Archive for the ‘Investment Banking’ Category

Understanding Bankruptcy as the World Collapses Around You (1)

Saturday, June 9th, 2012

We have seen the dire economic consequences of excessive consumer, corporate, financial, and sovereign leverage of the past 5 years. Our global economy has been a punching bag for corporate greed, political incompetency, and poor central bank planning. From shadow banking and derivatives (“weapons of mass destruction” according to Mr. Buffet) in the United States to Greece’s fraudulent attempt to the enter the Eurozone, world markets have been whipsawed every year since 2007. I cannot help but feel deep remorse after witnessing multiple occasions of the VIX above 40, sovereign CDS making multi-year highs, and political uprising. Five years later, we have yet to learn that leverage is the primary cause of our pain.

Despite an Icelandic bankruptcy, 2 Greek bailouts, a Portuguese bailout, and Irish bailout, and a U.S. bank bailout, 35% of U.S. homes underwater, and 20%+ unemployment rates in certain Western nations, student loans have emerged as yet another bubble, the U.S. consumer savings rate remains below 4%, European banks are levered 26x on average, and countries continue to borrow at astronomical rates. Are we doomed to repeat our mistakes? Sadly, the answer seems to be yes.

Every 2 generations (70-80 years), individuals tend to forget the pain that their forefathers felt in a deep economic contraction. The Great Depression certainly did its job. Maybe we need a constant painful reminder to reign in our tendency to express “irrational exuberance?” Luckily, for learning purposes, a global debt deleveraging cycle is the most painful type of contraction. Hopefully, our children and grandchildren can learn from our mistakes.


Until then, I have started this series to explain the BANKRUPTCY process, specifically the U.S. Ch. 11 process, as I continue to do my part to clean up the riff-raff, the banksters, the incompetent politicians, and the corrupt corporate bureaucrats holding back true capitalism.

  • Bankruptcy is governed by federal statute (11 U.S.C., Section 101):
    • For the equitable distribution among creditors and shareholders of a debtor’s estate in accordance with either the principle of absolute priorities or the vote of bankruptcy majorities of holders of claims
    • To provide a reasonable opportunity, under Chapter 11, to effect a reorganization of business
    • For the opportunity to make a “fresh start” through, among other things, the discharge of debts

  • The goals of bankruptcy are:
    • To afford the greatest possibility of resolution for the estate as a whole, while maintaining the balance of power as between all creditors and the debtor as of the petition date
  • Debtor’s rights and protections include:
    • Automatic stay: an automatic injunction to halt action by creditors
    • Exclusivity to formulate/propose plan of reorganization
    • Continued control and management of the Company
    • Assumption/rejection of executor contracts and unexpired leases
    • Asset sale decisions
    • Avoidance actions
    • Discharge of claims
  • Secured creditor’s rights and protections:
    • Secured to extent of value of collateral
    • Limitations on debtor’s ability to use proceeds/profits of collateral (“cash collateral”)
    • Entitled to “adequate protection” for use of collateral or diminution thereof
    • Entitled to relief from automatic stay for cause shown
    • Entitled to interest and reasonable legal fees when collateral value exceeds debt
    • Entitled to be paid in full in cash or to retain lien to the extent of its allowed claim and receive deferred cash payments totaling at least the allowed amount of such claim

  • Unsecured creditors’ rights and protections include:
    • Majority voting controls
    • Improved and mandated disclosure by debtor
    • Committee representation at debtor’s expense
    • Ability to challenge business judgment of debtor
    • Absolute priority rule generally ensures payment before distribution to existing equity security holders
    • Ability to examine/challenge validity and enforceability of liens and, if debtor refuses, to obtain authority to bring fraudulent conveyance, preference and other actions
    • May continue to exercise corporate governance subject to limitations
    • Valuation as the fulcrum and equalizer of debt and creditor powers
  • Equity may also seek committee representation under certain circumstances and thereby obtain leverage similar to that of creditors’ committee

~Xavier, Leverage Academy Instructor

(All similar entries are in LA’s “Bankruptcy” folder on the right of the blog.)

MF Global Files for Bankruptcy and Plunges in First Day of OTC Trading

Wednesday, November 2nd, 2011

November 2, 2011 - MF Global (NYSE: MF) tumbled in its first day of over-the-counter trading after the futures brokerage filed for bankruptcy, prompting the New York Stock Exchange to delist the shares.  MF Global’s bankruptcy is the 8th largest bankruptcy of all time.

The stock, quoted under the symbol “MFGLQ,” declined 83 percent to 21 cents at 12:45 p.m. New York time on trading volume of 170.9 million shares. MF Global plunged 67 percent last week as the New York-based firm reported a record $191.6 million quarterly loss.

MF Global stock hasn’t changed hands during a regular trading session since Oct. 28. NYSE Euronext suspended the stock before the New York Stock Exchange opened on Oct. 31. MF Global filed the eighth-largest U.S. bankruptcy this week after failing to find a buyer over the weekend. The futures broker suffered a ratings downgrade and loss of customers after revealing it had investments related to $6.3 billion in European sovereign debt.

The night before MF posted its biggest quarterly loss, triggering a 48 percent stock plunge, Chairman and Chief Executive Officer Jon Corzine appeared at a steak dinner at New York’s Helmsley Park Lane Hotel for a speech to a group of bankers and traders.

“There was no sense at all that there was impending doom,” Kenneth Polcari, a managing director of ICAP Corporates, said of Corzine’s Oct. 24 address to the National Organization of Investment Professionals. “He gave a spectacular speech” about his decades at Goldman Sachs, life as a U.S. senator and New Jersey governor and his return to the private sector. “He’s had a full life, up until now.”

Corzine, 64, excused himself before the main course was served, saying he had to prepare for an earnings call the next day, said David Shields, vice chairman of New York-based brokerage Wellington Shields & Co. and a former chairman of the organization. The group seeks to foster “a favorable regulatory environment,” according to its website.

Timothy Mahoney, CEO of New York-based Bids Trading LP, said Corzine’s speech was “delightful.”

The next day, MF Global reported a $191.6 million net loss tied to its $6.3 billion wager on European sovereign debt. On Oct. 27, after the company’s bonds dropped to 63.75 cents on the dollar, Moody’s Investors Service and Fitch Ratings cut the firm to below investment grade, or junk. Unable to find a buyer, the company filed for bankruptcy on Oct. 31, the first major U.S. casualty of the European debt crisis.

‘Serve the Public’

At least two dozen U.S. lawmakers and regulators, including Representative Joe Barton, a Texas Republican, Carolyn Maloney, Democrat of New York, and former Securities and Exchange Commission Chairman Harvey Pitt have addressed the group, according to its website.

“There are many people in the group that do lobby and talk to regulators,” Shields said. “You talk to regulators, you talk to lawmakers and you try to get the points forward, things that will help the marketplace, that will serve the public.”

The group’s board includes head traders at firms such as Waddell & Reed Financial Inc., whose futures trade triggered the flash crash of May 6, 2010, according to a study by the SEC and the U.S. Commodity Futures Trading Commission.

Its members’ firms “trade approximately 70 percent of the institutional volume transacted daily in the New York and Nasdaq markets,” according to the website.

‘Difficult’ Day

The group’s current chairman, Dan Hannafin of Boston-based investment manager Wellington Management Co., declined to comment on the dinner. Corzine and Diana DeSocio, an MF Global spokeswoman, didn’t reply to an e-mailed request for comment.

Mahoney said he appreciated Corzine’s ability “to compartmentalize” and speak engagingly last week. Mahoney’s firm, Bids, runs a private trading venue known as a dark pool, and is a joint venture of banks including Goldman Sachs.

Before the speech, Moody’s cut MF Global’s credit ratings to the lowest investment grade. Polcari said there was one reference to Corzine’s “difficult” day.

While he was “cordial” and “positive,” the MF Global chief lacked his typical “sharp bounce,” Shields said. Corzine is “a member of the community,” and could be invited back after the bankruptcy, he said. “People go through bad times.”

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

Glencore Considering $19.5 Billion Bid for ENRC…

Monday, June 13th, 2011

You thought you had heard the last of Swiss based Glencore, the famed diversified commodities trading firm, with the news of its multi-billion dollar IPO.  Now rumors of a nearly $20 billion takeover?  Looks like Glencore’s management team is taking advantage of its new currency.  According to ENRC’s 3 founders, Alexander Mashkevitch, Patokh Chodiev and Alijan Ibragimov, who control 45% of the company, Glencore’s CEO recent discussed a possible merger.  ENRC, a Kazakhi miner, trades at a 15% discount to its peers, using a trailing P/E multiple, and is down almost 30% this year.

HISTORY OF GLENCORE

Glencore, headquartered in Baar, Switzerland, is the world’s largest commodities trading firm, which a 60% market share in the trading of zinc, and a 3% market share in the trading of crude oil.  The company is also the biggest shipper of coal in the world.  Glencore’s 485 traders own and run the company today.  It was formed by a management buyout of Marc Rich & Co AG in 1974.  Marc Rich, now a billionaire commodities trader at the time was charged with tax evasion and illegal business dealings, fleeing to Iran.  Years later, he was pardoned by President Bill Clinton.

In 1994, after failing to corner the zinc market, the company lost $172 million and nearly went bankrupt, forcing Rich to sell his share in the company back to the firm, which was renamed Glencore.  It was run by Rich’s inner circle, including Willy Strothotte and Ivan Glasenberg.

Over the years, Glencore has also been accused of illegal dealings with rogue states, including the USSR, Iran, and Iraq (under Hussein).  It has a history of breaking UN embargoes to profit from corrupt regimes.

The company owns stakes in Rusal, Chemoil, Xstrata, Minara Resources, PASAR, Evergreen Aluminum, Katanga Mining, Windalco, OAO Russneft, and many other firms.

INITIAL PUBLIC OFFERING

With its initial public offering weeks ago, Glencore was valued at about $60 billion, and raised about $10 billion.  Each of the 485 traders received average payouts of $100 million through the flotation.

I highly recommend reading, “Secret Lives of Marc Rich.”

Intralinks (IL) Falls 7.5%+ on No News, Possible Insider Trading Alert!

Tuesday, June 7th, 2011

After trading flat for days, Intralinks just lost over 7.5% on no news.  For those of you who aren’t familiar with the name, “IntraLinks, formerly TA Indigo Holding Corporation, is a global provider of software-as-a-service (SaaS) solutions for securely managing content, exchanging critical business information and collaborating within and among organizations.”  The company serves financial institutions host data rooms, etc.  Now the company performed well in 2010, missed guidance slightly this spring, and traded down 30%.  Over the past two weeks, it performed well enough to stay in a band around $20.00/share.

Through the last four down days, IL’s stock moved with the market, staying about $20, then gave up almost 10% of its value during the first half of the trading day.  The last time I saw a move like this on no relevant news was for Interoil Corp. in 2007, right before an insider trading investigation (which was eventually resolved, and the stock performed well):

InterOil has ‘undiscovered resources’ and calling a field ‘world class’ isn’t the same thing as actually knowing how much of a natural resource exists there. InterOil is capitalizing on the confusion between undiscovered resources (which are unknown quantities) and discovered resources. And the victims are the investors who falsely believe that InterOil has known quantities of natural gas, when in fact they do not.

Sam Antar, says InterOil’s stock is boosted by a manipulation scheme involving InterOil, John Thomas Financial, and Clarion Finanz AG:

I believe that InterOil with the assistance of Clarion Finanz concealed John Thomas Financial’s involvement in helping it raise $95 million through a private placement of convertible debt securities. Clarion Finanz acted as a buffer between InterOil and John Thomas Financial to help InterOil hide John Thomas Financial’s role in raising funds. Afterwards, InterOil filed false and misleading reports with the Securities and Exchange Commission in an effort to conceal John Thomas Financial’s role in helping the company raise $95 million in convertible debt.

Courtesy of Lawrence Delevigne

Bank Stocks Beware: Bernanke & Fed Support Increasing Capital Requirements

Tuesday, June 7th, 2011

U.S. bank indices fell 2% yesterday after fears that capital requirements would increase as much as 7%.  Bank of America (NYSE: BAC), fell below $11.00, the lowest since last year.  The discussion came about after the Basel Committee on Banking revealed how levered large financial institutions still were, and tried to reconcile levels with future recession risks.  A 7% equity capital raise for most banks would be catastrophic and dilute equity by 50%+, but a 3% raise seems manageable in a functioning economy.  The problem is that the U.S. economy is on life support, and that life support is called Quantitative Easing 2.  Once this support fades on June 30th, how will U.S. banks (at their already low valuations due to real estate risk and put backs) raise new equity capital?  A replay of 2009?  You be the judge.

According to Bloomberg, “The Fed supports a proposal at the Basel Committee on Banking Supervision that calls for a maximum capital surcharge of three percentage points on the largest global banks, according to a person familiar with the discussions.

International central bankers and supervisors meeting in Basel, Switzerland, have decided that banks need to hold more capital to avoid future taxpayer-funded bailouts. Financial stock indexes fell in Europe and the U.S. yesterday as traders interpreted June 3 remarks by Fed Governor Daniel Tarullo as leaving the door open to surcharges of as much as seven percentage points.

“A seven percentage-point surcharge for the largest banks would be a disaster,” said a senior analyst at Barclays Capital Inc. in NY. “It will certainly restrict lending and curb economic growth if true.”

Basel regulators agreed last year to raise the minimum common equity requirement for banks to 4.5 percent from 2 percent, with an added buffer of 2.5 percent for a total of 7 percent of assets weighted for risk.

Basel members are also proposing that so-called global systemically important financial institutions, or global SIFIs, hold an additional capital buffer equivalent to as much as three percentage points, a stance Fed officials haven’t opposed, the person said.

Bank Indexes Fall

The Bloomberg Europe Banks and Financial Services Index fell 1.45 percent yesterday, while the Standard & Poor’s 500 Index declined 1.1 percent. The KBW Bank Index, which tracks shares of Citigroup Inc., Bank of America Corp., Wells Fargo. and 21 other companies, fell 2.1 percent.

In a June 3 speech, Tarullo presented a theoretical calculation with the global SIFI buffer as high as seven percentage points.

“The enhanced capital requirement implied by this methodology can range between about 20% to more than 100% over the Basel III requirements, depending on choices made among plausible assumptions,” he said in the text of his remarks at the Peter G. Peterson Institute for International Economics in Washington.

In a question-and-answer period with C. Fred Bergsten, the Peterson Institute’s director, Tarullo agreed that the capital requirement, with the global SIFI buffer, could be 8.5 percent to 14 percent under this scenario. A common equity requirement of 10 percent is closer to what investors are assuming.

‘Across the Board’

“I think 3 percent is where everyone expected it to come out,” Simon Gleeson a financial services lawyer at Clifford Chance LLP, said in a telephone interview. “If it is 3 percent across the board then it will be interesting to see what happens to the smallest SIFI and the largest non-SIFI” on a competitive basis, he said.

U.S. Treasury Secretary Geithner, in remarks yesterday before the International Monetary Conference in Atlanta, said there is a “strong case” for a surcharge on the largest banks. Fed Chairman Bernanke is scheduled to discuss the U.S. economic outlook at the conference today.

“In the US, we will require the largest U.S. firms to hold an additional surcharge of common equity,” Geithner said. “We believe that a simple common equity surcharge should be applied internationally.”

Distort Markets

Financial industry executives are concerned that rising capital requirements will hurt the economy, which is already struggling with an unemployment rate stuck at around 9 percent.

Higher capital charges “will have ramifications on what people pay for credit, what banks hold on balance sheets,” JPMorgan Chase & Co. chairman and chief executive officer Jamie Dimon told investors at a June 2 Sanford C. Bernstein & Co. conference in New York.

The Global Financial Markets Association, a trade group whose board includes executives from GS and Morgan Stanley, said the surcharge may apply to 15 to 26 global banks, according to a May 25 memo sent to board members by chief executive officer Tim Ryan.

Dino Kos, managing director at New York research firm Hamiltonian Associates, said the discussion about new capital requirements comes at a time when banks face stiff headwinds. Credit demand is weak, and non-interest income from fees and trading is also under pressure.

Best Result

U.S. banks reported net income of $29 billion in the first quarter, the best result since the second quarter of 2007, before subprime mortgage defaults began to spread through the global financial system, according to the Federal Deposit Insurance Corp.’s Quarterly Banking Profile.

Still, the higher profits resulted from lower loan-loss provisions, the FDIC said. Net operating revenue fell 3.2 percent from a year earlier, only the second time in 27 years of data the industry reported a year-over-year decline in quarterly net operating revenue, the FDIC said.

“You can see why banks are howling,” said Kos, former executive vice president at the New York Fed. Higher capital charges come on top of proposals to tighten liquidity rules and limit interchange fees, while the “Volcker Rule” restricts trading activities. Taken together these imply lower returns on equity, he said.

“How can you justify current compensation levels if returns on equity are much lower than in the past?” Kos said.

Angry Bird Creator (Android) Raises $42mm in Seed Capital

Friday, March 11th, 2011

The latest phone app craze is the game “Angry Birds,” a popular pastime for android users across the globe.  It was developed by Finnish company, Rovio, and is played by over $40 million users per month. The game description on the Android app website reads: “Use the unique powers of the Angry Birds to destroy the greedy pigs’ fortresses! The survival of the Angry Birds is at stake. Dish out revenge on the greedy pigs who stole their eggs. Use the unique powers of each bird to destroy the pigs’ fortresses. Angry Birds features challenging physics-based game-play and hours of replay value. Each of the 225 levels requires logic, skill, and force to solve.”  Is this Company the next Zynga?  Who knows…I questioned Farmville when it came out as well.

Rovio, the tiny Finnish company behiind the iPhone, iPad and Android app Angry Birds, says it has raised $42 million from investors.

The game, consisting of angry birds shot at bewildered-looking pigs, is played by 40 million users every month, the Wall Street Journal said today. its fans, according to Daily Mail, include UK prime minister David Cameron, and Aussie leader Julia Gillard.

The funding round was co-led by venture capital firm Accel Partners, known for working with fast-growing companies such as Facebook. Also involved was the venture capital firm Atomico Ventures, created by Skype co-founder Niklas Zennstrom.

It is part of an “aggressive expansion mode” that Rovio’s co-founder and chief executive Mikael Hed said will make the company an “important entertainment media company for the future”.

Although he would not say what projects the company was working on, or how big of a share of the company was sold, Mr Hed reportedly told TV-industry website C21media.net that Rovio was looking at plans to make a broadcast cartoon version of Angry Birds.

“We will strengthen the position of Rovio and continue building our franchises in gaming, merchandising and broadcast media. Our next big thing is to execute superbly well on our strategy,” Mr Hed said in the article today.

Rovio has all ready been building on Angry Birds’ success with franchise products such as soft toys, which have sold more than 2 milion units.

Check out our intensive investment banking, private equity, and sales & trading courses! The discount code Merger34299 will be activated until April 15, 2011. Questions? Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.


HCA IPO Rises 4% on Day Dow Falls 228 Points

Friday, March 11th, 2011

HCA Holdings rose about 4.0% in its first day of trading.  This was very impressive, considering the Dow Jones Industrial Average fell 228 points in the same day (3/10/11).  The Dow fell in response to increasing jobless claims, a larger U.S. trade deficit, a larger Chinese trade deficit, and a lower GDP revision in Japan on 3/9/11.  Luckily, HCA was unaffected, which reflects both the strength of the company and its balance sheet.  HCA represents such a large share of the U.S. hospital industry, that institutional money managers probably could not refuse to purchase the security for their portfolios.  HCA’s public competitors include CYH – Community Health Systems and THC – Tenet Healthcare Corp.

According to Bloomberg, “HCA Holdings Inc., the largest publicly traded hospital chain in the U.S., rose 3.9 percent on its first day of trading after completing a record $3.79 billion, private equity-backed initial public offering.

Nashville, Tennessee-based HCA increased $1.15 to $31.15 at 1:16 p.m. in New York Stock Exchange composite trading, even as rising U.S. jobless claims drove the Dow Jones Industrial Index down 137 points. HCA’s offering sold more than 126 million shares at $30 each, the top of the proposed price range, the company said yesterday in a statement.

The IPO’s performance on a day when the market is falling reflects both the strength of HCA’s balance sheet and the momentum in favor of private equity-backed deals being brought to market, said Josef Schuster, founder of IPOX Schuster LLC in Chicago. There’s “plenty of liquidity available” for large U.S. deals like this one, he said.

“The deal underlines the level of confidence among large- cap managers about these type of private equity deals and the for-profit hospital space,” Schuster said in a telephone interview today. “Even with no dividend, investors like the level of cash with this company.”

For-profit hospitals will benefit as last year’s U.S. health overhaul forces consolidation and cost cutting that may leave non-profit competitors at a disadvantage, said Les Funtleyder, an analyst at Miller Tabak & Co. in New York. Investors are also expecting HCA to be added to stock-trading indexes and buying ahead of that, he said.

Blue-Chip Name

“People look at HCA as a blue-chip name in a space they want to get involved in,” said Mark Bronzo, who helps manage $25 billion at Security Global Investors in Irvington, New York, in a telephone interview today. “There just aren’t a lot of names to choose from there.”

For-profit hospital chains such as HCA depend more on commercial payers and less on government beneficiaries than do nonprofits, which have already seen their revenue reduced by government cutbacks, particularly in Medicaid.

HCA competitors among for-profit hospitals include Community Health Systems Inc. (CYH) in Franklin, Tennessee, and Tenet Healthcare Corp. (THC) in Dallas.

HCA’s offering exceeded the Feb. 10 initial stock sale by Houston-based energy-pipeline company Kinder Morgan Inc., which raised $3.3 billion. Private equity-backed IPOs in the U.S. have gotten a boost this year as the Standard & Poor’s 500 Index rallied to the highest level since June 2008, raising investors’ interest in companies acquired through debt-fueled takeovers.

‘Warmer Climate’

“We have a market that’s more willing to take on risk,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees $52.5 billion. “This is a much better, much warmer climate for this type of offering.”

The underwriters may exercise an overallotment option to buy as many as 18.9 million additional shares within 30 days, the company said. HCA sold 87.7 million shares, while existing investors sold 38.5 million.

Companies owned by private equity investors have accounted for 80 percent of the funds raised in U.S. IPOs since the beginning of the year, and the shares have gained 10 percent on average through yesterday, compared with 4.8 percent for companies not owned by leveraged buyout firms, Bloomberg data show.

KKR and Bain

KKR & Co., Bain Capital LLC, Bank of America Corp. (BAC) and other owners invested about $5 billion in equity in the $33 billion takeover of HCA. Including debt, it was the largest leveraged buyout at the time.

In acquiring HCA, KKR and Bain chose a company with steady cash flow and a business that’s protected to a large extent from swings in the economy. Cash flow from operations was $3.16 billion in the year before the 2006 buyout, according to data compiled by Bloomberg. As of Dec. 31, 2010, that number was little changed at $3.09 billion.

The company offered as many as 124 million shares at $27 to $30 apiece, according to a filing with the U.S. Securities and Exchange Commission. Charlotte, North Carolina-based Bank of America and Citigroup Inc. and JPMorgan Chase & Co. of New York led HCA’s sale. HCA said it will use the proceeds to repay debt.”

The following links will take you to previous articles we wrote on HCA:

http://leverageacademy.com/blog/2010/04/11/hca-could-have-3-billion-ipo-4-years-after-kkr-bain-buyout/

http://leverageacademy.com/blog/2011/03/04/2310/ – KKR & Bain to IPO HCA at $30/share

Check out our intensive investment banking, private equity, and sales & trading courses! The discount code Merger34299 will be activated until April 15, 2011. Questions? Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.


Deutsche Bank Discriminates Against Indian Rainmaker

Thursday, March 10th, 2011

It is March 10, 2011, and today I read that a German bank is discriminating against a top banker, a “rainmaker,” because he is Indian.  Anshu Jain is a 48 year old head of investment banking at Deutsche Bank and has generated hundreds of millions of Euros in fees for the bank since 1995.

Anshu was born in 1963 in the humble town of Jaipur, India and later studied economics at Shri Ram College of Commerce at Delhi University.  He earned a bachelor’s degree with honors in 1983 and then pursued a Masters in Finance at UMASS Amherst.  He then started as an analyst in derivatives research at Kidder Peabody (now UBS), from 1985 to 1988.  Anshu joined Merrill lynch in 1989, where he started the first hedge fund coverage group.

By 1995, Anshu joined Deutsche’s markets business and stared a unit focusing on hedge funds and institutional derivatives, later becoming the head of fixed income sales and trading and global head of derivatives and emerging markets.  In 2002, he joined the Deutsche Bank Group Executive Committee and became the head of Global markets and joint head of the Corporate & Investment Bank in 2004.  Anshu’s segment of Deutsche Bank’s business generates 80% of the Company’s revenues, and he still may be passed over for CEO.

Mr. Jain has been in the media under speculation that he could succeed Josef Ackerman, but the Company’s Board of Directors won’t have it.  Key members of the bank’s supervisory board are not in favor of an Indian born banker at the helm.  They want to see the bank under more “traditional” leadership.  The bank also wants to diversify revenues away from the profitable investment banking segment.  Is this just an excuse to pass over Mr. Jain?

The next CEO of the 141 year old bank needs a 2/3 majority vote and approval by the 20 member advisory board.  The board has 10 German labor representatives and 10 shareholder representatives.

According to Reuters, “In a written statement Deutsche Bank said selecting the CEO is a task which the “supervisory board is pursuing in an orderly and professional manner. A decision will be taken when the time is right. There is no urgency, given that Dr. Ackermann’s contract runs for another two years.”

BARCLAYS SOLUTION?

Investors, though, are sure to worry that the move could alienate the hard-charging Jain. Supervisory board chairman Clemens Boersig knows this, according to two people familiar with the supervisory board’s thinking, and is working on ways to retain Jain and his colleague, Chief Risk officer Hugo Baenziger. In the end, however, “the supervisory board believes everybody is replaceable,” a member of the supervisory board said on condition of remaining anonymous. The board feels it is too dangerous for the bank to rely on any one person. “You cannot be held to ransom,” another person, who is familiar with the supervisory board’s thinking, said.

Jain, who would not comment on the issue of succession, could well stay. He has had a hand in hiring most of the key staff at the investment bank, and his considerable stake in Deutsche in the form of shares and options gives him a vested interest in the place. But if he does walk, the bank hopes one of his proteges will step up in the same way that Jain himself emerged after his mentor Edson Mitchell died in a plane crash in December 2000. Most of Deutsche’s top 15 investment bankers have been with the firm for more than a decade, something that should instill loyalty toward the firm and not only its leader, the person close to the supervisory board said.

In private conversations between supervisory board members and Deutsche Bank executives, there has been talk of a “Barclays” solution, named after a recent arrangement at British bank Barclays where John Varley, a Briton with connections to the political establishment, took the title of chief executive, while Robert Diamond, a powerful American investment banker, held de facto power in the background. Diamond finally took the reins from Varley two months ago.

“Perhaps one could whet Jain’s appetite for a similar solution,” one of the people close to the supervisory board said. “In the end we may have to divide up the role among different sets of shoulders,” a supervisory board member said adding. “But we’re not yet at that stage.”

A decision on succession won’t be made this year, another supervisory board member, who declined to be named, said.

The German establishment has long been skeptical of investment banking, a conviction that has hardened since the subprime debacle and the ensuing financial crisis. When the German government stepped in to bail out a raft of lenders including Hypo Real Estate, IKB and Commerzbank, many Germans pointed to “casino” style investment banks as the main culprits. Deutsche Bank, Germany‘s biggest, did not require a bailout itself, but had long been a lightning rod for criticism as Europe’s largest economy moved away from old-fashioned “Rhineland Capitalism,” in which a close-knit clique of bankers, politicians and company executives fostered business and dictated change in corporate Germany, toward a more cut-throat “Wall Street” model where shareholder return is the main driver of change.

A raft of supervisory board members believe Deutsche should focus solely on providing simple financial services to corporations and the “real economy,” rather than dabbling in more complex and higher margin financial products. “Wall Street style capitalism doesn’t have many friends on the supervisory board,” a person close to the supervisory board said.

The opposing camp believes that Deutsche should be a place where gifted and risk-hungry bankers can make outsized bets to generate profits for themselves and shareholders. That view is often associated with Jain, who oversees some of the world’s most talented bankers.

Perhaps crucially, members of the board’s four person chairman’s committee, which is formally tasked with drawing up the shortlist of CEO candidates, consists of only Germans: two labor representatives, chairman Boersig, and Tilman Todenhoefer, former deputy chairman of the board of management at Robert Bosch, an engineering company that specializes in high-tech automotive technologies and is known for its skeptical view of Wall Street-style capitalism.

Although not bestowed with formal powers to appoint the next leader, chief executive Ackermann and shareholder representatives on the supervisory board will have considerable influence over who makes it on to the shortlist, a person close to the supervisory board added.

A PILLAR OF THE GERMAN ESTABLISHMENT

For decades the system that helped steer Europe’s largest economy was controlled by Deutsche Bank and insurer Allianz. Working with large German corporations in which the two financial institutions held stakes, the network of bankers and executives formed what became known as “Deutschland AG”.

The system worked, in its own way. By holding large stakes in companies like Daimler-Benz, Siemens and Thyssen, Deutsche protected German industry from foreign takeovers and provided a system of mutual support in the event of large-scale bankruptcies. Market forces were an afterthought. When German Chancellor Helmut Schmidt decided Germany’s aerospace companies needed to consolidate to stay competitive, he simply talked to then Deutsche boss Alfred Herrhausen, who promptly nudged Daimler-Benz to absorb the big aerospace and defense companies and form German aerospace company DASA.

Deutsche Bank’s seats on corporate boards meant it could win mandates for bond and stock issuances and force changes when it saw the need. In one infamous incident, in 1987, Herrhausen dismissed Daimler-Benz chief Werner Breitschwerdt and installed another executive, Edzard Reuter in his place.

But by the 1990s, as German companies pushed more aggressively into global markets, they needed more sophisticated products even to meet simple needs such as currency or oil price hedging. When Ackermann joined Deutsche in 1996 he was tasked with transforming Germany’s corporate fixer into a “global champion”.

“Joe,” as Ackermann is known by colleagues, had worked at SKA — later to become Credit Suisse — and liked to use tactics and strategy he learned as a Swiss army officer. He decided to accelerate a selloff of industrial stakes — which made up half of Deutsche Bank’s market value as late as 1998, and were proving a drag on the company’s share price — and use the proceeds to build up its core business of banking. The last significant holding — a stake in Daimler — was sold in October 2009.

GLOBAL EXPANSION WEAKENS LOCAL TIES

When Ackerman became the first non-German in the top job in 2002, his academic background and gentle demeanor masked an ambition to shake up the lender. He embarked on a radical program to boost the profitability of bread-and-butter corporate loans, even if that meant alienating established customers.

In early 2003, Ackermann, together with investment banking co-chiefs Jain and Michael Cohrs, and Baenziger, then head of credit risk, introduced the “loan exposure management group” to ensure that each loan to be approved was priced in accordance with international market standards, rather than traditional German ones, and to guarantee that the “overall customer relationship” was generating a 25 percent pre-tax return on equity. The move helped lift Deutsche’s pre-tax return on equity to 14.7 percent today from just 1.1 percent back in 2002.

Competitors like Commerzbank also quietly introduced profitability targets for corporate loans. But it was — and still is — Deutsche that attracted the most criticism for abandoning the old system. Ackermann remains unrepentant. “As a bank with global operations that conducts more than 75 percent of its business outside of its home market, we have obligations to numerous stakeholders around the world,” he told shareholders at Deutsche Bank’s annual general meeting last May. “We have to carefully weigh up these obligations. Sometimes, in Germany, this can lead to criticism by the political community. We have to be able to take it.”

One of Deutsche’s key stakeholders is internal: golden boy Jain. A keen cricket fan, he built up what has become known within Deutsche as “Anshu’s Army” from the original core of mostly American bankers who defected from Merrill Lynch in 1995. The defectors had followed Edson Mitchell, a brash American who demanded fierce loyalty from those who served under him.

Mitchell’s team was instrumental in introducing a more aggressive Anglo-Saxon style of management which sacrificed long-term job security for eye-popping pay packages. Ackermann later cemented the new culture by transferring decision-making power away from the German “Vorstand”, or management board, to a new committee known as the Group Executive Committee, dominated by London-based investment bankers.

The power of the investment banking arm became clear in 2000, when its senior officials sabotaged a signed 30 billion euro merger deal with Deutsche Bank’s main rival, Dresdner Bank, because of overlaps in investment banking. Following a strategy meeting in Florida, Deutsche told Dresdner that of the 6,500 investment bankers at its investment banking unit Dresdner Kleinwort Wasserstein, Deutsche could only take 1,000, a person familiar with the conversation said.

Another clash between the Deutsche’s management board and the supervisory board came in February 2004, when it emerged that Ackermann and senior executives had met Citigroup’s chairman Sanford “Sandy” Weill, and chief executive Charles Price a few months earlier to discuss a takeover of Deutsche Bank. When Ackermann raised the possibility of a sale, members of the German-dominated supervisory board blocked the deal, arguing that Deutsche would be reduced to a local branch office of a New York bank.

As the investment banking arm has grown more powerful, Deutsche’s center of gravity has shifted to London, where key staff including Baenziger and Jain spend most of their time, and where the company now employs more than 8,000 staff. Their London base helps Jain and Baenziger remain close to key clients. But has it also hampered their ability to build up a network of political and corporate contacts in Germany.

CASINO BANKING?

A sign of potential trouble emerged two years ago, when the supervisory board chose to dodge the issue of succession by extending Ackermann’s contract until 2013. Some inside the bank blame that in part on Ackermann, who has not successfully nurtured a clear successor.

Tensions between the supervisory board and Deutsche’s management have grown since 2008, when the global financial system went into meltdown. Deutsche was under extreme pressure to help rescue failing rivals. In mid-March 2008, while Ackermann was in New York, U.S. treasury secretary Henry “Hank” Paulson called him and tried to get Deutsche to buy Bear Stearns, a person familiar with the matter said. Later Deutsche was pushed to buy parts of Lehman. In both instances, Ackermann declined. Deutsche also turned down offers to buy parts of UBS in the second half of 2008, two senior executives familiar with the lender’s thinking said. The Swiss bank was looking for fresh leadership and mulling a sale of its investment bank, but Deutsche preferred its wealth management assets, these people familiar with the talks said. Deutsche walked away when it couldn’t get sufficient detail on balance sheet risks. Regulatory approval may also have been a hurdle, a senior Deutsche banker said.

Only months earlier the bank had been giving its traders a remarkable degree of leeway to place large directional bets, a strategy that had proved extremely successful, current and former employees of the global markets division said, also declining to be named. Proprietary traders — small teams that bet with a bank’s own money — made up to 15 percent of revenues at the sales and trading division between 2002-2007, a senior banker familiar with Deutsche’s strategy told Reuters.

At the sales and trading division, managers such as Boaz Weinstein, a former head of credit trading North America and Europe, and Greg Lippmann, global head of asset-backed securities trading and syndicate and collateralized debt obligations (CDOs), were particularly aggressive. Lippmann made a $1 billion bet against the subprime market, a gamble that started to come good in the second half of 2008 when global markets fell. Weinstein — a chess fanatic known for taking teams of traders to Vegas for poker tournaments — also had large positions running into the billions, a person familiar with his business said.

Single bets could be very large. One left the bank with 600 million euros of rates exposure, a former colleague who worked at Deutsche’s credit trading division at the time told Reuters. This sort of extreme trading led The Economist to describe Deutsche as a “giant hedge fund” run by an “Indian bond junkie” in 2004, a view some could argue was not justified by the investment bank’s relatively consistent performance over the past decade.

Things were less rosy at the proprietary and credit trading divisions during the financial crisis: they fueled Deutsche’s 4.8 billion euro loss in the fourth quarter of 2008 and prompted its management board to abandon proprietary trading the same year — months before regulators discussed a move in that direction.

Despite shedding almost a third of its risky assets between 2009 and 2010, Jain has managed to retain his top staff and win market share in key areas of investment banking. Research firm Greenwich Associates last year ranked Deutsche Bank No. 1 in U.S. bond trading. Profits from the corporate and investment bank have jumped from almost 4 billion euros in 2000, to a near record level of 6 billion euros in 2010, a testament to Jain’s ability to deliver profits in extremely challenging market conditions, analysts and rivals say.

GERMAN REQUIRED

Ackermann’s recent language indicates how difficult it has become to defend risk-taking. In countless speeches to the German business community and politicians, he has said the country “needs to decide whether it wants a globally successful investment bank or not.”

But the son of a doctor from the village of Mels in Switzerland has also tried to ease tensions between business and politics. “Especially here in Germany where those responsible in business and politics live and work further apart geographically than in other countries, we must make a greater effort to listen to one another,” he told the company’s annual general meeting in Frankfurt in May. “Verbal attacks on so-called speculators and political rhetoric about a ‘war’ between governments and markets is not conducive to such a dialogue,” he said.

Bundesbank president Axel Weber’s name has surfaced as a potential candidate though critics on the supervisory board highlight his lack of experience running a commercial bank, as well as his recent clash with Merkel as weak points for such a candidacy.

Helmut Hipper, a fund manager at Frankfurt-based Union investment, thinks Deutsche should not leave it until the last minute to reveal who will take over: “For an institution like Deutsche it is important to announce a successor. Designating a candidate will provide security and predictability.”

Also in the race with an outside chance are internal candidates such as Deutsche’s Germany chief Juergen Fitschen, retail chief Rainer Neske or Chief Financial Officer Stefan Krause.

Whoever does get the job will need to be able to mediate between Berlin and Germany’s financial players. That became clear during the credit crisis. In September 2008, Ackermann was involved in rescue talks for German lenders IKB and Hypo Real Estate. Discussions involved the then finance minister Peer Steinbrueck, regulator Jochen Sanio and representatives from the German banks.

“You need to speak German, period,” a senior German financial figure who was familiar with these talks said. Ackermann himself, asked if the next chief of Deutsche Bank needs to speak German, said, “That’s for the supervisory board to decide.” He had found speaking German “helped.”

Although Jain has been with the Frankfurt-based bank since 1995, he has never spoken a word of German in public and relies on a translation service during press conferences. Late last year when Jain made an appearance at a banking conference in Frankfurt he was asked “Sprechen Sie Deutsch?” a question designed to find out whether he had been brushing up his German. Jain dodged the answer with a smile and said, “I’m not going to go there,” before walking away.”

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Saudi Day of Rage – Fri., March 11th

Thursday, March 10th, 2011

We have seen riots in Tunisia, Algeria, Egypt, Libya, Bahrain…and now Saudi Arabia?  All of these countries have fallen victim to internal unrest because of both their lack of basic freedoms, and wealth disparity between the rich and the poor.  All of the countries above are known to be wealthy oil nations, but more than 20% of the youth in each are unemployed.  Grain prices in these areas have more than tripled, and food inflation is causing unrest.  Shiites in Saudi Arabia have also claimed discrimination, as almost all senior businessmen and officials are Sunni Muslims, despite qualifications and experience.  This has helped drive Brent crude prices to as high as $118, crippling both emerging and developing economies.  Some are calling for a “day of rage” on March 11th, while others claim it will be delayed…

According to CNN, protesters in Saudi Arabia called for a “day of rage” Friday, though longtime observers of the kingdom remained skeptical that it would make a major impact. ”I don’t think any protests that happen tomorrow will be destabilizing to the country,” said Christopher Boucek, a Saudi expert with the Carnegie Endowment for International Peace.

Prominent blogger Ahmed Al-Omran said the Saudi government remains unresponsive to the streets. ”I don’t think they’re really in touch with the people,” he said. Still, he said, Friday’s planned protests could set the tone in Saudi Arabia for the next few months.

The Saudi government prohibits all kinds of public demonstrations. But more than 100 Shiite demonstrators defied that ban and rallied Wednesday in the eastern city of Qatif, calling on authorities to release Shiite prisoners. A sprinkling of women were among the protesters, said Ibrahim Al-Mugaiteeb, president of the Human Rights First Society. Police kept a watchful eye but did not intervene, he said. Earlier, Saudi authorities had authorized its security forces to “take all measures against anyone who tries to break the law and cause disorder.”

Last week, about 24 protesters were detained in Qatif as they denounced “the prolonged detention” of nine Shiite prisoners held without trial for more than 14 years, Amnesty International said. Police kicked and used batons to beat three protesters in what was an apparent peaceful demonstration, Amnesty said in a statement. ”The Saudi Arabian authorities have a duty to ensure freedom of assembly and are obliged under international law to allow peaceful protests to take place,” said Philip Luther, deputy director of the human rights group’s Middle East and North Africa program. ”They must act immediately to end this outrageous restriction on the right to legitimate protest.” There was no immediate reaction from the Saudi government to the Amnesty statement.

The protests in the majority Sunni kingdom have followed similar demands across the Arab world for more freedom and democracy. Rights activists have been advocating the right to protest for months in the kingdom but they have been denied permission to assemble. Lately, grass-roots ferment mirroring the unrest across the Middle East and North Africa has emerged, with a Facebook group calling for days of rage and Shiites taking to the streets. Activists have been calling for reform and the release of people jailed without charge or trial.

Amnesty said the recent detentions came a week after a prominent Shiite cleric, Sheikh Tawfiq Jaber Ibrahim al-’Amr was arrested after a sermon calling for reforms in Saudi Arabia. He was released without charge Sunday. Most of the protesters are believed to be held in a police station in Dhahran, an eastern city. Among them are activists who have protested arrests and discrimination against the minority Shiites.

“The Saudi authorities must investigate reports of beatings of protesters by security forces. They should also ensure that those detained are either charged with recognizable offences and tried fairly or released,” Luther said. ”While in detention they must be protected from torture and other ill-treatment and given regular access to their family, lawyers and medical staff.”

The Shiite activists in “prolonged detention” have been held in connection with the deadly 1996 bombing of a U.S. military complex in Khobar in which 20 people were killed and hundreds injured. ”According to reports, they were interrogated, tortured and denied access to lawyers together with the opportunity to challenge the legality of their detention,” Amnesty said.

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Nomura Hires First Female CEO – Junko Nakagawa

Thursday, March 10th, 2011

September 2011: According to BBC News, Nomura made a very bold move this week by appointing its first female CEO.  Junko Nakagawa joined Nomura Securities Co. in 1988, working at its underwriting and finance divisions before leaving the company in 2004.  This could start a trend in upward mobility for women in the investment banking field:

Japan’s largest brokerage house, Nomura, has appointed its first female chief financial officer in an unusual move for a top Japanese company. Junko Nakagawa will take up her position on 1 April. Nomura also announced the promotion of Jesse Bhattal to deputy president of the firm’s wholesale banking division. The move is part of a wider effort by some big Japanese companies to offer roles to foreigners to help them move into overseas markets, analysts said. “We have not named Ms Nakagawa as chief financial officer because she is a woman but because she has the capacity to do this job and assume the responsibilities,” Nomura said. “That said, we think is good to encourage diversity in our business.” The promotion is an unusual move in Japan where senior business positions are generally filled by men. “It is rare for a Japanese financial institution to give this type of promotion to a woman,” said Azuma Ohno at Credit Suisse in Tokyo.“It’s an impressive move.”