ability to generate income for its shareholders.  Also this choice is related to the nature of consolidated statements as outlined in #5 below. 

3.      As consolidation only affected 2014 (restated) and 2015 results, those are the only two years where there is a difference in calculation methodology.  

4.      Both GFH and AA used beginning and end of period equity to determine a year’s “average” equity to calculate ROE.  Because there were significant capital increases over the five year period (an almost three times increase), this method overstates ROE for certain periods because it understates average equity.  But what’s important here are trends, directional rather than locational statistics.

5.      One very important note:  consolidated financials are an accounting construct.  They are designed to provide a way to analyze the economic performance of a “group”.   But the consolidated "group" is not a legal entity.  That is, the group does not really (legally) directly owns the assets or receive the income shown.  Parent only or individual financial statements show the legal status ownership of assets, cash flows, etc.  Take a look at note 34 in JPMC’s 2015 AR and compare the data to the consolidated financials.  Parent revenues are largely dividends and assets are largely investments. This fact has important implications for investors and creditors that buy holding company equities or unsecured debt securities. Or for lenders to holding companies.  Access to cashflow, access to assets, priority in bankruptcy, responsibility for subsidiary/affiliate debt (absent parent guarantees) are some of these. 

Whether you take GFH’s or AA’s calculations, performance has been “disappointing” (euphemism of the post).  Earnings have been volatile.  ROE has been subpar.

Some of this is economic:  a “weak” (second euphemism) legacy portfolio, the cyclical nature of GFH’s businesses, etc. 

Some of this is a function of internal management: legacy leadership—responsible for the high risk portfolio—was only conclusively removed in late 2013, no doubt delaying remedial action.  GFH has also conducted successful legal actions against “two of its ex-Chairmen for bonuses illegally obtained during the period 2005-2008”  which some readers may interpret as indicating less than the ethics one might hope to find in a self-described Shari’ah compliant institution.   الله اعلم

A coming post will take a look at GFH’s attempt to address its problems.  

The Trouble with Macroeconomics

Good Old Pierre-Joseph Didn't Give Up

If you unfortunately missed this article and the surrounding controversy, AA has your back. 

Funny thing about the controversy Dr. Romer is not the first economist to criticize economics, though perhaps his naming and shaming of specific practitioners is what has the economists’ guild in an uproar. 

Here’s a link to his thought-provoking article “The Trouble with Macroeconomics”   and his bio . He was appointed this year to be the World Bank’s Chief Economist. 

His paper deals with the “identification problem” which is tech speak for determining that an equation or model is specified properly.  That is, that the major causal factors have been identified and their relative causative impacts properly determined.   If these factors have been properly “identified”, then the economist understands the underlying processes and can use model to predict the results of certain (policy) actions. 

Thus, the model is not only descriptive but also normative.   

Romer levies a savage critique against macroeconomics spiced with some positively delightful “digs”:

1. comparison of certain macroeconomic “principles” to the long-abandoned theory of phlogiston
2. a call out of “FWUTVs” (facts with unknown truth values) assumptions that are treated as facts without any proof-- particularly relevant in this post-truth age
3. analogies to dogmatic beliefs or religions where theory “trumps” (I’m allowed to use that word) the truth

Well worth a read. 

Some quotes to whet your appetite.  Headings and boldface are AA’s. 

One quibble with Dr. Romer.  There’s always at least one quibble when AA is involved! 

Economics is not a science as that term is properly understood.  Complex systems cannot be reduced to descriptive much less predictive models because of the interplay of causes and the interplay of effects.  That means economics is more a “social science”. 

General

“For more than three decades, macroeconomics has gone backwards. The treatment of identification now is no more credible than in the early 1970s but escapes challenge because it is so much more opaque. Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as "tight monetary policy can cause a recession." Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes. A parallel with string theory from physics hints at a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.”

Assume Your Way to Truth

“Relying on a micro-foundation lets an author can say, ‘Assume A, assume B, ... blah blah blah .... And so we have proven that P is true.’ Then the model is identified”

Comparison to the Theory of Phlogiston

“Once macroeconomists concluded that it was reasonable to invoke an imaginary forcing variables, they added more. The resulting menagerie, together with my 5 suggested names now includes:

1. A general type of phlogiston that increases the quantity of consumption goods produced by given inputs  An "investment-specific" type of phlogiston that increases the quantity of capital goods produced by given inputs 
2. A troll who makes random changes to the wages paid to all workers 
3. A gremlin who makes random changes to the price of output 
4. Aether, which increases the risk preference of investors 
5. Caloric, which makes people want less leisure

With the possible exception of phlogiston, the modelers assumed that there is no way to directly measure these forces. Phlogiston can in measured by growth accounting, at least in principle. In practice, the calculated residual is very sensitive to mismeasurement of the utilization rate of inputs, so even in this case, direct measurements are frequently ignored.”

Seven Characteristics of String Theorists (Physics) and Comparison to Macroeconomists

1. “Tremendous self-confidence
2. An unusually monolithic community
3. A sense of identification with the group akin to identification with a religious faith or political platform 
4. A strong sense of the boundary between the group and other experts 
5. A disregard for and disinterest in ideas, opinions, and work of experts who are not part of the group 
6. A tendency to interpret evidence optimistically, to believe exaggerated or incomplete statements of results, and to disregard the possibility that the theory  might be wrong 
7. A lack of appreciation for the extent to which a research program ought to involve risk

The conjecture suggested by the parallel is that developments in both string theory and post-real macroeconomics illustrate a general failure mode of a scientific field that relies on mathematical theory. The conditions for failure are present when a few talented researchers come to be respected for genuine contributions on the cutting edge of mathematical modeling. Admiration evolves into deference to these leaders. Deference leads to effort along the specific lines that the leaders recommend. Because guidance from authority can align the efforts of many researchers, conformity to the facts is no longer needed as a coordinating device. As a result, if facts disconfirm the officially sanctioned theoretical vision, they are subordinated. Eventually, evidence stops being relevant. Progress in the field is judged by the purity of its mathematical theories, as determined by the authorities.”

AMF Study: Bank De-Risking in the Arab Region -- Big Deal or Not?

AA: As Usual on Top of the Story.  It Looks a Lot Scarier Up Here. 

In an earlier post I outlined why the Hong Kong Monetary Authority's appeals to its banks to "manage correspondent risks" rather than "de-risk" were likely to fall on deaf ears. Today I’d like to continue exploration of that topic by looking at September 2016 Arab Monetary Fund/IMF/IBRD study “Withdrawal of Correspondent Banking Relationships (CBRs) in the Arab Region”. Context – Survey Coverage The report is based on a survey of 216 banks in Algeria, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Mauritania, Morocco, Oman, Palestine, Qatar, KSA, Sudan, Tunisia, UAE, and Yemen.  One country was excluded from “some analysis” as it is “perceived as a high risk area”. AA is guessing Yemen, though it is not the only “high risk” name in the list.       Details Apparent Modest Impact 55% of the banks surveyed did not experience any problems with closure of CBRS.  1% did not respond. 5% reported an increase in CBRs.  Only 39% (84 out of 216 banks) had CBRs terminated.  Of this latter group roughly 63% (53 banks) found replacement CBRs, and another 17% (14 banks) developed “workarounds”.  Perhaps an indication that all correspondents are not de-risking? Only 20% (17 banks or 8% of the 216 banks surveyed) did not find a solution.    On this basis, it doesn’t seem that de-risking in MENA is a major problem at least at the macro level. Two caveats.    First, “limitations” in the survey (see below) preclude making a definitive assessment on impact as well as on the motive(s) for de-risking.   Second, the number of accounts closed increased over the survey period 2012-2015 (Figure 5), indicating that affected banks are increasingly being disconnected from international finance.          Primary De-Risking Banks As expected US banks were the main de-riskers followed by the UK and Germany. Interestingly of the ten countries’ banks named as de-riskers, banks in Saudi were in 4th place and the UAE in 8th place.  AED and SAR accounts were closed. It’s not clear from the survey if the UAE and Saudi banks are solely responsible for the closures.  It doesn't seem unreasonable to assume that they were at least partially responsible. If so, an intriguing but unanswered question.  Were their actions motivated by these banks’ own concerns or local regulations? Or are they defensive measures to prevent their foreign correspondents from “de-risking” them? Survey “Limitations” As outlined below, these limitations lessen the survey’s utility. Presumably some of this reflects a conscious decision to avoid creating a knock-on effect and potentially worsening the situation by providing too much public information. Now to the limitations. The size and location of the affected banks is not disclosed.  If major banks are being de-risked, the impact is likely to be greater than if smaller banks are.  If the de-risking is focused on one or two countries, then what appears to be manageable problem is not –at least for the affected countries. It’s highly likely that correspondents did not provide a concrete reason for terminating a CBR. But rather used such words as “strategic review of our business”, “change in focus”. If you ever have had to let people go or were on the receiving end yourself, you know that these events are couched in euphemisms like “downsizing”. One doesn’t fire an employee.  Rather his or her position is “eliminated”.  Nothing personal there at all.  We’d love to have you but we don’t have a “position” for you.  The same with closure of accounts.  If the reason for the firing or closure of an account is not directly “personal” or concrete, it’s hard for the affected party to mount an objection.  How do you argue your case?  Do you really expect the institution to change its board-approved strategy so you get to retain your job or account?        To get around this likely scenario, survey respondents were asked to ascribe motives to the termination of CBRs.  The survey provides 16 possible “drivers” of the decision to terminate CBRs.  Respondents were free to select more than one and were asked to rank them from 1 to 16--which AA takes as an invitation to rank all of them.  Thankfully not every respondent did.  There were some 234 votes from the 84 banks.  Only 17% of the maximum possible number of responses.    There are two problems though.    First, respondents are not only being asked to read their correspondents’ minds, but also to do so with a high degree of precision. Second, many of the drivers are similar.  One might well need an electron microscope to parse these in any practical sense.  This compounds the dubious first assumption of mind reading skills. Some examples of similar/duplicative motives.  Note the numbering below follows the rankings on pages 11-12 in the report.    Driver 1 (overall risk appetite) seems to include Driver 4 (change in sovereign risk rating).  As to 4, if indeed it is an accurate assessment, then shouldn’t all banks in Country X be affected more or less at least by the same correspondent? Thus, one would find that all or most banks in Country X had their CBRs terminated.   If that’s not the case (and the AMF has the data), then this Driver should be excluded.     There are 10 Drivers related to regulatory reasons. Drivers 2, 5, 6, 8, 9, 11, 12, 14, 15, and 16 overlap to a large extent on AML/CFT, though those aren’t the only regulatory issues mentioned. It boggles AA’s mind that the survey constructor thought that participants would be able to provide such granular assessments of what their correspondents’ motives were.       Third, it also seems (note that caveat) that in ranking drivers no adjustment was made for this overlap.   The summary puts AML/CFT in fifth place.  This seems based Driver 5 being in fifth place by number of “votes” while ignoring the votes for all the other AML/CFT related drivers.     I think it would have been better to have a few very broad primary motives, e.g., credit, profitability, regulatory, refusal/failure to provide requested information.  Participants could have then been asked to ascribe a percentage to each.  This more limited menu probably would be not only easier but more appropriate given the inherent limitations of mind reading.     Follow-up questions could have been used to attempt to parse sub-drivers with economy in options.  For example, was refusal/failure to provide requested information due to regulatory impediments (bank secrecy) or internal bank decision?  Were regulatory concerns focused on AML/CFT, sanctions, or other (e.g. FACTA)?  Interestingly Driver 16 and part of Driver 8 consist of failures by the respondent bank to provide sufficient AML information, in which case one might argue that the correspondent was obliged by regulation to terminate the CBR or decided failure indicated not only bad faith but probable bad behavior.    The same with Driver 15 imposition of sanctions.  DPAs would be another example. This is an important point.  If the correspondent is "forced" to withdraw services, this is not "de-risking" but compliance. Focusing a question on this issue would be most helpful.   The survey noted that banks that found replacement CBRs or developed workarounds faced increased costs, but no data is provided on the relative increase in costs. All this being said there is useful information in the study.  Hopefully, it will serve as a basis for further examination of this issue with perhaps answers to some of the above open items as well as a fine tuning of questions. There's an Occasion Every Day! One quibble.  There’s always at least one and usually more with AA. 1.3 Hence, the “de-risking” phenomenon involves financial institutions’ practices of terminating or restricting business relationships with clients or categories of clients to avoid rather than manage risks. It is a misconception to characterize “de-risking” exclusively as an anti-money laundering/ combatting terrorism financing issue. In fact, “de-risking” can be the result of various drivers, such as concerns about profitability, prudential requirements, anxiety after the global financial crisis, and reputational risk.    The AMF is right to indicate that the motives for “de-risking” don’t relate solely to AML/CFT.  Sanctions and other regulations are important as well. I’d argue that termination of unprofitable relationships is not “de-risking” nor is restructuring/eliminating lines of business to meet prudential regulations (increases in capital charges).  That’s simply common business sense.  If one can’t make a profit selling a good or providing a service, one stops doing so if there is no way to increase pricing or lower costs sufficiently.  No doubt many of the small CBRs being tossed do not meet internal ROA targets and would require massive increases in pricing to do so.  At some point too banks like any business need to focus on key LOBs and customers.  “80% of the revenue comes from …”  If you've been around long enough, you know the last bit to that sentence and the business strategy it supports.  "Dabbling" or "hobbies" (my mentor’s descriptive terms) divert resources and attention from more profitable customers and LOBs. Also it’s not clear to me how anxiety is playing a role. Clearly any regulatory/prudential anxiety is already covered by those topics.  If there are concerns about credit quality, then measures theoretically could be put in place to cover these.  Pay against receipt of funds only (no overdrafts), require cash collateral for residual risks (check deposits bouncing, for example), and increase pricing for the additional special handling required.  But, if a relationship is marginally profitable, what's the point of all of this when the time and effort might be spent on other customers or LOBs where real money could be made?  And when 100% of the risks are unlikely to be covered despite all the elaborate risk management?  But let's assume a correspondent exerts the effort. At this point, “risk management” might result in making an offer that can’t be accepted, equivalent to withdrawal of CBR. No doubt sparking the argument that “risk management” of this sort was really disguised “de-risking”.

Death of Thailand’s Beloved King – Why Didn't Bahrain and Kuwait Embassies Fly Their National Flags at Half-Staff?

Picture Courtesy of Akh  Abu Arqala  Note the Flag of Greece is at Half-Staff

Powered by more than 2,600 journalists and analysts in more than 120 countries, another Suq Al Mal exclusive.  (OK, an overstatement.  AA’s brother is on a strictly business trip to Bangkok).

AA can now report that last week for at least three business days both the Bahrain and Kuwait Embassies in Bangkok have not been flying their national flags at half-staff to participate in official mourning for Thailand’s beloved king. 

A letter to the editor at The Nation indicates that this has been going on for some time and other GCC nations have not lowered their flags.

At least as far as Bahrain an interesting development given the close relations between the two countries and the particular fondness of Bahrain’s Prime Minister for Thailand. 

HRH Shaykh Khalifa personally conveyed the condolences of the government and people of Bahrain on 18 October.  While not the first representative of a foreign nation to pay condolences in person, early enough to show the extent of his feelings

So why didn't Bahrain's Embassy fly its flag at half-staff?

AA Facing Arrest!

AA Can't Do Hard Time

Well, the joy from the Cubs victory was short-lived indeed.

I received the following email from FBI Director “Sir. James B. Comey, Jr.” using his work email at friend.ocn.ne.jp.  No doubt a new security measure to prevent TISVP from “hacking” him.  And I’m assuming the lapses in language are also a security ploy. 

OFFICIAL LETTER FROM FBI NEW YORK

Your fund was received at JFK airport and necessary fees/charges has been paid by sender except $75 for CCC, but a lady Janet came forward claimed you sent her to claim your fund, is it true, did you order her to pay fee for CCC? Also be informed that we came to an agreement with the U.S Custom Authority at (JFK) John F. Kennedy Int'l Airport NYC that you will send fee latest tomorrow, else your fund will be hand over to her while you will be arrested for assigning her without informing us. Just click reply to reply back to us immediately OK.

Yours sincerely
Director-Sir

Unfortunately I missed the deadline.

I’m hoping for a Club Fed berth.  I hear the internet is much faster and reliable there than elsewhere in the system.

Or alternatively a Presidential pardon.

Uber: First Class Business in a First Class Way

Unfortunately No Longer Watching or Investigating

If you know your financial history, you’ll recognize the riff on JP Morgan’s famous quote (later appropriated by David Ogilvy) before the 1933 Senate Banking Sub Committee hearings, immortalized here at JPMC’s website.  

Here’s another:

“Some bankers are not as observant of this code as they should be; but if, in the exercise of his profession, the banker disregards this code – which could never be expressed in legislation, but has a force far greater than any law – he will sacrifice his credit. This credit is his most valuable possession; it is the result of years of fair and honorable dealing and, while it may be quickly lost, once lost cannot be restored for a long time, if ever. The banker must at all times conduct himself so as to justify the confidence of his clients in him and thus preserve it for his successors.”

A powerful statement on bankers’ ethics and sober behavior. 

A reconfirmation, even though none is needed, of the imaginary power of the market to self-regulate.

Assuming you know the reasons for the 1933 hearings, you might be forgiven for thinking that there was a lack of sincerity in these words.  AA certainly forgives you.  

If you take them at face value, then I’d suggest perusing the Sub Committee’s report.

In a related story, 7 November Bloomberg reported  that two banks declined to participate in Uber's IPO.  Boldface courtesy of AA.   

“The potential fees and reputation boost that could come from working on Uber Technologies Inc.’s initial public offering are the stuff of bankers’ dreams.

Yet at least two investment banks passed on selling shares of Uber to their high-net worth clients -- shares eventually sold by other banks in January -- because the ride-share company wasn’t willing to provide financial details about its business, people with knowledge of the matter said.

JPMorgan Chase & Co. and Deutsche Bank AG both turned down the opportunity to offer their wealthiest clients the option to invest in Uber, said the people, who asked not to be identified because the information is private.

Bank of America Corp. and Morgan Stanley ended up selling the shares earlier this year through those firms’ private wealth divisions.”

Imagine thinking that investors should be given financial information if they are being asked to give money to a company. 

What ever happened to trust? 

Does this mean that the participating banks in the IPO would be happy to lend Uber money without financial information? 

Or is it only their customers who are expected to part with their money without information like some investors in at least one UAE bank? 

In any case kudos to JPMC and DB.  

千里之行，始於足下   (A journey of 1,000 li begins with a single step). 

But no matter how auspicious the beginning, it takes more than one step to reach the goal.  

Stunning Revelations of Apparent Corruption in Ukraine

Imagine How Shocked He'd Be by Corruption in Ukraine

On 31 October The Guardian reported “Ukraine stunned as vast cash reserves of political elite are made public”.

Two years after angry Ukrainians deposed Viktor Yanukovych and broke into his vast, opulent residential compound outside Kiev, revelations thrown up by a new system that requires government officials to declare their wealth and property online have led many to suspect the new elite are no better.

Cash hoards, collections of expensive watches, a Faberge egg or two, a Nazi SS dagger (what sort of Eastern European politician has Nazi souvenirs – oh, sorry this is Ukraine), a church, lists of offshore companies.  And laughable declarations by some politicians that they were living off their government salaries.

AA was stunned as well though for a different reason. 

It’s almost as if The Guardian published the article “Ukraine stunned as sun rises in East”.

Corruption in Ukraine is as commonplace as rain in London or the sun rising in the East. 

It is the one policy that the “pro-Western” and pro-Russian politicians in the country agree on, though of course they remain in sharp competition over the spoils of depredation of the country.  Both share an apparently unbounded kleptocratic avarice that exceeds the usual “beak wetting” by elites.  An avarice that destroys the wealth of the country and inhibits development.      

Given the damage that the previous “pro-Western” Orange government visited upon the country– the wrecking of an already fragile banking system and the sweetheart deal given to Gazprom by the braided hair lady—are Ukrainians really stunned by corruption among the current crop of self-proclaimed pro-Western politicians? 

AA is stunned.

Corporate Crime: The End of Personal Responsibility

No One Is Responsible

Matt Taibi has an interesting article over at Rolling Stone "Too Smug to Jail".

Here's a quote that he attributes to former Attorney General Eric Holder.

"It remains true that, at some institutions that engaged in inappropriate conduct before, and may yet again, the buck still stops nowhere. Responsibility remains so diffuse, and top executives so insulated, that any misconduct could again be considered more a symptom of the institution's culture than a result of the willful actions of any single individual." 

Worth a read.