China and the northern lights
By dkildahl on Jun 14, 2011
I saw the South China Sea, ran a couple miles along the beach. Warm breezes, little fishing boats at dawn, large cargo ships along the horizon. Spent the week on Haikou, a northern city on a island called Hainan.
I saw the most beautiful sunset I have ever seen. How long is the horizon? Shades of red that I did not know existed, layered on top of each other, all along the horizon.
I saw the Aurora Borealis - spooked me out completely for a few seconds. The flight back from Beijing took the polar route, and I was just too disturbed to sleep. Luckily, I was forced onto a window seat and was looking out for hours when I saw these lazily dancing rays of lights, weird shapes, ethereal colors, like ghosts. I thought I was hallucinating, perhaps too much Stephen King in my earlier days, and then I realized that we must be over the north pole. A quick check and indeed. What a sight. I wish I could have shared these moments with some others.
I saw the Grand Canyon earlier this year, was my fourth time there. Its beauty still astounds. The words that both, the GC and the Aurora conjure in my head - magnificent, epic, spectacular. The difference for me though, the GC invokes thoughts of an old lover, reunited. The timing in my life was such, late April this year. Sadly, the Aurora will always remind me of those beautiful days, forever gone. A sense of loneliness, emptiness.
I saw a spectacular sunrise, on the Arctic coast. Miles and miles of nothing but white, and the sunlight creeping up, glinting on ice. And then, sleep for a couple of hours, the body just seemed to fall into total exhaustion after the last week.
My team and I spent the week in Haikou, meeting the Financial Services sales teams from the APAC countries. We had about 100 people there, with representation from China, Taiwan, Korea, Japan, India, Hong Kong, Singapore, Vietnam, Thailand and Australia. Fantastic crowd, responsible for about USD0.5B worth of FS business to Sun. Most very optimistic, irrespective of the financial correction.
Most countries are modernizing at a rapid rate, and as predicted by yours truly, the smaller domestic dominants are viewing this correction as a way to take market share away from the globals. The Indian government is encouraging the local banks to merge, and create larger entities that can compete on a global level. The use of technologies is rampant, how do you expect to reach a 1 billion unbanked, underserved populus? Not by branches, not by ATMs, not by the internet. By mobile phones. Good that my team has been working on our mobile banking solution!
I come back well fed - tripe, pigs feet and shrimp that looked ready to leap out of the dishes they were served in, not withstanding - well educated and a tad tired. My team is enthused, we have a lot of work to do but the enthusiasm of the APAC sales teams have given us a boost of adrenalin.
And I did play some golf, how can one resist golfing in China? Played at theWest Coast Golf Club, where a LPGA tournament kicks off at the end of this month. Hopefully Michelle Wei will not be too upset by the divots I left behind! I am the one in the bright red shirt, with my good friend and irritatingly good golfer, Samad Ali.
Oh, and a quick recap of the markets thus far in October.
- Congress passes USD700B bailout package.
- Citi fights the now proposed Wells buyout of Wachovia.
- US loses 159K jobs in September, 2x that of August, most in the last 5 years
- Mitsubishi UFJ Financial Group Inc. mulls merging its securities unit, Mitsubishi UFJ Securities Co., with Morgan Stanley's Japanese securities unit.
Oct 4, 5
- The German government guarantees all private checking and savings accounts.
- European countries, one after another announce deposit guarantees. Iceland and Denmark issue guarantees on monday after Germany, Ireland, France, Greece and Sweden did the same on sunday.
- Germany's private financial sector promises to put up an additional E15B, in addition to the E35B already pledged, to help Hypo Real Estate bank, one of Germany's largest housing lenders.
- BNP Paribas takes control of the Belgian and Luxembourg businesses of troubled financial group Fortis in a complex rescue that makes Belgium the French bank's biggest shareholder. BNP Paribas buys a 75 percent stake in Fortis' Belgium and 66 percent of the bank's Luxembourg banking activities.
- China's second largest insurer Ping An Insurance reports a loss of about 15.7 billion yuan (USD2.3 billion) on its investment in Fortis. The loss is one of the largest suffered by a Chinese financial institution so far in the turmoil.
- Allianz SE invests USD2.5B in Hartford Financial, a large US based Property and Casualty, and Life insurance carrier, after Hartford announced a USD2B loss for Q3 (most from its investments in the Capital Markets industry).
- On a positive note for us end user consumers, Oil prices drop to USD88/barrel (high was USD147 in July 2008) on concerns that demand would slow globally.
- Bank of America reports a 70% drop in Q3 profits, again as a result of losses stemming from mortages and other debts.
- Saying Iceland was at risk of "national bankruptcy," Prime Minister Geir Haarde prepares to give regulators authority to take over the nation's ailing banks as a worsening financial crisis all but cuts off the island from the global financial system.
- U.S. Treasuries soar as worries about a global credit crisis and a slow economy slam stock markets around the world and sends investors scurrying for shelter in low-risk government debt. US dollar posts a sharp rise against other world currencies.
- Indonesia's markets are suspended after its key index falls 21% after the first hour of trading. They remain closed for the next 3 days.
- Citi backs out of the Wachovia deal. Interestingly, Wells Fargo came back to the table after the IRS introduced a regulatory clause that allowed Wachovia's losses to be taken as a tax write-off. This prevented the feds from buying out these losses, which is what Citi had negotiated (see my previous blog).
- Hong Kong's Hang Seng index hits 3 years low amidst global sell-off.
Oct 10 - Black Friday
- Credit Suisse shares plunge to five-year lows, falling faster than Swiss peers and the European banking sector as investors fret over the impact of the financial crisis on the bank's earnings.
- Dow Jones Industrial Average finishes the worst week in its 112 year history (18% decline). The 1018.77 point swing on Friday October 10th was the largest ever. 11.16B shares traded on the NYSE, the largest ever.
- While in China, I was watching Bloomberg TV and saw every single stock market get pummeled. Nekkei fell 9.6%, Singapore down 7.3%, HK down 7.2%, India down 7.1%, Australia down 8.8%.
- Yamato Life Insurance of Japan files for bankruptcy
- The Group-of-7 (G7) countries, which I believe is an anachronism in this century, gather to try and put together a coordinated response. As expected, no concrete steps are agreed upon.
- US, Germany and UK start to put plans together to nationalize the banking system - "King Henry" Paulson says he will use government power to buy assets - not just the bad ones! - and look to invest in banks. The British government may end up owing as much as 30% of 4 of the largest banks - RBS, Barclays, Lloyds TSB and HBOS. HSBC, Standard Chartered Bank and Abbey National refuse capital infusion from the government.
- The G20 meet, their jointly issued communique is here.
- The International Finance Corporation (IFC), the private-sector lending arm of the World Bank, plans to launch a $3 billion fund to capitalize small banks in poor countries that are battered by the financial crisis.
- The 15 countries that form the Euro zone announce 3 key measures - they agree to guarantee new bank debt issuance until the end of 2009, which should spur interbank lending; permission for governments to shore up banks by buying preferred shares; and a commitment to recapitalize any ``systemically'' critical banks in distress. How much will this cost the taxpayers? Unknown.
- Oil falls to USD77.70 a barrel.
- Morgan Stanley's woes intensify. The infusion of USD9B from Mitsubishi UFG is expected on tuesday (Oct 14), the worry is that MS might not survive that long. Antitrust regulations in the US require a 5 day waiting period.
- IMF says the worldwide economy is heading towards a recession, with global growth falling. The WHO says the rates of depression and suicide globally are expected to rise.
Solvency vs. Liquidity
Lets get this one straight - this is *not* a stock market crisis. The stocks are down because of negative sentiment all around. If I had liquidity - liquid cash I could move around - I would be buying right now, a lot of good stocks are being hammered by association.
Everyone keeps saying that this is a liquidity crisis. That the US government bailout is to inject liquidity into the financial system. Really? Is this really a liquidity problem? I disagree, to a certain extent. I think there is enough liquidity around, banks are actually hoarding cash. Data does seem to suggest that banks have added USD442.5B in new capital, while posting losses and writedowns of USD592B. So there is a liquidity problem however that is not the real issue here. The real issue is the fear that if I loan money to my neighbour, he might never pay it back, that he might be insolvent and even he might not know it! Why is that? Because if he is invested in the original CDO toxic assets, he has no clue what they are worth, and how solvent he actually is. So even though I have money to loan him, I will not do it. So even though there is liquidity, it not really liquid - its not moving around. Fears of solvency are preventing it.
The US government is looking to buy these insolvent assets, using a reverse auction scheme. If there is a large enough sample, reverse auctions work well. That is the hope here, and that seems to be the only way to put a $ amount on the worth of these assets.
I was with friends last night, a couple of whom are in the business. They claimed that the only way to get the credit markets - which are used to make loans - moving is by the governments guaranteeing these loans, especially the short term ones. Not unlike the FDIC insures your bank accounts. Note the entry for Oct 12 above!
The fun continues, and moves eastwards at a rapid rate.