Thursday, December 6, 2012

Blame The Idiot Tiger Keeper

When Myron S. Scholes and Robert C. Merton, joint winners of the 1997 Nobel Memorial Prize in Economic Sciences for a "new method to determine the value of derivatives", came up with a formula to price the dollar value of risk, it was the equivalent of inventing the atomic bomb. Both started Long-Term Capital Management L.P. (LTCM) in 1994 to test their  absolute-return trading strategies combined with high financial leverage, and it blew up in their faces. 4 years later in 1998, LTCM lost US$4.6 billion in less than 4 months, requiring financial intervention by the U.S. Federal Reserve.

Their mathematics were used in the invention of collateralized debt obligations (CDOs), a variant of structured asset-backed security (ABS) collateralized by debt obligations including bonds and loans. IMF's former chief economist Raghuram Rajan warned that asset-backed securities and other derivatives spread risk and uncertainty more widely, rather than reduce risk through diversification as was the purported intention. We witnessed the contribution in the financial meltdown.

We don't know the full mathematics behind the Olam International rights issue, a complex structured deal involving bonds, warrants and shares. By one "tricky estimate", the warrants become valuable only if Olam shares trade above $1.575. Don't miss the line that says Olam shares continued to flounder, falling 5.31 percent to $1.515 yesterday.

And then there's the sequence of events behind the Temasek's show of support and confidence in the beleaguered company. According to chief executive Sunny Verghese, it was the company's banks that went to Temasek to propose the rights deal. Temasek then approached Olam. That was on Monday. The latest variant has it that it was Olam which had instructed one of its banks to go to Temasek to discuss the investment deal. So were the banks not on talking terms with Olam in the first place, or was Temasek not on talking terms? Asking for money is such a delicate subject, especially when the CEO claims he has more than $10 billion in liquidity.

Educated friends who lost money on the Lehman mini-bonds said they didn't understand the financial gobbledygook, it was the 5 percent promised returns that sucked them in. Warren Buffett's long-time partner, Berkshire vice chairman Charlie Munger, has choice words for lax or dysfunctional government regulations, comparing the relationship between banks and regulators to that between a tiger and a tiger keeper, "When the tiger gets out and starts creating damage, it's insane to blame the tiger, it's the idiot tiger keeper."

31 comments:

  1. Sinkies.
    We should all know how "caring" our financial regulators are.
    This has been double confirmed many times in recent years.
    We also know the excellent track record of TummySick Holdings with respect to what is considered prudent investments and market timing.

    If you lose money over this latest opportunity, you only have yourself to blame.

    ReplyDelete
    Replies
    1. Too complex for an electrical engineer to understand.Can only delegate and see report.

      Tummy Sick, no problem, CPF minimum sum and withdrawal age increase, HDB price increase,suck from GLCs via return to shareholders, raise 10-20 years bonds, etc.

      What can we do? Give 5-year notice? But then 60 % of us dont agree.

      Delete
    2. What if somebody within makes big bets using TummySick to steer share prices and gain massively while TummySick bears all losses? Will the 60% wake up!!?

      Delete
    3. I can understand why now capital gains are not taxed as it leaves no traces if any insider trading is done.

      Delete
    4. If you dont understand, how do you wake up? We will understand only if we dont have jobs or money to put food on the table, pay our large medical bills, become homeless when we cant catch up with our mortgage payment or lost our jobs to cheaper but no better FTs.

      We the daft sheep have thick hides and have a high threshold of pain.

      Delete
  2. Purpose of the massive issue is to test the availability of funding in the capital market. What a load of crap. As it turns out, the market is the Tiger Keeper, the backstop for the whole issue. The banks are there for show.

    One can be sure that in calculating the underwriting risk, that Tiger Keeper has factored in the possibility of ending up with the entire issue on his lap. With share price not lookin up, that is now a massive loss on paper. What is not so clear is the extent of its current bond holdings.

    What a zoo!

    faber

    ReplyDelete
  3. http://www.dailytelegraph.com.au/news/julia-gillard-the-end-of-the-world-is-coming/story-e6freuy9-1226531023530

    I think our PM should go on national tv and also announce the end of world so that workers don't have to give 14 days notice to strike anymore..better strike now than never, and Olam need not be saved because is all too late for Temasek to play white knight, and Jurong rig is small casualty because end of world could have been worse...and if you are a jurong residents, better go find out from your MP Tharman if you get a priority shelter seat in the huge underground cave that has been dug or are they just for MIWs and their oil rigs rich clients...oh, and everyone should go buy presents for the loved ones too.

    ReplyDelete
  4. the end statement is very good. very appropriate.

    ReplyDelete
  5. They need better caliber people to run Temasek. If it were my own money, I would have fired all the managers three years ago.

    ReplyDelete
    Replies
    1. Sorry, you can't fire the PM's wife.

      Delete
    2. If it is your own money, you will sober and clam up and not utter "I have no regrets"

      Delete
    3. Sorry, why would I hire her to manage MY money? Based on what?

      Delete
    4. The gist is not directed at you but as an add on to your comments, unless you have billions to burn, not hell banknotes,hor.

      Delete
  6. When is the hearing scheduled for the case between Olam and Muddy Waters?
    I'd like to get popcorn ready and watch the circus of Olam winning the suit while its share price sink further.

    ReplyDelete
    Replies
    1. Do you mean the hearing in the bankruptcy court? :)

      Delete
    2. It closed at S$1.45.... 6th Dec.
      Interesting.

      Delete
  7. Muddy Waters got its name from the Chinese idiom "浑水摸鱼". When water turns muddy, fish gets disoriented and becomes easy prey. Dysfunctional government regulations provide the right muddy water environment that even if you go in with both eyes open, you will still fall prey due to lack of clarity.

    ReplyDelete
  8. This doesn't look good. Someday, the bomb will explode to Temasek's face. Lets hope it happens around 2015 or 2016. On paper, it sounded like Olam has no problem getting funds (in this case, banks to underwrite a debt issuance). But of course there's "no problem". Because Temasek is the real underwriter here, since its given its word to soak up everything. And since the banks are in a "no lose" position, everyone jumps on board to be the "underwriter". And note that since the only objective is to sell everything, the banks have no interest to ensure borrowing cost is low. So the real sucker here is Temasek. Why the "mistake"? Because Temasek thinks with its ass, not with its head. It thinks that as a big institution, it can, so it will. The same kind of bravado that led it to invest far too early in Citibank, UBS etc. But in Olam's case, there's really no way to square the circle. The debt is just too high. The share price will keep dropping and its a matter of time before Temasek's folly becomes obvious.

    Its just like if the CPIB thinks that YOU are corrupt, YOU are corrupt. Never mind all those incriminating SMSes etc. Same kind of folly.

    ReplyDelete
    Replies
    1. In our business, such institutions are called SUCKERS. And it cannot come any bigger than this. If you accept this premise, all is clear. And this would become clearer very soon, not 2015/16.

      faber

      Delete
  9. "
    Its just like if the CPIB thinks that YOU are corrupt, YOU are corrupt. "

    In the first place, can CPIB please advise if a gov organization is corrupted if subject to political will manipulation ? Is corruption a universal word or a different meaning when apply to different party ? Fruit for thought.

    ReplyDelete
  10. What happened to the foreign talent tiger keeper at SGX? Silence? What happen to the scholars talent at the MAS? silence. Temashit is not the tiger keeper, it is a weasel in the same cage as the olam tiger; it was sold a 13% pow-chiat deal by the squids and whales and thought it was such a good deal. Temashit think that this issue is risk-free, because as bond holders, they have claims to Olam's assets even in bankruptcy. Only 1 advice: think again! Lehman's bondholders got back a few cents, the first claims went to ..... yes lehman's counterparties!! ie the squids and the whales. Yesterday I said Olam is in shot not because of Mr Block, Olam is in shiot because leaks of its soon expiring and deeply losing derivatives contracts have leaked/ And who are Olam's counterparties in these contracts? The innocent investment managers of Temashit will soon find out :) ..... (when Micahel Lewis writes his next novel .. hee hee)

    ReplyDelete
    Replies
    1. Are they going to rollover these contracts with the same counterparties? Or they have been unable to kick the can down the road this time round? Wonder if T knows that it is actually underwriting an extension of these contracts.

      faber

      Delete
  11. we are rich, we are rich but where is the money?

    ReplyDelete
    Replies
    1. Hey! Of course we are rich.
      Of course we can pay up to $1.2 billion for toilet paper?

      Delete
  12. So in our case, is it the PM's idiot wife that is gambling our public funds away ?

    ReplyDelete
  13. Question:
    Olam's Senior management hold a sizeable number of shares.
    Can we presume that they will be taking up their entire allotment of bonds?

    Fans of TummySick Investments want to know.

    ReplyDelete
    Replies
    1. Don't be surprised if T ends up with the entire issue.

      faber

      Delete
  14. More shit for Temashit and the Dowager. Analysts rate SMRT to sell.

    ReplyDelete
    Replies
    1. Oops, there goes the 17% annual return...

      Delete
  15. http://www.baldingsworld.com/2012/12/05/olam-temasek-and-singapore/

    Enough said..

    ReplyDelete
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