It looks like, at least for the time being, the danger of a possible default that would have roiled the Chinese financial markets is over. However, there is still the case of setting a precedent and of "moral hazard".
The article is from Bloomberg:
China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China's biggest bank, to contact their financial advisers.
The accord staves off a default that threatened to roil China’s markets and stoke concerns of financial fragility in emerging economies after assets from Argentina’s peso to the Turkish lira plunged last week. The bailout may encourage risk-taking by wealthy investors in China’s $1.7 trillion trust industry -- the fastest-growing part of the shadow-banking system -- even as authorities try to curtail the nation’s debt.
“A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,” said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. Still, implicit guarantees distort the market and “delaying the first default means risks are snowballing,” he said.
Showing posts with label moral hazard. Show all posts
Showing posts with label moral hazard. Show all posts
Monday, 27 January 2014
Sunday, 30 June 2013
Irish banks abusing state guarantee
Bank bailouts are a terrible moral hazard: "Heads I win, Tail you lose".
In Ireland the economy is doing really badly, partly by the 2008/2009 crisis and the subsequent bank bailouts, to be paid by the taxpayers. Details are emerging that are not exactly pretty, from an article of The Irish Times:
David Drumm, former chief executive of Anglo Irish Bank, laughed at the prospect of abusing the State guarantee, the latest revelations from tapes reveal.
The victims? The ordinary people, as usual:
Mr Gilmore said that the decision cost the Irish people billions of euro. “I think we need to get to the bottom of how the decisions were made and what was behind them.”
I often complain about the slow enforcement in Malaysia, but Ireland is also not exactly quick in taking actions either.
The chairman of the Oireachtas Finance Committee Ciaran Lynch said the latest disclosures were proof-positive that an inquiry into the banking collapse was urgently required.
Urgently? After five whole years?
Even Warren Buffett invested in two Irish banks just before the crisis, although not in the Anglo Irish Bank. He is, apparently, human after all. The good thing is, he did acknowledge his mistake.
For more background on the Irish crisis, a long but very interesting article by Michael Lewis: "When Irish Eyes Are Crying"
In Ireland the economy is doing really badly, partly by the 2008/2009 crisis and the subsequent bank bailouts, to be paid by the taxpayers. Details are emerging that are not exactly pretty, from an article of The Irish Times:
David Drumm, former chief executive of Anglo Irish Bank, laughed at the prospect of abusing the State guarantee, the latest revelations from tapes reveal.
“We won’t do anything blatant, but . . . we have to get the money in . . . get the f***in’ money in, get it in,” he tells a senior manager at the bank, John Bowe.
In another recording, Mr Bowe and another senior executive at the bank, Peter Fitzgerald, are heard laughing about the prospects of nationalisation. They see it as “fantastic” and are delighted at the prospect of becoming civil servants.
The victims? The ordinary people, as usual:
Mr Gilmore said that the decision cost the Irish people billions of euro. “I think we need to get to the bottom of how the decisions were made and what was behind them.”
I often complain about the slow enforcement in Malaysia, but Ireland is also not exactly quick in taking actions either.
The chairman of the Oireachtas Finance Committee Ciaran Lynch said the latest disclosures were proof-positive that an inquiry into the banking collapse was urgently required.
Urgently? After five whole years?
Even Warren Buffett invested in two Irish banks just before the crisis, although not in the Anglo Irish Bank. He is, apparently, human after all. The good thing is, he did acknowledge his mistake.
For more background on the Irish crisis, a long but very interesting article by Michael Lewis: "When Irish Eyes Are Crying"
Tuesday, 20 November 2012
Did Astro employees buy shares on margin? (2)
Received an excellent comment on the previous posting from MH Fong:
Agree with your assessment, specifically on the moral hazard element of it. There is no good reason for Astro to bail out its staff who, in this case, must be treated as ordinary shareholders.
If they do want to compensate them for the decline in share price, they must do the same for all shareholders, e.g. capital repayment, special dividend, etc. (And no, I swear I'm not an Astro shareholder).
Furthermore, I personally have issues with companies allotting IPO shares to employees; if you really want your staff to benefit, give them options instead, which at least gives them some protection from the swing in the market.
I don't think there should be a witch-hunt about who's selling down though. I disagree with positions that suggest that market volatility is a bad thing especially in a market like Bursa that is often criticised for its poor velocity.
Two things come to mine about Astro: It was overvalued and investors suspect that much and two, Astro decided against a Greenshoe, which is fairly common for IPOs of this size. I think it was a bad decision (a bad bet, if you will) rather than anything conspiratorial to forego the Greenshoe.
Finally, one last comment on the giant IPOs pushed through this year. I suspect that the decline in Astro's share price is indicative of a a new element of uncertainty creeping into share trends post-IPO, even for blue chips. And here's where I'll throw in a shameless plug for Nate Silver's brilliant book, The Signal and The Noise. Great stuff about predictability.
The book can be found on Amazon's website. I am afraid I have not yet read the book, although it is very much in my alley, making predictions and putting my money where my money is, is basically what I do.
Nate Silver's blog FiveThirtyEight became rather famous when it predicted the latest US elections accurately.
Where is the "Malaysian Nate Silver" predicting the coming elections, both overall and per state .....?
Agree with your assessment, specifically on the moral hazard element of it. There is no good reason for Astro to bail out its staff who, in this case, must be treated as ordinary shareholders.
If they do want to compensate them for the decline in share price, they must do the same for all shareholders, e.g. capital repayment, special dividend, etc. (And no, I swear I'm not an Astro shareholder).
Furthermore, I personally have issues with companies allotting IPO shares to employees; if you really want your staff to benefit, give them options instead, which at least gives them some protection from the swing in the market.
I don't think there should be a witch-hunt about who's selling down though. I disagree with positions that suggest that market volatility is a bad thing especially in a market like Bursa that is often criticised for its poor velocity.
Two things come to mine about Astro: It was overvalued and investors suspect that much and two, Astro decided against a Greenshoe, which is fairly common for IPOs of this size. I think it was a bad decision (a bad bet, if you will) rather than anything conspiratorial to forego the Greenshoe.
Finally, one last comment on the giant IPOs pushed through this year. I suspect that the decline in Astro's share price is indicative of a a new element of uncertainty creeping into share trends post-IPO, even for blue chips. And here's where I'll throw in a shameless plug for Nate Silver's brilliant book, The Signal and The Noise. Great stuff about predictability.
The book can be found on Amazon's website. I am afraid I have not yet read the book, although it is very much in my alley, making predictions and putting my money where my money is, is basically what I do.
Nate Silver's blog FiveThirtyEight became rather famous when it predicted the latest US elections accurately.
Where is the "Malaysian Nate Silver" predicting the coming elections, both overall and per state .....?
Friday, 9 November 2012
Did Astro employees buy shares on margin?
The article "What can Astro do for its employees?" on the website of The Star suggests that employees of Astro might have bought shares on margin:
"Last week Astro had a town hall meeting with their staff to talk about the share price fall and it is really up to the company to handle the situation because no organisation will like to have a group of disgruntled employees. There may be the pressure of margin calls for those who had taken financing to buy their allotment of shares. There might be employees who might not have the ability to hold on to their shares."
The share of Astro has indeed performed quite badly:
On the other hand, a decline of 12% is not exactly shocking. If employees did indeed buy shares with borrowed money during the IPO and can't even stand a loss of this magnitude, then something is very wrong.
The writer offers a piece of advice:
Astro perhaps needs to figure out what it can do to assist their employees. A bonus or ex-gratia payment or even a one-off payment based on a pre-determined price below the IPO price to employees will do a lot to help those in need. That show of goodwill will certainly cure any grouses employees will have and it will automatically lower their holding cost of Astro's shares. It's a goodwill gesture but it's one for Astro to make.
I disagree very much with this advice. First of all, there is no free lunch here, money that will be used to bail out employees will come out of the pockets of others, in this case other shareholders of Astro.
Secondly, from the point of view of "moral hazard" this is really, really bad advice.
If indeed employees have bought shares on margin, then first of all there should be a transparent investigation, based on what information and assumptions they did that.
The Malaysian authorities are proud of the 3 large IPO's this year, but cracks have started to appear. I hope there will be an evaluation say one year in the future how this all panned out, with transparency which "cornerstone" investors held on to those shares, which sold their shares for a quick buck.
"Last week Astro had a town hall meeting with their staff to talk about the share price fall and it is really up to the company to handle the situation because no organisation will like to have a group of disgruntled employees. There may be the pressure of margin calls for those who had taken financing to buy their allotment of shares. There might be employees who might not have the ability to hold on to their shares."
The share of Astro has indeed performed quite badly:
On the other hand, a decline of 12% is not exactly shocking. If employees did indeed buy shares with borrowed money during the IPO and can't even stand a loss of this magnitude, then something is very wrong.
The writer offers a piece of advice:
Astro perhaps needs to figure out what it can do to assist their employees. A bonus or ex-gratia payment or even a one-off payment based on a pre-determined price below the IPO price to employees will do a lot to help those in need. That show of goodwill will certainly cure any grouses employees will have and it will automatically lower their holding cost of Astro's shares. It's a goodwill gesture but it's one for Astro to make.
I disagree very much with this advice. First of all, there is no free lunch here, money that will be used to bail out employees will come out of the pockets of others, in this case other shareholders of Astro.
Secondly, from the point of view of "moral hazard" this is really, really bad advice.
If indeed employees have bought shares on margin, then first of all there should be a transparent investigation, based on what information and assumptions they did that.
The Malaysian authorities are proud of the 3 large IPO's this year, but cracks have started to appear. I hope there will be an evaluation say one year in the future how this all panned out, with transparency which "cornerstone" investors held on to those shares, which sold their shares for a quick buck.
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