Temasek And A Black Hole Named Merrill

From CNN Money:

More pain for Merrill Lynch
Wall Street firm's quarterly loss is even wider than expected after billion in writedowns, and it plans to cut 4,000 jobs.
By Tami Luhby

April 17, 2008: 7:04 AM EDT

NEW YORK (CNNMoney.com) -- The pain isn't over for Merrill Lynch & Co.

The investment bank Thursday missed even the drastically lowered estimates for its first-quarter results, reporting a net loss of $1.96 billion, or $2.19 per diluted share.

The company also plans to cut about 4,000 jobs, or about 10% of its workforce, excluding financial advisers and investment associates. It will focus the reductions in its global markets and investment banking division.

Net revenue was $2.9 billion, down 69% from the prior-year period, primarily due to net writedowns totaling $1.5 billion related to asset-backed securities and a downward adjustment of $3 billion related to hedges with financial guarantors.

"Despite this quarter's loss, Merrill Lynch's underlying businesses produced solid results in a difficult market environment," said John A. Thain, chief executive officer, who said the bank remained well-capitalized.

Analysts had projected a $1.99 per share loss on a net loss of $1.4 billion and revenue of $3.7 billion.

Wall Street was prepared for horrendous earnings from Merrill Lynch (MER, Fortune 500). Analysts were almost tripping over themselves to cut profit estimates and enlarge writedowns, suspecting the value of the company's assets had fallen steeply in recent months. Only a month ago, analysts were predicting profit of 48 cents per share. At the start of 2008, the consensus estimate was $1.52 per share.

"Unfortunately, Merrill has significant balance sheet exposures in many of the asset classes that experienced continued pricing pressure in [the first quarter]," wrote Jeff Harte in an April 2 note.

.... Merrill Lynch raised $12.8 billion in capital during the past two quarters and Chief Executive John Thain has said he doesn't plan to raise any more.

Early last year, I came close to accepting a job at Merrill Lynch. It was quite tempting, not only because Merrill Lynch was a brand name organisation then, but also because the job was in a rapidly growing sector - commodities.

The commodities space is still hot - in fact, it's arguably the only thing that's still hot in the financial world. It's not just the usual oil, gas and gold stories - now, even plain old rice has become a hot commodity.

Merrill Lynch is, however, no longer a brand name. Instead, among all the investment banks in the world, it's probably the one that was hardest-hit in the US subprime crisis. Merrill Lynch will take a long time to recover from this mess, if it ever does.

Oh well. Just as well I didn't join Merrill.

It's barely been 4 months since Temasek started buying into Merrill Lynch, and Temasek is already sitting on paper losses of more than half a billion USD dollars. Citizens, are you worried for Singapore yet?

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Hopping As a Survival Strategy (And I Don't Just Mean Frogs)

For the past five years or so, headhunters have been calling me quite regularly.

Typically, they begin by introducing themselves and their search firm. They then ask if this is a convenient time to talk (they know that you might be in your office area with your boss or colleagues nearby).

If convenient, they say that they have an interesting job opportunity and could they please have a minute to tell you about it.

Next comes a quick rundown on the JD ("job description") - the role, the responsibilities, the required experience, the reporting line and so on.

At this stage, they won't reveal their client's name, but they will give a general description - for example, "one of the biggest UK banks" - which, coupled with the JD, is often enough for you to make a good guess.

If you say you're not interested, they'll ask you why. If your reason is not particularly compelling, they'll persuade you to reconsider.

If your reason is compelling, and furthermore conveyed in a firm, no-nonsense tone, they will say,''Okay, fine then. But do you happen to know anyone else who might be suitable for the role?".

Here you have a choice. Either you can curtly say, 'No, I do not' and hang up, or you can try to be helpful. I always opt to be helpful. If I know of people whom I think could be suitable and interested, I pass their names on to the headhunter.

It is a good idea to be nice to headhunters, because you never know when you might want or need their help in finding a new job.

Just last Friday I had lunch with a headhunter. We have lunch every few months or so.

We have known each other from uni days, so we are also old friends. However, I shall be frank - if I were not currently in the banking sector, and he were not currently a banking headhunter, we would not have bothered to keep in touch with each other.

As usual, our lunchtime conversation was mostly me telling him what I know about who works where now doing what kind of work, and him telling me which kind of banks are interested in hiring what kind of people in the foreseeable future.

It is important for me to get regular updates on such market conditions. If there are really significantly superior opportunities elsewhere, it would be foolish not to try for them.

By "superior opportunities", I don't mean just money (although that is definitely very important) but the total package of all relevant factors. For example, these factors would include the opportunity to learn new skills, join a top brand name, move up the management ladder, join a place with better working culture, and so on.

Contrary to what Minister Lim Swee Say recently said, job-hopping is neither necessarily greedy nor necessarily short-sighted. In fact, it is the far-sighted people who would regularly review their career plans, options and strategies.

Many parts of the banking industry have done very well in the past few years. However, some parts of the banking industry have been doing very badly in the past few months. That's all thanks to the US subprime crisis, and the spillover effects.

As a result, a significant number of very high-flying banking professionals overseas have suddenly lost their jobs. They include no less than Chuck Prince and Stan O'Neal, the now ex-Chief Executives of Citigroup and Merrill Lynch respectively.

And of course, many others lower down the food chain.

So the question is how long the subprime crisis will last; how bad the spillover effects will be; and how severely Asia will be affected.

And whether, say, sometime in 2008, banking professionals in Singapore specialising in certain types of banking work (CDOs; structured finance; credit derivatives; debt capital markets; perhaps even IPO work) will also start losing their jobs or suffering drastic pay cuts.

Of course I hope the answer is no, but at this point in time, well, who can say for sure. So I'm looking ahead, getting news from my headhunter friend, finding out the trends in the banks' hiring plans for 2008.

If I suddenly have to move, at least I have a few backup ideas and I have got some sense of which areas still have demand and where I can quickly try to move to. In other words, I won't be caught off-guard and wrong-footed.

Unlike 2WO Henry Minjoot.

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Chaos in the Financial Markets

Here is an email from one of my readers, Slawek Rogulski:

Hello Mr Wang,

You are no doubt aware of the world financial situation, especially that of the US with the sub-prime mortgages and other exotic instruments starting to lose their value. In your opinion what if any impact on Singapore will this have? Have any funds here had to close or at least temporarily halt withdrawals? And how sound are the local banks? I would appreciate your comments on these issues. Thank you. Regards,

Yes, I am very aware of the current world financial situation. However, for two reasons, I will not comment specifically on the US subprime mortgage situation.

1. There is already an abundance of articles and commentaries in the news and media about the US subprime mortgage situation.

2. No one knows what's going to happen next anyway. That includes Mr Wang.

Me, I'm getting at least 4 jokes per day by email, about Goldman Sachs, Bear Stearns or hedge funds in general. But if you really want to read some serious, and excellent articles on this topic by an anonymous blogger, click here.

Trust that man, he's very good. At the same time, being anonymous, he doesn't have to tailor his commentary to suit any particular vested interest, which he would have to do if he were a known person employed by, say, certain investment banks or hedge funds right now.

As for myself, over the past two months, I've heavily dumped my own fund investments worldwide in the past two months and I'm very long on cash right now. It's been a brilliant bull run, I've made my money over the past two years and I'm out. The party's over, and it sure was fun!

I'm not going bottom fishing yet, because I think we're still a long way from bottom. It is frankly not just about US subprime - it is the market doing a major repricing of credit risk everywhere that credit risk appears. In other words, not just CDOs, but debt in general, and equities too.

Now I'm going to work on my Plan B and Plan C. What shall Mr Wang do, if in three or six months time, his own job (in credit derivatives) vanishes? Poof. Magic, just like a Bear Stearns hedge fund.

Sigh, I may have to become a lawyer again.

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Credit Cards For the Zero Income Earners

ST July 29, 2007
Have card, no income, know the risks
Be aware of legal issues facing those under 21 such as the penalty for missing payments
By Lorna Tan

EASY credit has long been a fact of life for many Singaporeans. But now the floodgates are being opened to vast numbers of people who would normally never manage to get their hands on plastic.

Eighteen-year-old youth and those with no or low income can now apply for a ground-breaking card that does away with the standard $30,000 minimum annual income requirement.

Regulatory changes have allowed Citibank to launch the card, which offers a maximum credit of $500, a fraction of the typical limit of two months' pay.

In my opinion, this new Citibank initiative is at least partly due to the recent decision by NETS to approximately triple its administrative fees for retailers.

In order to allow their customers to make payment by NETS or credit card, retailers have to pay fees to NETS and credit card issuers. Traditionally, credit card issuers charge higher fees than NETS. That's why lower-end retailers accept payment by NETS, not credit card.

Now, by raising its fees, NETS has made it possible for the likes of Citibank to compete in the space of facilitating low-cost cashless transactions. If NETS facilities are not any cheaper than credit card facilities, your average HDB shop owner who allows you to pay by NETS might as well also allow you to pay by Visa or Mastercard.

The first step by Citibank, of course, is to ensure that the average customer of the average HDB shop can have a credit card, and not merely a NETS card. Since the MAS regulations have changed such that there is zero income requirement to get a credit card, your average HDB customer WILL be able to get a credit card.

Applicants under 21 need the consent of their parents, but the bank will not require parental income information. However, the bank is playing it safe: If the minimum monthly payment is not made, the card will be blocked.

The Citibank move - which could admit more than 900,000 people to the ranks of new credit card users - has sparked debate over whether Singaporeans, particularly teenagers, can be trained to use credit responsibly.

It is a pressing issue as more of such products are in the pipeline, with OCBC Bank and United Overseas Bank saying they will introduce similar cards soon.

Some people are concerned about the danger of raising a generation of young adults who chalk up debts even before they leave school.

I think the attention got a bit misdirected. They forgot about the adult uncles and aunties in the heartland - the ones who queue up at the 4D and Toto outlets, and/or who are genuinely struggling to make ends meet.

"My income close to zero, what. I also over 21.
Maybe can use credit card to buy 4D."

How much will one be able to borrow via credit card, if one has no income? According to the ST article, it's $500. Of course, this is on a per bank basis, and we also learn from the article that apart from Citibank, two other banks - OCBC and UOB - will be introducing similar cards.

If you have zero income, but apply simultaneously and successfully to all three banks, you'll be able to borrow $1,500. If you wait and see if HSBC, Maybank, ABN AMRO and Standard Chartered come up with similar cards, who knows, you may be able to get 7 cards x $500 = $3,500.

Not bad for someone with zero income. A pretty good recipe for financial disaster too.

One interesting thing to watch is how the nature of credit card advertising will change as a result of the new rules. In the past, credit cards were often marketed as a symbol of the customer having "arrived", being successful etc. In fact, a credit card is one of the five C's that commonly represent material achievement in the Singapore lifestyle. But now that kids and poor people can also get credit cards, I think that the usual advertising/marketing themes will have to change.

Into what? That's the interesting question.

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Knowledge & The Working World - Part 1

As my regular readers will know, I recently made a career switch from law to investment banking. Commenting on this, a reader wrote:

"Given his legal background Mr. Wang is probably starting off his IB career in the structuring side focusing on the legal risk aspects of credit derivative contracts. Naturally, the IB team will want to have an experienced lawyer to navigate the legal risks that can be a tricky portion of credit derivative contracts.

Acquiring an understanding for evaluating the credit risk of reference entities and counterparties will probably take somewhat longer. Meanwhile, the mathematical valuation and pricing aspects of credit derivatives will probably elude him for quite a while, given that one needs a strong foundation in applied mathematics in order to grasp the nuances of this field."

In case you got lost in the technical jargon there, this is what the reader meant to say: Mr Wang may have moved from law to investment banking, but (a) he has probably been hired for his legal knowledge, and (b) he's probably clueless about the other, non-legal areas of investment banking.

Apparently, a logical deduction. However, it relies on certain implicit assumptions. These assumptions are commonly made in Singapore and aren't always correct.

In Singapore, we often tend to think that a person doesn't know anything about anything, unless he holds proper qualifications in it. By proper qualifications, we mean that he has gone to school, taken a course, passed his exams and been awarded a certfiicate, a diploma or a degree. Preferably one recognised by the Ministry of Education.

Of course, this line of reasoning can go wrong for any number of different reasons. For example, a formal course may not actually teach anything relevant to what the supposedly-qualified person is really doing in his job.

Or skills acquired in one particular field or discipline may turn out to be surprisingly transferable to another apparently unrelated field or discipline.

Or a person may acquire quite considerable expertise without any formal training at all - for example, through self-learning, practical work experience, or because the subject-matter happens to be his favourite hobby.

Last weekend I decided to organise my rather chaotic bookshelves and categorise my books according to topic. This picture shows a stack of banking and finance-related books that I've been reading over the past few years.



(Note: this stack of book excludes my law books on banking and finance - those are in another stack).

I could be wrong, but I suspect that my banking & finance textbooks are more than all the banking & finance textbooks that an undergrad student at SMU or NTU would have to read, over 3 or 4 years, in order to get a degree in Banking & Finance.

Now of course, I have not read all of my books with the same vigour and rigour that a university student, mugging for his exams, would have read his textbooks.

After all, my reading is not for the purpose of passing exams. My books are more for my leisure reading.

I started reading those books when I was a lawyer advising on banking and finance. I thought that it would be interesting to know what all those bankers were talking about.

Or sometimes a certain point would come up at work, and it would puzzle me, so over the weekend, I would just pick up the relevant book, zoom straight to the relevant chapter, and investigate that point. And if that was interesting, I'd just go on to read the next chapter as well.

As the years passed, I just ended up reading more and more.

And suddenly, I realise that if I add it all up, my total knowledge about investment banking is .... Very Not Insignificant. (Pardon the twisted language. I'm trying not to sound boastful here).

So while law is still my professional forte, I've come to understand enough about other areas of the financial world to feel comfortable in an investment banking environment. I know enough to engage constructively with the traders, the structurers, the salespeople, the quants, the lawyers, the accountants, the credit officers, the tax advisors, the economists, the relationship managers, the compliance personnel ... and whoever else I need to engage with.

To function effectively, I don't need to know everything that all of them know (which would be impossible and impractical). I just need to know enough about what each of them knows.

In Part 2 of this series, I will share some thoughts on information and knowledge networking. You might also call it "Why You Don't Need To Know It All, To Know It All".

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The Art of an Inexact Science

Readers often send me emails. They ask all sorts of different questions, but career advice is a fairly common topic. Recently one reader, JW, asked me for tips on how to get a job in investment banking. Well, here’s a tip about job interviews at investment banks.

In most other industries, to get a job, you go for one interview, maybe two. Very occasionally, three. Then either they offer you the job, or they don’t. But investment banks are a little different. To get the job, you typically have to go through five, six, seven or even more interviews.

This can be a little exhausting, if you are simultaneously pursuing opportunities with, say, three or four investment banks. As you can see, you could easily be doing more than 20 interviews in two months.

My little tip for JW is that after each interview, you should quickly make a note of which bank it was, who the interviewers were, and what you spoke about. Otherwise everything can soon degenerate into a blur in your memory.

It would be embarrassing if you went for your 6th interview with Bank A, and the interviewer asked you something about your 3rd interview with Bank A, and in your mind you confused your 3rd interview with Bank A with your 4th interview with Bank B.

Why do investment banks have so many interviews with their job candidates? The key consideration is usually not your technical expertise. They already have your resume. With two interviews and a few careful questions, they can already have a good sense of your technical skills. You probably wouldn't get to the 3rd interview, if they thought you didn't have the right skills.

The key consideration is your personality. You go through half a dozen interviews with one investment bank, so that different people in the investment bank can “smell” you. All of them are trying to see if they would be happy and comfortable working with someone like you.

And yes, definitely there are some candidates who don’t get the job, because an interviewer later said, “I just didn’t like that guy. He didn’t give me good vibes.” The poor candidate may have made it through seven earlier interviews, but in Round Eight, he met an interviewer who didn’t like him. And that was that.

Is this unfair? Well, I would say that personality is very important. The fact that there is no 100% reliable method of testing personality doesn’t mean that it’s not important, or that prospective employers shouldn’t try to make a subjective assessment.

Some employers do use personality tests, which in theory is clearly a more objective method. The problem is that in practice, job seekers are likely to give answers that they think the prospective employer wants to see, rather than the most truthful answers about themselves.

So I do not believe that personality tests are particularly useful, in the recruitment process. The best use of personality tests, in my opinion, is still for the purpose of self-knowledge and self-improvement.

No, that’s not an exact science either. It never will be. But then again, that’s no excuse for not trying to understand and improve yourself. Is it?

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Mr Wang's Exam Surprises

While studying for my CMFAS exams, I had two surprises.

My first surprise was that the CMFAS syllabus requires students to study the rules on who is required to take the CMFAS exams. This is an examinable topic.

'Well, now, isn't that silly?" I thought. "If you are already studying for the CMFAS exams, surely you must be required to take them."

My second surprise came shortly thereafter. While studying this topic, I discovered that I am not actually required to take and pass the CMFAS exams. In other words, these exams should not be compulsory for me.

Duh!

Generally if your job is to provide "financial advisory services" to the average client in Singapore, you will need to take the exams. But:

(1) most of my clients are not even in Singapore,
(2) they are all "accredited investors", in other words, sophisticated investors with high net worth, not your average HDB grandmother ; and
(3) I do not advise my clients on anything.

My typical client is a hedge fund or a bank. In fact, every document that I send to my client contains "big boy" language. In this industry, "big boy" language means language that makes it clear that both sides are sophisticated parties; both sides are able to understand and assess the risks for themselves; and neither side is advising nor relying on any advice from the other side.

But since I have already been registered for the CMFAS exams, I'll just take them anyway. Even. Though. I. Really. Shouldn't. Have. To.

This is annoying.

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Lee Kuan Yew's Laughable Matter

An article from Today:

Extradition treaty will not harm banks, property: MM
Wednesday • April 25, 2007
By Lee U-Wen

THE agreement between Singapore and Indonesia to sign an extradition treaty will not scare wealthy Indonesians away from Singapore, nor will the pact harm the Republic's banking and property sectors.

Making these points yesterday, Minister Mentor Lee Kuan Yew said the treaty — to be signed in Bali on Friday — would, rather, "act as an inhibitor".

"It's laughable. Do you believe that any Indonesian who was likely to be extradited would be here at all? (The treaty) acts as an inhibitor, and does give an extra barrier for any would-be escapee from their system," he said in an interview with Reuters before gracing the opening of its new office at One Raffles Quay.

Lee Kuan Yew's "laughable" remark might soon indeed turn out to be, errr, laughable. On Tuesday, he told us that it's very unlikely that any wanted Indonesians are here in Singapore at all.

However, Forbes quickly reported that Singapore is believed to be "a haven for as many as 200 Indonesians suspected of embezzlement, many of whom fled [Indonesia] with stolen funds as the banking system collapsed in 1997."

Today is Saturday, and we learn from the Straits Times itself that in fact, the Indonesia government already has 18 specific individuals living in Singapore that they want to investigate:

ST April 28, 2007
Indonesia to go after 18 suspects

BALI - INDONESIA plans to 'go after' about 18 people living in Singapore following the signing of an extradition treaty with the Republic, Attorney-General Abdul Rahman Saleh told reporters yesterday.

'There are a lot of Indonesian assets in Singapore. We need to ask for those assets to be returned.'

Indonesia has said that the treaty would allow Jakarta to chase down alleged corrupt officials and businessmen from the time of former dictator Suharto.

Deputy Attorney-General Hendarman Supanji said a list of 20 people - 'suspected, accused or convicted' - had been drawn up and would be handed to Singapore almost as soon as the signing was over, he told reporters in Jakarta.

Indonesian Defence Minister Juwono Sudarsono said last Sept 25 that an extradition treaty would help track down six Indonesian businessmen living in Singapore with US$600 million (S$910 million) in government debts.

Some 18,000 Indonesians, with a total net worth of US$87 billion, are said to be living in Singapore.

Mr Teten Masduki, founder of Indonesia Corruption Watch, believes tens of billions of US dollars have been stockpiled in the Republic since the 1997 financial crisis.

Jakarta had accused Singapore of delaying the treaty for fear that the suspects' withdrawals would shake its financial system and property sector.

Singapore had denied it was a magnet for laundered funds, saying adequate safeguards were in place.

LKY has been insisting that Singapore has "very strict rules to prevent money-laundering". That's his way of saying that there is no dirty Indonesian money in Singapore. I do agree with Lee that Singapore's anti-money laundering rules are strict. Our rules satisfy the international standards set by the Financial Task Force Action on Money Laundering.

Today the MAS has regulations that spell out in great detail all the anti-money laundering procedures that banks in Singapore must follow. For example, there are rules about checking on the customer's true identity; keeping proper records of his transactions; verifying his sources of funds; and reporting any suspicious transactions to the authorities.

However, there is something which Lee didn't tell you. So Mr Wang will have to do the job again.

These anti-money laundering rules basically came into existence only in November 2002. It was all part of a worldwide response to the September 11, 2001 terrorist attacks. The concern was that terrorist groups could secretly be using banks to finance their activities. All over the world, countries including Singapore then began to pay serious attention to the need to implement anti-money laundering rules for their financial institutions.

The point is that prior to November 2002, MAS Notice 626 on the Prevention of Money Laundering simply didn't exist. In those days, Singapore, like most other countries in the world, simply didn't take money laundering as seriously as it does now.

It is alleged that corrupt Indonesians had fled to Singapore after the 1997 Asian financial crisis, and deposited their illegal money into our banking system. This sounds quite plausible to me. Singapore would have been a natural destination, because it is so close to Indonesia.

And in those days, our banks simply wouldn't have had any standard systems, processes or policies to deal with the situation. Back then, it may not even have been improper for the bank to simply accept the money and say thank you, no further questions.

So when Lee Kuan Yew says that Singapore has "very strict rules to prevent money-laundering", what this means is that today, we have very strict rules to prevent money-laundering. We didn't have these rules in 1997, 1998, 1999, 2000 or 2001 - the critical years, from Indonesia's point of view.

These would have been the years when the corrupt Indonesians urgently needed to flush their dirty money through our financial system, to conceal its origins and "wash" it clean. In other words, money laundering.

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