GIC cuts loss in one fell swop

Mar 02, 2009
The Business Times

GIC cuts loss in one fell swop
By Conrad Tan

THE Government of Singapore Investment Corp (GIC) will convert all its preferred shares in Citigroup into common stock to cut its losses. The swop will give it an 11.1 per cent stake in the troubled US bank, which yesterday announced a sweeping plan to boost its common equity base. The conversion will pare GIC’s paper loss on its original US$6.88 billion investment in Citi from 80 per cent or US$5.5 billion to 24 per cent, or US$1.67 billion, based on Thursday’s closing price of US$2.46 for Citi shares.

Separately, Citi said yesterday that it plans to swop up to US$52.5 billion of its preferred stock, including US$25 billion of the US$45 billion held by the US government, for ordinary shares.

Citi also recorded a massive US$10 billion charge for impairment of goodwill and other intangible assets in the fourth quarter, resulting in an additional net loss of US$9 billion for the final three months of last year.

For GIC, the decision to convert its shares appears to have been the lesser of two unpalatable choices. Citi yesterday suspended dividend payments on its preferred shares as well as common stock, which means that GIC would lose the 7 per cent annual dividend that it has been receiving if it chose not to convert its holdings.

The conversion will make GIC the second-biggest shareholder in Citi with a stake of about 11 per cent, compared to about 4 per cent at the time of its original investment. The US government will be Citi’s largest shareholder, owning 36-38 per cent of Citi’s common equity. The final stakes will depend on how many investors in the publicly held tranche of Citi’s preferred stock decide to participate in the share conversion.

One thing is certain: Existing ordinary shareholders will suffer massive dilution of more than 70 per cent. Citi shares plunged 37 per cent to US$1.55 at the start of US trading yesterday after the bank’s announcement. At that price, GIC’s unrealised loss on its Citi investment would be US$3.6 billion. The profitability of US banks ‘is likely to be impaired in the next two years’, said Ng Kok Song, GIC’s group chief investment officer in a statement.

‘GIC’s view is that with this latest move, Citigroup’s capacity to weather the severe economic downturn will be strengthened.’

Before yesterday’s announcement, the market value of the preferred shares held by GIC had already slumped 80 per cent to just US$1.376 billion since its initial investment in Citi, as mounting losses made it less likely that the bank would be able to keep up its dividend payments.

The US government, GIC and other investors that bought Citi preferred stock alongside GIC in January last year will receive common stock at a price of US$3.25 a share. Those investors, including Saudi Arabia’s Prince Al-Waleed bin Talal, have agreed to the exchange, said Citi.

At the conversion price of US$3.25, GIC will get some 2.12 billion common shares in exchange for its US$6.88 billion in preferred stock. Based on Thursday’s closing price of US$2.46 a share, GIC’s stake after conversion is worth US$5.21 billion.

That puts GIC’s unrealised loss on its original US$6.88 billion investment in Citi at US$1.67 billion after the conversion, compared to US$5.5 billion before.

Under the original terms of GIC’s investment in Citi, it would have had to pay a much higher conversion price of US$26.35 for each common share, GIC said. That would have translated into a stake of just 261.1 million shares, worth a mere US$642 million at Thursday’s closing price for Citi shares.

But the conversion also means that GIC will now bear greater risk than before, as an ordinary shareholder. It also gives up for good the 7 per cent annual dividend that it previously earned on its preferred shares.

Citi chief executive Vikram Pandit said that the conversion plan had just ‘one goal’ – to increase the bank’s tangible common equity or TCE. Converting its preferred shares into ordinary equity will boost its TCE ratio – the focus of stress tests by US regulators starting this week as a key measure of the bank’s ability to withstand further losses if the recession is worse than expected.

Ordinary shareholders are the first to suffer any losses, so common equity is seen as the highest quality of capital that a bank holds, and the size of a bank’s common equity base relative to its assets is considered the purest measure of its buffer against losses.

The hope is that by raising its TCE ratio, Citi will be able to weather the worst recession that the US has seen in decades. The plan is expected to increase its TCE as a proportion of its risk-weighted assets from less than 3 per cent now to 7.9 per cent.

Crucially, it does so without the need to inject more money from the public purse. That makes it unnecessary for the US government to seek the approval of lawmakers for more funds amid growing public fury over the use of taxpayers’ money to bail out large banks.

But the US government could still inject more capital into Citi – in the form of mandatory convertible preferred shares – if the stress tests show that the bank’s capital cushion still needs bolstering. That would mean further dilution for ordinary shareholders, including GIC, when the shares are eventually converted to common stock.

‘As a shareholder, GIC supports the initiative by Citigroup and the US government to strengthen the quality of the bank’s capital base in view of the challenging economic environment,’ GIC said in a statement.

Chivalry

When examining medieval literature, chivalry can be classified into three basic but overlapping areas:

1. Duties to countrymen and fellow Christians: this contains virtues such as mercy, courage, valor, fairness, protection of the weak and the poor, and in the servant-hood of the knight to his lord. This also brings with it the idea of being willing to give one’s life for another’s; whether he would be giving his life for a poor man or his lord.

2. Duties to God: this would contain being faithful to God, protecting the innocent, being faithful to the church, being the champion of good against evil, being generous and obeying God above the feudal lord.

3. Duties to women: this is probably the most familiar aspect of chivalry. This would contain what is often called courtly love, the idea that the knight is to serve a lady, and after her all other ladies. Most especially in this category is a general gentleness and graciousness to all women.

25 Year-Old Beauty Seeks Rich Banker

This was posted on Craigslist last year:

‘What am I doing wrong?

Okay, I’m tired of beating around the bush. I’m a beautiful (spectacularly beautiful) 25 year old girl. I’m articulate and classy. I’m not from New York. I’m looking to get married to a guy who makes at least half a million a year. I know how that sounds, but keep in mind that a million a year is middle class in New York City, so I don’t think I’m overreaching at all.

Are there any guys who make 500K or more on this board ? Any wives ? Could you send me some tips ? I dated a business man who made an average of around 200 – 250K. But that’s where I seem to hit a roadblock. $250,000 won’t get me to Central Park West. I know a woman in my yoga class who was married to an investment banker, and lives in Tribeca. She’s not as pretty as I am, nor is she a great genius. So what is she doing right ? How do I get to her level ?

Here are my questions specifically:

– Where do you single rich men hang out ? Give me specifics – bars, restaurants, gyms

– What are you looking for in a mate? Be honest guys, you won’t hurt my feelings

– Is there an age range I should be targeting ?

– Why are some of the women living lavish lifestyles on the Upper East Side so plain? I’ve seen really ‘Plain Jane’ boring types, who have nothing to offer incredibly wealthy guys. Then I’ve seen drop dead gorgeous girls in singles bars in the East Village. What’s the story there ?

– Lawyers, investment bankers, doctors. How much do those guys really make ? And where do the hedge fund guys hang out ?

– How do you rich guys decide on marriage vs. just a girlfriend ? I am looking for MARRIAGE ONLY.

Please hold your insults – I’m putting myself out there in an honest way. Most beautiful women are superficial – at least I’m being up front about it. I wouldn’t be searching for these kind of guys if I wasn’t able to match them – in looks, culture, sophistication, and keeping a nice hearth and home’.

An Investment Banker’s Response:

Dear Pers-431649184:

‘I read your posting with great interest and have thought meaningfully about your dilemma. I offer the following analysis of your predicament.

Firstly, I’m not wasting your time. I qualify as a guy who fits your bill – that is, I make more than $500K per year. That said, here’s how I see it:

Your offer, from the prospective of a guy like me, is a plain and simple crappy business deal. Here’s why. Cutting through all the B.S., what you suggest is a simple trade: you bring your looks to the party and I bring my money. Fine, simple. But here’s the rub, your looks will fade and my money will likely continue into perpetuity – in fact, it is very likely that my income will increase, but it is an absolute certainty that you won’t be getting any more beautiful!

So, in economic terms, you are a depreciating asset. Not only are you a depreciating asset, however, your depreciation accelerates! Let me explain – you’re 25 now and will likely remain pretty hot for the next 5 years, but less so each year. Then the fade begins in earnest. By 35 – stick a fork in you!

So, in Wall Street terms, we’d call you a trading position – not a buy and hold…hence the rub…marriage. It doesn’t make good business sense to ‘buy you’ (which is what you’re asking) – so I’d rather lease. In case you think I’m being cruel, I would say the following: if my money were to go away, so would you – so when your beauty fades I need an out too. It’s as simple as that. So the deal that makes sense for me is dating, not marriage.

Separately, I was taught early in my career about efficient markets. So, I wonder why a girl as ‘articulate, classy and spectacularly beautiful’ as you has been unable to find your sugar daddy. I find it hard to believe that, if you are as gorgeous as you say you are, your $500K man hasn’t found you – if only for a tryout.

By the way, you could always find a way to make your own money – and then we wouldn’t need to have this difficult conversation.

With all that said, I must say you’re going about it the right way. Classic ‘pump and dump’. I hope this is helpful, and if you want to enter into some sort of lease, please let me know’.

Singapore acts to lure overseas-trained lawyers back home

By Imelda Saad | 13 February 2009
CNA

SINGAPORE: Major changes are on the cards for Singapore’s legal education system.

The changes are aimed to ensure Singapore has an adequate supply of local lawyers who can compete against global competition and to strengthen Singapore’s position as a key regional legal education hub.

Law Minister Law Minister K Shanmugam announced the changes in Parliament on Friday.

In hoping to attract overseas-trained Singapore lawyers to come back and practise law at home, the Law Ministry will abolish the one-year-long Diploma in Singapore Law course.

Mr K Shanmugam noted that the course, which is a requirement for all returning lawyers, has proven to be a disadvantage as lawyers feel they can pick up most of what’s taught during practice.

Hence, from June this year, such students will be offered an optional three-month conversion course.

To enhance legal training, measures include:

– revamping the Practice Law Course;

– replacing the pupillage system with training contracts, with the intention of putting the onus on law firms to ensure that trainees have a constructive and structured learning programme;

– the possibility of making continuing legal education mandatory to ensure practising lawyers are up to date on any changes to the law and are familiar with emerging areas of law.

To ensure a steady supply of lawyers, graduates with a Second Class (Lower) degree from approved universities will be admitted to the Singapore Bar without the two-year minimum legal experience requirement.

Adding to this, the Singapore Management University’s Law School will put in place additional measures to add to the pool of lawyers.

The first batch of graduates from SMU will join the industry in 2011.

The NUS Law Faculty will also increase its intake from 220 to 250 students a year.

Together, Mr K Shanmugam said, these moves will result in an almost 70 per cent increase in the number of local law graduates in a few years’ time – from 220 to 370 annually.

He added the incoming Qualifying Foreign Law Practices (QFLPs) will also bring in more lawyers as they consolidate their regional offshore work here.

To oversee the legal education in Singapore, a new statutory board – tentatively called the Institute for Legal Education – will be set up.

Mr K Shanmugam said: “Most essential for a vibrant legal sector are good quality lawyers. Therefore ensuring that legal education and training is top notch is extremely important”.

The minister also gave an update on moves to free up legal services in Singapore.

The Law Ministry notes that despite the current economic crisis, there is potential in the medium term for the legal sector to expand in certain areas.

One example is arbitration as Singapore is fast becoming an arbitration venue of choice.

By mid-2009, Singapore will have the Maxwell Chambers to house arbitration hearings under one roof.

Mr K Shanmugam said: “Our advantage is our connectivity and world class infrastructure, our judicial philosophy in respect to arbitration and being accessible at a much lower expense than some of the other popular arbitration centres.”

Another good sign is that international law firms have been setting up new offices in Singapore in recent months.

In the past four months alone, four new firms opened up offices here, one of them among the Global Top 40.

Another two firms have already registered with the Attorney-General’s Chambers and have announced plans to open new offices in Singapore.

Atheists and the Stock Market – Nassim Nicholas Taleb

Taleb’s exposition of the Ludic fallacy:

“We love the tangible, the confirmation, the palpable, the real, the visible, the concrete, the known, the seen, the vivid, the visual, the social, the embedded, the emotional laden, the salient, the stereotypical, the moving, the theatrical, the romanced, the cosmetic, the official, the scholarly-sounding verbiage, the pompous Gaussian economist, the mathematicized crap, the pomp, the Academie Francaise, Harvard Business School, the Nobel Prize, dark business suits with white shirts and Ferragamo ties, the moving discourse, and the lurid. Most of all we favor the narrated.

Alas, we are not manufactured, in our current edition of the human race, to understand abstract matters — we need context. Randomness and uncertainty are abstractions. We respect what has happened, ignoring what could have happened. In other words, we are naturally shallow and superficial — and we do not know it. This is not a psychological problem; it comes from the main property of information. The dark side of the moon is harder to see; beaming light on it costs energy. In the same way, beaming light on the unseen is costly in both computational and mental effort.”

How to choose good durian

Here is a short durian tutorial by Mr Wong who runs a small boutique durian stall at 231 East Coast Road (Opp Jago Close) Singapore. You can contact him for your durian needs by calling 97514828. At the time of blogging, his Mao Shan Wang was selling for $16 per kg. Having been in the durian trade for 20 years, he has established a good relationship with his suppliers who would pre-select all his durians so that his customers can look forward to a really good durian experience.

Source: http://ieatishootipost.sg/2008/07/durian-tutorial-made-possible-with-my.html

Short straw dims New Year glow

Short straw dims New Year glow
Fortune stick predicts worst luck for HK, and hours later fireworks barge catches fire
Mary Ann Benitez, Danny Mok and Amy Nip
SCMP Jan 28, 2009

As if recession and the prospect of a worsening economic downturn were not enough, Hong Kong yesterday drew the worst possible fortune stick in a ceremony at a Sha Tin temple.

Lau Wong-fat, chairman of rural affairs body the Heung Yee Kuk, drew the stick numbered 27 on the city’s behalf in the Taoist ceremony at the Che Kung temple.

A fortune-teller at the temple who read the stick said it showed the city could not isolate itself from the global economic turbulence, but that Hongkongers should nevertheless be cautiously optimistic.

Fung shui masters interpreted the stick’s meaning differently.

James Lee Shing-chak said it signified possible conflicts between the government and its people.

Mr Lau said: “It is a warning to all of us that only a harmonious society with people staying united can enable us to get through our challenges.”

The last time that stick was drawn, 1992, saw, among other things, the arrival of last governor Chris Patten – who unleashed fierce political strife.

When a Sha Tin district councillor drew the ill-omened stick 17 years ago, the council immediately burned it and drew another, lucky one.

Yesterday, that option was not open to Mr Lau and, rather than the stick burning, it was a barge used for the Lunar New Year fireworks display that went up in flames last night.

The barge, one of three from which fireworks were launched during the 23-minute display, burst into flames near the end of the HK$5 million spectacle that lit up Victoria Harbour. The barge’s two crewmen were rescued. No one was hurt.

Within minutes thick black smoke had engulfed the bow of the vessel. Fire boats soon doused the flames.

Teddy Ng, watching with his 19-year-old daughter, said flames engulfed at least a quarter of the barge.

Wilson Mao Wai-shing, chief executive officer of Pyro Magic Productions, which produced the show, could not be reached for comment.

A spokesman for the Leisure and Cultural Services Department said it appeared sparks falling onto the barge had started the fire.

It wasn’t the only mishap on the harbour. Earlier, a pleasure boat taking 41 people to see the fireworks sprang a leak soon after leaving the Kowloon City ferry pier.

A lucky 23,888 fireworks formed the display, which was watched by 250,000 people lining both sides of Victoria Harbour and featured the character for ox.

The crowd was much smaller than expected. A turnout similar to last year’s 400,000 had been forecast.

Spectators gasped when curtains of gold and red fireworks cascaded or comets and sparking fireflies seemed to hover on the horizon.

As well as the character for ox – which was hard to pick out – the show also featured for the first time the characters for “good luck” and the lucky numbers six, eight and 10.

Afterwards spectators were divided about the merits of the show. Some said it was small and that, because it was a windless night, smoke had blanketed the harbour by halfway through the show. An amateur photographer, C. P. Chan, said: “I took pictures and the smoke started to get in the way after just 10 photos.”

But another spectator, Lois Wong Yu-siu, 19, said: “The combination of the music and fireworks matched.”

Alex Tsang said he was disappointed because it was quite smoky.

Still, he is hopeful about the Year of the Ox.

“My new year wish is for a pay rise so that I can get married soon,” the sales representative said.

Restaurants, too, were optimistic. Several said that business was holding up during the Lunar New Year holiday.

More shops were open than a year ago, too, though there was both a positive and a negative reason for that, said Caroline Mak Sui-king, chairwoman of the Retail Management Association.

On the one hand, a rise in tourists made it more worthwhile opening, but on the other hand they were forced to open because they needed every opportunity to earn the money to pay ever higher rents, she said.

Away from the festivities, pan-democrats petitioned Chief Executive Donald Tsang Yam-kuen – who is on holiday – with their wishes for the Year of the Ox, and reminded him he had a tough year’s work ahead.

The Hong Kong Observatory issued the cold weather warning for the fifth consecutive day.

Urban temperature hovered around 12 degrees Celsius. In the northwestern New Territories they dipped to 8 degrees. Warmer weather is forecast for today.

John Thain

Thain behaviour
FT
January 23 2009

What is it that bankers don’t get? Unable to own up to a collective failure, some still display a sense of entitlement that bears no relation to their current status as wards of the state supported by the taxpayer. Step forward John Thain.

Formerly of Goldman Sachs, he was feted just months ago for securing the sale of Merrill Lynch to Bank of America, just as Lehman Brothers crumbled into dust. BofA even paid a 70 per cent premium. Some deal. Some salvation.

It now emerges that Mr Thain brought forward about $4bn in discretionary bonuses, paying them out in the narrow window after the sale of Merrill was agreed but days before the deal was actually closed.

This wheeze went down just as Merrill headed into record $21.5bn operating losses in the fourth quarter and BofA started seeking additional taxpayers’ funds from the troubled asset relief programme to digest its acquisition.

These bonuses, moreover, came in a year when Merrill’s total operating loss was $41.2bn. Bonuses equivalent to 10 per cent of the profits would be excessive, but 10 per cent of the losses? Furthermore, reports that Mr Thain spent $1.22m doing up his office, including $1,400 on a parchment rubbish bin, after his arrival at Merrill last year will serve to feed popular perceptions that the greed and insensitivity of investment bankers knows few limits.

Whether or not the bonuses were legal – and it seems they were – outside the parallel universe of investment bankers they are seen as looting. Bankers played a very big part in setting fire to the world economy – and reaped large rewards for their recklessness. They are being supported with public money because the economy cannot work without banks, not because bankers should be a protected species.

There may be no tumbrils rolling down Wall Street or through the City of London but a backlash is building. It would be a pity if this translates into regulation more stifling than that required to restrain more foolish risk-taking. But if bankers behave like this, it certainly will.

The 10 Levels of Healing

The 10 Levels of Healing

1. Awareness: Identifying with victim behavior.

2. Commitment to change old patterns and begin to practice healing tools.

3. Step by step, you begin to see results of using the tools.

4. You are now processing and integrating new insights while releasing old patterns.

5. The determination becomes stronger to create more balance in your life.

6. Increased awareness of your ability to manifest the life you deserve.

7. Self-worth expands and grows significantly.

8. You have stopped creating dramas and have drawn in mentors.

9. Confidence in handling life’s lessons.

10. Experience more pleasure, happiness, delight, clarity, and peace, in your daily life now.

~ Lori Rekowski

Citibank

When Travelers chief executive Sandy Weill acquired Citibank for US$70bn in April 1998 he effectively forced a rewrite of the rules of financial regulation. The US system was set up in the 1930s to prevent a repeat of the crash that led to the Great Depression.

The Glass-Steagall Act kept investment banks on Wall Street separate from commercial and retail lenders on main street, so traders couldn’t bet bank deposits. It was effectively repealed during the dying days of the Clinton Presidency in November 1999.

The Citibank takeover, which brought together legendary bond trading house Salomon, acquired by Travelers in 1997, with one of America’s largest main street lenders, forced this issue out into the open.

It heralded a wave of similar deals, combining both sides of the banking business. Most notably in September 2000 Chase Manhattan bought JP Morgan for US$33bn shortly after it had snapped up UK investment bank Robert Fleming.

Soon afterwards inventive investment bankers made the most of the low interest rates put in place after the terrorist atrocities of September 11 2001 to create debt instruments that led ultimately to the current debacle.

The next Presidency looks as if it will be dominated by revising the current laissez-faire financial regulations, with Governments around the world determining how the banks they have taken stakes in should now operate.

It is impossible to imagine that the clock will be turned back. Indeed many of the rescues have involved conservative lenders, such as Bank of America, buying more speculative banks, the mighty Merrill Lynch for instance in this case.

And in Europe, even before Travelers-Citigroup was created, many conventional banks had long had a presence in investment banking, such as Barclays, or bought their way in: Deutsche acquiring Morgan Grenfell and Swiss Bank snapping up Warburgs.

The problem that universal banking has suffered is using the balance sheet to take inappropriate positions in the market. This ‘proprietary’ trading created immense profits in the boom times but has found out many on the way down.

Citi’s proposals to keep the same model, albeit on a much reduced basis, of combining retail, commercial and investment banking, whilst hiving off the ‘bad’ assets left from this trading frenzy, indicates how things might look for banks in the future.

Politicians after all want the banks to keep functioning and lending to businesses and consumers, using appropriate advice from investment bankers. However, they should focus on getting regulators to curb the betting using leverage on such group’s deposits.

If the right balance is obtained then acquisition finance could recover along similar lines albeit at a much reduced level.

Vedanta

Vedanta is a spiritual tradition explained in the Upanishads that is concerned with the self-realisation by which one understands the ultimate nature of reality (Brahman) and teaches the believer’s goal is to transcend the limitations of self-identity and realize one’s unity with Brahman. Vedanta which implies “the end of all knowledge” – by definition is not restricted or confined to one book and there is no sole source for Vedantic philosophy. Vedanta is based on immutable spiritual laws that are common to religions and spiritual traditions worldwide. Vedanta as the end of knowledge refers to a state of self-realisation, attainment, or cosmic consciousness. Historically and currently Vedanta is understood as a state of transcendence and not as a concept that can be grasped by the intellect alone.

In the Bhagvad Gita, Krishna tells Arjuna, “It is better to follow your own calling imperfectly than follow another’s perfectly. If death should come while following your own path, this is surely better than living with the fear and anguish of following a false path.” (3:35)

Jim Rogers

“Be extremely skeptical, and stay with what you know. The great success stories in life are people who figure out what they know, stay with it, put their eggs in that basket and watch it very carefully. Don’t listen to me or anybody else.”

~ Jim Rogers

Ted Williams

Ted Williams was the most robust batter in baseball history. Williams discarded the strike zone and ignored umpire calls, instead creating his own personal batting zone. This was an area divided into 77 sub-sectors each the size of a baseball.

Through many trials, Williams determined that the probability distribution of him getting a hit was best in only nine of those zones.

Using tremendous discipline in his set-up, he would only swing the bat if a pitch was in one of those nine zones. The results are recorded in baseball’s Hall of Fame.

If there was ever a time in market history when we all need to be Ted Williams, it’s now.

Shantideva: Far-reaching Mental Stability

(10) One moment, they’re friends;
In an instant, they’re enemies.
At a time for being delighted, they fall into a rage:
Ordinary beings are so difficult to please.

(11) Told what’s of benefit, they get enraged
And cause me to turn from what’s of benefit too.
But, if their words aren’t listened to,
They fall into a rage and go, then, to a worse rebirth state.

(12) They’re envious of superiors, competitive with equals,
Arrogant toward inferiors, conceited when praised,
And hateful when told what they don’t want to hear:
When is there benefit from infantile beings?

(13) If I associate with infantile people,
Then destructive behavior inevitably arises among infantile folk,
Such as praising myself and belittling others,
And prattling on about the pleasures of samsara.

(14) From entrusting myself to others in this way,
Nothing but loss comes about in the end,
For they’ll be, in fact, no-good for me
And I’ll be, in fact, no-good for them.

(15) So let me flee far away from infantile folk;
But if encountered, I’ll please them with pleasantries,
And without becoming overly familiar,
I’ll conduct myself nicely, merely as an ordinary person would.

Black Swan Revisited

The Black Swan theory (in Nassim Nicholas Taleb’s version) refers to a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations. The term black swan comes from the commonplace Western cultural assumption that all swans are white. In that context, a black swan was a metaphor for something that could not exist. The 17th Century discovery of black swans in Australia metamorphosed the term to connote that the perceived impossibility actually came to pass.

In risk management, we need to deal with black swans that have consequences. Further, a search in the literature in the philosophy and history of probability shows the depressing fact that large impact events are absent from discussions. Probabilities by themselves do not matter. They can be very small, but their results are not. What matters in life is the equation probability x consequence. This point may appear to be simple, but its consequences are not.

If small probability events carry large impacts, and these small probability events are more difficult to compute from past data itself, then our empirical knowledge about the potential contribution – or role – of rare events (probability x consequence) is inversely proportional to their impact.