News of the finance

The restructuring’s terms

Last week Dubai World revealed the general terms of the $24 billion debt restructuring it said it was seeking last November.  They are:

1.  trade creditors. Small trade creditors will be paid in full.  Larger creditors will get 40% of the money they are owed in cash and the rest in a sukuk where ownership will be transferable–i.e., public trading will be allowed.

2.  secured creditors. Sukuk holders will be paid in full and on time.

3.  unsecured lenders. The nominal amount of the non sharia-compliant, unsecured loans from international banks will be paid in full.   But maturities will be extended and interest rates lowered.  Also, it sounds as if interest payments may be “in kind” rather than in cash.  In other words, creditors may get periodic IOUs redeemable in cash at the final bond maturity.  The modified bonds will now have an explicit sovereign guarantee.  Dubai’s intention is to get the money to redeem them from asset sales.  The guarantee appears to be a pledge that the government will make up the difference if sales don’t fetch hoped-for prices.

4.  the Dubai government. First of all, there’s the guarantee.  Dubai will also  convert its $8.9 billion in loans to Dubai World into equity and will inject another $1.5 billion in cash, as needed.

Is the restructuring “pragmatic”?

Western commentators have so far concentrated on the “pragmatic” nature of the restructuring.  They suggest that the better treatment of sukuk holders vs. the banks comes from the fact that many of the former are British or American hedge funds who were threatening to delay the restructuring through litigation in the UK.  Therefore, they, not the banks, had to be appeased.

It has also been remarked that trade creditors had to be repaid so that construction work could be restarted.  Partial payment in a tradable sukuk would have been an exercise in futility if Dubai had, at the same time, acted in a way that devalued sukuks in general.

I think this is true as far as it goes, but may miss the main point.

… or is it sharia-compliant?

Dubai is not an oil-rich country.  It has decided that its future lies in being a cultural and commercial interface between the Middle East and the rest of the world, a neutral site that caters to the needs of all sides and creates an atmosphere where ideas can be discussed and business deals arranged.  This is the same role that Hong Kong continues to play with regard to China.

Dubai has just experienced a tremendous property crash, much like Hong Kong did in 1994.  For Hong Kong, the rules of the game were very clear.   Beijing was happy that Western financial principles would apply.  That’s not so clear in Dubai’s case.

Two issues.

–Dubai has a mix of Islamic and non-Islamic, sharia-compliant and non sharia-compliant, Middle Eastern and rest-of-the-world creditors.  It has to satisfy both.

–In addition, as the first mega-blowup of sharia-compliant finance, and one closely associated with Dubai government policy,  the way Dubai handles this situation would doubtless act as a precedent for future resolution of sharia-compliant investment problems. And it could easily make or break Dubai’s reputation as a place to conduct business for sharia-compliant investors.

If the Dubai World case is to be a blueprint for future sharia-compliant debt restructurings, what are its salient features?

salient features

contrast a Chapter 11 filing…

Let’s start by considering what would have happened in a Dubai World Chapter 11 bankruptcy proceeding in the US.

–trade creditors would receive nothing

–equity holders would receive nothing

–bondholders and bank lenders would receive some portion, but not 100%, of what they were owed.  Who got what would be a subject for negotiation among the parties involved.  In the cases of GM and Chrysler, the federal government pressured bondholders to relinquish some of their legal rights in favor of employee pension and healthcare claims.

…with what Dubai is doing

In contrast, in the Dubai World case,

–everyone, except possibly the Dubai government, gets their principal back in full

–sharia gives no clear precedent for extending the maturity of a sukuk, other than that a creditor should give a debtor extra time to settle his debts, if needed.  Dubai presumably didn’t want to establish one by trying to change its sukuks’ terms.  The effect on Islamic banks holding Dubai sukuks of doing so, and the reaction of those banks–and their countries’ governments– would also be unpredictable.

–(secured) sukuk holders are getting better treatment than (unsecured) bank lenders.  One could argue that the collateral backing, or lack of it, was the deciding factor.  One could just as easily argue (and I think this is the right way to look at it) that sukuk holders got sharia-compliant treatment, bank lenders got Western-style treatment.

–trade creditors are in a much stronger position than they would be in Chapter 11.

consequences

I’m not sure that in the rush to provide financing to Dubai a few years ago, any creditor gave a lot of serious thought to the possibility of a restructuring.  The absence of a dispute resolution mechanism for sharia-compliant finance is one lesson that jumps out.

Another is that Dubai World, either by accident or design, built an important safety value into its financial structure by including relatively more flexible Western bank loans in the mix.   Their terms can be changed without violating any ethical norms.  I imagine that future large project financings in the Middle East will try to imitate this mixed structure.  One difference, though–Western banks, having seen this once, will want to charge more for their services.

I should preface this by saying I’m very happy with my bank.

Before and during this recession it has emerged with an enhanced reputation and ethical credentials – quite a feat given the state of the financial industry as a whole.

But the trials and tribulations of the industry are still having a knock-on impact.

That is why I’m seriously annoyed with other people’s banks and financial institutions. It probably explains why the usual irritation I feel towards TV advertising is now almost exclusively aimed at campaigns for banks, building societies and other financial services companies.

From the excruciating Halifax “radio station” ads, to the red Lego-style building blocks of Lewis Hamilton’s favourites Santander and not forgetting the odious CreditExpert campaign by Experian, my brow furrows whenever these adverts hit my TV screen.

Incidentally, putting aside the act that such a service is being advertised as a necessity, who exactly are those CreditExpert adverts aimed at? They fail to even have any quirk appeal.

I have become caught up in the new national sport of bank baiting and it is mainly because they spent so many years adopting a hateful “do as I say, don’t do as I do” approach. Yet even though they  collectively failed on a massive scale, they have still not been held to account.

So-called tough new regulations have failed to materialise and both the major political parties should be damned for their failure to take a harder line.

That is undoubtedly why Vince Cable, the Liberal Democrats’ Treasury spokesman, currently holds the title of “the nation’ favourite politician” – although, admittedly, there isn’t really much competition. Cable easily won this week’s chancellors’ debate as Alistair Darling again failed to shine and George Osborne did anther fine impression of an arrogant, petulant and generally clueless fool.

What is refreshing about Cable is that although he does say what people want to hear, he backs it up with plenty of substance and common sense solutions to the financial problems the country is facing. He may well yet get to test out these sensible and popular policies if we get a hung parliament, but the chances are we’ll still get landed with the same old hot air if Labour or the Conservatives secure a big enough majority.

So I’ll concentrate on getting riled whenever a bank, building society or financial services company advertises on my TV.

At the moment, I’m particularly annoyed with the NatWest Moneywise campaign and especially the bank employee who dispenses financial advice to a young mum and says: “That would look like a savings bond. That would look like a high interest current account.”

No, you idiot! It won’t look like anything, it will be something.

And that will look like an ill-conceived rant about banks.

It couldn’t have happened to a nicer country.

On March 18, with very little pomp and circumstance, president Obama passed the most recent stimulus act, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487), brilliantly goalseeked by the administration’s millionaire cronies to abbreviate as HIRE.

As it was merely the latest in an endless stream of acts destined to expand the government payroll to infinity, nobody cared about it, or actually read it. Because if anyone had read it, the act would have been known as the Capital Controls Act, as one of the lesser, but infinitely more important provisions on page 27, known as Offset Provisions – Subtitle A—Foreign Account Tax Compliance, institutes just that.

In brief, the Provision requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS. And should this provision be deemed illegal by a given foreign nation’s domestic laws (think Switzerland), well the foreign financial institution is required to close the account. It’s the law.

If you thought you could move your capital to the non-sequestration safety of non-US financial institutions, sorry you lose – the law now says so. Capital Controls in the U.S. are now here and are now fully enforced by the law.

For details of the provisions of the law, go here.

Banks continue to be reluctant to lend to small businesses. As a result, NPR reports (ht Ray), some small businesses are turning to a form of microlending. A case in point is Ryan Fochler, a pet care entrepreneur:

After being turned down by bank after bank, Fochler came across the Latino Economic Development Corporation, a nonprofit microlender based nearby in Washington, D.C.

Fochler is not Latino, but he was told that was OK. The LEDC works with all kinds of local businesses that have been turned down by traditional banks. Their goal is to help fledgling, independent businesses get on their feet.

They don’t operate exactly like microlenders in the developing world, some of which issue interest-free loans and let recipients repay whatever they can, whenever they can.

In contrast, American microlenders charge competitive interest rates, and the loans must be repaid on time. Defaulting on a microloan has the same consequences as defaulting on a bank loan.

The LEDC issues loans ranging from $500 to $50,000. Often in the past, those who came to the LEDC to apply for a microloan had little or no credit history.

But Rob Vickers, director of lending at the LEDC, says the profile of his average microloan applicant changed dramatically during the credit crisis.

“I was seeing clients that I couldn’t believe weren’t bankable coming in, and thinking, ‘Wow, this person has a credit score in the mid-700s, their business existed for more than two years, and yet, not only are they not able to obtain a bank loan, but they’re having their credit line slashed.’”

As noted, it isn’t exactly the same as the microlending made famous in developing economies. But it has some interesting similarities.

For more, read the transcript on which the NPR article is based.

President Obama, in a massive weasel-move, hitched a college funding bill onto the Healthcare bill that, unfortunately, passed recently. This bill removes many banks from the loaning process and makes it easier for many people to get, and pay off, their loans. Now let’s get to the problem. Being able to more easily pay off the loan on the side, more people going to college is a bad thing. Follow me into the rabbit-hole.

College isn’t for everyone. It involves a massive amount of hard-work and dedication that some people, or even most people, just aren’t able to supply. Most people drop out before even getting an Associates. Colleges have, as a result, started making it easier for people to earn degrees that don’t necessarily represent any actual skill or ability in order to rake in the cash (and get parents out of their hair). Human studies majors are a big part of this. The most popular college majors are Business majors, which is quickly followed by a number of non-science majors, all of which are dominated by women. Real science majors such as biology, astronomy, physics, chemistry and anatomy are attended in a mere 10% by women. When added to the fact that women now make up a majority on campuses, you can see that hard sciences are on the decline. The influx of college students that never previously existed is being absorbed by majors that tend not to advance beyond Masters degrees.

The vast increase in the college community that enters only to quickly graduate with a tissue degree has diluted the effectiveness of degrees as a whole. The market has been flooded with cheap slips of paper that have no bearing on real life and are being waved in the faces of employers. Journalism degrees,  Women’s-studies degrees, Management degrees, Marketing, Sociology: none of which actually teaches a pertinent skill or involves any real work in its study. Most, in fact, are nothing more than political rhetoric mashed together in order to fill quotas that keep businesses from being sued. Your anger-management consultants, etiquette coaches, and sensitivity trainers. None bring anything useful to society.

Due to the surplus of applicants and cheap degrees, prices were raised as an attempt by the colleges to bottleneck attendance and maintain their degrees’ affluence (this being a separate case to what I mentioned before. The desire to earn more money is a different entity entirely than the desire to remain a respectable institute). A report by the Illumina Foundation follows the increase of cost over the last 30 years for college attendance and the time it takes to pay off that cost. Colleges increasing their price for attendance can’t really be objected to. Those that can handle the college workload and atmosphere are likely to attain grants and scholarships, negating the increased cost as they are the people college is designed for; the rest of us are out of luck, and should be.

The government becoming the main issuer of college loans is going to drive up attendance prices and lower the wage median as a result. Monopolies are a terrible thing, and the government is a monopoly. Frankly, if the bill couldn’t survive on its own, it should have died. Personally, I’m getting bloody tired of legislators hammering together bills in order to force Senators to vote for it. Mr. President, shame.

(I know this is a shit post but it’s been a slow feckin’ week and I want to write something.)

Agent Will is Will Wertheim, a local realtor who posts the daily Vancouver RE statistics on his indispensable blog, agentwill.com. Recently he shared his current experiences in the market. Here’s Agent Will reporting from the trenches, 25 Mar 2010 8:45 am -

“Talking with mortgage brokers you’re seeing a lot of cash brought to the table. People buying those properties over a million dollars are plunking down 50%+ on them. Yes, there is a lot of rich foreign money coming in. I’m not selling those, though (not that I don’t want to). At the lower end we’re seeing buyers put down 10-15% on average and being pretty conservative with what they are buying. They may be approved for $500k but they’re looking at $400k or less as their max.

You look in the papers and media these past few months (at least what gets reposted on various sites in our community) and you see a lot of talk about prices, interest rates, and the future. I don’t understand that talk and I’ll tell you why. The Banks want to lend money. They only make money when they lend it. But they don’t just lend it to anyone… they only lend to those they deem credit worthy. They adjust the interest rate to reflect the risk. If the person is too risky then they won’t lend at all and the borrower has to go to a B or C lender which has far higher rates and will lend subsequently lower amounts of money. When media reports that “banks are worried” (and the reality for me is that I haven’t seen any worry) then I wonder if someone is saying a personal opinion or if the bank wants to reduce time spent on processing soon-to-be-rejected paperwork.

There’s also a lot of confusion about the HST and so many people think it applies to ALL housing. To every potential buyer I have had to explain (sometimes more than once) that it only will apply to wherever GST was applied (New housing over $525k, lawyers, realtor commissions paid by the seller, movers, materials for renos, contractors, strata management, utilities, etc.) and that means that purchasing a previously titled property will NOT pay HST.

[Results of a recent poll reported on in the G&M] jive exactly with what I’ve been seeing and saying here: “The survey showed six in 10 mortgage holders say they have taken advantage of current low rates to pay off more principal. It also revealed that 18 per cent of homeowners say they have made a lump sum payment on their mortgage and 16 per cent have doubled up payments to reduce the principal. ”

Again, 60% are paying off their mortgage faster, 18% have made lump sum payments, and 16% have doubled up payments. Question is if those 60% contain the 18% and the 16%, but still that is a very good number to see. And it only means that the other 40% have been going about their business and not taking advantage of the low interest rates. I wonder if maybe that is because the fixed rate still rules the vast majority of mortgages taken. Everyone I know on the variable is making extra payments or payments equal to what the fixed rate would be. Everyone.

Oh, and back to the “qualify for the higher fixed even if taking the variable”? I applaud that decision. But that’s just conservative lil’ ol Me. In my experience those who couldn’t really afford to buy are the least realistic, the biggest dreamers, and the greatest time wasters in my line of work. Yeah, they’re the ones watching the infomercials late at night.”

Is this where your savings are?

I have to say that it is one of my least favorite corporate practices – mountaintop removal or MTR. I just don’t see any sustainable benefit from it. And it’s pretty ugly too. So no surprise that people continue to target the industry for some activist scrutiny. 

Their latest target is JPMorgan Chase. Young activists are targeting JPMorgan Chase for underwriting “environmental Armageddon”. Harsh words but that’s in the nature of activism. Although I am interested in the MTR issue this specific campaign raises another long standing interest of mine – defining CSR and Sustainability for the banking and financial sector.

The recent economic meltdown raised serious questions on the role of banks and financial institutions and how they serve society. I’m not going to go there as it is well documented and an ongoing discussion. But I would like to propose we think of banks in a similar way that we look at other companies – via their value chain.

We ask of companies to be responsible by looking at the impact of their business operations as well as throughout their supply chain – upstream and downstream. It’s not good enough for a clothing company to only look at their own operations, they now have to have guidelines and systems in place to ensure their suppliers don’t commit human rights violations. Today we go even further by asking companies to also look at the environmental impact of their suppliers and to favor those who have a better environmental impact.

Of course we also ask companies to make sure that they take some level of responsibility for their products once they leave their stores. We expect computer manufacturers to offer some level of recycling and we want bottled beverage companies to take responsibility for the bottles they sold us. Heck, some cities and states help us (and the companies) to recycle these goods.

In short, we ask companies to make sure their products are manufactured in a responsible way and that they take responsibility even when they no longer ‘own’ the product.

Banking works the same way. We don’t want banks to make money through theft or money laundering and we don’t want them to fund terrorism or offer services to dictators or organized crime. That’s the easy part…

Why do we not expect them to take responsibility for the environmental impact of their services? Banks make investments that could threaten our future through global warming possible. Should they not be held responsible? Should we not measure the environmental impact of their money? Or rather, the environmental impact of their “investments”?

For me it goes beyond activism as we can then start measuring the impact of banks and financial services. We can make judgements on the values of these companies based on the impact they have – directly or indirectly. And the nature of CSR and Sustainability is to adapt to make it work for each industry. Maybe this is the way we can start figuring out the social and environmental impact of companies offering services – look at the impact they result in.

Maybe then we’ll stop funding everything in the name of profit. Or at least know what a responsible and sustainable bank looks like.

Do you know where your investment is going?

Citigroup’s shares are worth less than 10% of their peak value a few years ago. But far from a slide into obscurity, a steady stream of market-moving news has seen the bank’s stock account for an extraordinarily large share of trading volume at the New York Stock Exchange recently.

The trade in Citigroup briefly reached above 25% of all shares traded around midday yesterday, when interest was driven by the government’s announcement of its intention to sell its stake in the beleaguered lender. (At the parent site, a full analysis of the Treasury’s plan is available for subscribers.)

Today, Citigroup accounted for “only” 15% of trading in New York. It was still the most active stock by far, with the absolute volume of shares changing hands—nearly 620m—dwarfing second-place Bank of America, which saw a mere 143m shares traded.

Cross -selling is the holy grail of banks with diverse business or product limes, and big branch networks.

So DBS with an extensive  network of 81 branches and more than 900 ATMs in Singapore, including those belonging to POSB, want to do more cross-selling. The relatively newish CEO has spoken of the need to improve cross-selling and said DBS should offer a wider suite of products, including appropriate investment products, and sell more mortgages and unsecured loans.

DBS ’s customers can only hope management have learnt the lessons of HN5 Notes. DBS issued and arranged HN5 Notes, selling in 2007  a total of $103.7 million worth of HN5 to 1,083 “Treasures” and “Emerging Affluence” retail clients. (This refers to clients with more than $200,000 (for “Treasures”) and $80,000 (for “Emerging Affluence”) assets respectively under management by DBS although the “Emerging Affluence” definition also takes into consideration the client’s income and occupation.)

The collapse of Lehman Brothers made the notes worthless. DBS offered only  $7.6 million in compensation to 22.8% out of the 1000 odd investors. The compensation amounted to 7.3% of the amount that was invested.These sums were peanuty compared to the amounts that MayBank and Hong Leong Finance paid to minibonders.  Some investors are suing.

And in HK, DBS said in a statement in October last year that 4,700 investors would their entire investment of $241-million in the Constellation 253 notes. They have not been compensated en-mass like the Hongkie minibonders who got 60% of the principal back, with the possibility of more. Again some are suing.

Shareholders can only hope that next time DBS successful cross sells, affluent customers don’t get made poor .  True the notes made money for DBS, but at what cost to its reputation?

Up to you, chairman to make sure that when DBS cross-sells, customers tbenefit too. Or at least don’t get demoted from “Treasures” or “Emerging Affluence” to paupers or “the newly poor”.

I hope he remembers that the “holy grail”, though often sighted (tat’s the claim) has never been found. And that its search led to the demise of Camelot as Arthur’s knights focused on the search of the grail, rather than the defence of the realm. Must be a lesson somewhere in all of this for DBS, if not Citi.

Oh and I hope that a Singaporean chairman of an Asian bank realises the incongruity of following a European myth, which the “holy grail” is rather than an Asian truth. The holy grail is the cup that supposedly Jesus drank from at the “last supper”, before his execution on Good Friday.

First, a question with which few biogeographers bother. If a goodly chunk of their discipline is dedicated toward obfuscating the impact capitalism imposes on the natural world (discussed here and here), how can researchers interested in paying their bills study the crises that threaten the croupiers for whom, however distally, they ultimately work?

For those that study pathogens, the answer is a short one. Focus on viruses and bacteria as biomedical objects alone. The lil’ nasties’ spread and evolution can be tracked underneath the microscope or, at the public health level, across modeling’s spatial surfaces, but, by willful paramnesia, rarely across their geographies.

Otherwise, the problematic, already treacherous, goes south—methodologically, professionally—and, God forbid, we would be forced to study the social relationships that bind and separate people across real landscapes. The corrupt omission is eased with the trail of career pellets that accompany reductionism’s stilted research program, whatever the failures of the solutions that are proposed as a result.

Recent work on one virus illustrates there is another way.

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