Archive for the ‘Region: Europe’ Category

George Soros on European Fiscal & Banking Crisis and EU Summit on June 28-29, 2012

Monday, June 25th, 2012

Here I present key take-aways from George Soros’ in depth Bloomberg interview on the current European fiscal and banking crisis, Angela Merkel, the Spanish bailout, and Greece leaving the Eurozone.

The video is also below:

Banking & Fiscal Issues

  • “There is an interrelated problem of the banking system and the excessive risk premium on sovereign debt – they are Siamese twins, tied together and you have to tackle both.”
  • Soros summarizes the forthcoming Eurozone Summit ‘fiasco’ as fatal if the fiscal disagreements are not resolved in 3 days.
  • There is no union without a transfer.
  • Europe needs banking union.
    • Germany will only succumb if Italy and Spain really push it to the edge (Germany can live in the present situation; the others cannot)
    • Europe needs a fiscal means of strengthening growth through Treasury type entity
      • What is needed is a European fiscal authority that will be composed of the finance ministers, but would be in charge of the various rescue mechanisms, the European Stability Mechanism, and would combine issuing treasury bills.
        • Those treasury bills would yield 1% or less and that would be the relief that those countries need in order to finance their debt.
        • Bill would be sold on a competitive basis.
        • Right now there are something like over €700bn euros are kept on deposit at the European Central Bank earning a 0.25% because the interbank market has broken down, so then you have €700bn of capital that would be very happy to earn 0.75% instead of 0.25%, and the treasury bills by being truly riskless and guaranteed by the entire community, would yield in current conditions less than 1%.
        • Governments should start a European unemployment scheme, paid on a European level instead of national level.
        • Soros’ solutions, however, are unlikely to prove tenable in the short-term as he notes “Merkel has emerged as a strong leader”, but “unfortunately, she has been leading Europe in the wrong direction”.
          • “Euro bonds are not possible because Germany would not consider euro bonds until there is a political union, and it should come at the end of the process not at the beginning.
          • This would be a temporary measure, limited both in time and in size, and thereby it could be authorized according to the German constitution as long as the Bundestag approves it, so it could be legal under the German constitution and under the existing treaties.
          • The political will by Germany to put it into effect and that would create a level playing field so that Italy and Spain could actually refinance debt on reasonable terms.

Scenario Discussion

  • LTRO would be less effective now
  • At 6%, 7% of Italy’s GDP goes towards paying interest, which is completely unsustainable
  • Spain may need a full bailout if summit is not successful
    • Financial markets have the ability to push countries into default
    • Because Spain cannot print money itself
    • Even if we manage to avoid, let’s say an ‘accident’ similar to what you had in 2008 with the bankruptcy of Lehman Brothers, the euro system that would emerge would actually perpetuate the divergence between creditors and debtors and would create a Europe which is very different from open society.
    • It would transform it into a hierarchical system where the division between creditors and debtors would become permanent…It would lead to Germany being in permanent domination.
      • It would become like a German empire, and the periphery would become permanently depressed areas.

On Greece

  • Greece will leave the Eurozone
    • It’s very hard to see how Greece can actually meet the conditions that have been set for Greece, and the Germans are determined not to modify those conditions seriously, so medium term risk
    • Greece leaving the euro zone is now a real expectation, and this is what is necessary to strengthen the rest of the euro zone, since Greece can’t print money
    • By printing money, a country can devalue the currency and people can lose money by buying devalued debt, but there is no danger of default.
      • The fact that the individual members don’t now control the right to print money has created this situation.
      • A European country that could actually default. and that is the risk that the financial markets price into the market and that is why say Italian ten-year bonds yield 6% whereas British 10-year bonds yield only 1.25%.
  • That difference is due to the fact that these countries have surrendered their right to print their own money and they can be pushed into default by speculation in the financial markets.

On Angela Merkel

  • Angela Merkel has been leading Europe in the wrong direction. I think she is acting in good faith and that is what makes the whole situation so tragic and that is a big problem that we have in financial markets generally – she is supporting a false idea, a false ideology, a false interpretation which is reinforced by reality.
  • In other words, Merkel’s method works for a while until it stops working, and that is what is called a financial bubble
    • Financial bubbles look very good while they are being formed and everyone believes in it and then it turns out to be unsustainable…
    • The European Union could turn out to have been a bubble of this kind unless we realize there is this problem and we solve it and the solution is there.
    • I think everybody can see it, all we need to do is act on it, and put on a united front, and I think that if the rest of  Europe is united, I think that Germany will actually recognize it and adjust to it.

On Investing

  • Stay in cash
  • German yields are too low
  • If summit turns out well, purchase industrial shares, but avoid everything else (consumer, banks)

Conclusion: We are facing conditions reminiscent to the 1930s because of policy mistakes, forgetting what we should have learned from John Maynard Keynes.

Fantastic Michael Burry UCLA Commencement Speech on U.S. & European Financial Crises

Sunday, June 24th, 2012

Below you can view an excellent speech by Dr. Michael Burry, who at one point shorted over $8 billion of subprime mortgage backed securities before the U.S. credit crisis. Dr. Burry openly shares his experiences on divorce, luck, finance, and the future of college graduates at UCLA. As an alumnus of UCLA, Dr. Burry shows that passion, curiosity, foresight, and “working smart” rather than “working hard” can be handsomely rewarded. Michael Burry’s hedge fund, Scion Capital ultimately recorded returns of 489.34% (net of fees and expenses) between its November 1, 2000 inception and June 2008. The S&P 500 returned just over two percent over the same period. Other than Dr. Burry’s subprime short, I am not sure of his performance from 2000 through 2005. Enjoy.

[youtube]http://www.youtube.com/watch?v=1CLhqjOzoyE&feature=share[/youtube]

Burry left work as a Stanford Hospital neurology resident to become a full-time investor and start his own hedge fund. He had already developed a reputation as an investor by demonstrating astounding success in “value investing,” which he wrote about on a message board beginning in 1996. He was so successful with his stock picks that he attracted the interest of such companies as Vanguard, White Mountains Insurance Group and such prominent investors as Joel Greenblatt.
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After shutting down his web site in November 2000, Burry started Scion Capital, funded by a small inheritance and loans from his family. The company was named after The Scions of Shannara, a favorite childhood book. Burry quickly earned extraordinary profits for his investors. According to Lewis, “in his first full year, 2001, the S&P 500 fell 11.88 percent. Scion was up 55 percent. The next year, the S&P 500 fell again, by 22.1 percent, and yet Scion was up again: 16 percent. The next year, 2003, the stock market finally turned around and rose 28.69 percent, but Mike Burry beat it again—his investments rose by 50 percent. By the end of 2004, Mike Burry was managing $600 million and turning money away.”
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In 2005, he veered from value investing to focus on the subprime market. Through his analysis of mortgage lending practices in 2003 and 2004, he correctly forecast a bubble would collapse as early as 2007. Burry’s research on the runaway values of residential real estate convinced him that subprime mortgages, especially those with “teaser” rates, and the bonds based on these mortgages would begin losing value when the original rates reset, often in as little as two years after initiation. This conclusion led Burry to short the market by persuading Goldman Sachs to sell him credit default swaps against subprime deals he saw as vulnerable. This analysis proved correct, and Burry profited accordingly. Ironically Burry’s since said, “I don’t go out looking for good shorts. I’m spending my time looking for good longs. I shorted mortgages because I had to. Every bit of logic I had led me to this trade and I had to do it”.
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Though he suffered an investor revolt before his predictions came true, he earned a personal profit of $100 million and a profit for his remaining investors of more than $700 million. Scion Capital ultimately recorded returns of 489.34 percent (net of fees and expenses) between its November 1, 2000 inception and June 2008. The S&P 500 returned just over two percent over the same period.
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According to his website, he liquidated his credit default swap short positions by April 2008 and did not benefit from the taxpayer-funded bailouts of 2008 and 2009.[13] He subsequently liquidated his company to focus on his personal investment portfolio.
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In a April 3, 2010, op-ed for the New York Times, Burry argued that anyone who studied the financial markets carefully in 2003, 2004, and 2005 could have recognized the growing risk in the subprime markets. He faulted federal regulators for failing to listen to warnings from outside a closed circle of advisors.
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In April 2011, he suggests: (1) Open a bank account in Canada, (2) there are opportunities in small cap stocks, and (3) blue chips may be less attractive than their price-earnings suggests.

Burry left work as a Stanford Hospital neurology resident to become a full-time investor and start his own hedge fund. He had already developed a reputation as an investor by demonstrating astounding success in “value investing,” which he wrote about on a message board beginning in 1996. He was so successful with his stock picks that he attracted the interest of such companies as Vanguard, White Mountains Insurance Group and such prominent investors as Joel Greenblatt.After shutting down his web site in November 2000, Burry started Scion Capital, funded by a small inheritance and loans from his family. The company was named after The Scions of Shannara, a favorite childhood book.


Burry quickly earned extraordinary profits for his investors. According to Lewis, “in his first full year, 2001, the S&P 500 fell 11.88 percent. Scion was up 55 percent. The next year, the S&P 500 fell again, by 22.1 percent, and yet Scion was up again: 16 percent. The next year, 2003, the stock market finally turned around and rose 28.69 percent, but Mike Burry beat it again—his investments rose by 50 percent. By the end of 2004, Mike Burry was managing $600 million and turning money away.” In 2005, he veered from value investing to focus on the subprime market. Through his analysis of mortgage lending practices in 2003 and 2004, he correctly forecast a bubble would collapse as early as 2007.

Burry’s research on the runaway values of residential real estate convinced him that subprime mortgages, especially those with “teaser” rates, and the bonds based on these mortgages would begin losing value when the original rates reset, often in as little as two years after initiation. This conclusion led Burry to short the market by persuading Goldman Sachs to sell him credit default swaps against subprime deals he saw as vulnerable. This analysis proved correct, and Burry profited accordingly. Ironically Burry’s since said, “I don’t go out looking for good shorts. I’m spending my time looking for good longs. I shorted mortgages because I had to. Every bit of logic I had led me to this trade and I had to do it”. Though he suffered an investor revolt before his predictions came true, he earned a personal profit of $100 million and a profit for his remaining investors of more than $700 million. Scion Capital ultimately recorded returns of 489.34 percent (net of fees and expenses) between its November 1, 2000 inception and June 2008.

The S&P 500 returned just over two percent over the same period. According to his website, he liquidated his credit default swap short positions by April 2008 and did not benefit from the taxpayer-funded bailouts of 2008 and 2009. He subsequently liquidated his company to focus on his personal investment portfolio. In a April 3, 2010, op-ed for the New York Times, Burry argued that anyone who studied the financial markets carefully in 2003, 2004, and 2005 could have recognized the growing risk in the subprime markets. He faulted federal regulators for failing to listen to warnings from outside a closed circle of advisors. In April 2011, he suggests: (1) Open a bank account in Canada, (2) there are opportunities in small cap stocks, and (3) blue chips may be less attractive than their price-earnings suggests.

Bank of Spain Nationalizes Bankia – Property Bubble Bursting

Wednesday, May 9th, 2012

According to ZeroHedge, the Bank of Spain has recently nationalized Bankia, the first of many nationalizations that have to occur in Spain because of poor underwriting by the cajas (regional banks/savings and loan institutions) and falling real estate prices. The Spanish housing price graph above shows how much further the property bubble went in Spain, where at one point, more than 15% of the labor force was working in construction.

With a government debt to GDP ratio of 70%, and another 30%+ of municipal debt, where is Spain getting the money to accomplish these bailouts?

By Alexander Lemming, Leverage Academy Associate

Statement on BFA-Bankia

The Board of Finance and Savings Bank (BFA) announced today the Bank of Spain its decision not to buy in the terms and conditions agreed to the securities issued in the amount of € 4.465m who signed the FROB (Bank Restructuring Fund). BFA has concluded that the most desirable to strengthen the soundness of the business project that began with the appointment of Jose Ignacio Goirigolzarri as president is to request the conversion of these titles in stock ordinary. This conversion must be authorized by the Bank of Spain and the other authorities Spanish authorities and community and will be conducted in accordance with the valuation process established in the indenture securities.

The Bank of Spain has worked hard in recent months with the group address BFA-Bankia to specify the measures to ensure compliance with the provisions of the RD-l 2/2012 for the sanitation Spanish financial system. BFA-Bankia late March presented a restructuring plan and restructuring that included measures that would comply with the RD-l, and standardize its financial  position.

After analyzing this reorganization plan, the Bank of Spain also ordered the entity measures complementary to streamline and strengthen management structures and management, increasing professionalization and a divestment program. These additional actions should serve to enhance the soundness of the institution and restore market confidence. The events of the past weeks and the growing uncertainty about the future of the company has made it advisable to go further and raise the providing resources to accelerate and increase public sanitation.

The changes in the presidency of BFA-Bankia is precisely oriented in the direction shown in professional management and allow the group to boost its restructuring program. The new address of the entity must submit in the shortest possible plan of reorganization strengthened that places BFA-Bankia able to cope with a full guarantee its future.

In any case, BFA-Bankia is a solvent entity that continues to function quite normally and customers and depositors should have no concern. (ZHedge)

Italian 10 year Yield Rises Above 7.4%, Country Theoretically Unable to Fund Itself at These Levels (Bankrupt), Prime Minister Offers to Resign

Wednesday, November 9th, 2011

November 9, 2011: After Italian Prime Minister Berlusconi offered to resign yesterday, the credit markets almost sighed in relief. But today, markets were punched in the jugular as LCH.Clearnet increased margin requirements on Italian bonds. Margins were raised because 10 year credit spread exceeded 450 bps, the same point at which Clearnet raised margins on the bonds of other peripheral countries in Europe.
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The pressure is certainly on the ECB and Italy now to find a solution to this debt crisis, as Italy is too large to be bailout out. Yesterday, known for his sex scandals and political corruption, Prime Minister Berlusconi was pressured to leave his post because Italian yields were creeping above 6.5%. According to the Times, “In the end, it was not the sex scandals, the corruption trials against him or even a loss of popular consensus that appeared to end Mr. Berlusconi’s 17 years as a dominant figure in Italian political life. It was, instead, the pressure of the markets — which drove Italy’s borrowing costs to record highs — and the European Union, which could not risk his dragging down the euro and with it the world economy. On Wednesday, yields on 10-year Italian government bonds — the price demanded by investors to loan Italy money — edged above 7 percent, the highest level since the adoption of the euro 10 years ago and close to levels that have required other euro zone countries to seek bailouts.”
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Currently, the Italian 10 year yield has exceeded 7.4%, and the 2 year note has risen more than 10 year rate. At this point, Italy is theoretically unable to fund itself and could theoretically be bankrupt. The margin call on bonds due between seven and 10 years was raised by five percentage points to 11.65%, for bonds due between 10 years and 15 years it was raised by five percentage points to 11.80%, while for bonds that mature in 15 years and 30 years the margin call was raised by five percentage points to 20%. The changes come into effect Nov. 9 and will have an impact on margin calls from Nov. 10, the French arm of LCH.Clearnet said.

Occupy Main Street, Restructure America

Sunday, November 6th, 2011

November 6, 2011: It has been almost 4 years since the United States and the entire Western World has been mired in this recessionary state. What has happened should not be a surprise to anyone. After scrambling for an ever higher quality of life, sending labor-intensive industries overseas, and losing more than 2.5 million manufacturing jobs and more than 850,000 professional service and information sector jobs to outsourcing, we foolishly blame our government and the top 1% of our earning population for our hardships. Most Americans lack the skills and motivation to innovate, and are fit to work only in commoditized industries, yet most of our commoditized industries have been sent overseas. The government has unsuccessfully spent trillions on the economy to lessen market volatility, to reassure pensioners, to bolster bank and corporate balance sheets, and to create jobs. Over the past 10 years, spending growth for prisons has risen at a rate 6x the rate of spending on education because this society simply does not value education as much as it should. The truth of the matter is, we are all to blame. After inflating real estate and securities prices through leverage, after fighting senseless wars in pursuit of oil when we have enough natural gas reserves to last 200 years, and after allowing an entire generation of our citizens to lose their values of hard work and integrity, we ALL are to blame.

Instead of pushing our children to embrace globalization, we have allowed them to grow up isolated from the rest of the world. Instead of encouraging them to be productive and to earn their own keep from a young age, we have allowed them to spend hours watching brainless television and to lose themselves in drugs and alcoholism in communities where families aren’t the norm and divorce rates are greater than 70%. Instead of building secure homes, we have a bred a completely confused generation just asking to be taken advantage of by the rest of the world.

We need to OCCUPY MAIN ST.; we need to restructure America, the American lifestyle, and the American mind before it’s too late. We need to instill passion for innovation and entrepreneurship, we need to teach our children practical skills and make sure that they are proficient in math and science, we need to encourage competition, and we need to instill the values of hard work and integrity into our youth so they can grow up to be proud and self-sufficient.  No able bodied person should feel entitled to anything material in life without providing value or giving back to society.

Today, there are 45 million Americans on food stamps.



The number of very poor Americans (those at less than 50% of the official poverty level) has risen to 6.7%, or to 20.5 million.  This is the highest percentage of the population since 1993.  At least 2.2 million more Americans, a 30% rise since 2000, live in neighborhoods where the poverty rate is 40% or higher. Last year, 2.6 million more Americans descended into poverty, which was the largest increase since 1959.  In 2000, 11.3% of all Americans were living in poverty; today 15.1% of Americans are living in poverty. The poverty rate for children living in the U.S. has increased to 22%. There are 314 counties in the U.S. where at least 30% of the children are facing food insecurity. More than 20 million U.S. children rely on school meal programs to keep from going hungry. In 2010, 42% of all single mothers in the U.S. were on food stamps. More than 50 million Americans are now on Medicaid. One out of every six Americans is enrolled in at least one government anti-poverty program. I agree that we should help the poor and that compassion is a virtue, but shouldn’t these people help themselves as well? What specifically has caused their plight? Is only the government to blame? Are only the rich to blame? No, of course not.


Inflation adjusted wages have not grown since 1999, the S&P 500 is at 1998 levels, and real estate prices are at 2002 levels.  It is up to us to realize what caused the “lost decade” and avoid a “lost century.”

Why has this happened? By the 1970s, the average American was 20x richer than the average Chinese person. Today, it is only 5x. The Western world rose to power because “they had laws and rules invented by reason.” Our institutions, our basic freedoms and property rights, our discipline, and our motivation to work hard created $130 trillion of wealth in the Western World. Unfortunately, we have lost our work ethic and our intellectual drive. The average Korean works 1,000 hours more per year than the average German. The Chinese soon will have filed more intellectual property patents than the Germans. This is the END of the great divergence between the West and the East. There is little that differentiates us from the rest in a world that is being forced to understand the idea of resource scarcity more than ever before.

In 1776, Adam Smith, in The Wealth of Nations, explained how the East lagged behind because it lacked capitalism and property laws. Niall Ferguson explains how in addition to this, Competition, Applied Science, Property Rights, Modern Medicine, the Consumer Society, and Work Ethic propelled the West into prosperity:

[youtube]http://www.youtube.com/watch?v=xpnFeyMGUs8[/youtube]

This video link by Niall Ferguson shows why the Western world may lag behind as emerging market nations continue to gain in global wealth.

I am sick and tired of watching Occupy Wall Street protests. Stupidity should not be tolerated; we should educate the rest and Occupy Main Street. I asked a protester two weeks ago why he was protesting, and he could not give me a straight answer. His parents unfortunately didn’t teach him the values of hard work and self respect. It reminds me of the guy in this video asking for “millionaires & billionaires” to pay for his college tuition: [youtube]http://www.youtube.com/watch?v=wrPGoPFRUdc&feature=share[/youtube]

Contrast that young man with this young Asian immigrant, who hasn’t been able to set up his business properly in 2 weeks because of the protesters blocking access to his food cart:

[youtube]http://www.youtube.com/watch?v=ZxaUgI0Ascw&feature=related[/youtube]

I can’t believe I would ever say this, but even Ari Gold knows better: [youtube]http://www.youtube.com/watch?v=3Ajh8zKPMXc[/youtube]

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

Soros Says the U.S. is Already in a Double Dip Recession – Defining Balance Sheet Recessions

Sunday, September 25th, 2011

Soros recently asserted that Europe could be more dangerous to the global financial markets than the default of Lehman Brothers in 2008, because of the political stubbornness of European policy makers.   He has been saying this for over two years now, while government officials continue to ignore him, focusing instead on making bold statements and causing riots.  In a brilliant move, Soros returned investor capital at the end of July to avoid the eyes of the public.  I am sure he is now short sovereigns via CDS, currencies, and synthetic instruments, while he continues to donate to the poor in Eastern Europe like a modern day Robin Hood.  Since March, Italian CDS has more than doubled, and French and Belgian CDS spreads will continue to creep higher as the sovereign crisis persists.  How are Greece, Italy, Spain, and Portugal supposed to grow their way out of debt, as deficit cutting reduces European GDP growth to less than 1%?

The public doesn’t trust officials to make timely decisions to protect the EU.   The PIIGS (Ireland and Italy included) pose an insurmountable task for the region, as the combined nations have far greater GDP and net leverage than Germany, the only country that will be supporting the EFSF with a AAA rating. Italy itself has €1.2 trillion of debt, which is  more than Germany, and France may be downgraded in the next 6 months, which is evident in how much its CDS spread has widened over the past 2 months.  France also cannot print money like the United States, and certainly should have been downgraded beforehand, sharply decreasing the effectiveness of the stabilization facility in the EU. A French downgrade would not only endanger French banks, it would create counterparty risk for its U.S. partners as well.  Soros has already claimed that the U.S. is currently in a double dip recession, which I personally think to be true.

Both the majority of the EU and the United States are in a global double dip already not only because of policy mistakes, but due to unsustainable leverage, overspending, broken healthcare and education systems, and corrupt governments. Recent real estate, manufacturing, and confidence numbers, along with revisions down in the earnings of major metallurgical coal and transportation companies in developed countries support my thesis (look at tickers ANR, WLT).  Alpha Natural Resources recently cited a sharp decrease in coal demand for steel production in Asia, reflecting weakness in both its U.S. and ex-U.S. clients.  In the U.S., real estate usually contributes 15% to GDP growth, and it is showing no chance of recovering (HOV), as most sales over the past two years have been distressed sales driven by investors, not families or single buyers.  Developed economies are slowing down quickly, as elected officials argue over who is more important than the other.  The S&P 500 ex-dividends is at the same level it was in 1998, the FTSE MIB in Italy is down 30% on the year (40% from April), and the emerging market index (EEM) just broke its 2010 lows.  Many European financial institution equities are down 60%+ to date.  Markets are broken, as the CME has to raise margins every other day to bring down the prices of precious metals, which are rising in the face of fiat destruction and future inflation risk.  Poverty has reached 15% in the United States, unemployment is over 9.2%, underemployment is about 17%, and local government cuts have resulted in the layoffs of countless public employees, like the recent 3,000 teachers who were fired in Providence, Rhode Island.

There are 44 million people on food stamps in the United States, which is supposed to be the wealthiest nation, and the land of hope for many immigrants.  Over 30% of the U.S. population pays more than half their gross income on rent, since incomes (adjusting for inflation) have not increased since 2000.  With rents projected to increase 3-4% in metropolitan areas over the next year, even the educated poor may be driven out of cities or on to the streets. The land of hope? Why don’t you ask my hardworking university friends about hope, who are much more qualified than some of their U.S. peers, but cannot get jobs and improve the quality of our economy due to the difficulty of obtaining visas.  This country was built by immigrants, who are now blocked out of entering the nation. Teen unemployment also hit decade lows this past month.

According to New York-based Economic Cycle Research Institute (ECRI), which tracks some 20 large economies contributing about 80% of the world GDP and provides critical information about upturns and downturns of economic cycles to money managers, we will know within the next 60 days whether we are in a recession or not.  ECRI’s Lakshman Achuthan has been one of the most accurate forecasters for economic cycles over the past decade.   He argues that the 2008/2009 recession was different than the sharp recession of the 1980s, “This is very different than the early 1980s. The issues that ail the U.S. economy and the jobs market today are not things that result from nearby events. What we’re living through and dealing with now has been building for decades,” he says. “If you look at the data, you see that the pace of expansion has been stair-stepping down ever since the 1970s, on all counts — on production, how much can we produce, how many jobs can we create, how much money do we make, how much do we sell. These are all trending down.” In the deep recession of the 1980s, GDP growth was 5%+ coming out of it…our growth in Q111 was revised down to 0.4%, and will be less than 2% for the year. Don’t believe me? Check on your own.

“If we do have a double-dip recession, Achuthan says, the people who are already having trouble finding work and paying bills are already in a depression and that they “are going to suffer more.”  ”It poses massive problems for policymakers because a new recession automatically increases all of these expenditures out of the public sector, while at the same time dramatically decreasing all their revenue,” he says. “So there’s even less ability to help the people who are hurting the most.”

Although I am not a fan of Roubini for his sensationalist gloom and doom scenarios, he does do decent research and predicted a 60% chance of a double dip in the U.S. three weeks ago.  The United States is in a balance sheet recession, as the economist Richard Koo, a strategist at Nomura, predicted may happen back in 2009.   Most of the growth we have experienced has been the result of continued fiscal and monetary stimulus from the United States government over the past three years, as well as inventory restocking.  The biggest driver of this slow and painful recession is that more stringent underwriting standards for real estate lending and small business lending are slowing down aggregate demand and GDP growth.  Koo argues that once you have a balance sheet recession, people focus on paying down debt, making the situation much worse over time.   The government has to increase fiscal stimulus for the entire duration of the private credit contraction cycle to overcome private deleveraging.  Unfortunately war and internal conflict has made this impossible in the United States as our debt to GDP nears 100%. Since the private sector has moved away from profit maximization to debt minimization, newly generated savings and debt repayments enter the banking system but cannot leave the system due to a lack of borrowers.  The economy here will not and cannot enter self-sustaining growth until private sector balance sheets are repaired.

If the government tries to cut spending too aggressively in 2012-2013, Koo thinks that we would fall into the same trap President FDR fell into in 1937 and that Prime Minister Ryutaro Hashimoto fell into in 1997.  The deflationary gap created by a lack of credit creation and fiscal stimulus “will continue to push the economy toward a contractionary equilibrium until the private sector is too impoverished to save any money.”  The economy will collapse again, and the second collapse will be worse than the first.  It will be difficult to convince people to change their behavior in this scenario.

In a typical recession, private sector balance sheets are not hurt very badly, and most still express profit maximizing behavior.  People borrow money and spend as interest rates are lowered.  In a balance sheet recession, consumers refuse to borrow even if rates are at 0%.  This results in asset prices collapsing and banking crises.  Banks then cannot lend into the private sector, and the government becomes the borrower of last resort, at extremely low rates, because banks don’t need to hold capital against government loans.  When people use money to pay down debt, they withdraw money from their bank accounts and pay it back to the banks, so both deposits and the money supply shrink, which actually caused the Great Depression.  For example, 88% of Obama’s tax rebates have been used to pay down debt.

Let me put it in perspective:

According to Koo, “The Board of Governors of the Fed in 1976 estimated that deposits lost in Depression-era bank closures and through increased hoarding of cash outside of the banking system explained just 15% of the almost $18 billion decline in deposits during the period. Meanwhile, bank lending to the private sector plunged 47%, or by almost $20 billion, from 1929 to 1932. The conventional wisdom is that lending fell because banks panicked in response to dwindling reserves and forcibly called in loans. But that same Fed study shows that bank reserves did not actually fall during that period, when borrowings from the Fed are taken into account. In addition, a survey of almost 3,500 manufacturers, undertaken in 1932 by the National Industrial Conference Board, showed that fewer than 15% of the firms surveyed reported any difficulty in their dealings with banks.”
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If bank closures, cash hoarding and heartless bankers didn’t cause the Depression, what did? ”There’s only one possible alternative explanation for that era’s dramatic shrinkage in deposits and loans — or, at least, for the 85% of those shrinkages that can’t be attributed to the traditional villains. And that is that firms were reducing their debt voluntarily. At that time, the Fed tried to increase money supply by pumping reserves into the system, but with everyone paying down debt, the multiplier was actually negative, so it produced no results whatsoever.”
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And companies became hellbent to pay down debt because — “The price of assets purchased with borrowed funds (as most had been, during the Roaring’20s) collapsed after the stock market crash, and companies’ leverage had already gotten extremely high before the Crash. In other words, companies in the 1930s faced the same balance sheet problems as Japanese firms confronted in the 1990s. The lesson we learned from our experience in Japan is that with the government borrowing and spending money, the money multiplier will stay positive, and that’s basically how Japan kept its GDP growing throughout its Great Recession. So we have a situation where fiscal policy is actually controlling the effectiveness of monetary policy. It’s a complete reversal of what almost everyone alive today learned in school — that monetary policy is the way to go. But once everyone is minimizing debt instead of maximizing profits, all sorts of fundamental assumptions go out the window.” Just like a severe asset price crash on leverage caused crises for the U.S. in the 1930s and for Japan in the 1990s, our real estate driven recession is more than just a manufacturing slowdown or a simple policy mistake.
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In the U.S. we had over 150 bank closures last year, and have had 72 in 2011.  Banks are reticent to lend, but the real problem continues to be that there is less demand for money, and deleveraging will continue to weigh on growth for years. There are many parallels Koo describes with the Japanese crisis as well, which I will discuss in another article.
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The worst part of our current situation in the U.S. is that new bank capital adequacy standards are making it even more difficult for banks to encourage private lending.  So banks do not wish to lend, lending standards have increased dramatically, and citizens don’t want to borrow…and now with a flat yield curve, I don’t understand how financial institutions are going to dig their way out of this mess with profits either. Thank you Ben Bernanke.  Your “operation twist” policy has eroded all profit potential for financial institutions in 2012.  Let the deleveraging continue…

Cheers, Singh

“As I said there is nothing wrong with failing. Pick yourself up and try it again. You never are going to know how good you really are until you go out and face failure.”
-Henry Kravis

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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.

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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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Top Hedge Fund Managers of 2009

Wednesday, March 9th, 2011

Hedge fund pay has always been astounding, but few realize that it is only a handful that make over $1 billion per year.  BBC recently released a report highlighting some of the most successful alternative asset managers in the world, which include David Tepper, George Soros, Steve Cohen, Edward Lampert, and Ken Griffin.

According to BBC, HF managers “wouldn’t even consider getting out of bed for the $13m (£8m) Goldman Sachs’ boss Lloyd Blankfein was paid last year. Such a trifling pay packet represents just a few days’ work for these staggeringly well-paid financial executives. If bankers inhabit a different world, says London-based headhunter John Purcell, “these guys are out on their own in a different universe”.

‘Private bunch’

So just how much do these guys – for the vast majority are men – earn each year? At the very top of the pile, we’re talking $4bn. Just in case that hasn’t quite registered yet – that’s four billion dollars. This does, of course, include bonuses and fees as well as salary. In fact, the salary is a tiny fraction of their overall pay. And who are these men? They are called hedge fund managers – in other words, they are investors who buy and sell all manner of financial instruments with the express aim of making money for their clients, and for themselves. Finding out much about them is notoriously difficult. ”They’re a very private bunch,” Mr Purcell explains, “largely because they earn so much. They are highly secretive in every aspect of what they do.” Discovering how they make their money is a little easier.

Popular myths

Hedge funds are actually one of the most misunderstood of all financial products. They get something of a bad rap, largely due to some spectacular failures, most notably Long Term Capital Management, which blew up in 1998 and almost took Wall Street with it, and Amarinth Advisors, which lost billions of dollars in a few weeks on bad natural gas trades in 2006. Many have also tried to blame them for some of the excessive risk-taking they say triggered the global financial crisis, but with little success. As one industry insider argues, hedge funds are worth around $1.5 trillion in total – “less than the assets that some individual banks have on their books”. Hedge funds, then, are not the the gung-ho, high-risk beasts of popular mythology. In fact, the majority are quite the opposite, seeking to produce what are called absolute returns – those over and above what you get from the bank, risk free – year in, year out. In other words, they are designed to be low risk. What sets them apart from most investment funds is the range of instruments they can use and the strategies they can employ. Whereas traditional fund managers buy shares and bonds in the hope that they will rise in value, or occasionally dabble in financial derivatives, their hedge fund counterparts can do so much more. For example, they can take advantage of movements in interest rates and currencies, company restructuring and bankruptcies, and pricing anomalies across different markets. One of their most important strategies is shorting – borrowing shares to sell into the market in the expectation that they will fall, then buying them back at the lower price. This means they can make money when markets fall.

Results business

This investment freedom is what attracts so many investment managers to hedge funds. That and the quite extraordinary sums of cash that the very best can earn, of course. In fact, many are not ready for the challenge. Encouraged by potentially huge fees, they begin running portfolios without the necessary knowledge and experience of the strategies they employ. As a result, many come unstuck. And this is one reason why it is rather unfair to compare directly the pay of hedge fund managers with that of bankers. For there is a very crucial difference – hedge fund managers get paid bonuses only when they make money. In other words, there is no reward for failure in this highly competitive business. Salaries in the industry are not dissimilar to those paid in investment banking, so to make seriously mind-boggling amounts of cash, managers need their performance-related fees. These typically amount to 20% of any returns made on a portfolio above a set benchmark, and this is how hedge fund pay rockets into the stratosphere and beyond. But for those that make no returns, through no one’s fault but their own, of course, the rewards are less attractive. In fact, the large number of managers who set up on their own don’t even have a salary to fall back on, although they do take a 2% management fee on the funds they manage. For this reason, “a lot of managers are not making any money at all,” says the industry insider. Equally, hedge fund managers invariably have their own money invested in the funds that they run, unlike bankers who generally stake other people’s cash. ”Investors are very keen to see the fund management company have ‘skin in the game’,” says Mr Purcell.

Celebrity pay

It’s also important to bear in mind that the very best-paid hedge fund managers – the John Paulsons and George Soroses of the industry – own their own companies. They take a cut on all the assets under management across a number of funds run by their firm. In other words, George Soros owns Soros Fund Management. By contrast, Lloyd Blankfein does not own Goldman Sachs. And while it’s relatively easy to find out what the boss of a public company owns, it’s far harder to discover what the owner of a private company pays him or herself. Individual hedge fund managers actually earn a fraction of what their employers earn – on average $4.9m in 2007, the last year for which figures are available. Still, nice work if you can get it. In fact, when it comes to comparisons, bank bosses are nowhere near the best paid executives of even publicly-listed companies. H Lawrence Culp Jnr, boss of US manufacturing and technology group Danaher, was paid $141m in 2009, while Larry Ellison, head of technology giant Oracle, got $130m, according to Forbes. Not even sports starts or actors can match that – Tiger Woods, for example, earned $91m, while Johnny Depp pulled in $75m. In the UK, the boss of consumer goods group Reckitt Benckiser, Bart Becht, was awarded £93m ($148m), while Sir Terry Leahy, outgoing chief executive of supermarket group Tesco, earned £18m, according to research company IDS.

Charitable giving

Staggering sums they may be, but they pale into insignificance compared with the multi-billion dollar packages the very top hedge fund managers earn. It is important not to forget the huge amounts in tax that those managers not based in tax havens, of which there are many, pay. Many also donate vast sums to charity and have become well-known philanthropists. Carl Icahn, for example, who earned $1.3bn in 2009, recently signed up to the Giving Pledge, a club of billionaires who have promised to give large chunks of their wealth to charity. Still, whichever way you look at it, $4bn sure is a lot of dough for one man to be earning over many lifetimes, let alone one year.

Are they worth it?

No doubt a good number of their clients, which include many the world’s biggest pension funds, will say that they are. Their tailors may well agree. Others may take a slightly different view.

Hedge fund rich list 2009

Hedge fund manager Hedge fund group Earnings
SOURCE: AR MAGAZINE
David Tepper Appaloosa Management $4bn (£2.5bn)
George Soros Soros Fund Management $3.3bn
James Simons Renaissance Technologies $2.5bn
John Paulson Paulson & Co $2.3bn
Steve Cohen SAC Capital Advisers $1.4bn
Carl Icahn Icahn Capital $1.3bn
Edward Lampert ESL Investments $1.3bn
Ken Griffin Citadel Investment Group $900m
John Arnold Centaurus Advisors $900m
Philip Falcone Harbinger Capital Partners $825m

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