Why would anyone take toxic waste?
APPEALING TO GREED WILL MALAYSIAN SIVs SUCCEED IN THIS SUCKERS’ GAME?
For six months, I have been exposing the con and fraud that was inherent in the SIVs touted by the global investments banks, led by Goldman Sachs, Citibank, Bank of America, JP Morgan, Merrill Lynch, Morgan Stanley, Lehman Bros., HSBC, Barclays Bank, Deutsche Bank etc.
The only Bank that came out of this con with positive figures (up to this point in time) was Goldman Sachs and all because three of its traders, against the Management’s “Better Judgment”, shorted the market for sub-prime mortgages. What this means in simple terms was that Goldman Sachs having masterminded such toxic waste and flooded the market with it and making obscene profits in the process, quietly unloaded the same (i.e. selling to late comers suckers) before the shit hit the ceiling fan in July. The gain which the three traders made on these trades, more than offset the huge losses that Goldman Sachs suffered from other sectors of its operations.
On December 12, the very day that the Fed lowered its Fund and Discount rate by 25 basis points, and unlike previous reductions which gave rise to a stock market rally, the Dow plunged massively. Yet, we witnessed Malaysian mass media and so called financial analysts trumpeting the health of the global economy and that of Malaysia, as if Malaysia will not be affected by the global banking turmoil.
I believe that there is a concerted effort by the Government and the mass media which it controls to mislead the people so as to obtain another mandate in the coming General Elections.
As an individual, I can only do so much, but as a collective, we can effect change and save our fellow countrymen and women from the financial devastation that is now sweeping across the developed economies and heading towards us. I therefore urge each and every one of you who have received my e-mail Alerts to forward them to as many friends as possible.
Do not forget the fiasco of the 1997 – 1998 financial crisis! This will be worst.
You Don’t Have To Believe Me, But Do Heed The Insiders
You may well ask, “Who are the experts? There are so many – Who to follow?” These are indeed legitimate questions. So I am not going to waste time but to quote just a few impeccable insiders.
Please consider the following:
1) Warren Buffett, December 12, 2007
“You can't turn a financial toad into a prince by securitizing it. Wall Street started believing its own PR on this — they started holding this stuff themselves, maybe because they couldn't sell it. It worked wonderfully, until it didn't work at all.”
2) Merrill Lynch, December 18, 2007
Merrill: $500 Billion in Economy-Wide Mortgage Losses
Merrill Lynch may have laid down a new high-water mark for estimated losses on mortgages across all investors and institutions, pegging the ultimate tally at $500 billion.
“How did we arrive at that staggering number?” North American economist Dave Rosenberg asks in a report today. “It is the sum of projected losses of $250 billion in subprime loans, [about 18% of the $1.4 trillion subprime market], $50 billion for Alt-A loans, $100 billion in negative amortization mortgage-backed security option ARMS, and $100 billion in synthetic CDO losses (synthetic CDOs gain credit exposure to the underlying subprime assets via credit default swaps).”
3) Gillian Tett, Financial Times December 18, 2007
Money Rescue Helicopters Are Getting Bigger:
The monetary helicopters are getting bigger. When the European Central Bank conducted an auction Tuesday, it initially expected to inject EU180.5bn ($260bn) of funding into the markets, based on its past benchmarks of what banks usually need. In the event, however, 390 institutions demanded EU348.6bn of funds. That is almost four times bigger than the funds dropped by the ECB helicopter into the markets back on August 9, when it first intervened (unsuccessfully) to stop the money market woes. Indeed, Tuesday's drop equates to an average of almost EU1bn, per bank.
The good news is that this has now pushed money market rates down. On Tuesday, the one-month euro Libor rate was fixed at 4.59 per cent, down from 4.92 per cent on Monday. But the bad news is that there is no guarantee that rates will stay low. The key reason why money market tensions have risen is not a lack of cash in the system per se – but widespread mistrust about the health of banks. In some respects the ECB's move could exacerbate this psychological trap.
4) Paul Davies, Financial Times, December 18,2007
Second Wave of SIV Liquidity Problems Looms
The funding problems for the structured investment vehicles (SIVs) that have been at the centre of this year’s liquidity troubles are far from over in spite of a number of banks stepping in to support their vehicles. January will bring the start of a second wave of liquidity problems for SIVs as the vast majority of medium-term funding starts to come due for repayment, according to a report from Dresdner Kleinwort analysts ….
5) Paul Krugman, NYT December 14, 2007
On Wednesday, the Federal Reserve announced plans to lend $40 billion to banks. By my count, it’s the fourth high-profile attempt to rescue the financial system since things started falling apart about five months ago. Maybe this one will do the trick, but I wouldn’t count on it.
In past financial crises — the stock market crash of 1987, the aftermath of Russia’s default in 1998 — the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn’t working. Why not? Because the problem with the markets isn’t just a lack of liquidity — there’s also a fundamental problem of solvency.
Should Malaysians Invest In SIVs?
I am asking this question again because the Malaysian mass media recently highlighted that CIMB is launching a new “Structured Investment Product, Rebound FRNID (Floating Rate Negotiable Instruments of Deposit). This instrument will, as reported in the media “enable investors to benefit from the potential rebound of four global banking giants whose share prices have been negatively impacted by the US Sub-prime crisis.”
The four banks identified are Citigroup Inc, Merrill Lynch & Co Inc, UBS AG and Morgan Stanley.
The pitch that this is a good investment is and I quote: “The decline has created opportunities and resulted in sizeable investments by sovereign wealth funds such as Abu Dhabi Investment Authority, Government of Singapore Investment Corp and China Investment Corp into this sector.”
What would you get? “The Rebound FRNID guarantees investors a fixed return of 15% on a two-year investment, 23% on a three-year investment and 45% on a five-year investment provided the equity basket exceeds a return of 25% at maturity. The principal is guaranteed by CIMB Bank if held to maturity.
Mr. Lee K Kwan, CIMB Group Treasurer is quoted as saying, “This product affirms CIMB Bank’s ability to capitalize on global market developments and provide our customers access to these investment opportunities in a timely manner when such opportunities are usually only available to large global investors.”
FRNID are issued under the Bank Negara Malaysia (Central Bank) Guidelines on Negotiable Instruments of Deposit which sets the minimum investment at RM100,000.00
Readers of my Red Alerts have every right to ask, “Why do I care, if there are people who want to gamble with their savings? Caveat Emptor!”
I am sure there were quite a few people who held that view prior to the present financial mess that is sweeping across the globe. There was a party and everyone was drunk with greed and euphoria. The mantra was, “This is the New Economy, stupid! The good times will roll forever and ever.” Now that the SIVs are in deep shits, the banks which operated these SIVs are in trouble to the extent that they are now insolvent and are seeking capital injections from Soveriegn Wealth Funds.
When a firm lacks capital to meet liabilities, in law and in fact that firm is said to be insolvent. Period!
Please read again the five quotations.
Don’t Be Greedy, Cash Is King
Please ask the following questions of CIMB and make sure your friends ask them as well.
1. How have this instrument been rated – AAA?
2. If rated AAA, why?
3. If not rated AAA, why?
4. Who rated them, and the basis of the rating?
5. How much capital is CIMB putting into this SIV?
6. Why is CIMB guaranteeing this investment and not a 3rd party Triple A rated insurer?
Let me explain. When you borrow money from a bank, say RM10 million, do you guarantee your own borrowing? The answer is an obvious NO. The bank always insists that a third party guarantees the loan no matter how trustworthy and credit worthy you may be.
When a bank invites customers to deposit funds (see my previous article – DEBT 101) the customer is the creditor and the bank the borrower.
So here the bank borrows RM100,000.00 from you (this being the minimum “investment” by Bank Negara’s Guidelines) and promises to refund capital and interest at 15% or 23% or 45% depending on the duration of your “investment (i.e. how long you are lending the bank the said RM100,000.00).
Why don’t the bank simply say that they are borrowing the money from you instead of saying, “You are investing a sum of RM100,000.00 with them.”
Therefore, when you are lending money, don’t you want a third party to guarantee your capital and interest?
7. Read the proviso to the invitation to “invest”.
“The Rebound FRNID guarantees investors a fixed return of 15% on a two-year investment, 23% on a three-year investment and 45% on a five-year investment provided the equity basket exceeds a return of 25% at maturity.”
Please check with the bank whether the 15%, 23% or 45% payout at maturity is dependent on the equity basket exceeding a return of 25% at maturity. Put it in another way – Will you get 15%, 23% or 45% if the return on the equity basket is less than 25% at maturity?
My reading and interpretation of this proviso is that you get nothing at maturity except the guaranteed capital sum of RM100,000.00 if the return on the equity basket is less than 25%.
In short, if the return of the equity basket is less than 25% the bank have used your money for free for the duration of the period of “investment” i.e. your loan to the bank. I may be wrong in my interpretation. So check them out. Read all the fine prints.
8 The most critical question to ask of the bank is, “What is the total aggregate of the Fund – RM200 million, RM300 million etc? Having establish the fund limit, how much is the leverage?”
Normally, SIVs will use the capital to borrow more monies – “to leveraged” from other banks or hedge funds at 10 to 12 times. This means that if the Fund is capitalized at RM100 million, the SIV can leverage for RM1 billion.
Given the present global credit crunch, I have my doubts whether such leverage will be feasible.
What Is The Essence Of This “Investment”?
In a nut shell, the bank is asking you to lend them RM100,000 on a prospect that you can earn interest at 15% for a two-year term, 23% on a three-year term and 45% on a five-year term (provided the return on the Equity Basket exceeds 25%) on the gamble that these four banks, presently insolvent will turn round and survive the current financial tsunami.
The pitch is simple – If Abu Dhabi, Singapore and China is putting their money, it cannot go wrong!
This can blind you from asking the Trillion Dollar Question, Why is Abu Dhabi, Singapore and China’s Wealth Fund “investing” in these four banks? Are they all collectively investing in these four banks?
As at the date of writing this article, the following Sovereign Funds have taken up or will take up the following percentage of the respective bank’s equity:-
Barclays – China Development Bank 3.1pc; Temasek 2.1pc
Bear Stearns – Citic Secs (China) $1bn share-swap
Citigroup – Abu Dhabi Investment Authority 4.9pc
Merrill Lynch* – Temasek not yet known
Morgan Stanley – China Investment Corp 9.9pc
UBS – Government of Singapore Investment Corp 9pc; Saudi Royal Family* just under 2pc
* = understood but not confirmed
It is clear that the Sovereign Funds have not and are not acting collectively to “invest” in all the abovementioned banks. I am led to believe that one of the reasons for such “investments” is that the relevant countries have exposure to toxic wastes which they had “purchased” from these banks – hence, China’s interest in Bear Stearns, Barclays, and Morgan Stanley. If these banks do go down, these countries will suffer huge losses.
Additionally, please bear in mind that the average yield on US junk bonds is 9.4 per cent. Abu Dhabi Investment Authority injection into Citigroup of US$7.5 billion cash is in the form of a coupon rate (fixed rate) of 11 pc.
Therefore, in this instant case, Abu Dhabi Investment Authority is getting a premium of 2.6 percent over the average US junk bond rate over a period of five years. This is a high rate, a desperate rate agreed by the insolvent Citigroup.
Therefore, the rate offered by CIMB of 15% for 2 years, 23% for 3 years and 45% for 5 years is unrealistic. I am therefore not surprised that the bank has the proviso – the Equity Basket must yield a return in excess of 25% at maturity.
Conclusion
Some of you will hate me for saying this – “You may be a Big Fish in Malaysia, but a “Big Fish” in a small pond. In the Global Ocean of high stakes gambling, you are but sardines, feedstock for the sharks!”
Don’t be greedy.
In bad times, cash is KING.
MATTHIAS CHANG
