Abax Global Capital: Redux

Abax just announced they are opening up a global macro fund. This must be where their paths diverged with founder Chris Hsu last year. A switch from special sits to global macro makes sense if you are an investor, but I’m not sure it makes sense if you work for the firm. I mean, did they just dispose of all their corporate finance people and hire traders instead.

Tudor, the $10.5 billion Greenwich, Connecticut-based hedge fund company founded by Paul Tudor Jones, contributed the majority of the initial capital for the Asian macro fund, with the rest coming from Abax partners, Yong said. Abax raised $300 million at inception and now oversees $455 million.

Tudor is known as a good macro guy. So the fact that they raised money from him is great. But why did he fund them? They might have some market access or knowledge on Chinese currency movements.

Fund info: Och-Ziff Asia

General

Och-Ziff (NYSE:OZM) is a traded hedge fund initially seeded by the heirs to the Ziff publishing fortune and founded by Dan Och, a protege of Robert Rubin and alum of the Goldman Sachs risk arbitrage desk. Och-Ziff Asia has been around for a while, primarily trading liquid instruments and equities in Hong Kong, before they expanded their distressed business in early 2008. It was a disastrous move, and the the Asia Master Fund was down 31% in 2008. They ended up firing the entire distressed and private equity and credit section, and hiring real estate guys.

OZ has offices in Beijing, Tokyo, Hong Kong and Bangalore. It hired real estate guys for HK,  Singapore, China and India.

Deals

China Healthcare Holdings (HKSE:673):  A provider of healthcare services in China. OZM only owns 2% of the convertible shares according to news. Have to investigate further.

Fisherman’s Wharf: Stanley Ho promoted casino in Macau. Greenfield project. ML arranged a USD400mm private convertible in 2006. Looks like the CB value has crashed. Chow is offering 50 cents on the dollar or less to buyback the debt. When is this thing going to IPO given that the Macau gaming market has generally crashed? TPG was also in there…

People

Zoltan Varga: partner, head of Asia-Pacific. based in HK

Punit Patel: HK, Analyst, Ex JPM, Ex NYU Stern. Capital structure arb

Stephen Yuen: HK, Analyst, Ex GS, Wesleyan University

Manoj Jain: HK, MD, Ex-CS, Cambridge

Raaj Shah: former partner, former co-head Asia Pacific, head of credit and distressed, based in HK, former head of European credit trading

Mary Schroeder: former distressed debt head, based in HK,  joined the firm at the beginning of 2008 from Asian Debt Management.  Got axed by the end of the year. Poor woman, talk about a bad move.

Oliver Wimmer: former employee, formerly of Lehman Brothers.

Deep Mishra: Indian real estate. fired at end of 2008

View this document on Scribd

Josh Katzin: Analyst, HK, ex Mckinsey, Fenway Partners, HBS

Kirti Ram Hariharan: Analyst in Bangalore office, National Law School of India University, Partner at Amarchand Mangaldas

Zain Fancy: new hire, former head of Morgan Stanley Real Estate Asia Pacific. Zain joined Morgan Stanley in 1996. Prior to joining MSRE in 1998, he worked in the Mergers & Acquisitions Department. Zain has spent five years in the U.S. business and the remainder in Asia. Zain received a BS from Georgetown University’s School of Foreign Service.

Roy Kwok: new hire from MS

Annan Madduri: new hire from MS

Bharat Khanna: new hire from MS

Entities

Fund info: Myo Capital

I’ve previously posted on these guys in relation to ADM, but here is an update.

General

Myo Capital was founded in 2007 by ex-ADM Justin Ferrier. They started out with USD50mm from an institutional seed investor and aimed to scale up to USD500mm. Unfortunately they may have been a bit early, and from the looks of the website, they might be dead already. Prime broker was Merrill, and ML Asia was selling a lot of crappy paper, so if these guys were enticed into buying any of that stuff… Very little information on these guys. With USD50mm, you would be buying pieces of debt with no hope of control of a company. USD1mm -USD5mm size, and you would think very carefully about putting USD5mm in one deal. They were still alive as of October 2008, so maybe they didn’t invest in anything since they began.

Update: They got funded by Man Group, according to Bloomberg.

Focused on distressed debt, special sits and event driven.

Deals

?????

People

Justin Ferrier
Myo Capital
Justin has 18 years experience in investment management, corporate finance and management consulting, including 8 years with ADM Capital where he was a director and member of the investment committee; 8 years in corporate finance advisory with the S.G. Warburg group in Australia and Indonesia, and Peregrine Capital in Hong Kong; and 2 years with Andersen Consulting as a management consultant. Justin has an MBA from Monash University, a graduate diploma in Applied Finance and Investment from the Securities Institute of Australia and a BSc from the University of South Australia. He is also an associate CPA (Australia) and a fellow of the Financial Services Institute of Australia.

Geoff Lee
Prior to setting up Myo Capital in 2007, Geoff was a Director and Head of Asian Investments at HSBC Alternative Proprietary Investments Limited in HK, whose mandate is to invest in the alternative assets space globally. He was responsible for managing the Asian investment team and portfolio, and developing and implementing the fund’s Asian investment strategy. From 2004 to 2006, Geoff was a Director at CLSA Capital Partners’ Mezzanine Fund in HK with primary responsibility for North Asia. Geoff has 8 years experience in corporate finance with HSBC Investment Bank and with Peregrine Capital in HK where he worked on a wide range of M&A and international capital raising assignments across the Asia-Pacific region.

Julius Jurianto

Seems to have quit to join Rajasa and Partners law firm in Indonesia.

Of Counsel

We are now retaining Julius Jurianto as our of counsel. When necessary, Julius will assist us in rendering services in the areas of banking, finance, merger and acquisition, and investment.

Julius previously worked with a British private equity firm as part of a small team covering investment portfolio in South East Asia. He was mainly responsible for the workouts and recoveries of troubled investments and provided valuation recommendations and transaction supports for divestments of the portfolio. He started his career with KPMG and subsequently practiced law for several years in Jakarta, during which time he was mostly involved in project finance, privatization, debt restructuring, and litigious proceedings at the bankruptcy court.

Julius read law at the University of Indonesia and Louisiana State University, Baton Rouge, and he also obtained a degree in accountancy from Atma Jaya University and a master degree from Durham Business School in the UK. He is admitted to practice law in Indonesia, a member of the Indonesian Bar Association, and also holds the Chartered Financial Analyst designation.

Entities

Myo Capital Fund Limited

PPFI: Going to be a disaster

The Toxic Asset Plan detail trial balloons are starting to be floated. This piece in the NYT has some preliminary details.

Basically, FDIC will provide leverage of 85% at something like 1% interest. Then FDIC will also chip in 12% of equity, and the private investor will put in 3% equity.

This is supposed to encourage the private investor to buy assets which are worth 30 cents on the dollar for the 60 cents that it’s marked on the bank’s book.

Devil in the details.

Basically I see only two ways this can play out, either A) It’s not going to work or B)It’s going to work, but produce massive profits for investors and massive losses for taxpayers… at the same time.

A) It’s not going to work

Because the investor still bears the first loss piece. So he is highly incentivized to pick and choose among the assets on offer and price them correctly. What happens when they hold the first auction and all the bids come in below the bank marks? Do you force the banks to sell? Or do you allow the banks to keep them on the book?

B) It’s going to work, but with massive losses for the taxpayer, and massive profits for private investors

This goes back to my earlier ringfencing post. Someone is going to figure out a structure so that assets can be segregated. Investors are going to punt, and they’re going to take the massive profits when they win, and leave everyone else saddled with losses when they lose.

Other considerations:

Special treatment: What happens if Treasure chooses say 5 firms, Blackrock, PIMCO, Western Asset Mgmt, Oaktree and Goldman. Won’t all the other firms scream bloody murder? Varde in Minnesota, Citadel in Chicago, Berkshire in Omaha? Each with it’s own congressional delegation making the appropriate noises? How are they not going to play favorites?

Spreading the wealth: Say due to the last point, anyone with say 50 mil under management gets to play. First it’s going to be an administrative nightmare, they’re going to be thousands of firms. Second, if the SEC didn’t know what Madoff was doing for 20 years, how are they going to keep track of this? What’s to prevent investors from playing games and money laundering and using derivatives to milk the taxpayer?

Is the money really out there? : Treasury seems to think that there’s 30 bill or more waiting to jump into this stuff. I doubt it. Firstly most of the private equity funds have far less money than the stated fund size. Secondly even if they could access it, they probably couldn’t draw all of it down in 1 go. It’s a practical matter because their investors are institutions like Harvard Management Company which simply don’t have liquid assets to fund PE commitments.

So where might the money come from? Foreign investors. That’s right. The guys holding the Treasuries who can put them into this. But it’ll have to be washed, so they’d pump money in through Blackstone or the other group.

Foreign governments are effectively going to assetize their US government debt, and end up owning large portions of the US economy.

Fund Info: Abax Global Capital

Oh how the stars of yesteryear have fallen so swiftly to the Earth. Abax was THE hedge fund launch of 2007. Everyone and their mom wanted in on these guys… who were they?

Let’s put together the story:

Abax launched in early 2007 with USD300mm in capital, most of it chipped in by Morgan Stanley. MS gave them a hunk of money in return for 20% of the firm’s equity. The plan was to do Special Situations, a fancy name for putting hedge fund money in private equity deals and waiting to get it out.

They did a bunch of small private equity deals in China, and some in South East Asia. Most of these involved Abax putting USD20-30mm in the form of a private convertible which would then be converted to equity once the investee IPO-ed. Unfortunately CBs tend to be really unattractive if you just have to carry them as bonds, they are unsecured, have small coupons, and have tenors between 5-7 years. The stocks they are based on are usually illiquid small caps, so a lot of the more interesting hedging can’t be carried out.

Looking at the deal list, these guys basically bought into a bunch of small caps, with the idea that each one would use the cash to finish an expansion project or for growth capital, and then IPO. They were very thematic, making multiple bets on China water industry, China gas industry, commodities and China consumer. They were not afraid to touch the dodgiest of the dodge, and ended up with one of the crappiest books I’ve ever seen. There was zero downside protection for the investor. None of the companies had assets that could be seized to make investors whole if the promoters turned out to be cads.

Some of the deals they did:

China Natural Gas (OTC:CHNG) :- A Chinese LNG and CNG infrastructure company. Invested USD40mm, 5% coupon with warrants struck at USD7.3. As of March 2009, stock is trading at USD2.50. The intent with this one was to provide capital for CHNG to complete their LNG facility, potentially quadrupling their earnings, and realize the warrants when they went public on NYSE or one of the other big boards.

Reuters

China Water Industry (HKSE:1129) :- USD50mm CB in Aug 2007. Conversion struck at HKD1.42, shares now trading (March 2009) at HKD0.126. This was a Chinese water treatment and sewage company.

PRNewswire

United Fiber Systems (SP:UFS) :- The deal that would not die. This thing has been passed around South East Asia like a Hong Kong hooker in heat. You have an potentially incredibly lucrative pulp and paper mill, which no bank project finance group will touch with a stick because of environmental concerns. Abax puts in USD25mm, with a promise to secure an additional USD200mm to complete the mill. As far as I can tell, Stephanie Fried hit the nail on the head, when she said it was a form of money laundering. Basically Abax fronts an investment of American and European bank capital into the project, and gets paid out of the equity investment. Abax’s commitment was struck at SGS0.355 per share, while Mar09 prices are SGD0.02. That’s right 2 cents.

China Mobile Media Technology (OTC:CHMO) :- A mass marketer of digital knick knacks. Invested USD21mm in Jan08. Warrants struck as USD2.00/share, as of Mar09 price was USD0.013 per share. No interest first year and 9.5% interest in the year after. Looks like this was the crappiest deal they did. No hard assets to have recourse too..

Coastal Greenland (HK: 1124) :- Chinese real estate developer.  USD45mm 8% notes with warrants due 2010. Invested Dec 2007, when share price was HKD1.50.  Mar09 share price HKD0.27. They owned 17% + of this company and started to sell off in Oct08. Must have started liquidating stake.

SinoEnergy Corp (OTC:SNEN) :- Another CNG play. USD20mm with average 6% coupon. Mar09 USD1.13.  Sept07 deal announce, strike at USD3.17.

Bio-Treat Technology (SP:BIOT) :- Another China water play. Fortunately for Abax, Bio-treat reneged on their borrowing agreement and never drew down the bulk of the cash. Whew what a relief. Case is in court now, with Abax suing to retrieve SGD5mm while if the investment had gone through they might have lost SGD100mm. Sigh. Strike was 0.76 on the deal, Mar09 price is, drum roll please… SGD0.03.

Who is Abax?

Chris Hsu:     He was forced out in Nov 2008. Excerpt from Top Trader’s Under 30.

Age: 27

After graduating early from Stanford with a degree in engineering, this Taiwan native got a job at Aristeia Capital in New York, followed by gigs at JMB Capital in Los Angeles and Chicago-based Citadel. Working out of Citadel’s Hong Kong office, Hsu led the firm’s Asian special-situations group. Now one year into his $300 million launch, Abax Global Capital, Hsu is invading China with the zeal of a thirteenth-century Mongol.

Donald Yang: formerly managing director and head of Hong Kong and Greater China debt capital markets atMerrill Lynch

Frank Qian: formerly a trader and risk manager in Asia, Europe and the U.S. at Citadel Group.

Andy Shpiz: Managing Director of Abax Global Capital. Formerly of Mellon HBV/Fursa Alternative Special Situations. Looks like a typical Filth-er, came out to HK, loved it, rode the curve up during the China IPO boom. Doesn’t look that well qualified, I mean IB at Allen & Co, is like Equities in Dallas isn’t it. Excerpt from Mellon bio below:

Andrew G. Shpiz will lead the Asian research effort in Hong Kong to support Asian deals in the firm’s global multi-strategy discipline and to identify further event driven opportunities throughout Asia. Before joining the company in 2001, Mr. Shpiz was a Vice President of Allen & Company Incorporated (“Allen”). Mr. Shpiz was employed by Allen since 1995 and worked in investment banking, where he was responsible for advising corporate clients and investing the firm’s capital in new businesses. Prior to working in investment banking, Mr. Shpiz researched and monitored investments for several internal special situation investment and risk arbitrage funds. Prior to joining Allen, Mr. Shpiz worked for Fidelity Investments for three years in various sales and trading positions. Mr. Shpiz received a Masters in Business Administration from New York University’s Stern School of Business in 1996 and a Bachelor of Arts degree in economics from Colby College in 1991.

Benjamin Happ: Amherst ‘98 Psych who’s a very reasonable qualified Investment Mgmt guy. Expertise is capital raising. Looks like speaks Chinese from the backgrounder.

Danny Yong Ming Chong, Chief Investment Officer of Abax: Singaporean and old SJI boy (go go St. Joe)

Lee Ka Shao managed both macro positioning and the South Asia special situations portfolio. Now at Cavenagh Capital

Bonita Choi : Low level analyst and investor relations. What is a religious studies major from Toronto doing in a hedge fund? A) She must be cute B) she speaks Chinese. Combi of one and two would be perfect for handling testy older Chinese gentlemen watching their money evaporate.

Known Abax Related Entities
Abax Arhat Fund
Abax Claremont Ltd
Abax Global Capital
Abax Global Opportunities Fund
Abax Lotus Ltd
Abax Upland Fund LLC

How would I play the Treasury’s Public Private Partnership to buy assets?

Let me count the ways…

To recap, Geither proposes that the Treasury will contribute, say 70%-90%  of the funding required such toxic bank assets as long as unnamed hedge funds and private equity funds put in the remainder. Any loss that occurs would come out of the fund’s equity portion, before affecting the Treasury contribution.

Face value

This structure is essentially equivalent to having private investors contribute equity capital in a bank and having the government provide the deposits and unsecured debt. This would form the liability side of the balance sheet, and then the new shareholders would be incentivized to go out and buy bank assets. The key problem that this structure is supposed to resolve is that of price discovery: the private investors would have the incentive to price assets correctly in order not to lose their shirts.

As Mr. Geithner already knows from the AIG bailout, the devil is in the details, so here is an early preview of what could go wrong. Private investors will make a simple evaluation: Can I buy this toxic asset from a distressed bank, such that after whatever defaults may occur in the future, I will make a profit?

Cherry-Picking

The first thing I would do it cherry pick. I would go over a bank’s book, and wherever they have undervalued assets i.e. assets they have marked down already, but I think has a greater chance of recovery than they do, I would buy. This would load up the PPP bank with the higher quality assets, and leave the banks with lower quality assets. In return, the distressed banks will realize a profit because they sold the asset for a higher price than the mark.

Ring Fencing

The next thing I would do is ring fence, or play the odds. This is actually a typical private equity trick. Let’s say I have a 100 million dollars. I split that into ten vehicles, and have the Treasure give me 10:1 leverage on each vehicle. I have a billion dollars of firepower in 10 vehicles. I then make absolute punts with each vehicle, going for broke, buying stuff that no one else will buy. If each vehicle buys an asset at 30 cents on the dollar,  and just one of the vehicles manages full recovery and all the others go bust,  then for that one vehicle:

10mm equity+90mm debt = 100mm assets

after recovery

333mm assets = 90mm debt + 10mm interest + 233mm equity

My return on 10mm would be 2330% and on 100mm would 233%.

Most real banks are prevented from doing this because the Fed and FDIC has restrictions about how much risk they can take on the book, but the PPP vehicles will not.

My ring fence strategy would probably lose the Treasury a butt load of money, because they will lose money on all the other nine vehicles and won’t have recourse to my profitable tenth.

More coming soon…

The world’s biggest carry trade…

It’s occurred to me that the US and the Fed are now officially engaged in the world’s biggest carry trade. They’re borrowing money at the risk free rate and pumping it to the economy, whether it’s through the TARP or the Fannie or Freddie.

Here’s a thought, you don’t think Citi, or Goldman or BofA are good enough credits to lend them money at say 5% interest, so instead you lend money to the US government at 2%, and the government then onlends this to the banks at 5%. Ludicrous. All that money has to come from somewhere, so first you borrow it, and then you print paper money till the real value of those debts that you incurred is impaired.

Sooner or later the rest of the world is going to wise up to this. TANSTAAFL

If Vikram Pandit was honest….

I was thinking of what Vikram Pandit might have said when he took over leadership of Citigroup. If he had been really honest, he might have said the following:

Date: Dec 11, 2007

Transcript of speech by Vikram Pandit

Thank you Win Bischoff and Robert Rubin.

Dear Colleagues,

Citi has been through a trying time in the last 12 months and indeed in the last few years. While I am a relative newcomer to Citi, I am extremely proud of this institution’s history and aware of the tremendous responsibility that comes with assuming the mantle of leadership.

First, it is necessary for me as incoming CEO to make a thorough assessment of the current state of our business, and outline my plans for the firm.

I think of our business as a combination of several advisory firms with a large portfolio of securities. In order to have an honest reckoning of the state of the firm, it is necessary to value the portfolio under a global recessionary scenario which may last as long as 2 years, and a decrease in global GDP by about -1%.

Under this scenario, combined with a real estate bust in major Western markets, we see significant impairment in our securities portfolio. In all, we expect to take in excess of USD500bn in losses over the next two years or approximately 25% of total assets. These losses will occur across all portions of our business including subprime mortgages, prime mortgages, Alt A mortgages, small business loans, bonds, leveraged loans, lines of credit and consumer loans such as credit cards, auto loans.

As of today, our market capitalization stands at USD167bn, and our total long term debt stands at USD427bn. Over the course of the next 24 months, I expect that out equity will turn out to be worthless, and in addition our debt will be worth 78 cents on the dollar.

In addition, Citi is the counterparty to millions upon millions of trades, including repos, rehyphothecations, credit default swaps etc. We do not have an effective way of gauging losses on these trades in response to market movements. It is within the realm of possibility that we have additional billions of losses that we are not aware of yet.

We also do not know what terms lie in the hundreds of contracts we sign on a daily basis. Under what conditions do we have an obligation to consolidate our off balance sheet entities? When would we have to post collateral on our CDS contracts? As the machine which is the contract grinds forward, we are as susceptible as anyone to surprises.

I propose from this day forward to cease paying dividends indefinitely, this would increase cash available to debtholder USD11bn annually. I also propose to pay all bonuses in the form of restricted stock which will have to be held for 5 years.

I propose from this day onward to cease making new loans of any sort until capital position is sorted out. If the government wants us to make loans, it better give us the money.

I propose to split Citigroup into 4 different parts: a retail and corporate bank providing loans, an investment bank providing advice, a brokerage and wealth management firm, an insurance firm. The hedge fund, private equity and proprietary trading desks will be allowed to buy themselves out, sold or terminated. They will no longer have access to the bank’s capital.

I will ask for the US, EU and other national governments in each jurisdiction that Citigroup has operation in to participate in a global bailout. The capital received will be senior to all existing equity and debt, but junior to customer deposits in order to avoid a bank run. Each national government will be asked to guarantee every penny of customer deposits. This action, combined with writedowns of assets to realistic market values, will result in the nationalization and loss of control of most of Citi’s international businesses.

Our board is composed of highly respected individuals who are not really that interested in our business. If Chuck Prince, who spent every moment looking at our business did not completely understand it, then what hope is there for luminaries such as Richard Parsons, who couldn’t tell a CDO from a good HBO episode of Sopranos? Bob Rubin is a great man, but he’s our schmoozer in chief, not a manager of our business. The last time Win Bischoff actually did anything in banking, derivatives were something you did in calculus.

In short, I am in complete control, and rule the board through fear of exposing their incompetence.

I could have come up here and done the usual CEO rigmarole. Oh yeah business is great, things are looking up, the music will start and we’ll keep dancing… Our portfolio has been cleansed and has now top notch securities… Great franchise, we’ll never break up.. our board is stunning… etc etc.  But in fact this would only give some meagre support to shareholders and fleece sovereign wealth funds into buying our worthless shares.

No, I care more for being honest, and keeping it real. In 12 months, I want to be able to say I was right, rather than going on the Charlie Rose show and saying how when the facts change, I change my mind.

This speech also ensures that I won’t lose my job for poor performance next year, because I’ve already revealed exactly how abysmal performance really is right now. So all you fools who just think I’m a seatwarmer who’ll announce the bad results and then be axed, this’ll show you..

Ya Trick Yar!

The reaction to that honest speech should have been Citi’s share price plummetting immediately to below USD1, all other banks suffering the same fate. No financial institution would have been able to raise capital for the next year, and there would have been riots on the street as banks stopped lending.

Contrary to the tone of the letter above, this piece is actually a defense of Vikram Pandit. Sometimes you need liars and cheats to get us through the bad times by telling us its not really that bad.

Credit Suisse Bonuses: Better than a stock award?

The news that Credit Suisse is going to pay bonuses using its troubled assets has been viewed with glee, both restrained at the NYT and unrestrained at Dealbreaker. But I’m not totally sure that this actually disadvantages the senior bankers in anyway.

Here’s why. Let’s say that the troubled asset pool is currently marked at fair value on the CS balance sheet. Firstly let’s think about this, how do you identify high risk assets? Is it just the interest rate/risk premium on the asset? Nope, let’s say its trading at 30 cents on the dollar, but you bought it (or its marked on your book) at 15 cents on the dollar, then the asset is actually in the money, and hence not troubled. Now I doubt they know what the fair value of the assets really is, but let’s just assume management actually has genuine faith in the statements they’ve been putting out to the market saying that their marks are reasonable.

Now let’s compare handing out bonuses in terms of stock awards versus a slice of the troubled asset pool. What is stock? Shareholder’s equity is the residual value after all other claims have been paid. Hence if the firm were handing out stock awards, each recipient is receiving a portion of the remainder of the hypothetical value of the firm if all assets were sold and the proceeds used to pay off all liabilities.

Now if you hand out a slice of the troubled asset pool, what is the analogy? You look at the asset side of the balance sheet, identify the high risk assets, section them off, and hand them off to a trust to administer them. In theory, this is actually better for the recipients than the stock award. Why? Well let’s say the assets are valued at a distressed but fair market value. In effect what is happening is that a portion of the assets is getting carved out of the benefit of the recipients, who then have a collateralized position. Ie the recipients are actually now have a senior claim on the firm with reference to the shareholders. In the same theoretical value liquidation exercise, they will receive their money before shareholders do, and in effect this reduces the value of the stock.

This is even before the identification problem. How does the bank know which assets are troubled? Let’s say the bank has taken writedowns on its leveraged loans and these are piled into the bonus facility. But then perhaps the bank did not forsee a problem in the commercial mortgage market and leaves these on the balance sheet. The shareholders are still exposed to the commercial morgages as residual claimants, while the leveraged loans, if they have been written down far enough, might eventually be worth more than their written down value, and the shareholder no longer have a claim on them.

Of course most of us know that the assumption here is wrong. Those assets are not marked at fair value and CS knows it. Why no one calls them on this shit, I have no idea. Plus they’re supposedly providing leverage to the facility. So what they’re saying that the recipients are going to take first losses. Which means more of less that CS is paying bonuses using stuff that they already know is worthless.

Why an accounting or regulatory body doesn’t call these guys out on this shit is beyond me. But, Dealbreaker is right, CS bankers are getting screwed worse than their counterparts at any other bank.

Blame it on the river not on the bank

Every pundit has a different opinion on who is responsible for the credit crisis and the coming recession. From Kunstler who blames it on the Republicans, to Mish who includes Greenspan, to Feldstein who brings in the regulators.

I don’t think any of them deserve the blame.

My thesis is that the credit crisis and the coming recession are manifestations of a process that the entire world is responsible for. This narrative begins with the triumph of capitalism over communism in 1989, which reordered the world. As soon as capitalism became accepted as the only reasonable way of ordering the economic affairs of humanity, the warring between differing systems of capitalism began. On the one hand you have the laissez faire systems of the West and the developed countries and on the other you have the command economies of the East.

The Western system allows for individual decision making and political renewal but on the whole fails to reward long term planning by politicians. The Eastern system relies on catching up on development using methods already developed in the West while holding on fast to political power. Hence policy makers in the East are able to use their political strength to push unpopular long term goals because they have the utmost confidence in where their roadmap will lead.

The end result of the Eastern system is Japan. Once all catchup development has been done and new entrepreneurship is required, the Eastern system finds itself in crisis. Institutions which were not build to support individualistic thought find themselves struggling.

What does this have to do with the credit crisis? Well it all boils down to the savings rates of the fast growing East. With the amount of money being saved and invested in US dollar assets, there was essentially no way asset price bubbles of some sort would NOT have formed in the US. That is why the bubble moved from Internet stocks to home prices and then to all forms of debt. There is essentially no way that the Fed could have prevented this without some rather drastic measures, like for example restricting US dollar convertibility.

So when the tide of liquidity rose, there was bound to leaks, bridges swept away, land inundated, and when the levees broke, it should not have come as a surprise that a flood of biblical proportions emerged.

Blame the river, not the bank.