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Money matters:
Graham Macdonald MBMG International Ltd.
A beginner’s guide to the credit crunch, part 2
They didn’t get their predictions right?
You could say that! What was contained inside these batches of
mortgages, generally referred to as Collateralized Debt Obligations (CDOs) was
not really what it said on the label. Sub-prime standards had become more
relaxed than ever before, Alt-A misrepresentations seem to have become more
widespread, lenders had offered increasingly unsuitable terms (interest rates
too low, deposits too low, property sector valuation expectations too high) and
above all the banking industry had become so sophisticated at mixing and
matching different parts of different mortgages together (so called ‘slicing and
dicing’) that the mortgage tranches being presented to the ratings agencies were
nothing like the old models upon which their data was based. Rather than
recognizing or admitting this, the agencies took their fees and applied what now
appear to be wholly inaccurate credit ratings to these CDOs. Because there is a
formula for calculating the price of these CDOs, the banks and other
institutions, such as pension funds, traded these with gay abandon at what now
appears to have been totally the wrong price. Equally these institutions held
large tranches of these CDOs on their own balance sheets.
The inflated prices of these assets inflated the asset side of the balance
sheets of these businesses, the industry booked excessive profits and paid its
leaders excessive bonuses. However, during 2007 it became apparent that the
value of many of these CDOs and related vehicles (such as structured products
built around CDOs in a way specifically designed to remove liabilities from
balance sheets) had been seriously overstated. The price at which these assets
were traded began to plummet until soon many of them could not actually be sold
at almost any price at all. The weakening of balance sheets made it more
difficult for these banks to borrow the ongoing funding that every bank needs to
survive.
As stated in a recent article, in February this year Dr. Marc Faber published a
list of 10 American institutions who could be insolvent depending on the real
value of their Tier 3 (in many cases read sub-prime/Alt-A, etc.) assets.
This list included (our subsequent updates added)
1. Bear Stearns: 313.97% - Bought out by J P Morgan
2. Morgan Stanley: 234.88% - Converting status into bank holding company rather
than stand-alone investment bank (like Bear Sterns and Lehman Brothers were),
has already taken write offs of $ 11.7 billion
3. Merrill Lynch: 225.4% - Bought out
4. Goldman Sachs: 191.56% - Converting status into bank holding company rather
than stand-alone investment bank and even following capital injection from
Warren Buffet is still rumoured to be looking for a suitor at any price.
5. Lehman: 171.18% - Filed Chapter 11, 15th September 2008, at the U.S.
Bankruptcy Court for the Southern District of New York
6. Fannie Mae: 161.48% - Bailed out in largest government bailout in US history
7. Northwest Air: 142.02% - Exited Chapter 11, May 2007
8. Citigroup: 125.06% - the big one! Arranged additional financing through
Middle Eastern Sovereign wealth funds but still vulnerable despite that, even
after Wachovia merger.
9. Prudential: 119.36% - should be able to work through unless there’s a major
widespread panic, which there will be!
10. Hartford: 108.52%. - Reeling from heavy exposure to Fannie Mae & Freddie Mac
Preferred stock
Other names like Washington Mutual, Freddie Mac, Indy Mac and AIG have also been
closed down or bailed out.
However, the problem is not just peculiar to the USA. In Europe, the Belgian,
Dutch and Luxemburg governments injected $16.4 billion to save Fortis; Iceland
has almost gone belly up and the government has had to step in the save the
banks and German financial institutions had to bail out Hypo Real Estate. In the
UK, Northern Rock and Bradford & Bingley both had to be nationalized while HBoS
(the country’s biggest lender) will have to be sold to Lloyds-TSB to ensure its
survival. In these cases this was less to do with direct exposure to sub-prime
American CDOs as the sheer inability to ensure adequate ongoing funding in a
global environment where no-one knows which banks are safe and which ones are
not. In such a situation, almost any lending institution is vulnerable although
some more than others.
How can banks suddenly be so vulnerable?
The UK banks perhaps highlight this issue the best. The real
difficulty for these banks was that to maximize profits they lend money from a
combination of:
- Their own cash (essentially profits that they have accrued over the years)
- Investors’ deposits
- Money that they borrow from other banks and sources.
During the last few years the proportions of these have changed hugely. As
credit has become both easier and in greater demand, banks could not suddenly
rustle up more cash of their own or even more deposits - during this last
property boom, savings rates fell significantly as investors wanted to hold less
cash since it was just earning single digit returns and to have more property
because it had been growing at well into double digits each year. Therefore,
major property lenders like Northern Rock, HBoS and B&B managed to punch above
the lending weight of their capital by borrowing massively from the money
markets.
Another change took place at this time whereby the availability and cost of
short term capital as opposed to long term capital meant that banks become
increasingly dependent on short term (less than 1 year) and medium term (1-5
year) funding even though typical mortgage terms were 15-30 years. This was OK
whenever the banks could keep borrowing the short and medium term money.
However, once replacement funding ceased to be available, they simply ran into a
situation where they had to pay back borrowing commitments that they simply did
not have the means to do with. Rumours surrounding NR, HBoS and B&B led to a
spate of withdrawals from these banks that made their cash positions worse and
hastened their inevitable foreclosures.
So are any more banks at risk?
Yes. Very much so. The US bail out plan is designed to provide
liquidity and confidence - the two things that the markets need globally to try
to buy the time to survive the current squeeze. However, it is far from clear
that this will work, although if it does the rewards will probably be
spectacular. We have published a separate MBMG Global Guide to Credit Risks
which looks at the situations facing different jurisdictions and containing
suggestions as to action depositors should consider.
What do you mean the rewards will be spectacular?
The banks that held sub-prime assets on their balance sheets
previously had them priced almost for perfection; i.e., assuming that there
would very little default. The current crisis is now pricing them for disaster -
assuming massive defaults and losses. If the truth turns out to be somewhere in
the middle then anyone buying these debts now will profit handsomely. Warren
Buffet has invested $5 billion into Goldman Sachs partly because of this.
What should I be doing to protect my financial situation and
to look to make the most of any opportunities that present themselves?
That is a very good question. For most of our clients, other than
reviewing their banking deposits in line with the MBMG Global Guide referred to
above, the answer is probably nothing different. Our managed currency portfolios
take exposure to every investable asset class and manage currency exposure and
risk. This combination of diversification; i.e., the ability to invest is almost
everything and anything along with active management; i.e., changing which
assets you actually do choose to invest in, means that there is always the
potential to make attractive, consistent returns, especially with active
currency management.
To be continued…
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The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a result of any
actions taken or not taken as a consequence of reading the above article. For
more information please contact Graham Macdonald on
[email protected]@mbmg-international.com.com
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Snap Shots: by Harry Flashman
For killer pix - try contrast
The secret of great photography is not just in correct
exposure and placement in the frame. You will get plenty of dull
photographs that are perfectly exposed and with the subject at the
intersection of thirds. You need to remember contrast!
 High
Key
Contrast in photographic composition is an effective means of directing
the viewer’s attention to the center of interest. When I speak of
contrast, I am referring to both tonal contrast, as in black-and-white
photography, and color contrast as it relates to color photography.
In B&W photography, contrast is the difference in subject tones from
white-to-gray-to-black or from the lightest tone to the darkest tone. In
color photography different colors create the contrast.
Tonal contrast is generally expressed as high contrast which has extreme
black and whites, or low contrast which has nothing but graduated greys.
The first photograph used this week is an example of very high contrast,
so much so that detail is blown out, but this is not designed to be a
portrait, this was designed to be a photograph that hits you between the
eyes.
High contrast gives very black blacks and very white whites, and usually
with nothing in between. Low contrast, on the other hand, still has
blacks and whites, but everything is predominantly grey, giving a flat
scene which still has tones, but in which highlights and shadows have
very little difference in densities. In other words, all tones within
the scene are very similar in appearance. However, remember that if you
are shooting in automatic mode, the camera will be set to deliver 18
percent grey, and not black.
 High
Contrast
Now you can wander around all day looking for a girl in a black swimsuit
on a white sandy beach, or you can manipulate a photograph to produce
that image. If you have an advanced digital camera, you can program it
to record black and white only and then go from there, but if not, no
fear, your software will allow you to do this post camera.
How do you do the manipulation? First convert the color shot to grey
scale, then play with the brightness and contrast, and you will very
quickly produce an effect like the one used here.
Now high contrast should not be confused with high key. A high key black
and white shot is one where the photo shows mostly light tones.
Conversely, a low key shot is one that has mainly dark tones. Low key
and high key pictures convey mood and atmosphere. Low key suggests
seriousness and mystery and is wonderful for Halloween photographs.
However, high key creates a feeling of delicacy and lightness. A
portrait of a blonde in white against a white background is an example
of high key.
Now to contrast in color. This is where an artist’s color wheel comes in
handy. By picking colors from opposite sides on the wheel, you
immediately have stunning contrasts. Blue and yellow is a classic
example. Another is bright red against a luminescent green background.
Cold colors (bluish) and warm colors (reddish) almost always contrast.
Cold colors recede, while warm colors advance. Light colors contrast
against dark ones, and a bold color offsets a weak color.
Colors with opposite characteristics contrast strongly when placed
together. Each color accentuates the qualities of the other and makes
the color images stand out dramatically. Color contrast is enhanced when
you create the contrast of detail against mass. An example is a single,
bright, yellow sunflower shot against a blue sky background.
The most important factor when shooting a scene or subject using
contrasting colors is that the two colors have to predominate. A bright
yellow sunflower in a mottled green background and a pale blue sky with
grey clouds does not have the impact of the yellow and blue.
Kill ‘em with contrast!
Modern Medicine:
by Dr. Iain Corness, Consultant
AAA - and it’s not your credit rating
AAA stands for Abdominal Aortic Aneurysm, and as I have often
pointed out, we doctors love acronyms. I am sure that the education bodies
have decreed that the medical course should contain three years of acronyms,
as well as another three years of clinical practice.
So what is an abdominal aortic aneurysm (AAA)? First off, what is the aorta?
The aorta is the main artery of the body, directly connected to the heart
and taking the vast majority of the blood from that important central pump
to the abdominal organs and the legs. This artery is around 2 cm in
diameter.
However, a situation can occur, whereby the artery begins to bulge and can
grow to four or five times the normal diameter. It is this swelling that is
called an ‘aneurysm’. Being of the Abdominal Aorta, then explains the AAA
description. An aorta is considered ‘aneurysmal’ when it grows more than 50
percent over its normal size. By the way, aneurysms may occur in any blood
vessel in the body, but the most common place is in the abdomen below the
renal arteries (the blood vessels that provide the blood to your kidneys).
Interestingly, aneurysms are four times more common in men than women and
occur most often after 55-60 years of age. Elderly males have yet another
aspect to monitor, as well as their prostates!
The danger of the AAA comes from the fact that this can burst, like an
over-inflated balloon, and the patient experiences a catastrophic internal
hemorrhage. This is generally fatal. Aneurysm rupture affects approximately
15,000 people per year making it the 13th leading cause of death in the US.
The incidence of aortic aneurysm increases every decade as the population
ages. Fortunately, early detection and diagnosis is increasingly possible as
more sophisticated medical screening methods become available.
So why does this aneurysm occur? Aneurysms are caused by a weakening or
damage in the wall of a blood vessel. There are many conditions known to
contribute to the weakening of the artery wall including atherosclerosis
(hardening of the arteries), cigarette smoking, high blood pressure and
inflammation or infection.
Atherosclerosis (hardening of the arteries) is the most common cause of
abdominal aortic aneurysms. This occurs when substances such as cholesterol,
minerals, and blood cells build up in the walls of the artery, and thus
damaging it. The muscular wall of the aorta weakens and with the pressure
inside the artery, it begins to bulge. High blood pressure may speed up the
weakening, but it is not the cause. Aneurysms also tend to run in families,
so there is the thought that genetics may play a role in who gets an
aneurysm. (When in doubt, blame your parents - for everything!)
There is a strong link between cigarette smoking and the occurrence of
aneurysms. Smokers die four times more often from ruptured aneurysms than
nonsmokers. Aneurysms in smokers also expand and weaken faster than those in
nonsmokers, making this the one hundred and twenty thousandth good reason to
give up cigarettes.
Unfortunately, until an AAA bursts, there are generally no symptoms to let
you know you have one of these ‘time bombs’ sitting in your belly. The
discovery is then usually during an annual physical, where it can be
palpated by the doctor, but by far more accurate is an ultrasound, which can
give exact dimensions, and thus progressive indication of how rapidly the
swelling is growing.
The answer to this is an operation to replace the swollen, weakened artery
with a suitable piece of highly expensive ‘garden hose’ of correct length
and diameter. This is a major operation, but once you have had an AAA
detected, there is no other way around the problem. There is also some work
being done on encasing the aorta to contain the swelling, but this is not
the usual method of ‘defusing’ an AAA.
You should be lining up for a routine health check every 12 months, after
you reach 40 years of age. When was your last one?
 Heart to Heart with Hillary
Dear Hillary,
I have a problem with my wife’s cooking. It’s not that she’s a bad cook or
anything. She does a mean sausage, egg and chips these days, and even has a go
at toad in the hole. So you think I should have no complaints. It’s not her
British cooking that’s the problem - it’s when her girlfriends come over and
they start cooking that Esarn stuff. The really, really, really bad smelling
stuff. Honestly Hillary, when I walk in the door of the house I get hit with it.
It’s so bad I come close to puking. She knows I hate the smell, but she does
this at least twice a week. It puts me right off my food as well. What should I
do? She’s a great woman, other than the Esarn cooking.
Laurie
Dear Laurie,
This is an easy one to fix, my Petal. You say you live in a house. All houses
have a back door, and Esarn cooking, to be really genuine should be cooked
outside. Most homes that foreigners live in have two kitchens - one indoors for
the sausage, egg and chips and the other outside for the Esarn, where the
pungent and the putrid smells just waft away with the afternoon’s breezes. The
one outside is called the “Thai kitchen” and does not get used for toad in the
hole, either.
Dear Hillary,
My friends tell me I’ve got no problems, but I am not sure they just want me to
lose my relationship. I am a little worried that my husband has been playing up
recently. He has been going to bars with his workmates after the office closes
and seems to be staying out longer and longer. I have told him he has to let me
know when he is coming home, as I have often got jobs for him to do around our
condo, and he has to have time to prepare the dinner for all of us (we have a
pet poodle). When I went through his pockets the other evening I found a
business card for a bar in one of the more seedy areas in town. Have I got a
real worry here or not, Hillary. Please let me know.
Waiting Wifey
Dear Waiting Wifey,
You sure do have a problem, Wifey my Petal, you surely do. If my partner were to
be telling me to come home and cook the dinner after I spent all day in the
office, then I’d even go to bars myself, just as retaliation. Time you learned
to cook and fend for yourself. I hope you and the poodle have some lovely
romantic candlelight dinners together. Just watch out that its coat doesn’t
singe. Have you thought about adopting a pet piranha as well? Wake up, Wifey.
Time for you to be looking at what you are doing, not what he is doing.
Dear Hillary,
Have you ever tried crossing the road here in Thailand? You take your life in
your hands as nobody slows or makes any effort at avoiding you. Three times this
week I have had to jump out of the way of those dreadful public taxi buses and I
feel this can do the image of Thailand no good at all. What do you think,
Hillary?
Pedestrian Pete
Dear Pedestrian Pete,
Have I tried crossing the road? What a ridiculous question! Of course I’ve tried
crossing the road. That does not mean to say that I have always been successful
though. Honestly, you men do amaze me at times! I agree that the sight of people
like you jumping ineptly out of the way of rampant taxi buses will do our image
no good at all. Perhaps you could try ballet lessons at the Chiang Mai Ballet
Academy so you could jump with elegance in a “pas de chat” maneuver (or perhaps
that should be a “pas de bus” number?). However, if you find that crossing the
road is totally impossible, then just take the arm of one of our old folk, and
then using them as a shield, force your way through the belching buses.
Dear Hillary,
I am coming over to your neck of the woods at Christmas and was wondering if you
could help me with accommodation? I want to keep enough money so that I can go
trekking and I want to ride an elephant. Is Malaysia very far away, as I would
like to try surfing? I only want to spend about seven quid a day for the place,
is this possible? I know it’s probably a funny question, but I’m serious.
Trekker Tom
Dear Trekker Tom,
Don’t worry, my little impecunious one, Hillary has had sillier questions than
yours over the years. When I first read your letter, I thought you were asking
to come and stay with me, and I was about to suggest that if you brought enough
bottles of bubbly, I might just be able to help you. However, it is probably
better for both of us if you just find a little pension for around 500 baht a
night. There’s plenty of them. No Malaysia’s not far away, but then neither is
Cambodia. Spend some of your quids on an atlas, that’s a good chap.
Let’s go to the movies:
by Mark Gernpy
Now playing in Pattaya
Tropic Thunder: US Comedy/ War – I have seen this, and I
heartily recommend the film, but only for those not easily shocked. You
might just have the best laughs you’ve had in years. Robert Downey, Jr.
gives another amazing performance, this time playing a black. It’s an
action comedy about a group of self-absorbed actors who set out to make
the biggest war film ever. After ballooning costs (and the out of
control egos of the pampered cast) threaten to shut down the movie, the
frustrated director refuses to stop shooting, leading his cast deep into
the jungles of Southeast Asia where they inadvertently encounter real
bad guys. Generally favorable reviews.
Beverly Hills Chihuahua: US Comedy/ Adventure/ Family – In this
Disney comedy, a pampered Beverly Hills Chihuahua finds herself
accidentally lost in the mean streets of Mexico. I thought this one
looked quite delightful, to gauge by the previews I saw, but reaction
seems to be very mixed, with people either loving it or hating it.
Overall, it comes out as mixed or average reviews.
Queens of Langkasuka: Thai Adventure/ Fantasy – Nonzee Nimibutr’s
200-million-baht historical action-fantasy, more than three years in the
making, has all the makings of a blockbuster – big stars, loads of
special effects, lavish costumes, and an exotic seaborne setting.
Max Payne: US Action/ Thriller – Starring Mark Wahlberg. Based on
the popular interactive video game, it’s the story of a maverick cop
determined to track down those responsible for the brutal murder of his
family. Basically for fans of the game and action movies; has some
striking and stylish visuals in a somber mood, which I really enjoyed
looking at, and an intense performance by Wahlberg. Generally negative
reviews.
Body of Lies: US Action/ Drama – Directed by Ridley Scott, with
Leonardo DiCaprio and Russell Crowe. I liked this very much: a spy movie
as dark as night and as ruthless and vile as Abu Ghraib. Smart and
tightly drawn; it has a throat-gripping urgency and some serious
insights. About a CIA operative who attempts to infiltrate the network
of a major terrorist leader operating out of Jordan. This film did not
have a very impressive opening weekend boxoffice in the US. It’s really
too bad. Moviegoers around the world seem to be allergic to matters
revolving around Iraq and the war on terror. Films like Rendition and
Redacted have foundered at the box office (and never even made it to
Pattaya), as have movies only tangentially linked to the conflict (like
The Kite Runner, set in a Taliban-controlled Afghanistan). It would be a
shame if such sentiments kept you from seeing this really quite
excellent, thinking-person’s action drama, which unapologetically raises
issues concerning terrorism and the fight to combat it. Rated R in the
US for strong violence including some torture, and for language
throughout. Mixed or average reviews.
City of Ember: US Adventure/Family/Fantasy – It has almost
everything one could want from a science fiction-based family film:
likeable characters, an imaginative setting, and a fast pace – plus a
subtly dark feel rarely seen in kids’ movies. But for me the fabulously
designed underground metropolis proved more involving than the teenagers
running through its streets. The story: For over 200 years the
crumbling, labyrinthine underground city of Ember has been run by a
generator. Now it is breaking down and no one knows how to repair it.
Ominous blackouts regularly plunge the city into darkness and supplies
are depleted. Because the people of Ember, forbidden to venture into the
above-ground world, have forgotten their past, they face extinction.
Mixed or average reviews.
Eagle Eye: US Action/ Mystery/ Thriller – Two strangers are
thrown together by mysterious phone calls from a woman they have never
met. Threatening their lives and their families, the phone calls push
the two into a series of increasingly dangerous situations. I found it
very disappointing. The script has the feel of something once
substantive, but which was poked, prodded, cut, and crimped until all
semblance of intelligence was wrung out of it. Mixed or average reviews.
Luang Pee Teng II: Thai Comedy – Bad boy becomes monk, meets
misadventures, makes merit. The first Luang Pee Teng was the top Thai
film at the box office in 2005; this second of the series has a new
star, Thai rapper, hip-hopper, and ex-skateboarder Joey Boy with a cast
filled out by the usual Thai TV comedians.
Scheduled for Oct 30
Saw V: US Action/ Crime/ Horror/ Mystery/ Thriller – Oh,
dear! Just in time for Halloween, I suppose. More of the same torture
and gore. Jigsaw (Tobin Bell) might be dead, but his traps live on in
this fifth “Saw” entry, which finds the series’ production designer
David Hackl at the helm for his debut directing stint. Rated R in the US
for sequences of grisly bloody violence and torture, language, and brief
nudity.
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