Blog on Financial/Economic Views, Stocks & Index Investments, Forex(FX) & Options Trading

Credit protection madness

2009-03-11T10:28:00.000+08:00

http://krugman.blogs.nytimes.com/2009/03/10/credit-protection-madness/

Paul Krugman's blog, which also happens to be the reason why i was learning and playing with real money on options trading, forex trading in 2007, only to drop everything end 2007.

March 10, 2009, 3:33 pm

Credit protection madness

Marketwatch reports:

The cost of buying protection against the risk that the United States will default on its mounting debt has surged in the past months, outpacing the rise in corporate-credit costs, now that the government has absorbed more private-sector debt.

The spreads on credit-default swaps for U.S. government debt jumped to 97 basis points Tuesday, nearly seven times higher than a year ago and 60% higher than the end of last year, to a level roughly in line with those of France, according to data supplied by Markit. The spreads also hit a record last week.

Has the risk of a US government default risen? Probably. Nonetheless, the people buying these contracts are crazy. A world in which the US government defaults would be a world in chaos; how likely is it that these contracts would be honored?

Nassim Taleb has a line about CDS in general, which certainly applies here:

It would be like buying insurance on the Titanic from someone on the Titanic.

Hee Teck

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How did software group pull off India's biggest corporate fraud?

2009-01-09T08:43:00.001+08:00

How did software group pull off India's biggest corporate fraud?

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INDIA vowed to strengthen laws to prevent corporate fraud after Satyam Computer Sevices shocked investors by revealing profits had been falsely inflated for years.

What is within? A security guard standing outside the headquarters of Satyam in Hyderabad yesterday

Chairman Ramalinga Raju resigned on Wednesday after revealing India's biggest corporate scandal in memory, sending the company's shares plunging nearly 80 per cent.

The following is an overview of how the fraud escaped detection for so long and what compelled a soft- spoken man born into a family of farmers to risk all.

Q: How did Satyam escape detection?

A: On the face of it, New York-listed Satyam did everything by the rulebook, with an international firm auditing its books, declaration of accounts in accordance with Indian and US standards, and the requisite number of independent directors with excellent credentials, including a Harvard business school professor and a former federal cabinet secretary.

Mr Raju, in his now famous five-page letter outlining the deception, said no other board member - past or present - was aware of the financial irregularities.

Regulators were blindsided, and analysts and experts say there are 'systemic flaws' in accounting and audit practices.

About US$1 billion, or 94 per cent of the cash, on the company's books was fictitious, Mr Raju said, and manipulation of the cash flow may be a reason why the fraud was undetected.

'Companies have manipulated P&L (profit and loss) accounts before, but cash flow is the Holy Grail - you don't tamper with it,' said Saurabh Mukherjea, an analyst at UK-based research firm Noble Group.

'Auditors generally assume if there is cash, things are OK. But there are plenty of accounting and governance loopholes.'

India also lacks a culture of dissent, with shareholders and independent directors reluctant to question company founders.

Q: What was the motive?

A: India's US$50-billion information technology industry - the poster child for India's economic liberalisation and rapid growth - expanded at a scorching pace on the back of outsourcing demand from Western firms.

At the height of the boom, top software firms Tata Consultancy Services, Infosys Technologies, Wipro and Satyam consistently reported annual 50 per cent increases in profits every quarter.

Pressure to maintain this pace of growth, please investors and shareholders and justify inflated P/E multiples during a six-year bull run on the stock market have all been cited as reasons why Satyam cooked the books.

Some news reports say Mr Raju was an aggressive investor in failed dotcoms, and the family also put money in real estate.

Mr Raju, in his letter, said he had 'not benefited in financial terms' as a result of the inflated accounts.

Q: Are there other Satyams out there?

A: Most certainly, say analysts and industry experts.

While there has been a plea from chief executives across the board against painting all of corporate India with the same brush, Noble Group estimates at least a fifth of the top 500 listed companies practice 'creative accounting'.

'At its most innocent it is not illegal, but account manipulation is very pervasive,' said Mr Mukherjea.

Q: What needs to be done to prevent another Satyam?

A: Tighter rules for accounting and corporate governance, including appointment of independent directors by selection committees, and greater oversight from regulatory and government authorities.

Noble Group also suggests separation of audit and consultancy functions at companies, and quicker publication of annual reports. -- Reuters

Hee Teck

Quantitative Easing 101 - or the art of creating money

2009-01-09T08:40:00.001+08:00

Quantitative Easing 101 - or the art of creating money

By EDWARD HADAS AND HUGO DIXON

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DESPERATELY ill patients are willing to try drugs that have not been shown to be either effective or safe. Even dodgy medicines look better than the alternative. As countries' financial systems remain immobile in the face of standard monetary policy treatment, more are turning to 'quantitative easing' as a therapy of last resort. The US Federal Reserve is already trying it out. The Bank of England is likely to follow. The European Central Bank probably won't because it doesn't seem to have the authority to.

Averting future disaster: Central banks and finance ministers must commit to reversing quantitative easing when the good times return - before they go wild and open the spigots

Quantitative easing is the modern way to print money. The central bank doesn't actually have to use a four-colour press to spew out crisp notes. There are more sophisticated ways to boost a nation's money supply. But ultimately the impact is not very different from dropping dollar bills from a helicopter as Ben Bernanke once described this policy before he became the Federal Reserve's chairman.

So what exactly is quantitative easing, what disease is it supposed to cure, how is it supposed to work and what are the possible side effects?

The theory

Quantitative easing is a method of boosting the money supply. Its aim is to get money flowing around an economy when the normal process of cutting interest rates isn't working - most obviously when interest rates are so low that it's impossible to cut them further.

In such a situation, it may still be possible to increase the 'quantity' of money. The way to do this is for the central bank to buy assets in exchange for money. In theory, any assets can be bought from anybody. In practice, the focus of quantitative easing is on buying securities (like government debt, mortgage-backed securities or even equities) from banks.

Where, one might ask, does the central bank get the money to buy all these securities? The answer is that it just waves a magic wand and creates it. It doesn't even need to turn on the printing presses. It simply increases the size of banks' accounts at the central bank. These accounts held by ordinary banks at the central bank go by the name of 'reserves'. All banks have to hold some reserves at the central bank. But when there is quantitative easing, they build up 'excess reserves'.

If banks swap their securities for reserves, the size of their own balance sheets shrinks just as the central bank's balance sheet expands. Assuming they want to keep their own balance sheets static - admittedly a big assumption in the current climate - they will then start lending to end-borrowers and so start putting more liquidity into the economy.

To some extent, central banks have been engaging in quantitative easing for the past year. The Fed, for example, has had a range of programmes and ad hoc initiatives that have resulted in it acquiring securities from the banking system and more recently from the US government. The Fed may not have justified these under the rubric of quantitative easing. But its balance sheet has certainly mushroomed: it is up 18-fold in the past four months to US$820 billion.

Does it work?

Such quantitative easing certainly hasn't yet done the trick so far in this recession. Credit conditions have continued to tighten in the US. Things, of course, could have been even worse if there hadn't been any easing. Equally, although an 18-fold increase in the reserves on the Fed's balance sheet sounds impressive, it is still below 6 per cent of GDP. It may therefore only be once quantitative easing properly gets going that the benefits will flow through.

Similarly, history isn't much use in judging the therapy's effectiveness. There has been only one significant trial - in Japan between 2001 and 2006. Excess reserves held by banks at the Bank of Japan rose from 5 trillion yen to 35 trillion yen (S$552 billion), roughly 6 per cent of GDP.

Scholars cannot agree whether the technique worked. On the positive side, Japanese GDP didn't shrink. On the negative side, GDP growth was moderate and not sustained after quantitative easing ended. Also, the experiment coincided with a big programme of government spending, so no one can tell whether it was the unusual monetary policy or the intense fiscal policy that kept the wolf from the door.

Almost no one would argue that Japanese quantitative easing was an unqualified success. But some economists think the Japanese were too slow and too half-hearted in applying the therapy. What's more, the Japanese record isn't necessarily all that meaningful for the US and the UK. Quantitative easing may work better - or worse - in a country like Japan with a cultural preference for savings and a huge trade surplus than in lands where borrow-and-spend has been the rule for years.

Unintended side effects

Even if quantitative easing isn't necessarily effective, it would certainly be worth a try if it carried no danger. But its safety is far from certain. It could theoretically lead to the debauchment of a nation's currency and inflation.

Again history doesn't provide much of a guide. Japan hasn't suffered any bad side effects - inflation is low and the yen is strong. However, in some more extreme examples of old-fashioned money printing, the results were disastrous. Witness the assignats of the French Revolution, Confederate dollars in the Civil War, Reichsmarks in Germany after World War I, Russian roubles after the fall of communism and the current hyper-inflation in Zimbabwe.

The US and UK are, of course, in a far healthier state than revolutionary France or the Weimar Republic. So there isn't a danger of such alarming consequences. But central banks might lack the will to engage in 'quantitative tightening' when the economy starts to pick up.

In theory, reversing the policy should be quite easy. The central bank could just sell the excess assets on its balance sheet, sucking money out of the system. In practice, the political pressure to keep the party going might be too hard to resist.

This is particularly so because, in order to engage in quantitative easing in the first place, some central banks may well need the permission of their governments. The more they work in cahoots with politicians, the more their independence will come under threat. Already, Alastair Darling, the UK Chancellor of the Exchequer, has made it clear that the government - not the Bank of England - will play an active role if quantitative easing proves necessary.

It is therefore essential that both central banks and finance ministers commit themselves to reverse quantitative easing when the good times return - before they go wild and open the spigots. Quantitative easing is risky. It needs to be practised safely.

Hee Teck

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Moment of truth in fighting off depression

2009-01-06T08:42:00.000+08:00

Moment of truth in fighting off depression

Unless Congress gets its act together, Obama's stimulus plan will be delayed or downsized

By PAUL KRUGMAN

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'IF WE don't act swiftly and boldly,'declared President-elect Barack Obama in his latest weekly address last Saturday, 'we could see a much deeper economic downturn that could lead to double-digit unemployment.' If you ask me, he was understating the case.

The writing's on the wall: The biggest problem facing President-elect Barack Obama's economic stimulus plan is likely to be the demand of many US politicians for proof that the benefits of the proposed public spending justify its costs - a burden of proof that was never imposed on proposals for the Bush tax cuts

The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren't lending; businesses and consumers aren't spending. Let's not mince words: this looks an awful lot like the beginning of a second Great Depression.

So will we 'act swiftly and boldly' enough to stop that from happening? We'll soon find out.

We weren't supposed to find ourselves in this situation. For many years most economists believed that preventing another Great Depression would be easy. In 2003, Robert Lucas of the University of Chicago, in his presidential address to the American Economic Association, declared that the 'central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades'. Milton Friedman, in particular, persuaded many economists that the Federal Reserve could have stopped the Depression in its tracks simply by providing banks with more liquidity, which would have prevented a sharp fall in the money supply. Ben Bernanke, the Federal Reserve chairman, famously apologised to Mr Friedman on his institution's behalf: 'You're right. We did it. We're very sorry. But thanks to you, we won't do it again.'

It turns out, however, that preventing depressions isn't that easy, after all. Under Mr Bernanke's leadership, the Fed has been supplying liquidity like an engine crew trying to put out a five-alarm fire, and the money supply has been rising rapidly. Yet credit remains scarce, and the economy is still in free fall. Mr Friedman's claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy - large-scale deficit spending by the government - is needed to fight mass unemployment.

The failure of monetary policy in the current crisis shows that Keynes had it right the first time. And Keynesian thinking lies behind Mr Obama's plans to rescue the economy. But these plans may turn out to be a hard sell.

News reports say that Democrats hope to pass an economic plan with broad bipartisan support. Good luck with that.

In reality, the political posturing has already started, with Republican leaders setting up roadblocks to stimulus legislation while posing as the champions of careful congressional deliberation - which is pretty rich, considering their party's behaviour over the past eight years. More broadly, after decades of declaring that government is the problem, not the solution (not to mention reviling both Keynesian economics and the New Deal), most Republicans aren't going to accept the need for a big-spending, FDR-type solution to the economic crisis. The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs - a burden of proof never imposed on proposals for tax cuts.

This is a problem with which Keynes was familiar: giving money away, he pointed out, tends to be met with fewer objections than plans for public investment 'which, because they are not wholly wasteful, tend to be judged on strict 'business' principles'. What gets lost in such discussions is the key argument for economic stimulus - namely, that under current conditions, a surge in public spending would employ Americans who would otherwise be unemployed and money that would otherwise be sitting idle, and put both to work producing something useful.

All of this leaves me concerned about the prospects for the Obama plan. I'm sure that Congress will pass a stimulus plan, but I worry that the plan may be delayed and/or downsized. And Mr Obama is right: we really do need swift, bold action.

Here's my nightmare scenario: it takes Congress months to pass a stimulus plan, and the legislation that actually emerges is too cautious.

As a result, the economy plunges for most of 2009, and when the plan finally starts to kick in, it's only enough to slow the descent, not stop it.

Meanwhile, deflation is setting in, while businesses and consumers start to base their spending plans on the expectation of a permanently depressed economy - well, you can see where this is going.

So this is our moment of truth. Will we in fact do what's necessary to prevent Great Depression II? - NYT

The writer is a professor of economics and international affairs at Princeton University and last year's winner of the Nobel Prize in Economics

Hee Teck

Bringing up good kids

2008-12-28T23:27:00.001+08:00

Probably unrelated, but i thought this was a very good article, hence to share =)

AsiaOne.com
Sun, Dec 28, 2008
My Sinchew/Asia News Network
Bringing up good kids

Educators, sociologist and psychologists have debated this topic for decades with varying emphasis. Most parents today are convinced that if they provide as many opportunities as possible for the child, they have done their duty and their children are destined to become "success stories". But this may not be as simple as it seems.

Schools in Malaysia for example, experience time and time again the extraordinary performance from children who come from poor, neglected and even broken homes. This proves that so much depends on a combination of factors both in the heritage and the environment in motivating and enabling children to be proficient in what they do and excel in what they undertake.

As parents, we need to dismantle our mindsets on what we may think are advantages or opportunities. A grand home with the latest computers, or even an up-to-date library does not guarantee the making of a scholar or a genius. Fractured relationships in a home may act as a motivation for one child and completely discourage another. Similarly, good health and early training may make one child into an athlete but may prove futile with another.

Enthusiastic parents can, with the best of intentions overload and completely exasperate the child with options for which he has no inclination or talent. Parents need to keep their ears close to the ground to hear what children are saying and they need to have their eyes up above recognizing that the Creator has given each child a special gift. To provide space, encourage, and cultivate that gift is really the way to success but too often parents have their own agendas for the child's life and make a mess with their well-intended strategies to achieve their own ends in the life of their child.

We need to take our cue from a certain country in which graduate parents were encouraged to have more children as it was assumed that they would produce more intelligent human beings. But it has never been that way. A humble clerk and a housewife have produced a string of brilliant children. How does one account for this?

Talents and temperaments often seem to be inherited but given a different environment and circumstances; where the emotional climate is conducive to the flourishing of latent talent, a child can develop exceptional ability and character. Let us be sensitive to their leanings and help them to develop the uniqueness that is theirs.

Question: Tell me why some kids with every advantage and opportunity seem to turn out bad, while others raised in terrible homes become pillars in the community. I know one young man who grew up in squalid circumstances, yet he is such a fine person today. How did his parents manage to raise such a responsible son when they didn't even seem to care?

Answer: That illustrates just the point I have been trying to make. Neither heredity nor environment will account for all human behaviour. There is something else there - something from within - that also operates to make us who we are. Some behaviour is caused, and some plainly isn't.

Several years ago, for example, I had dinner with two parents who had unofficially "adopted" a thirteen-year-old boy. This youngster followed their son home one afternoon and asked if he could spend the night. As it turned out, he stayed with them for almost a week without so much as a phone call coming from his mother. It was later learned that she works sixteen hours a day and has no interest in her son. Her alcoholic husband divorced her several years ago and left town without a trace. The boy had been abused, unloved, and ignored through much of his life.

Given this background, what kind of kid do you think he is today - a druggie? A foul-mouthed delinquent? A lazy, insolent bum? No. He is polite to adults; he is a hard worker; he makes good grades in school and enjoys helping around the house. This boy is like a lost puppy who desperately wants a good home. He begged the family to adopt him officially so he could have a real father and a loving mother. His own mum couldn't care less.

How could this teenager be so well disciplined and polished despite his lack of training? I don't know. It is simply within him. He reminds me of my wonderful friend David Hernandez. David and his parents came to America illegally from Mexico more than fifty years ago and nearly starved to death before they found work. They eventually survived by helping to harvest the potato crop throughout the state of California. During this era, David lived under trees or in the open fields. His father made a stove out of an oil drum half-filled with dirt. The open camp fire was the centrepiece of their home.

David never had a roof over his head until his parents finally moved into an abandoned chicken coop. His mother covered the boarded walls with cheap wallpaper, and David thought they were living in luxury. Then one day, the city of San Jose condemned the area, and David's "house" was torn down. He couldn't understand why the community would destroy so fine a place.

Given this beginning, how can we explain the man that David Hernandez became? He graduated near the top of his class in high school and was granted a scholarship to college. Again, he earned high marks and four years later entered Loma Linda University School of Medicine. Once more, he scored in the top 10 percent of this class and continued in a residency in obstetrics and gynaecology. Eventually, he served as a professor of OB-GYN at both Loma Linda University and the University of Southern California medical schools. Then, at the peak of his career, his life began to unravel.

I'll never forget the day Dr. Hernandez called me on the telephone. He had just been released from the hospital following a battery of laboratory tests. The diagnosis? Sclerosing cholangitis, a liver disorder that was invariably fatal at that time. We lost this fine husband, father, and friend six years later at the age of forty-three. I loved him like a brother, and I still miss him today.

Again, I ask, how could such discipline and genius come from these infertile circumstances? Who would have thought that this deprived Mexican boy sitting out there in the dirt would someday become one of the most loved and respected surgeons of his era? Where did the motivation originate? From what bubbling spring did his ambition and thirst for knowledge flow? He had no books, took no educational trips, knew no scholars. Yet he reached for the sky. Why did it happen to David Hernandez and not the youngster with every advantage and opportunity?

Why have so many children of prominent and loving parents grown up in ideal circumstances only to reject it all for the streets of Atlanta, San Francisco, or New York? Good answers are simply not available. Some kids seem born to make it and others are determined to fail. Someone reminded me recently that the same boiling water that softens the carrot also hardens the egg. Likewise, some individuals react positively to certain circumstances and others negatively. We don't know why.

Two things are clear to me from this understanding. First, parents have been far too quick to take the credit or blame for the way their children turn out. Those with bright young superstars stick out their chests and say, "Look what we accomplished." Those with twisted and irresponsible kids wonder, "Where did we go wrong?" Well, neither is entirely accurate. No one would deny that parents play an important role in the development and training of their children. But they are only part of the formula from which a young adult is assembled.

Second, behavioural scientists have been far too simplistic in their explanation of human behaviour. We are more than the aggregate of our experiences. We are more than the quality of our nutrition. We are more than our genetic heritage. We are more than our biochemistry. And certainly, we are more than our parents' influence. We are unique individuals, capable of independent and rational thought that is not attributable to any source. That is what makes the task of parenting so challenging and rewarding. Just when you think you have your kids figured out, you had better brace yourself! Something new is coming your way.

This article was written by Focus on the Family Malaysia and the Questions and Answers are extracted from "Complete Family and Marriage Home Reference Guide" by Dr. James Dobson with permission.

My Sinchew/Asia News Network

--
Courage is not the absence of fear, but something more important than fear

http://dreamerziv.blogspot.com/ - DreamerZ Investment Views
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Japan Offers a Possible Road Map for U.S. Economy

2008-12-20T15:12:00.000+08:00

http://www.nytimes.com/2008/12/20/business/worldbusiness/20yen.html?_r=2&ref=business

Japan now leads the way forward, in pure darkness...

This article is very important in terms of ZIRP(Zero Interest Rate Policy) as it shows the experiences in execution, the responses and how to generate an interest out of it... In short, an out of the box way of execution...

--
Courage is not the absence of fear, but something more important than fear

http://dreamerziv.blogspot.com/ - DreamerZ Investment Views
http://heeteck.blogspot.com/ - DreamerZ Personal Blog

Treasury's Paulson vague on auto bailout prospects

2008-12-19T12:04:00.001+08:00

our Former goldman CEO is an experienced Banker... i think anyone can see that GM is not a viable business.

It is a matter of time for failure.

HeeTeck

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NEW YORK - Treasury Secretary Henry Paulson on Thursday offered mixed signals on the chances of a bailout for troubled automakers, saying failure is not an option but adding that any bankruptcy should be 'orderly'.

His tone suggested there was lingering doubt within the Bush administration on how to deal with the teetering industry.

'President Bush has been pretty clear that, since Congress has failed to act, he wants to take steps to avoid a failure,' Mr Paulson said at a Business Week forum. But, he added: 'If the right outcome is bankruptcy, then it's better to get there through an orderly process.'

Chrysler LLC and General Motors Corp (GM) have said Chapter 11 bankruptcy protection would risk causing their suppliers to collapse, driving dealers out of business and compounding job losses at a time when the US economy is already mired in recession.

Mr Paulson also appeared reticent. 'This is a time when it makes sense to be prudent,' he said.

In addressing broad issues of the financial system, he said the US supervisory system was broken and required an overhaul that could see the Federal Reserve emerge as a mega-regulator that would have power over all large financial institutions.

'The Fed should have oversight over hedge funds,' he said.

The comments represent a change of heart for the Treasury secretary, who has often said he did not believe hedge funds should be regulated.

The remarks echoed those by President-elect Barack Obama, who promised on Thursday to strengthen financial regulatory agencies and crack down on runaway 'greed and scheming' in an effort to restore stability to a reeling US economic system.

Second guessing
Mr Paulson, who has been widely criticized for not only missing the oncoming financial debacle but also for fumbling various rescue plans, strongly defended his actions.

'The lessons that history teaches us is that the biggest mistake to be made is not doing enough,' he said. 'The major actions we took, they were the right thing to do.'

Asked whether there was a risk of future inflation from throwing so much cash at the nation's financial problems, Mr Paulson played down the risks.

'That will be a high-class problem when we have to worry about inflation and growth,' he said. 'The bigger risk is to the downside.'

With this in mind, Mr Paulson said it was important to enact more direct help for struggling homeowners. He said the White House had not done any more in this area in order not to tie the hands of the incoming administration.

Mr Paulson downplayed the failure of the Bush administration's US$700 billion Troubled Asset Relief Program to get banks lending again.

'Lending is much greater than it would have been' without the program, he said. -- REUTERS

Hee Teck

.ppt that interests me

2008-11-16T00:01:00.001+08:00

BCC to: all that i know

From Hee Teck

Attached is a presentation from Sequoia to all their companies.

Sequoia is a Venture Capital which funded companies like Apple, Google and Yahoo.

One of the views on this presentation

http://www.breakingviews.com/2008/11/14/VC%20panic.aspx?sg=false

Hee Teck's thoughts -

Most "impactful" slide - death spirial. Many companies immediately come to mind - IE AIG, GM, and in local market - Ferrochina etc... just to mention a few... and the 2nd slide brings one of my thoughts back to mind - "Bulls make money, Bears make money, pigs get slaughtered"

Already knew it will be bad one year before, but this markets has gone beyond what i can imagine. Forward-looking, i think there isn't light beyond the tunnel yet, as there are many potential dangers ahead, like when one is healthy, everything is fine; when one undergo a major surgery, there is a chance of complications... a high chance of complications in this case.

Stay positive and healthy

Hee Teck

--
Courage is not the absence of fear, but something more important than fear

http://dreamerziv.blogspot.com/ - DreamerZ Investment Views
http://heeteck.blogspot.com/ - DreamerZ Personal Blog

Jim Rogers says get rid of dollars, buy gold/silver

2008-11-13T18:11:00.001+08:00

Jim Rogers says get rid of dollars, buy gold/silver

Posted: 13-Nov-2008
Source: BI-ME , Author: BI-ME staff

INTERNATIONAL. Legendary global investor Jim Rogers believes the recent dollar gains are temporary and are not based on fundamentals.

“The fact that the dollar is gaining rapidly is only temporary,” Rogers recently told a group of private bank clients.

“Within a year you’ll have to get rid of the dollar,” he said.

Rogers has spent a career being one step ahead of mainstream investment thinking. Amongst his many accomplishments, Rogers was co-founder with George Soros of Quantum Fund. During his ten years with the fund, the portfolio gained more than 4,000%, while the S&P rose less than 50%.

All hedge funds were short on the dollar, Rogers said, but because there has been a rapid increase in the dollar’s value against other currencies, fund managers want to buy them now.

“This is temporary, Rogers says. “Fundamentally it is a drama.”

Rogers also said US government bonds are extremely overvalued. “They are “the world’s last bubble.”

The current rescue plans, which will force governments to issue more debt, print money and flood the markets with liquidity, will flare up inflation after the crisis is over and will create worse problems.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke should resign for keeping alive “zombie banks” that should be allowed to fail, he said

The Japanese government refused to let financial institutions fail in the 1990s. “It’s 18 years later and their stock market is 75% or 80% below what it was 18 years ago,” he added.

“I know we are going to get aggressive rate cuts everywhere, that’s why I’m long short-term government bonds in the US, but shorting long-term government bonds because it’s not going to help, it’s going to add to inflation.”

Rogers admits that silver has been particularly battered down, 35% this year, and perhaps that is why he thinks this precious metal will outperform gold as investors turn to the metal as a hedge against inflation.

“Silver will do better than gold,” Rogers recently said. “It’s been beaten down horribly. If you put a gun to my head and said you have to buy one, I would buy silver rather than gold.”

Gold may drop as central banks and the International Monetary Fund (IMF) sell the metal to raise cash, said Rogers, who correctly predicted in April 2006 that gold would reach US$1,000 an ounce. The IMF in May ratified a plan that included proposals to sell 403.3 metric tons of gold to reduce a budget deficit.

“The IMF has gigantic amounts of gold. Maybe gold is going to go down for a while. If gold does go down, I’m going to buy more,” Rogers said.

Hee Teck

OCBC Q3 net profit down 13% on bad debt charges

2008-11-05T15:59:00.001+08:00

OCBC profit down, will the smallest bank throw a bomb? things are certainly getting interesting...

OCBC Q3 net profit down 13% on bad debt charges

By ANGELA TAN

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SINGAPORE - Oversea-Chinese Banking Corporation reported on Wednesday a net profit of $402 million (US$272 million) for third quarter 2008, 13 per cent lower than a year ago.

Excluding tax refunds from both periods, core net profit fell 7 per cent to $396 million. The decline was largely due to increased allowances which offset growth in operating profit driven by strong net interest income.

Net allowances for the quarter amounted to $156 million, substantially higher than the $39 million in Q307. The allowances were mainly for the Group's holdings of debt securities which suffered losses following the unprecedented upheavals in global credit markets.

Related article:
	Click here for OCBC's news release

Core operating businesses delivered steady results, as reflected in the 5 per cent year-on-year increase in operating profit before allowances.

Net interest income grew 21 per cent, underpinned by healthy loan growth and better interest margins. Non-interest income held up well under challenging market conditions, registering a modest decline of 4 per cent, as weaker stockbroking, wealth management and investment income were largely compensated by stronger contributions from the insurance business and other fee-based activities.

Compared with Q208, the Group's core operating profit and core net profit increased by 16 per cent and 4 per cent respectively, in spite of the higher allowances. The profit growth was driven mainly by stronger insurance and foreign exchange income. Insurance contributions improved significantly compared to a weak first half performance, as the decline in long term interest rates in Singapore and rise in government bond prices during the third quarter boosted the Singapore non-participating fund profits of Great Eastern Holdings (GEH).

For the nine months ended Sept 30 2008 (9M08), the Group's reported net profit fell 12 per cent to $1,449 million, while core net profit declined 15 per cent to $1,237 million (excluding $174 million divestment gains and $38 million tax refunds). Robust net interest income growth of 23 per cent was offset by lower insurance income, reduced gains on investment securities and losses on trading securities, while allowances were significantly higher at $203 million. Operating expenses rose 16 per cent due to increases in staff costs, business promotion expenses and costs associated with the Group's continued overseas expansion. GEH's core net profit contribution to the Group fell to $113 million in 9M08 from $332 million in 9M07. Annualised return on equity for the nine months, based on core net profit, was 11.6 per cent, down from 14.1 per cent for 9M07.

Net interest income rose 21 per cent year-on-year to $684 million in Q308. Customer loans grew by 20 per cent from a year ago and 4 per cent from the previous quarter, contributed mainly by increased corporate and SME loans in Singapore as well as overseas markets. Net interest margin improved by 11 basis points to 2.18 per cent on lower cost of funds and improvement in loan spreads.

Compared with Q208, net interest income grew 1 per cent. Net interest margin narrowed by six basis points due mainly to lower average yields on the investment securities portfolio, particularly for Singapore government bonds.

For the nine months period, net interest income grew 23 per cent to $2,000 million, and net interest margin improved by 12 basis points to 2.20 per cent.

OCBC continues to maintain a strong capital position and a solid deposit funding base, which are vital attributes for banks given the current global financial crisis. The Group's Tier 1 capital increased to $14 billion as at Sept 30 2008, following the successful issues of $2.5 billion of Tier 1 preference shares during the third quarter. Its Tier 1 ratio of 14.4 per cent ranks among the highest in the world, and is well above the regulatory minimum of 6 per cent.

The Group has a stable and growing deposit base, with customer deposits growing by 11 per cent year-on-year to $95 billion as at Sept 30 2008.

Hee Teck

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Channelnewsasia commentary on UOB results

2008-10-31T18:04:00.000+08:00

http://www.channelnewsasia.com/stories/singaporebusinessnews/view/386738/1/.html

Hee Teck

Political Agenda causing the market meltdown? think US elections?

2008-10-27T14:02:00.001+08:00

Hi,

Just to share a point of view. US elections is 4th Nov i think, and when the tide recedes, the stones will surface.

Earlier back, i was looking at other elections like year 2000, where we had the tech bubble, coincidence?

Food for thought.

Wishing all a Happy Deepavali

Hee Teck

ming is a forummer in channelnewsasia.

Quote

http://forum.channelnewsasia.com/viewtopic.php?t=174788&start=260

ming

Joined: 02 Aug 2005
Posts: 1635

Posted: Fri Oct 24, 2008 8:27 pm Post subject:

So shocking is this sell down that I wondered how could I be so blind. If the whole world was heading into a new dark age, how is it that I have not read anything that would have alerted me to this catastrophe. As an act of penance, I scanned through the earnings reports of major U.S. corporations and I have included them here in case there are other people like me who wish to punish themselves for missing the fact that the ground they stand on has opened up.

One by one, large corporations report healthy or expected results but say that they feel uncertain about the global macroeconomic situation. Aside from the financials, corporations are not saying that problems in their industry explains the sell-off but rather that the meltdown is causing them to be cautious about the future. Dog wagging the tail or tail wagging the dog?

Quote:

ming

Joined: 02 Aug 2005
Posts: 1635

Posted: Mon Oct 27, 2008 10:58 am Post subject:

Everyone is screaming bloody recession, but where are the tell tale signs of a global slowdown? Every time a store closes or a factory shutters, it is taken as evidence of the doom that is upon us. But retail stores fail all the time, in good times and in bad times. Production that is no longer competitive will have to shut down. Inefficient producers in China for instance are now forced to contend with a stronger yuan and many of them are closing shop. This is just the natural economic process of how society organizes itself. It is not evidence of a general economic malaise. Indeed, as I go through the earnings releases for major U.S. corporations, I find practically no evidence of the economic collapse that financial markets are assuming. In fact, now that commodity prices have returned to rational levels, the margin squeeze from higher production costs and inflationary fears can recede into the background. And that is a positive because it takes the heat off the global economic infrastructure. Will there be deflation instead? How is that going to happen when trillions and trillions of dollars have been pumped into the global financial system? Do people really expect that aggregate demand in Western economies will fall substantially because of the market crisis? There is no economic explanation for what has happened, but the all important U.S. elections are on in a few days and that makes things very interesting. Baring the possibility that all money managers have gone crazy and have decided to force a fire sale of their own and their clients' assets, there are only a few economic actors who can create such mayhem and none of them are private individuals. Continued U.S. engagement in the Middle East is simply too important and a U.S. withdrawal from Iraq as proposed by Senator Barack Obama is just not something that can be contemplated. But what will they do to stop Obama?

ming

Joined: 02 Aug 2005
Posts: 1635

Posted: Mon Oct 27, 2008 1:08 pm Post subject:

http://online.wsj.com/article/SB122505465551669955.html Just look at the projected growth rates for Asian economies. Growth rates come down by 1-2% and the market falls by 70%? Huh? During the Asian Financial Crisis, there was a sharp and real contraction in economic output which helped justify the sharp equity sell-off. But nothing of the sort is happening in today's markets. Look at the numbers, there is no global recession.

--
Courage is not the absence of fear, but something more important than fear

http://dreamerziv.blogspot.com/ - DreamerZ Investment Views
http://heeteck.blogspot.com/ - DreamerZ Personal Blog

Developing Nation Debt Costs Soar as Belarus Joins IMF Requests

2008-10-23T18:08:00.001+08:00

The fall of Iceland proved to start a chain effect, with Pakistan Hungary and Ukraine in the mellows yesterday.

Today, Belarus join in the fun.

Who's next?

http://www.bloomberg.com/apps/news?pid=20601087&sid=aT_l.Yhb3LqQ&refer=home

Quote

Ex-Soviet Belarus followed Iceland, Pakistan, Hungary and Ukraine in requesting emergency loans as the global financial crisis restricts its ability to borrow, the IMF said yesterday. Argentina's lawmakers are attempting to stop President Cristina Fernandez de Kirchner seizing pension funds from money managers, as the country risks defaulting for the second time this decade.

Hee Teck

Goldman Sachs Paydays Suffer on Lost Leverage With Fed Scrutiny

2008-10-22T08:53:00.001+08:00

For my own reading and record..

Goldman Sachs Paydays Suffer on Lost Leverage With Fed Scrutiny

By Lisa Kassenaar and Christine Harper

Oct. 21 (Bloomberg) -- On Sunday Sept. 21, just before 3 p.m., Lloyd Blankfein gathered the top executives of Goldman Sachs Group Inc. in his 30th-floor office and set off a chain of events that would forever change the company he leads.

It had been a week like no other on Wall Street. Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, was bankrupt. The credit markets, which Goldman uses to fund its business, were frozen. And Treasury Secretary Henry Paulson, Blankfein's predecessor as chief executive officer of Goldman, was begging Congress for $700 billion to save the financial system. Goldman's stock had plunged as much as 26 percent in one day.

In the brief meeting in lower Manhattan that warm Sunday, according to a person familiar with the events, Blankfein told his lieutenants the firm would become a bank holding company, ending its run as the jewel of global investment banks.

So began the next chapter in the history of Goldman Sachs, a company founded in 1869 by a former street peddler that had weathered many crises. It survived what may have been the most serious threat in September, only to be thrust into a new landscape where Goldman will have to prove that old virtues--a vast alumni network, a fierce partnership culture, high levels of compensation and trading acumen--are still of value.

The contingency planning to become a commercial bank had been under way since March, after the collapse of Bear Stearns Cos. sent shivers through Wall Street. That's when Federal Reserve inspectors set up camp at the firm's 85 Broad St. headquarters, a sign of things to come.

Break the Glass

It wasn't until that weekend in September that Blankfein, 54, decided to break the glass and sound the alarm. Goldman was going to need the stability of a large deposit base, he concluded, to compete with the likes of JPMorgan Chase & Co. and Bank of America Corp., the nation's two largest commercial banks. It was no longer enough to be the biggest, most profitable securities firm--not when the investment banking model of relying on capital markets for funding was busted.

Goldman executives, fortified with Chinese takeout, gourmet pizza and burgers from Harry's at Hanover Square, had spent the weekend debating the firm's options. Lawyers were preparing the paperwork to transform the bank into an institution supervised by the Fed. Some slept in the office. Blankfein was in close contact with Timothy Geithner, president of the Federal Reserve Bank of New York, and with John Mack, chief executive of rival Morgan Stanley, the person said.

After the meeting in his office, Blankfein secured the consent of his board of directors on a conference call. By 10 p.m., as darkness engulfed Wall Street, Goldman and Morgan Stanley separately announced they would henceforth do business as deposit-taking institutions.

Cohn, Winkelried

That was only the first step in rescuing Goldman from what would have been an unthinkable fate last year, when the firm earned $11.6 billion and its three top executives -- Blankfein and Co-presidents Gary Cohn and Jon Winkelried -- earned a total of $203 million.

Over the next days, the trio, stewards of Goldman since 2006, would call Warren Buffett for a $5 billion investment to shore up their balance sheet--and snag the billionaire's platinum-plated endorsement. And they'd raise another $5 billion by selling public shares for $123 each. That price was 43 percent higher than the $85.88 the shares touched in New York trading on Sept. 18, their lowest level in four years.

Treasury Connections

Meanwhile, in Washington, Paulson, 62, was scrambling to sell his plan to relieve banks of toxic mortgage securities that had sucked more than $600 billion from their balance sheets and were now devouring investor confidence. The world's rapidly unraveling financial web could trigger economic catastrophe, he told Congress. Paulson had already let Lehman go. The Fed had pledged $85 billion to keep American International Group Inc., the world's biggest insurer, from the same destiny. The markets were screaming that such stopgaps were no longer enough.

On Oct. 3, President George W. Bush signed legislation establishing the Office of Financial Stability to oversee the U.S. purchase of soured securities and loans from scores of companies, including Goldman. Edward Forst, 47, a former head of Goldman's asset management unit who now helps manage Harvard University's $35 billion endowment, helped set it up. On Oct. 6, another Goldman alumnus, Neel Kashkari, a 35-year-old former technology banker who joined the Treasury in 2006, was named to lead it.

Then, a week later, Paulson reversed course and summoned Blankfein and eight other banking chiefs to Washington, where he told them the government would inject $250 billion into the banking system -- including $10 billion for Goldman -- and insure senior unsecured debt issued over the next three years. In exchange, the government would take stakes in their companies and control executive compensation.

At the Pinnacle

Goldman has adapted before. It rose to the pinnacle of Wall Street profitability and power by creating a culture with a canny talent for reacting to what's coming next.

``Change is a general operating principle,'' says John Rogers, 52, Blankfein's top counselor, who has managed the firm's executive office under three CEOs. ``We have people who live in the markets, and our culture is one of speed. It's nimble.''

Goldman's business model is rooted in contrasts, current and former employees say: agile and unrelenting, risk loving and paranoid, outward looking and secretive, demanding of individuals and focused on team above all else. Traders and bankers have the wits to move billions of dollars a day between markets, supported by an exacting risk management system. Goldman has also built a brand that, with the promise of reputation and riches, entices the best talent.

`Greater Regulation'

The government plan is designed to make it easier and cheaper for banks to borrow money, alleviating the pressure on Goldman to gather deposits right away. By providing capital to the financial system, the government hopes to loosen credit markets and get banks lending to each other and to companies again.

With that benefit will come restrictions.

``The capital infusions will mean much greater regulation and oversight, not only from the government but from Mr. Buffett,'' says Peter Solomon, a former Lehman Brothers vice chairman who now runs Peter J. Solomon Co., an advisory firm in New York.

Blankfein, Cohn, Winkelried and Chief Financial Officer David Viniar, 53, are among the executives whose compensation will be subject to new Treasury-imposed standards, although none of these rules is likely to make a material difference to pay practices at Goldman. While the company won't be able to take tax deductions on salaries exceeding $500,000, bonuses that make up the majority of Goldman executives' pay won't be affected.

Less Leverage

The Fed may impose stricter controls on the amounts and types of risks that Goldman and other banks can take in the future, although regulators haven't said anything publicly.

``The government is going to want to ensure that there isn't a meltdown like this again,'' says Larry Tabb, founder and CEO of Tabb Group, a financial market research and advisory firm in Westborough, Massachusetts. ``They're going to have to use less leverage.''

Goldman's record profits last year were fueled by trading and multibillion-dollar investments that leveraged the company's total assets to shareholder equity more than 25 to 1. The firm seemed to make all the right bets: Mortgage securities traders wagered against the U.S. subprime market, bankers booked hundreds of millions from private equity stakes in energy companies and in China and prime brokerage revenue soared 25 percent as former Goldman employees directed business to their alma mater. For the seventh year in a row, the firm was No. 1 in advising on mergers and acquisitions, as dealmakers worked Goldman's network of business and government contacts.

2008 Credit Crisis

Now the credit crisis of 2008 has shattered the business, and Goldman is switching gears. Blankfein plans to gather consumer and corporate deposits as a more-stable and lower-cost source of funding. He'll dial back risk in trading and principal investing, which provided 68 percent of revenue in 2007. And partners will have to learn to live with Fed inspectors in their midst.

``Most outsiders don't realize how frequently and how drastically Goldman has changed,'' says Peter Weinberg, 51, a founder of New York-based Perella Weinberg Partners LP who ran Goldman's international operations from 1999 to 2005 and whose grandfather, Sidney Weinberg, was the firm's senior partner from 1930 to '69. ``The changes we see today, however seismic they may seem, will be met like the many others: with a rigorous evaluation of which businesses make sense and which don't and then a fierce commercial plan to be leaders in those businesses.''

Good News, Bad News

The good news for Goldman is that the company's expertise in making investments in distressed assets could pay off. The firm has already raised funds to buy assets ranging from mortgage securities to loans made to finance leveraged buyouts, and it sees opportunities to invest in the current environment, people familiar with the company say.

Goldman's top executives declined to comment for this article. Blankfein scheduled an interview and then canceled on Oct. 10, when the firm's shares plunged 12 percent and the Standard & Poor's 500 Index finished its worst week since 1933.

The bad news is that the weak economy may depress business in other areas, including M&A and trading. Blankfein has described Goldman's strategy as ``chasing GDP around the world,'' meaning the company makes money in economies that are growing fastest. ``Our ultimate source of growth is the economy,'' he has said.

Slower Growth

The International Monetary Fund on Oct. 8 scaled back its forecast for global growth in 2009 to 3 percent -- a level the fund has called the dividing line between a global recession and expansion -- and it predicts industrial economies will grow at the slowest pace since 1982. The volume of global corporate takeovers, a business Goldman dominates, plunged 29 percent in 2008 through Oct. 16 compared with the same period a year earlier. Worldwide stock offerings fell by the same percentage, while sales of high-yield bonds tumbled 60 percent, according to data compiled by Bloomberg.

Asset management, which includes hedge funds and investing in stocks, bonds, private equity and real estate, may also be hurt in declining markets, although it could be a long-term growth area for the company. Falling markets mean declining asset values and fewer fees. In the three months ended in August, Goldman's assets under management dropped 4 percent to $863 billion, cutting management fees 3 percent from the prior quarter.

New Competitors

In trading, Goldman's biggest source of revenue, cutting leverage means smaller bets, capping the amount the firm can make -- and lose. The firm may revert to acting as a middleman between buyers and sellers, says David Killian, a fund manager at Valley Forge Advisors LLC in King of Prussia, Pennsylvania. That isn't as lucrative as making trades with the firm's own capital, he notes, but it's less risky.

For Blankfein, the question is no longer about survival, says Killian, whose fund manages $650 million and owns Goldman stocks and bonds.

``The question,'' he says, ``is, Can we put up the same returns over the next 10 years as we did the prior 10? Unequivocally, the answer is no.''

Already, fewer deals and curbs on risk have cut into the available money for compensation. As of the end of the third quarter, Goldman had set aside $11.4 billion for pay and benefits for its 32,000 employees this year, 32 percent less than in the same nine months of fiscal 2008. About two-thirds of that pool is typically paid out as year-end bonuses.

Deposit Base

The new rules of finance also force Blankfein to rethink his competition. Decades-old rivals Bear Stearns and Lehman are dead. Now, Goldman will contend with behemoths such as Citigroup Inc., Bank of America and JPMorgan Chase. Those banks have been hobbled by the credit crisis, yet they're way ahead in deposits, which has kept their overall cost of funding relatively low.

Goldman is set to begin building its deposit base. Since 2002, it has operated a Utah-based bank for private clients that has grown to about $19 billion in deposits. The firm is moving $150 billion of assets from other businesses, including lending, into that division immediately, and it has also applied for a New York state bank charter. Goldman's plans to acquire deposits may include buying banks as the credit markets thaw and some lenders falter, a person familiar with the strategy says. It's more likely to gather wholesale deposits, money from companies, than smaller amounts from retail clients.

`More Conservative Model'

CFO Viniar is now in charge of a group of about 200 people changing the company's accounting and legal systems to meet Fed requirements. Peter O'Hagan, a managing director from Goldman's commodities group, was named CEO of GS Bank USA. E. Gerald Corrigan, 67, a former New York Fed president who joined the firm in 1996, was appointed the unit's chairman.

``Goldman is being forced into a much more conservative model,'' says Christopher Whalen of Hawthorne, California-based Institutional Risk Analytics. While the business will be steadier, even the best-run commercial banks tend to post return on equity of about 12 percent, he says, meaning Goldman isn't likely to be the highflier for investors it was last year, when its ROE topped 32 percent.

That will be a test for Goldman's culture, which above all is about making money for employees and shareholders. Weinberg, who left the firm in 2005, remembers a conversation with Jon Corzine, a former bond trader who bucked Wall Street style by wearing a beard and a sweater vest, rose to senior partner of Goldman in 1994 and is now governor of New Jersey.

Goldman `Hustle'

``Jon Corzine always told me that the only strategy really worth a damn was 'hustle,''' Weinberg says. ``And I will tell you one thing: 'Hustle' was practiced to a fine art at Goldman Sachs.''

With their rapid action that September weekend, Blankfein and Paulson -- CEOs present and past -- offered a glimpse of Goldman at full speed. Blankfein, a postal worker's son from Brooklyn, New York, who joined the firm as a gold salesman in 1982, didn't hesitate to move quickly when the markets demanded it. Byron Trott, who started at Goldman the same year and is one of Buffett's closest advisers, was able to score Berkshire Hathaway Inc.'s capital injection within five hours. Goldman's equity sales desk, adept at moving stocks into the market, was informed of a $2.5 billion share sale the afternoon of Sept. 23, according to a person familiar with the matter. By 8 a.m. the next day, they'd sold twice that much.

Appearance of Conflict

The alumni network was also engaged. Paulson has been working with former Goldman colleagues to wrestle with the financial crisis for months. In August, he brought Kendrick Wilson, Goldman's former head of bank M&A, to Treasury as a consultant. Paulson is close to Josh Bolten, Bush's chief of staff, who worked at Goldman until 1999. Robert Rubin, who led Goldman from '90 to '92 and was President Bill Clinton's Treasury secretary, was advising Democratic presidential nominee Barack Obama on his response to the economic crisis.

Goldman's connections in Washington have spurred speculation that the Treasury Department, and Paulson in particular, may have favored the firm during the process of trying to rescue the financial system, especially by letting Lehman, a Goldman rival, go down and then saving AIG, which owed Goldman billions. Paulson started at Goldman in 1974 as an investment banker and became co-CEO with Corzine in '98. He sold all of his Goldman stock when he joined the Bush administration.

``Paulson has found himself in a position of extraordinary appearance of conflict,'' says Solomon, the former Lehman vice chairman. ``But I don't believe in any way, shape or form that it influenced his decisions.''

Competitive Advantage

Lucas van Praag, a spokesman for Goldman, says the firm has not received any preferential treatment from the government. If anything, he says, Goldman has been excluded from some opportunities afforded competitors, such as the chance to analyze Bear Stearns's books before the company was sold to JPMorgan. A person close to Paulson, who asked not to be identified, says he has gone out of his way to avoid even the appearance of conflict.

Yet Goldman's network is a clear competitive advantage, says Ed Maran, portfolio manager at Thornburg Investment Management in Santa Fe, New Mexico, which manages more than $35 billion and has bought more than a million Goldman shares since mid-September.

``Every major move that's happened in the markets, they've been there for: hedge funds, alternative investments, globalization in Asia and Eastern Europe,'' Maran says. ``You don't get these positions by reacting but by anticipating the way the world is going.''

`Influenced by Greed'

Goldman has been anticipating the way the world is going since Marcus Goldman, a German immigrant, began brokering IOUs from an office on Pine Street in lower Manhattan in 1869. Thirteen years later, he invited his son-in-law, Sam Sachs, to join the business, which became Goldman, Sachs & Co.

A partnership was born that would flourish until 1999, when the company, the last major Wall Street firm to abandon private ownership, sold shares on the New York Stock Exchange. Needless to say, the partnership managed its own sale: Goldman started handling public offerings in 1906, when sales for United Cigar Manufacturers and Sears, Roebuck & Co. introduced the concept of evaluating a company by its cash generation rather than its assets, according to the firm's Web site.

Working the Network

Goldman's first major crisis, in 1929, presaged the firm's troubles with leverage now. An investment arm, Goldman Sachs Trading Corp., had bought millions in shares of U.S. companies with money raised in the stock market. Later, Walter Sachs, Sam's son, would say, according to Goldman Sachs: The Culture of Success, a history by Lisa Endlich: ``I confess to the fact that we were all influenced by greed. We thought these values were going to be justified.''

Sidney Weinberg, who took over in 1930, was loath to put partners' capital at risk after the collapse of the stock market. He expanded in investment banking instead. He also forged the company's still-prevalent view toward public service as an adviser to presidents Roosevelt, Truman and Eisenhower. His role as a director on 34 boards helped him recruit corporate leaders to serve the government during World War II, earning him the nickname ``the body snatcher.''

Weinberg worked the network for the good of the firm, says Charles Ellis, a former consultant to Goldman whose book The Partnership: The Making of Goldman Sachs was published in October. Many executives turned to Weinberg for advice on appointing board members.

1994 Crisis

``Then, of course, he'd make it clear to the people who were going to go on the board that he had made it happen,'' Ellis says. ``And so they were grateful. And who would they choose for an investment banker? Pretty soon he's got a network of corporations that want to be clients of Sidney Weinberg.''

In 1994, the firm faced another crisis that almost put it under: The Fed jacked up U.S. overnight lending rates seven times, doubling its target to 6 percent and sending Goldman's bullish bets on the bond market into a tailspin. It was then that the partnership structure was truly tested, says Peter Weinberg, who became a partner in 1992.

``The firm was struggling month to month; we all had personal liability,'' he says. ``It was a great way to learn what a partnership really means.''

The 1994 crisis ramped up the urgency to go public. It also pressed the firm to examine its risk management process.

Risk Committee

Merrill Lynch & Co. CEO John Thain, who became Goldman's chief financial officer that year, and David Viniar, the firm's treasurer at the time, designed the system of checks and balances still in place today. Controllers who monitor risk report directly to Viniar, who has been CFO since 1999, not to the heads of individual businesses.

A risk committee of about 25 people meets every week to talk about developments in the market, examine value at risk and review positions over a certain size, according to a person familiar with the system. The firm marks to market every day, which means it assigns its assets the prices they'd fetch from a buyer. For illiquid securities, those prices may be estimated based on computer models.

``We recognize concentrated exposures early, and we move aggressively to reduce them,'' Viniar said on a conference call on Sept. 16, when Goldman reported third-quarter earnings, which were hurt by losses on its sales of leveraged loans. ``This risk reduction was painful. It caused us to have losses of over $3 billion. But daily marks actually strengthened our resolve to continue to reduce our exposures.''

Avoiding Subprime

It was Viniar, following his own risk rules and his instinct for keeping the firm out of consumer businesses, who prevented Goldman from having blistering losses in the subprime market, according to a person familiar with the firm's operations. Viniar and other top executives were early to see risks in the home loan market, the person said. In September 2006, as rivals such as Merrill Lynch and Morgan Stanley were snapping up mortgage lenders, Viniar told analysts that Goldman was hesitant to follow.

``We have two primary concerns,'' he said. ``One is a timing concern: Is this the right point in the cycle to do it? And the second is a retail concern. Goldman Sachs is largely an institutional business.''

Three months later, Viniar observed that the U.S. housing market was wobbling. He met with Goldman's mortgage-trading department to advise on offsetting the risk of Goldman's holdings of mortgage-backed collateralized-debt obligations and other related securities, according to people familiar with the matter.

AIG Hedge

Those discussions proved critical. Goldman's structured- products trading group, betting the firm's own money, shorted the subprime-securities market by buying credit-default swaps through 2007. By the end of the year, the firm had made money on those trades and avoided losing billions.

This year, Goldman also saw trouble brewing in the insurance sector and began hedging its exposure to AIG, which had a notional value of about $20 billion as of mid-September, according to a person familiar with the strategy. The hedges included short positions on AIG and other insurance companies, as well as CDSs. Goldman wouldn't have lost money if AIG had gone out of business, the person said, although the collapse would have caused wide- spread economic distress.

Blankfein's Record

The firm Blankfein took over in 2006, after Paulson's sudden decision to join the Bush administration, was in great shape by most measures. The stock had almost tripled since the initial public offering. Goldman had reported record profit in 2005 and was growing income from trading and from the firm's own investments. Revenue from those activities was $16.4 billion that year, 17 percent more than the entire firm made in 2002.

Goldman's appetite for risk was climbing in tandem. Value at risk, a measure of how much the firm could lose in a day if markets turned against it, climbed to $70 million in 2005 from $28 million in 2000.

As CEO, Blankfein drove further into trading and principal investing, which accounted for 75 percent of its pretax profits by 2007. Like other Wall Street banks, Goldman used leverage to generate bigger returns. The year before Blankfein became CEO, Goldman's gross leverage ratio, a measure of assets compared with shareholder equity, was 18.7 to 1. By the end of 2007, it had ballooned to 26.2 to 1. Assets more than doubled in that period to $1.1 trillion.

The strategy of buying assets with borrowed money worked wonders when the values of everything from U.S. real estate to Chinese bank shares were soaring. About 65 percent of the jump in Goldman's ROE from 2003 to '06 can be traced to an increase in leverage, more than its competitors, Merrill Lynch analyst Guy Moszkowski calculated in an Oct. 7 report.

Asset Management

Now with losses spreading beyond mortgages to a wider range of assets including stocks, corporate debt, commodities, emerging markets and real estate, Goldman's leverage amplifies the risk to the firm of those falling prices. At a leverage ratio of 26 to 1, a 4 percent decline in the value of the firm's assets will wipe out shareholder equity. As of mid-October, the firm had cut its leverage ratio to 19 to 1.

With investors and regulators demanding that banks cut risk, Goldman may beef up a business that doesn't require the company's own money: asset management. Even after a decline in the third quarter, the business was on track for another record year, with revenue up 8 percent from last year's record.

One part that has flourished is so-called alternative investments, such as private equity funds and hedge funds. They're lucrative because they reap higher fees than traditional money market or stock funds. More than 17 percent of the company's funds under management were in alternative investments at the end of 2007.

`Marquee Business'

Investors may have more appetite for conservative choices such as money markets as they emphasize safety over high returns, says Peter Sorrentino, a senior portfolio manager at Cincinnati-based Huntington Asset Advisors.

``They will continue to do private equity and things like that, but it will be a sideline business as opposed to the marquee business,'' he says. ``The less risky the business, the greater the dollar volume they can garner and the more consistent the returns.''

Some analysts say Goldman's asset management business could grow to as much as $5 trillion under management. By comparison, BlackRock Inc., the fund management company run by Larry Fink and part owned by Merrill Lynch, had $1.4 trillion under management at the end of June.

``I wouldn't be surprised if the scale of the asset management business dramatically increased,'' Weinberg says, ``which may finally provide the recurring earnings stream so sought after by public equity investors.''

Weinberg's Trauma

There's a certain irony in Sidney Weinberg's grandson predicting that asset management may end up becoming a core business for Goldman. The elder Weinberg was so traumatized by the Goldman Sachs Trading Corp. calamity that, for years afterward, the company made it a policy not to manage other people's money.

``Goldman Sachs does not manage any investment trusts--open end, closed end, or no end,'' Weinberg said, according to Endlich's book about the firm.

Ever since the scandal, Goldman has had a love-hate relationship with managing money for clients. Gus Levy, Weinberg's successor, sold the firm's $500 million money management business in 1976 because Goldman wanted to avoid competing with clients, according to Endlich's book. John Whitehead, the firm's senior partner from '76 to '84, got back into the business. In '90, Goldman created the Water Street Corporate Recovery Fund, a pool of money to buy controlling stakes in the debt of financially distressed businesses. It was shut a year later when its negotiations upset clients such as Fidelity Investments and Tonka Toys.

Global Alpha

Blankfein, in a speech to investors in November 2006, said that skepticism about Goldman's asset management strategy was ``unwarranted.''

A year later, even though the unit had posted record revenue, the division again marred the firm's reputation. The flagship Global Alpha hedge fund fell 40 percent in 2007, hurt by wrong-way stock and currency bets. Global Equity Opportunities, which relied on mathematical models to select trades, fell 28 percent in August 2007. That led Goldman to put $2 billion of its own money into Global Equity Opportunities and to raise $1 billion from a group of outside investors, including billionaire Eli Broad and hedge fund firm Perry Capital LLC.

``We feel terrible about it,'' Blankfein said in November 2007. Still, he noted that Goldman had recently raised a new $2.7 billion credit hedge fund called Liberty Harbor and a $1.8 billion distressed credit fund called GS Liquidity Partners.

$1 Billion Hurdle

A month after that fateful September weekend, Blankfein's rescue plan was still a work in progress. His challenge is to find revenue as the global economy veers into recession and markets gyrate in a way not seen since the Great Depression. He has support from the likes of Buffett and the U.S. government-- although at a cost. Berkshire's $5 billion investment pays a 10 percent dividend, an annual expense for Goldman of $500 million. The Treasury's $10 billion pays a 5 percent dividend, or another $500 million. That's $1 billion in new expenses Goldman has to cover.

Blankfein, known for his disarming quips, tried to make light of his predicament on the evening of Oct. 14. It was the day after Paulson had gathered the heads of the biggest U.S. banks in Washington and forced them to accept the government's cash. Blankfein stood in front of a crowd of about 160 people in New York's Plaza Hotel, where he presented a book award to Mohamed El-Erian, Pacific Investment Management Co.'s co-chief executive officer and author of When Markets Collide.

``Are you suggesting that you think I should be depressed?'' he asked at one point, as guests ate banana- chocolate puff pastry.

``There's an evolution here,'' Blankfein said, ``and just as we are being provided with stimulus that none of us in our lifetime have ever had to this extent before, we are going to have responses that nobody's ever seen before. We understand the importance of the moment.''

With that, Blankfein was off -- headed to the airport, to meetings in London and to figure out Goldman's future.

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The dark side of lower prices(Deflation)

2008-10-19T23:20:00.000+08:00

http://money.cnn.com/2008/10/17/news/economy/deflation/index.htm?postversion=2008101705

Deflation, the devil of all evils, is touted as a rising comeback possibility, and if oil continues to call below 50 by the end of the year, do not rule anything out,in my humble opinion.

There was a time when oil prices ruled the market, not anymore...
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Overnight Libor Starting to Look Like Overnight Libor Again

2008-10-18T23:29:00.000+08:00

http://bespokeinvest.typepad.com/bespoke/2008/10/overnight-libor.html

Libor is going back to normal, signally the financial part of the crisis is about to end.

However, i look at the crisis from 2 parts, the other part is the economical, and that looks to have just started, jumpstarted by the financial part. And that's the tricky part.

Nevertheless, the thawing of financial crisis is a positive one.
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S&P 500 chart

2008-10-18T23:20:00.000+08:00

Longer time frames no longer makes sense to me...
this 30 min chart says the S&P500 is looking to break out in a triangle, with the Lehman CDS situation in Tuesday, we can pretty much expect the breakout to be downwards.

US Indices are still lagging behind the rest, IE Asia, and looks to play catching up soon?
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Fears of Lehman Brothers CDS derivatives haunt Financial markets

2008-10-18T23:13:00.000+08:00

This is an article with thanks to Chris.

I think we need to look out coming tuesday.

It is a full week after bankers gathered in New York to start sorting out the derivatives mess left by the bankruptcy of Lehman Brothers. We still do not know who is on the hook for some $360bn of default insurance, or how much they will have to pay.

By Ambrose Evans-Pritchard
Last Updated: 12:18AM BST 17 Oct 2008

Comments 27 Comment on this article

Lehman Brothers former chief executive Dick Fuld has faced heavy criticism Ominous talk of big names and big sums continues to haunt global markets, thwarting efforts by the US and European authorities to unlock inter-bank lending. Traders have noted with acute interest that insurer AIG - now nationalised - says it will need another $38bn from the US government, on top of the $85bn bail-out it has already received. AIG is the world's biggest underwriter of credit protection.

Those on the wrong side of these Lehman debt contracts - known as credit default swaps (CDS) - must come up with the money by Tuesday, the next D-Day in the ever-fraught calendar of the credit markets. There has been a deafening silence so far.

There is no easy way of finding out who they are, so every bank and insurer is suspect. The $55,000bn CDS market is "completely lacking in transparency and completely unregulated" in the words of Chris Cox, the chairman of the US Securities and Exchange Commission.

The settlement auction on Lehman CDS contracts last week was in itself a bombshell. Creditors retrieved just nine cents on the dollar from the Lehman wreckage. As Naked Capitalism put it, the bank had "vaporised". The biggest players at the auction were Goldman Sachs and Deutsche Bank but they were almost certainly transacting for clients.

The insurers of the debt -- a third are hedge funds -- will have to pay 91pc of the $400bn in contracts.

The Depository Trust and Clearing Corporation says the risks have been exaggerated in headline scare stories, insisting that the total sum to be paid will be closer to $6bn. It says most positions are "netted out".

"That's not credible," says Andrea Cicione, credit chief at BNP Paribas.

"They keep coming up with these number by 'netting' but we think the amount is going to anywhere from $220bn to $270bn. The chain broke in the CDS market when Lehman Brothers went down. We may now see other counter-parties defaulting," he said.

With hindsight, it is now clear the decision to let Lehman Brothers go bankrupt set off a melt-down of the world financial system, forcing North America, Britain, Europe, Australia, and now parts of Asia to rescue their banks. "A dramatic error," said Christine Lagarde, France's finance minister.

US Federal Reserve chair Ben Bernanke said this week that Washington lacked the legal power to take on the vast liabilties stemming from a Lehman rescue.

"A public-sector solution for Lehman proved infeasible, as the firm could not post sufficient collateral to provide reasonable assurance that a loan from the Federal Reserve would be repaid, and the Treasury did not have the authority to absorb billions of dollars of expected losses to facilitate Lehman's acquisition by another firm. Consequently, little could be done," he said. The new legislation passed by Congress "will give us better choices."

In truth, both Congress and the US public wanted a scalp. Treasury Secretary Hank Paulson had to bide his time until it was clear to almost everybody that a domino collapse of the US banking system would lead to catastrophe. The Lehman collapse did the trick.

The list of companies admitting to losses on Lehman investments reveals the global extent of the damage. Dexia held €500m of bonds, which may have caused its own need for a Franco-Belgian rescue days later.

Among the others with declared exposure: Swedbank $1.2bn; Freddie Mac $1.2bn; State Street $1bn; Allianz €400m; BNP Paribas €400m; AXA €300m; Intesa Sanpaolo €260m; Raffeissen Bank €252m; Unicredit €120m; ING €100m; Danske Bank $100m; Aviva £270m; Australia and New Zealand Bank $120m; Mistubishi $235m; China Citic Bank $76m; China Construction Bank $191m, Industrial Commercial Bank of China $152m and Bank of China $76m. Ultimately, some money may be recovered.

These losses are out in the open, but the CDS shoe has yet to drop. Perversely the insured volume is greater than the $150bn total of Lehman debt. Some $400bn of CDS contracts were sold. Many were used by hedge funds to take "short" bets on the fate of the bank. The contracts nevertheless have to be honoured.

Chris Whalen, head of Institutional Risk Analytics, says this creates a huge moral dilemna. Why should taxpayers now responsible for AIG foot the bill for huge windfall transfers to hedge funds?

"We need to shut this whole thing down. The people who don't own the underlying collateral and were just betting should be flushed away. It would be grotesque if the US authorities were now to subsidize speculators. The US political class is waking up to this," he said.

If so, the winners may have more trouble than they realize collecting their prize.

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Fed's Bullard: Emergency lending not inflationary

2008-10-18T23:10:00.000+08:00

http://www.reuters.com/article/ousiv/idUSTRE49G79E20081017

Emergency lending not inflationary?
Frankly, that's very different from convention wisdom.

Inflation is down right now, with oil somewhere around USD70, but i dun see oil remaining that low.

Oil is political driven, primary by the middle east. And they wont like a low price of oil. Afterall, they made the world got used to USD100 oil.

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Carl Icahn's 177-ft motor yacht up for sale

2008-10-18T23:07:00.000+08:00

http://www.reuters.com/article/ousiv/idUSTRE49G6J520081018

Carl Icahn, well known for his hostile approach in takeovers, is one of richest man in USA.

Margin call leading to selling of assets?
Frankly, this market meltdown does not only hurt the poor.
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CSE Global looks beyond investing in UK

2008-10-15T08:50:00.001+08:00

One of the very first stocks that i start with in 2003, CSE is indeed looking very attractive.

Great investment idea in my opinion.

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CSE Global looks beyond investing in UK

By NISHA RAMCHANDANI

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MAINBOARD-LISTED systems integrator CSE Global, which was awarded the 2008 UK Trade & Investment International Business Award yesterday, will continue to invest in Britain and plans to move in markets such as Canada, where it has yet to establish a presence.

'We will continue to look into acquisitions in the UK,' said group managing director Tan Mok Koon, adding that these will be funded by cash flow from the UK subsidiaries Servelec and Scomagg.

Beyond the UK, CSE Global would like to venture into Canada, Latin America, Central Asia and Eastern and Western Europe.

Currently, the oil and gas sector accounts for 75 per cent of the company's business. Power and water utilities, and transport and health care, account for 10 per cent each.

Mining and minerals constitutes 5 per cent, though Mr Tan reckons this sector could grow to 15-20 per cent in about three years.

CSE Global said it decided to invest in the UK because of the transparency of the system there. In 2000 it acquired Servelec, which now has annual turnover of more than £17 million (S$43.5 million). And in 2006 it acquired Scomagg. CSE Global has invested £25 million in the UK.

Its investments initially attracted scepticism, as Asian and Western companies have different styles of business. CSE Global also faced board pressure to send a Singaporean to the UK to keep an eye on operations.

But Mr Tan said 'mutual trust and respect are very important' in a business relationship. Instead, an incentive scheme was put in place 'to motivate management to work hard for us', he said. 'After all, we want to be a global company.'

The UK accounted for a revenue of £30 million last year, while profit (before tax) was £7 million. The group as a whole earned S$42 million in 2007, while revenue was S$405 million.

'This year we'll come in with good growth,' said Mr Tan. 'Analysts are expecting 30 per cent growth and I don't think we'll give any surprises,' he said. CSE Global is aiming for revenue of half a billion dollars.

Despite the credit crunch and slowdown in the economy, the company expects a steady stream of projects over the next few quarters. 'We will only be able to tell whether the credit crunch will affect us by 2010-2011,' Mr Tan said, pointing to the Middle East, Africa and the Gulf of Mexico as areas with strong demand.

The UK Trade & Investment International Business Award is conferred by the UK government on local companies with significant strategic and long-term investments in the UK.

S&P 500's Drop Points to `Significant Rally': Chart of the Day (Bloomberg)

2008-10-09T10:05:00.001+08:00

Bloomberg says significant rally

http://www.bloomberg.com/apps/news?pid=20601213&sid=aQIltTzoVEPI&refer=home

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Rally ahead(short term)? - charts says it as posted earlier

2008-10-09T09:38:00.001+08:00

For me, the turning point was 2 issues.

1) coordinated effort to cut rates.

Fed knew the effects of rate cuts are drowning, but a coordinated effort is a big and significant one. This could lead to a sustainable bear rally till near elections.

2) Treasury Secretary Henry Paulson says of plans to recapitalise banks.

The earlier measure of buying bad stuff using taxpayers money is not effective. It takes bad stuff and do a transfer from one balance sheet to another. It does not fundamentally solve the problem, which is a lack of cash, or capital.

Today, he mentioned the recapitalisation of bank, which literally means to provide cash for stakes in banks.

This means that banks will have more money, and that fundamentally solves the issue of lack of money, until confidence comes back.

the combination of the 2, no. 1) to stop the rout, no. 2) to take on the issue are 2 major positives for me.

Esp 2) is the main solution that many strong economist have mentioned.

this could be a substantial turning point for a while, it remains a recessionary global economy.

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Time to buy?

2008-10-09T00:01:00.000+08:00

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2008-10-03T09:00:00.001+08:00

9. Credit-linked notes: 'Ironically, the broker who sold me those notes did not invest in this product. How I wish he could have told me that when he was selling it to me.' (ST Forum, 2 Oct) - I REFER to letters by Mr Jag Kuo last Thursday, 'Ultimately it's buyer beware' and Mr Stanley Jeremiah on Saturday, 'Instances where 'buyer beware' is unfair'. As an investor in several Minibond series and Jubilee Notes Series 3, which was affected by a credit event, I want to relate several observations supporting Mr Jeremiah's view. These pertain to the way such financial products are distributed. As an investor in Minibond Series 1, I had the opportunity to attend a launch briefing by Lehman Brothers representatives and facilitated by OCBC Securities. The briefing addressed risks associated with the investment if credit references fail but little was highlighted on other risks related to the arranger or the swap party. I could also recall an answer to the question, 'What happens when there's a credit event?': 'The securities would have to be unwound and investors will get back less than the principal amount invested.' This response oversimplifies the content in prospectus, and the fact that the resulting amount, after adjusting for the sale of collateral and termination of swap arrangement, may be negative or zero. Interestingly, a high proportion of investors present at that briefing were retirees. As this was the first launch of a credit-linked instrument to retail investors, there was significant coverage in major newspapers, including the Chinese media, on April 4, 2006. Quotes from interviewees included: 'The bonds are linked to entities which are solid, stable and very large.

10. Under intense pressure to sell (Today, 2 Oct) - Letter from L H Tang. I AM a personal financial consultant in a local bank. Banks state that there is no misrepresentation of products sold, and that products are usually recommended based on consumers’ needs. A financial needs analysis and fact find is usually done to ensure consumers have sufficient funds and have a real need for the product. Often, though, consultants like myself are under pressure to sell certain products so as to hit our sales target. A fresh graduate from the National University of Singapore, I have a contract with the bank for nine months. If I do not pass my probation in six months by hitting my sales target, I will be asked to leave and pay a $3,000 “bond”. So far, I have sold $500,000 of insurance based on consumers’ needs, but I need to sell more investment-linked insurance products. Ten of these will be equivalent to 60 of those I have sold. Consumers should understand that consultants are under immense pressure to think of ways such products can be “beneficial” to them.

Products sale to benefit ourselves or the sales ppl? haha...

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