Reflections of a Recycled Bureaucrat: Leadership Lessons from Hon Sui Sen

When I joined the service, my first permanent secretary was Hon Sui Sen. When he died in harness, in the mid-1980s, he was the Minister for Finance, and I was one of the permanent secretaries in that ministry. He was my boss for most of the intervening 25 years. He was, without doubt, the best reporting officer I had, a perception that most of my contemporaries who served under him shared. I have tried to apply his template of leadership and management in the many areas where I have worked, albeit with nowhere near as much success.

Nonetheless, I was fortunate to observe that template at close hand and to try to replicate it. I suppose that is how traditions in an institution are built, and a culture of good governance is fostered. Like most good things in life, the concept is deceptively simple, the application a matter of discipline. It is a distillation of principles and practices that have stood the test of time. But for success, the environment has to be wholesome.

The example must come from the top. If that vital element is missing, good deeds below decks may ameliorate the situation, but cannot make up for that critical deficiency. So, what was it in Hon Sui Sen’s leadership style that many of my contemporaries and I admired?

Without doubt, integrity—not just moral, but intellectual. Some will say, “What is so unusual about integrity?” Surely, leaders must have integrity to get to their lofty position. Integrity is more than keeping the hands off the till, although scary examples in recent times suggest that some leaders cannot even refrain from doing that. Consider Enron, WorldCom, Tyco, Parmalat.

Then, there are shades of grey—ethical issues that do not transgress any law except one’s sense of honour and straight dealing. But intellectual integrity goes further than that. It is a matter of quietly defending your position no matter how unpopular it may be to the institution.

A second outstanding quality of Mr Hon was his ability to delegate a large measure of authority to his subordinates, to leave them to run their show, and to avoid breathing down their necks. Of course, they were held accountable for their actions, and Mr Hon was no namby-pamby when it came to disciplining people. Yet, he would always support subordinates who made an honest error, and did not shield himself by assigning blame to others. He took the rap for anything that went wrong in his bailiwick.

You may well imagine that such behaviour comes from enormous self-confidence, without arrogance. It is the measure of a person’s generosity of spirit, modesty, the even tenor of his ways, and a forgiving nature. At the same time, while Mr Hon was prepared to defend his officers and ministry, he was respectful of authority, following the age-old principle of rendering unto Caesar that which is Caesar’s.

A third, key attribute was his skill in drawing out ideas from his officers through a heuristic approach, gently challenging assumptions, and urging thinking out of the box. He got the best out of his people.

That, in a nutshell, is what characterises an outstanding leader and manager. Textbooks, management consultants, workshops, seminars, and executive courses, all play a role in the effort to learn about management and leadership; or, if you like, in the context of present-day Singapore, creativity, innovation and entrepreneurship. But above all, keep the eyes and ears open. There are always many examples of outstanding leadership around.

The attributes of good leadership are eternal and universal. They stem from traditional norms embellished by sound management-practices that have evolved and been refined with experience.

The starting point is clarification of the mission, based on a realistic assessment of the environment, and courage in pushing the envelope. Strengthen the organisation, paying particular attention to how people are managed and endowed with authority. Encourage openness, do not fear dissent within limits, and allow those now-cherished attributes of creativity and innovation to flourish. Finally, define and know your customer, and respond to his legitimate needs.

When I look back on the institutions in which I have worked, I do not see any fundamental difference in the package of leadership and management skills that contributes to success. Of course, each institution is unique, with its own mission and culture. An adaptable leader can, within reason, certainly function in many environments. The civil service, or at least the administrative service, testifies to that dictum. The key to successful leadership lies in the individual, the experiences he has been exposed to, the environment. Management gurus, seminars, consultants, and so forth, may be useful tools. They cannot substitute for the real thing.

~ JY Pillay, Reflections of a Recycled Bureaucrat, April 2004

'Mispricing' could cost Deutsche Bank over $1m

‘Mispricing’ could cost Deutsche Bank over $1m
By Goh Eng Yeow, Markets Correspondent

DEUTSCHE Bank could lose more than $1 million after a bungle that underpriced a keenly-awaited new warrant being sold to Singapore investors.

The bank suspended trading of the warrant – issued on Hong Kong-listed China Railway – from 9am yesterday, and it might ask the Singapore Exchange (SGX) to cancel the mispriced trades.

Traders said, however, that should the SGX decline to do so, Deutsche Bank’s losses could well exceed $1 million.

Deutsche Bank announced yesterday afternoon that trading in the warrant would resume at 9am tomorrow.

The bank’s call warrant on China Railway started trading on Monday last week, two weeks after the stock started trading in Hong Kong. Holders can use one warrant to buy two China Railway shares at HK$9.50 each. The warrant expires in June this year.

One dealer said, based on China Railway’s close of HK$10.74 last Friday, the warrant should now be worth over $1, given its long period before maturity.

UNDERPRICED ISSUE
The new warrant was issued by Deutsche Bank at 78.7 cents apiece. It closed last Friday at 77 cents on a heavy volume of 10.65 million shares, after it gained 44.5 cents from Thursday’s close of 32.5 cents.

Deutsche Bank said trading in the warrant was suspended pending the resolution of error trades – ‘due to significant mispricing on its part in the warrant’.

Dealers contacted by The Straits Times believed the warrant attracted heavy trading last Friday, as traders became aware of the serious mispricing. ‘Deutsche Bank will be making a big loss if the bulk of the 10 million warrants was sold by the bank,’ said a remisier.

Still, many were amazed that errors in pricing the warrant went undetected for two days.

‘When Deutsche Bank announced that it was launching the new warrant, it clearly stated that the issue price was 78.7 cents,’ said a market observer.

Warning bells should have been sounded when the warrant was trading at only 32.5 cents last Thursday, even though China Railway’s share price was surging at the time, he added.

Given the two currencies involved, the error could have been caused by a Deutsche Bank trader entering the wrong conversion price into a pricing model.

Still, unless the SGX allows Deutsche Bank to cancel the error trades, there is nothing much the bank can do. ‘There is a consultation paper to give the SGX the power to adjust the transacted price of the trade, rather than cancel them outright, but this policy has not been implemented yet,’ a banker said.

Some traders are also wondering if it is advisable for a warrant issuer to suspend trading of a warrant simply because of error trades.

Deutsche Bank’s warrant mispricing follows error trades at other warrant issuers.

Societe Generale apparently had to pay millions three years ago when a wrong keystroke sent shares of and warrants on Total Access Communications into a tailspin. Last year, DMG & Partners stopped online warrants trades completely, after an Internet trader nearly lost $426,000 on a warrant sale.

Bonuses for top lawyers hit 9 months

More propaganda to stem the loss of talent. It does not say what proportion of lawyers get nine months. Usually 1 or 2.

Straits Times, 29 Dec
Bonuses for top lawyers hit 9 months

Business boom leads to larger payouts this year, with big firms paying 5-1/2 months and upwards
By K.C. Vijayan, Law Correspondent

BIG law firms, buoyed by the business boom, are handing out bigger year-end bonuses this year, with the best payouts breaching the nine-month mark.

The Straits Times understands that top performing lawyers in top-league firms like Drew & Napier and Rajah & Tann are getting high payouts across the board as rewards to recognise good work when the going is good.

Other firms like Harry Elias Partnership (HEP) and KhattarWong also awarded fatter bonuses of between 5-1/2 and eight months to its lawyers.

HEP’s managing partner Latiff Ibrahim said its top performers are in the ‘booming corporate, construction and litigation practices’.

KhattarWong’s Subhas Anandan said the bigger bonuses also spilled to the non-legal support staff, with the best receiving up to 5-1/2 months.

Lawyers generally attributed the fat bonus cheques to the strong economy, increased revenues and the need to pay high performers for ‘all the hard work and all the nights they have put in’.

WongPartnership, one of the biggest firms here, has had an ‘extremely good year’ in terms of the transactions and briefs received, said Mr Chou Sean You, a partner in the firm.

‘We expect to remunerate our lawyers well for all the hard work they have put in throughout the year,’ he said, adding that his firm traditionally declared its bonuses in January.

The upturn has benefited small and medium-size firms as well, especially in conveyancing work, said senior lawyer N. Sreenivasan.

‘Whether the property boom continues into the new year remains to be seen,’ he added.

He said that ‘with expected rental and salary increases next year, law firms will have to be more efficient, to reduce the impact of these increased overheads on the cost of legal services’.

Small firms which may not be able to match the fat bonuses of their bigger counterparts are unfazed, with some noting the hidden toll in work-life balance for those working in the top league.

Said Mr R. Kalamohan, who has run his own firm for more than 18 years: ‘I don’t know how many ‘handicaps’ I have compared to big firms, but when you look at the work-life balance, it is a different issue.

‘I am not constrained to burn the midnight oil every day unless there are exigencies. I do not think income is the main criterion for a good life.’

Give that man a Tiger.

Sailing a Pico in St Stephen's Beach


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St Stephen’s Beach is a very nice area near Stanley market. It is located within the same bay and if you stand at Stanley together with the tourists and look out to sea and to your left, you will see a boathouse and a patch of sand which is called St Stephen’s Beach. I say it is nice because it is tranquil and not packed with tourists or commercial interests, unlike Sentosa in Singapore. Indeed, the South side of Hong Kong is always beautiful, at any time of the year.

The sailing centre at St Stephen’s Beach is much better than the Sai Kung one, because it’s 5 times less crowded and the staff are more friendlier, i.e. have more patience with newbies like me. In addition, the boats are newer and I would say better than the RHKYC ones.

So last Sunday, I rented a Laser Pico. I had initially invited this Indonesian babe from Morgan Stanley to sail with me but it turns out she had other plans during that Christmas weekend (which is understandable because the concept of Indonesian and babe is a remote combination in the SAR). Since I had already paid for the boat, I went out alone. Now I had never sailed a Laser Pico before, but I did my best in rigging up (and some fellow sailors pointed out that I got one or two riggings wrong) before setting sail for Stanley Bay. After about 15 mins of happily cruising in the bay (wind was gusty but more tolerable than Deep Water Bay), I noticed that I was slower than all the other Picos in the bay and could not catch up with any of them no matter what I tried. So I thought to myself, wow, everyone here must be really good. I also made a mental note to get in a lot more practice, since I had already registered for a Laser racing clinic with the RHKYC in January and did not want to be last in class (you can tell I am a true blue Singaporean).

Well mental notes aside, after another few minutes, the front of my hull decided to go underwater. I was really shocked because in my limited sailing experience with Lasers, the front of a boat never gets dragged underwater like that. It was as though some invisible hand had just dragged the whole boat underwater! I panicked and thought that maybe there was some kind of fishing net or rope that got stuck on the front and caused the boat to tilt downwards. So after a few seconds it surfaced and all was fine. I crawled to the front to inspect the hull but no, no rope or anything like that. Then after a while it went underwater again. I knew by then that something was wrong with this boat and decided to immediately get back to base. However, even though I had formed the intention to cut losses at this stage, my Sunday adventure had just begun. The hull dipped a few more times under the choppy waves. And then it capsized.

As any beginner can tell you, the worst part of sailing is capsizing, not because you are announcing to everyone around you that you are a beginner, but because it takes a tremendous amount of energy and co-ordination to get the boat back upright. In addition, you would have immediately lost any race that you were in, and the inconsolably unfriendly concept of wind-chill would sit right next to you whether you like it or not.

So I slowly flipped it over, and it promptly replied to me by capsizing again. Strange, I wondered, why is it capsizing so easily and with no apparent fault in my sailing technique. And so after flipping it up I loosened the sails to prevent the wind from causing a capsize, but it still capsized. Then I lifted the rudder, it still capsized. Then I did all of the above and lay flat in the boat, still capsized. It consecutively capsized 15 times until I was running out of energy and it dawned on me that the hull of the boat was sinking deeper and deeper underwater each time I righted it up. It was like I was standing on a plastic iceberg. Water was rushing into the seating area as though a dam had somehow been broken and the water would just rush in. The boat just would not drain out the seawater. Gosh, I thought, this boat had to be leaking and I somehow managed to rent a boat with a leaky hull. Luckily I am close to shore otherwise I’ll be in big trouble. So I waved the rescue boat to come over to save me from this difficult situation. As it took time for them to come (they were busy rescuing other windsurfers who had capsized for reasons different from mine), rather than wasting my energy righting up the boat umpteen times, I allowed it to capsize and sat on the hull.

When the rescue boat was approaching my boat they asked what the problem was. I told them water was entering the boat, and I remember the pair of sunglasses smiling back:

“Did you remember to fasten the drain plug before you took the boat out?”

Care taken to maintain order at ZoukOut party

Care taken to maintain order at ZoukOut party
ST 27 Dec

IN RESPONSE to Mr Kwok Chee Chiu’s letter, ‘Stop diseases, ban parties like ZoukOut’ (ST, Dec 14).

From the nature of the letter, I assume Mr Kwok did not attend ZoukOut and the opinion may be based on The New Paper post-coverage and the translated version carried in the Chinese dailies. This is unfortunate as it was only The New Paper that took this angle out of more than 150 local and foreign publications that attended and covered the event.

This highlights the fact that that story was not an accurate overall reflection of the 23,000 attendees over the 12-hour period, and the pictures featured were of isolated incidents of consenting adults who may have been behaving more intimately than some would consider appropriate but, by no means, against the law. The article may have provoked strong emotions but we assure everyone that Zouk takes safety and managing a party within the legal parameters of the Singapore judicial system very seriously.

Although we respect Mr. Kwok’s point of view, we believe such a call for action, if implemented, would not benefit Singapore’s nightlife industry, tourism (more than 9,000 international guests attended), world democratic standing or economy. ZoukOut has become a national event over the last seven years and a fixture on the international dance and music calendar, considered by many to be one of the best in the world in terms of management, production and entertainment. As responsible organisers, our pre-emptive measures to maintain law and order and abide by licensing conditions included hiring more than 150 security personnel, plus another 40 uniformed police. In addition, ZoukOut is one of the few major events in Singapore where attendees must present photo ID stating they are above 18.

To call for a ban of events like ZoukOut, that promote tolerance, uniting people from all walks of life, regardless of nationality, as the solution to stopping the spread of diseases is in our view misguided and not the most productive way to address the issue. Echoing Forum respondent Dr Wong Jock Onn on Dec 18, it is through better education that people have a greater awareness of how sexually transmitted diseases are spread and ultimately make the right choices.

It was heartening to see all three respondents (Andre Oei, Owen Yeo and Anna Wong) in the ST YouthInk section on Dec 24, all under the age of 21, making concise, analytical and educated statements on whether such events should be banned. They leave us with confidence that the youth of Singapore are more knowledgable, responsible and informed than some may think.

Tracy Phillips
Marketing Manager
Zouk Management

Why Temasek should stop investing in investment banks

Dear Temasek shareholder

Did you know that, at the current state of play, several investment banks are technically insolvent the moment they disclose their true financial situation? And that the U.S. Federal Reserve, the European Central Bank (ECB) and the Bank for International Settlements (BIS) are trying their best to prevent such a blowup from occurring, including lending unlimited amounts of money to these banks? Are you aware that the international press is clueless or does not wish to write about what is really going on within the investment banks, much less how structured products are priced, valued and traded? Why do you think that no person, entity or government corporation in the U.S., Europe, or the Asia-Pacific (other than yourself) wanted to touch the shares in these investment banks with a ten foot pole?

The Reason

According to banking regulators, there are three kinds of assets in the world:

Level One assets are actively traded. You can know exactly how much they’re worth based simply on their price in the open market. Examples of Level One assets are common stock, bonds and funds.

Level Two assets are not actively traded. But they’re similar enough to actively traded assets to give you a reasonable estimate of their value. Examples of Level Two assets are preference shares, antiques and paintings.

Level Three assets are the most slippery. In addition to having no active market, they’re so unique, there’s no reliable way to estimate their true value. Instead, all that banks and regulators can do is guess. And the only tools they have to support their guesswork are unproven mathematical formulas. Examples of Level Three assets are structured products like credit derivatives, collateralised debt obligations (CDOs) and credit default swaps (CDS).

Here’s the key:

The money panic brewing today is driven largely by this third kind of asset — derivatives of questionable value that were artificially created by Wall Street brokers, officially sanctioned by Washington regulators, and falsely rated by Wall Street rating agencies.

These are the sinking assets that are hitting the big Wall Street firms … panicking investors all across the U.S. and Europe … even threatening some money market funds.

Some of Wall Street’s investment banks have more Level Three Assets than they have capital

Specifically, according to data compiled by the Financial Times:

Merrill Lynch has US$27.2 billion in Level Three assets, the equivalent of 70% of its stockholders’ equity. In other words, for each $1 of its capital, Merrill has 70 cents in assets of questionable and uncertain value.

Goldman Sachs has US$51 billion in Level Three assets, or 130% of its equity.

Bear Stearns has sunk its balance sheet even deeper into the Level Three asset hole, with US$20.2 billion, or 155% of its equity.

Lehman Brothers is in a similar situation — US$34.7 billion, or 160% of its equity. And …

Morgan Stanley tops them all with US$88.2 billion in Level Three assets, or 250% of its capital. That’s an unwieldy $2.50 cents in Level Three assets for each dollar of capital. It implies that, in the absence of new capital infusions, all it would take is a 40% loss — and Morgan Stanley’s capital could be 100% wiped out.

Bottom line: The huge Wall Street write-downs you’ve heard about to date — among the largest in history — could be just the tip of the iceberg.

All told, there are 968 U.S. commercial banks that invest in derivatives. But among them, 963 banks hold a meager 1.5% of all the interest-rate and credit derivatives in America.

In contrast, just five banks hold an amazingly large 98.5% of all the interest-rate and credit derivatives.

That is why no one in the entire world, other than Qatar, Saudi Arabia and Temasek wanted to become shareholders of UBS or Merrill Lynch! Why would international IBs have to turn up, cap in hand, at the doorsteps of little red dot sovereign funds?

Helping to cut through some of the uncertainty, the Office of the Comptroller of the Currency (OCC) evaluates the credit exposure of each U.S. bank holding derivatives. In other words, it asks the question:

Regardless of whether the bet is a win or a loss, what happens if the investor on the other side of the bet doesn’t pay up?

In normal times, such payment defaults are rare. So this is largely a theoretical question. But in a money panic, when markets can go haywire and available cash financing can suddenly dry up, a chain reaction of defaults could make this a very urgent and practical question. The answers, according to OCC data are that overall, including all types of derivatives:

Wachovia has credit exposure that’s equivalent to 89% of its capital. In other words, if all of its counterparties defaulted on their bets with Wachovia, nearly nine-tenths of its capital would be wiped out.

Bank of America is exposed to the tune of 99% of its capital. Assuming no capital infusions, it could be virtually wiped out in an extreme money panic scenario.

And at three banks, the panic would not have to be quite that extreme:

Citibank has 292% of its capital exposed to this kind of credit risk.

JPMorgan Chase has 387% of its capital exposed.

HSBC beats them all with an exposure of 388% of its capital. That means that even if its counterparties defaulted on just 26% of their bets, its capital could be wiped out.

Now, remember what I told you about Level Three assets — that they don’t have a regular place to trade.

Well, we could say something similar about the overwhelming majority of derivatives: They are not traded on regulated exchanges. Rather, they are traded over the counter, based on individually negotiated contracts.

In other words, if there’s a default, the parties have to work through it directly, one on one. Exchange authorities are not going to step in to help manage the crisis for them.

And currently, four of the five U.S. banks I named earlier trade over 90% of their derivatives in this way — outside of regulated exchanges.

At JPMorgan Chase, Bank of America, Citibank and HSBC, the derivatives they trade outside of exchanges represent 94%, 93%, 97% and 97% of their total, respectively. Only Wachovia has a somewhat lesser amount in this category — 77%.

What does this mean?

That the upcoming financial collapse will be the worst of its kind in human history, and will make 1929 “look like a walk in the park”.

Ah, but you say, ML and UBS are fine. They are immune. They are in a different class altogether. You have spoken to their finance departments, their auditors have produced interim reports. No problem at all.

Well, two points:

1. It is not in the interests of the vendor of an asset (and neither is it under any obligation) to inform you that it’s asset is worthless, or even worse, a liability (aka, caveat emptor).

2. If it’s too good to be true, it usually is.

Citigroup and Merrill face bigger writeoffs: Goldman Sachs

Thu Dec 27, 2007

NEW YORK (Reuters) – Citigroup Inc , Merrill Lynch & Co and JPMorgan Chase & Co may face larger fourth-quarter write-offs of fixed-income securities than previously expected, and Citigroup may have to slash its dividend 40 percent to preserve capital, according to a Goldman Sachs & Co analyst.

“It will be a couple of quarters before the current credit crisis is fully digested by the markets,” the analyst, William Tanona, wrote on Thursday.

The analyst issued his forecast after banks said they would write off tens of billions of dollars of debt this quarter, as rising mortgage and credit losses led investors to shun debt once thought safe but now deemed risky. Citigroup replaced Chief Executive Charles Prince with Vikram Pandit, while Merrill replaced Chief Executive Stanley O’Neal with John Thain.

Citigroup, Merrill and JPMorgan did not immediately return calls seeking comment.

Tanona, who rates Citigroup “sell,” said the largest U.S. bank may have to write off $18.7 billion this quarter for collateralized debt obligations. That’s up from his prior $11 billion forecast, and higher than Citigroup’s $8 billion to $11 billion forecast. Tanona boosted his forecast for the bank’s fourth-quarter loss to $1.33 per share from 52 cents.

The analyst also said Citigroup may in 2008 cut its 54-cents-per-share quarterly dividend, equal to a 7.1 percent yield, to help raise or preserve another $5 billion to $10 billion of capital. In November, Citigroup shored up capital by selling a $7.5 billion stake to Abu Dhabi’s government.

Tanona said Merrill, rated “neutral,” may write off $11.5 billion for CDOs this quarter, up from his prior $6 billion forecast, as Thain tries to clean up problems now rather than let them fester in 2008. The analyst expects a fourth-quarter loss of $7.00 per share, up from his prior $1.50 forecast.

Brad Hintz, a Sanford C. Bernstein & Co analyst, separately on Thursday predicted a $10 billion fourth-quarter write-off at Merrill, leading to a $5.10 per share quarterly loss.

Merrill on Monday announced a $6.2 billion capital infusion from Singapore’s government and money manager Davis Selected Advisers.

Tanona also doubled his forecast for fourth-quarter CDO losses at JPMorgan to $3.4 billion from $1.7 billion. He cut his forecast for fourth-quarter profit to 65 cents per share from $1.04. The analyst rates JPMorgan “neutral.”

In Wednesday trading, shares of Citigroup closed at $30.45, Merrill at $54.54, and JPMorgan at $44.94. The shares are down a respective 45 percent, 41 percent and 7 percent this year.

David Viniar

Man in the News: David Viniar
By Ben White in New York
Financial Times December 21 2007

Call up Goldman Sachs and ask to chat with David Viniar, chief financial officer, and this is the first response you will get: “David hates publicity and would probably rather amputate one of his arms than be interviewed.”

Ring up friends and colleagues and the answers will be similar. “I’ll talk to you,” said one former Goldman executive. “But you cannot possibly quote me. David would rather self-immolate” than be the focus of attention.

Yet there is no avoiding the limelight. In a nightmare year for most investment banks, Goldman just set another earnings record. While others tallied ever-bigger mortgage losses, Goldman made an early call to hedge its mortgage exposure and turned a tidy profit in the process. While no one man, woman or child was responsible for Goldman’s golden call (a fact the bank wants no one to forget), Mr Viniar was certainly a central player, along with Lloyd Blankfein, chief executive, and Gary Cohn and Jon Winkelried, co-presidents.

Mr Viniar was the one who convened the now famous meeting on December 14 2006, in which senior members of the mortgage trading desk, the risk department, the controller’s office and others gathered to discuss the US housing market. They decided that it was time to put hedging strategies in place to prepare for a housing downturn given information from the controller’s office and early losses showing up in Goldman’s mortgage book. The call to hedge was a collective one, but as one senior executive put it: “If it hadn’t been for [Mr Viniar], it probably wouldn’t have happened.”

The hedging worked in fits and starts and eventually produced a profit in the third quarter and left Goldman with a net short position against the mortgage market, a fact Mr Viniar took the rare step of acknowledging when the bank announced earnings.

This week, he returned to form and would not say what Goldman’s stance was on the housing market and added it was unlikely he would ever again acknowledge a proprietary Goldman position.

Mr Viniar, 51, is more than a traditional chief financial officer. He is also in charge of Goldman’s massive back office operations, an area referred to within the bank as “the federation”. (The phrase back office is never uttered at Goldman, presumably because it sounds pejorative.) At some banks being in charge of the back office would not be much to brag about. Not so at Goldman, which places enormous value on technical expertise and the power to crunch massive amounts of data.

John Thain, former Goldman president and now Merrill Lynch chief executive, rose to power through the federation after working as a banker. So did Mr Viniar after Mr Thain plucked him out of investment banking in 1992. So by virtue of what he oversees, Mr Viniar, is extraordinarily powerful for a CFO.

“He is the most influential CFO on Wall Street,” says one former Goldman executive who left recently. “That reflects not only his capabilities, which are enormous, but also Goldman’s treating the back office as an equal partner.”

The fact that other banks do not treat the back office in this way may also explain why they ran into so much more trouble with the mortgage crisis.

Like most Goldman executives, Mr Viniar operates almost entirely behind the scenes, save for his conversations with analysts, investors and reporters during earnings season.

Like Mr Blankfein, Mr Viniar was born in the Bronx. He studied economics at Union College in Schenectady, New York, where he played basketball, a sport he follows to this day with informal games near his home in New Jersey that often include other Goldman executives. He donated $3.2m to the college to build a basketball arena that bears his name. The passion and energy he invested in basketball, Mr Viniar insists, helped him get to the top of his career game. He told the student magazine: “I loved the team and my teammates. I was one of the first ones to show up at practice, the last to leave.”

In a rare personal interview three years ago, Mr Viniar told Institutional Investor magazine: “I’m a very slow, very small forward . . . But I can hit the 15ft jump shot.”

Mr Viniar went on to Harvard Business School and joined Goldman in 1980, where he began as a banker in the structured finance department before moving to head the Treasury department in 1992, the year he became a partner. He became co-chief financial officer in 1994 and chief financial officer just before Goldman went public in 1999.

Mr Viniar, who earned more than $30m last year, played a critical role in 1994 when Goldman was losing millions of dollars a day due to bad proprietary trading bets, an experience colleagues say shaped his approach to risk management. “When you go through a war like that it changes you,” said one former Goldman executive who was then in a senior position. “No one had any clue what was going on.”

The experience did not make Mr Viniar risk averse (Goldman is among the biggest risk takers on Wall Street), it just made him more dedicated to consistently monitoring positions and testing for the worst possible scenarios. Mr Viniar is known to say no often to traders who want to take big bets but also to be careful to ensure the bank is taking enough risk to weather downturns in other parts of the business.

He is known as a quiet, self-effacing family man who never missed a basketball game when the youngest of his four children was at high school. “He would always say we are in a marathon, not a sprint, so take vacations, take time with your family,” said someone who worked under Mr Viniar. “He really did the whole work-life balance thing.”

Of course, when he went to basketball games, he would work in the car on the way there and the way back home or to the office.

If there is criticism of Mr Viniar, it is one that also applies to Goldman as a whole and it is that he provides too little information to investors and analysts about how Goldman makes money in its proprietary trading operations, an area of the bank that some refer to as a black box. “They do a horrible job at investor relations. They refuse to take their investors in as partners,” said Dick Bove, analyst at Punk Ziegel in New York. He added that Mr Viniar “is strong-minded and has a clear sense of what he is willing to do and what he is not willing to do. He has some of that Goldman Sachs arrogance about him. But who cares? The job he has done as CFO is impeccable.”

Criticism

We need very strong ears to hear ourselves judged frankly, and because there are few who can endure frank criticism without being stung by it, those who venture to criticise us perform a remarkable act of friendship, for to undertake to wound or offend a man for his own good is to have a healthy love for him.

~ Michel de Montaigne (1533 – 1592)

Merrill Lynch to Get $6.2 Billion From Temasek, Davis

By Yalman Onaran and Chia-Peck Wong

Dec. 24 (Bloomberg) — Merrill Lynch & Co., reeling from the biggest loss in its 93-year history, will receive a cash infusion of as much as $6.2 billion from Singapore’s Temasek Holdings Pte. and Davis Selected Advisors LP.

Temasek will invest up to $5 billion for a less-than 10 percent stake and New York-based money manager Davis Advisors will buy $1.2 billion of Merrill stock, the world’s largest brokerage firm said in a statement today. Merrill fell 2.9 percent to $53.90 at 1 p.m. in New York Stock Exchange trading, after the firm said Temasek will pay $48 a share, almost 14 percent less than the Dec. 21 closing price.

Merrill Chief Executive Officer John Thain, who took over Dec. 1, joins Citigroup Inc., Morgan Stanley and UBS AG in tapping a sovereign wealth fund to shore up capital. An $8.4 billion writedown of mortgage investments and loans led the firm to post a $2.2 billion third-quarter loss and oust CEO Stan O’Neal in October. Merrill may report another $8.6 billion writedown next month, said David Trone, an analyst at Fox-Pitt Kelton Cochrane Caronia Waller.

“Capital raising is a positive” for Merrill, said Mark Batty, who helps manage about $77 billion including Merrill shares at PNC Wealth Management in Philadelphia. “Given the challenge of the hits they’ve received to the equity base, that’s a necessity.”

Merrill also agreed earlier today to sell its commercial finance business to General Electric Co.’s finance arm for an undisclosed price to free up $1.3 billion of capital.

Temasek will pay $4.4 billion for new Merrill shares at $48 apiece and has an option to buy an additional $600 million of stock by March 28, according to a term sheet posted on Merrill’s Web site. Davis Advisors, a closely held firm founded in 1969, will make a “long-term investment” of $1.2 billion, according to today’s statement. Davis will also pay $48 a share.

“The only negative for these capital infusions is that they’re selling their stock at the lows,” said Ben Wallace, who helps manage $850 million, including shares of Merrill, at Grimes & Co. in Westborough, Massachusetts. “When you need the money most, you have to accept the low price.”

Temasek’s stake won’t exceed 10 percent, Merrill said. Neither the sovereign fund nor Davis Advisors will play a role in Merrill governance, the company said.

“What we like so much about John Thain is that he has a proven track record of creating shareholder value,” said Kenneth Feinberg, who helps oversee more than $100 billion at Davis Advisors, including its Davis Financial Fund, which has declined 4.6 percent this year.

The firm had a 0.2 percent stake in Merrill at the end of September, according to a filing with the U.S. Securities and Exchange Commission. Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.

Thain, a former Goldman Sachs Group Inc. president, joined Merrill from NYSE Euronext, which he helped transform into a publicly traded company in 2006. By the time his departure as CEO was announced last month, NYSE shares had gained 35 percent since their first day of trading, twice as much as the Standard & Poor’s 500 Index in the same period.

Davis Advisors’ preference for financial stocks dates back to 1947, when Shelby Cullom Davis, the grandfather of the firm’s current chairman, invested $100,000 in insurers at the age of 38. By the time he died in 1994, the sum had grown to almost $900 million, according to John Rothchild’s book “The Davis Dynasty,” published in 2001 by John Wiley & Sons.

“Davis Funds are very credible,” said Ken Crawford, who helps oversee $900 million, including Merrill shares, at Argent Capital Management in St. Louis. “Their involvement signals that they believe the shares offer value and Thain is the right CEO going forward.”

Governments in the Middle East and Asia have agreed to invest more than $25 billion in Wall Street firms since banks began to disclose subprime losses. Merrill’s shares slumped 40 percent in NYSE trading this year, cutting its market value to $47.5 billion.

“Many take the view that the worst is probably over,” said Teng Ngiek Lian, who oversees $3 billion as head of Target Asset Management in Singapore. Merrill has “written down their books to a comfortable level and I’m sure Temasek would have done its homework.”

Set up in 1974 to run state assets, Temasek now manages a portfolio of more than $100 billion that includes controlling stakes in seven of Singapore’s 10 biggest publicly traded companies.

It holds 18 percent of London-based Standard Chartered Plc and 28 percent of DBS Group Holdings Ltd., Southeast Asia’s largest bank.

Temasek, owned by Singapore’s finance ministry, has reaped an 18 percent average annual return since its inception. It raised more than $800 million in the past month selling part of its stakes in China Construction Bank Corp. and Bank of China Ltd., the nation’s second- and third-largest lenders.

Citigroup, the biggest U.S. bank by assets, said Nov. 27 that Abu Dhabi would invest $7.5 billion in the New York-based company. State-controlled China Investment Corp. is buying almost 10 percent of Morgan Stanley for $5 billion after the second-biggest U.S. securities firm reported a loss of $9.4 billion from mortgage-related holdings on Dec. 19.

Government of Singapore Investment Corp., along with an unidentified Middle Eastern investor, agreed this month to inject 13 billion Swiss francs ($11.2 billion) into UBS, the biggest Swiss bank. The government fund manager, known as GIC, manages more than $100 billion of the nation’s foreign reserves.

“The valuation for banks seems very reasonable, which is why the sovereign wealth funds are keen,” Target Asset’s Teng said. “We, too, are more bullish about banks generally.”

Investments by sovereign funds may give some respite to banking stocks battered by at least $96 billion of credit- related related writedowns at the world’s biggest financial institutions.

“It just shores up confidence and will boost banking shares,” said Nicholas Yeo, who helps oversee more than $40 billion in Asian equities at Aberdeen Asset Management in Hong Kong. “Maybe the outlook is not so bad.”

Bear Stearns Cos., the securities firm that helped trigger the collapse of the subprime market, struck an agreement in October with China’s government-controlled Citic Securities Co. for a $1 billion cross-investment. The New York-based company announced a $1.9 billion writedown on mortgage losses Dec. 20, sending the firm to its first quarterly loss since it went public in 1985.

General Electric, based in Fairfield, Connecticut, said today it agreed to acquire about $10 billion of assets and $5 billion of commitments from Merrill Lynch Capital, the firm’s commercial finance business.

GE will buy Merrill units that specialize in equipment, franchise, energy and healthcare financing, according to the companies’ statement. The sale, for an undisclosed price, doesn’t include Merrill Capital’s real estate assets.

GE’s finance units, known collectively as GE Capital, have more than $612 billion in assets, with about $260 billion at its commercial finance division.

Kipling

“Him I love because he is devoid of fear, carries himself like a man, and has a heart as big as his boots. I fancy, too, he knows how to enjoy the blessings of life.”

~ Rudyard Kipling, in the December 12 1889 account for the Indian newspaper Pioneer, describing the kind of man who gets to California.

Mahatir on Malaysia's fighter plane purchase

“I want to tell you, we had wanted to buy Russian MiGs (fighter planes). You know Russians, they are very inferior. Somehow or other, it was wangled without my knowledge, that part of the money (only to be used to purchase MiGs was also used) to buy (the American made) F-18 (planes). The very good American aircraft costs twice as much as the MiGs. And then, we acquired eight F-18s and 18 MiGs. MiGs are sold to us without any condition. If we feel like bombing Singapore, for example, the Russians are not going to object. Any Singaporeans here? Or ex-Singaporeans?

But this great aircraft called F-18 which we bought from America, after buying it, after several months, I got to know that these aircraft cannot be used for any attacks against any country even if it is not Singapore, because the Americans sold the aircraft, but the source code is kept by them. So you cannot plan anything, you cannot fly them to carry out any bombing attacks against anybody but you have this wonderful aircraft which you can see at Lima (the Langkawi International Maritime and Aviation Exhibition). So, we spent this huge sum of money and they actually negotiated and agreed to these terms. So that’s why I say we are not very good at negotiating.”

Ministry of Sound parent sues Singapore franchise

The Straits Times
Nov 17, 2007

Ministry of Sound parent sues Singapore franchise
UK nightlife giant unhappy over local licensee’s running of its nightclub here
By Sujin Thomas

THE London-based parent company of the nightlife giant Ministry of Sound (MoS) has filed suit against its Singapore franchise, alleging a litany of shortfalls in the way it is run – from the kind of music played to its unstable website.

MoS filed suit in Britain’s High Court of Justice on Thursday, seeking damages and a court order to force its Singapore licensee LB Investments to fall in with its guidelines on running the club.

LB Investments is a subsidiary of Singapore mainboard-listed company LifeBrandz.

MoS has alleged, among many things, that LifeBrandz’s focus has been on promoting its stable of other nightclubs in Clarke Quay, such as The Clinic, Fashion Bar and Lunar.

Court papers also said the MoS Singapore website has ‘often been down or inaccessible’.

LB Investments is also said to have breached its contract in the areas of staff uniforms, music policy, door policy and the dismissal of key employees.

The bottom line: It had ‘failed to develop’ the club here ‘in a manner consistent with the reputation of the brand’.

LB Investments signed the contract in April 2005 for 15 years and threw a big bash when the 40,000-sq-ft party venue opened in December 2005.

The lawsuit caps an almost year-long exchange of letters and talks, which MoS said ‘was never taken seriously’.

LifeBrandz chief executive Clement Lee said: ‘We don’t think these breaches are of any substance. They have claimed certain things and I don’t think all of them are true.’

He added that his lawyers from Rajah & Tann would draft a reply to MoS.

Besides the alleged breaches of contract, MoS claims that it is owed $200,000 in royalties which were due in April.

But Mr Lee said he was due to pay only next month: ‘Their claim of our not paying them the money is ridiculous because the contract is not even due.’

MoS International’s president Michael Wilkings, who has visited the club here, told The Straits Times on the line from Dubai: ‘The breaches are material, substantial, continuing and unremedied. We are out of patience.’

He has been overseeing the nightclubs and bars under the MoS brand outside Britain for the past 11/2 years; MoS makes about $300 million worldwide every year and now has another franchise in Egypt.

He said: ‘We have been trying to deal with Clement Lee and his colleagues through most of this year, to try and make him understand MoS Singapore has to be operated at a standard that is acceptable to MoS.’

When asked how MoS was alerted to these breaches, he said that, besides customer feedback, periodic checks are made on the group’s clubs, some without the licensees’ knowledge.

‘We obviously don’t have a lot of confidence in their ability to operate the club,’ he said.

Rumours of an imminent closure have churned among partygoers since last month, when industry sources began speculating about unhappiness in Britain’s MoS about the way the club here was run.

But as far as Mr Lee is concerned, the party goes on, since the franchise has not been revoked.

He said: ‘There just seems to have been a difference in direction as to what is expected and what we’re delivering.’

ST
Sun 26 Nov 2007

Canned brands – a hit or miss?

A foreign club brand may entice a crowd at the start, but it’s not enough to keep them coming back

By Frankie Chee

MADE in Britain, established since 1991.

That’s what its tag would read if the Ministry of Sound (MoS) had one.

The nightspot’s London outlet’s reputation for thumping house beats spurred Singaporean clubbers to endure long queues to check out the action when MoS opened in Clarke Quay in 2005.

Listed home-grown company LifeBrandz, which brought in MoS, went on to introduce other established nightspot brands from overseas such as Cafe Del Mar, Fashion Bar and Barfly.

Mr Clement Lee, chief executive of LifeBrandz, says brand names ‘come with recognition’.

His take is that ‘it’s the success of the investment that counts. If I have to pay for something that will give me a better chance of making it, then why not?’

But LifeBrandz ran into some turbulence last week when reports said that it had been sued by MoS’ London-based parent company.

The latter cited a list of infringements – from the music genre offered to the uniform of its staff, and even its unstable website.

It is believed that LifeBrandz has a 15-year deal to use the MoS monicker.

‘We will be answering them through a lawyer, and will look at what we can do when we get more detailed information on their complaints,’ Mr Lee says.

To be sure, imported brand names are not a recent trend.

Over the last 15 years, names like Thailand’s trendy Q Bar and America’s posh Studebaker’s have popped up here, only to fold within five years because of poor business.

Similarly, France’s famous revue, Crazy Horse, trotted off after barely a year here, incurring a write-off of $5.7 million for franchisee Eng Wah Organisation.

No wonder then that industry sources note that a foreign import is no guarantee of surefire success.

Clubbers here are notoriously fickle – the now-deserted Mohamed Sultan Road bears witness to this, after a short three years of fame.

Sure, the nightlife industry may be worth more than $250 million a year but it is contested by many players, from Chinese KTV lounges to the opening of new hubs like Tanglin Village and the revamped Clarke Quay.

Customers are king and are not afraid to barhop.

And the initial gasps soon fizzle out, even for famous overseas brands, if they do not have any particularly strong proprietary edge.

Industry sources say that ultimately, it doesn’t matter who you are but what you can give to the customer.

‘In the end, it’s really the quality of people, music and exclusivity that counts for me,’ says Ms Brenda Kow, 30, a derivatives broker who parties at least once a week.

There are enough local success stories, such as the Harry’s chain, Zouk, the Emerald Hill Group, IndoChine and St James Power Station, to back the contention that home-grown players have the ability to cut it too.

Some, like Attica, IndoChine and Zouk, have expanded to places like Shanghai, Hamburg and Kuala Lumpur.

Pays to be home-grown

THE advantage of incubating homegrown brands is that you can save on paying licence fees and royalties to a franchisor.

‘In a very competitive environment, when revenue goes down, all these excessive costs can become a huge burden on the operator,’ says Mr Dennis Foo, chief executive of St James Power Station.

‘All the money paid to the franchisor after the few years of operation should have been in our own bank account, not theirs,’ he adds.

Upfront licensing fees can number in the millions while royalties can be as high as 10 per cent of the annual profits.

Such payments can become a drag on profits, especially if the customer numbers stagnate, or worse, drop.

Mr Lee admits that the attendance at MoS – which celebrates its second anniversary next month – has tapered compared to its first few months.

He is unable to say how much the numbers have dropped, saying only that it now draws 3,000 to 5,000 patrons on a good weekend night.

Despite the heavy financial obligations, the franchisees don’t get full control over the product.

They have to abide by stipulated management, music and operation standards, and changes have to gain the nod of the brandowner.

This means they will not have a free hand in making the crucial tweaks to give what the local folks want. And foreign operators may not fully understand the local situation and, hence, may not agree to changes in management or concepts.

Each market is different, a fact which local clubbing icon Zouk learnt when it opened its first overseas outlet in Kuala Lumpur in 2004.

Zouk’s marketing manager Tracy Phillips says: ‘It’s a different market over there; they have other kinds of influences that can affect the business, such as the age and operating-hour restrictions.’

Zouk KL’s director Cher Ng says: ‘We had to think about the local culture, like drinking habits and music trends.’

Such attention to detail has allowed it to attract between 5,000 and 6,000 clubbers during the four days it operates a week.

The freedom to innovate was key too for Attica when it exported its concept to Shanghai last year.

‘By owning our own brand, we can play with certain aspects of the club and adapt them to suit the local client base,’ says Mr Mikey M.S., director of Attica.

Another Singapore export is IndoChine which has stretched its wings to Hamburg, Kuala Lumpur, Phuket and New Delhi.

Local players agree that the onus is on the operator to decide which makes better business sense for him – to import a brand or groom his own.

Mr Lee says: ‘Surely, there is more freedom in operating your own brand but, ultimately, it’s the entertainment on offer that’s important, not just the logo.’

LifeBrandz has seen it fit too to invest in its own brandnames such as Lunar and The Clinic in Clarke Quay and Balcony Bar in The Heeren.

Mr Mohan Mulani, chief executive of Harry’s Holdings which operates 25 outlets, says that while ‘developing your own brand is tough and takes time, it’s rewarding”.

Mr Foo also prefers to do things his way.

‘If it’s your own brand, you own it. And if you build it up, it’s yours, not somebody else’s. So if you can build your own brand, why pay for someone else’s and do it for him?’

‘You can feel like you are on holiday’

‘You can feel like you are on holiday’
By Kitty Go
Financial Times

Published: December 8 2007 00:22 | Last updated: December 8 2007 09:54

Austrian Christian Rhomberg, 51, is the co-founder and director of the 97 Group, which he established in 1982. He now owns and manages 12 restaurants in Hong Kong and Shanghai. He is also executive director and founder of Kee, one of the city’s most exclusive dining clubs.

I came here with the foreign service as deputy Austrian trade commissioner. Hong Kong has been my home for 25 years, since I was 26 years old. I fell in love with the entrepreneurial spirit of the city and it inspired me to open my first restaurant, 1997, with some friends in 1982. I was young and I found the city very mysterious, sexy and exotic, especially coming from Austria, which was the complete opposite. The reason I wanted to leave Europe was because I wanted to go somewhere completely different, to an exciting and vibrant place that had a lot of growth potential.

When I was in my 20s, I met friends in nightclubs but I couldn’t find one I really liked, so I opened one myself. When I first arrived in Hong Kong choices for dining and drinking spots were confined to hotel outlets and a few pubs but not trendy western cafés or restaurants. My friends and I talked among ourselves and decided we should open one because that was what was obviously missing. My office was in the financial district yet, for an international city, at that time, entertainment was virtually non-existent.

In Hong Kong, to make a successful party you have to surprise people with a unique location. Five years ago, for the Kee anniversary, we rented a warehouse and an amphitheatre to host a party for 2,500 people. We had a circus and an Hermès fashion show amidst gardens, fountains and elaborately decorated stages. Ten years ago we found an old fashioned, sleepy amusement park, which doesn’t exist anymore, in Lai Chi Kok. There was a Chinese-themed garden with ponds, tea houses and a replica of the Great Wall. We didn’t tell our guests the location until the last minute and they came in costume. We flew in top impersonators of Michael Jackson, Madonna and Elton John from Las Vegas to perform.

Unfortunately Hong Kong has become very serious in business and people work too much. In my first 10 years of operation, we had a lot of business people coming in for leisurely lunches. These days, people rush back to the office. Business is very exciting, yet demanding, nowadays. I really wish the city would invest more into making it clean and green in terms of air and water quality. I don’t think it would require that much work – just a little more vision on the part of the government. Singapore and Sydney have shown us that there is a lot of potential [for cities] to be beautiful. Doing so will really make Hong Kong the “pearl of Asia” or the Monte Carlo of China. I think that would be really nice. In Monte Carlo you can still swim in the harbour between the yachts so why can’t we do that here?

I am from Innsbruck and grew up as a good skier and I am very much a sportsman. I still have family there and we have a beautiful home there. Normally I spend two to three months of the year in Europe and I am also working on something very different for that market. We have a beautiful property there with two lakes where we will build a transcultural health centre for preventive health and also a museum. Since I come from Austria, I like nature and, with a little effort, there are lots of walks in Hong Kong. Every morning I walk on the Blacks Link trail for an hour. On weekends I take my kids to [one of] the many country parks or we go out with friends on boats. You can really feel like you are on a tropical holiday in Hong Kong but you have to make a little bit of effort. Equally, the city is not a cultural desert; there is a lot of theatre, concerts and exhibitions where visual arts are expanding very quickly.

The quality of living in HK is expensive and then you also have to make an effort. Right now the market it very “brought through”, so there are not as many opportunities as in the early days. The fun in my business is to constantly reinvent ourselves and that makes it exciting. Kee is a sophisticated restaurant during the week and a trendy nightclub on weekends, which is a concept we chose on purpose. These days, there is every concept, every cuisine and entertainment you can imagine hosted in very interestingly designed venues.

You have to be up to date with global trends because the Hong Kong market is very demanding. In general, the western-oriented market has developed and become very sophisticated. In the beginning there were a handful of restaurants and bars similar to what we have in our group. These are operated both by foreigners and local Chinese who have travelled and wanted to do something they saw abroad.

Ideally, you should own your own property. When it comes to business it’s important to find the right location and, if you can’t own your own property, have a partnership with your landlord. Otherwise you will be exposed to exorbitant rent increases every three years.

Austria’s main business is tourism, yet there is very high taxation and bureaucracy that make it very difficult to make money there. Of course it’s also not as dense as Hong Kong. Innsbruck has 150,000 inhabitants and a third are students, so it is a good place for small cafés, bars and restaurants. And the Austrians love to eat and go out as much as the Chinese so this is not the problem. Having good staff is a problem in Europe. Europeans don’t want to be in the service profession so you have to work with a lot of foreigners but for a good restaurant to work you have to really work with local people.

The Other Derivative Problem

By now everyone can recite how crummy mortgages got packaged into asset-backed securities, and how, after the tastier tranches were sliced off, the meat by-products got sent along to the CDO sausage factory to be made palatable again. Now CDO investors are puking up all over town.

But there has been another derivatives party going on, where the bubbly is still flowing to a large extent. That, as many will relate, is the explosion in credit default swaps (CDS) that has appeared over just the past few years.

Structured finance has been around since the 1980s, but the CDS market is essentially brand new. The CDS was invented in the mid-1990s but it was minor until the last four years. Since 2003, this market has exploded in size by 10x, to a total notional amount of about $45 trillion. Yes, that’s trillion with a “t”. This market has never been tested in any kind of economic downturn, not even the most recent one of 2001-2002.

The credit-default swap is insurance against a credit accident. The seller of CDS receives a small monthly payment. If the insured bond fails to perform, the buyer of CDS receives a large one-time payment from the seller. At first, in the 1998-2002 period, this was mostly a way for holders of bonds to insure themselves. However, in recent years, the CDS market has become a way for CDS buyers to wager on credit deterioration, and a way for CDS sellers to act like banks.

Banks are a wonderful business, when everything is working right. They have returns on equity that can range from 15% to as much as 25%. These are the kinds of returns that get hedge funds, and their investors, interested. However, it is difficult to enter the banking business. You need offices, branches, depositors, employees, advertising, and so forth.

Banks traditionally profit on the interest rate difference, or “spread”, between the money they borrow, from depositors for example, and the money they lend, to corporations for example. They may lever up ten to one, supporting $100 billion of assets on $10 billion of equity. Thus, if their spread is 2%, and they are levered 10:1, their return on equity is a juicy 20% (actually more like 24% because of the return on the underlying capital).

The CDS contract allowed hedge funds to act like banks. The monthly premium on the CDS is a spread between the equivalent Treasury yield and the implied yield on the underlying bond. This can be considered payment for the risk of default, which the Treasury bond presumably does not have. Imagine you’re a fund with $1 billion in capital. You could try to borrow $9 billion – from whom? – and then buy $10 billion in bonds, and enjoy the spread, like a bank. However, that $9 billion would probably have a higher interest rate than a Treasury bond, because the fund also has risk. And, the maturity of the borrowed money would likely be very short, while the bond has a long maturity, introducing duration risk (this didn’t seem to scare the SIVs however).

The CDS solves these problems. You just sell CDS on $10 billion of bonds. This doesn’t cost any money. You don’t have to put up any collateral. You don’t have to hire a single bank teller or loan officer. You just call your broker, put in the order, and start getting your monthly payments, just as if you had borrowed $9 billion (at the same rate as the Federal government) and lent $10 billion.

And the fund manager who made this one single phone call? If we assume a 20% return, and $1 billion of capital, he collects about $60 million per year. Which explains the explosive growth of the CDS market in the last four years.

Ah, there’s something. You “call your broker.” Actually, you call your dealer. It’s not so easy to just find a buyer for your $10 billion notional of CDS. This is an over-the-counter market. This is where the big broker-dealers, like JP Morgan, Bank of America, and Citibank step in. Over-the-counter markets are lovely for dealers because of the fat spreads – there’s that magic word again that pricks up bankers’ ears – between bid and asked in this market. So, what happens is you sell the CDS to your dealer, such as JP Morgan? JP Morgan then sells CDS – of its own issuance – to its customers that want to buy CDS.

So, you see that JP Morgan now sits in the middle, like a banker should. JP Morgan is “long” the CDS you sold to them, and also “short” the CDS it sold to someone else, and is thus theoretically hedged from risk while collecting the spread between the prices it bought and sold at. This is a lot like bankers’ traditional business of pocketing the spread between the rate it borrows and the rate it lends.

So, it should be no surprise that the big broker/dealer banks (JP, BofA, Citi) account for 40% of the CDS outstanding. Hedge funds account for 32%. This reflects banks’ monkey-in-the-middle dealer strategy for CDS. The remainder is likely insurance companies, synthetic CDOs, CPDOs, and other weird fauna that will soon become extinct. (Thanks go to Ted Seides of ProtÈgÈ Partners for aggregating this information.)

Now, that 32% of CDS sold by hedge funds has a notional value of $14.5 trillion. This means that, if all those bonds underlying the CDS were a total loss, the funds would have to pay $14.5 trillion. Not very likely. However, if there were only a 5% loss – not so impossible these days – the CDS-selling hedge funds would still be on the hook for $725 billion. Hedge funds, all together, have estimated assets of around $2.5 trillion. However, only a small fraction of those are CDS-sellers. Let’s take a guess at 10%, or $250 billion of capital. (It’s probably less than that.) How do you pay a $725 billion bill with $250 billion of capital?

There’s an easy answer to that: you don’t. So, who pays? The banks, remember, are in the middle. If the CDS-selling hedge fund doesn’t pay up on its $725 billion, then the bank is unhedged regarding the CDS that it sold. In this case, the banks would be liable for $475 billion. This is known as counterparty risk.

That’s four-seventy-five billion. More than four times the entire capital of Citigroup – capital which has already come under pressure from losses elsewhere.

So, what happens if there is a CDS counterparty-risk event? Do the big banks go bankrupt? Probably not, although there would be much wailing and gnashing of teeth. Instead, they would probably get a nod and a wink from the government to simply ignore their own CDS obligations. The counterparty risk shifts to CDS-buyers.

The CDS buyers can take the hit, because they aren’t really out any money. They paid their monthly insurance bills, but never got a payout after the credit market car crash. So, in a sense, this drama would likely end in more of a whimper than a bang. In fact, everyone got off OK: the CDS-selling hedge fund manager made a killing in management fees, before the fund went bust; the bank made a killing in dealer income, before kissing their obligations goodbye, and the CDS-buying hedge fund manager raked in the fees on the enormous mark-to-market profits of his CDS portfolio (20% of the aforementioned $725 billion), before these profits were eventually shown to be uncollectible. A perfect Wall Street happy ending.

However, the kind of situation in which large banks ignore multi-hundred billions of legal obligations is very extreme. The last time something like that happened was in the early 1930s. At that time, they called it a “bank holiday,” which has a nice festive ring. The celebration included a devaluation of the dollar, the first permanent devaluation in U.S. history. At least president Roosevelt had the good sense to repeg the dollar to gold at $35/ounce, parity it maintained until 1971. Feel free to make your own guesses as to what Paulson and Bernanke might try.

Regards,

Nathan Lewis

Governments

Betting against gold is the same as betting on governments. He who bets on governments and government money bets against 6,000 years of recorded human history.

~Charles De Gaulle~

China says falling US dollar is a concern

12 December 2007 1700 hrs

XIANGHE, China: China said Wednesday that a weakening US dollar was a bigger global economic concern than the value of its own currency, as it rejected calls for the yuan to be allowed to rise very quickly.

Chen Deming, vice minister of commerce but slated soon to rise to head the ministry, argued that “excessively fast appreciation” of the Chinese currency, called the yuan or the RMB, would be in no one’s interest.

“In my capacity of vice minister of commerce, (the Chinese currency) is not the key issue. Currently my focus is more on the depreciation of the US dollar and its possible impact and repercussions for the world economy,” he said.

“I sincerely wish to see a scenario where the US economy is getting stronger and the US dollar is getting stronger.”

Chen was speaking at a briefing on the sidelines of the third Sino-US Strategic Economic Dialogue, a two-day event bringing together Cabinet-level officials from both sides at a venue an hour’s drive from Beijing.

A continued weakening of the US dollar has negative consequences such as a rise in the price of oil and the erosion in the wealth of countries that hold their assets in the US unit, Chen said.

US Treasury Secretary Henry Paulson said at the dialogue earlier Wednesday a more flexible Chinese currency would also benefit China, making it easier for the government to handle some of its own domestic economic issues.

Chen said China was not opposed to the yuan appreciating but warned that a too rapid rise would cause trouble in global markets.

“If we were to see excessively fast appreciation of the RMB, then it would create repercussions to the global economy and global financial markets. I don’t think it would do anyone any good,” he said.

“Remarks by some people around the world, including in the United States, that they favour appreciation that is as fast as possible, are not responsible.”

US critics have argued the yuan is kept at an artificially low level, making Chinese products cheaper abroad and giving Chinese exporters an unfair advantage.

Singapore to invest almost US$10b in Swiss bank UBS

I wonder whether GIC has thought about the full extent of the upcoming financial meltdown. UBS must have approached GIC because no one in the U.S. was prepared to be the single largest shareholder of UBS, which, according to the rumour mill, is technically bankrupt.

Singapore to invest almost US$10b in Swiss bank UBS
10 December 2007

SINGAPORE : The Singapore government’s investment arm announced Monday that it will inject almost US$10 billion into Swiss bank UBS.

The Government of Singapore Investment Corporation (GIC) said it would inject 11 billion Swiss francs (US$9.74 billion) into UBS, which on Monday announced further writedowns of around US$10 billion (6.8 billion euros) due to the US sub-prime mortgage crisis.

GIC said an undisclosed strategic investor in the Middle East is injecting an additional two billion francs into the bank.

“We made this significant investment in UBS because we have confidence in the long-term growth potential of the bank’s businesses, particularly its global wealth management business,” GIC’s deputy chairman and executive director, Dr Tony Tan Keng Yam, told a news conference.

GIC has committed to subscribe to 11 billion Swiss francs worth of mandatory convertible notes that will pay a coupon of nine percent until conversion into ordinary shares about two years after issuance, UBS said.
Depending on the conversion price, Dr Tan said GIC’s total shareholding “could amount to possibly around nine percent of UBS equity”.
GIC currently has less than 1.1 percent of the bank’s equity, he said.
“Nine percent is a large stake. I think we would be the single largest shareholder in UBS,” Dr Tan added.
GIC executives said the move marked a departure for the firm, whose practice has been to take relatively small public equity stakes for portfolio diversification.
“It is a departure from the norm in the sense that it is a larger than usual stake but we made the decision based on our confidence in the long-term prospects of UBS,” said Ng Kok Song, GIC managing director and group chief investment officer.

He and Dr Tan emphasised that GIC does not seek a say in management and said it would be premature to talk of GIC’s obtaining a seat on the UBS board. “We’ve got no desire to control the business of the bank but as a large investor, as a large long-term investor, we would like to work with the board of the bank, the chairman and the management to create maximum value for all shareholders,” Ng said.

UBS, Switzerland’s largest bank, in October reported its first quarterly loss in five years after its third-quarter results were hit in the financial crisis caused by the ailing US home loans market. On Monday the bank said in Zurich that it has revised the assumptions and inputs used to value US sub-prime mortgage related positions, resulting in further writedowns of around US$10 billion.

UBS said it expected to post a fourth-quarter loss and may record a net loss for the full year 2007.

“I don’t think that either UBS or any bank can say with absolute certainty that this is the last of the writedowns,” Tan said.
But he added UBS “have taken a very aggressive writedown” and acted before the market develops problems. “Our intention is to remain a responsible, supportive investor in UBS, hopefully for the long term,” Tan said.

He added that UBS approached GIC about a possible deal, and then “at their own initiative” contacted the other investors whom he declined to identify. GIC was established in 1981 to manage Singapore’s foreign reserves and now manages “well above” US$100 billion, making it one of the world’s largest fund management companies, its website says. “The group strives to achieve good long-term returns on assets under our management, to preserve and enhance Singapore’s reserves,” it adds.

Sim Kee Boon

ST Nov 11, 2007
A keen golfer with a mean swing

By Terrence Voon

MR SIM COULD NOT bear to stay away from golf for more than a week. THE man who built a world-class golf course from a plot of barren land had a mean golf swing himself.

Mr Sim Kee Boon, who died on Friday at the age of 78, was an ardent golfer who could not bear to stay away from his favourite pastime for more than a week, say his staff and friends.

Even when he headed the civil service and, subsequently, Keppel and the Civil Aviation Authority of Singapore, he still found time to tee off on weekends. One of his favourite putting grounds was the Garden Course at Tanah Merah Country Club (TMCC), which he founded in 1982 at the behest of then-prime minister Lee Kuan Yew.

His interest in the game first developed in the 1970s, when he joined the Ministry of Communications as permanent secretary.

‘He was one of the few perm secs who knew how to play golf,’ recalled TMCC captain Goh Hup Chor, who knew Mr Sim for over 20 years.

Mr Sim’s wife, Jeanette, also a keen golfer, is the club’s current lady captain.

According to his friends, Mr Sim’s handicap was as low as 11. Though it went up to 22 in the past few years, his technique remained as good as ever.

‘He was a short hitter, but he hit the ball straight. He hardly ever got into trouble on the fairways,’ said TMCC events director Edwin Khoo, who used to play a few rounds with his boss.

Mr Sim’s regular golf ‘kakis’ included former finance minister Richard Hu and TMCC president Tan Puay Huat.

‘Whoever won the game would pay for meals after that,’ said Mr Khoo.

Mr Sim played golf the way he ran TMCC as chairman – with precision and a keen attention to detail.

Said the club’s marketing manager, Ms Han May Leng: ‘He once came up to me and told me to fix the signages on the golf course because they were slightly tilted. He wanted them to be straight as an arrow. For him, everything had to be first-class.’

Mr Sim led by example, even picking up litter on the club grounds. He was often seen in a T-shirt or short-sleeved shirt – a dress code he also imposed on all male employees at the club.

‘His reasoning was that if you’re in a shirt and a tie, you would stay in the office and never get out to see how things really were at the club,’ said Ms Han.

Under his charge, TMCC membership rates rose from an initial $20,000 to $190,000 now. The Garden Course was named the No.1 course in Singapore for three years running by the United States-based Golf Digest magazine.

Though he demanded nothing but the best from his staff, Mr Sim also dished out compassion in equal measure. They recalled how he would often ask about their health and their families – a personal touch that made him a popular figure even outside the club.

Said Pan-West retail manager P.M. Samy: ‘Whenever he came to my shop, he would never fail to ask about my work, my family and my life.

‘He was a real gentleman – both humble and approachable – a man who had golf in his blood. His passing is a great loss to golf.’

S’poreans owe pioneer civil servants a big debt: PM Lee
Paying his respects, he says those like Sim Kee Boon saw the country change and made change happen
By Peh Shing Huei


SINGAPOREANS owe the pioneer generation of public servants such as Mr Sim Kee Boon an ‘enormous debt’, said Prime Minister Lee Hsien Loong yesterday.

‘There was a certain cut of the people who were of that generation,’ he said, after paying his respects to the former civil service head who died on Friday.

‘They grew up, they saw the country change, they made the change happen.’

They were ‘the last of the Mohicans’: a phrase which another former civil service head, the late Mr Howe Yoon Chong, had used to describe himself and Mr Sim, both of whom were among the founding group of top administrators.

‘In a way, that’s true,’ said Mr Lee. ‘That generation of public servants, we owe them an enormous debt.’ Mr Howe, who was also a Cabinet minister, died three months ago.

Mr Sim was 78 when he lost his 17-year-long battle with stomach cancer on Friday.

MM Lee’s tribute to Sim Kee Boon

MINISTER Mentor Lee Kuan Yew paid his respects to the late Sim Kee Boon last night. He released a condolence letter to Mrs Sim and a tribute to her husband.

Letter to Mrs Sim

After retiring from the civil service in 1984 – which included a five-year tenure as its head – he joined Keppel Corporation as its executive chairman and turned the loss-making outfit into one of Singapore’s leading conglomerates.

From 2000, he was also a director of Temasek Holdings.

Mr Lee, who was accompanied by his wife Ms Ho Ching, said Mr Sim was not just doing a job but was sharing his experience, wisdom and perceptiveness as well.

While paying tribute to Mr Sim’s work in building Changi Airport, Mr Lee also praised him for setting the tone of the civil service and leading it to achieve many things.

‘Not everything was done personally by himself. But the leader’s job is not to do everything by yourself. It’s your job to enable other people to work and to be productive and he achieved that,’ he said.

‘He’s not a flamboyant person. He doesn’t put himself on a high pedestal. He’s very easy to get along with, chatty, gregarious, but very sharp mind, very clear what needs to be done.

‘And if you are dealing with a touchy situation, not just in Singapore but with our neighbours or with some other countries, you can depend on him to understand what the issue is, what the other side is trying to achieve, how we can get what we need and maintain the relationship.’

Minister Mentor Lee Kuan Yew and several other Cabinet ministers, including Foreign Minister George Yeo and Defence Minister Teo Chee Hean, as well as former deputy prime minister Tony Tan, who is also SPH chairman, were among those at the wake yesterday.

The wake, which continues until Tuesday, is at Mr Sim’s home at 114 Watten Estate Road.

Steve Friedman

If you are not constantly working for constructive strategic change, then you are the steward of something which must erode. Competitors will leapfrog over you, and clients will find you less relevant. If that was your approach, why would you even want the job?

– Steve Friedman, Former CEO of Goldman Sachs

Some quotes

“A gentleman is not to be found in the office before 11 and never stays beyond four.”

– Alfred de Rothschild, quoted in The World’s Banker – The History of the House of Rothschild by Niall Ferguson

“You could be somewhere where the mail was delayed three weeks and do just fine investing.”

– Warren Buffett, quoted on Global-investor.com

Blue Ocean Strategy

The “ocean” refers to the market or industry. “Blue oceans” are untapped and uncontested markets, which provide little or no competition for anyone who would dive in, since the markets are not crowded. A “red ocean”, on the other hand, refers to a saturated market where there is fierce competition, already crowded with people (companies) providing the same type of services or producing the same kind of goods.

Their idea is to do something different from everyone else, producing something that no one has yet seen, thereby creating a “blue ocean”. An essential concept is that the innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market.

More info: http://www.blueoceanstrategy.com/downloads/bos_web.pdf