Monday, October 26, 2009

Zombie Banks 1998 edition

About 10 years ago I was living in Singapore, and working in the aerospace sector. At that time getting good deals were difficult, these were the days when Thai Airways finance a bunch of Boeing B747 with loans priced at 12.5 bps (e.g. 0.12%) over LIBOR (the best rate banks lend to each other), it marked a low point in loan prices, it made my life a misery trying to find interesting deals.

One evening while in Tokyo with friends I met the head of one of Japan's premier aerospace banks, these guys were one of the biggest players in the business, they were drowning their sorrows because they could no longer bid on new business, they had effectively been shut down to new business until the new financial year (1998). They bemoaned their poor luck (no new business meant very small bonus), as their bosses even asked them (desperately) to reduce balance sheet usage -- get rid of loans at least until the turn of the year!

Intrigued I called them up the next day (Japanese despite mind numbing drunkenness are always in the office early the next morning) and see if there was anything we could do to help (e.g. make money). In a nutshell they were looking to unload between $1 billion and $2 billion in aerospace loans ASAP. I told them that to sell such a big number would be very complex unless we could figure out a way to make it low risk for the buyer (me in this case).

This was a two step process, the first was a review of the documentation which took a few days (lots of fun was had in Hong Kong for 5 days of loan review). These were fiendishly complex structures, triple dip tax leases (Japan, Hong Kong and other jurisdictions) but they were also boiler plate so once we verified the termination values (which was done via bespoke models) we were ready to deal. What we did was amazing in its simplicity and it still amazes me that these banks didn't think of doing the deal themselves.

We bought the entire loan book and securitized the obligations; today this would be considered a very safe deal, because we matched our obligations exactly and provided full backstop to the investors. What we had created was an exploding note, the Japanese bank would be the paying agent and the counterparty in those days were were allowed to have exploding margins, so we sold a note for six months at a margin of 50 bps over the US Treasury rate and received 150 bps from the Japanese bank, we also took the refinancing risk -- which was large, but at the end of six months we had a margin of 300 bps should the paper not be redeemed by the issuer, we in turn had an exploding margin with the Japanese banks of 500 bps, we had sold on this risk to an insurance company (for 20 bps), so in a nutshell we paid 70 bps (plus structuring costs) and received 150 bps on $1.8 billion for six months with no refinancing risk, since we had sold this refinancing risk to a third party AAA rated entity we generated $15 million dollars in profit for 8 weeks of work, and because the transaction was securitized there was virtually no capital cost, we calculated at the time that our return on capital was 30,000%.

This may seem insane today, in fact it could not work anymore, because with this type of structure with exploding rate would be illegal for corporation (amazingly Alt-A mortgages, which are with exploding rates, are still legal today -- although not much demand)

Why the Zombie banks, because we are seeing the same insane solutions today with the big US banks; Last week Citibank sent a letter to 2 million credit card holders and increased their interest rate from 7.6% to 29.9%, this to people who do not carry balance on their credit cards! People who payoff their credit cards will usually all have the same reaction, can their cards, the impact on the money supply is not negligible here, because credit cards are a form of cash, and this reduction in the availability of credit is certain to have an impact.

P.S. Yes simplified the meat of the deal, the credit agencies were involved (private rating) but since this was sold as a private placement it didn't make the headlines, we were also very lucky in that there was so much money around that we could "pay" everybody in the bank to get the deal done.

P.P.S The $15 million represented 1.1 year of profits for the Japanese Bank in the book (average loan costs was 45 bps), total cost of the transaction was nearly 2.5 years of bank profits on this portfolio.

Saturday, October 24, 2009

Of Ferrari and Insanity

Thursday night Mrs Frozen in the North and I were driving back home from the office, the congestion was rather bad and so we deviated from our normal route to take an alternative route which took us up Peel Street in Montreal. For those not familiar with this street there are a few "Chi chi" restaurants and a surprisingly large number of toy cars (Ferrari, Mercedes AMG, etc), in front of us a little Korean import was having a hard time "waking up" to the fact that the light had turned green, so I flashed the guy, he was not offended, clearly his mind was elsewhere. He we driving distracted I presumed that he was talking on the phone or something, anyway because of his distraction we missed the green light at the next intersection. Once that light had turned green he was again driving distracted, and at one point started weaving a bit until he hit a parked car, and you guessed it he hit a beautiful black Ferrari... we didn't stick around to see how that turned out, since he hit the car in front of a rather "notorious" restaurant. Still it must have been an interesting conversation.

Second part is the insanity, Mrs FinN is an artist, not always the most practical person but she got great ideas. Next week there is artistic event globally to mark the 20th anniversary of the fall of the Berlin wall. Initially she was to make a Wall in here studio that people could break down. She's now decided that the wall will be more figurative, and so the wall will be made of pretzels. These will not the "american" pretzels these will be the German version, yep, the German version -- there about 4 inches across (the slightly smaller and thinner than a bagel), and get this, she's not buying the 140 pretzels, she's making them!

By the way do you know how many pretzel Mrs. FinN has baked in the past....ZERO. That should make for a fun weekend, and can just picture us Sunday night driving down back to Montreal will two green garbadge bags full of pretzels, cause you don't know Mrs. FinN like I do, no you don't because if she has to cook the pretzels for the next 48 hours straight she will do it!

Proof of insanity

P.S. Are you not amazed that Peel Street in Montreal has its own Wiki page?

Update: Should anybody be interested, by Sunday night, Mrs. FitN had made/cooked more than 50 prtezels...

Winter Wonderland

Last night Mrs Frozen in the North and I drove up to the cottage. Now that we are here my guess is that Mrs FitN would have rather stayed in Montreal, you see, despite heavy rain last night there's still lots of snow on the ground here. Yep snow, the white stuff, thermostat is suppose to rise to 15c in Montreal, it is still Zero here (you see the white stuff behind the sail boat!!!)

Anyway, a quiet weekend at the cottage since it is still raining. Our cat (Hoover) is also disappointed, not a fan of the snow (he grew up in Singapore) he was push-out the door twice today to "take care of business" I am confident that he's now fast asleep on our bed.

Despite the weather, the motorway was jam packed last night, we left Montreal at 20:30 and despite this late departure there was much traffic.

Still its nice to see winter at our doorstep, it makes a change from the rainy summer we have had. In fact, the weather has been so bad that we've had a bear invasion near the cottage. Every year there are a number of bears (black bears) that decide to pay a visit to the town of St-Donat to increase their food intake prior to hibernation. But the berry season was terrible this year, and so the bears are thin, hence their arrival into town. Nearly 80 were captured and forty were killed, without the cull more die of starvation during the winter.

Just to add a touch, I am writing this blog while sitting in front of the fireplace, could not be better!

Wednesday, October 21, 2009

Jackie O

Ms. Frozen in the North and I enjoy two reality shows: The Amazing Race and Survivor, the first where contestant race around the world the other where they are left stranded on an Island, a-la-Robinson-Crusoe mold.

Last Sunday while watching the Amazing race the ignorance of the average American amazed both my wife and I, the contestants were given a picture of a women waving from an official car, and they had to figure out where this picture was taken. Immediately, my wife and I recognized Jackie Kennedy -- wife of JFK, but none of the contestants recognized her! Not one, not even the "old guy" on the show. The contestants were in Burma (there virtually every cab driver could identify Jackie and could also tell the hapless Americans that the picture was taken in front of a famous hotel in the capital).

Later on the contestants were told the head to the tallest building in the Persian Gulf, one contestant actually asked for a flight to a country called the "Persian Gulf", eventually everybody figured out that they needed to fly to Dubai. America is fighting two wars in the area, and whereas Afghanistan is rather far, Iraq actually has a small beachhead on the Persian Gulf and tried to create a bigger one by annexing Kuwait in the 90s.

Thinking about the entire episode I guess the educational system is to blame, there is no more room for general knowedge in the curriculum. The I realized that if the media are incompetent with regards to geography so should the population.

As an aside years ago we lived in Singapore, the city state is globaly considered #1 or #2 in education, a great point of pride for the the country. The local TV station introduced a local version of Who wants to be a millionaire, but clearly little vetting had been done of the contestants, who not only were cloths challenged (some men were wearing singlet vests..) but when asked the most mindless general knowledge questions were unable to answer. One even called a friend who was categoric that a large ice and snow formation in the water was a glacier and not an Iceberg.

My point, even in advance education systems there is no room left for general knowledge, if I cannot make money from it, there is no need to know it. As an undergrad student I was always surprised when a fellow student would ask from the professor: Will this be in the Test? As if this information could not be of any other use in the future. Thankfully most teachers reply was a stern direct look at the student and a silence -- still there was always one or two who would ask!

P.S. After two embarrassing airings, the Singapore version of Who wants to be a millionaire was put on hiatus and a new version was shot where better contestant vetting was done.


Tuesday, October 20, 2009


It has been a week since my last post

Its not for a lack of desire, its just been a little busy over the past few days. This is a short post, yesterday I had a bit of a China Syndrome episode. It seems that last week I spilled a soft drink onto my keyboard, nothing really, but yesterday four keys were operating with some difficulties. I called the help desk and they told me to fill a requisition and that something would show up in a few days/week -- hardly satisfying!

On a whim, I asked the computer tech on the trading floor (where I exist on the edge) if he had any idea where I could get a keyboard fast! He bent under his desk and pulled out a brand new keyboard. Working in a dealing room where each trader has between 5 and 10 screens (we look like NASA) we order about 10-20 new computer per month. In the past we would only order the computer (no keyboard or monitor), but about two years ago, we noticed that if we ordered the a keyboard it was cheaper... than if we just bought the machine.

The impact, we have lots of spare keyboards. he told me not to tell the tech group, you see if he did we would have to match the keyboard to inventory... and the only reason we buy the things is because the computers are cheaper. For those who are too young the premise of the movie China Syndrome is that a can of coke was spilled on the keyboard which let to a nuclear melt down, and in finishing where it gets weirder, when the Three Mile Island nuclear plant almost went critical it was a can of Seven-Up that caused the problem.

Sometimes reality and fiction are strange bedfellows