Saturday, 30 June 2012

Shocking behaviour of banks

Has anything really changed since the 2008 financial crisis? Below articles are simply shocking.

From RollingStone:

On Wednesday, Barclays won the race to reach a deal with U.S. and British regulators, beating UBS, which was reportedly the first bank to begin cooperating with international antitrust authorities. Barclays agreed to pay at least $450 million to resolve government investigations of manipulation of Libor and the Euro interbank offered rate (or Euribor): $200 million to the U.S. Commodity Futures Trading Commission, $160 million tothe criminal division of the U.S. Department of Justice and $92.8 million to Britain's Financial Services Authority.

Trader: "Can you pls continue to go in for 3m Libor at 5.365 or lower, we are all very long cash here in ny."

Libor rate submitter: "How long?"

Trader: "Until the effective date goes over year end (i.e. turn drops out) if possible."

Submitter: "Will do my best sir."

This is unbelievable, shocking stuff. A sizable chunk of the world’s adjustable-rate investment vehicles are pegged to Libor, and here we have evidence that banks were tweaking the rate downward to massage their own derivatives positions. The consequences for this boggle the mind.

For instance, almost every city and town in America has investment holdings tied to Libor. If banks were artificially lowering the rates to beef up their trading profiles, that means communities all over the world were cheated out of ungodly amounts of money.

And another one bites the dust:

The Royal Bank of Scotland is about to be fined $233 million (£150 million pounds) for its role in the Libor-rigging scandal. It joins Barclays as the first banks to walk the plank in what should be, but so far is not, the most sensational financial corruption story since the crash of 2008.

A much longer article from the same website: The Scam Wall Street Learned From the Mafia

And another article from Bloomberg:

More than four years after the financial crisis began, it’s so widely accepted that many of the world’s banks are burying losses and overstating their asset values, even the Bank for International Settlements is saying so -- in writing. (The BIS’s board includes Federal Reserve Chairman Ben Bernanke and Mario Draghi, president of the European Central Bank.) It fully expects taxpayers to pick up the tab should the need arise, too.

In this respect, little has changed since the near-meltdown of 2008, especially in Europe. Spain has requested 100 billion euros ($125 billion) to rescue its ailing banks. Italy, perhaps the next in line for a European Union bailout, is weighing plans to boost capital at some of the country’s lenders through sales of their bonds to the government.

Those bank rescues almost certainly won’t be the last. All but four of the 28 companies in the Euro Stoxx Banks Index (SX7E) trade for less than half of their common shareholder equity, which tells you investors don’t believe the companies’ asset values. While it may be true that the accounting standards are weak, the bigger problem is they are often not followed or enforced.

The lack of transparency and credibility in banks’ balance sheets fuels a vicious cycle. When investors can’t trust the books, lenders can’t raise capital and may have to fall back on their home countries’ governments for help. This further pressures sovereign finances, which in turn weakens the banks even more. The contagion spreads across borders. There is no clear end in sight.

Friday, 29 June 2012

MAS, where is the transparency? (2)

In addition to the previous posting on MAS, an new announcement has been made to the Bursa Malaysia.

a)        the parties in KLHC Suit No: S3-22-634-2006 will complete the Sale and Purchase Agreement dated 16 June 1997 (“SPA”) in which MAS purchased certain lands in Langkawi. MAS had sought to enforce the SPA by way of specific performance. This will result in the remaining land purchased (a 21 acre portion of the land held under HS(D) 623, Mukim Ayer Hangat, Daerah Langkawi) to be effectively transferred to MAS upon payment of the agreed balance purchase price of RM4,001,622.50 that is still outstanding under the SPA;

b)        all Counter-claims in KLHC Suit No: S3-22-634-2006, KLHC Civil Suit No: S7-22-487-2006 and SAHC Civil Suit No: MT3-22-365-2006 are to be withdrawn against MAS and parties related; and

c)        MAS and parties related will withdraw its claims in the above legal suits.

There is no adverse financial or operational impact on MAS arising from the settlement. MAS will not be incurring any financial or operational loss.

I find the announcement puzzling at best, and it throws up more questions than it answers, for instance:
  • What are the details of the SPA of 1997?
  • Why does it take 15 years to complete the SPA?
  • The claims against TSDTR and others were very specific and serious in nature, totalling many hundreds of millions of RM, why are they settled with a parcel of 21 acre land which even has to be purchased?
The claims, as detailed in the 2011 year report:

The Annual General Meeting of MAS has just been held, so shareholders have to wait almost one year to air their possible grouses regarding this settlement.

I doubt if they are happy with the performance, this is the 5-year chart of MAS:

Monday, 25 June 2012

Why SGX should review its rules

Letter in the Strait Times from Mak Yuen Teen, Assoc. Prof. at NUS Business School. He often comments on CG issues, more articles of the "Centre of Governance, Institutions and Organisations" can be found here.

I refer to the June 18 letter by Mr Gary Teo ('SGX shouldn't ignore investors' delisting concerns') and the reply by the Singapore Exchange

('SGX explains due diligence provisions in delisting protocol'; last Friday).

These relate to SGX-listed companies which fail to provide an exit offer when they are directed to delist after they fail to satisfy the criteria for removal from the SGX watch-list.

The SGX's reply states: 'In the event that a company faces the prospect of an involuntary delisting, the boards and management should present an exit alternative.

'Where it is not possible to do so, boards and management must disclose the reasons and explain to shareholders.'

However, this does not appear to be what the SGX rules say and what was presented when the SGX consulted the public on the introduction of the watch-list in 2007. Rule 1306 in the SGX rulebook for mainboard companies states that if the SGX exercises its power to delist a company, the issuer or its controlling shareholder(s) must comply with the requirements of Rule 1309.

Rule 1309 requires that a reasonable exit alternative - which should normally be in cash - be made and the issuer should normally appoint an independent financial adviser to advise on the exit offer. There is no provision for the board and management to disclose the reasons and explain to shareholders if no exit offer is made.

In other words, it appears that SGX has relaxed the application of the applicable rules presumably because it now realises that it is difficult to enforce an exit offer when a company is directed to delist.

Indeed, we are seeing repeated cases of companies being delisted without an exit offer.

Allowing the board and management to explain why no exit offer is possible, without additional safeguards to ensure that these reasons are bona fide, can lead to abuse.

Without an exit offer, minority shareholders will be holding illiquid shares in an unlisted company which is subject to far less stringent reporting and accountability requirements, and therefore with relatively little protection for them.

Since the watch-list and directed delisting regime has deviated from what is spelt out in the listing rules and what the SGX consulted on before it was introduced, I believe that the SGX should suspend its application and review the rules.

Link to the Straits Times website.

Friday, 22 June 2012

MAS, where is the transparency?

MAS made an announcement regarding the suit with former executive chairman Tan Sri Dato' Tajudin Ramli (TSDTR). This is an imporant suit, and it has been dragging on for a long time (TSDTR was attached to MAS until 2001, 11 years ago). The content of the announcement:

"We wish to announce that MAS and TSDTR have reached an agreement to settle the legal suits concerned on terms. As a result, the legal suits and all counter-claims in the legal suits against MAS will be withdrawn."

Is that all the information the shareholders of MAS receive? Where is the transparency in this?

According to this article:

"(Tajudin) has agreed to surrender valuable land in Langkawi where the Four Seasons Hotel stands,” a court source told The Malaysian Insider on condition of anonymity.

But if that is true, why is it not revealed in the announcement to Bursa Malaysia?

From a corporate governance point of view, this looks not good.

Thursday, 21 June 2012

The Genius of Mutual Indebtedness

I love this guy, Nigel Farage, at least somebody who tells it as it is:

The Whole Thing is a Giant Ponzi Scheme

Quotes from Farage (UK Independent party):

  • "EC president Jose Barroso is a delusional idiot and was a supporter of Chairman Mao"
  • "The only buyers of Spanish bonds are Spanish banks" 
  • "Listen. The Whole Thing's a Giant Ponzi Scheme!" 
  • "At the end of the day, this whole thing is going bust" 
  • "We have been led by a group of ex-communists to a total disaster" 
  • "What we're doing in Brussels with Barroso, and the other joker Van Rumpoy, is we are actually rebuilding a model of centralized undemocratic government run by bureaucrats"

Monday, 18 June 2012

SGX shouldn't ignore investors' delisting concerns

In the Singapore share market (SGX) all is also not 100%, as can be seen from this letter in the Straits Times. Companies that are going to delist have to make an exit offer (and some pressure is brought on the majority shareholder to make it a decent offer), but in some cases no exit offer has been made. The writer is of the opinion that if no exit offer is made, the company should not be delisted, which seems a fair point.

The writer states also that unlisted shares are worthless, which might not necessarily be the case. But to own shares in a delisted company is indeed not appealing to most minority shareholders. Because of this, the share price will be depressed, which is again beneficial for the majority shareholder.

The rules are apparently different from those in Malaysia, but in both cases they are not ideal for the minority shareholders. They buy into companies because the shares are listed, and thus can be sold in the open market. The delisting threat has often be used to put pressure on minority shareholders, who don't seem to have an adequate protection against this.

On June 5, Sunray Holdings, which is listed on the mainboard of the Singapore Exchange (SGX), received a delisting notification and was told to inform SGX of an exit offer by tomorrow.

Despite being placed on the SGX watch-list since June 3, 2010, Sunray was unable to meet both the profitability and market capitalisation criteria for removal from the watch-list.

Ever since a watch-list for troubled listed companies was introduced in 2008, the investing community has seen a number of formerly listed entities compulsorily delisted from the SGX. Since the implementation of this policy, the SGX has not proven that this system is beneficial to investors and shareholders.

For recent delistings such as The Style Merchants (delisted on Feb 24 this year) and Firstlink Investments (delisted on Nov 30 last year), the SGX had similarly issued the delisting notification and instructed those companies to submit their proposal for an exit offer. Both companies were subsequently delisted without any exit offers being given and shareholders of both companies were left with untradeable share certificates.

Even General Magnetics, which was delisted by the SGX on April 1, 2010, is yet to provide the shareholders with an exit offer.

I really wonder why nobody at the SGX can see there is a flaw in the system. In all these cases, the companies were notified to inform the SGX of an exit offer prior to the delisting. Where the exit offers were not given, the companies should not have been allowed to be delisted.

Does the SGX not recognise that shareholders will be left with untradeable shares which are virtually worthless upon a company's delisting?

In effectively delisting the shares, thousands of shareholders lose their entire investments and millions of dollars in market capitalisation is wiped off the market. Does the SGX not see that the exchange itself is the creator of a market risk by causing shareholders to lose their entire investments?

Ultimately, the decision whether to delist a company should come from the shareholders rather than from the exchange.

The SGX should give more thought and explore all possible options before taking away a firm's status as a public listing.

Sadly, the SGX has chosen to ignore the discontent among the investing public regarding this issue.

Gary Teo

80% of all day traders lose money

Behavioral-finance researchers have studied the performance of stock market traders in both America and Asia. Interestingly, they discovered that traders in both countries underperform the world’s broad markets by significant amounts. One study analyzed 66,400 accounts at a major Wall Street firm over a seven-year period. Another studied all the active traders on the Taiwan exchange.

In spite of the cultural differences, the results were virtually the same. The odds are against getting rich. Why? Due to the high transaction costs, taxes and bad decisions, the bottom line is simple: “The more you trade the less you earn.”

In fact, about 80% of all day traders lose money. In researching the Americans, one study found that the active investors who turned over their portfolios 258% annually made less than 12% on their money. Passive buy-and-hold investors, with only 2% portfolio turnover, had average returns about half again higher than the active investors.

Trading is bad for your health (and your retirement)

The bottom line is simple: Most traders do lose money. But most are also born optimists, think they’re different, above average, the exception to the odds.

Earlier Forbes reported on a study that the “North American Securities Administrators found that 77% of day traders lost money.” Bloomberg BusinessWeek says 82% of all day traders lose money. The data parallels a study by professors at the University of Taipei working in conjunction with University of California behavioral-finance professors Terry Odean and Brad Barber, the same two who researched 66,400 Wall Street accounts earlier and concluded, “The more you trade the less you earn.”

Get this: Even the traders who did make money in their trading were net losers after transaction costs were deducted. The study also checked whether past winners repeated. They did, but at a very high cost. The average winning trader did in fact repeat as a winner, netting $251 a day after transaction costs.

But overall 82% of all the traders still lost money, an average loss of $45 a day.

Rare 5% have the profile of a winning trader

Successful traders are born. My research on personality types for “The Millionaire Code” tells me most people do not have that unique profile, maybe 5-10%. But they all love the action, the thrill of the hunt, risks, gambling, the pressure, the pounding heart, sweaty palms.

Yes, they want to be heroes. They’re addicted to the adrenaline rush of living on the edge; it’s a “drug” driving them.

Decisions are made within minutes of receiving real-time financial information and signals from their programs. They may move in and out several times a day. Mutual fund investors get day-end quotes, too late to compete. For many traders, 15 minutes is an eternity. After that, breaking news is worthless. Everybody knows it.

Technical analysts, chartists and market timers may be longer-ranged, plan ahead, searching for patterns, rock-solid holding to their system. One successful trader showed me his plan for the day, the two-minute ticks, we tracked them, saw when to get out, all very rational, mechanical.

The personality type of winners is the same, they need to be in on the action, but they’re disciplined, got a system, stick to it, turn on the thrill of hunting for higher returns. It’s a fix, a high, an endless stream of instant gratifications.

For more, including a stress test for traders, please follow this link

Saturday, 16 June 2012

"Ugly stuff. And it's about to get a lot worse"

Forty-five million people (one in seven) are on food stamps.
One in seven is unemployed or underemployed.

Above statistics are, quite unbelievable, about the richest country in the world, the USA. Some more shocking facts:
  • The percentage of those out of work defined as long-term unemployed is the highest (42%) since the Great Depression.
  • Fifty-four percent of college graduates younger than 25 are unemployed or underemployed.
  • Forty-seven percent receive some form of government assistance.
  • Employment-to-population ratio for 25- to 54-year-olds is now 75.7%, lower than when the recession "ended" in June 2009.
  • There are 7.7 million fewer full-time workers now than before the recession, and 3.3 million more part-time workers.
  • Eight million people have left the labor force since the recession "ended" -- adding those back in would put the unemployment rate at 12% instead of 8.2%.
  • The number of unemployed looking for work for at least 27 weeks jumped 310,000 in May, the sharpest increase in a year.
  • Just 14% of high-school graduates believe they will have a more successful financial future than their parents.
  • The male unemployment rate for ages 16 to 19 is 27%; for ages 20 to 24, it is 13%.
  • Because of structural problems such as negative home equity (which keeps people from moving for work) and skills erosion (from long-term unemployment), UBS economists estimate that the economy's natural unemployment rate has increased from 5.7% before the recession to 8.6% now. This acts as a speed limit on potential economic growth.
  • Between 2007 and 2010, median family net worth fell nearly 40%, while median inflation-adjusted incomes before taxes fell nearly 8%.
The USA sems to have completely lost it, the most damage was done in the last four years, since the recession that was caused by the financial system. But the rot has set in a long time ago.
And, according to the writer of this article:
"Ugly stuff. And it's about to get a lot worse."

Tuesday, 12 June 2012

David Webb on governance

In The Edge Singapore an one page interview of David Webb by Assif Shameen. As always, Webb is very outspoken and opinionated.

In the article only one reference to Malaysia:

"Often, in emerging markets, it is years after a transaction that investors realise a company was sold or bought from a relative of the chairman or CEO, who was acting through some nominee companies, Webb says. "In many jurisdictions, including Singapore and Malaysia, often they don't name the counterparty or the people behind the buyer or vendor," he notes."

The full article from a yahoo link:

In early 2009, with markets reeling at the height of the global financial crisis, Hong Kong's main telco PCCW was being privatised by its listed Singapore holding firm Pacific Century Regional Development. Most analysts had written off the actual vote for the firm — controlled by Richard Li, the younger son of billionaire Li Ka-shing — as a mere formality. Enter Hong Kong's corporate governance campaigner and gadfly David Webb.

The former British corporate finance executive, who runs the popular, which uncovers corporate shenanigans in Hong Kong, had been campaigning to derail PCCW' privatisation effort but initially had not attracted much attention. In mid-January 2009, Webb had received an anonymous tip-off that there was a ballot rigging plot to influence the privatisation vote. He complained to the Hong Kong Securities and Futures Commission and kept up the pressure via his website.

Eventually, SFC intervened, taking PCCW to court, but losing the initial case and only to succeed in blocking the privatisation on appeal. While the move won him few friends in Hong Kong, it did reaffirm his role as Hong Kong's most feared corporate governance campaigner who would not spare even the city's richest clan.

Started in 1998, has become the go-to portal for retail investors in Hong Kong and global hedge funds following the shenanigans of companies in the greater China region. Webb arrived in Hong Kong in 1992 as a rookie corporate finance executive with BZW Securities, the then investment banking arm of London-based financial services giant Barclays. He later worked for Wharf Holdings as an in-house corporate finance executive until the tail end of the Asian financial crisis, when he found himself out of job. Instead of returning home to the UK and looking for another investment banking job, the shy, soft-spoken Webb decided to retire early in Hong Kong to manage his own portfolio and start a website in a city long known for opaque business practices and tame disclosure laws.

Although Hong Kong's business elite as well as its securities regulators may not like him, Webb knows they read almost everything he posts and pay attention to what he is saying. Just recently, the regulators abruptly reversed gears on the handcount rule on privatisations in Hong Kong after Webb forcefully made his point in the wake of the PCCW privatisation in 2009. Hong Kong law currently says companies need three-quarters of the vote in favour of the privatisation move in addition to the majority of the people through a handcount.

"The problem has always been that you can manipulate the handcount by adding extra hands [just as PCCW was trying to do]," Webb, 46, tells The Edge Singapore in an interview on June 7.

In late May, Hong Kong's Law Reform Commission, first set up three years ago, took up another major cause that Webb has campaigned for years: class action suits. The commission recommended the introduction of class action suits in Hong Kong. For now, there is a small caveat.

"The commission says class action suits will be allowed in Hong Kong, but not for investors, only for consumers of goods and services," says Webb. "What's been proposed is far too little and far too late, but if there is a positive, it is that Hong Kong now permits class action suits." At some point, perhaps investors will be allowed to file class action suits as well.

As the full impact of the European crisis is felt across the world, China starts to slow and other Asian economies slow, Webb says investors should watch for more financial scandals. "In boom times, when profits are growing fast, things get covered up easily. But, in more challenging economic times, shenanigans come to light," he says.

In the 14 years that he has been campaigning for better corporate governance, Webb says, a lot has changed in Hong Kong and elsewhere across Asia, including Singapore, but the region still has a long way to go. "Clearly, the biggest change in Hong Kong has been in market composition," says Webb.

Mainland Chinese companies with their listed H-shares, including top banks such as ICBC, big oil companies such as Petrochina and giant telcos such as China Mobile, now dominate the Hong Kong bourse, making up for more than half of the market capitalisation.

Tightening of rules
To be sure, regulations in Hong Kong have improved. Take, for instance, the takeover threshold, which has come down to 30%, from 35%; and disclosure agreement for shareholders, which now triggers at 5% instead of 10% previously. Moreover, insider trading has been a criminal offence in Hong Kong since 2003, along with being a civil offence.

"The frequency of financial reporting has improved," notes Webb. "When I first started in Hong Kong, it used to take up to five months for companies to publish their annual results. Now, that's down to three months."

Still, he says there are things that Hong Kong can learn from Singapore. "Hong Kong needs to catch up with Singapore and the rest of Asia in terms of quarterly financial reporting," he says. "There are those who say it will only force companies to push for short-term results but, as long as most Hong Kong companies are controlled by people who have large portions of their net worth in their listed vehicles, they are not going to be cavalier and just try to make quarterly earnings targets."

Will Singapore benefit from the tightening of rules in Hong Kong and snare a bigger share of quality China listings instead of being satisfied with second- and third-tier Chinese companies? The way he sees it, luring companies through some sort of competitive regulatory arbitrage just will not work.

"In the end, if investors believe a certain market was attracting lower quality companies, they will pay much less for stocks in that market," he says. "Ultimately, good companies will go where they see investors are willing to pay a premium and, often, that's an exchange with the most stringent of rules."

Trying to lure big IPOs by offering a slightly more lax regulatory environment, he says, is a short-term strategy that Hong Kong or Singapore should not fall for.

To attract the best listings from Asia and around the world, Singapore and Hong Kong need to develop their own niche. He cites how Singapore has done well by attracting shipping companies, shipyards, and offshore and marine players because it has long had an expertise in the area. Another area in which Singapore has done well is in real estate investment trusts and business trusts, while Hong Kong has done well attracting global resources companies such as Glencore or luxury global brands such as Prada and Coach.

He cites how Singapore has successfully attracted IPOs such as Formula One and Manchester United, while Chinese Internet companies have avoided both Hong Kong and Singapore, listing directly on Nasdaq because analyst coverage there is better. So, the likes of Baidu, Netease, Sina are all listed in the US.

"In the long run, policymakers and regulators need to build a top quality framework and attract the best companies in the world and say they don't care about a few bad ones that can't come in," he says. "Hong Kong and Singapore need to be in a virtuous cycle of listings, not a vicious cycle," says Webb.

Fighting for transparency
Webb has for years campaigned for better disclosure and stringent rules against related party transactions that are common across Asia. "At least in Hong Kong and Singapore, there is a system for approving such transactions," he notes. "Minority shareholders do have the opportunity to stop them, provided the company admits that they are related party transactions," he says.

Often, in emerging markets, it is years after a transaction that investors realise a company was sold or bought from a relative of the chairman or CEO, who was acting through some nominee companies, Webb says.

"In many jurisdictions, including Singapore and Malaysia, often they don't name the counterparty or the people behind the buyer or vendor," he notes.

"In Hong Kong, even if it is a [British Virgin Island] company, you can get the names behind the buyer or seller. In corporate transactions, it is absolutely crucial to know who is actually behind it — the name of the beneficial owner, not just the name of a nominee company registered in some offshore island. If somebody is actually lying and is just a puppet for someone, you can go after them and find out who exactly benefits from the sale or who is forking out money for the purchase."

Another key issue in Asia is the lack of truly independent directors. "You have tycoons appointing their cronies and golf buddies as ‘independent directors'," notes Webb.

"There are very few really independent directors in Asia who are not tied to management or owners and who are willing to ask difficult questions," he says. "It is important that independent directors be elected by minority shareholders, with controlling shareholders forced to abstain from voting."

He adds that independent directors should be answerable to minority shareholders; so, if they fail to do a decent job, they can be quickly replaced.

Webb also wants regulators with more teeth. "One thing you have to recognise about regulations globally is that they are limited by jurisdiction, and there is a lack of cooperation between governments," he says.

As investors in the beleaguered Sino-Forest Corp found out last year, it is hard to keep tabs on a company based in Hong Kong, with main operations in China and a dual listing in the US and Canada.

"The US doesn't have an extradition treaty with China, nor does Canada or Hong Kong, so even the threat of prosecution isn't much of a deterrent," he says. "The thing to remember is that China is still an emerging market, one without a clear rule of law and one without a respectable enough court system that it can have extradition treaties with the US, the UK, Canada or Australia."

After 20 years in Asia following companies and corporate shenanigans in the region, Webb still says a lot of things never cease to amaze him. He chuckles when he talks about the long-running saga of pump-and-dump Chinese reverse takeover companies in North America.

"Why does a Chinese herbal medicine company want to list through the backdoor by taking over a small Maryland company and giving it a Chinese name?" he asks. If the company had good fundamentals, it could have always listed in Hong Kong, Singapore or China, he says. "You have to ask yourself, did they ever want to make a profit or was it always just all financial engineering and shenanigans?"

Webb is now as much a part of the Hong Kong establishment as he is a gadfly. He is on the Security and Futures Commission's takeover panel — as its longest-serving member — and previously served as a director of the Hong Kong Stock Exchange. Yet, he is not expecting to be invited to Li Ka-shing's or son Richard's home for tea any day soon. — The Edge Singapore

Monday, 11 June 2012

Spanish Bank Rescue: Will the Treatment Make the Patient Worse?

Article from Yves Smith who rightly asks if this bailout will actually help. Research has been done on this subject, Marc Faber writes about it in his latest newsletter, and the results are not encouraging. The damage (moral hazard) is most likely larger than the possible benefits. And also the question is, if 100 Billion Euro is enough, I read already stories about 500 Billion Euro for the whole of Europe.

Spain has reversed itself and asked the Eurozone for “up to” €100 billion after not long ago insisting it could go it alone. The proximate cost was the increase in its sovereign debt yields in the wake of the announcement of a bailout of Bankia, which was cobbled together from dud cajas. Even though Spain’s bond auction last week got off better than expected, that was likely in part due to the expectation that the creditor states would indeed ride in to the rescue.

But will the latest, yet to be finalized remedy do anything more than buy a little time? The half life of Euro-interventions is shortening. George Soros has argued that the Europeans have at most three months, and the action they need to take must be decisive. Unfortunately the Germans are signaling movement, but the ideas they are touting, such as having debtor nations agree to cede more sovereignity and implementing pan-European banking supervision, aren’t like to be achieved quickly; indeed, they may require treaty approvals.
And there are reasons to wonder whether the Spanish bank rescue will accomplish its aim of bringing Spanish bond yields back to a more sustainable level. The first question is whether it is big enough. Even though the Spanish government is confident that €100 billion gives it an ample buffer, Spain’s unemployment level only recently gapped up to 25%. Without a fix for the underlying economy, it’s not hard for the powers that be to underestimate the stresses Spanish banks will face as the impact of job losses work their way through the economy.

Second is the bank rescue is being routed through Spain’s Fund for Orderly Bank Restructuring and repayment will be an obligation of the government, bringing its total debt outstanding from roughly €600 billion to as much as €700 billion. There is a good possibility that this change alone will lead ratings agencies to downgrade Spain from singe A to BBB.

Third is that the specific funding mechanism has yet to be decided. Even though the Spanish finance minister asserted the loan would be “on very favourable conditions, more favourable than in the market,” that remains to be seen. The funds will come from the EFSF and the ESM. The problem with that is that use of either one has adverse implications. Spain may have to get at least some funds from the EFSF, since the ESM is not operational for another month. But Finland insists that if Spain gets funds from the EFSF, it must provide collateral, and it is not likely that Spain has a ton of good collateral sitting around. To the extent the funds come from the ESM, those obligations will be senior to that of existing and new sovereign bond issuance. Needless to say, this change is not going to be a plus for Spain as far as its regular bond issuance is concerned.

Various commentators have argued that the Eurozone needs to backstop its banking system, say by issuing deposit guarantees. Instead, just as the Troika did with Ireland, the Eurocrats are intent on making a bust banking system the problem of its already-stressed government, even when the markets are certain to see around the circularity of that arrangement. We argued that the Irish had the upper hand and could have stared down the Troika (Irish bank failures would have blown back to certain German banks), but Irish were sold out by the head of their central bank. Spain was widely acknowledged as having considerable leverage in its negotiations with the officialdom; it is clearly too big to fail. So it is puzzling that it allowed itself to be put in the same position as the Irish. It seems the Spanish were so pleased not to be required to implement more draconian austerity measures that they settled for less than they could have.

As Marshall Auerback discussed by e-mail, this measure also fails to address the existential threat to the Eurozone:
There is a key flaw in the European monetary system that lies behind the current bank run, an all important difference between the Target 2 clearing system and that of the Federal Reserve. As Peter Garber explained in 1998, any possibility of a euro exit by one of the euro member countries creates a risk of a currency loss to parties involved in the euro area banking system. There is no parallel potential currency loss in the case of the US. No state is going to pick up and run and form its own new currency (Rick Perry’s mindless secessionist threats to the contrary in Texas). It is this potential for euro exit and subsequent currency loss that fuels the European bank run. It is this potential for currency loss that prevents the private interbank system from recycling flight deposit funds from recipient nation banks back to the banks in those countries where the deposit run originates. This is why the ECB has to step in and act as lender of last resort lynchpin in the system. There is no parallel need for such a Federal Reserve role in the U.S.
Peter Garber explained that, given the complete capital mobility in the EU and euro wide acceptance of a common currency, transferring deposits from a domestic commercial bank in one nation to a bank domiciled in another EU nation is costless. In a world of rational economic agents, any non-negligible perceived probability of euro exit and subsequent currency loss should result in a massive deposit run. The imbalances we see now reflect only the early stage of such rational behavior. The bank deposit run and therefore Germany’s unenforceable claims against the periphery countries could explode.
So, given these considerations, the ECB’s “unenforceable claims against the periphery” could be many trillions of euros by year end to which Germany would be massively exposed. Therefore, according to Soros’ logic, Germany would be all the more trapped into doing whatever is necessary to preserve the euro.
The endless stopgap measures have kept the Eurozone limping through its sovereign debt/banking crisis far longer than I thought possible. But the seeming success of bare minimum moves may well have conditioned the authorities to continue on that path. If so, it will prove to be their undoing.

Wednesday, 6 June 2012

Corporate Governance, a glass half full?

In The Edge of June 4, 2012 the results are presented of the 2Q/2012 Vistage - MIER CEO Confidence Index Survey. Membership comprises companies with sales between RM 5 million and 1 billion.

Question 16: Is corporate governance (broadly defined as quality of independent non-executive directors, effectiveness of audit committees, high standard of internal controls and risk management, timeliness and transparency in disclosure of information, etc) adequately practiced in the public-listed entities in this country?

Yes: 32%
No: 68%
I guess that if this survey was held 10 years ago, then the result would have been worse.

On the other hand, only 32% answering "Yes" is not exactly a lot. The SC and BM have put a lot of effort in promoting good corporate governance, the latest 2012 code can be found here.

But, [1] changes will take a long time, [2] there is still a lot of box ticking (even companies with really bad CG practices still have chapters how good they behave themselves), [3] the CG standards itself are voluntarily (companies are only required to report on their compliance).

I am therefore for a strong increase in enforcement, in combination with promoting good CG.

Another, worrisome, question from the same survey is about crime perception in Malaysia.

Question 15: From your experience and in your conversations with your family, friends and business associates, do you believe or feel that the crime rate in the country has:

Come down: 14%
Remained the same: 53%
Gone up: 33%

Monday, 4 June 2012

Minister to override corporate decisions made by the Board?

Another worrisome article on MalaysianInsider's website:

Government-owned companies will have to include a rule to follow directives issued by the finance minister despite the latter not being a legal entity on their boards, a move that could ignore corporate governance procedures and transparency.

This does indeed fly straight into the face of best CG practices.

"one MoF-owned company chief told The Malaysian Insider that such directives will make its board of directors mere “rubber stamps” for the government instead of making business decisions in the stakeholders’ best interest. “I chair a board of professionals but if the minister can give directives, then why even have a board? Perhaps Putrajaya should micromanage all these companies,” said the company chief, who declined to be named. He also pointed out there were corporate governance issues as the companies have to answer to the Companies Commission of Malaysia. “How can we justify a decision if we didn’t make it but it’s made by the minister or the ministry?” he asked."

I hope that the MoF will reconsider this plan.

Government-owned companies will have to include a rule to follow directives issued by the finance minister despite the latter not being a legal entity on their boards, a move that could ignore corporate governance procedures and transparency.

The Malaysian Insider understands a letter to the effect was issued in late April by the Ministry of Finance (MoF) following a query about instructions given by the minister to such companies despite a lack of rules to allow such directives.

Auditor-General Tan Sri Ambrin Buang (picture) confirmed his department had raised the query, saying the move was to ensure firms owned by the MoF complied with Putrajaya’s rules and regulations.

“I can now confirm that we did raise the query in the 2010 Auditor-General’s Report because we felt that such a clause is necessary to ensure compliance with government rules and regulations in government-owned companies or GLCs,” Ambrin said in an email response to questions by The Malaysian Insider.

“A clause like that will mean that it is mandatory that the company will act in compliance with government’s legislations and regulations as section 33(1) of the Companies Act 1965 states that the company’s M&A binds the company and its members,” Ambrin said.

“This clause will empower the minister to issue directives on general policies such as appointment, remuneration and dismissal of directors. In doing so it will enhance clarity, consistency and corporate governance as a whole,” he added.

Ambrin also said that the matter was being studied by the MoF.

But The Malaysian Insider sighted a copy of a letter issued by the ministry on April 24 to MoF-owned companies indicating the matter was a done deal, allowing the finance minister to override corporate decisions reached by consensus at their board meetings.

I chair a board of professionals but if the minister can give directives, then why even have a board? Perhaps Putrajaya should micromanage all these companies. — A company chief, who declined to be named

The letter told the MoF-owned firms to amend their Memorandum and Articles of Association (M&A) by inserting a clause to allow the minister to issue directives to the corporation that must be followed.
The letter states that the national Audit Department had raised an issue on the lack of a clause in the M&A and told the GLCs and MoF-owned firms to reply as to whether or not their M&A had the clause.

“Official instructions will be issued to the companies to create the clause in their respective M&A if the clause does not currently exist in the M&A,” the MoF said in the letter, signed by the MoF’s investment, incorporated companies and privatisation division secretary, Eshah Meor Suleiman.

However, one MoF-owned company chief told The Malaysian Insider that such directives will make its board of directors mere “rubber stamps” for the government instead of making business decisions in the stakeholders’ best interest.

“I chair a board of professionals but if the minister can give directives, then why even have a board? Perhaps Putrajaya should micromanage all these companies,” said the company chief, who declined to be named.
He also pointed out there were corporate governance issues as the companies have to answer to the Companies Commission of Malaysia. “How can we justify a decision if we didn’t make it but it’s made by the minister or the ministry?” he asked.

The company chief believed the issue arose due to excuses given by some company chiefs when queried by the Auditor-General and his staff.

“There are some who pass the buck to the minister and probably the Auditor-General wants this to be in black and white. But this is not how it should be done. Professionals should run the board, not government ministers or civil servants,” he said.

Geroge Soros about the European crisis

George Soros was the main person on the other side of the currency trade, which cost Malaysia so dearly, 20 years ago. He profited handsomely, to the tune of USD 1.1 Billion, when England devalued it's currency. Malaysia, who should never have been in that trade, lost out.

Soros held a speech June 2, 2012, at the Festival of Economics in Trento (Italy) about the economic crisis in Europe. Some excerpts:

But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realize what that entails – and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.

Banks need a European deposit insurance scheme in order to stem the capital flight. They also need direct financing by the European Stability Mechanism (ESM) which has to go hand-in-hand with eurozone-wide supervision and regulation. The heavily indebted countries need relief on their financing costs. There are various ways to provide it but they all need the active support of the Bundesbank and the German government.

We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be. The future of Europe depends on it.

Sunday, 3 June 2012

Bank Negara's forex trading losses: shocking revelations

Shocking article about Bank Negara's forex trading losses of ca. 20 years ago. Revelations from former Bang Negara deputy manager Dr, Rosli Yaakop.

Will we ever see independent in-depth research on this scandal, revealing the immense size of it (rumoured to be around RM 30,000,000,000), the people who were responsible for it, if rules were breached, if certain persons should be (belatedly) punished?

Most countries in the world had their fair portion of scandals, but the way Malaysia deals with them is so disappointing: all conveniently swept under the carpet. Are Malaysian taxpayers not allowed to at least know where their precious money went to? How can we learn from mistakes of the past if they are not revealed?

A former Bank Negara insider has named four powerful elites as main players to have caused the central bank’s massive RM30-billion loss in the international foreign exchange speculation scandal some 20 years ago.

In his explosive revelation, retired Bank Negara deputy manager, Dr Rosli Yaakop named former Prime Minister Dr Mahathir Mohamed, ex-finance minister Daim Zainuddin, ex-Bank Negara Governor, the late Jaffar Hussein and current Minister in Prime Minister’s Department in charge of Economic Planning Unit Government Nor Mohamed Yakcop as the “forex scandal elite club masters.”

He said certain people would have been in jail as criminal elements existed in the forex scandal. He said the criminal elements were negligence, overstepping of power, falsification of accounts, “creative accounting”, misinformation, breach of trust and corruption. “But, they had protectors,” he said.

In 1995, a book on international high finance, "The Vandal’s Crown" by Gregory J. Millman had this to say about the Bank Negara forex scandal:

"Using all the resources a central bank commands - privileged information, unlimited credit, regulatory power, and more - Malaysia’s Bank Negara became the most feared trader in the currency markets. By trading for profit, Bank Negara committed apostasy against the creed of central banking. Instead of working to ensure global financial stability, Bank Negara repeatedly shoved huge sums of money into the most vulnerable market situations in order to destabilize exchange rates for its own profit" (p.226)

"(Bank) Negara operated behind a thick veil of secrecy. The bank seldom spoke publicly about its controversial trading activities. Yet it was increasingly clear to foreign exchange traders that Bank Negara’s operations in the foreign exchange markets went far beyond simple self-defense. It became the most awesome currency trader in the world." (p. 227)

"(Bank) Negara’s market manipulation was so egregrious that one American central banker said, ‘If they tried this on any organized exchange in the world, they’d go to jail.’ However, in the unregulated international currency markets, there were neither police nor jailers. The only rule was the rough justice of the vandals, and it was this rule that eventually brought (Bank) Negara down.

"In 1992, (Bank) Negara took on a large pound sterling position, apparently expecting Britain to maintain the discipline required by the European Exchange Rate Mechanism. It was a bad economic and political judgement. (Bank) Negara lost approximately $3.6 billion when Britain withdrew from the ERM, letting sterling collapse. The next year, (Bank) Negara lost an additional $2.2 billion. By 1994, Bank Negara was technically insolvent and had to be bailed out by an infusion of fresh money from Malaysia’s finance ministry." (p.229)

Saturday, 2 June 2012

A Porsche for a Chery

One man's Chery QQ is another man's Porsche Boxster Black Edition - if the Porsche man were shopping for a car in the United States, that is.

Soaring Certificate of Entitlement (COE) premiums and a robust Singapore dollar have made the cheapest passenger car here - the manual Chery QQ 0.8 - the equivalent of most European luxury badges elsewhere.

Even at a promotional net price of S$74,988, the Chery QQ gets you the Porsche Boxster Black Edition at US$55,200 in the US.

The above fron an article in Business Times (Singapore).

Some other car comparisons:

  • a Toyota Corolla in Singapore cost the same as a Jaguar XFR in the US
  • a BMW 520i cost the same as a Ferrari California
  • a Lexus LS 460 cost the same as a Rolls-Royce Ghost

Property in Singapore is of course also very expensive, what a HDB flat can buy:

  • a 3-room HDB in Bedok buys a 12 acre island in Maine, US
  • a 4-room HDB in Serangoon buys a seaview villa in Spain
  • a 5-room HDB in Bukit Batok buys a mansion in Georgia, US
  • a 5-room HDB in Bukit Merah buys a 2-acre island in the Caribbean

Interestingly enough, Singapore is one of the cheapest countries in which to buy the new iPad. The cheapest model went for US$ 527 at the online Apple store. Buyers in Europe had to pay at least US$ 600. For most, this will have to be consolation enough if house and horsepower remain out of reach.