As the country adjusts to a new political reality, the issue of the current Government’s political support base has yet to be resolved.
When it rains, it pours. The phone calls in the middle of the night from Head Office. The flurry of emails from regulators. The pressure from the CEO on what is actually going on in their books, who in turn is being pressured by the board.
We have been trawling various YouTube channels discussing Occidental Petroleum and finally, (after cleaning our room and attending Sunday Service online), we got down to the gritty details of forming a financial projection on Occidental Petroleum. We just focused on the US upstream portion of things in order to get a conservative estimate of the likelihood of Occidental filing for Chapter 11. All other segments of Oxy are expected to break even , but this is still a work in progress so we may update it after looking at the midstream segment and Oxy’s Chemical Manufacturing business. But the conclusion of this analysis has already given some confidence that Oxy has a better than 50-50 shot of surviving , at the expense of their bankster friends. However, this does not mean that we expect the stock to appreciate. Instead we expect it to trade at the price of a 1 year out of the money call option on WTI at strike price of $40 aka at GE stock pricing.
The key to Oxy’s profitability is the cost of extracting 1 BOE, or Barrel of Oil Equivalent vs the price it receives for a BOE extracted. Currently at $17 WTI, its operating margin for this core activity is -200% or Oxy loses $21 per Barrel of Oil Equivalent produced. The cash component is somewhat lower , Oxy loses $5 per Barrel of Oil Equivalent produced. However , if WTI futures drop further to under $10, Oxy could lose on a cash basis, $15 per Barrel of oil Equivalent produced. Simply stopping production to 0 is not so simple. Each well needs to be capped and sealed, which could cost $1M to $2M per well. In some cases, the entire well asset is destroyed and it may cost up to $4 to $5M to reactivate the well in the future. There is a further complication on asset retirement obligations, the cost Oxy needs to incur to permanently deactivate a well in order to conform to Environmental legislation.
The US shale business is operating cash flow dead at WTI @ $20, if WTI @ less than $10, the business is a toxic asset.
Oxy’s 3 way collar hedges expire in 2020 and is considered as an equity infusion of $1.2B. At current pricing, this can tide over 50 days of cover, of which 10 days has been extinguished. Next year, it no longer has this protection.
The mark that distinguishes the Rembau Times is that we are fact based and not based on conjecture. We spend countless hours to build a simple, intuitive financial model which we do share our work with the outside world. The link is here.
We will start with the good news first. Bottom line is that Occidental will most likely not go under because of the Revolving Credit Facility but management could be incentivised to do a voluntary Chapter 11 bankruptcy if oil prices remain where they are in 3 months time. The intrinsic value of Occidental is low to mid single digits , and that is purely due to the put option granted to equity holders by credit providers. (Equity holders can put the Company back to the debt holders if the intrinsic value falls below $0).
Profitability wise at $20 WTI, OXY assets are worth less than its liabilities as reflected in its debt pricing of 60 cents on the dollar. Near term we may see further pressure on WTI so I won’t be surprised to see Oxy trading at GE level prices for an extended period of time. WTI will need to move 250% before OXY can make an accounting profit on its US shale operations.
Good news for Oxy
- Occidental entered into a 3 way cost less collar to hedge 128.1 million barrels of oil, bench-marked to Brent. To simplify this, so long as Brent is less than $45 a barrel, OXY will receive $10. Brent is currently $21 for June and the December 20 price is $31.54. Oxy will receive $10 per barrel, we consider this a capital infusion of $1.28 billion.
2. Occidental has a $5.0b Revolving Credit Facility with no Material Adverse Clause. With Occidental’s $3.0b of unrestricted cash, this means that Occidental has $8b in liquidity.
Bad news for Oxy
- Current US Production cost is approximately $33 per Barrel of Oil equivalent, or BOE. This is not to be confused with a Barrel of Oil, because you have to weight the components that go into a single barrel, namely Crude Oil, Natural Gas Liquids and Natural Gas, with Oil being the most valuable and Natural Gas soon to be essentially worthless. All 3 components have a different price benchmark. Based on our calculations, Occidental’s current price received per BOE is approximately $11.26. So Occidental makes a loss of $22 per BOE. On its production of 1.2m BOE per day, Occidental makes an operating loss of about $25M per day. The entire capital infusion from the hedges will be wiped out in approximately 50 days at current pricing
2. Occidental has long term obligations of $68.5b, arising from its debt and purchase obligations. This figure is important because it will be a determinant in the future whether Occidental can remain a going concern when the auditors prepare their annual audit opinion. At current WTI prices, the Company auditors may need some convincing
3. Occidental’s debt is currently rated as junk, meaning Occidental cannot hope to tap the debt markets next year to refinance its debt. Occidental’s 3.400% maturing 2026 is currently trading at 58 cents on the dollar. This means fixed income investors expect to lose 42 cents on the dollar. Remember, equity investors will lose everything before fixed income investors lose one penny.
3. Warren Buffet has a $10b Perpetual Cumulative Preferred Shares yielding 8.00% cash or 8.80% if settled in shares. Assuming it’s cash settled, this will cost $800m per year, and taken together with the $1,500m Occidental pays in interest means that the cost of capital is $2,300m per year currently on a cash basis.
The future cost of capital is not worth calculating because Occidental’s debt implies an unrealistic cost of debt financing – it just states that the debt market is closed to Oxy and the only financing available to Oxy in the future will be equity financing, after it draws on its revolver.
Electing to pay Buffet in stock is not wise given the potential significant dilution it poses. Occidental’s management should just default on the preferred, stop paying Buffett and ask him to accrue the dividend on the preferred stock while doing a debt to equity deal with the bondholders . Let Buffet take the loss for doing a deal on a Sunday morning. Unfortunately, common equity goes to ZERO but the employees and the banksters get saved.
- Occidental’s dividend cut to 0 is a foregone conclusion. Those looking at Oxy’s dividend yield of 23% on Google Finance should not rely on Google Finance in making financial decisions.
2. Occidental’s is quite dependent on whether they can complete the sale of their African assets in Ghana and Algeria. It is in Total’s best interest to delay this, given the collapse of the oil market. Ghana is claiming a $500M tax charge and Algeria’s Sonatrach Group is opposing the sale of the Algerian assets. (Hint, hint: Malaysian should be able to add 2 + 2 on this one. The first 2 is that Total probably hates the price it agreed upon with Oxy. The second 2 is that Algeria is blocking the deal. Figure it out!)
3. Occidental’s cash balance as of 31 Dec 2019 was $3.5b, comprising of $3.0b in unrestricted cash and $0.5b in restricted cash.
4. Given Occidental’s short term liquidity of $8B, Occidental could ride out this oil crisis at the expense of the banks which gave them the financing offer of a life-time. Congratulations, Brian Moynihan of Bank of America.
The question is whether Occidental will want to take down the banks by fully drawing on its revolver?
Of course, doing so will mean that Occidental will get no mercy next year when it comes time to settle their debts.
Some wise investment banker may suggest that Occidental do a pre-packaged bankruptcy somewhere in the 3rd quarter, if oil prices remain where they are. Bottom line, an investment in Occidental means assuming that Occidental fully draws on its revolver and burns all bridges with their Wall Street bankers.
It will perhaps come down to the Audit Opinion at the end of the year whether Occidental could remain as a going concern. So Occidental still has at least 9 months left to fight, unless some wise banker does the prepackaged bankruptcy route.
By the way, the management of Occidental deserve an F for destroying $44B of shareholder value . (One could argue that $20B was oil market and that $24B was their own making)
Note: Bottom line, what we are really trying to communicate is that we prefer cheese 🧀 and ketchup to oil.
(Note to the VIP elderly readers: Revolver: Its like an overdraft facility for corporates. Banks offer companies revolving lines of credit in return for the fees they generate but never really expect that all the companies will draw on their revolver at the same time, like what is currently taking place. )
Over the weekend of April 19th, many Oil and Gas bankers in Singapore must have had an upset stomach as they digested the shocking news that Hin Leong, one of the largest oil trading houses in the region, was effectively insolvent. The owner, the ex-billionaire OK Lim, had admitted that he had cooked the books and that Hin Leong’s true liabilities of $4,000m against assets of approximately $750m. In Singlish, Hin Leong is effectively a “gone case”. The 3 main Singapore local banks are on the hit for a combined total of $600M and HSBC by itself is on the hit for $600M. To make it even more dramatic, this announcement was made by Mr. Lim while he was on a conference call with the company’s network of banks who were assembled to discuss whether to offer Hin Leong a debt moratorium, or in other words giving the company a lifeline . Most bankers who heard Mr Lim’s confession were left in a state of shock and awe.
First a quick summary of the facts:
- A) Hin Leong trades about S$20,000m worth of oil and oil products in one year
- B) Banks lent Hin Leong S$4,000m in the form of commodity financing loans or Letters of Credit for the purchase of oil and oil products.
- C) A Hin Leong affliate, Universal Terminals, has storage capacity of approximately 14m barrels of oil.
- D) Hin Leong owns a lot of VLCC Tankers
- E) OK Lim is a well known gambler
- F) This sector has witnessed some spectacular bankruptcies such as OW Bunker’s bankruptcy in 2014. Bunker trading has a reputation as a shady business with shady operators.
Together, A, B, C, D , E and F is a recipe for disaster.
First some background. Let’s say in January, when an oil trader buys a cargo of oil, its called a cargo of oil based on the standard VLCC cargo of 2 million barrels, the amount for the purchase is probably about USD$90M based on the price of oil at $45 per barrel in a world before Covid19 aka #CCPVirus. If this VLCC was loaded in Houston, Texas, the 13,253 nautical mile trip to Singapore will take approximately 2 months. The seller, let’s say for argument sake is that firm headed by that female CEO, yes Occidental Petroleum, is not going offer any credit terms whatsoever to the buyer. The title to the oil changes from Occidental to the buyer as the oil passes through the main flange of the oil tanker. From the sellers point of view, its a done deal and they want to be paid.
Here is where the oil bankers step in, and for argument sake, lets call it HSBC. They issue a document called a Letter of Credit or LC to the buyer’s bank, let’s call it JP Morgan, which constitutes an irrevocable undertaking by HSBC to remit to JP Morgan in favour of Occidental Petroleum $90M once they have received the original documents detailing the transfer of oil from Occidental to the trader. This could take several days. So from Occidental’s point of view, their payment is guaranteed by HSBC and not by the trader, who could be some fly-by-night outfit. The risk of non-payment is borne by HSBC and not by Occidental. So far, so good, and the VLCC sets sail from Corpus Christi, destination Singapore.
Now, to recap, an Oil Trader buys a cargo of oil from a producer, the payment is $90M and the payment risk is borne by the oil trader’s bank, in our case HSBC. At the heart of the issue is what makes the bank so confident of this transaction is that so long the oil is in the VLCC, the title to the oil actually belongs to the bank and not to the trader. So from the bank’s point of view, they will usually demand some form of collateral from the trader, maybe a 10% deposit or about $9M and finance the 90%, by issuing a $90M LC. The oil then arrives in Singapore, where the trader gets the banks permission to store the oil in its oil storage facility. The bank agrees and the LC is now converted to a loan, maybe a 180 day loan, once again secured on the value of the oil.
Ok here is where things mess up. What happens if the oil trader secretly decides to sell the oil stored in the oil storage terminal without telling the bank?
This form of financing, called Inventory or Stock Financing has this weakness. Usually in the case of financing of industrial metals, like Copper, the Warehouse party is an independent party to the buyer and will only allow stocks to be taken out upon the explicit instruction of the bank.
It is a basic error in risk judgement for any banker to allow an oil trader, or any commodity trader, to store inventory FINANCED BY THE BANK in the warehouse of an affiliated party.
And that is most likely what happened in the case of Hin Leong. The oil which was bought was most likely stored in Universal Terminals, an entity linked to Hin Leong. The oil actually belonged to the banks, who financed the purchase transaction. But Hin Leong’s owner, would have on-sold the oil to get much needed cash to cover other bad debts and ordered the tank operator in Universal Terminals to pump the oil to a ship.
The financing bank is left issuing a loan against NOTHING.
So at heart, bank’s suffer when they do not hire experienced risk professionals to vet through transaction deals and protect the bank’s interest. Either the risk officers are happy for the 9 to 5 paycheck without raising a fuss or they have had the experience of being shouted down by the powerful commercial folk in the bank. In the latter case, the bank usually defer to the Oil and Gas banker, who is in for the short haul, gets the commission on the financing transaction and jets off when things go bad. The job of risk management in a bank is to cost a bank $1 a year so that they will prevent the bank the $100 loss that comes once every 5 to 10 years. But most of the time, some short sighted bankers see risk management as a cost without understanding the benefit. The following applies to those banks.
These banks deserve their losses, well and proper. Actually any bank which defers to their glorified Relationship Managers against the protestations of a proper risk analyst, deserve their losses, well and proper. Any bank that does not have a proper trained risk analyst, adequately compensated, is doomed to sustain the $100 loss that can wipe out an entire year’s worth of earnings.
ISSUE NO 2 – Deloitte
The second issue has to do with Deloitte. Deloitte Audit has some serious issues in South East Asia.
Didn’t Deloitte in Malaysia look the Malaysian Cabinet in the eye and said 1MDB was not a fraud case when even a junior auditor who was simultaneously high, drunk and slipping in and out of consciousness could point it out. And now, the Singapore Deloitte office has decided to join their Malaysian counterparts infamy by not uncovering what appears to be an elementary case of accounting fraud when all the risk indicators should be bright red – high turnover, low profit margin, multiple banking relationships, affiliated subsidiaries, poor accounting controls, family run business AND exposed to a highly volatile markets, which had a recent history of large bankruptcies like OW Bunker .
As they say in Malaysia: MAMPUS!
For the record, of the 4 big audit firms in South East Asia, only PWC and Ernst and Young (EY) have any value in my opinion. The Malaysian offices of both these firms told 1MDB to go fly kites and refused to audit their financial statements. Their reputation is intact.
ISSUE NO 3 – OK LIM’s misreading of the oil market.
Over the weekend of the 8th of March, Saudi Arabia decided to launch an oil price war. When markets opened for trading on Monday, 9th of March, WTI collapsed by about $10 to $30 a barrel. At that time, two very important elderly readers (related to the author) sought our opinion on what the price of oil would be. We said cooly, it was going to drop below $20 a barrel. And as of today, WTI prices are $10 a barrel and there is probably little hope that prices could touch $20 a barrel anytime soon.
But OK Lim had misread the market, thinking that the Coronavirus could be beaten. We actually saw the following a) Collapse in global air travel , b) Collapse in motor gasoline demand and c) Massive overproduction. To be honest a) and b) and c) were blatantly obvious to any right headed oil analyst. One way that this was obvious was to look at the stock prices of oil companies over the last 1 year. They were trading horribly in the 4th quarter and only managed a short gasp of air in the first 2 months of the year when the financial markets were going crazy and Dow Jones 30,000 was just one or two trading days away. The last point is actually quite important. Some of the best money managers say that the best reading of the economy could be found in the “bowels of the stock market”.
OK Lim however was on the wrong side of this development. He believed that oil prices would recover and probably nobody in his company would want to challenge the opinion, seeing that he had lost his mind by agreeing to do the accounting fraud.
There is some truth in the markets ability to make sector predictions, because in the case of the oil market, its doom was quite evident since last year and the stock prices reflected its doom. The oil sector has been a downturn ever since 2017. ExxonMobil which used to be trading at $90 a share a couple of years ago is now $40 a share. Occidental, which used to be trading at $80 , is now $12. I kid you not, some folks actually said that oil could crash to $2. Our view is that oil will be under $20 until May before recovering in June. The Covid-19 situation is beginning to end.
Actually, if Hin Leong’s owner, OK Lim did not do accounting fraud, he could actually be earning a risk free reward of up to $70M a month by just renting out his sprawling 14M barrel of oil facility for about $5 per barrel. The key thing now is storage, and Hin Leong had a lot of storage in the form of Universal Terminals. Pity, though because once you do this thing called fraud once, it usually has a habit of biting you back and leaving the fraudster with NOTHING.
JP Morgan just reported their 1Q20
results and here is our run down.
• Tangible Book Value Per Share is $61, little changed from last quarter. The stock is trading at $95. The difference is the minimum overvaluation of JPM. The reason is that we are entering a mega world depression and all that provision for credit losses is going to hit there.
• Allowances for the Credit Card 💳 portfolio increased from $5.6B to $15B. Provision increased from their community bank portfolio increased from $1.2B to $5.7B. Ok some semantics here. You provide for a loan when the credit risk has increased substantially, as they are on Basel. The difference between the allowance and the provision basically means that the bank is expecting things to get a whole lot worse. ( That’s a really simple explanation and avoids the entire issue about contra assets and things like that. Remember we are dealing with Politicians, big game decision makers and not microscopic Accountants.)
• Accrued interest on JPMs loan book increased from $72B to $122B. So what does this mean? In normal times, there is a timing difference between when the bank actually gets paid from the time it recognises it as revenue. So for example, you have a loan for $100 that is charged a monthly interest rate of 1.00%. The bank closes its books at the end of the month and records the $1 of interest as interest income. But you pay the $1 on the 15th of the next month. From the 1st to the 15th, this $1 is carried as accrued interest and when you pay your $1, it ceases to become accrued interest and becomes cash. During normal times, this figure is quite constant and in JPM’s case, it ranged from $70B to $90B over the last 1 year. Now it’s $120B from $70B. Is it a bad thing? Quite possibly if you make the hypothesis that a lot of it is from interest on interest. If that is the case and those loans turn bad then the extra $50B accrued will become a $50B write off.
• Credit quality slipped a bit but that is a lagging measure. After all, a bank will only know if you defaulted 90 days from now. But the good thing is that it did not look bad. But this is a lagging measure. Which means that it will hit in 3 Mths time.
And WeWork has not defaulted yet and with that collapsing the New York commercial office space. For now, as well.
Undrawn commitments refer to credit lines granted by banks that can be suddenly drawn down unless the bank chooses to stop it, either by cancelling the line or claiming the Material Adverse Clause (“MAC”) clause. In the case of JP Morgan, there is more than $1 trillion of undrawn credit lines as per the table below.
Click for details
First, readers should understand that never in the history of banking has the United States suddenly gone from maximum full employment to maximum unemployment in just 5 weeks. The issue with this is that consumers and corporate customers like the Boeing could have drawn down on their credit lines within the 1 month time frame before banks even knew what hit them.
This represents a big issue because we have a situation where the US is facing an economic depression. So, we could have and there is already evidence of mass defaults in the consumer side. For the corporate customers, or what is called as the wholesale side, the credit ratings of many firms can get downgraded, and some already have. There could also be a mass wave of defaults by corporate customers, like those in the energy sector, airline sector, REITs and of course the WeWork.
So for this reason, I am quite concerned about US banking sector, because of JP Morgan. JP Morgan’s capitalization ratio is not as “iron clad” strong as Morgan Stanley. And JP Morgan did not hedge its entire credit portfolio like what Morgan Stanley did. More to come after we finish analyzing JP Morgan’s 10K. Stay tuned.
Our first candidate is Morgan Stanley or MS as in MS-13.
Morgan Stanley is a large investment bank with assets of $895.4b as of 31 Dec 19. The thing that sets Morgan Stanley apart from other banks such as JP Morgan or Citigroup is that MS has a much smaller consumer loans footprint. Its main clients are large companies, hedge funds, money professionals and rich people. Perhaps the most important set of clients are money people, who manage retirement funds for good blue collar Americans like Teachers. I think this will be an important point to keep in mind. Wall Street has always been a treacherous place and retirement plans promising a return above the Government bond yield usually blow up spectacularly but don’t expect Wall Street to shoulder the loss.
So to understand Morgan Stanley, we have to understand two parts of their business: the Institutional Securities business, or IS as in Islamic State, and the Wealth Management business or WM. We also have to be able to differentiate from what is called the Banking Book and the Trading Book. I know it hurts, but I’ll try to make it very simple.
The Banking Book can be understood as the loans the bank intends to keep. The bank makes money by earning a higher interest on the banking book than what it pays to obtain the funds to “support” those loans. So the right first question to ask is, what kind of loans are on MS banking book. As of Dec 19, MS had about $130.7b of loans on its banking book. The main components are Corporate Loans – $59.3b, Consumer, mostly security margin loans of $31.7b, Residential Real Estate loans of $30.2b, and Commercial Real Estate loans of $9.9b.
So far, so good.
The interesting thing that lawmakers and readers may get confused is even though MS loans are at $130.7b, there is another figure called Credit Exposures of $262.0b, a number approximately double the loans number. So what this really means in an oversimplified way is that, in theory, if all MS customers were to draw on all their facilities at the same time, and MS did nothing to stop it, then MS loan number will balloon to $262.0b. So quite logically, the difference of $120.1b is actually called the undrawn or “commitment” part. (Small note: if you add $130.7b to $120.1b you will be slightly short of $262.0b. The difference of $11.3b refers to loans on the trading book, which we will come to shortly). This concept will be extremely important when we discuss JP Morgan.
With the United States facing the equivalent of the Great Depression, Members of Congress will ask, will the banks come begging for cash after their billion dollar bonuses and thumbing their noses to Main Street?
Many may still remember how Morgan Stanley came desperately close to failing at the last financial crisis and only a $10B lifeline from Mitsubishi UFJ saved the bank from becoming the next Lehman Brothers. So did Morgan Stanley learn anything?
The answer actually is ‘Yes’. Of all the muppets/banks we profile, MS actually earns the Kermit the Frog rating. To say, it gets the best.
The things to note about MS is that the bank is ultra well capitalized. It had a total capital of $82.8b, of which Common Equity Tier 1 ($64.7b). Capital is like a shock absorber and Common Equity Tier 1 or CET1 is the best shock absorber around. (Of course, MS just made a rather ill-timed decision to buy E*Trade recently for $15b, but its still ultra strong)
The second thing to note is that MS is a “serial hedger”, which is a good thing. MS bought $236b of Credit Default Swaps to protect its portfolio. Its not about having some insight into the Coronavirus, MS actually has being doing for a long time, as they were probably scarred by the financial crisis.
Ok, that leads to this whole thing about what a Credit Default Swap is. The Member of Congress explanation: its insurance. So rightfully, people will think won’t all this insurance cost MS some serious cash? The answer is yeah, from recording an asset of $1.3b at the end of Dec 18 when markets were going mad with fear, MS had to record a liability of $2.3b at the end of Dec 19 when the markets were going mad with greed. So this difference of $3.7b was the cost MS had to “pay” to keep itself ultra protected.
Of course, the question still remains, which muppets were on the other side of this insurance deal? Who were the guys happy to take the $3.7b and then end up on the hook for the $236b.
The answer is we don’t know right now, but they will sure come knocking on Congress door really soon.
So that is the skinny of the MS story for Members of Congress. MS is almost immune to the financial crisis because the Fed will bailout whoever sold them all the insurance. That is perhaps why MS could confidently state that on its DFAST stress test, which was mandated by the Dodd Franks Act, MS will only lose $2.2b on its loans most of it due to its insurance.
Now a couple of things to note here. The first question is this entire “insurance cost” of $3.7b. One question would be why did it “cost” MS $3.7b for 2019 when the markets ended really good? Logically, shouldn’t insurance get cheaper when everybody is promising sunny skies and get more expensive when we are facing the end of the world, again.
That is a right question to ask and it is important for Members of Congress to have a little understanding of how these CDS or Credit Insurance work, because this will be a big part of this year’s edition of the Great Financial Meltdown. To put it simply, Credit Insurance is a game between two parties (or muppets) that gets reset periodically, let’s call it a year for argument’s sake. So for argument sake let’s say that MS entered into these contracts at the end of 2017 to insure $260b of its loans and to make things concrete, let’s say that the “credit spread”, or really the cost of the insurance was 100 basis points or 1%. So what this means is that MS agrees to sort of pay the other muppet 1% of $260b or $2.6b for its insurance, but in reality that does not happen and we will explain why shortly when we understand this concept called ‘mark to market‘.
So now, lets roll forward 1 year to the end of 2018 when the markets had gone crazy because Jerome Powell had not rolled over to their liking and the entire US China Trade War thingy. The cost now has shot up to 2%, but MS had entered into a contract paying 1%. So MS sort of gained 1% or 100 basis points in value and the other muppet had to “sort of pay” the 1%. That is why at the end of 2018, MS recorded an economic gain, or an asset of $1.4b.
Now roll forward 1 year to the end of 2019 when the trade war was over, America won, Jerome Powell and the Fed had rolled over, the Dow was reaching new highs and crazy people actually believed that WeWork was worth more than $0. The cost of insurance has plummeted, and it only costs 50 basis points or 0.5% for the same insurance. MS now lost the spread of 1.5%, being the difference of the cost of 2% at the end of 2018 and the current cost of 0.5%. So MS records a liability, or an economic loss, of $2.3b. So from an economic gain of $1.4b, MS now has an economic loss of $2.3b, a reversal of $3.7b. That is sufficient for today’s exposure on CDS, we will develop on this as we feature other muppets. But the key point to note is that MS always bought insurance, they did not try to time things, they probably never wanted to suffer the same fate they suffered in 2008.
So for 1,400 words we have covered $130b of MS portfolios, which surprisingly 14.5% of its portfolio. So try to get more economical on the remainder of the $764.7b of its assets, which we will cover in 800 words.
So to do that, we need to look at the trading book for MS, which was $355.9b or 39.7% of its assets as of Dec 19. A good question is what is a trading book and how is it different from the banking book and should this bother Members of Congress.
To understand that we need to understand two things: VAR and the Bank’s VAR Police.
VAR or Value At Risk means quite simply, how much the minimum the bank could lose each day on a really bad day, or to be more exact the worst 5 days out of a 100. The number changes depends on what kind of risk the bank takes and how crazy things are out there. For MS, the VAR ranged from $33M to $55M for 2019. The model that measures a bank’s VAR needs to be approved by the Federal Reserve.
Let’s get a bit more detailed over her. So there were approximately 222 trading days and did MS actually lose $33M on any single day? The answer is no and that is because the whole idea of having a VAR is not to breach it – in fact if MS states that if its VAR gets breached more than 21x a year, they would throw out the model. And the task of ensuring that the “cowboy traders” do not try to take on excessive risk falls on the bank’s VAR police, or its Market Risk Managers.
This is an important point to understand.
A financial institution’s trading book cannot be effectively supervised by the Federal Reserve because it could change day by day or even within the day. A bank could start the day having a certain position and end the day taking complete opposite positions – that is the essence of trading. The task of the Federal Reserve is to ensure that the bank’s VAR models have some sort of validity and that the Management of the bank ensure that the VAR police supervise the cowboy traders and not the other way around. VAR police must be given the authority to pull over a speeding trader, give him a caution or kick him out of the office if he misbehaves again.
However, too often in some financial institution, the cowboy traders determine how much compensation the VAR police which renders the entire control meaningless. These things usually ends up in the Treasury Secretary taking the knee in front of the Speaker of the House Representatives begging for more taxpayer money to bailout these muppets.
So to wrap things up, lets see what kind of risk MS had on its trading book at the end of 31 Dec 19.
So on its $355.9b trading book on 31 Dec 19, we think of it in terms of VAR Risk.
MS had about $26M of Interest rate and credit spread risk, $11M of Equity Price risk, $10M of Foreign Exchange Risk and $10M of commodity price risk, for a total of VAR $57M. MS claimed that things don’t move altogether at the same time so claimed a $27M VAR credit and stated that its trading book VAR was $30M. So it means, for 5 days in 100, MS could lose at the minimum $30M, but these occurrences are so rare that it can only happen at most 22 times in a year before it throws out the model. To put in perspective, MS claims that the minimum it could lose on the 5 worst days out of a 100 was at least $30M on a portfolio of $355.4b, or less than 0.08%. Sounds crazy, but in 2019, it did not even register a single day when that $30M limit was exceeded.
So if you have come all the way here and are disappointed that you have yet to find that smoking gun to hammer the bank CEOs, fret not. Morgan Stanley run a good shop, but there will be other muppets who ran a loose amoral house and we will equip Members of Congress with the right information to give those CEOs a good ol’ grilling.
But for extra credit, we can reveal some more salacious parts of MS portfolio. However, don’t get your hopes up because MS has hedged its entire credit portfolio, they ran a tight shop, or that what it seems on the DFAST and their 10K.
- MS Commercial Real Estate exposure (aka offices, malls and factories) as of end 2019 was $12.0b, comprising $9.8b on its banking book and $2.0b. Commercial Real Estate will feature heavily in this year’s financial crisis due to that monstrosity called WeWork.
- MS “sponsored” Special Purpose Vehicles of $189.1b, where its total exposure was $29.0 billion. This includes $11b of exposures to CDOs , remember that stuff.
- MS warehouse lending facilities was $29.7b. This refers to financing MS provides to other Real Estate Investment Trusts which are the epicentre of this year’s disaster.
- Get familiar with these names: MTOB or Municipal Tender Option Bonds. We will cover this in another segment, but MS exposure to unconsolidated / outsourced MTOBs was $4.7b in derivative assets.
This is the first in a series about large US Financial Institutions so as to give the required understanding to exercise their oversight for the benefit of the American people*
Sorry I lied. I want to educate Members of Congress so that give those bank CEOs a good ol’ kicking for the common man out there.
On the 30th Mar 2020, The Rembau Times made a startling prediction that once the Coronavirus, or #CCPVirus, dies down, the world will have to prepare for yet another issue: an armed military conflict between the United States and China over Taiwan.
From our point of view, the path to war has already been cast in stone. If one characterized the view Congress had over China as being negative in 2019, currently this view is probably downright hostile and China is seen as a hostile threat that needs to be dealt with. After all, Dr Fauci, the physician pivotal to the Trump administration’s response to the Coronavirus has cautioned Americans that the final death toll from the Coronavirus to be in the hundreds of thousands range. This figure is comparable in magnitude to the the 300,000 American lives lost in World War 2. America will undoubtably demand a response.
The path to war starts on the steps of the Capitol in Washington DC.
The TAIPEI act, or S.1678 / HR. 4754 Taiwan Allies Protection and Enhancement Act (2019) which has been signed into law will probably be the catalyst for the confrontation . There are other legislation making its way through the cloakrooms of Congress , which further recognises Taiwan’s status as an independent country, a move Beijing has deemed as a redline that should not be crossed . Other European nations are expected to make similar formal declarations attesting to Taiwan’s independence, shattering the myth one China, or 1China diplomatic smokescreen the Chinese Government has demanded that nations adopt in order to keep the People’s Liberation Army in their barracks.
But of course the path to war has less to do with nations seeing past a diplomatic smoke and mirror act, but more to do with why almost all wars start in the first place: The Preservation of Power. And in China, this means President Xi Jinping’s grip on absolute power in China, which is weakening day by day as the country faces up to the reality that an economic disaster is at the door and there is little the Chinese Government can do to prevent it. The Coronavirus has shattered China’s export oriented economy, meaning that factories will start laying of millions of workers, creating massive social unrest that could cause the collapse of Xi’s government.
Faced with a collapsing economy, being shut out of the world’s major markets, the President Xi will roll his final dice in his efforts to remain as China’s equivalent of Chairman Mao : A military confrontation with Taiwan or even with the US in the Straits of Taiwan. President Xi will argue that the unrest is not a part of any issue specific to himself but rather threatens the fate of the Chinese Communist Party. If readers don’t understand this, the Peoples Liberation Army swears their oath of alligience first to the Communist party, and the nation of China is somewhere in the background. So in order to perpetuate the legitimacy of the party, President Xi will argue that some sort of mass wave of nationalistic fervour will be demanded, something wars usually create at its onset.
If you think that the Pentagon is not currently actively preparing for this, think again.
The Trump White House will actually jump at this opportunity. As current polls go, President Trump will be a one-term President. He gambled on the stock market and the economy, the former with the Dow at 22,000 gives an indication of some eventual recovery; the economic indicators on the other hand gives readings not even conceivable in any of the doom and gloom scenarios banking regulators conceive in their annual stress test exercises.
Let that sink in for a moment. The Fed, the ECB and the Bank of England have never come out with a stress scenario which mimics the current conditions we face now with the world being shutdown over the Coronavirus (#CCPVirus). The readings we get are off the charts, and given the likely loan defaults, destruction in demand and so forth, the chances of a recovery before November don’t look so good. And President Trump will not fancy losing giving up power to President Joe Biden : it ranks second to worst to President Trump’s worst fear of giving up power to President Obama, which the US Constitution happens to forbid. So a war between the US and China is in both the interests of the occupants of the White House and the Forbidden City.
You have been warned by the Rembau Times, the only organisation that predicted Trump, predicted Brexit, predicted the Malaysian General Election, predicted the collapse of the new Malaysian Government and now predicts this.
As the global coronavirus epidemic grips the world, governments are at a loss over how to contain the virus stopping short of issuing nationwide lockdown orders which can cripple the economy and create significant mental health issues to an over stressed health care network.
The key in our strategy focuses on the big issues, which is
- Creating on demand secondary healthcare facilities
- Using dynamic real-time risk based assessment of Covid-19 and other pandemics that will emerge
3. Autonomous cars to ferry people with self-isolating cubicles
4. Mass temperature screening checkpoints
- Creating on demand secondary healthcare facilities
We now have assembly-lines that can take raw a metal skeleton and produce a car or truck at the end of the assembly line. The question is why can’t turnkey healthcare facilities, that are configured to deal with an epidemic be designed in such a manner? The issue is that of specialization : a healthcare facility is usually designed to handle multiple possible care pathways which require a rather cell-based service delivery as opposed to a production line. And this has worked well in the past when the service is highly personalized and care giver to patient ratios are within the limits of the entire healthcare system. But in the case of the Coronavirus epidemic, a mere increase of 250,000 active cases, which represents less than 0.0005% of the total developed world (assumed to be 500m population) has the entire system in a flux.
The answer: The Government, perhaps the US, should get the major players, namely the car companies (like GM), the airplane manufactures (like the Boeing), the tech giants (like Apple), the medical device manufacturers, the civil engineers, the hospital designers and the care providers, to come out with a blueprint design of a production line orientated hospital unit that can be shipped out and rolled on demand. I think the US has shown in the past during wartime crisis that the capacity for innovation is outstanding and the US does boast some of the best “out of the box” thinkers as well. Basically the parameters of a solution are (a) structural integrity by limiting loads on all points so that a hospital can be assembled without the need for time-consuming earthworks, (b) reducing the patient to caregiver ratio through automation, remote technology and (c) ensuring modularity so that the space can be expanded and contracted on-demand. There are probably many other factors as well as medico-legal implications which could be expanded upon. However, the Constitution is created by man and can be changed by the representatives of men as the situation requires.
The use case is massive: Hospitals that spring up in the middle of now-where to dynamically cater to a health emergency and then shut down when the emergency is over.
The alternate state is a system that is crippled which benefits no one.
2. Dynamic realtime assessment of Covid-19 (and the next Covid until countries which allow the exploitation of wild animals are not ejected from the world’s financial system).
In a scenario like what we face today, the function of an individual acquiring an infection is related is a factor of how many people the individual interacted with over a period of time. So for argument’s sake, suppose an individual is able to go about his or hers daily life within a limited circle, necessarily all things being equal, that individual presents less of a risk of being a potential ‘spreader’ of a virus than another individual who interacts with many other people. And in any basis risk assessment protocol, groups which are of a higher risk warrant a higher level of risk assessment, perhaps regularly checking in to a specially designed booth for an assessment than groups which are not. This is where wearable technologies can come into play. If groups were to have their wearable on their wrists at all times when outdoors, the tech gadget could record interactions with others through some communication protocol. In the event that someone in the group they interacted with acquires an infection, the contact trace can be done immediately.
Aside from the ethical implications (the alternative is total lockdown), there are some criminal justice implications as well. For example, a person more likely to commit a crime will probably not wear the wearable so this would require some sort of law enforcement technology that will allow an officer to immediately identify such individuals like an afterburner to a heat-seeking missile.
I think item 3 – Autonomous vehicles and item 4 are quire self explanatory and need not require further elaboration from a humble news outlet.
The key idea that lawmakers and industry should consider are these startling facts. The current rate of active people diagnosed with Covid-19 is about 400,000 globally and the world has gone into meltdown. Solutions need to be developed and be shelf ready to deploy as and when the political climate allows it.
(Apologies for the awful php errors. Hopefully the host has provided an SSL Connection)
On December 21, 2018, The Rembau Times officially withdrew support for Pakatan Harapan and made a prediction that UMNO will be back in power within 24 months. At that time, many sneered and said that we were ‘smoking something’ or crazy.
Today we are proven correct as Tan Sri Muhiyiddin Yassin is appointed as the 8th Prime Minister on the back of an UMNO -PAS coalition. Even writing about PH is a waste of time as PH never followed any of our advice. However, for the sake of closure on PH, we will spend about 10 mins to pen our thoughts on why PH government fell and why there is 0 chance right now of any hope of PH returning to power.
The main issues
- Seafield temple issue
PH fell because it was clearly obvious to everybody that by the end of 2019, the PH Government had lost the support of the rakyat.
PH could not even defend seats which they had won with a strong majority as the Malay electorate completely shunned PH. The reason – Seafield Temple issue. PH did not follow our advice to sack a) Waytha and his gang, b) the DAP EXCO member (Ganabatirau) who came up with a stupid statement, c) enforce the rule of law.
2. The Economy
PH completely messed up the economy from the first day. The decision to abolish GST was stupid as it deprived the Government of an important source of revenue and at the same time, the imposition of new taxes resulted in prices remaining high due to ‘price stickiness’. This is basic economics. Furthermore, PH never seriously courted the important fund managers who could have contributed to portfolio inflows. Their Economics team fought with foreign fund managers when they should instead of answered in a diplomatic way and did many roadshows. None of these things happened, the Ringgit never recovered and the economy went down. This issue caused PH to even lose their core Chinese support as shown in the defeat PH suffered in Johor. I give Guan Eng and his team an ‘F’ for the economy. Johari Abdul Ghani, the ex-Minister of Finance 2 would have run circles around them! Even Najib would have done better!
3. Infighting within PKR
The infighting within PKR was a direct contributing factor. PKR MPs could not even understand the most basic fact in politics, which is if an election was called today, PH will lose flat out. Their support has been eroded but the YBs with their oversized egos could not see this. PKR infighting however is nothing new, but the people got sick and tired with it.
4. Losing the civil service
PH lost the civil service quite early on with DAP’s extremely hostile attitude. Remember how SPAD was closed down by Minister Anthony Loke? A very unwise move to make so early into the administration. Furthermore, PH came in like a conquering regime, so eager to appoint their Special Duty officers who then behaved like they owned the ‘Government’
Well, the civil service need not worry about that anymore.
5. ZERO Tactical Intelligence
PH Government had virtually ZERO tactical intelligence. By tactical intelligence, we mean how the Government conducts itself so that it is perceived favorably by the rakyat. A Government that is tactically intelligent knows what to message to the rakyat , when to keep on message and when to change the message. I think the only message I can remember from the PH Government is that Malaysia has a RM 1 Trillion debt problem and that the source of humanity’s pain is Najib! They may even blamed the coronavirus on Najib too if they had the chance. Their messages were disjointed and ineffective.
There never was an effort to to form a centralized Governments Communication HQ to co-ordinate between all the various diverse parties. DAP MPs like Ramkarpal were always quick to hammer their Prime Minister in social media so people had the impression that Tun was walking a tightrope. How stupid can that be. For 60 years, DAP behaved like the opposition and when they finally became the Government, they still behaved like the Opposition.
Well since they like behaving like the Opposition so much, they can continue to do that as His Majesty’s Loyal Opposition.
6. Incompetent Cabinet
The PH Cabinet was mostly incompetent. From ‘Flying Car’ Ministers to Ministers avoiding Parliamentary duties. The only Cabinet Minister that deserves some respect is the ex Minister of Health, Dr Dzul, who happens to hold a PhD from Imperial College. His intelligence was clear when he enforced the smoking ban on restaurants. That was smart.
7. Tun Dr Mahathir
He should have stepped down last year. There was a window of opportunity to hand over the Government to Dato Seri Anwar in February 2019 after the stunning defeat at the Cameron Highlands by-election. But he wanted the KSM medal.
Enough time wasted on PH.
Update: 01 Mar 2020
To recap, we predicted that Tun Dr Mahathir would become PM in 2017, and he became PM in 2018. We predicted that the PH Government would fall within 2 years in Dec 2018, and it collapsed in Feb 2020. So now comes yet another prediction :
When the dust finally settles, Najib will be re-established as Prime Minister.
Time frame: 1 year.