Derivatives

Notional Value

The total value of a leveraged position’s assets. This term is commonly used in the options, futures and currency markets because in them a very little amount of invested money can control a large position (have a large consequence for the trader).

For example, one S&P 500 Index futures contract obligates the buyer to 250 units of the S&P 500 Index. If the index is trading at $1,000, then the single futures contract is similar to investing $250,000 (250 x $1,000). Therefore, $250,000 is the notional value underlying the futures contract.

Credit Derivative

Privately held negotiable bilateral contracts that allow users to manage their exposure to credit risk. Credit derivatives are financial assets like forward contracts, swaps, and options for which the price is driven by the credit risk of economic agents (private investors or governments).

For example, a bank concerned that one of its customers may not be able to repay a loan can protect itself against loss by transferring the credit risk to another party while keeping the loan on its books.

Credit Default Swap

A swap designed to transfer the credit exposure of fixed income products between parties.

The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.

For example, the buyer of a credit swap will be entitled to the par value of the bond by the seller of the swap, should the bond default in its coupon payments.

Inemuri

Sleep, or rather the lack of it makes us less able (if not downright dangerous) in the workplace according to sleep expert Dr Neil Stanley of the Norwich University Hospital. “Sleep is as important as diet and exercise when it comes to the nation’s health,” says Dr Stanley, “but we place no importance on it in our culture. When you are sleep deprived you are putting yourself in a stress situation. In our culture it is socially acceptable to have had no sleep and go into work, even though your ability to function is severely impaired and you could be dangerous.” The good doctor recommends ‘power napping’ as a way of countering the effects of too little rest. “A 20-minute nap gives you an amazing boost, it’s much better than having a coffee,” he says. “Even closing your eyes for 20 minutes is better than nothing, but in the UK it is culturally unacceptable for us to be found napping with our head on the keyboard. However, it’s fine to pump yourself with caffeine even though it it’s nowhere near as effective.” Whilst nodding off at work is still largely unacceptable here, across the world in Japan it’s almost mandatory. Know as ‘inemuri’ or ‘to be asleep while present’, the custom is seen as a demonstration of how committed you are to the job (i.e. you are exhausted because you are putting in so many hours for the company). So well regarded is inemuri that many workers apparently fake it even if they aren’t really tired just to impress their bosses. Interesting place Japan. You couldn’t make this up.

Black swan theory

“So far, the losses reported on Wall Street are staggering. But rumors of much larger losses are being whispered…and at least one source has suggested that the firms may be bankrupt…crushed by total system-wide losses of more than $3 trillion.”

In Nassim Taleb’s definition, a “black swan” is a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations. Taleb regards many scientific discoveries as black swans—”undirected” and unpredicted. He gives the September 11, 2001 attacks as an example of a Black Swan event.

The term black swan comes from the ancient Western conception that all swans were white. In that context, a black swan was a metaphor for something that could not exist. The 17th Century discovery of black swans in Australia metamorphosed the term to connote that the perceived impossibility actually came to pass.

Taleb’s Black Swan has a central and unique attribute: the high impact. His claim is that almost all consequential events in history come from the unexpected—while humans convince themselves that these events are explainable in hindsight.

Taleb believes that most people ignore “black swans” because we are more comfortable seeing the world as something structured, ordinary, and comprehensible. Taleb calls this blindness the Platonic fallacy, and argues that it leads to three distortions:

1. Narrative fallacy: creating a story post-hoc so that an event will seem to have a cause.

2. Ludic fallacy: believing that the structured randomness found in games resembles the unstructured randomness found in life. Taleb faults random walk models and other inspirations of modern probability theory for this inadequacy.

3. Statistical regress fallacy: believing that the probability of future events is predictable by examining occurrences of past events.

He also believes that people are subject to the triplet of opacity, through which history is distilled even as current events are incomprehensible. The triplet of opacity consists of

1. an illusion of understanding of current events

2. a retrospective distortion of historical events

3. an overvalue of facts, combined with an overvalue of the intellectual elite

World's Largest Law Firms

This list of the world’s largest law firms by revenue is taken from The Lawyer and The American Lawyer and is ordered by 2006 revenue:

1. Clifford Chance, £1,030.2m – International law firm (headquartered in the UK);
2. Linklaters, £935.2m – International (UK);
3. Skadden, Arps, Slate, Meagher & Flom, £884.6m – New York City (USA);
4. Freshfields Bruckhaus Deringer, £882.1m – International (UK);
5. Latham & Watkins, £776.1m – National (USA);
6. Baker & McKenzie, £742.9m – International (USA);
7. Allen & Overy, £736.3m – International (UK);
8. Jones Day, £706.0m – National (USA);
9. Sidley Austin, £617.6m – International (USA);
10. White & Case, £574.7m – International (USA);
11. Weil, Gotshal & Manges, £558.5m – New York City (USA);
12. Mayer Brown, £538.5m – International (USA);
13. Kirkland & Ellis, £533.0m – Chicago (USA);
14. DLA Piper (USA), £489.3m – National (USA);
15. Sullivan & Cromwell, £480.8m – New York City (USA);
16. Greenberg Traurig, £472.8m – National (USA);
17. Shearman & Sterling, £458.8m – International (USA);
18. Wilmer Hale – £447.8m, Washington, D.C. (USA);
19. O’Melveny & Myers, £444.0m – Los Angeles (USA);
20. Morgan, Lewis & Bockius, £442.0m – National (USA);
21. McDermott Will & Emery, £439.3m – National (USA);
22. Cleary Gottlieb Steen & Hamilton, £417.6m – New York City (USA);
23. Gibson, Dunn & Crutcher, £409.9m – Los Angeles (USA);
24. Simpson Thacher & Bartlett, £399.5m – New York City (USA);
25. Lovells, £396.2m – International (UK);
26. Hogan & Hartson, £384.6m – National (USA);
27. Morrison & Foerster, £377.5m – San Francisco (USA);
28. DLA Piper (Europe), £366.5m – International (UK);
29. Paul, Hastings, Janofsky & Walker, £366.5m – National (USA);
30. Akin Gump Strauss Hauer & Feld, £339.6m – National (USA);
31. Foley & Lardner, £335.4m – Milwaukee (USA);
32. Davis Polk & Wardwell, £332.1m – New York City (USA);
33. Bingham McCutchen, £325.8m – National (USA);
34. Eversheds, £323.1m – International (UK);
35. Slaughter and May, £321.2m – London (UK);
36. Holland & Knight, £319.5m – National (USA);
37. Dechert , £317.0m – National (USA);
38. Pillsbury Winthrop Shaw Pittman, £315.4m – National (USA);
39. Winston & Strawn, £313.7m – Chicago (USA);
40. Paul, Weiss, Rifkind, Wharton & Garrison, £309.3m – New York City (USA);
41. Reed Smith, £309.1m – Pittsburgh (USA);
42. Ropes & Gray, £306.6m – Boston (USA);
43. Orrick, Herrington & Sutcliffe, £304.4m – San Francisco (USA);
44. Fulbright & Jaworski, £296.2m – Houston (USA);
45. Herbert Smith, £296.2m – International (UK);
46. Debevoise & Plimpton, £294.2m – New York City (USA);
47. King & Spalding, £282.7m – Atlanta (USA);
48. Vinson & Elkins, £280.2m – Houston (USA);
49. Cravath, Swaine & Moore, £275.0m – New York City (USA);
50. Milbank, Tweed, Hadley & McCloy, £272.5m – New York City (USA);
51. Cadwalader, Wickersham and Taft, £265.4m – New York City (USA);
52. Heller Ehrman, £261.0m – San Francisco (USA);
53. Hunton & Williams, £261.0m – Richmond, Virginia (USA);
54. Kirkpatrick & Lockhart Nicholson Graham – £257.71m – National (USA);
55. Arnold & Porter, £255.8m – Washington, D.C. (USA);
56. Proskauer Rose, £249.2m – New York City (USA);
57. Sonnenschein Nath & Rosenthal, £246.2m – Chicago (USA);
58. Wachtell, Lipton, Rosen & Katz, £243.4m – New York City (USA);
59. Willkie Farr & Gallagher, £243.4m – New York City (USA);
60. LeBoeuf, Lamb, Greene & MacRae, £241.8m – National (USA);
61. Baker Botts, £238.7m – Houston (USA);
62. Goodwin Procter, £228.0m – Boston (USA);
63. Simmons & Simmons, £226.9m – International (UK);
64. Wilson Sonsini Goodrich & Rosati, £226.4m – Palo Alto (USA);
65. Squire, Sanders & Dempsey, £225.3m – National (USA);
66. Bryan Cave, £219.0m – National (USA);
67. Alston & Bird, £217.0m – Atlanta (USA);
68. Dewey Ballantine, £215.7m – New York City (USA);
69. Fried, Frank, Harris, Shriver & Jacobson, £214.3m – New York City (USA);
70. Ashurst, £214.0m – International (UK);
71. Katten Muchin Rosenman, £212.4m – Chicago (USA);
72. Howrey, £211.3m – Washington, D.C. (USA);
73. Kaye Scholer, £210.7m – New York City (USA);
74. Norton Rose, £210.2m – International (UK);
75. Covington & Burling, £208.8m – Washington, D.C. (USA);
76. Nixon Peabody, £205.2m – National (USA);
77. McCarthy Tétrault, £203.8m – National (Canada);
78. Freehills, £194.8m – National (Australia);
79. Mallesons Stephen Jaques, £190.7m – National (Australia);
80. McGuireWoods, £187.4m – Richmond, Virginia (USA);
81. Seyfarth Shaw, £184.9m – National (USA);
82. CMS Cameron McKenna, £181.3m – International (UK);
83. Fidal, £181.3m – National (France);
84. Schulte Roth & Zabel, £176.4m – New York City (USA);
85. Dorsey & Whitney, £175.0m – Minneapolis (USA);
86. Perkins Coie, £174.7m – Seattle (USA);
87. Pinsent Masons, £172.0m – International (UK);
88. Minter Ellison, £171.7m – National (Australia);
89. Clayton Utz, £163.7m – National (Australia);
90. Cooley Godward, £163.7m – Palo Alto (USA);
91. Addleshaw Goddard, £161.3m – National (UK);
92. Duane Morris, £159.6m – Philadelphia (USA);
93. Jenner & Block, £158.0m – Chicago (USA);
94. Baker & Hostetler, £156.0m – Cleveland (USA);
95. Allens Arthur Robinson, £154.9m – National (Australia);
96. SJ Berwin, £154.9m – International (UK);
97. Edwards Angell Palmer & Dodge, £153.0m – Boston (USA);
98. Thelen Reid & Priest, £152.7m – San Francisco (USA);
99. Loyens & Loeff, £151.9m – Rotterdam (Netherlands);
100. Denton Wilde Sapte, £147.5m – International (UK).

Singapore apparently paid Citi more when China refused

Singapore apparently paid Citi more when China refused
By MarketWatch
Last update: 9:25 a.m. EST Jan. 15, 2008
The Singapore government’s main investment vehicle agreed to increase the amount it planned to inject into Citigroup (C:C 26.24, -0.70, -2.6%) “apparently to cover” the approximately $2 billion Citi had unsuccessfully sought from the government of China, a person familiar with the situation said Tuesday.

During most of the day, Government of Singapore Investment Corp. (GIC) was committed to invest about $4.8 billion to $5 billion in Citigroup, but later in the day apparently told Citi it would “cover” the amount of money ($1.8 billion to $2 billion) the bank had hoped to raise from the Chinese government, the person said.

GIC’s decision partly reflected GIC’s long-standing relationship with the new CEO of Citi, Vikram Pandit, the person said. GIC was an original investor in Old Lane Partners, a hedge fund Pandit co-founded; it was later bought by Citigroup.

China Development Bank’s rejection of Citi’s request emerged Monday night.

The Singapore government would consider additional investments in Citigroup “if the opportunity and the need arises,” the person said.

Singapore has two sovereign wealth funds – GIC and Temasek Holdings Pte. – which have taken stakes in troubled financial institutions in recent months.

The terms of GIC’s purchase of $6.88 billion in Citi convertible bonds reflect the cash-strapped bank’s lack of leverage: GIC said the instruments will earn a hefty 7% non-cumulative interest, payable quarterly.

The conversion premium is a fairly low 20% and is “subject to adjustment in certain limited circumstances.” However, GIC noted these instruments give “appropriate downside protection.”
The press release didn’t give further details.

All told, GIC will own 4% of Citi as a result of the transaction; it already held 0.3% of the bank. GIC said it won’t “take” a board seat at Citi. Indeed, political sensitivities have prompted sovereign wealth funds providing financial infusions to U.S. and European banks to emphasize their intended roles as passive investors.

GIC pumps S$9.8b into Citigroup

GIC pumps S$9.8b into Citigroup
By May Wong, Channel NewsAsia | Posted: 15 January 2008 1951 hrs

SINGAPORE: The Government of Singapore Investment Corporation (GIC) will soon have a bigger stake in US-based Citigroup.

GIC will pump in US$6.88 billion (S$9.8 billion) into one of the world’s largest banks. This is part of Citigroup’s bid to raise US$12.5 billion of capital to boost its financial position.

GIC is the hand behind the management and enhancement of Singapore’s reserves.

That is exactly what the company is doing with its latest purchase into Citigroup. The two companies took just eight days to seal the deal.

GIC’s investment is done through a financial instrument called convertible preferred securities. This will effectively give GIC some form of protection.

For example, if Citigroup’s stock price falls, GIC does not have to convert its securities into shares and will continue to earn dividends of 7 percent.

But such a prudent investment, with lower risks, will also mean that GIC will see relatively lower returns.

In a news release, GIC’s deputy chairman and executive director, Tony Tan, said the company looks for returns on a long-term basis. He believes GIC’s latest Citigroup investment will meet that objective.

Dr Tan said: “GIC is a financial investor seeking commercial returns on a long-term basis … We believe that the investment in Citigroup will meet our long-term investment objective in terms of risk and return.”

GIC now holds 0.3% of shares in Citigroup. The new deal will bring GIC’s stake in the bank to 4% if converted to shares.

The investment will make GIC, as a single entity, one of the top five investors in Citigroup. However, GIC says it will not sit on Citigroup’s board.

GIC’s latest investment comes hot on the heels of a major deal last month, when it pumped nearly S$14 billion into the Swiss banking giant UBS. – CNA/ir

Citigroup, Merrill Lynch Get $21 Billion From Outside Investors

Citigroup, Merrill Lynch Get $21 Billion From Outside Investors

By Yalman Onaran

Jan. 15 (Bloomberg) — Citigroup Inc. and Merrill Lynch & Co., two of America’s largest financial institutions, turned to outside investors for a second time in two months to replenish capital eroded by subprime mortgage losses.

Citigroup, the biggest U.S. bank, is getting $14.5 billion from investors, including the governments of Singapore and Kuwait, former Chairman Sanford Weill, and Saudi Prince Alwaleed bin Talal, the New York-based company said today in a statement. Merrill, the largest brokerage, said it’s receiving $6.6 billion from a group led by Tokyo-based Mizuho Financial Group Inc., the Kuwait Investment Authority and the Korean Investment Corp.

Wall Street banks have now received $59 billion, mostly from investors in the Middle East and Asia, to shore up balance sheets battered by more than $100 billion of writedowns from the declining values of mortgage-related assets. Citigroup was propped up in November by a $7.5 billion investment from the Abu Dhabi Investment Authority. New York-based Merrill was helped by a $5.6 billion cash infusion last month from Singapore’s Temasek Holdings Pte. and U.S. fund manager Davis Selected Advisors LP.

“The only reason the banks are raising capital from the Middle East and Asia is because those are the only people who have the excess capital to lend,” said Jon Fisher, who helps oversee $22 billion at Minneapolis-based Fifth Third Asset Management, which holds shares of Citigroup and Merrill.

Citigroup declined 68 cents to $28.38 and Merrill fell $1.25 to $54.72 in early New York trading.

The writedowns have reduced Citigroup’s so-called Tier 1 capital ratio, which regulators monitor to assess a bank’s ability to withstand loan losses. With today’s capital increase, the Tier 1 ratio would be 8.2 percent, Citigroup said, keeping it above the company’s 7.5 percent target.

`Capital at a Cost’

Morgan Stanley, UBS AG, Merrill Lynch & Co. and Bear Stearns Cos. also reached out to sovereign wealth funds or state- controlled investment authorities in Asia for money after bad investments depressed profits.

“It does show that investors aren’t completely ignoring the sector,” said Peter Plaut, a senior credit analyst at Sanno Point Capital Management, a hedge fund based in New York. “They are putting in capital but it’s at a cost. Now it’s up to the CEOs to be able to generate returns that exceed that cost of capital.”

The Kuwait Investment Authority, which invested in both Merrill and Citigroup, was formed by the Middle East’s fourth- biggest oil producing country in the 1980s to manage the nation’s wealth. Kuwait may have as much as $250 billion of assets, compared with about $875 billion for the Abu Dhabi Investment Authority, the world’s largest sovereign wealth fund, according to an estimate by Morgan Stanley analyst Stephen Jen.

Singapore, Alwaleed

The Government of Singapore Investment Corp. invested almost $7 billion in Citigroup convertible preferred securities and said in a statement today that it will own about 4 percent of the bank if the securities are turned into shares. With a 4 percent stake, Alwaleed has been Citigroup’s biggest individual shareholder since the early 1990s, when soured investments in commercial real estate left corporate predecessor Citicorp short of capital.

Singapore and Alwaleed, along with Los Angeles-based Capital Group Cos., the biggest U.S. manager of stock and bond mutual funds, Kuwait, the New Jersey Division of Investment and Weill, will receive a 7 percent annual dividend from the investment in Citigroup.

Merrill’s convertible securities will pay a 9 percent annual dividend on the securities until they automatically turn into Merrill shares in 2 3/4 years’ time. The group will get fewer shares if Merrill’s stock price climbs above $61.31 and more if it drops below $52.40, according to the company’s statement.

SEC’s Concern

Foreign investors whose stakes rise about 10 percent trigger a review by the U.S. Committee on Foreign Investment, which examines whether acquisitions by overseas buyers compromise national security.

U.S. Securities and Exchange Commission Chairman Christopher Cox said in December that the growth of state-run investment funds may lead to an increase in political corruption because governments might abuse the funds’ leverage over markets and companies.

While there may be “hand-wringing” in Washington over the investments, there won’t be an attempt to tighten rules on foreign investors, said Todd Malan, executive director of the Organization for International Investment.

“Congress realizes that we need this investment,” said Malan, whose Washington-based group represents 141 non-U.S. companies investing in the country.

The following is a table showing banks and securities firms that have sold stakes to shore up capital. All except Barclays Plc raised the cash after reporting asset writedowns and credit losses amid the collapse of the U.S. subprime mortgage market.

Firm Infusion Investor Stake

Citigroup $6.8 Government of Singapore 3.7%
Investment Corp.

7.7 Kuwait Investment Authority; not
Alwaleed bin Talal; Capital specified
Research; Capital World;
Sandy Weill; public investors.

7.5 Abu Dhabi Investment
Authority 4.9%

Merrill Lynch 6.6 Korean Investment Corp.; not
Kuwait Investment Authority; specified
Mizuho Financial Group

4.4* Temasek Holdings 9.4%**
(Singapore)

1.2 Davis Selected Advisors
(U.S.) 2.6%**

UBS 9.7 Government of Singapore
Investment Corp. 10%
1.8 Unidentified Middle Eastern
Investor 2%

Morgan Stanley 5 China Investment Corp. 9.9%

Barclays 3 China Development Bank 3.1%

2 Temasek Holdings 2.1%

Canadian Imperial 2.7 Li Ka-Shing; Manulife not
Financial; others specified

Bear Stearns 1 Citic Securities Co. 6%***
(China)
_____

TOTAL $59.4

* Temasek has an option to invest an additional $600 million.

** Estimate based on purchase price of $48 a share.

*** Citic has an option to increase its stake by as much as
3.3 percent.

Ten little Injuns

Ten little Injuns standin’ in a line,
One toddled home and then there were nine;
Nine little Injuns swingin’ on a gate,
One tumbled off and then there were eight.
One little, two little, three little, four little, five little Injun boys,
Six little, seven little, eight little, nine little, ten little Injun boys.
Eight little Injuns gayest under heav’n.
One went to sleep and then there were seven;
Seven little Injuns cuttin’ up their tricks,
One broke his neck and then there were six.
Six little Injuns all alive,
One kicked the bucket and then there were five;
Five little Injuns on a cellar door,
One tumbled in and then there were four.
Four little Injuns up on a spree,
One got fuddled and then there were three;
Three little Injuns out on a canoe,
One tumbled overboard and then there were two.
Two little Injuns foolin’ with a gun,
One shot t’other and then there was one;
One little Injun livin’ all alone,
He got married and then there were none.

One little, two little, three little Indians
Four little, five little, six little Indians
Seven little, eight little, nine little Indians
Ten little Indian boys.

Ten little, nine little, eight little Indians
Seven little, six little, five little Indians
Four little, three little, two little Indians
One little Indian boy.