The following story is making the rounds in Singapore. A young Malaysian guy named Gaw Yu Han is trying to get a sports car for free. Not sure how serious he is, but at least Singaporeans have something to talk about.
Call him shameless or naive but a 20-year-old has sent more than 300 letters to the richest residents in Sentosa Cove asking for a "sports car sponsorship".
And as incredible as it may sound, he said 10 have responded to him within a week - though none has granted him his wish.
In a brief letter sent last Thursday, Mr Gaw Yu Han introduced himself, giving his name and age, before stating his purpose which was "the hope of finding a sponsor".
He said he likes cars and listed as his favourites Audi R8 Coupe, Mercedes-Benz SLS AMG and Honda CR-Z.
"May I have the courage to ask for a car as a gift from you?" he wrote.
Owners of a Sentosa Cove property, he added, "must be a person of great success" and "it will be nice to know and perhaps learn from you".
His mobile phone number, e-mail address and Facebook page were included in the letters sent to landed-property addresses he found in an online street directory.
When contacted yesterday, Mr Gaw told The Straits Times over the phone: "Call it an experiment or a request if you want."
He claimed he is the only child of parents who run a real-estate business and drive a Toyota Camry. The Malaysian, who is a permanent resident here, said he lives in a private apartment in Upper Bukit Timah.
"But I don't like to ask my parents for money. I'd rather get a sponsorship," said Mr Gaw, who has lived here for 13 years.
He also claimed he is a first-year undergraduate at Singapore Management University. But when contacted, an SMU spokesman said the school is unable to confirm that he is a student.
When pressed on why he thinks strangers would be willing to give him such an expensive gift, Mr Gaw said he was "just trying his luck".
"Anyway, I spent only five cents on a letter. And even if nobody offers a car, I can still make friends. It is important to network and have connections," he said.
"I don't expect to give anything in return. What I can offer is casual friendship."
So far, 10 Sentosa Cove residents, all Singaporeans, have contacted him, he claimed.
But they were more interested in finding out why he is doing this than buying him his dream car.
One of them, a property developer known as Victor who owns two properties at Sentosa Cove, even arranged to meet him during the F1 race last Sunday and they chatted for 30 minutes, he told The Straits Times.
Victor had asked about his background and even requested to see his identity card - but no promises were made.
"I could tell that he was not interested," said Mr Gaw, who got his F1 ticket from an uncle.
"Singaporeans will never give me a car," he said.
But he is not discouraged.
He is pinning his hopes on foreigners, who could have missed his letter because they travel frequently, he said.
"Times have changed and foreigners are the wealthy ones," he said, adding that foreigners, like those from mainland China and Indonesia, are "so rich they don't know where to spend their money on".
Yesterday, his letter was circulated on the Hardware Zone online forum, garnering 10 pages of more than 100 comments in a day, with some netizens calling him naive and shameless.
Sentosa Cove resident Adora Ang, 22, a student, who lives in a bungalow on Ocean Drive, said he is brave to give all his contact details but silly to think it would work.
After reading the letter, she texted him: "Do you think that by sending a letter you'd get a car? Try harder."
She has yet to get a response.
From The Straits Times, by goh shi ting
Sunday, 30 September 2012
The secrets of Buffett’s success
Low beta stocks (meaning low volatility, "boring" stocks) and leverage (through the insurance business) explain some of Buffett's success, according to the below article.
I would like to add that very low expenses are also important, he is running his company with minimal staff and is only charging USD 100K yearly in wages. Furthermore, his partnership with Charley Munger, who helps with filtering investment opportunities.
And lastly, most importantly, his own stock picking ability to find wonderful companies at a relative cheap price and sticking with them.
From the Malaysian/Singaporean point of view his results are even more spectacular, since in the US one has to pay taxes on capital appreciation.
Beating the market with beta
If investors had access to a time machine and could take themselves back to 1976, which stock should they buy? For Americans, the answer is clear: the best risk-adjusted return came not from a technology stock, but from Berkshire Hathaway, the conglomerate run by Warren Buffett. Berkshire also has a better record than all the mutual funds that have survived over that long period.
Some academics have discounted Mr Buffett as a statistical outlier. Others have simply stood in awe of his stock-picking skills, which they view as unrepeatable. But a new paper* from researchers at New York University and AQR Capital Management, an investment manager, seems to have identified the main factors that have driven the extraordinary record of the sage of Omaha.
Understanding the success of Mr Buffett requires a brief detour into investment theory. Academics view stocks in terms of their sensitivity to market movements, or “beta”. Stocks that move more violently than the market (rising 10%, for instance, when the index increases by 5%) are described as having “high beta”, whereas stocks that move less violently are considered “low beta”. The model suggests that investors demand a higher return for owning more volatile—and thus higher-risk—stocks.
The problem with the model is that, over the long run, reality has turned out to be different. Low-beta stocks have performed better, on a risk-adjusted basis, than their high-beta counterparts. As a related paper† illustrates, it should in theory be possible to exploit this anomaly by buying low-beta stocks and enhancing their return by borrowing money (leveraging the portfolio, in the jargon).
But this anomaly may exist only because most investors cannot, or will not, use such a strategy. Pension schemes and mutual funds are constrained from borrowing money. So they take the alternative approach to juicing up their portfolios: buying high-beta stocks. As a result, the average mutual-fund portfolio is more volatile than the market. And the effect of ignoring low-beta stocks is that they become underpriced.
Mr Buffett has been able to exploit this anomaly. He is well-known for buying shares in high-quality companies when they are temporarily down on their luck (Coca-Cola in the 1980s after the New Coke debacle and General Electric during the financial crisis in 2008). “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he once said. He has also steered largely clear of more volatile sectors, such as technology, where he cannot be sure that a company has a sustainable advantage.
Without leverage, however, Mr Buffett’s returns would have been unspectacular. The researchers estimate that Berkshire, on average, leveraged its capital by 60%, significantly boosting the company’s return. Better still, the firm has been able to borrow at a low cost; its debt was AAA-rated from 1989 to 2009.
Yet the underappreciated element of Berkshire’s leverage are its insurance and reinsurance operations, which provide more than a third of its funding. An insurance company takes in premiums upfront and pays out claims later on; it is, in effect, borrowing from its policyholders. This would be an expensive strategy if the company undercharged for the risks it was taking. But thanks to the profitability of its insurance operations, Berkshire’s borrowing costs from this source have averaged 2.2%, more than three percentage points below the average short-term financing cost of the American government over the same period.
A further advantage has been the stability of Berkshire’s funding. As many property developers have discovered in the past, relying on borrowed money to enhance returns can be fatal when lenders lose confidence. But the long-term nature of the insurance funding has protected Mr Buffett during periods (such as the late 1990s) when Berkshire shares have underperformed the market.
These two factors—the low-beta nature of the portfolio and leverage—pretty much explain all of Mr Buffett’s superior returns, the authors find. Of course, that is quite a different thing from saying that such a long-term performance could be easily replicated. As the authors admit, Mr Buffett recognised these principles, and started applying them, half a century before they wrote their paper.
From the website of The Economist
I would like to add that very low expenses are also important, he is running his company with minimal staff and is only charging USD 100K yearly in wages. Furthermore, his partnership with Charley Munger, who helps with filtering investment opportunities.
And lastly, most importantly, his own stock picking ability to find wonderful companies at a relative cheap price and sticking with them.
From the Malaysian/Singaporean point of view his results are even more spectacular, since in the US one has to pay taxes on capital appreciation.
Beating the market with beta
If investors had access to a time machine and could take themselves back to 1976, which stock should they buy? For Americans, the answer is clear: the best risk-adjusted return came not from a technology stock, but from Berkshire Hathaway, the conglomerate run by Warren Buffett. Berkshire also has a better record than all the mutual funds that have survived over that long period.
Some academics have discounted Mr Buffett as a statistical outlier. Others have simply stood in awe of his stock-picking skills, which they view as unrepeatable. But a new paper* from researchers at New York University and AQR Capital Management, an investment manager, seems to have identified the main factors that have driven the extraordinary record of the sage of Omaha.
Understanding the success of Mr Buffett requires a brief detour into investment theory. Academics view stocks in terms of their sensitivity to market movements, or “beta”. Stocks that move more violently than the market (rising 10%, for instance, when the index increases by 5%) are described as having “high beta”, whereas stocks that move less violently are considered “low beta”. The model suggests that investors demand a higher return for owning more volatile—and thus higher-risk—stocks.
The problem with the model is that, over the long run, reality has turned out to be different. Low-beta stocks have performed better, on a risk-adjusted basis, than their high-beta counterparts. As a related paper† illustrates, it should in theory be possible to exploit this anomaly by buying low-beta stocks and enhancing their return by borrowing money (leveraging the portfolio, in the jargon).
But this anomaly may exist only because most investors cannot, or will not, use such a strategy. Pension schemes and mutual funds are constrained from borrowing money. So they take the alternative approach to juicing up their portfolios: buying high-beta stocks. As a result, the average mutual-fund portfolio is more volatile than the market. And the effect of ignoring low-beta stocks is that they become underpriced.
Mr Buffett has been able to exploit this anomaly. He is well-known for buying shares in high-quality companies when they are temporarily down on their luck (Coca-Cola in the 1980s after the New Coke debacle and General Electric during the financial crisis in 2008). “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he once said. He has also steered largely clear of more volatile sectors, such as technology, where he cannot be sure that a company has a sustainable advantage.
Without leverage, however, Mr Buffett’s returns would have been unspectacular. The researchers estimate that Berkshire, on average, leveraged its capital by 60%, significantly boosting the company’s return. Better still, the firm has been able to borrow at a low cost; its debt was AAA-rated from 1989 to 2009.
Yet the underappreciated element of Berkshire’s leverage are its insurance and reinsurance operations, which provide more than a third of its funding. An insurance company takes in premiums upfront and pays out claims later on; it is, in effect, borrowing from its policyholders. This would be an expensive strategy if the company undercharged for the risks it was taking. But thanks to the profitability of its insurance operations, Berkshire’s borrowing costs from this source have averaged 2.2%, more than three percentage points below the average short-term financing cost of the American government over the same period.
A further advantage has been the stability of Berkshire’s funding. As many property developers have discovered in the past, relying on borrowed money to enhance returns can be fatal when lenders lose confidence. But the long-term nature of the insurance funding has protected Mr Buffett during periods (such as the late 1990s) when Berkshire shares have underperformed the market.
These two factors—the low-beta nature of the portfolio and leverage—pretty much explain all of Mr Buffett’s superior returns, the authors find. Of course, that is quite a different thing from saying that such a long-term performance could be easily replicated. As the authors admit, Mr Buffett recognised these principles, and started applying them, half a century before they wrote their paper.
From the website of The Economist
Saturday, 29 September 2012
The independent adviser challenge
Excellent article by P. Gunasegaram in The Star.
By all accounts what happened recently at Glenealy Plantations (Malaya) Bhd raised more than a few eyebrows and plenty of questions over how valuations should be done and why minority shareholders don't seem to be exercising their rights.
There are two aspects to this and both warrant further action and investigation by the Securities Commission and Bursa Malaysia. First, despite the very vocal opposition of the minority to the privatisation offer of RM7.50 per Glenealy share eventually only just over 4% voted against it. Second, why was the plantation land not revalued as part of the valuation process?
On the first point, perhaps minority shareholders thought if they did not accept the offer, there would be nothing else for them.
But really a premium of about 15% over the market price then prevailing in January this year when the offer was first made is not that much especially if it is a plantation company with undervalued land and which gives good dividend yields.
Besides, the broad market has moved up much since then, reducing the premium although some of this would have been made up by the 52.75 sen dividend the company paid out just before the meeting to approve the offer earlier this month.
Considering that just 331 shareholders held some 85% of the shares not controlled by the majority shareholder, the Samling group, it would be appropriate to trace the ownership to see when the shares had been acquired to ensure that everything is above board.
Together with this and other shareholders, just over 94% of shareholders voted for the privatisation, four percentage points more than the required 90%.
This is indeed puzzling, and the same point has been made in The Edge of September 17 2012 (page 5), titled "Surprise! Surprise" . It appears to be the duty of the frontline regulator, Bursa Malaysia, to investigate this. But I can not remember that this has ever happened, despite many dubious deals "miraculously" been voted through, with the majority shareholders abstaining. Is it possible that PAC's (Parties Acting in Concert) have been "underreported", that there were much more shareholders aligned to the PAC's? Bursa Malaysia should step up its enforcement in this particular field and at least be transparent about it.
The second and perhaps more important question was why there was no revaluation of the plantation assets for 14 years. Between the first announcement of the offer in January and the meeting in September, there were more than six months for this to have been done.
Some minority shareholders charged that if the plantation assets had been revalued, Glenealy would have net tangible assets per share of over RM10.
A revaluation would have clearly established if that was the case and removed all doubt. It would also have been material to the entire valuation process.
Independent adviser Hwang DBS made no comment on the valuation of the plantation land in its executive summary in the offer document and so shareholders did not have that piece of information to evaluate if they should accept the offer.
This is indeed a serious matter, Hwang DBS definitely should have mentioned this in their report. The last valuation was done in 1998, not only 14 years ago, but also in the midst of the Asian crisis. That valuation hardly looks relevant nowadays.
The Securities Commission has now come with changes to Practice Note 15 of the Malaysian Code on Takeovers and mergers by inserting 28 new paragraphs. The most significant of this is that in takeover offers independent advisers must analyse the terms “fair and reasonable” as two separate criteria.
An offer can only be considered fair if the offer price is higher or equal to the market price and the value of the securities of the target company. Otherwise, it is not fair.
If an offer is not fair, the independent adviser has some explaining to do. “Generally, a takeover offer would be considered reasonable' if it is fair'.
“Nevertheless, an independent adviser may also recommend for shareholders to accept the takeover offer despite it being not fair', if the independent adviser is of the view that there are sufficiently strong reasons to accept the offer in the absence of a higher bid and such reasons should be clearly explained,” the practice note says. Fair enough.
The new practice note also says the independent adviser has to consider and select the most appropriate valuation method and consider more than one valuation technique. It should compare the results and justify its choice, preferably a range which is as narrow as possible.
Generally, those new practice notes go a much longer way but do not go long enough in one particular direction. As the Minority Shareholders Watchdog Group has pointed out, the new notes don't make a revaluation of assets mandatory. A revaluation should be mandatory if there had been none for the last three years.
Even if all these were done, how does one ensure the independence of minority advisers? How does one ensure that they are not chosen based on an understanding that they will make the appropriate recommendation the board wants?
Tough problems call for radical solutions. Simply make it unnecessary for independent advisers to market for the job. All of them will simply be put on a queue by ballot and take the next job that comes along.
The fees will be on a scale according to the size of the job and the SC will remind them sternly that the recommendations will be purely professional and independent. Those advising the particular company on the deal will be disqualified.
Companies may object that they are paying for someone they did not choose but in this instance that's precisely what is needed to ensure that independent advisers are indeed independent.
Although the new practice note seems to be an improvement, I still think that the old rules were good enough to take action against errant independent advisors.
We have seen much too many independent reports that looked very biased in favour of the majority shareholders and it is puzzling why the authorities have not take any action whatsoever against those biased advisers. Here is one example from the past, and here another (but there are really dozens of similar cases). In both cases the authorities are well aware of the situation, they should be transparent to the public why no action has been taken and explain their non-action.
The advice to more or less randomly assign independent advisers looks good. But surely the authorities should also very much increase enforcement in this area. It is long overdue.
By all accounts what happened recently at Glenealy Plantations (Malaya) Bhd raised more than a few eyebrows and plenty of questions over how valuations should be done and why minority shareholders don't seem to be exercising their rights.
There are two aspects to this and both warrant further action and investigation by the Securities Commission and Bursa Malaysia. First, despite the very vocal opposition of the minority to the privatisation offer of RM7.50 per Glenealy share eventually only just over 4% voted against it. Second, why was the plantation land not revalued as part of the valuation process?
On the first point, perhaps minority shareholders thought if they did not accept the offer, there would be nothing else for them.
But really a premium of about 15% over the market price then prevailing in January this year when the offer was first made is not that much especially if it is a plantation company with undervalued land and which gives good dividend yields.
Besides, the broad market has moved up much since then, reducing the premium although some of this would have been made up by the 52.75 sen dividend the company paid out just before the meeting to approve the offer earlier this month.
Considering that just 331 shareholders held some 85% of the shares not controlled by the majority shareholder, the Samling group, it would be appropriate to trace the ownership to see when the shares had been acquired to ensure that everything is above board.
Together with this and other shareholders, just over 94% of shareholders voted for the privatisation, four percentage points more than the required 90%.
This is indeed puzzling, and the same point has been made in The Edge of September 17 2012 (page 5), titled "Surprise! Surprise" . It appears to be the duty of the frontline regulator, Bursa Malaysia, to investigate this. But I can not remember that this has ever happened, despite many dubious deals "miraculously" been voted through, with the majority shareholders abstaining. Is it possible that PAC's (Parties Acting in Concert) have been "underreported", that there were much more shareholders aligned to the PAC's? Bursa Malaysia should step up its enforcement in this particular field and at least be transparent about it.
The second and perhaps more important question was why there was no revaluation of the plantation assets for 14 years. Between the first announcement of the offer in January and the meeting in September, there were more than six months for this to have been done.
Some minority shareholders charged that if the plantation assets had been revalued, Glenealy would have net tangible assets per share of over RM10.
A revaluation would have clearly established if that was the case and removed all doubt. It would also have been material to the entire valuation process.
Independent adviser Hwang DBS made no comment on the valuation of the plantation land in its executive summary in the offer document and so shareholders did not have that piece of information to evaluate if they should accept the offer.
This is indeed a serious matter, Hwang DBS definitely should have mentioned this in their report. The last valuation was done in 1998, not only 14 years ago, but also in the midst of the Asian crisis. That valuation hardly looks relevant nowadays.
The Securities Commission has now come with changes to Practice Note 15 of the Malaysian Code on Takeovers and mergers by inserting 28 new paragraphs. The most significant of this is that in takeover offers independent advisers must analyse the terms “fair and reasonable” as two separate criteria.
An offer can only be considered fair if the offer price is higher or equal to the market price and the value of the securities of the target company. Otherwise, it is not fair.
If an offer is not fair, the independent adviser has some explaining to do. “Generally, a takeover offer would be considered reasonable' if it is fair'.
“Nevertheless, an independent adviser may also recommend for shareholders to accept the takeover offer despite it being not fair', if the independent adviser is of the view that there are sufficiently strong reasons to accept the offer in the absence of a higher bid and such reasons should be clearly explained,” the practice note says. Fair enough.
The new practice note also says the independent adviser has to consider and select the most appropriate valuation method and consider more than one valuation technique. It should compare the results and justify its choice, preferably a range which is as narrow as possible.
Generally, those new practice notes go a much longer way but do not go long enough in one particular direction. As the Minority Shareholders Watchdog Group has pointed out, the new notes don't make a revaluation of assets mandatory. A revaluation should be mandatory if there had been none for the last three years.
Even if all these were done, how does one ensure the independence of minority advisers? How does one ensure that they are not chosen based on an understanding that they will make the appropriate recommendation the board wants?
Tough problems call for radical solutions. Simply make it unnecessary for independent advisers to market for the job. All of them will simply be put on a queue by ballot and take the next job that comes along.
The fees will be on a scale according to the size of the job and the SC will remind them sternly that the recommendations will be purely professional and independent. Those advising the particular company on the deal will be disqualified.
Companies may object that they are paying for someone they did not choose but in this instance that's precisely what is needed to ensure that independent advisers are indeed independent.
Although the new practice note seems to be an improvement, I still think that the old rules were good enough to take action against errant independent advisors.
We have seen much too many independent reports that looked very biased in favour of the majority shareholders and it is puzzling why the authorities have not take any action whatsoever against those biased advisers. Here is one example from the past, and here another (but there are really dozens of similar cases). In both cases the authorities are well aware of the situation, they should be transparent to the public why no action has been taken and explain their non-action.
The advice to more or less randomly assign independent advisers looks good. But surely the authorities should also very much increase enforcement in this area. It is long overdue.
Wednesday, 26 September 2012
Genneva taken to court by customer
She wins interim judgment; other lawsuits may follow
Genneva Pte Ltd, a gold trading company offering a "buyback" scheme, appears to be in hot water. At least one customer has recently won an interlocutory judgment against it in the Subordinate Court, pending an assessment of damages. It remains to be seen, however, whether she will recover her claim of about $190,000. Genneva failed to respond to the writ of summons or to contest the case.
A number of other customers are also looking into launching a lawsuit against the firm for its alleged failure to honour its part of the agreement to buy back gold. One group of about 60 customers, representing a total of roughly $10 million in gold purchases, is understood to be consulting lawyers.
Genneva is on the Monetary Authority of Singapore's Investor Alert list of unlicensed entities. Its scheme basically sells gold to customers at a hefty premium of 20-30 per cent. Customers, however, are told that they enjoy a "discount" of about 2 per cent off the headline price.
They are given the option to sell back the gold after a pre-agreed term of one month or three months. The gold can be sold back at the headline price and customers get to pocket the so-called discount. Assuming monthly rollovers, this could mean a return of as much as 24 per cent a year.
The above snippets from Singapore Business Times. Surprising that so many people seem to fall for these kind of schemes, although low interest rates will be one factor. However, promising 24% returns per year (cumulative even 27%) is way above what Bernie Maddoff offered. Surely some people should have been suspicious, if something sounds too good to be true, normally it is.
Bank Negara's alert can be found here and the same for the Monetary Authority Singapore here.
Genneva Pte Ltd, a gold trading company offering a "buyback" scheme, appears to be in hot water. At least one customer has recently won an interlocutory judgment against it in the Subordinate Court, pending an assessment of damages. It remains to be seen, however, whether she will recover her claim of about $190,000. Genneva failed to respond to the writ of summons or to contest the case.
A number of other customers are also looking into launching a lawsuit against the firm for its alleged failure to honour its part of the agreement to buy back gold. One group of about 60 customers, representing a total of roughly $10 million in gold purchases, is understood to be consulting lawyers.
Genneva is on the Monetary Authority of Singapore's Investor Alert list of unlicensed entities. Its scheme basically sells gold to customers at a hefty premium of 20-30 per cent. Customers, however, are told that they enjoy a "discount" of about 2 per cent off the headline price.
They are given the option to sell back the gold after a pre-agreed term of one month or three months. The gold can be sold back at the headline price and customers get to pocket the so-called discount. Assuming monthly rollovers, this could mean a return of as much as 24 per cent a year.
Genneva's model appears to fall into a grey regulatory area. Because there is typically a physical purchase of gold, the company is not classified as an investment adviser. The so-called discount that customers are extended is also not described as a yield or return.
The above snippets from Singapore Business Times. Surprising that so many people seem to fall for these kind of schemes, although low interest rates will be one factor. However, promising 24% returns per year (cumulative even 27%) is way above what Bernie Maddoff offered. Surely some people should have been suspicious, if something sounds too good to be true, normally it is.
Bank Negara's alert can be found here and the same for the Monetary Authority Singapore here.
Insider trading through underaged accounts
Study "Informed Trading through the Accounts of Children" shows:
"a high proportion of trading through underaged accounts is likely to be controlled by informed guardians seeking to share the benefits of their information advantage with young children, or camouflaging their potentially illegal trades. Consistent with this conjecture, we find that the guardians behind underaged accounts are very successful at picking stocks. Moreover, they tend to channel their best trades through the accounts of children, especially when they trade just before major earnings announcements, large price changes, and takeover announcements. Building on these results, we argue that the proportion of total trading activity through underaged accounts (labeled BABYPIN) should serve as an effective proxy for the probability of information trading in a stock. Consistent with this claim, we show that investors demand a higher return for holding stocks with a greater likelihood of private information, as proxied by BABYPIN."
"a high proportion of trading through underaged accounts is likely to be controlled by informed guardians seeking to share the benefits of their information advantage with young children, or camouflaging their potentially illegal trades. Consistent with this conjecture, we find that the guardians behind underaged accounts are very successful at picking stocks. Moreover, they tend to channel their best trades through the accounts of children, especially when they trade just before major earnings announcements, large price changes, and takeover announcements. Building on these results, we argue that the proportion of total trading activity through underaged accounts (labeled BABYPIN) should serve as an effective proxy for the probability of information trading in a stock. Consistent with this claim, we show that investors demand a higher return for holding stocks with a greater likelihood of private information, as proxied by BABYPIN."
Monday, 24 September 2012
Astro playing the listed/delisted/relisted game (2)
I blogged before about Astro's listing delisting and subsequently relisting.
The final prospectus dated 21st September 2012 can be found here, part 1 of the listing brochure can be found here.
I have to admit that I am pleasantly surprised about the changes made in paragraph 6.1 (pages 63-65, pdf pages 86-88). Information regarding its listing in 2003, the General Offer price in 2010, the Net Asset Backing per share, Earnings Per Share and EBITDA are all given. Also the reasons for the delisting is given and the restructuring details after the company was delisted, including new products and services and capital expenditure occurred.
I am still not exactly a fan of General Offers (especially the ones with a "delisting" threat) nor of companies that are being relisted so quickly afterwards, but the changes in the prospectus are definitely helpful in understanding what happened the last two years.
I will not subscribe to the IPO. Firstly because I never do that anymore, I prefer to wait about two years after a company is listed until all is settled and the hot air of an IPO has left the valuation. From time to time one misses a good opportunity because of that, but it is more than compensated by avoiding the companies that disappoint after their listing.
Secondly because I find the risk/reward not exactly enticing. The TV industry has had some clear changes during the last 45 years or so, but I expect things to change must faster in the coming years. And I am not sure if those changes will be good for companies like Astro. Being priced to perfection, the upside looks limited while there might be downside if technological changes move against its business model.
Still, I rate the chance that the share price goes up say 5-10% on the first listing day rather high.
NB: I am not a financial advisor, readers should decide themselves after doing their own research, as always.
The final prospectus dated 21st September 2012 can be found here, part 1 of the listing brochure can be found here.
I have to admit that I am pleasantly surprised about the changes made in paragraph 6.1 (pages 63-65, pdf pages 86-88). Information regarding its listing in 2003, the General Offer price in 2010, the Net Asset Backing per share, Earnings Per Share and EBITDA are all given. Also the reasons for the delisting is given and the restructuring details after the company was delisted, including new products and services and capital expenditure occurred.
I am still not exactly a fan of General Offers (especially the ones with a "delisting" threat) nor of companies that are being relisted so quickly afterwards, but the changes in the prospectus are definitely helpful in understanding what happened the last two years.
I will not subscribe to the IPO. Firstly because I never do that anymore, I prefer to wait about two years after a company is listed until all is settled and the hot air of an IPO has left the valuation. From time to time one misses a good opportunity because of that, but it is more than compensated by avoiding the companies that disappoint after their listing.
Secondly because I find the risk/reward not exactly enticing. The TV industry has had some clear changes during the last 45 years or so, but I expect things to change must faster in the coming years. And I am not sure if those changes will be good for companies like Astro. Being priced to perfection, the upside looks limited while there might be downside if technological changes move against its business model.
Still, I rate the chance that the share price goes up say 5-10% on the first listing day rather high.
NB: I am not a financial advisor, readers should decide themselves after doing their own research, as always.
"Asean: Virtue and Vice"
From CLSA's highly influential CG Watch 2012, the executive summary for Singapore, Malaysia, Thailand, Indonesia and the Philippines is given on pages 11 & 12:
Singapore has the highest CG score of markets we cover ex-Australia
Asean spans markets that in our rankings are the highest as well as those that come at the bottom of CLSA and ACGA’s rankings. Singapore has, on average, the highest score for governance among its corporates. As this report goes to print, there is a battle for corporate control for Asia Pacific Breweries (APB), which owns leading beer brands in the region (Tiger, Anchor, Bintang, etc). The conglomerate F&N looks set to dispose its majority stake in APB to Heineken, with which it has had a partnership arrangement that was disturbed when Thai Beverages made a bid for both a stake in FNN and control of APB. The likely outcome is that F&N disposes of its stake in APB at a premium and might disentangle its current structure that puts brewing and softdrinks together with a large property division. That a battle for corporate control in one of the largest conglomerates is leading to realisation of shareholder value with commercial logic prevailing is a rarity in the region.
But S-chips are an embarrassment
However, Singapore’s embarrassment is the so-called S-chips, mainland companies that have listed in its market. CG standards are shoddy, a number of firms have flouted the listing rules and directors have absconded to China when the exchange pursues them. The case for Chinese companies listing in Singapore has never been clear and investors in these stocks certainly need to weigh seriously the risks. This segment of the market, however, is likely to diminish in significance over time.
Sime Darby takes a hit again
Across the causeway, the largest of Malaysian conglomerates once again disappointed the market. In the Asian crisis, Sime Darby nearly blew up for its poorly managed foray into banking and stockbroking. Over the recent crisis, its balance sheet is much stronger and loses less significant but it took a hit again, this time for cost overruns at Bakun as well as the Middle East power projects, a business where it has little expertise.
Unfavourable optics in Sime’s E&O takeover
An independent director at Sime Darby has recently been charged with insider trading. More embarrassing for the governance perception for the market was Sime’s acquisition of a controlling stake in the property company, E&O. This had been preceded by the chairman of E&O buying shares in the company, before Sime Darby announced it was taking over control at a 60% premium. On the basis that the acquisition of the stake was a private transaction between Sime and the previous significant shareholders (which did not include the chairman), and that the matter had not been discussed by the board of E&O, no charges of insider trading was brought to bear. But unfortunately for the optics of the matter, the E&O chairman was the husband of the then chairperson of the Securities Commission (SC). She has since stepped down when her contract was not renewed earlier this year.
Successful enforcement required to improve perceptions
The now retired SC chairman had been brought to the commission fairly recently in 2006 from outside the agency. The current chairman has been promoted from within and has been a regulator for over 20 years (neither does he have the disadvantage of having a spouse who is a corporate figure). CG issues are nevertheless likely to continue to crop up but the efforts of the SC to take to task directors for insider trading is a positive. The country, though, needs a period without governance accidents at its larger companies and successful enforcement against transgressors to improve the perception of investors on the market.
Little impact from new government in Thailand
Thailand has a new government in place now for slightly more than a year. This has not had much of an impact on the governance outlook for corporates. Related-party transactions remain an issue with certain groups, cropping up again with CP Foods. But as companies get larger we notice improvement in transparency. The stock exchange continues to push for high standards, for instance on voting by poll, which is not mandatory but most companies have been persuaded to adopt this for extraordinary and annual general meetings, a practice that is still relatively uncommon in the region.
Regulatory issues in Indonesia
Indonesian firms have had to deal with regulatory uncertainty with regard to ownership limits on the banks and export restrictions on the mining sector. These impact their ability to maximise shareholder value, which is one of the issues in our CG scoring. Indonesian companies are also the slowest to release full-year results; given the 90-day deadline for releasing full-year numbers, none report within two months which is becoming the norm elsewhere.
Shadow play in the London market
Over in the London market, a shadow play for control of a FTSE constituent that had recently been created to take an interest in an Indonesian mining asset was illuminating. It reveals firstly there is still risk of change in shareholding structure for groups where major shareholders are highly geared. Yet, influential groups will often be able to retain effective control. Other shareholders and investors should expect to go along with the intentions of the effective controlling shareholder.
No real CG change yet in the Philippines
In the Philippines, President Aquino has been in power since 2010 and sets a positive backdrop for clean governance nationally. At the corporate level, however, there is little evidence of much change as yet. Companies continue to issue new equity when the purposes are unclear, eg, Ayala Corp, or
sometimes surprising the market with the size, eg, Banco de Oro. Inter-group transaction of assets within the First Philippine Holdings listed companies raised questions over pricing.
Singapore has the highest CG score of markets we cover ex-Australia
Asean spans markets that in our rankings are the highest as well as those that come at the bottom of CLSA and ACGA’s rankings. Singapore has, on average, the highest score for governance among its corporates. As this report goes to print, there is a battle for corporate control for Asia Pacific Breweries (APB), which owns leading beer brands in the region (Tiger, Anchor, Bintang, etc). The conglomerate F&N looks set to dispose its majority stake in APB to Heineken, with which it has had a partnership arrangement that was disturbed when Thai Beverages made a bid for both a stake in FNN and control of APB. The likely outcome is that F&N disposes of its stake in APB at a premium and might disentangle its current structure that puts brewing and softdrinks together with a large property division. That a battle for corporate control in one of the largest conglomerates is leading to realisation of shareholder value with commercial logic prevailing is a rarity in the region.
But S-chips are an embarrassment
However, Singapore’s embarrassment is the so-called S-chips, mainland companies that have listed in its market. CG standards are shoddy, a number of firms have flouted the listing rules and directors have absconded to China when the exchange pursues them. The case for Chinese companies listing in Singapore has never been clear and investors in these stocks certainly need to weigh seriously the risks. This segment of the market, however, is likely to diminish in significance over time.
Sime Darby takes a hit again
Across the causeway, the largest of Malaysian conglomerates once again disappointed the market. In the Asian crisis, Sime Darby nearly blew up for its poorly managed foray into banking and stockbroking. Over the recent crisis, its balance sheet is much stronger and loses less significant but it took a hit again, this time for cost overruns at Bakun as well as the Middle East power projects, a business where it has little expertise.
Unfavourable optics in Sime’s E&O takeover
An independent director at Sime Darby has recently been charged with insider trading. More embarrassing for the governance perception for the market was Sime’s acquisition of a controlling stake in the property company, E&O. This had been preceded by the chairman of E&O buying shares in the company, before Sime Darby announced it was taking over control at a 60% premium. On the basis that the acquisition of the stake was a private transaction between Sime and the previous significant shareholders (which did not include the chairman), and that the matter had not been discussed by the board of E&O, no charges of insider trading was brought to bear. But unfortunately for the optics of the matter, the E&O chairman was the husband of the then chairperson of the Securities Commission (SC). She has since stepped down when her contract was not renewed earlier this year.
Successful enforcement required to improve perceptions
The now retired SC chairman had been brought to the commission fairly recently in 2006 from outside the agency. The current chairman has been promoted from within and has been a regulator for over 20 years (neither does he have the disadvantage of having a spouse who is a corporate figure). CG issues are nevertheless likely to continue to crop up but the efforts of the SC to take to task directors for insider trading is a positive. The country, though, needs a period without governance accidents at its larger companies and successful enforcement against transgressors to improve the perception of investors on the market.
Little impact from new government in Thailand
Thailand has a new government in place now for slightly more than a year. This has not had much of an impact on the governance outlook for corporates. Related-party transactions remain an issue with certain groups, cropping up again with CP Foods. But as companies get larger we notice improvement in transparency. The stock exchange continues to push for high standards, for instance on voting by poll, which is not mandatory but most companies have been persuaded to adopt this for extraordinary and annual general meetings, a practice that is still relatively uncommon in the region.
Regulatory issues in Indonesia
Indonesian firms have had to deal with regulatory uncertainty with regard to ownership limits on the banks and export restrictions on the mining sector. These impact their ability to maximise shareholder value, which is one of the issues in our CG scoring. Indonesian companies are also the slowest to release full-year results; given the 90-day deadline for releasing full-year numbers, none report within two months which is becoming the norm elsewhere.
Shadow play in the London market
Over in the London market, a shadow play for control of a FTSE constituent that had recently been created to take an interest in an Indonesian mining asset was illuminating. It reveals firstly there is still risk of change in shareholding structure for groups where major shareholders are highly geared. Yet, influential groups will often be able to retain effective control. Other shareholders and investors should expect to go along with the intentions of the effective controlling shareholder.
No real CG change yet in the Philippines
In the Philippines, President Aquino has been in power since 2010 and sets a positive backdrop for clean governance nationally. At the corporate level, however, there is little evidence of much change as yet. Companies continue to issue new equity when the purposes are unclear, eg, Ayala Corp, or
sometimes surprising the market with the size, eg, Banco de Oro. Inter-group transaction of assets within the First Philippine Holdings listed companies raised questions over pricing.
Sunday, 23 September 2012
Bronte Capital’s short waves
Interesting interview of the two founders of Bronte Capital by Jonathan Shapiro.
Some excerpts:
Bronte Capital sprouted from Hempton’s investment blog, which attracted a cult following around the world after he began posting in early 2008 at the height of the financial crisis. As the financial system headed for destruction, Hempton’s posts included the prediction of a Baltic banking crisis by measuring the collapsing cost of hookers in Estonia, and nominating RBS banking head Sir Fred Goodwin as worst-ever banking CEO. Among the first financial experts to embrace the blogosphere, fans of his sharp, detailed and accessible stock analysis grew. His admirers and pen pals include some of Wall Street’s brightest, hotshot hedge funds and a number of Silicon Valley luminaries.
The forensics of finding shorts is part art, part science. But since fraud is human, it helps to follow the people. Hempton pays very close attention to public relations agencies, stockbrokers, and, most of all, lawyers of companies he knows to be fraudulent, as these handmaidens to sharemarket fraud leave a trail. “Lawyers are our favourite scumbags,” he says. “They sign their name on everything and they never get prosecuted.”
Plenty of other methods remain distinctly proprietary. But one that Maher was prepared to share is to sift through the divorce filings of American executives. These can reveal undisclosed related-party transactions, resulting in different stock holdings than what is reported publicly. “You may be able to hide from the SEC [US Securities and Exchange Commission], but an acrimonious wife with her own legal team is a different matter entirely,” Maher comments dryly.
Bronte has a strong track record picking Chinese frauds on global exchanges in sectors including cement, travel, medical products and education. By its estimates, it has successfully shorted more than 40 Chinese stocks. “We really do have a hard time finding one that is honest, and we sincerely want to so we can hedge our short positions. There are a lot of good things going on in China. But the good things just don’t get shown to Western investors.”
Some excerpts:
Bronte Capital sprouted from Hempton’s investment blog, which attracted a cult following around the world after he began posting in early 2008 at the height of the financial crisis. As the financial system headed for destruction, Hempton’s posts included the prediction of a Baltic banking crisis by measuring the collapsing cost of hookers in Estonia, and nominating RBS banking head Sir Fred Goodwin as worst-ever banking CEO. Among the first financial experts to embrace the blogosphere, fans of his sharp, detailed and accessible stock analysis grew. His admirers and pen pals include some of Wall Street’s brightest, hotshot hedge funds and a number of Silicon Valley luminaries.
The forensics of finding shorts is part art, part science. But since fraud is human, it helps to follow the people. Hempton pays very close attention to public relations agencies, stockbrokers, and, most of all, lawyers of companies he knows to be fraudulent, as these handmaidens to sharemarket fraud leave a trail. “Lawyers are our favourite scumbags,” he says. “They sign their name on everything and they never get prosecuted.”
Plenty of other methods remain distinctly proprietary. But one that Maher was prepared to share is to sift through the divorce filings of American executives. These can reveal undisclosed related-party transactions, resulting in different stock holdings than what is reported publicly. “You may be able to hide from the SEC [US Securities and Exchange Commission], but an acrimonious wife with her own legal team is a different matter entirely,” Maher comments dryly.
Bronte has a strong track record picking Chinese frauds on global exchanges in sectors including cement, travel, medical products and education. By its estimates, it has successfully shorted more than 40 Chinese stocks. “We really do have a hard time finding one that is honest, and we sincerely want to so we can hedge our short positions. There are a lot of good things going on in China. But the good things just don’t get shown to Western investors.”
Friday, 21 September 2012
Blast from the Past: the Carrian case (2)
Interesting documentary from Crime & Investigation about Jalil Ibrahim, the real hero in the Carrian case:
According to this website, Jalil Ibrahim is the only civilian who ever received the highest federal award of Seri Pahlawan Gagah Perkasa ("Gallant Warrior" or "Warrior of Extreme Valour").
David webb has a collection of articles about George Tan of the Carrian case, but unfortunately his website started only in 1998.
Through Google many newspaper clips can be found, here is one of them:
"The Banker who knew too much"
According to this website, Jalil Ibrahim is the only civilian who ever received the highest federal award of Seri Pahlawan Gagah Perkasa ("Gallant Warrior" or "Warrior of Extreme Valour").
David webb has a collection of articles about George Tan of the Carrian case, but unfortunately his website started only in 1998.
Through Google many newspaper clips can be found, here is one of them:
Thursday, 20 September 2012
CG in Malaysia: enforcement and culture are still the main problem areas
CLSA has published its highly influential corporate governance survey 2012 that examined 11 markets and more than 800 listed companies across Asia.
A posting about the previous 2010 survey can be found here.
I could not yet locate the report (which often has a lot of interesting detail), but the main findings can be found in the below table from this source:
It should be noted that the scores are relative, and that Singapore and Hong Kong (globally considered to be Grade B) score tops in Asia, but that better CG is to be found in certain Western countries (Grade A), although nowhere it will be really ideal. Thailand, Japan, Malaysia, Taiwan, India and Korea are considered to be in Grade C.
Total score for Malaysia improved, from 52 to 55.
CG Rules & Practices improved from 49 to 52.
Enforcement improved from 38 to 39.
Political & Regulatory improved from 60 to 63.
Accounting standards remained the same, on 80.
CG Culture improved from 32 to 36.
Malaysia has done a lot of work on CG, organising seminars, publishing booklets and its CG blueprint, hence the improvement in the CG Culture.
However, if not accompanied by a clear increase in enforcement (which is still so much lacking), the effects will only be limited, in my opinion.
My main grouses:
A posting about the previous 2010 survey can be found here.
I could not yet locate the report (which often has a lot of interesting detail), but the main findings can be found in the below table from this source:
It should be noted that the scores are relative, and that Singapore and Hong Kong (globally considered to be Grade B) score tops in Asia, but that better CG is to be found in certain Western countries (Grade A), although nowhere it will be really ideal. Thailand, Japan, Malaysia, Taiwan, India and Korea are considered to be in Grade C.
Total score for Malaysia improved, from 52 to 55.
CG Rules & Practices improved from 49 to 52.
Enforcement improved from 38 to 39.
Political & Regulatory improved from 60 to 63.
Accounting standards remained the same, on 80.
CG Culture improved from 32 to 36.
Malaysia has done a lot of work on CG, organising seminars, publishing booklets and its CG blueprint, hence the improvement in the CG Culture.
However, if not accompanied by a clear increase in enforcement (which is still so much lacking), the effects will only be limited, in my opinion.
My main grouses:
- much more enforcement is needed on rampant insider trading and market manipulation
- handling of complaints by minority investors should be hugely improved
- the standard of independent reports should be higher, independent advisors who write biased reports should be adequately punished
- minority investors should be better protected in delisting exercises and related party transactions
- companies that are delisted should not be allowed to be relisted again, at least not within a certain time frame (say 5 or 10 years); if they relist, they should be transparent about the reasons for the delisting, the change in valuation, etc.
- companies that post very disappointing results immediately after they are listed should be investigated, together with their bankers, advisors etc;
Some worrisome signals from China
Chinese banks and companies looking to seize steel pledged as collateral by firms that have defaulted on loans are making an uncomfortable discovery: the metal was never in the warehouses in the first place.
China's demand has faltered with the slowing economy, pushing steel prices to a three-year low and making it tough for mills and traders to keep up with payments on the $400 billion of debt they racked up during years of double-digit growth.
As defaults have risen in the world's largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal. Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said.
Ghost inventories are exacerbating the wider ailments of the sector in China, which produces around 45 percent of the world's steel and has over 200 million metric tons (220.5 million tons) of excess production capacity. Steel is another drag on a financial system struggling with bad loans from the property sector and local governments.
"What we have seen so far is just the tip of the iceberg," said a trader from a steel firm in Shanghai who declined to be identified as he was not authorized to speak to the media. "The situation will get worse as poor demand, slumping prices and tight credit from banks create a domino effect on the industry."
The above news comes from Reuters.
Mish commented on it:
Several months of net outflow, similar to what happened during the economic crisis in 2008.
China's demand has faltered with the slowing economy, pushing steel prices to a three-year low and making it tough for mills and traders to keep up with payments on the $400 billion of debt they racked up during years of double-digit growth.
As defaults have risen in the world's largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal. Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said.
Ghost inventories are exacerbating the wider ailments of the sector in China, which produces around 45 percent of the world's steel and has over 200 million metric tons (220.5 million tons) of excess production capacity. Steel is another drag on a financial system struggling with bad loans from the property sector and local governments.
"What we have seen so far is just the tip of the iceberg," said a trader from a steel firm in Shanghai who declined to be identified as he was not authorized to speak to the media. "The situation will get worse as poor demand, slumping prices and tight credit from banks create a domino effect on the industry."
The above news comes from Reuters.
Mish commented on it:
Several months of net outflow, similar to what happened during the economic crisis in 2008.
Wednesday, 19 September 2012
BRDB offer: "not fair but reasonable"
From the website of The Star:
Independent adviser recommends acceptance of Bandar Raya Developments buyout
The independent adviser for Bandar Raya Developments Bhd (BRDB) has recommended that minority shareholders accept the RM2.90 per share general offer by the company's major shareholder, deeming the offer as “not fair but reasonable”.
Major shareholder and chairman, Datuk Mohamed Moiz Jabir Mohamed Ali Moiz, who owns 18.47% of BRDB via his private vehicle Ambang Sehati Sdn Bhd, had earlier made an offer to acquire all the shares and warrants of BRDB at RM2.90 and RM1.80 respectively. Moiz has been BRDB chairman since February 2002
The independent adviser, namely AmInvestment Bank Bhd, said in a circular to shareholders that the offer price for the shares represented a 91 sen or 23.88% discount to the estimated revised net asset value of the shares. “In our view, this 23.88% discount renders the share offer price of RM2.90 to be not fair,” it said.
However, it has recommended that shareholders accept the offer as the offer is considered not detrimental to them since the shares and warrants have consistently been trading below the offer price for the past three years up to July 30, when the offer was made.
Furthermore, AmInvestment Bank said BRDB had not received any other offer for the company's shares or its assets and liabilities.
It said the share offer price represented a premium ranging from 39 sen to 53 sen per share over the five-day, one-month, three-month and six-month volume weighted average market price up to July 30 while the warrant offer price represented a 36 sen to 52 sen premium over the same periods.
It added that the share offer price's 39-sen premium based on the five-day volume weighted average market price “is within the range of successful precedent privatisation transactions in Malaysia of 2.46% to 37.50% since January 2011.”
AmInvestment Bank also reminded holders of the warrants that these securities would expire on Sept 26, after which they would have no value.
It said that based on the share offer price, the annual gross dividend yield for the shares for the past two years was about 2.59%.
Ambang Sehati had proposed the acquisition of The Bangsar Shopping Centre, Menara BRDB, CapSquare Retail Centre and Permas Jusco Mall early last September on a fair value basis. The properties had a total value of RM942.37mil.
But the offer to buy the properties at RM914mil fell through several weeks later after questions arose over the price, motives behind the acquisition, the identity of the ultimate shareholders behind a 23.57% block of shares held under a nominee account for Credit Suisse and the company's prospects after losing properties generating recurring income.
It was then decided that the properties would be sold via open tender by the first quarter of this year with Ambang Sehati participating but the tender for the properties was never carried out. This was followed by the general offer by Ambang Sehati to buy out the rest of the shares in BRDB for RM1.17bil cash.
BRDB closed unchanged at RM2.85.
Is the identity of the large block of shares already revealed? If not, why not, should there not be transparency regarding this important matter?
Interestingly, the major shareholder of BRDB was also the same party behind the settlement of the CLOB shares. And sentiment towards the way the CLOB issue was handled is pretty negative (to put it mildly) in Singapore, and might have to do with the luke warm start of the SGX-Bursa trading link. Below is a part of an article is from the Business Times (Singapore):
SGX-Bursa trading link off to a slow start
The trading link between the Singapore Exchange (SGX) and Bursa Malaysia (BM) went "live" yesterday but failed to excite investors - dealers here reported little or no interest among the clients who were said to be more concerned with Europe's debt worries and the US stagnant economy.
"Singapore investors could already trade Malaysian shares for years before this link and vice-versa while clients could also trade through the Internet," said a dealer. "Maybe when the other Asean exchanges come online, interest will pick up."
And from the Straits Times:
"As expected, the first day of the SGX-Bursa link did not have any visible impact on trading activity".
Independent adviser recommends acceptance of Bandar Raya Developments buyout
The independent adviser for Bandar Raya Developments Bhd (BRDB) has recommended that minority shareholders accept the RM2.90 per share general offer by the company's major shareholder, deeming the offer as “not fair but reasonable”.
Major shareholder and chairman, Datuk Mohamed Moiz Jabir Mohamed Ali Moiz, who owns 18.47% of BRDB via his private vehicle Ambang Sehati Sdn Bhd, had earlier made an offer to acquire all the shares and warrants of BRDB at RM2.90 and RM1.80 respectively. Moiz has been BRDB chairman since February 2002
The independent adviser, namely AmInvestment Bank Bhd, said in a circular to shareholders that the offer price for the shares represented a 91 sen or 23.88% discount to the estimated revised net asset value of the shares. “In our view, this 23.88% discount renders the share offer price of RM2.90 to be not fair,” it said.
However, it has recommended that shareholders accept the offer as the offer is considered not detrimental to them since the shares and warrants have consistently been trading below the offer price for the past three years up to July 30, when the offer was made.
Furthermore, AmInvestment Bank said BRDB had not received any other offer for the company's shares or its assets and liabilities.
It said the share offer price represented a premium ranging from 39 sen to 53 sen per share over the five-day, one-month, three-month and six-month volume weighted average market price up to July 30 while the warrant offer price represented a 36 sen to 52 sen premium over the same periods.
It added that the share offer price's 39-sen premium based on the five-day volume weighted average market price “is within the range of successful precedent privatisation transactions in Malaysia of 2.46% to 37.50% since January 2011.”
AmInvestment Bank also reminded holders of the warrants that these securities would expire on Sept 26, after which they would have no value.
It said that based on the share offer price, the annual gross dividend yield for the shares for the past two years was about 2.59%.
Ambang Sehati had proposed the acquisition of The Bangsar Shopping Centre, Menara BRDB, CapSquare Retail Centre and Permas Jusco Mall early last September on a fair value basis. The properties had a total value of RM942.37mil.
But the offer to buy the properties at RM914mil fell through several weeks later after questions arose over the price, motives behind the acquisition, the identity of the ultimate shareholders behind a 23.57% block of shares held under a nominee account for Credit Suisse and the company's prospects after losing properties generating recurring income.
It was then decided that the properties would be sold via open tender by the first quarter of this year with Ambang Sehati participating but the tender for the properties was never carried out. This was followed by the general offer by Ambang Sehati to buy out the rest of the shares in BRDB for RM1.17bil cash.
BRDB closed unchanged at RM2.85.
Is the identity of the large block of shares already revealed? If not, why not, should there not be transparency regarding this important matter?
Interestingly, the major shareholder of BRDB was also the same party behind the settlement of the CLOB shares. And sentiment towards the way the CLOB issue was handled is pretty negative (to put it mildly) in Singapore, and might have to do with the luke warm start of the SGX-Bursa trading link. Below is a part of an article is from the Business Times (Singapore):
SGX-Bursa trading link off to a slow start
The trading link between the Singapore Exchange (SGX) and Bursa Malaysia (BM) went "live" yesterday but failed to excite investors - dealers here reported little or no interest among the clients who were said to be more concerned with Europe's debt worries and the US stagnant economy.
"Singapore investors could already trade Malaysian shares for years before this link and vice-versa while clients could also trade through the Internet," said a dealer. "Maybe when the other Asean exchanges come online, interest will pick up."
And from the Straits Times:
"As expected, the first day of the SGX-Bursa link did not have any visible impact on trading activity".
Tuesday, 18 September 2012
Blast from the Past: the Carrian case
I received several comments regarding the Carrian case. From Wikipedia:
The Carrian Group was a Hong Kong conglomerate founded by George Tan, a Singaporean Civil Engineer working in Hong Kong as a project manager for a land development company. The Group's principal holding company Carrian Holdings, Ltd. was founded in 1977.
In January 1980, the group, through a 75% owned subsidiary, purchased Gammon House (a commercial Office building, now Bank of America Tower) in Central District, Hong Kong for $998 million. It grabbed the limelight in April 1980 when it announced the sale of Gammon House for a staggering HK$1.68 billion, a price that surprised Hong Kong's Property and Financial markets and developed public interest in Carrian.
In the same year, Carrian capitalized on its notoriety by acquiring a publicly listed Hong Kong company, renaming it Carrian Investments Ltd., and using it as a vehicle to raise funds from the financial markets.
The group grew rapidly in the early 1980s to include properties in Malaysia, Thailand, Singapore, Philippines, Japan, and the United States. At its peak, the Carrian Group owned businesses in Real Estate, Finance, Shipping, Insurance (China Insurance Underwriters Ltd), Hotels, Catering and Transportation (A Taxi fleet that was the largest ever in Hong Kong).
Carrian Group became involved in a scandal with Bank Bumiputra Malaysia Berhad of Malaysia and Hong Kong-based Bumiputra Malaysia Finance. Following allegations of accounting fraud, a murder of a bank auditor, and the suicide of the firm's adviser, the Carrian Group collapsed in 1983, the largest bankruptcy in Hong Kong.
Of the group's numerous businesses, only the Carriana Restaurant remains.
Other links:
Bowring
ICAC 1
ICAC 2
BMF 1
BMF 2
Gwulo
Parmalat and Carrian
Asiasentinel 1
Asiasentinel 2
The Carrian Group was a Hong Kong conglomerate founded by George Tan, a Singaporean Civil Engineer working in Hong Kong as a project manager for a land development company. The Group's principal holding company Carrian Holdings, Ltd. was founded in 1977.
In January 1980, the group, through a 75% owned subsidiary, purchased Gammon House (a commercial Office building, now Bank of America Tower) in Central District, Hong Kong for $998 million. It grabbed the limelight in April 1980 when it announced the sale of Gammon House for a staggering HK$1.68 billion, a price that surprised Hong Kong's Property and Financial markets and developed public interest in Carrian.
In the same year, Carrian capitalized on its notoriety by acquiring a publicly listed Hong Kong company, renaming it Carrian Investments Ltd., and using it as a vehicle to raise funds from the financial markets.
The group grew rapidly in the early 1980s to include properties in Malaysia, Thailand, Singapore, Philippines, Japan, and the United States. At its peak, the Carrian Group owned businesses in Real Estate, Finance, Shipping, Insurance (China Insurance Underwriters Ltd), Hotels, Catering and Transportation (A Taxi fleet that was the largest ever in Hong Kong).
Carrian Group became involved in a scandal with Bank Bumiputra Malaysia Berhad of Malaysia and Hong Kong-based Bumiputra Malaysia Finance. Following allegations of accounting fraud, a murder of a bank auditor, and the suicide of the firm's adviser, the Carrian Group collapsed in 1983, the largest bankruptcy in Hong Kong.
Of the group's numerous businesses, only the Carriana Restaurant remains.
Other links:
Bowring
ICAC 1
ICAC 2
BMF 1
BMF 2
Gwulo
Parmalat and Carrian
Asiasentinel 1
Asiasentinel 2
Nigel Farage, fined, Europe's 7th most dangerous man?
According to this post from Mish (Mike Shedlock), Der Spiegel (an influential German magazine) voted Farage the 7th most dangerous man of Europe. And what is the party creed of this "dangerous" man?
That does not sound that bad to me, actually, the Malaysian government might want to check if they can learn something from it.
Monday, 17 September 2012
Blast from the Past: CLOB (2)
From The Straits Times, an article by Anita Gabriel:
Tycoon who made Clob investors a daring offer
Before 1999, few had heard of reclusive tycoon Akbar Khan, a Singaporean businessman based in Kuala Lumpur.
But not many could forget him once he emerged on the scene back then with a plan to free up frozen Clob shares.
Mr Khan and his nephew, Mr Mohamed Moiz Ali Moiz - another name etched in the memory of former Clob investors - have been making some big corporate moves in recent months.
Mr Khan's private vehicle Ambang Sehati - also owned by his two children and Mr Moiz - recently launched a RM 1.5 billion takeover offer for Bandaraya Development (BRDB), a listed flagship property firm in Malaysia where they are the majority shareholder.
BRDB is mostly involved in the high-end luxury residential market. Ambang Sehati acquired BRDB in 2001 following a restructuring of Multi-Purpose Holdings, which was a Clob darling that was popular with Singapore investors in the 1990's.
Mr Khan, a chartered accountant by training who is widely perceived to be close to Malaysia's former finance minister Daim Zainuddin, continues to keep a low profile.
In 1999, his Effective Capital - where Mr Moiz was chief executive - enraged Singaporeans when it first swooped in with a cash offer to buy all the Clob shares at half their last traded price.
(Note MAW: the last traded price was already very depressed, this all happened in the midst of the Asian crisis)
Matched by somewhat palatable offers made by other parties, he would tweak his offer several times later.
His final plan to migrate the shares back to their rightful shareholders on a staggered basis at a fee of 1.5 per cent eventually pulled through, reportedly netting the company Effective Capital a cool RM 80 million.
The fee was hard to swallow for the stricken investors who had suffered great losses.
Tycoon who made Clob investors a daring offer
Before 1999, few had heard of reclusive tycoon Akbar Khan, a Singaporean businessman based in Kuala Lumpur.
But not many could forget him once he emerged on the scene back then with a plan to free up frozen Clob shares.
Mr Khan and his nephew, Mr Mohamed Moiz Ali Moiz - another name etched in the memory of former Clob investors - have been making some big corporate moves in recent months.
Mr Khan's private vehicle Ambang Sehati - also owned by his two children and Mr Moiz - recently launched a RM 1.5 billion takeover offer for Bandaraya Development (BRDB), a listed flagship property firm in Malaysia where they are the majority shareholder.
BRDB is mostly involved in the high-end luxury residential market. Ambang Sehati acquired BRDB in 2001 following a restructuring of Multi-Purpose Holdings, which was a Clob darling that was popular with Singapore investors in the 1990's.
Mr Khan, a chartered accountant by training who is widely perceived to be close to Malaysia's former finance minister Daim Zainuddin, continues to keep a low profile.
In 1999, his Effective Capital - where Mr Moiz was chief executive - enraged Singaporeans when it first swooped in with a cash offer to buy all the Clob shares at half their last traded price.
(Note MAW: the last traded price was already very depressed, this all happened in the midst of the Asian crisis)
Matched by somewhat palatable offers made by other parties, he would tweak his offer several times later.
His final plan to migrate the shares back to their rightful shareholders on a staggered basis at a fee of 1.5 per cent eventually pulled through, reportedly netting the company Effective Capital a cool RM 80 million.
The fee was hard to swallow for the stricken investors who had suffered great losses.
Sunday, 16 September 2012
Blast from the Past: Pan-Electric (2)
The Attorney-General's Chambers (AGC) in Singapore has responded to the claims from Glenn Knight. It should be noted that Tan Koon Swan had pleaded quilty and that 14 other charges were not proceeded. This case will not be re-opened, as far as I can see, but still interesting that this old but very important case suddenly popped up again.
..... the AGC pointed out in its statement that CJ Yong had noted in his judgment that there had been no arguments about the correctness of the charge against Mr Tan when it was made.
The AGC said CJ Yong "did not go into any detailed discussion of Mr Tan Koon Swan's case or Mr Knight's conduct of the case. Specifically, CJ Yong did not express any opinion that Mr Tan was wrongly charged".
The AGC also stated that although CJ Yong might have disagreed with the view of the law in Mr Tan's case, his decision "could not and did not overrule" the decision in Mr Tan's case, as both cases had already been decided by the High Court, said The Straits Times.
"Differences in the courts' pronouncements on the law occur, especially in legal systems based on the common law," said the AGC. It added that the public prosecutor had decided to charge Mr Tan based on the evidence against him and the law. Mr Tan's lawyers had not taken issue with the charge or his conviction based on the law and facts.
Said the AGC: "Mr Tan Koon Swan was convicted on the basis of his own plea of guilt, based on the law and facts as was accepted by his own counsel."
There were 14 other charges not proceeded with against Mr Tan, who had already pleaded guilty to criminal breach of trust.
The AGC added: "It was said that the judgment in Cheam Tat Pang meant that Mr Tan Koon Swan had been wrongly convicted and that he was technically an innocent man. Mr Tan Koon Swan’s conviction stands, and he remains guilty of the crime that he had admitted to."
The AGC also highlighted another error made by Mr Knight in his book. He had said "the sentence imposed as including a fine of $1 million". The correct fine was $500,000, said the AGC.
When contacted by The Straits Times last night, Mr Knight said as there were two differing High Court judgments on the same issue, the matter should have been referred to the Court of Appeal for a clarification.
"At the end of the day, after CJ Yong's judgment in 1996, nobody has been charged since then under that particular section, to my knowledge."
For Malaysia, it was another case of mixing business with politics. Another old (updated) case is reported in the SCMP.
Some snippets:
UNITED NATIONS negotiator Razali Ismail has won praise for his efforts to bring democracy to Myanmar. He also is being criticised over a business deal his firm was clinching with the military regime as he was in talks for the release from house arrest of opposition leader Aung San Suu Kyi.
The former Malaysian ambassador was not doing anything unusual, observers said. The links between politics and business in Malaysia had become so entwined that such practices were common.
Malaysia experts interviewed by the South China Morning Post were split on whether Mr Razali, who has denied any conflict of interest, may have harmed the process of returning democracy to Myanmar. Pro-democracy activists and Western analysts - while stressing the details of the deal brokered by the Malaysian company Iris Technologies and the junta were not known - said such practices were wrong.
The Malaysian system has also been dragged into focus and activists said Mr Razali had highlighted an area needing reform.
Ms Gabriel said the revelations embarrassed Malaysians.
'This practice is something that human rights activists in Malaysia and I'm sure many other parts of the world are very concerned about,' she said. 'This uneasy mix of business and playing public roles as various personalities in negotiating for freedom or leading a country or being kept in an administrative role carries a very serious threat.' She called for Mr Razali's resignation from his UN post.
Her observations were backed by Mr Rasiah, who said the proximity of political interests and business was so common in Malaysia that sometimes it was not seen as a problem.
He did not believe the majority of Malaysians supported the system, but they could do little about it.
'There's not much scope to criticise the political leaders and to stop them,' he said.
..... the AGC pointed out in its statement that CJ Yong had noted in his judgment that there had been no arguments about the correctness of the charge against Mr Tan when it was made.
The AGC said CJ Yong "did not go into any detailed discussion of Mr Tan Koon Swan's case or Mr Knight's conduct of the case. Specifically, CJ Yong did not express any opinion that Mr Tan was wrongly charged".
The AGC also stated that although CJ Yong might have disagreed with the view of the law in Mr Tan's case, his decision "could not and did not overrule" the decision in Mr Tan's case, as both cases had already been decided by the High Court, said The Straits Times.
"Differences in the courts' pronouncements on the law occur, especially in legal systems based on the common law," said the AGC. It added that the public prosecutor had decided to charge Mr Tan based on the evidence against him and the law. Mr Tan's lawyers had not taken issue with the charge or his conviction based on the law and facts.
Said the AGC: "Mr Tan Koon Swan was convicted on the basis of his own plea of guilt, based on the law and facts as was accepted by his own counsel."
There were 14 other charges not proceeded with against Mr Tan, who had already pleaded guilty to criminal breach of trust.
The AGC added: "It was said that the judgment in Cheam Tat Pang meant that Mr Tan Koon Swan had been wrongly convicted and that he was technically an innocent man. Mr Tan Koon Swan’s conviction stands, and he remains guilty of the crime that he had admitted to."
The AGC also highlighted another error made by Mr Knight in his book. He had said "the sentence imposed as including a fine of $1 million". The correct fine was $500,000, said the AGC.
When contacted by The Straits Times last night, Mr Knight said as there were two differing High Court judgments on the same issue, the matter should have been referred to the Court of Appeal for a clarification.
"At the end of the day, after CJ Yong's judgment in 1996, nobody has been charged since then under that particular section, to my knowledge."
For Malaysia, it was another case of mixing business with politics. Another old (updated) case is reported in the SCMP.
Some snippets:
UNITED NATIONS negotiator Razali Ismail has won praise for his efforts to bring democracy to Myanmar. He also is being criticised over a business deal his firm was clinching with the military regime as he was in talks for the release from house arrest of opposition leader Aung San Suu Kyi.
The former Malaysian ambassador was not doing anything unusual, observers said. The links between politics and business in Malaysia had become so entwined that such practices were common.
Malaysia experts interviewed by the South China Morning Post were split on whether Mr Razali, who has denied any conflict of interest, may have harmed the process of returning democracy to Myanmar. Pro-democracy activists and Western analysts - while stressing the details of the deal brokered by the Malaysian company Iris Technologies and the junta were not known - said such practices were wrong.
The Malaysian system has also been dragged into focus and activists said Mr Razali had highlighted an area needing reform.
Ms Gabriel said the revelations embarrassed Malaysians.
'This practice is something that human rights activists in Malaysia and I'm sure many other parts of the world are very concerned about,' she said. 'This uneasy mix of business and playing public roles as various personalities in negotiating for freedom or leading a country or being kept in an administrative role carries a very serious threat.' She called for Mr Razali's resignation from his UN post.
Her observations were backed by Mr Rasiah, who said the proximity of political interests and business was so common in Malaysia that sometimes it was not seen as a problem.
He did not believe the majority of Malaysians supported the system, but they could do little about it.
'There's not much scope to criticise the political leaders and to stop them,' he said.
QE Forever
"Congratulations Mr. Bernanke. I'm happy, my assets' values go up. But as a responsible citizen I have to say the monetary policies of the U.S. will destroy the world." Marc Faber, investor, analyst and writer extraordinaire, September 14, 2012
The above reaction of Dr. Faber can not come as a surprise, he has long time warned about the irresponsible actions of the FED in the US, which are further detailed below.
Doug Noland added to this:
If I can chuckle perhaps it will hold back the tears. It's difficult not to be reflective - to ponder how things could ever have come to this. Thursday was another historic day for policymaking, for markets and for the perpetuation of history's most spectacular financial mania. In the past I've noted that, in comparable circumstances, I have viewed my 14-year weekly chronicle of history's greatest Credit Bubble as pretty much a great waste of effort. I have tried to warn of the dangers of an unanchored global financial "system." I've done my best to illuminate the dangerous interplay between an unwieldy global pool of speculative finance and aggressive "activist" central bankers. I have forewarned of the perils of discretionary (as opposed to rules-based) policymaking - in particular highlighting the (long ago appreciated) fear that too much discretion ensures that monetary policy mistakes will only be followed by yet greater mistakes. I took strong objection to Dr. Bernanke's doctrine and framework when he arrived at the Fed in 2002 and protested in vein when he was appointed Federal Reserve Chairman in early-2006.
Instead of moving prudently to rein in egregious Credit and speculative excess, the Greenspan/Bernanke Fed's went in the opposite direction and repeatedly provided extraordinary accommodation. Amazingly, each bursting Bubble led to only more aggressive monetary largess and more power for dysfunctional (Bubble-prone) markets. Thursday's policy move by the Bernanke Fed essentially indicates full capitulation to what has become a highly speculative global marketplace. There is at this point no doubt in my mind that we are witnessing the greatest monetary fiasco ever.
As an analyst of Bubbles, I often quip that they tend to "go to incredible extremes - and then double." Timing the bursting of a Bubble is a very challenging - if not nearly impossible - proposition. Yet this in no way should cloud the harsh reality that the longer a Bubble is accommodated the more devastating the unavoidable consequences. It is, as well, the nature of speculative manias for things to turn crazy in the destabilizing terminal-phase. The past few weeks - with more than ample Bubble accommodation and craziness - really make me fear that eventual day of reckoning.
Another critic is Peter Schiff, who wrote:
With yesterday's Fed decision and press conference, Chairman Ben Bernanke finally and decisively laid his cards on the table. And confirming what I have been saying for many years, all he was holding was more of the same snake oil and bluster. Going further than he has ever gone before, he made it clear that he will be permanently binding the American economy to a losing strategy. As a result, September 13, 2012 may one day be regarded as the day America finally threw in the economic towel.
Here is the outline of the Fed's plan: buy hundreds of billions of home mortgages annually in order to push down mortgage rates and push up home prices, thereby encouraging people to build and buy homes and spend the extracted equity on consumer goods. Furthermore, the Fed hopes that ultra-cheap money will push up stock prices so that Wall Street and stock investors feel wealthier and begin to spend more freely. He won't admit this directly, but rather than building an economy on increased productivity, production, and wealth accumulation, he is trying to build one on confidence, increased leverage, and rising asset prices. In other words, the Fed prefers the illusion of growth to the restructuring needed to allow for real growth.
The problem that went unnoticed by the reporters at the Fed's press conference (and those who have written about it subsequently) is that we already tried this strategy and it ended in disaster. Loose monetary policy created the housing and stock bubbles of the last decade, the bursting of which almost blew up the economy. Apparently for Bernanke and his cohorts, almost isn't good enough. They are coming back to finish the job. But this time, they are packing weaponry of a much higher caliber. Not only are they pushing mortgage rates down to historical lows but now they are buying all the loans!
The above reaction of Dr. Faber can not come as a surprise, he has long time warned about the irresponsible actions of the FED in the US, which are further detailed below.
Doug Noland added to this:
If I can chuckle perhaps it will hold back the tears. It's difficult not to be reflective - to ponder how things could ever have come to this. Thursday was another historic day for policymaking, for markets and for the perpetuation of history's most spectacular financial mania. In the past I've noted that, in comparable circumstances, I have viewed my 14-year weekly chronicle of history's greatest Credit Bubble as pretty much a great waste of effort. I have tried to warn of the dangers of an unanchored global financial "system." I've done my best to illuminate the dangerous interplay between an unwieldy global pool of speculative finance and aggressive "activist" central bankers. I have forewarned of the perils of discretionary (as opposed to rules-based) policymaking - in particular highlighting the (long ago appreciated) fear that too much discretion ensures that monetary policy mistakes will only be followed by yet greater mistakes. I took strong objection to Dr. Bernanke's doctrine and framework when he arrived at the Fed in 2002 and protested in vein when he was appointed Federal Reserve Chairman in early-2006.
Instead of moving prudently to rein in egregious Credit and speculative excess, the Greenspan/Bernanke Fed's went in the opposite direction and repeatedly provided extraordinary accommodation. Amazingly, each bursting Bubble led to only more aggressive monetary largess and more power for dysfunctional (Bubble-prone) markets. Thursday's policy move by the Bernanke Fed essentially indicates full capitulation to what has become a highly speculative global marketplace. There is at this point no doubt in my mind that we are witnessing the greatest monetary fiasco ever.
As an analyst of Bubbles, I often quip that they tend to "go to incredible extremes - and then double." Timing the bursting of a Bubble is a very challenging - if not nearly impossible - proposition. Yet this in no way should cloud the harsh reality that the longer a Bubble is accommodated the more devastating the unavoidable consequences. It is, as well, the nature of speculative manias for things to turn crazy in the destabilizing terminal-phase. The past few weeks - with more than ample Bubble accommodation and craziness - really make me fear that eventual day of reckoning.
Another critic is Peter Schiff, who wrote:
With yesterday's Fed decision and press conference, Chairman Ben Bernanke finally and decisively laid his cards on the table. And confirming what I have been saying for many years, all he was holding was more of the same snake oil and bluster. Going further than he has ever gone before, he made it clear that he will be permanently binding the American economy to a losing strategy. As a result, September 13, 2012 may one day be regarded as the day America finally threw in the economic towel.
Here is the outline of the Fed's plan: buy hundreds of billions of home mortgages annually in order to push down mortgage rates and push up home prices, thereby encouraging people to build and buy homes and spend the extracted equity on consumer goods. Furthermore, the Fed hopes that ultra-cheap money will push up stock prices so that Wall Street and stock investors feel wealthier and begin to spend more freely. He won't admit this directly, but rather than building an economy on increased productivity, production, and wealth accumulation, he is trying to build one on confidence, increased leverage, and rising asset prices. In other words, the Fed prefers the illusion of growth to the restructuring needed to allow for real growth.
The problem that went unnoticed by the reporters at the Fed's press conference (and those who have written about it subsequently) is that we already tried this strategy and it ended in disaster. Loose monetary policy created the housing and stock bubbles of the last decade, the bursting of which almost blew up the economy. Apparently for Bernanke and his cohorts, almost isn't good enough. They are coming back to finish the job. But this time, they are packing weaponry of a much higher caliber. Not only are they pushing mortgage rates down to historical lows but now they are buying all the loans!
Saturday, 15 September 2012
Blast from the Past: CLOB
Again an excellent posting from "DanielXX" at this web address.
Having read the various postings in Shareinvestor.com for some time, it is surprising that an event which happened about eight years ago still evokes so much emotion among veteran investors in the stock market. Pan Electric and the Asian financial crisis nowadays seem like distant memories, yet the CLOB saga strikes a raw nerve among those who had their money in these stocks (including some of my relatives) when the Malaysia government froze CLOB accounts in 1998.
The move was a direct result of the Asian currency crisis, when foreign speculators shorted the currencies of highly leveraged Asian countries, with Southeast Asia being particularly hard hit. Dr Mahathir, then Malaysia's PM, came up with the idea of imposing capital controls (a move for which he was lauded later for its effectiveness) to curb speculation (if money could not be moved out, any gains foreigners made from speculating would essentially be frozen, hence the markets would stabilise).
Of course, this also meant the CLOB market facilitating buying of Malaysian shares on the Singapore market would be affected. CLOB, or Central Limit Order Book (don't ask me why it is so named... reminds me of Central Limit Theorem in statistics) was set up in Singapore to trade Malaysian companies over-the-counter in Singapore after the Malaysian and Singaporean exchanges separated in 1990. Over the years it had developed into the main avenue for veteran Singaporean investors to invest in Malaysian equities.
The amount of money in CLOB shares at the time of the suspension in trading in September 1998 gives a clue to the anguish that is still felt by many investors today. There were about 172,000 Clob investors on the books - as many as 95 percent of them Singaporeans - and the total shares had a value of approximately US$4.47 billion. That works out to about US$25,000 per CLOB investor (remember that the US$ was king then) .... an indication that these CLOB share buyers were not small fry. And yet they got killed by events beyond their control. Under the arrangements following the CLOB market suspension, all shares in CLOB accounts were to be eventually transferred to accounts in the Malaysian Central Depository for eventual trading on the Kuala Lumpur Stock Exchange (KLSE). However, the Malaysian government feared a massive share overhang in the KLSE (given the enormous amounts of money tied up) if liquidation was made possible en-bloc and hence things dragged on as the SES (the predecessor of SGX) and the KLSE worked to facilitate the share migration.
There would be no clear resolution to the issue until early 2000, and between 1998 and then there was an ugly war of words between the Malaysian and Singaporean market authorities which served only to exacerbate the unfortunate situation. Bank Negara's (Malaysia's central bank) chief claimed that during the Asian crisis, CLOB shares were being borrowed to be short-sold on the Malaysian market, hence hinting at the reason why the CLOB market was suspended. It was further suggested that the Singapore authorities had done nothing to deter such damaging actions to the Malaysian market. The war of words then shifted over to the legitimacy of the CLOB market, with KLSE noting that the CLOB market was created "unilaterally" by SES to facilitate to generate revenue for the SES, was "never endorsed by the Malaysian authorities", and was effectively an "an unauthorised market for Malaysian shares" and that there were inherent risks to those who invested in CLOB shares. SES, of course, had never made public to its investors of such a risk. On its part, the latter declared that "trading of Malaysian securities on Clob was not authorised by Malaysian authorities because it required no such authorisation", and that it was essentially a win-win game as Singaporean money provided liquidity and support to Malaysian stocks. Of course, it was win-win so long as things were going fine.... it took a major dislocation like a regional financial crisis to unleash the inner demons.
Finally in early 2000 the two exchanges worked out a scheme of arrangement for letting CLOB investors trade out of their misery, where investors were offered two options, both of which involved releasing of CLOB shares on a staggered basis over >10 months, reflecting the KLSE's abovementioned concerns of a share glut should all be released at one go. The faster scheme involved payment (something like 2% upfront) of higher administrative fees to a Malaysian company, Effective Capital, which was linked to Malaysia's then-Finance Minister Daim Zainuddin, an indication of how business operates in Malaysia. CLOB investors were strongly urged by the Malaysian side to opt for the Effective Capital scheme. Although there were calls for this to be referred to the WTO given the rather unfair scheme of arrangement and rather threatening tones adopted by the Malaysian authorities to CLOB investors to accept the proposed schemes, it appears that ultimately the CLOB investors had been worn down sufficiently by the two-year impasse to succumb and sell off at huge losses. For a US$4.5B CLOB position (believe it was measured at 2000 market prices based on KLSE), Effective Capital offered US$1.5B to "take over the risk" of holding the long position. One knows that given its government links, it would have no problem disposing of this entire line eventually in the KLSE.
Out of this whole saga arose SIAS, Small Investor's Association of Singapore, which represented the bulk of CLOB investors in liaising with the various authorities. It also gave rise to the easily understood term "CLOB-bered". Most of all, it gave rise to a fear of Malaysian stocks, not just by Singaporeans but by most foreign investors, who saw the perils of putting their money in a market that could easily change tack when under pressure. There are plans by the SGX to restore trading links with Bursa Malaysia soon. Perhaps that might go some way to restore investor interest in this market.
The last two sentences do ring a bell, the Malaysian and Singaporean stock markets are indeed trying to link up, something that has been delayed. But please note that the above was written in 2006, six full years ago.
From the above it might be clear that Malaysians should not expect Singaporeans to jump on the first opportunity to trade Malaysian shares through a direct link. Even now, 14 years later, things have not been forgotten. The amount of USD 4.47 Billion might not look that much, but my guess is that it was calculated using the very depressed share prices of that moment.
Although it might indeed have been better to close CLOB in the long term, the way it was handled and the timing (in the midst of the Asian crisis) was simply horrific. CLOB accountholders should have been informed about the pending closing of the CLOB market, and all should gradually have been phased out.
Some links: Asia Times, Time Asia and Singapore Window.
Having read the various postings in Shareinvestor.com for some time, it is surprising that an event which happened about eight years ago still evokes so much emotion among veteran investors in the stock market. Pan Electric and the Asian financial crisis nowadays seem like distant memories, yet the CLOB saga strikes a raw nerve among those who had their money in these stocks (including some of my relatives) when the Malaysia government froze CLOB accounts in 1998.
The move was a direct result of the Asian currency crisis, when foreign speculators shorted the currencies of highly leveraged Asian countries, with Southeast Asia being particularly hard hit. Dr Mahathir, then Malaysia's PM, came up with the idea of imposing capital controls (a move for which he was lauded later for its effectiveness) to curb speculation (if money could not be moved out, any gains foreigners made from speculating would essentially be frozen, hence the markets would stabilise).
Of course, this also meant the CLOB market facilitating buying of Malaysian shares on the Singapore market would be affected. CLOB, or Central Limit Order Book (don't ask me why it is so named... reminds me of Central Limit Theorem in statistics) was set up in Singapore to trade Malaysian companies over-the-counter in Singapore after the Malaysian and Singaporean exchanges separated in 1990. Over the years it had developed into the main avenue for veteran Singaporean investors to invest in Malaysian equities.
The amount of money in CLOB shares at the time of the suspension in trading in September 1998 gives a clue to the anguish that is still felt by many investors today. There were about 172,000 Clob investors on the books - as many as 95 percent of them Singaporeans - and the total shares had a value of approximately US$4.47 billion. That works out to about US$25,000 per CLOB investor (remember that the US$ was king then) .... an indication that these CLOB share buyers were not small fry. And yet they got killed by events beyond their control. Under the arrangements following the CLOB market suspension, all shares in CLOB accounts were to be eventually transferred to accounts in the Malaysian Central Depository for eventual trading on the Kuala Lumpur Stock Exchange (KLSE). However, the Malaysian government feared a massive share overhang in the KLSE (given the enormous amounts of money tied up) if liquidation was made possible en-bloc and hence things dragged on as the SES (the predecessor of SGX) and the KLSE worked to facilitate the share migration.
There would be no clear resolution to the issue until early 2000, and between 1998 and then there was an ugly war of words between the Malaysian and Singaporean market authorities which served only to exacerbate the unfortunate situation. Bank Negara's (Malaysia's central bank) chief claimed that during the Asian crisis, CLOB shares were being borrowed to be short-sold on the Malaysian market, hence hinting at the reason why the CLOB market was suspended. It was further suggested that the Singapore authorities had done nothing to deter such damaging actions to the Malaysian market. The war of words then shifted over to the legitimacy of the CLOB market, with KLSE noting that the CLOB market was created "unilaterally" by SES to facilitate to generate revenue for the SES, was "never endorsed by the Malaysian authorities", and was effectively an "an unauthorised market for Malaysian shares" and that there were inherent risks to those who invested in CLOB shares. SES, of course, had never made public to its investors of such a risk. On its part, the latter declared that "trading of Malaysian securities on Clob was not authorised by Malaysian authorities because it required no such authorisation", and that it was essentially a win-win game as Singaporean money provided liquidity and support to Malaysian stocks. Of course, it was win-win so long as things were going fine.... it took a major dislocation like a regional financial crisis to unleash the inner demons.
Finally in early 2000 the two exchanges worked out a scheme of arrangement for letting CLOB investors trade out of their misery, where investors were offered two options, both of which involved releasing of CLOB shares on a staggered basis over >10 months, reflecting the KLSE's abovementioned concerns of a share glut should all be released at one go. The faster scheme involved payment (something like 2% upfront) of higher administrative fees to a Malaysian company, Effective Capital, which was linked to Malaysia's then-Finance Minister Daim Zainuddin, an indication of how business operates in Malaysia. CLOB investors were strongly urged by the Malaysian side to opt for the Effective Capital scheme. Although there were calls for this to be referred to the WTO given the rather unfair scheme of arrangement and rather threatening tones adopted by the Malaysian authorities to CLOB investors to accept the proposed schemes, it appears that ultimately the CLOB investors had been worn down sufficiently by the two-year impasse to succumb and sell off at huge losses. For a US$4.5B CLOB position (believe it was measured at 2000 market prices based on KLSE), Effective Capital offered US$1.5B to "take over the risk" of holding the long position. One knows that given its government links, it would have no problem disposing of this entire line eventually in the KLSE.
Out of this whole saga arose SIAS, Small Investor's Association of Singapore, which represented the bulk of CLOB investors in liaising with the various authorities. It also gave rise to the easily understood term "CLOB-bered". Most of all, it gave rise to a fear of Malaysian stocks, not just by Singaporeans but by most foreign investors, who saw the perils of putting their money in a market that could easily change tack when under pressure. There are plans by the SGX to restore trading links with Bursa Malaysia soon. Perhaps that might go some way to restore investor interest in this market.
From the above it might be clear that Malaysians should not expect Singaporeans to jump on the first opportunity to trade Malaysian shares through a direct link. Even now, 14 years later, things have not been forgotten. The amount of USD 4.47 Billion might not look that much, but my guess is that it was calculated using the very depressed share prices of that moment.
Although it might indeed have been better to close CLOB in the long term, the way it was handled and the timing (in the midst of the Asian crisis) was simply horrific. CLOB accountholders should have been informed about the pending closing of the CLOB market, and all should gradually have been phased out.
Some links: Asia Times, Time Asia and Singapore Window.
Wednesday, 12 September 2012
The Nomad Group buys a hotel, meagre disclosure
The Nomad Group made an announcement to buy a company owning the Grand Paradise Hotel in Penang for RM 25 million.
The hotel was indeed for sale (asking price 26.3 million) as we can see from this advertisement at iProperty's website.
From the skimpy information available it looks like the owners of the company invested RM 3 million, borrowed RM 9 million from a bank and bought the hotel in 2005 for RM 12 million. If the announced sales would go through, then the bank would receive its money back, and the owners RM 16 million for a cool profit of RM 13 million. Not bad, especially given that the hotel made a loss of RM 98,932 over the year ended 31st March 2011.
It is very disappointing that no later numbers are given, we are now 1.5 years later, surely the company can give more recent updates about profit and revenue, even unaudited numbers would be helpful. Also, revenue numbers should really be included.
Bursa Malaysia asked for additional information (good) and this is what The Nomad Group answered.
"The exact age of the hotel building is not known to the Vendors and no further information is available on the age of the hotel building."
I can not recall I have ever read a similar answer, surely there must be a register where that information is kept. Otherwise the previous S&P agreements will contain the information. But at the very least, there should be an explanation for this absence of this important information, together with an estimate of the age.
"There was no formal valuation by an independent valuer carried out on the Hotel Property."
The proposed acquisition is not subject to the approval of the shareholders or the authorities (only to the bank who carries the loan). Although that might be right, it would have been more appropriate for the shareholders to give additonal information on which the price is based and to call for an independent valuer, RM 25 million is a large amount of money.
The hotel was indeed for sale (asking price 26.3 million) as we can see from this advertisement at iProperty's website.
From the skimpy information available it looks like the owners of the company invested RM 3 million, borrowed RM 9 million from a bank and bought the hotel in 2005 for RM 12 million. If the announced sales would go through, then the bank would receive its money back, and the owners RM 16 million for a cool profit of RM 13 million. Not bad, especially given that the hotel made a loss of RM 98,932 over the year ended 31st March 2011.
It is very disappointing that no later numbers are given, we are now 1.5 years later, surely the company can give more recent updates about profit and revenue, even unaudited numbers would be helpful. Also, revenue numbers should really be included.
Bursa Malaysia asked for additional information (good) and this is what The Nomad Group answered.
"The exact age of the hotel building is not known to the Vendors and no further information is available on the age of the hotel building."
I can not recall I have ever read a similar answer, surely there must be a register where that information is kept. Otherwise the previous S&P agreements will contain the information. But at the very least, there should be an explanation for this absence of this important information, together with an estimate of the age.
"There was no formal valuation by an independent valuer carried out on the Hotel Property."
The proposed acquisition is not subject to the approval of the shareholders or the authorities (only to the bank who carries the loan). Although that might be right, it would have been more appropriate for the shareholders to give additonal information on which the price is based and to call for an independent valuer, RM 25 million is a large amount of money.
Tuesday, 11 September 2012
Blast from the Past: Pan-Electric
In 1985 Pan-Electric Industries collapsed, causing lots of mayhem especially for its 5,500 shareholders who lost all their money in the company. Article from Wikipedia:
"Pan-Electric Industries was a Singapore-based company that specialised in marine salvage work, and had 71 subsidiary companies, including hotel and property interests, with a market capitalization of S$230 million. The company collapsed in 1985 due to unsettled forward contracts, forcing the stock exchanges of both Singapore and Malaysia to shut down for three days. At its demise, the company had a total debt of S$480 million, and all its shares held by 5,500 shareholders were found to be worthless overnight. As of 2000, it remains the largest corporate collapse in Singapore's history, and the only instance where the Stock Exchange of Singapore (SES) had to close. The Malaysian Kuala Lumpur Stock Exchange was also forced to close for three days as a result.
In the aftermath of the collapse, key people in the company such as Peter Tham, Tan Kok Liang, and Tan Koon Swan were prosecuted and given varying jail sentences. The collapse of the company shook public confidence in the SES, causing prices of stocks to plunge. New securities laws were introduced in March 1986 to ensure that stockbroking firms can protect themselves against credit risks."
An amount of S$230 million corrected for inflation would now be worth about RM 1.3 Billion.
On (the excellent) website stocktaleslot "Bulls and Bears, Tales of the Zoo" a much longer description, also indicating the political consequences for Malaysia, since Tan Koon Swan was the President of the MCA.
It all looked like history, although very important, until suddenly the following news appeared on The Edge:
Koon Swan not "saying anything soon" on Singapore's wrongful prosecution:
Businessman Tan Koon Swan, the president of the MCA in the early 1980s and founder of Multi-Purpose Holdings, told theedgemalaysia.com he would not "say anything soon" on the mistake by the Singapore government in prosecuting him during the Pan-El crisis in the mid-1980s.
"I don't know whether I will do something. I am overseas now. I will probably return tomorrow and maybe I will meet the press then. But don't write anything that will put me in trouble. It's very unlikely I will say anything soon," Tan said from Hainan when contacted on his hand-phone.
In the just-published book "Glenn Knight, The Prosecutor", the writer Glenn Knight — who was the famous prosecutor then — confesses to having wrongly prosecuted Tan in 1985 and in the chapter on the Pan El crisis, he mentions his apology to Tan Khoon Swan — a fact hitherto unknown for 27 years.
Glenn slapped Tan with 15 charges after the collapse of Pan-El Industries which caused the Singapore stock exchange to halt trading for three days. Among others, Tan was alleged to have committed criminal breach of trust (CBT) and share manipulation, and a guilty finding sent him to Singapore's Changi Prison for 18 months.
In his book, Glenn has suggested Tan to seek "pardon" from the Singapore President to wipe out his criminal record so that it would mean he had not been convicted of any wrong-doing legally in this case, which also rocked the Malaysia stock exchange.
In response to this, Tan declined to commit himself to any action. He said: "No, I am not going to say anything." He also declined to say whether he would sue the Singapore government for compensation for ruining his reputation and his future.
The incident not only forced Tan to quit as MCA president but also the collapse of his huge Malaysian-Singapore business empire which comprised at least three listed companies then.
And posting bail for Tan while waiting for the trial of the century was Robert Kuok, Malaysia's richest man. Due to this high profile prosecution, Glenn was awarded the Public Administration Gold Medal by the Singapore government. But in 1990, Glenn himself was charged for CBT and later jailed in Singapore.
The wrongful prosecution of Tan was splashed on the front pages of two leading Chinese newspapers — the Nanyang Siang Pau and Sin Chew on Monday.
Nanyang said Glenn told Tan about his mistake in prosecuting him apologised to Tan when they met at a function two years ago.
Quoting a unnamed aide of Tan, Nanyang also said Tan has been advised to be cautious in his comment.
In previous interviews with this writer, Tan did say that he felt "cheated" during the Pan-El crisis.
He said he was advised by "people in power" to admit guilt to get a light sentence which would amount to a fine, but he was horrified to hear the jail term when the verdict was read out in court.
But as a born-again Christian, he had tried to forgive all those who had caused hardship and agony to him.
Tan is now a property developer with a lot of developments in China. He has been made an "honorary citizen" of Hainan for his contributions there.
It still is an intriguing case, and this might be another, new twist in the story. However, details are still patchy (why does Glenn Knight think that Tan was wrongfully prosecuted?), so we have to wait for more news to draw any conclusions.
PS: another article in The Star, with a rather twisted logic that is hard for anybody (except legal people) to understand. Anyhow, I don't like the word "stealing" in the next sentence:
“Chief Justice Yong was of the opinion that the section I had charged Koon Swan with was wrong in law for we could not charge a person for stealing from a company because as a director, it was not a breach of the law in that sense,” he wrote.
"Pan-Electric Industries was a Singapore-based company that specialised in marine salvage work, and had 71 subsidiary companies, including hotel and property interests, with a market capitalization of S$230 million. The company collapsed in 1985 due to unsettled forward contracts, forcing the stock exchanges of both Singapore and Malaysia to shut down for three days. At its demise, the company had a total debt of S$480 million, and all its shares held by 5,500 shareholders were found to be worthless overnight. As of 2000, it remains the largest corporate collapse in Singapore's history, and the only instance where the Stock Exchange of Singapore (SES) had to close. The Malaysian Kuala Lumpur Stock Exchange was also forced to close for three days as a result.
In the aftermath of the collapse, key people in the company such as Peter Tham, Tan Kok Liang, and Tan Koon Swan were prosecuted and given varying jail sentences. The collapse of the company shook public confidence in the SES, causing prices of stocks to plunge. New securities laws were introduced in March 1986 to ensure that stockbroking firms can protect themselves against credit risks."
An amount of S$230 million corrected for inflation would now be worth about RM 1.3 Billion.
On (the excellent) website stocktaleslot "Bulls and Bears, Tales of the Zoo" a much longer description, also indicating the political consequences for Malaysia, since Tan Koon Swan was the President of the MCA.
It all looked like history, although very important, until suddenly the following news appeared on The Edge:
Koon Swan not "saying anything soon" on Singapore's wrongful prosecution:
Businessman Tan Koon Swan, the president of the MCA in the early 1980s and founder of Multi-Purpose Holdings, told theedgemalaysia.com he would not "say anything soon" on the mistake by the Singapore government in prosecuting him during the Pan-El crisis in the mid-1980s.
"I don't know whether I will do something. I am overseas now. I will probably return tomorrow and maybe I will meet the press then. But don't write anything that will put me in trouble. It's very unlikely I will say anything soon," Tan said from Hainan when contacted on his hand-phone.
In the just-published book "Glenn Knight, The Prosecutor", the writer Glenn Knight — who was the famous prosecutor then — confesses to having wrongly prosecuted Tan in 1985 and in the chapter on the Pan El crisis, he mentions his apology to Tan Khoon Swan — a fact hitherto unknown for 27 years.
Glenn slapped Tan with 15 charges after the collapse of Pan-El Industries which caused the Singapore stock exchange to halt trading for three days. Among others, Tan was alleged to have committed criminal breach of trust (CBT) and share manipulation, and a guilty finding sent him to Singapore's Changi Prison for 18 months.
In his book, Glenn has suggested Tan to seek "pardon" from the Singapore President to wipe out his criminal record so that it would mean he had not been convicted of any wrong-doing legally in this case, which also rocked the Malaysia stock exchange.
In response to this, Tan declined to commit himself to any action. He said: "No, I am not going to say anything." He also declined to say whether he would sue the Singapore government for compensation for ruining his reputation and his future.
The incident not only forced Tan to quit as MCA president but also the collapse of his huge Malaysian-Singapore business empire which comprised at least three listed companies then.
And posting bail for Tan while waiting for the trial of the century was Robert Kuok, Malaysia's richest man. Due to this high profile prosecution, Glenn was awarded the Public Administration Gold Medal by the Singapore government. But in 1990, Glenn himself was charged for CBT and later jailed in Singapore.
The wrongful prosecution of Tan was splashed on the front pages of two leading Chinese newspapers — the Nanyang Siang Pau and Sin Chew on Monday.
Nanyang said Glenn told Tan about his mistake in prosecuting him apologised to Tan when they met at a function two years ago.
Quoting a unnamed aide of Tan, Nanyang also said Tan has been advised to be cautious in his comment.
In previous interviews with this writer, Tan did say that he felt "cheated" during the Pan-El crisis.
He said he was advised by "people in power" to admit guilt to get a light sentence which would amount to a fine, but he was horrified to hear the jail term when the verdict was read out in court.
But as a born-again Christian, he had tried to forgive all those who had caused hardship and agony to him.
Tan is now a property developer with a lot of developments in China. He has been made an "honorary citizen" of Hainan for his contributions there.
It still is an intriguing case, and this might be another, new twist in the story. However, details are still patchy (why does Glenn Knight think that Tan was wrongfully prosecuted?), so we have to wait for more news to draw any conclusions.
PS: another article in The Star, with a rather twisted logic that is hard for anybody (except legal people) to understand. Anyhow, I don't like the word "stealing" in the next sentence:
“Chief Justice Yong was of the opinion that the section I had charged Koon Swan with was wrong in law for we could not charge a person for stealing from a company because as a director, it was not a breach of the law in that sense,” he wrote.
Monday, 10 September 2012
the Global Debt Clock
From the website of The Economist, the Global Debt Clock.
Situation in 2001:
Situation in 2013 (forecasted):
Globally the debt has risen from USD 18 Trillion to USD 51 Trillion, 2.8 times as much, or a year-on-year growth of 9%. Very worrisome, since global growth has been much lower.
I am not sure if all numbers are correct. In the Malaysian situation for instance I read somewhere that government guarantees of debt are not counted in the overall number.
The debt in Singapore appears very high, but surely this must be offset by huge amounts of assets overseas which are much more valuable than the debt.
Situation in 2001:
Situation in 2013 (forecasted):
Globally the debt has risen from USD 18 Trillion to USD 51 Trillion, 2.8 times as much, or a year-on-year growth of 9%. Very worrisome, since global growth has been much lower.
I am not sure if all numbers are correct. In the Malaysian situation for instance I read somewhere that government guarantees of debt are not counted in the overall number.
The debt in Singapore appears very high, but surely this must be offset by huge amounts of assets overseas which are much more valuable than the debt.
Sunday, 9 September 2012
Goldman Sachs earned 600 million Euro to help Greece fudge the numbers
Stunning revelations in an article on Bloombergs website.
Basically Goldman Sachs received 600 million Euro (= RM 2.4 Billion, RM 2,400,000,000.00!) to structure a deal enabling Greece to fudge the numbers to meet the European Union requirements.
Greece’s secret loan from Goldman Sachs Group Inc. (GS) was a costly mistake from the start.
On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.
Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs.
“The Goldman Sachs deal is a very sexy story between two sinners,” Sardelis, who oversaw the swap as head of Greece’s Public Debt Management Agency from 1999 through 2004, said in an interview.
Goldman Sachs’s instant gain on the transaction illustrates the dangers to clients who engage in complex, tailored trades that lack comparable market prices and whose fees aren’t disclosed.
Barry Ritholtz writes about this case, and another on in the US, and warns about these very difficult to understand financial structures, and comes up with “The Inviolable Rules for Dealing with Wall Street”:
The only positive thing in this whole case (and many others as well) is that there are organisations that are actively trying to uncover what exactly happened:
"Bloomberg News filed a lawsuit at the EU’s General Court seeking disclosure of European Central Bank documents on Greece’s use of derivatives to hide loans."
Basically Goldman Sachs received 600 million Euro (= RM 2.4 Billion, RM 2,400,000,000.00!) to structure a deal enabling Greece to fudge the numbers to meet the European Union requirements.
Greece’s secret loan from Goldman Sachs Group Inc. (GS) was a costly mistake from the start.
On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.
Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs.
“The Goldman Sachs deal is a very sexy story between two sinners,” Sardelis, who oversaw the swap as head of Greece’s Public Debt Management Agency from 1999 through 2004, said in an interview.
Goldman Sachs’s instant gain on the transaction illustrates the dangers to clients who engage in complex, tailored trades that lack comparable market prices and whose fees aren’t disclosed.
Goldman Sachs DNA
“Like the municipalities, Greece is just another example of a poorly governed client that got taken apart,” Satyajit Das, a risk consultant and author of “Extreme Money: Masters of the Universe and the Cult of Risk,” said in a phone interview. “These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren’t compromised -- it’s part of the DNA of that organization.”Barry Ritholtz writes about this case, and another on in the US, and warns about these very difficult to understand financial structures, and comes up with “The Inviolable Rules for Dealing with Wall Street”:
1. Reward is always relative to risk: If any product or investment sounds as if it has lots of upside, it also has lots of risk. If you can disprove this, there is a Nobel Prize waiting for you.
2. Asymmetrical information: In all negotiated sales, one party has far more information, knowledge and experience about the product being bought and sold. One party knows its undisclosed warts and risks better than the other. Which party are you?
3.Good advice is priceless: I know, easier said than done. The Street buys the best legal talent, mathematicians and strategists that money can buy. Make sure you have expert advisers and lawyers working for you as well.
4. Motivation: Always ask, what is the motivation of the outfit selling me this product? Is it the long-term stability and financial health of my organization — or their own fees and commissions?
5. Legal documents are created to protect the preparer (and its firm), not you or yours: In the history of modern finance, no large legal document has worked against its drafters. Private placement memorandums, sales agreement, arbitration clauses — firms use these to protect themselves, not you.
6. Performance: How significantly do the fees, interest rates commissions, etc., have an impact on the performance of this investment vehicle over time? Determining for yourself what the actual cost of money is will avoid more heartache in the future.
7. Shareholder obligation: All publicly traded firms (including investment banks and bond underwriters) have a fiduciary obligation to their shareholders to maximize profits. This is far greater than any duty owed of care to you, the client. Always ask yourself whether this new product benefits the shareholders or your organization. (This is acutely important for untested products.)
8. Reputational risk: Who suffers if this investment goes down the drain? Who gets fired or voted out of office if this blows up? Who suffers reputational risk?
9. Keep it simple, stupid (KISS): It’s easy to make things complicated, but it’s very challenging to make them simple. The more complexity brought to a problem, the greater the potential for things to go awry — not just astray, but very, very wrong.
10. There is no free lunch: Repeat after me: There is no free money, no riskless trade, no way to turn lead into gold. If you remember no other rule, this is the one that will save your hide time and again.
The only positive thing in this whole case (and many others as well) is that there are organisations that are actively trying to uncover what exactly happened:
"Bloomberg News filed a lawsuit at the EU’s General Court seeking disclosure of European Central Bank documents on Greece’s use of derivatives to hide loans."
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