Market Commentary: Greensill -- The Critical Difference between Insurance and a Guarantee and Why It Matters

 

An Unhappy Outcome

Since I haven’t seen anything on this topic in re Greensill, I thought I’d offer a few thoughts on how the fundamental difference between (1) a guarantee of payment and (2) an insurance policy affects the Greensill “situation”. 

And how it might motivate actions by participants in this unhappy event.

The difference between these two instruments is frequently misunderstood, including by supposed finance professionals. Hopefully, this post will fill in any extant knowledge gaps.

A guarantee of payment (as opposed to a guarantee of collection) is a legally binding obligation by the guarantor to make payment to the guaranteed party if the debtor does not make a scheduled payment. Proof of the debtor’s non payment is generally fairly “easy” to make. Usually then the guarantor makes payment without undue delay.

An insurance contract is a legally binding obligation by the insurance company to pay the policyholder if the policyholder submits a valid claim.

Keep those last two words in mind. 

The insurance company reviews the policy conditions, the insured’s (or policyholder’s) actions, and makes the initial determination of the validity of the claim. Some policyholders have been known to complain that such assessments seem to move at a glacial pace.

As that should imply, the insurance company has more legal defenses against payment than a guarantor. And its payment is not as fast given the time to review the claim.

The insurance policy spells out the conditions for validity.

For example, in obtaining the policy, did the policyholder make a material misrepresentation or fail to disclose material information that would reasonably have caused the insurance company to refuse to write the policy? In such a case the entire policy is invalid.

Did the policyholder fail to take reasonable steps to prevent the loss?

For example, if he left his Maybach unlocked with the key in the ignition and his insurance company knew this fact, they would likely decline the claim for theft.

If she routinely stored gasoline in her villa and filed a claim for fire damage and the insurance company knew this fact, the result would be the same.

Did the policyholder take reasonable steps to mitigate damages?

When the fire broke out, did she call the fire department? Or just let the villa burn down?

If his trade counterparty was in financial difficulty and he should have been aware, did he shorten payment terms, ask for collateral, lower his credit limit for aggregate outstandings?

There may also be other specific policy exclusions: strike, riot, civil commotion, actions of political entities, foreign exchange controls, etc.

We can therefore expect that Tokio Marine and other insurance companies will be carefully reviewing their obligations under any outstanding policies on Greensill related debt. 

I saw in today's FT (23 March) that Tokio Marine had opined that the policies might not be valid. 

Today (2 April) the FT reported that Grant Thorton acting as administrator for Greensill had been unable to verify certain invoices underpinning loans to Liberty Commodities - part of Mr. Gupta's group.  

Actually, the article says that several firms whose names appeared on invoices denied any commercial relationship with Liberty.  You can guess that this means that any "insurance" on these invoices is invalid.

One would of course have to review the actual policies and the respective governing laws to determine the defenses the insurance companies might have.

But I wonder if it’s possible that policies issued in excess of underwriting limits might be one? 

Part of that might turn on whether Mr. Brereton was working for Greensill (as an insurance broker) or for Tokio Marine (as its employed underwriter).

As well one can imagine Credit Suisse fund managers' angst over the difference between insurance and a guarantee as well as potential liabilities that might arise from potential "defects" in disclosures in selling documents vis-a-vis disgruntled clients whose attorneys will be going over said documents carefully.

Keep up to date on developments.  

The FT continues to follow the Greensill saga with an interesting article on Mr. Brereton earlier this week.

Market Commentary: Tesla "Loses" One-Third of Its Value

 

Make Sure Your Weighing Machine is Properly Calibrated

Just a few days ago, I read courtesy of Reuters that Tesla had lost one-third of its value. 

Shocked, I rushed to read how such a loss had occurred.

Had Brother Musk misplaced or “lost” the “code” to Tesla’s Bitcoin account?

Did meteors strike Tesla’s factories, wiping out needed capital assets?

Did Lucid leapfrog Tesla's self-driving technology?

I read on.

Rather the article was about the decline in the price of Tesla stock.

The writer of the headline apparently is a naive adherent of the efficient market theory conflating stock prices with value.

So what is the point?

There is a difference between the price of a stock and its (intrinsic) value.

Many tragedies in the investment world have occurred because of a conflation of the two.

Market sentiment plays a large part in the price of a stock.

One day an NMC or a Wirecard are flying high. The next day they are not.

When 911 occurred, prices on the NYSE dropped dramatically forcing the closure of the market.

In both cases there was a wide gap between value (reality) and price (sentiment).

Prior to the price decline NMC and Wirecard had high prices, but no value, unless one were to count negative numbers.

In the second case, the stocks on the NYSE as a general group did not suffer any real loss of value. Their prices just diverged from value.

Earlier this year, one of my colleagues gave me a JPMorgan research piece on Tesla which posited a value of some USD 160 or so a share.

JPM had computed the value using multiple “different” methods, though as Aswath might tell you many of these seemingly independent methods are really fundamentally linked.

I found it entertaining but not convincing reading. The JPM research piece not the Professor's. 

A sum of the parts analysis in a distressed sale might have been more illuminating.

Market Commentary: Bill Gates on Biden's USD 1.9 Trillion Covid Relief Bill

Answers to All Your Questions

Announcing a new feature here at SAM: AA’s trenchant commentary on news and developments in the "market".

I saw on the internet about two weeks ago a Fareed Zakaria interview in which he asked Bill Gates to opine on the Biden USD 1.9 trillion stimulus plan.

I was surprised.

Prior to that, I hadn’t known that Bill Gates was an expert on economics.

As Phil Rosenzweig can tell you, success in one field, particularly one in which an individual makes billions, automatically confers unique knowledge in almost every other field on that individual or at least the appearance of such knowledge.

Often such knowledge is attributed by folks who one hopes should know better.

Given Fareed’s academic and professional focus on foreign affairs, I was surprised that he did not seize the opportunity with Bill to heal an unfortunate rift in the Middle East by asking Bill to provide the definitive analysis of the meaning of “غَدِيْر خُمّ “ and “أَهْل ٱلْكِسَاء‎ “.

Or perhaps give his solution to the Korea issue.

Sadly, for whatever reason, he did not.

One or is that two for the “missed opportunities” file?

I, of course, would have had my own set of different questions.

Before outlining these, I need to make a material disclosure.

Devoted readers of this blog (I’m counting bots so I can use the plural) know that there is a bit of bad blood between Bill and me.

Sometime back I was expecting advice from him on what I should be having for dinner, hoping to draw on another area of his wide ranging expertise after my foray in a mall bookstore's business books section.

Advice that sadly never came.

Madame Arqala, as she so often does, did rescue me on that occasion.

Despite a bit of lingering rancor on that failure, I would have straightaway asked Bill what strategy he would employ as Arsenal’s new head coach to ensure that they repeatedly won the Premier League, the Champions League, etc.

All in the hopes that Brother Stan was watching. Or might see the interview later on the VAR.

I'd probably have moved on from there to ask him to opine on a sharp difference between my elder wiser brother (expert in many thing Asian though clearly not on pizza) and me over the best pizza:  deep dish or thin crust. 

Or perhaps why the last two words in the fourth verse of Surah 112 did not have the same terminal vowels. 

Eventually I’d probably have asked Bill to comment on SolarWinds and Microsoft Exchange.

Why these events happened?

What Microsoft could or should have done to prevent them?

Perhaps, an area where his skills might be more profitably employed.

لأبي المشاكل

يا صديقي هل رأيت بعض أقاربك؟

 

Citibank's USD 902 Million Revlon Payment - What's Not in the News

 

You’ve probably been reading about the mistaken USD 900 million payment made by Citibank acting as agent for Revlon.

As as well as the decision by the US District Court, Southern District of New York, that the lenders to Revlon who received Citibank’s erroneous payments of principal were not legally obligated to return the funds.

Let’s take a closer look as I think some details of the story haven’t been highlighter. 

Here’s the link to the 105 page decision.

As a starter it's a good introduction.

It’s well worth a read as it explains the background and facts of the erroneous payment and the legal precedent Banque Worms vs Bank of America International (Banque Worms) which “led” the court to its judgment.

Banque Worms establishes the right of creditor who receives funds in error from a debtor or the debtor’s agent to retain the funds and apply them against the debtor’s outstandings as long as the lender had no knowledge of the error when it received the payment.

This precedent thus overrides the concept of equity that typically governs payments received in error: if one receives funds in error, one is obligated to return the funds.

Background and Some Clarifications

The “USD 900 million” payment was actually for approximately USD 902 million: approximately USD 894 million in principal and USD 7.8 million in interest. Citibank received funds from Revlon for the (authorized) interest payment, but used its own funds for the (erroneous) principal payment.

Citibank were able to recover about USD 390 million from the principal payment, reducing its loss to some USD 504 million. 

The USD 894 million principal payment was made to two groups of lenders. Allocations are based on my calculations using data in the court decision.

1. The first group received USD 341 million. They were involved in a non-cash exchange of one Revlon debt for another (a “roll up”). Based on the terms of the exchange, they were not to receive any principal payments. Thus, they would not be able to resort to the Banque Worms precedent cited above. This group returned the full USD 341 million in principal payments they received.

2. The second group received USD 553 million. This group was not involved in the debt exchange. Therefore, they had no right to any interest or principal. Under Banque Worms they had a legal defense to retaining the funds because they did not “know” the transfer was in error when it was received. An important part of the refusenik lenders’ defense was that they were unaware of the “roll up” involving the first group. Some lenders in this group returned USD 49 million either because they or they agents were unaware of the possible Banque Worms defense or decided to return funds despite such knowledge. 

At first blush, this sounds like a case of human error.

A “fat” finger, a misplaced decimal point, or an error in calculation.

But there’s more to the story than that.

Each lender received a principal payment in the exact amount of its principal balance as well as the exact amount of interest due it to the date of the payment – which was not an interest payment date.

The error was due to a combination of factors – human plus limitations in Citibank’s perhaps inaptly-named Flexcube system.

Citi was attempting to perform a complicated and uncommon transaction. 

1. The first “bit” of complexity was that this was a “roll-up” transaction. Some lenders were exchanging existing Revlon debt (positions in the 2016 Revlon loan) for positions in other Revlon debt.

2. The second “bit” of complexity was that not all of the lenders in the 2016 Revlon debt were participating in the “roll-up”.

The lenders participating in the roll-up—whose positions were managed by Angelo Gordon (the Angelo Gordon Lenders)--were entitled to a cash payment of interest on the existing debt up to the date of the “roll-up”. They were, however, not entitled to any cash payment for principal. Revlon owed this group USD 341 million in principal.

Those lenders not participating in the roll-up were not entitled to any cash payment of either interest or principal. Revlon owed this group USD 553 million in principal.

What were the problems? And what were the “issues” surrounding Citibank’s systems?

Citi’s system could not process an interest payment to just the Angelo Gordon Lenders.

All lenders had to be paid interest.

To get the exchange done, Revlon agreed to pay (cash) interest to all lenders. Some USD 7.8 million.

If my calculations are right, Revlon paid approximately USD 4.9 million in interest to the non Angelo Gordon lenders. Interest that it did not have to pay on that day.  

In effect it prepaid this amount of interest. 

Small beer perhaps, but perhaps not so small for a company in Revlon's financial position.  

As well as, perhaps, opening itself to the charge of creditor preference were the egg to fall off the proverbial spoon. 

Further complicating matters, to achieve the “roll up”, the principal balances of the Angelo Gordon Lenders in the 2016 Revlon term loan had to be reduced.

Citi’s system required this be achieved using a principal payment.

To do this without the movement of cash, the principal payment would have to be made using internal Citi “wash accounts” (General Ledger accounts). The amount of the principal payment would be funded by debiting an internal Citi G/L account. Then the principal payments to each roll-up lender would be “paid” into an internal Citi G/L account. Then (presumably) each lender’s principal payment would be be used to purchase an equivalent amount in the other Revlon facility.

But there was the same problem as before.

Citi’s system could not apply this mechanism to only the Angelo Gordon Lenders.

All lenders would have to be “repaid”.

That means that the non participating lenders’ shares of the 2016 loan would have to be "repaid" using the Citibank G/Ls as above. But with a key difference. In the final step instead of “purchasing” shares in another Revlon loan, these lenders would “repurchase” their shares in the 2016 loan.

That wasn’t the only wrinkle.

To ensure that interest payments would be made in cash and that the principal payments would not, Citi’s ABTF (Asset Based and Transitional Finance Team) had to check three boxes on the Flexcube payment system: FUND, FRONT, and PRINCIPAL to override the standard settlement instructions. They also had to input the related G/L account numbers in each of the three fields associated with these boxes

You can see a “screen shot” of Citi’s Flexcube system on page 13 Figure 1.

This seems a rather complicated system. Unnecessarily complicated.

One that is not intuitive. What does FRONT mean? What does FUND? And thus subject to mistake.

Citi’s agents (Wipro) checked the box “override default settlement instructions” next to PRINCIPAL as well they input the internal G/L in the required field.

They did not do the same for FUND and FRONT.

There are two possibilities here. 

The first case: If settlement instructions means the details of where Citi was to pay the funds (to the creditors) then it would appear Flexcube “ignored” the two override inputs for PRINCIPAL.

I would have expected it to decline the transaction with a note “incomplete” or “inconsistent instructions”.

Also if the standard settlement instructions for the principal payment were “overridden”, shouldn’t the system have been unable to make the payment as presumably it did not have other settlement instructions?  

The second and more likely case: Settlement instructions meant the accounts that Citi should debit (the debtor's), the system processed a payment against an internal Citi G/L account that was it seems (note that caveat) designed for non-cash transactions.  

With 10/10 hindsight, it would seem that ideally the system should have been programmed to refuse such a transaction.  

Or perhaps more likely programmed to raise a warning -- You are attempting to make an external cash payment against an internal non-cash account.

As well, it would have been ideal if the warning message associated with the final release of funds had been more explicit. For example, “You are about to release an external cash payment of USD 902 million: USD 894 million in principal and USD 7.8 million in interest”.

Somehow the fact that Citibank had not received USD 894 million from Revlon and was “going out of pocket” was not reflected in Flexcube.  

Typically agent banks require a borrower to remit funds to a special “loan agent” account to cover loan repayments and only release payments to lenders when receipt of funds is confirmed. Banque Worms is one reason why.  

There are of course other reasons. The Agent wants to be certain it has received the funds and that the funds are in an account under its control, not the borrower's account.

As indicated above, and with admitted 20/20 hindsight, it seems there were several steps in the process where a fail safe mechanism in Flexcube could have prevented the payment.

That being said, the human element is not innocent here.

Citi’s Flexcube manual contained detailed instructions.

The three Citi employees charged with input of the payment, checking of details, and authorization (release) apparently assumed that checking the PRINCIPAL box and inputting the G/L number was all that was required.

The fact that this wasn’t a common transaction, that Citi’s mistakenly named Flexcube required workarounds to complete the transaction, that the size of the transaction was "large", and that Revlon’s credit was weak should have prompted additional steps by Citi’s staff.

ذكرى وفاة أم كلثوم 3 فبراير 1975

 

"  لاَ يَرُوقُ الْوُجُودُ مِنْ دُونِها "

" لاَ أَرَى الْعَيْشَ مَا تَفَكَّرْتُ فِيهِا "

A Timely Reinforcement of Points from My Post on SolarWinds

Funny I always thought it was ἀνάμνησις. 
At least that's what I remember.

 

A while back I wrote about the underlying factors that make hacking “events” like SolarWinds possible and weaken information security. If you missed that “gem”, you’ll find it here.

Part of that post dealt with the risks posed by companies with offices in “risky” foreign countries that 

1. might expose them to local government pressure to disclose information;
2. allow local employees—whether pressured or not and one would expect the pressure a local government could exert on its citizens would probably extend to more than a concern for profit—to engage in activities that breached security of information; or
3. provide a local access point for those foreign governments or other malign actors in those countries to penetrate the companies’ security systems and access information without inside co-operation.

In last Wednesday’s FT, Tom Mitchell wrote about the US Department of Justice’s complaint against a PRC national resident in the PRC and formerly employed by Zoom.

Before going further, it’s important to note that at this point the DoJ has only made allegations against the individual as stated in its press release.

The charges in the complaint are allegations, and the defendant is presumed innocent unless and until proven guilty. If convicted of both charged conspiracies, Jin faces a maximum sentence of ten years in prison.

Two other points to note:

1. Companies are subject to the laws of the jurisdictions in which they operate, particularly, where they have offices.
2. The complaint does not allege hacking or surveillance of other than residents of the PRC.

You can read the DoJ press release here.

Here is the accompanying statement by an FBI Special Agent as part of the request for an arrest warrant. The “bits” about the “rectification plan” and involvement of the former employee and other officers of the company are quite “interesting”.

And to round out the picture, Zoom’s perspective on the DoJ complaint.

I think the lessons here are clear. 

On a corporate level, if you are concerned—as well you should—about the security of your corporate information and communications, or if you are worried about the security of your own internal systems: 

1. it’s a wise idea to avoid dealing with companies that have offices in jurisdictions of “risk”
2. in that regard you cannot rely only on the registration or domicile of the company but have to look deeper into shareholding, management as well as location of its network of offices. Not every company in the USA is pure as the driven snow. Nor every company in Switzerland.

On a personal level, if you are using the services of a company with exposure in a jurisdiction of risk, and are concerned about human rights, including your own, it may be equally a wise idea not to use that provider. 

Equally, you might be well advised to inquire whether the provider of a free service/app routinely sells the personal information, contacts, location history, or other aspects of its customers’ life to others. 

There are no truly “free” services, just like there is no free lunch.

It is probably not a good idea to rely on the kindness or conscience of strangers, particularly those focused on their own profitability.

عيد ميلاد سعيد

 

SolarWinds - What's Behind Events Like This?

Not Every Server Needs to Be Connected to the Internet

See additional comments here.

There's a lot in the press about the SolarWinds breach.

What's largely missing from the discussion is a hard look at why events like this happen.

It is more than the fact that there are "hackers" out there. Some very sophisticated. 

What I want to explore are two factors—that are in the control of those being hacked—and that I believe facilitate hacking.

Note I am not saying that curing these will stop all hacking. Any more than locking your door or installing an alarm system will stop all burglars.

But I think it will reduce the damage done.

Largely these factors are a matter of mindset: 

1. responsibility "shifting" associated with outsourcing
2. the private sector's focus on profit maximization.

To the first point, responsibility "shifting" or perhaps more accurately "abandonment"

When services are outsourced, often the responsibility for managing the risks associated with the outsourced "bits" appears to be outsourced as well.

No doubt some checks are performed on the service provider's procedures and controls leading to the granting of access to the outsourcer's systems. Probably the same sort of box-ticking that goes on with AML efforts.

Or in some other way an entity is allowed to use the company's systems based on some determination that the provider is a "trusted" counterparty.

Here I'm thinking of the self-described "secure" portals for the distribution of "safe" apps for smartphones. Or other similar "portals" for PCs.

In the first case, the outsourcer doesn't seem to place redundant controls on its systems to monitor and supervise the service provider's access. Or control the volume of information that is allowed to exit its systems.

Nor apparently does the "portal" check each app it distributes for malware. Admittedly with the number of apps on these platforms that would be quite a task.

What I think underpins a great deal of this reliance on third parties to do there job is the unwarranted belief that the operation of the "free" market results in companies delivering the best products at the most competitive costs. 

Third party suppliers or creators of apps will make sure their security is ironclad—as much as that is possible—because if they fail, a competitor who is more secure and cheaper will displace them.

I also suspect that most governmental customers believe the even greater myth that the private sector is inherently more capable, innovative, and flexible than they are.

Not only will private sector "George" do it, but he will do it perfectly.

Side Comment: There's a lot of focus these days on this or that conspiracy theory or other material misinformation. Of which there seem to be quite a lot floating around.

You don't hear anything about the economic theory on which the assumptions regarding the "free" market and superiority of the private sector are based. A theory whose main proof is a tautological set of assumptions and assertions not related to what has gone on in the past, goes on now, and will no doubt go on in the future in the real world.

Yet, when compared to some of this other rubbish, it is very likely, a more damaging piece of material mis-information than the more discussed others.

Some examples of pathologies.

Example #1 No Due Diligence, Please, They're American 

AA's older and wiser brother relayed to me a recent conversation he had about computer system security.

He noted that the USA firm that his interlocutor used for a key service had a world wide network of staff and offices, including in the Russian Federation and Pakistan.

My brother opined that it was highly likely that employees in those offices had access to the computer network in the USA of the company, and its products and programs. And likely to the confidential information of the interlocutor's entity that was stored with that company.

He noted common perceptions about criminal activity and other security/intelligence risks in those countries.

He also opined that the activities of the interlocutor's entity and the identity of its customers might be of keen interest

He then asked how the interlocutor's company managed these risks.

His clear impression was that none of these risks had been identified much less considered based on the response he received. 

"As a USA company, the service provider is a "trusted counterparty" and is presumed (note that word) to be managing that risk."

As to other due diligence, it seemed to be limited to determining the USA company had the lowest price.  No inquiry into ownership.

Example #2” Sometimes George Doesn’t Do It Even for Himself 

According to recent press reports, Microsoft admitted that the SolarWinds “hackers” had gained access to Microsoft’s source code.

That code is the heart of Microsoft’s products and profitability. 

It would seem that this would be one of the most carefully guarded secrets of all those entrusted to Microsoft’s care.

Probably even more closely guarded than any information they were “safeguarding” for third parties.

Bonus Lesson: So much for the private sector’s presumed superiority over governments. 

Examples #3 Not Every Castle is “ حصن الأبلق “ 

3A ToTok

For some time, both the Apple and Android stores allowed the ToTok chat app to be distribued through their portals because its creators were a "trusted" party.

Some 12 or 13 months ago, the NY Times reported that this app – strangely the only chat app allowed in the UAE—was likely being used by the UAEG to spy on UAE residents, including non citizens.

3B Zoom

Another "trusted" app distributed through self-identified "secure" sites, used at one point by corporations and some governments to conduct confidential meetings due to Covid restrictions on in person meetings. Including HM's PM.

Turns out that at least some of the conversations were routed through servers in the Peoples' Republic of China.

A flaw now "corrected" according to press reports.

To the second point, profit maximization.

Adding to the problem is the private sector's well known focus on profit maximization.

One possible example is the SS7 legacy vulnerability in phone systems that allows "hackers" to track cell phone locations and intercept messages.

Not only to the benefit intelligence services but also of use to common criminals. You can read about it here. 

The SS7 system was implemented some 50 years ago.

The vulnerability has been publicly known since at least 2008.

If AA's arithmetic is correct, that's 12 years. 

During that period, members of the US Congress have raised their august voices in concern. 

The ITU has held meetings. 

The press has reported on repeated use of this vulnerability by foreign governments. Most recently here. 

It has not been fixed.

Why? 

Can you think of a better explanation other than a stubborn reluctance to spend money? 

Stronger Together the 21St Century Case for Scotland and the EU

Leave the Light On

 

The case is quite elegantly expressed in Gordon's piece of some years ago.

Just update it by replacing "Britain" with "European Union" or "EU". 

It's Scotland's!

 

" بترول الاسكتلنديين للاسكتلنديين "

Manifest Signs of Irrational Exuberance in the Market

In December, Martin Wolf—for whom I have a lot of respect—wrote an article in the FT arguing that the stock market is not currently overvalued.

To be as fair, I’d note that his argument was based on two premises: corporate earnings would be strong and interest rates would remain ultra-low.

With the right assumptions, of course, just about any assertion can be supported.

I’d like to make a contrary case that financial markets—not just that for equities—are indeed in bubble territory.

Bubbles occur when providers of capital—lenders or investors—underestimate risk and overestimate return.

It’s relatively simple to diagnose contrary to what some “maestros” believe as I now propose to show.

Think of me as your financial Don Ho, but with a focus on larger events.

The size of the bubble is directly proportional to 

1. the acceptance of most outrageous investment theses and valuations and 
2. engagement in unsafe and unsound practices. 

For the last point, the “running with scissors” test is an apt tool.

First, signs in the equity market.

What better poster child for irrational exuberance in the equity markets than Tesla?

One does not have to be as smart as Jim Chanos to see that Tesla’s price is supported by multiple fanciful delusions about the future. “Fanciful” to distinguish these delusions from “normal” investor over optimism.

And Tesla is not the only case, but likely the most outrageous.

To measure the extent of the madness reflect on Tesla’s entry to the S&P 500.

That indicates the extent of the overvaluation of Tesla. 

It also thus suggests we have passed the frontier of “irrational exuberance” to “Brexit” level delusions.

Second, signs in the debt markets. 

Issuers with currently crippled businesses are issuing debt at record levels.

Now I am not advocating refusing loans to all companies in distress. But rather being selective.

And when doing so applying time tested practices.

One should wear a helmet when riding a motorcycle and drive at a sensible speed.

When the road is wet, it’s daylight madness not to wear a helmet and not to drive slower.

But exactly the opposite is happening.

Much of this debt is “secured” by assets that the borrowers currently cannot profitably employ.

There is also a surfeit of such unemployed assets at present.

Additionally, it is unclear what returns these assets may afford in the future. Or when that “future” may be.

The collateral value of an asset that has limited value in use is roughly equivalent to the sound of one hand clapping.

Think of planes and cruise ships.

To that add the wanton abandonment by “investors” of basic common sense credit and legal structuring.

Debt is repaid by cashflow not assets. History suggests that primary reliance on collateral for repayment is likely to be an unhappy affair.

Covenant “lite” structures offer limited legal protection and limited means to pressurize debtors. And will be of limited utility when clouds gather.

Third, signs in private equity. 

Also in December Kate Wiggins wrote an article on how canny private equity General Partners had found a solution to blocked “exits”. 

If there’s no suitable opportunity for a trade sale or an IPO, why not sell a portfolio company to yourself? Or more precisely to a so-called continuation fund.

A suitable “opportunity” is one where one doesn’t have to sell at a loss. Or face the subsequent valuation consequences of failure to sell a duff asset that there was no perceptible demand for.

But sales essentially to oneself can be “structured” to

1. deliver sufficient “return” to LPs to keep them happy
2. generate carried interest for the “deserving” GP, and
3. create the appearance of a suitable return on the selling Fund that will persuade a “sophisticated” investor to sign up for the buying Fund (the continuation fund).

One hopes that LPs from the selling fund are not the major cohort in the buying fund.

But then AA has seen some rather incredible behaviour by so-called sophisticated investors.

Fourth, signs in the retail market. 

Increased activity by the financially illiterate: the rise in the price of Bitcoin, day trading, etc. 

The past suggests that all this is not going to lead to a happy outcome. Though as you know past performance is no guarantee of future results.

Brexit Means BREXIT!!! It also means ...

 

The Sound of the Pipes, The Sound of God's Music

 

En cada escocés un árabe 

En cada árabe un escocés

Wirecard A Series of Unfortunate Regulatory Incidents

 

"Who are the police?
We need a police to catch the police?"

No sooner had I posted about regulatory lapses by Apas in re Wirecard than the weekend edition of the FT landed at my doorstep.

Was für eine Überraschung! (Quelle surprise!)

Olaf Storbeck had another article on German parliamentary hearings on Wirecard.

This time the head of Apas, Mr. Ralf Bose, gave testimony.

Herr Bose admitted that he purchased an undisclosed number of Wirecard shares in April and sold them at an undisclosed loss in May – while Ba-Fin and Apas were in confidential talks about Wirecard.

Bundesminister für Wirtschaft und Energie Peter Altmaier, reportedly found Herr Bose’s comments “disconcerting” (beunruhigend?)

Ba-Fin fresh from its success supervising Wirecard will investigate Herr Bose’s share trading.

In that regard, I would hasten to note that Herr Bose was “long” not “short” Wirecard shares so the investigation may be able to be concluded quickly.

First time an oversight. Second time a mistake. Third time an unfortunate coincidence?

You may recall a post from some years back in which I ridiculed the idea of the imagined superiority of supervision in the “developed” West when discussing l’affaire Abraaj.

I’d offer the WC saga as re-enforcement of that argument.

"Timely" Words to Live By - Lloyd Green The Guardian

 

Recent Photograph of Professor Rovelli

I suppose in some quarters it would considered the equivalent of ordering Kansas-style fish and chips, but there I was reading the 15 December US Edition of The Guardian.

Lloyd Green’s musings on the potential impact of AG Barr’s resignation on the Incumbent US President’s exercise of his power to pardon ended with what appears to be a four word koan: “What comes next remains.”

An allusion to Einstein’s theory of the illusion of time?

Or a subtle advancement of Carlo Rovelli’s more radical theory?

We may never know, if we don’t already.