Investment Bank Analyst “Angst” – Bootcamp It Takes a Team (Preferably in Person)

Borstal Investment Bank UK
Had Greater Success with More Cohesive Teams

Having called out those who offered theories why IB analysts were experiencing angst, today I’m here to offer my own theory. Kettle meet pot.

In an earlier post, I described the employment “life” of IB analysts as composed of three elements: audition, apprenticeship, and bootcamp.

A military bootcamp is designed to break old individual “molds” and create a new communal one.

What does this mean?

The prioritization of a single shared mission over personal identity, individual goals, ways of thinking, whatever.

In the military “national defense” is the replacement priority mission.

The civilian is turned into a soldier whose primary goal is to fight and perhaps die for the country.

Bootcamps are generally grueling. Not particularly attractive experiences.

50 for 50. Fifty pound backpacks for 50 mile hikes. Physical and military arts training.

Some of this well required by the needs of the apprenticeship – developing the aptitude and attitude to “do the job”.

But if you look closely, much of it is of doubtful direct use in a military situation. 

Soldiers who can make their beds so tight that a quarter will bounce when dropped on them are not generally more effective than others.

Soldiers whose boots are polished to a blinding shine and whose uniforms are crisply ironed don’t necessarily do better in war than those clad in black pyjamas or wearing flip flops.

The goal of these practices is psychological.

To “break” the civilian and once “broken” turn him into soldier.

An important element in this is making the individual part of a team.

Mission first, the team a close second, individuals third,

There’s a similar process in Investment Banking.

With similar “character redevelopment” going via the process. Long hours, face time, etc.

Here the communal mission is the priority of the deal. It takes precedence over everything else.

The team is created “We are Morgan Stanley”.

This poster approved by HMG.

As in the military, there is another function to the team.  To lessen the strains of bootcamp.  To make team bonding stronger.

First, misery loves company.

When you’re working long hours, it’s comforting to see someone beside you slogging away as well. Or to hear that another team worked 36 hours straight without a break. Someone has it worse than you!

Second, hardships become badges of honor and rites of passage.

Team B may have worked 36 hours in a row, but your team has worked 37. 51 for 51.

Third, the team offers a sympathetic ear to release one’s frustrations.

They say there is grumbling in the sergeants’ mess about more senior officers.

No doubt the O-1s and the O-2s grumble about those whose O’s have higher numbers.

In the IB world one can complain to one’s peers about the behaviour of one’s team leader, the more senior chap whose dithering or change of mind caused work to be delayed or redone, the last minute “Richard” (more familiarly known as “Dick” to analysts with a few months under their belts) who came up with apparently meaningless revisions to the pitchbook extending the time to completion.  

It's "us" against the "world".

Fourth, at times the unit may be rewarded or individual team members’ distinctive services reognized and honored. 

A timely “pass”. A bump up in rank. Recognition!

In the IB world, in-house dinners are usually provided for evening work. Some times the “usual” pizza. Sometimes, depending on the team leader, more elegant fare.

It is claimed that at some firms some team leaders have non-official “bottles” from which team members would take a libation after the slide deck was finished to “seal the deal”.

A “black car” to take one home – an indication to one and to all those who might see about the importance of one’s position as well as generally being more convenient.

A team leader mentioning your name in front of your fellows. “Nice work on the slide deck. The MD making the pitch mentioned that he especially liked the graphic on the transaction structure. Kudos to you, Rupert, for the suggestion.”

A liquidity preference function – ideally the day before one of those rare off-days.  Either team member organized.  Or hosted by the team leader.

An off-campus off-day celebratory meal -- “somewhere nice” when a particularly big fish was landed. Billed (or attempted to be billed) as team development: “Lessons learned from the [Name] Pitchbook.” (Let's chip in and buy "Dick" a trip to Bosworth Field).

When there aren’t opportunities for these sorts of in-person interactions, bootcamp is even more difficult.

It's also harder to develop the sort of camaraderie among one's fellow rookies over Zoom as one would in person together in the trenches.    

Additionally, unlike a military bootcamp where one's team is all rookies, at an IB the rookie joins an existing team members of which have existing relationships with one another and the shared history of "past battles".  

Over Zoom one is on one's own among the other rookies and the veterans. 

I think that explains a good deal of the angst. 

As well, there is the human factor.

Some bosses don’t know when to lighten the pressure.

Some folks aren’t a “fit” for the demands of IB. That’s nothing against them or AA.

A note on terminology. 

“Slide deck” always sounded to me like the cruise ship deck for kids. Perhaps, it was as well that it carries the connotation of three card monte. 

“Pitchbook” sounds more congenial and substantial.  It's not a collection of slides, but a book.  

With a bit of athletics involved.  Sports is a beloved business metaphor.

And, if one had a particular rough experience preparing one, one could always “pitch” it against a convenient wall.

Investment Banking – Why is It the Way It Is? Part 4 The Nature of the Analyst Position: Audition, Apprenticeship, and Bootcamp

 

Analysts are generally hired for a fixed period.

At the end of which depending on performance and need, they are either invited to remain with the firm as associates or are bid adieu.

One can think of their stay as a prolonged audition.

As we know from watching shows like Britain’s Got Talent, competition is intense. Sometimes the judges can be direct, even cruel. 

And here there are no “golden tickets” or “buzzers” for contestants. 

It’s often an uncomfortable experience, especially since many are called but few are chosen. 

The process is designed to turn “kids” into deal generating machines.

See Part 2 of this series about the pitch intensive culture. 

Think bootcamp for an elite military service. 

It is also a crash course whose goal is to endow the analysts with the experience and skills to discharge their tasks with greater rapidity and competence. 

And at least a feigned indifference to demands on their time.  

Coming soon IB pathologies explored and explained.

Investment Banking – Why is It the Way It Is? Part 3 Marketing a High Priced Intangible Product

 

You'd Probably Find an IB Pitch
from this Duo Unconvincing

IB’s sell high priced professional services.

If you’re in the market for a car, you can nip down to the Maybach dealer and kick the tires. And then continue over to check out the latest offering from Geely. Take a test ride.

IB’s products aren’t hard physical items. 

Usually they act as intermediary between two parties in a transaction.

They help you to find buyers for that unwanted division of yours. 

Or help you find just the new division you’re looking for. 

And negotiate the “best” price.

Or investors for your debt or equity issue at the “fair” or “market” price.

By expanding the geographic or sector range of investors they may be able to lower the price. Or though nifty new instruments. 

That applies even if they underwrite because they don’t underwrite until they have a good sense of their ability to place the deal and a price range.

Success in these endeavours depends on their "smarts", experience, range of contacts as well as their ability to persuade other parties to participate in a transaction. 

So you’re looking for professional, competent, self-assured, experienced, persuasive bankers.

If they can prepare “flash” presentation materials (a “pitch book”), deliver a convincing (verbal) sales pitch to you, all the time maintaining a professional appearance, you're more likely to have confidence that they will be able to perform these same tasks with the transaction counterparties you need to have convinced.

Pin-striped suited bankers will make a better impression than the same presentation team in Hawaiian shifts. Thought the latter may make a better impression when pitching a movie idea to an entertainment conglomerate.

In other words: horses for courses.

McDonald’s pitches its offerings with a clown. IB’s don’t.

While past performance is no guarantee of the future, a track record of success (league table positions), a brand name, a team with documented experience are also selling points.

Often IB’s cut prices on megadeals – to garner market share stats. That’s why sometimes you see a plethora of banks on a deal even though they are not all really needed.

Not only is the cut of their jib important, but also the appearance of materials associated with the sale.

When you buy a Rolex, it doesn’t come in a cardboard box lined with plastic foam.

Nor is that pearl necklace you just bought at Mikimoto handed to you tucked into a handy Ziploc plastic bag.

Investment Banking – Why is It the Way It Is? Part 2 Compensation Structure: Bonus Drives Behaviour

(Investment Banker Charles Wellington III)
He's Got His Mind on His Money
and His Money on His Mind

Like other businesses IB’s are in the business of making money.  As much as possible. No surprise here.

So what’s the difference from other firms?

Investment banks largely but not exclusively compensate an employee for his or her personal revenue generation.

While investment bankers have relatively high salaries, their yearly bonuses are often multiples of the base. And thus can easily dwarf the base salaries.

Few other industries are as generous.

The more revenue one generates or is seen to have generated the higher one’s bonus.

Promotion depends on revenue generation. Those in the higher realms receive bonuses based on their team’s revenue generation along with any “rainmaking” of their own.

Generating transaction volume and favorable publicity also generates bonus “credit”.

Bosses are therefore motivated to ensure that they “pitch” as many clients as possible. So are those with their eyes on the higher rungs of the corporate ladder.

All of them are also motivated to ensure that no opportunity to pitch is lost because of “bandwidth” problems. Not enough people. Just work the ones you’ve got longer hours. And yourself - ideally.

Woe betide the boss whose team misses a marquee deal.

There is another motive: self-preservation.

In most firms, each banker has a minimum target of annual revenue he or she must generate. An amount that depends on his or her “level”. 

Miss that target and you may find a target of another sort on your back. 

And the target meter resets to zero revenue with uncomfortable regularity. 

It's not what revenue you brought the firm in the past, but what revenue you will bring today.

Investment Banking – Why is It the Way It Is? Part 1 - Introduction

 

Like Bob Cody AA Says What He Means
and Means What He Says

Recently there’s been a lot written about the plight of investment bank analysts. 

Long distance psychological diagnoses have been performed on both analysts and those who manage them. Paging Senator/Dr. Bill Frist!

Various economic theories have been trotted out and fingered as the culprits.

Deep societal analysis has shown. The weakness of youth. The enlightenment of youth. The end of the American Dream.

What I haven’t seen is a look at what are the fundamental drivers that affect how investment banking operates.

Not all industries are the same. There is no one organizational or management style that fits all. And even within industries there are differences.

Corporate organization and management style have a direct impact on how an organization behaves or doesn’t.

One more introductory comment. 

When there’s talk about “investment banking”, the names Goldman Sachs or Morgan Stanley usually come to mind.

Just to be clear: these and similar firms do more than investment banking.

What are some of the other activities?

Global client and proprietary trading. Asset management. Investment vehicles/funds. Securities research. And (shudder) now even retail banking. These all have different characteristics than investment banking and operate differently.

Broadly speaking what then is investment banking?

Capital (debt and equity and hybrids thereof) raising and placement. Mergers and Acquisitions. Structured Finance. Derivatives. And more.

In the posts to follow, I’ll look at two key characteristics of investment banking and the role/purpose of analysts with a firm. And use some of the observations to explain IB behaviour or misbehaviour.

All this meant to be descriptive not normative. 

Or, if you’d like, explanatory not exculpatory.

The three topics that I think are relevant to how IB’s operate are:

1. Compensation Structure
2. Product Characteristics
3. The Role and Purpose of Analysts

Windsors of Change - A Diversity Champion in The Firm?

Tan, Ready, and Rested

Robert Shrimsley had an absolutely brilliant article in The FT Weekend Magazine on the topic of a diversity champion for the English Royal Family.

One very major quibble. 

He mentions that currently the Family (or is that The Firm?) are primarily Windsors. And seems to suggest that a Plantagenet would be a worthy addition.

How sad when there are descendants of the House of Stuart extant to reclaim their rightful place on the throne. Or at least a share.

Who knows how such a magnanimous gesture might affect the fate (and perhaps faith) of the Union

Scotland: John Major Endorses IndyRef#2

 

Not Peter Greaves

Yaldi!

You could have knocked me over with a feather or a perhaps more appropriately a small thistle.

I read in The Financial Times today that John Major--yes, that John Major--believes “Westminister should not refuse Scotland a referendum”.

Which I believe demonstrates quite clearly that the Conservative Party does have something to offer Scotland.

An offramp.

To be fair he did go on to natter about “constitutional reform”, “devolution”, etc.

The Unionists “strong” economic arguments for the “Union”.

And that “small” Scotland would be but a minnow in the EU and have a concomitant small voice.

That is, no doubt in contrast to today?

One final comment a quote from the FT for those who have forgotten or perhaps never knew: The writer is a former UK prime minister

Bahrain Middle East Bank - 2020 Financials and 1Q2021 Financials Still in "Limbo"

24 March BMB announced that no date had been set by its Board of Directors to review and approve the bank’s financial statements for the period ending 30 June 2020, 30 September 2020, or 31 December 2020. 

As well it announced no date had been set for Board review and approval of its 31 March 2021 financials. These cannot be approved until 2020 financials are “set”.

Clearly, there is no “good” news to report. Which suggests that the news is bad.

Not a big surprise the bank is in dire straits.

But the continued delay on the financials probably indicates that things are heading further "south".

Wirecard: More Missing Money - This Time Real Money

Recommended Not Only for Its Fine Weather
But Also for Its Banking Facilities and "Discretion"

The FT reported 24 March that sources told them that Oliver Bellenhaus, late of WireCard and Al Alam, informed investigators that in 2011 he and Jan Marsalek, Wirecard’s former CF), began a scheme to shift money out of WC into “an array” of offshore accounts of shell companies in Hong Kong and the British Virgin Islands. Said account opened in 2010.

As I read this account, I suspected that many readers would think that this is where WC’s missing Euros 1.9 billion had gone.

I don’t think that this is the case.

Why?

Because it’s hard to steal what doesn’t exist.

If press reports are correct and WC was loss making, then the Euros 1.9 billion never existed. And couldn’t therefore be stolen.

These “shifted” funds would have had to be derived from other sources. And while no doubt significant, nothing close to the former amount.

Earlier I posted a detailed explanation why fiddling with the income statement requires fiddling dollar for dollar with the balance sheet (and vice versa) in my earlier post here.

Let’s look at WC’s financials from FY 2004 though 3Q19 to see if there was evidence of income above the imaginary Euros 1.9 billion. That may have produced actual cash to be stolen.

Why that period?

Prior to 2004 Wirecard was InfoGenie, a rather small call center with negative retained earnings.

There wasn’t much to fiddle with before 2004.

As the table below shows, during that period WC reported Euros 1.919 billion in net income, paid dividends of Euros 165 million, and had other adjustments to retained earnings of Euro 15 million. The dividends were likely funded via increased liabilities rather than cash flow from operations.

So, if there were transfers of “millions” as Mr. Bellenhaus is reported to have said, where did they come from?

Two likely possibilities.

Overstatement of  Expenses/Costs

Either those recognized through the income statement (expenses) or capitalized (costs).

For the former, professional services are a frequent favorite as they don’t generate a hard asset. Or business acquisition/referral fees, processing fees. 

Perhaps, imaginary fees on the imaginary transactions with the difference here is that the latter were paid in cash.

A particularly fertile ground for the latter might be the creation of intangible assets.

What is the proof of the cost of new software, other than the bill for development, particularly if outside vendors were contracted?

In its FY 2018 annual report, WC discloses it spent some Euros 86 million in FY 2018 and Euros 98 million in FY 2017 in cash for “investments in intangible assets”.

Over the period 2016 through 2017, WC’s internally created and other intangible assets increased from Euros 181 million to Euros 252 million.

Could some of these be the result of shifting funds? We don’t know.

Overpayment for Acquisitions

Acquisitions by their nature are “chunky” unless there are periodic payments, e.g., if the newly acquired company performs above a benchmark, the sellers may be entitled to a payment reflecting the greater value of the company they sold. That of course will depend on the terms of sale.

Another possibility would be fees to those who sourced acquisitions for WC, provided WC financial advice, performed due diligence, etc. This presumes such charges were capitalized as part of the cost of the acquisition rather than expensed.

Expense fiddling would a better “cover” for frequently recurring transfers than acquisitions which tend to be lumpy, particularly if the same accounts were used again and again.

It’s not clear from the FT article whether the same accounts were used over and over. 

Does “array of accounts” mean a single group of accounts created in 2010? 

Or could it mean repeated creation of new accounts?

Acquisitions would allow for larger payments in a single transaction. But it would seem that these would be handled by using a different (new) account for each acquisition rather than the same accounts. 

It would (should?) look a bit suspicious to auditors –at least I hope so—if acquisitions from different sellers and in different part of the world went to the same account.

So, if I’ve read the FT article correctly, my best guess would be expense fiddling.

With Mr. Bellenhaus’ co-operation and access to WC’s accounting records, investigators should be able to calculate the amount “shifted” and what transactions were used for cover.

Presumably, the stolen amounts were used to fund the costs associated with running the income fraud as well as to compensate the key players (like Mr. Bellenhaus) for their role.

SuqAlMal Career Advice -- Manage Your Personal Career Like Big Successful Corporations

 

AA Started Learning from Others on His
First Day as an Analyst at MegaBucks Firm

Did you ever wonder how I got this prestigious position at SuqAlMal coupled with a fast paced highly remunerative career in finance?

Besides my innate abilities and willingness to put in the hours, I wasn’t too proud to learn from the successes of others as the above archival picture demonstrates.

And apply what I found to my own career.

It is a uncommon occasion indeed when I share some of those career lessons.

Consider yourself lucky. Today is definitely one of those rare days.

As we all know, or think we do, major corporations have discovered secrets to success.

Sometimes a putative business leader “genius” will put his wisdom down in one of the many tomes you’ll find in the business books celebrity section at your local bookstore.

Sometimes an academic will distill these lessons into a path to excellence.

But what if this does not happen for whatever reason?

If we look closely at companies we can discover these “success” principles and strategies on our own. We can tease them out of their actions.

More than that, we are likely to find those principles and strategies that they are trying to keep for themselves!

Once we have a hold of them, we can apply them to our own careers.

Here are two sure-fire ways to increase your bonus this year:

1. Claim a 2021 bonus based on potential highly lucrative business you will obtain in the future from existing or potential future clients that are currently unknown. (This tactic is known among the cognoscenti as the “Blueridge” or “Liberty Primary” gambits).
2. Add credibility to that claim by committing that by 2050 you will have reduced your incidence of “lost” pitches to zero. (The Pitch Climate Improvement Plan).

With these two simple tactics, you’ll be on the way not only to a larger bonus in your firm, but also it's highly likely you’ll be identified as someone with leadership potential.

Market Commentary: Berkshire Hathaway, St. Augustine, and ESG

Patron Saint of Good Works,
But Primarily Those in the Future

 Analyst Disclosures:

• Oxford Commas provided by Eton College in return for this promotional mention. 
• AA holds no investment position (either short or long) in BH. Or more precisely BRK.

Berkshire Hathaway has made what I consider puzzling (at least on their face) responses to two shareholder introduced proposals for consideration at the 2021 annual general meeting. 

Readers are invited to make their own judgments as to the motives for these responses.

You’ll find BH’s proxy materials here. 

The first proposal is that “the Company publish an annual assessment addressing how the Company manages physical and transitional climate-related risks and opportunities.” This proposal contains suggested elements in that report but gives the board “discretion” on framing the report.

Berkshire replies that:

1. The Board recognizes the importance of responsibly managing climate-related risks to both shareholders and the future of Berkshire and its operating businesses.
2. The Board regularly receives reports on the major risks and opportunities of the operating companies, including those related to climate, and discusses those risks and opportunities. 
3. Berkshire manages its operating businesses on an unusually decentralized basis. There are few centralized or integrated business functions. (At the BH level).
4. We want our managers to do the right things and we give them enormous latitude to do that; consistent with our business model, each subsidiary is independently responsible for identifying and managing the risks and opportunities associated with their business, including those related to climate change. 

As I read this, BH admits it has the requested information in one form or the other (point #2) but pleads (point #3) that they don’t have the staff at the holding company level to compile such a report. 

Apparently, hiring a third party to compile such a report would be a large and extravagant expense. Note that is my assumption. BH did not say this.

Interestingly in arguing against adoption of this proposal BH then goes on to recite the climate related achievements of some subsidiaries in some detail. 

In light of the above comments about the small size of BH’s central staff, I wonder who prepared these. 

Could it possibly be the same folks who prepare information on financial performance at the subsidiary level? Note my assumption is that it is staff at those subsidiary companies.

In point #1 BH “recognizes” the “importance” of these issues and in point #4, it “wants” the managers of its subsidiaries to do the “right things”, but as also outlined in point #4 isn’t going to interfere with the discretion entrusted to the operating company managers.

BH's position on climate issues seems to AA to be similar to St. Augustine who reportedly recognized the danger of sin, and ardently wanted to do something about his own personal situation, but not today.

AA wonders at least rhetorically, and hope you do too, if the Board takes same approach on operating company financial performance. It “recognizes” the importance of good financial performance, “wants” good performance, but lets the operating companies “independently manage” financial performance.

The second shareholder proposal requested that “Berkshire Hathaway holding companies annually publish reports assessing their diversity and inclusion efforts, at reasonable expense and excluding proprietary information 

BH’s Board responded that:

1. Berkshire’s commitment to diversity, equity and inclusion and the effectiveness of our companies’ related programs starts with our leaders, including our Board of Directors on which three female and two ethnically diverse members serve. 
2. Mr. Buffett, Berkshire’s Chairman and CEO has set the “tone at the top” for Berkshire and its employees for over 50 years. During this period of time, Mr. Buffett has a record of opposing efforts, seen or unseen, to suppress diversity or religious inclusion. 
3. All of Berkshire’s leaders – whether in our operating businesses or on our Board – are extraordinarily qualified, committed to our culture and focused on ensuring long-term success for shareholders.
4. The proposal’s supporting statement indicates that “investors seek quantitative, comparable data to understand the effectiveness of the Berkshire Hathaway companies’ diversity, equity and inclusion programs,” improperly suggesting that there is a standardized technique for each of Berkshire’s more than 60 operating businesses to address diversity, equity and inclusion. 
5. Berkshire’s operating businesses represent dissimilar industries operating in multiple locations throughout the world. It would be unreasonable to ask for uniform, quantitative reporting for the purposes of comparing such dissimilar operations in different geographic locations. 

Again, as I read points #1 and #2, BH both recognizes and supports diversity and inclusion. Though I’d guess that as outlined above in the discussion on climate, the Board really doesn’t do anything to interfere with the subsidiaries’ operations.

Also I'd like to call to your attention another demonstration of why many call Mr. Buffett the Oracle of Omaha: he apparently can see both the seen and the unseen.

Point #3 was puzzling.

AA wonders if it is designed to calm the potential worries that some shareholders might have after reading point #2. All that diversity. Is my money really safe? 

I’d also note that two of BH’s directors would qualify as senior citizens. So score a few more diversity points for the Company.

Points #4 and #5 raise a question about how BH is able to provide reporting on its financial performance. 

I mention this because BH’s 60 companies operate in “different geographic locations” and “different industries” in “multiple locations in the world”. 

As a consequence, it is highly likely they are using different languages, different accounting systems, to say nothing of accounting principles, and are subject to different laws. 

It sounds an impossible task, but if you take a look at BH’s 2020 Annual Report, you will see a rather extensive discussion on BNSF, BHE, and other of BH’s companies.

Were these prepared by the 26 central staff in Omaha who, if this is the case, might be the modern day equivalent of the 300 Spartans? 

Or were they prepared by the subsidiaries themselves?

Couldn’t that be a solution if only in part to the shareholder proposal? 

The subsidiaries prepare such reports. 

Who better prepared to put their efforts and results in the appropriate regional and industry context?

Perhaps, with the requirement that only a few of BH’s 60 subsidiaries report each year.

With the focus on the major subsidiaries.

Where there is a will there is a way or so AA was told by his parents.

On the wider topic of ESG itself, here’s a link to an interesting piece at Bloomberg from January 2020 which analyzes the differences between what investors profess and what they do.

Two salient points therein:

1. Berkshire tends to score low on ESG (even below Amazon) due to lack of reporting and its holdings of coal-fired utilities. Mr. Buffett’s Friedmanite skepticism dogmatism on ESG may also be a factor.
2. Most investors who claim that ESG is a key element in their investing philosophy do not practice what they preach. If an investment has a high return, ESG concerns vanish. Virtue is apparently not its own reward. Even more interesting those who claim they would shun an investment in Amazon because of concerns about workers’ rights, would definitely shop there. There are a lot of St. Augustines about, it would seem.

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.