Merrill Lynch seeking new capital from Chinese and Mideast investors

You see? Temasek, you see?

Merrill Lynch seeking new capital from Chinese and Mideast investors – report
December 30, 2007: 08:46 AM EST

LONDON, Dec. 30, 2007 (Thomson Financial delivered by Newstex) — The new chief executive of Merrill Lynch (NYSE:MER) (OOTC:MERIZ) & Co Inc is in talks with Chinese and Middle Eastern investors this weekend that could lead to a capital-raising sale of another big stake in the US investment bank, the Observer reported.

John Thain is taking calls from a number of potential buyers, understood to include sovereign wealth funds from the Gulf and China, in a bid to raise extra capital, the newspaper quoted an unidentified US observer as saying.

Singapore state-linked investment company Temasek Holdings (Pte) Ltd said on Dec 26 it had invested 4.4 bln usd into Merrill — equivalent to 91.7 mln of Merrill’s shares at 48 usd a share — plus options to buy more shares worth up to 600 mln usd, as a vote of confidence in Thain’s leadership.

The newspaper quoted the unnamed US observer as saying the Temasek cash would not be enough to insulate the group from the impact of the global credit crunch and another unidentified source as saying Thain was seeking extra overseas capital to boost Merrill’s balance sheet and to avert potential future liquidity problems.

Bonuses for top lawyers hit 9 months

More propaganda to stem the loss of talent. It does not say what proportion of lawyers get nine months. Usually 1 or 2.

Straits Times, 29 Dec
Bonuses for top lawyers hit 9 months

Business boom leads to larger payouts this year, with big firms paying 5-1/2 months and upwards
By K.C. Vijayan, Law Correspondent

BIG law firms, buoyed by the business boom, are handing out bigger year-end bonuses this year, with the best payouts breaching the nine-month mark.

The Straits Times understands that top performing lawyers in top-league firms like Drew & Napier and Rajah & Tann are getting high payouts across the board as rewards to recognise good work when the going is good.

Other firms like Harry Elias Partnership (HEP) and KhattarWong also awarded fatter bonuses of between 5-1/2 and eight months to its lawyers.

HEP’s managing partner Latiff Ibrahim said its top performers are in the ‘booming corporate, construction and litigation practices’.

KhattarWong’s Subhas Anandan said the bigger bonuses also spilled to the non-legal support staff, with the best receiving up to 5-1/2 months.

Lawyers generally attributed the fat bonus cheques to the strong economy, increased revenues and the need to pay high performers for ‘all the hard work and all the nights they have put in’.

WongPartnership, one of the biggest firms here, has had an ‘extremely good year’ in terms of the transactions and briefs received, said Mr Chou Sean You, a partner in the firm.

‘We expect to remunerate our lawyers well for all the hard work they have put in throughout the year,’ he said, adding that his firm traditionally declared its bonuses in January.

The upturn has benefited small and medium-size firms as well, especially in conveyancing work, said senior lawyer N. Sreenivasan.

‘Whether the property boom continues into the new year remains to be seen,’ he added.

He said that ‘with expected rental and salary increases next year, law firms will have to be more efficient, to reduce the impact of these increased overheads on the cost of legal services’.

Small firms which may not be able to match the fat bonuses of their bigger counterparts are unfazed, with some noting the hidden toll in work-life balance for those working in the top league.

Said Mr R. Kalamohan, who has run his own firm for more than 18 years: ‘I don’t know how many ‘handicaps’ I have compared to big firms, but when you look at the work-life balance, it is a different issue.

‘I am not constrained to burn the midnight oil every day unless there are exigencies. I do not think income is the main criterion for a good life.’

Give that man a Tiger.

Sailing a Pico in St Stephen's Beach

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St Stephen’s Beach is a very nice area near Stanley market. It is located within the same bay and if you stand at Stanley together with the tourists and look out to sea and to your left, you will see a boathouse and a patch of sand which is called St Stephen’s Beach. I say it is nice because it is tranquil and not packed with tourists or commercial interests, unlike Sentosa in Singapore. Indeed, the South side of Hong Kong is always beautiful, at any time of the year.

The sailing centre at St Stephen’s Beach is much better than the Sai Kung one, because it’s 5 times less crowded and the staff are more friendlier, i.e. have more patience with newbies like me. In addition, the boats are newer and I would say better than the RHKYC ones.

So last Sunday, I rented a Laser Pico. I had initially invited this Indonesian babe from Morgan Stanley to sail with me but it turns out she had other plans during that Christmas weekend (which is understandable because the concept of Indonesian and babe is a remote combination in the SAR). Since I had already paid for the boat, I went out alone. Now I had never sailed a Laser Pico before, but I did my best in rigging up (and some fellow sailors pointed out that I got one or two riggings wrong) before setting sail for Stanley Bay. After about 15 mins of happily cruising in the bay (wind was gusty but more tolerable than Deep Water Bay), I noticed that I was slower than all the other Picos in the bay and could not catch up with any of them no matter what I tried. So I thought to myself, wow, everyone here must be really good. I also made a mental note to get in a lot more practice, since I had already registered for a Laser racing clinic with the RHKYC in January and did not want to be last in class (you can tell I am a true blue Singaporean).

Well mental notes aside, after another few minutes, the front of my hull decided to go underwater. I was really shocked because in my limited sailing experience with Lasers, the front of a boat never gets dragged underwater like that. It was as though some invisible hand had just dragged the whole boat underwater! I panicked and thought that maybe there was some kind of fishing net or rope that got stuck on the front and caused the boat to tilt downwards. So after a few seconds it surfaced and all was fine. I crawled to the front to inspect the hull but no, no rope or anything like that. Then after a while it went underwater again. I knew by then that something was wrong with this boat and decided to immediately get back to base. However, even though I had formed the intention to cut losses at this stage, my Sunday adventure had just begun. The hull dipped a few more times under the choppy waves. And then it capsized.

As any beginner can tell you, the worst part of sailing is capsizing, not because you are announcing to everyone around you that you are a beginner, but because it takes a tremendous amount of energy and co-ordination to get the boat back upright. In addition, you would have immediately lost any race that you were in, and the inconsolably unfriendly concept of wind-chill would sit right next to you whether you like it or not.

So I slowly flipped it over, and it promptly replied to me by capsizing again. Strange, I wondered, why is it capsizing so easily and with no apparent fault in my sailing technique. And so after flipping it up I loosened the sails to prevent the wind from causing a capsize, but it still capsized. Then I lifted the rudder, it still capsized. Then I did all of the above and lay flat in the boat, still capsized. It consecutively capsized 15 times until I was running out of energy and it dawned on me that the hull of the boat was sinking deeper and deeper underwater each time I righted it up. It was like I was standing on a plastic iceberg. Water was rushing into the seating area as though a dam had somehow been broken and the water would just rush in. The boat just would not drain out the seawater. Gosh, I thought, this boat had to be leaking and I somehow managed to rent a boat with a leaky hull. Luckily I am close to shore otherwise I’ll be in big trouble. So I waved the rescue boat to come over to save me from this difficult situation. As it took time for them to come (they were busy rescuing other windsurfers who had capsized for reasons different from mine), rather than wasting my energy righting up the boat umpteen times, I allowed it to capsize and sat on the hull.

When the rescue boat was approaching my boat they asked what the problem was. I told them water was entering the boat, and I remember the pair of sunglasses smiling back:

“Did you remember to fasten the drain plug before you took the boat out?”

Care taken to maintain order at ZoukOut party

Care taken to maintain order at ZoukOut party
ST 27 Dec

IN RESPONSE to Mr Kwok Chee Chiu’s letter, ‘Stop diseases, ban parties like ZoukOut’ (ST, Dec 14).

From the nature of the letter, I assume Mr Kwok did not attend ZoukOut and the opinion may be based on The New Paper post-coverage and the translated version carried in the Chinese dailies. This is unfortunate as it was only The New Paper that took this angle out of more than 150 local and foreign publications that attended and covered the event.

This highlights the fact that that story was not an accurate overall reflection of the 23,000 attendees over the 12-hour period, and the pictures featured were of isolated incidents of consenting adults who may have been behaving more intimately than some would consider appropriate but, by no means, against the law. The article may have provoked strong emotions but we assure everyone that Zouk takes safety and managing a party within the legal parameters of the Singapore judicial system very seriously.

Although we respect Mr. Kwok’s point of view, we believe such a call for action, if implemented, would not benefit Singapore’s nightlife industry, tourism (more than 9,000 international guests attended), world democratic standing or economy. ZoukOut has become a national event over the last seven years and a fixture on the international dance and music calendar, considered by many to be one of the best in the world in terms of management, production and entertainment. As responsible organisers, our pre-emptive measures to maintain law and order and abide by licensing conditions included hiring more than 150 security personnel, plus another 40 uniformed police. In addition, ZoukOut is one of the few major events in Singapore where attendees must present photo ID stating they are above 18.

To call for a ban of events like ZoukOut, that promote tolerance, uniting people from all walks of life, regardless of nationality, as the solution to stopping the spread of diseases is in our view misguided and not the most productive way to address the issue. Echoing Forum respondent Dr Wong Jock Onn on Dec 18, it is through better education that people have a greater awareness of how sexually transmitted diseases are spread and ultimately make the right choices.

It was heartening to see all three respondents (Andre Oei, Owen Yeo and Anna Wong) in the ST YouthInk section on Dec 24, all under the age of 21, making concise, analytical and educated statements on whether such events should be banned. They leave us with confidence that the youth of Singapore are more knowledgable, responsible and informed than some may think.

Tracy Phillips
Marketing Manager
Zouk Management

Citi, HSBC among banks considering sale of units

Citi, HSBC among banks considering sale of units
They turn to asset sales to generate immediate cash as credit woes persist

NEW YORK – UNITED States and European banks including Citigroup and HSBC Holdings are mulling over sales of parts of their businesses in a nod to crunch times ahead, the Wall Street Journal reported on its website.

While Citigroup may shed or shut several of its mid-size units, HSBC could exit all or parts of its US$13 billion (S$18.9 billion) auto finance arm, said the paper yesterday, citing unnamed sources.

They estimate that Citigroup could dispose of as much as US$12 billion worth of what are considered non-critical assets. These include Student Loan Corporation; its North American auto lending business; its 24 per cent stake in Brazilian credit card company Redecard; and its Japanese consumer finance business.

Talk of the potential moves comes days after Merrill Lynch announced that it would sell most of its commercial-lending business to General Electric for US$1.3 billion. Morgan Stanley pocketed more than US$250 million last month by selling a slice of its

MSCI investment-analysis unit in a public offering.

‘I think we are going to see a real wave of these coming through in the first half of next year,’ said Morgan Stanley banking analyst Huw van Steenis.

Buyers could be hard to find in an environment where many financial companies are in trouble but analysts said the motivation to sell is strong, said the Journal.

This is because asset sales generate quick cash at a time when banks are likely to face persistent difficulties in borrowing money.

Rates at which banks lend to one another are still prohibitively high because of lingering worries about further losses from US sub- prime mortgage investments, it added. Other sources of funds, such as commercial paper, remain frozen or too expensive.

Several of the world’s largest banks have recently sold multibillion-dollar stakes to state-owned Asian and Middle Eastern investors to boost their capital.

But as banks increasingly take onto their balance sheets assets that had been held off-balance, their capital needs have grown.

In a report this month, Goldman Sachs estimated that US$475 billion of extra assets had been moved to bank balance sheets since the credit crunch sped up earlier this year, said the Journal.

Changes in leadership at Citigroup and HSBC also increased the likelihood of sales, it added. Citigroup recently installed Mr Vikram Pandit as its new chief executive, while Mr Brendan McDonagh took over in February as head of HSBC’s US consumer unit, HSBC Finance Corp, after the unit suffered heavy losses on investments in US home loans.

Why Temasek should stop investing in investment banks

Dear Temasek shareholder

Did you know that, at the current state of play, several investment banks are technically insolvent the moment they disclose their true financial situation? And that the U.S. Federal Reserve, the European Central Bank (ECB) and the Bank for International Settlements (BIS) are trying their best to prevent such a blowup from occurring, including lending unlimited amounts of money to these banks? Are you aware that the international press is clueless or does not wish to write about what is really going on within the investment banks, much less how structured products are priced, valued and traded? Why do you think that no person, entity or government corporation in the U.S., Europe, or the Asia-Pacific (other than yourself) wanted to touch the shares in these investment banks with a ten foot pole?

The Reason

According to banking regulators, there are three kinds of assets in the world:

Level One assets are actively traded. You can know exactly how much they’re worth based simply on their price in the open market. Examples of Level One assets are common stock, bonds and funds.

Level Two assets are not actively traded. But they’re similar enough to actively traded assets to give you a reasonable estimate of their value. Examples of Level Two assets are preference shares, antiques and paintings.

Level Three assets are the most slippery. In addition to having no active market, they’re so unique, there’s no reliable way to estimate their true value. Instead, all that banks and regulators can do is guess. And the only tools they have to support their guesswork are unproven mathematical formulas. Examples of Level Three assets are structured products like credit derivatives, collateralised debt obligations (CDOs) and credit default swaps (CDS).

Here’s the key:

The money panic brewing today is driven largely by this third kind of asset — derivatives of questionable value that were artificially created by Wall Street brokers, officially sanctioned by Washington regulators, and falsely rated by Wall Street rating agencies.

These are the sinking assets that are hitting the big Wall Street firms … panicking investors all across the U.S. and Europe … even threatening some money market funds.

Some of Wall Street’s investment banks have more Level Three Assets than they have capital

Specifically, according to data compiled by the Financial Times:

Merrill Lynch has US$27.2 billion in Level Three assets, the equivalent of 70% of its stockholders’ equity. In other words, for each $1 of its capital, Merrill has 70 cents in assets of questionable and uncertain value.

Goldman Sachs has US$51 billion in Level Three assets, or 130% of its equity.

Bear Stearns has sunk its balance sheet even deeper into the Level Three asset hole, with US$20.2 billion, or 155% of its equity.

Lehman Brothers is in a similar situation — US$34.7 billion, or 160% of its equity. And …

Morgan Stanley tops them all with US$88.2 billion in Level Three assets, or 250% of its capital. That’s an unwieldy $2.50 cents in Level Three assets for each dollar of capital. It implies that, in the absence of new capital infusions, all it would take is a 40% loss — and Morgan Stanley’s capital could be 100% wiped out.

Bottom line: The huge Wall Street write-downs you’ve heard about to date — among the largest in history — could be just the tip of the iceberg.

All told, there are 968 U.S. commercial banks that invest in derivatives. But among them, 963 banks hold a meager 1.5% of all the interest-rate and credit derivatives in America.

In contrast, just five banks hold an amazingly large 98.5% of all the interest-rate and credit derivatives.

That is why no one in the entire world, other than Qatar, Saudi Arabia and Temasek wanted to become shareholders of UBS or Merrill Lynch! Why would international IBs have to turn up, cap in hand, at the doorsteps of little red dot sovereign funds?

Helping to cut through some of the uncertainty, the Office of the Comptroller of the Currency (OCC) evaluates the credit exposure of each U.S. bank holding derivatives. In other words, it asks the question:

Regardless of whether the bet is a win or a loss, what happens if the investor on the other side of the bet doesn’t pay up?

In normal times, such payment defaults are rare. So this is largely a theoretical question. But in a money panic, when markets can go haywire and available cash financing can suddenly dry up, a chain reaction of defaults could make this a very urgent and practical question. The answers, according to OCC data are that overall, including all types of derivatives:

Wachovia has credit exposure that’s equivalent to 89% of its capital. In other words, if all of its counterparties defaulted on their bets with Wachovia, nearly nine-tenths of its capital would be wiped out.

Bank of America is exposed to the tune of 99% of its capital. Assuming no capital infusions, it could be virtually wiped out in an extreme money panic scenario.

And at three banks, the panic would not have to be quite that extreme:

Citibank has 292% of its capital exposed to this kind of credit risk.

JPMorgan Chase has 387% of its capital exposed.

HSBC beats them all with an exposure of 388% of its capital. That means that even if its counterparties defaulted on just 26% of their bets, its capital could be wiped out.

Now, remember what I told you about Level Three assets — that they don’t have a regular place to trade.

Well, we could say something similar about the overwhelming majority of derivatives: They are not traded on regulated exchanges. Rather, they are traded over the counter, based on individually negotiated contracts.

In other words, if there’s a default, the parties have to work through it directly, one on one. Exchange authorities are not going to step in to help manage the crisis for them.

And currently, four of the five U.S. banks I named earlier trade over 90% of their derivatives in this way — outside of regulated exchanges.

At JPMorgan Chase, Bank of America, Citibank and HSBC, the derivatives they trade outside of exchanges represent 94%, 93%, 97% and 97% of their total, respectively. Only Wachovia has a somewhat lesser amount in this category — 77%.

What does this mean?

That the upcoming financial collapse will be the worst of its kind in human history, and will make 1929 “look like a walk in the park”.

Ah, but you say, ML and UBS are fine. They are immune. They are in a different class altogether. You have spoken to their finance departments, their auditors have produced interim reports. No problem at all.

Well, two points:

1. It is not in the interests of the vendor of an asset (and neither is it under any obligation) to inform you that it’s asset is worthless, or even worse, a liability (aka, caveat emptor).

2. If it’s too good to be true, it usually is.

Citigroup and Merrill face bigger writeoffs: Goldman Sachs

Citigroup and Merrill face bigger writeoffs: Goldman Sachs
Thu Dec 27, 2007 7:57 AM ET

NEW YORK (Reuters) – Citigroup Inc , Merrill Lynch & Co and JPMorgan Chase & Co may face larger fourth-quarter write-offs of fixed-income securities than previously expected, and Citigroup may have to slash its dividend 40 percent to preserve capital, according to a Goldman Sachs & Co analyst.

“It will be a couple of quarters before the current credit crisis is fully digested by the markets,” the analyst, William Tanona, wrote on Thursday.

The analyst issued his forecast after banks said they would write off tens of billions of dollars of debt this quarter, as rising mortgage and credit losses led investors to shun debt once thought safe but now deemed risky. Citigroup replaced Chief Executive Charles Prince with Vikram Pandit, while Merrill replaced Chief Executive Stanley O’Neal with John Thain.

Citigroup, Merrill and JPMorgan did not immediately return calls seeking comment.

Tanona, who rates Citigroup “sell,” said the largest U.S. bank may have to write off $18.7 billion this quarter for collateralized debt obligations. That’s up from his prior $11 billion forecast, and higher than Citigroup’s $8 billion to $11 billion forecast. Tanona boosted his forecast for the bank’s fourth-quarter loss to $1.33 per share from 52 cents.

The analyst also said Citigroup may in 2008 cut its 54-cents-per-share quarterly dividend, equal to a 7.1 percent yield, to help raise or preserve another $5 billion to $10 billion of capital. In November, Citigroup shored up capital by selling a $7.5 billion stake to Abu Dhabi’s government.

Tanona said Merrill, rated “neutral,” may write off $11.5 billion for CDOs this quarter, up from his prior $6 billion forecast, as Thain tries to clean up problems now rather than let them fester in 2008. The analyst expects a fourth-quarter loss of $7.00 per share, up from his prior $1.50 forecast.

Brad Hintz, a Sanford C. Bernstein & Co analyst, separately on Thursday predicted a $10 billion fourth-quarter write-off at Merrill, leading to a $5.10 per share quarterly loss.

Merrill on Monday announced a $6.2 billion capital infusion from Singapore’s government and money manager Davis Selected Advisers.

Tanona also doubled his forecast for fourth-quarter CDO losses at JPMorgan to $3.4 billion from $1.7 billion. He cut his forecast for fourth-quarter profit to 65 cents per share from $1.04. The analyst rates JPMorgan “neutral.”

In Wednesday trading, shares of Citigroup closed at $30.45, Merrill at $54.54, and JPMorgan at $44.94. The shares are down a respective 45 percent, 41 percent and 7 percent this year.

(Reporting by Jonathan Stempel; Additional reporting by Avishek Mishra in Bangalore; Editing by Steve Orlofsky)


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