Observations From The Inside

Evening Guests Only

2010-04-13T07:03:00.002+01:00

Another Farcical Wedding
I just got back from a wedding up in the Yorkshire Dales, which if you've never been to I highly recommend provided the weather is good, as it was during my visit. Unfortunately the wedding was terrible and scant reward for driving 5 hours each way, spending a great deal on hotels and generally making a huge effort to be there.

Our reward was to sit through the usual church ceremony snooze fest, followed by not being invited to the actual wedding itself. Instead we were 'evening guests', which as a concept is fine - but only for people who are invited locally. So the six of us drove off and found a nice country pub for lunch and to watch a couple of horses die horrifically in the Grand National (I always enjoy winding up L about such things as she's a huge animal lover). Thereafter we checked into the wedding hotel and spent the next 5hrs in a bizarre situation as effective wedding outcasts or second class citizens: drinking (at our own expense) in an atrium within sight of the wedding doors but not actually allowed in.

It was funnier because the others also recognised the situation as being ridiculous - the bride, who was the only connection we all had with this whole event, did come across as totally selfish however (perhaps fair enough, it was her big day). She wandered in for a token hello to us all, but clearly didn't give a shit that we were there and didn't recognise the effort - or more importantly didn't ensure WE recognised that she recognised the effort.

I've been through a situation like this once before, so this clearly happens all the time due to poor wedding planning. If anybody is planning a wedding, for goodness sake think about the experience all of your different types of guests will have. For guests who will have to travel from distance, either invite them to the full day or don't invite them at all - penny pinching is not worth it.

Ethical Dilemma? Nope
I took some time out for CFA study as well prior to my wedding fun last week. The main achievement was not my progress in ploughing through the course, but rather displaying my already questionable morals by lifting the entire set of one of the more popular 2010 study guides (in convenient pdf format) from a torrent site. The irony of this given the huge 'ethics' section of the course was not lost on me - or that thousands of other would-be candidates have clearly done the same judging by the seed and peer numbers.

What possessed me to take the hard road of making my own notes is quite beyond me. With this innovative new approach, and having just spent the morning quietly printing out around 800 pages courtesy of the bank's printers, I am now all done with making notes and can focus on the review (which won't take long), and then properly learning all this, memorizing the formulae and crucially practicing questions and preparing for the 5th June exam.

In this internet age of designer drugs, I'm sure most of my competitor candidates will be high on modafinil and other cognitive performance enhancers while I pass out mid-afternoon from exhaustion. This little tactic however, is an admission by me that I need to abandon my noble aim of going through the course at my own pace to learn everything (and get side tracked by applying what was learned to various investment scenarios or candidates), and instead focus on passing the level 1 exam.

If I had continued on my current path, the pressures from balancing work with study would simply have meant I would still have been not finished reviewing the course much less been preparing for the exam proper by the end of May. I have another two weeks off in May in the run up to the exam, so this is going to be a really shit couple of months all in all.

The main plus upon getting back into work today was working out just how little work my colleagues have done in my absence. Both the other new guys are off today - one with man flu and the other from tripping on a pavement yesterday and getting a bruise. Never let it be said that men don't feel pain more than women, particularly on a Monday morning.

So my sole job for the day will be interviewing some candidates for hire later on - unfortunately for the candidates, any too exceptional (if there are any) will suffer as my primary criteria will be to ensure they are good but know less than me. Where the Dark Lord is concerned, I don't intend to be outshined by any other new hires, and instead shall ensure I remain amongst his favoured elite footsoldiers, not to be sacrificed during culls or temper tantrums.

That's a survival tip for those considering a long-term career in banking by the way.

Client Relationship Manager (aka Private Banker)

2010-03-27T09:19:00.010Z

"In the US they just call them Customer Relationship Managers, and that's what we should be doing here too."

That was the paradigm I was faced with last week while in a discussion with the Global Head of Dealing - one of the many with a grandiose title and gargantuan ego that orbit the mothership that is my new bank.

I didn't even have to explain to him the problems in doing away with the cachet of the title 'Private Banker' to a large swathe of the most overpaid and undeserving in the backwater of finance that is private banking. He knows but is busy pursuing his own aim of turning his band of belittled dealers into something more meaningful than some trade execution monkeys at the behest of the bankers.

While the prized 'client relationship' that Private Bankers use to justify their salaries may apply for a small minority of HNW's and UHNW's, the model where Granny calls her banker for advice and reassurance is changing as old money moves down the generations. The younger generations frequently would rather trade online than talk to a time wasting middle man - I more base that on the fact I wouldn't trust these clowns with my money or for financial advice so find it hard to believe anybody else would either.

I have been having a most amusing time since I arrived at the new place. Compared to where I was, the new bank is hugely inefficient, which is a major plus as looking good is effortless compared to my peers. I like my new boss - petulant, demanding, irritable and impatient he reminds me hugely of my previous one (it's nice to feel at home from day one).

Unfortunately none of the other new joiners have come across such a personality, so are struggling with him, hence he has already been awarded the moniker 'The Dark Lord' (DL for short) due to his overbearing and demanding personality. A classic empire builder, what they need to learn is that The Dark Lord's only concern is about delivering to make himself look good.

I am finding the work quite refreshing, traveling to Singapore, Geneva, the Isle of Man, Edinburgh, Boston and New York so far for lengthy, detailed discussions with bankers and dealers - I'm afraid the exact details I can't reveal but suffice to say the ultimate aim is to finally move this ancient fossil of a business model kicking and screaming into the 21st century. The political factions and vested interests attempting to block this process along the way make it all the more interesting, not least because most of the private bankers have already worked out that it removes a key excuse for them not performing. They might actually have to do some work beyond extended lunches in the brave new world.

Meantime fitting in CFA studying has proven a huge pain in the arse, and whether I will be ready in time for June remains an open question. I'll be giving it my best shot but if the worst comes to the worst I will be pragmatic and retake in December and as many times as necessary - the content is not remotely challenging, just combining so much with a full time job.

I might as well mention just what an outstanding investment General Growth Properties has turned out to be following a couple of buy-out offers and the potential for further upward offers before the court accepts a proposal in the coming months. Hopefully a few people who read earlier entries took a closer look and decided to buy in over the last 18mths to join the party.

Either way I am sitting on around £2m in unrealised profit right now, which ain't a bad gain and I'm sure will have the government licking its lips.

On the subject of government and the election, I am certainly not remotely concerned by the various higher tax proposals to squeeze the rich (I assume of which I am classified). There are so many ways around most of the measures that the real tragedy is that the pain will mostly be felt by the aspirant and hard-working - it will generate token revenue, and goes almost none of the way to reducing the huge national debt.

To the multitude of unproductive public sector workers - the wake up call is that the country will only get out of this hole through deep spending cuts. Of course that's unfair, after all this is all the fault of the banks and people like me - certainly nothing to do with government deregulation, grotesque overspending for a decade to balloon the public sector (much of it completely unnecessary), and certainly nothing to do with people borrowing too much.

Brave New World

2010-02-15T22:44:00.011Z

I do feel I ought to apologise for my tardiness in posting since I returned from California, although as I mentioned in a reply to the reader who was kind enough to take the time to ask if I was still alive, I have come across a fairly obvious downside to studying for CFA whilst working full time at the bank (and looking around for a new role) - namely I never seem to have any spare time anymore.

On that note, I have made good on my promise and have made the big jump out of investment banking! No, no, no.. I have not 'seen the light' and decided to shave my head in readiness for a life of selfless devotion to others. Instead I have sold my soul to the devil with a sideways move into private banking - which is also a useful move further towards asset management.

I cannot say that I felt much regret as I sprung the news of my resignation on the Boss, just days after my bonus reached the safety of my account. He looked surprised initially - as if I had smacked him in the face, but then quickly a look of familiarity overcame him, it is not like he has not seen it all before. As I mentioned in my last entry way back in November, despite being amongst the world's most prestigious banks, my former employers have seen an exodus in recent months.

The irony is that having turned down a role for £50,000 more per annum back in March last year, I ended up snaring almost twice that with this move. Bonuses seem to have gone out of fashion, and it's all about the base.

Anyway going back to the lack of time, I wonder if that is why 99% of blogs do dry up after a year or two. Actually I suspect it is more running out of things to discuss. Of course, I've always got more than enough opinions to foist upon the unwilling world, but thought that I would devote this entry to a review of a fascinating couple of months for General Growth Properties, some comparative analysis into its current valuation, and a quick look at the recent report into the unwinding of the TARP programme and its impact upon the markets in 2010.

GGP - Into Double Digits (Briefly)
With the share price catapulting up by another 100% at its peak since my previous mail back in late November, it is worth reflecting on the underlying reasons. After all, continual reassessment is critical for the effective management of any portfolio.

Is the market being rational to value a company in bankruptcy at over $3 billion?

Key to the rises was the positive news regarding loan refinancing negotiations with secured creditors. That included the November 19 release that GGP had secured agreements in principle, followed by the filing of a Plan of Reorganization for some $9.7 billion of secured mortgage loans.

Adam Metz ensured that the propaganda machine was running at full capacity, with misrepresentative lines about GGP exiting Chapter 11 protection by the year end grabbing the headlines. It was always an unrealistic time frame, not to mention only a partial restructuring with a great deal of the important work still to do.

Having said that, a major part of General Growth Properties problems were a loss of confidence, and so instilling that in the markets once again is important - not least in the continuing creditor negotiations. By the time that aspect of the refinancing was approved by the court in mid-December, investors were partying, with myself no exception as my unrealised profits on the trade topped £1 million for the first time.

So it was with some amusement that I read through Hovde Capital's publication of a thesis that GGP shares were in fact horribly overvalued and that common stock would soon be worthless. The fact that the fund was short GGP, and the word on the street is that they are still sitting on some major losses, made it an enormous comedy. Obviously I bought into the plummet in the share price the day after it was published - but the damage to less sophisticated investors through such cynical market manipulation makes this more serious.

To say that Hovde's flawed analysis pissed off long investors more familiar than most with valuing the company might be an understatement. It is certainly rare to see two hedge funds like Pershing Square and Hovde Capital slugging it out in a war of presentations over the next fortnight, with other noteable commentators such as Whitney Tilson adding their voices to those denouncing Hovde's analysis for its fundamental flaws.

There is no point me summarising that whole saga now, as it was reported in so much detail elsewhere. This Marketfolly page is useful for giving the whole timeline and debate that raged during this period.

Ultimately though the markets are the real judge of these things, and while down from recent peaks, General Growth quickly recovered up to around $11/share. It has since of course fallen back to lows under $9/share, although remains firmly on the upward trend since filing for Chapter 11. I expect 52 week highs to be tested as additional court proceedings progress, and further unsecured creditors agree to the mass 5 year extension template that has been proposed.

GGP Valuation
As a mark of how long it has taken me to get around to completing this entry, I finished this comparative analysis of GGP versus its peer group several weeks ago, based upon an extract of sector FFO estimates using data from 21 Jan 2010.

As you can see, the all important price / FFO multiple estimates for General Growth Properties when its share price was $1.50 more than current are still the lowest in the entire sector. That is one of the key indicators of value, quid pro quo. Of course there are a multitude of other factors to take into account, but without going back over old ground and remaining on pure, technical analysis I am confident that General Growth remains the best hold in the sector at this time.

Unwinding TARP - Challenges & TALF
A key factor that will impact the markets in 2010 and beyond is the withdrawal of the quantitative easing policies that have buoyed the markets. I recommend taking a look at this report by the Congressional Oversight Panel as the section on TALF (page 106) conclusion is interesting - in summary that unwinding will have a minimal impact upon the commercial real estate market, and should provide comparatively few issues.

That's all for now campers, I'll do my best to get another entry together soon. Meantime I will be busy in Knightsbridge with my new colleagues, around the international travel that will apparently be making up a significant part of my role going forwards.

Chartering A New Course

2009-11-29T12:01:00.005Z

You could say that the wedding and subsequent month off has really knocked me out of my rhythm since getting back. That has certainly been a really good thing, as there is nothing worse than letting life's undercurrents pull you along in whatever direction it chooses.

I have taken the title of my last entry (time to reassess) to heart and have been taking a long, hard look at what I want to do next both professionally, not to mention spending all of yesterday looking at houses, as I think 2010 will be the year I finally pick up a place at last. Buying your own house (as opposed to properties to rent) are a total waste of money, and should never be viewed as investment.

Their 'return' is largely an illusion given the multitude of hidden costs, not to mention the opportunity cost from what returns all that money tied up in a property could yield elsewhere.

Anyway, It was over drinks with a number of former colleagues that I got into some serious banker-beer analytics on why I find my current job at the bank so utterly dull these days. I think it is easy to explain: ever since the work become reactive (the Time Wasting Insolvency Initiative, which was panic fuelled by the events of October 2008), the work is not remotely analytical based. As such my role has increased in responsibility but decreased in actual interest.

So it was that on my fifth pint with a good friend of mine, who has moved over to one of the other banks, concluded I ought to get out of what I am doing and become an investment analyst with a view to eventually trying to climb the greasy pole into full asset/portfolio management. It was the sort of matter-of-fact statement that makes it sound like the easiest thing in the world.

Despite that, it was a bit of a lightbulb moment, as I had not seriously considered the prospect of a complete move out of my area until now. However I am certainly never one to rule out ideas as 'impossible' simply because they might be difficult. So despite my inebriated state I filed that and mulled over it at work for the next week, eventually concluding that doing something I have been meaning to for the last 5 years would be a useful first step.

As such I signed up for the CFA (Chartered Financial Analyst) programme a couple of weeks ago, and that is naturally going to take up a great deal of time over the next 6 months alone.

To anybody who has taken the time to read some of my previous entries, it probably won't come as a great surprise to realise that I have a passionate interest in investing, not to mention an unusual willingness (and bizarre enjoyment) in carrying out the associated due diligence and analysis required to make sure the important decisions are the right ones. The CFA course itself looks to be largely areas I know a lot about anyway, so this should just be useful in really ensuring I fill in the knowledge gaps as I go along.

The benefit for all of you guys, is that I will start producing far more concise, better quality research and analysis over the coming months as I go forwards. Unlike the hoards of people blogging and making recommendations ultimately to make money, I'd rather help in my own small way in the development we all undergo as investors from those first, emotion-driven small dips in the water, through to spending hundreds of thousands based on a cold, worked analysis thesis.

And on that subject, we can celebrate the first anniversary of my initial position that I took in General Growth Properties. I have obviously been following developments with the company with a great degree of interest over the past fortnight regarding GGP's lender blueprint that it has fast-tracked with many of its major secured lenders, and of course the news the day before from Simon Property Group that they have hired Lazard Frères with a now open interest in acquiring some or all of GGP.

All excellent news for the share price of course, which has rightly repriced upward sharply into the $6 territory, and will almost certainly continue rising over the coming months as further news regarding lender settlements and takeover rumours begin to gather pace.

To anybody sitting on the sidelines, now remains a very good time to look at General Growth Properties as an investment. Despite concerns regarding the impact of share dilution from many, this is becoming an increasingly less important factor as the company market capitalisation increases. Limited asset sales to raise a couple of billion could easily be agreed with SPG or rivals to reduce that $6.5bn figure further, so I see this as a minor downside on the upward direction of the stock price over the next two years, as risk perceptions reduce and the market continues to reprice the stock accordingly.

Oh, and on a final note, the job market here in the City of London has bounced back hugely in the last few months. After screwing up the global economy, there is no irony that the sector is the first to be firmly out of recession. The major banks are all haemorrhaging good people now - people who are generally fucked off after the last two years of being treated badly and overworked by employers that are now making plenty of money (courtesy of cheap and easy government money).

As such, the already understaffed banks are now desperately hiring - my own being no exception. Naturally I am never one to turn down an opportunity, so have already had a couple of interviews in the last week and could take jobs with them now if I wanted based on the feedback. It is the best market I have seen since 2005/6, and so despite the longer term aim, I shall probably use this as a moment to cash in on the prestige/name of where I work and up my earnings by 30-40%. It would be rude not to...

Time to Reassess

2009-11-03T14:28:00.007Z

What a month! Thanks to those of you who took a moment to post a comment.. it was a fantastic day and three weeks out in California, even if I did somehow come across five bears in Yosemite.

As I sat there sipping champagne on the flight over to Chicago, I did wonder whether I'd miss anything about my job. However I can safely report that with close to a month off I didn't miss anything, which only confirms that I need to look into a move over the coming months now that the job market it picking up to something more rewarding (read: hedge fund).

This is a really rough 'n ready entry, as I have not really had time yet to gather my thoughts on anything properly, much less complete detailed analysis into various companies I have been researching - hopefully you'll find some of the links below interesting.

Crime Pays?
On the subject of hedge funds, I have started taking a look through the speeches from the Value Investor Congress today, and of course started with Bill Ackman. I was amused to see that Pershing Square's latest notable stake is 9.5% in the private prison company Corrections Corp of America.

Recessions tend to fuel demand for life's vices: cigarettes, drugs, alcohol, gambling and of course crime. At the Value Investing Congress, Bill Ackman confirmed that the fund have bought in at "more than $24.50 a share." At this moment CXW is trading at that approximate level, so what is it about the stock at this price which has tempted in a hedge fund?

"This is one of the best real estate businesses in the world. The biggest risk to Corrections Corp is that people stop committing crimes, and I think that's a low probability event." Bill Ackman, Value Investing Congress Oct 2009

Looking at the business sector, crime combined with the prolonged economic downturn and unemployment provides a strong demand for this particular business in the coming years. As such, without yet having carried out any financial analysis of my own, we can see that Corrections Corp appears to be in a strong sector in the current economic cycle.

However where Pershing Square have commented that the real value lies is in the real estate. Combine that with the US government being a tenant, and you start to see why CXW has potential. This post on Market Folly provides some useful commentary on the actual presentation itself, Additionally the actual Ackman presentation is available here.

A quick summary of the main reasons cited by Ackman as to why CXW has significant potential:

Industry occupancy is high (94% and rising)
New state facilities cannot be built easily in the current climate due to budget constraints
Numbers of prisoners is continuing to increase
Company history of stock buy backs

Corrections Corporation of America (CXW)

Before just jumping to the latest earnings it is always useful to look at the prior quarter (at least), particularly to give perspective relating to any exceptionals.

The first quarter earnings release for CXW is here and is certainly going to have been a significant factor in influencing Pershing Square to buy into the stock. Earnings of $0.29/share with EBITDA up 9.6% to just under $100m are the headline figures, along with the final phase construction of a new correction centre and being awarded three new management contracts for over 3,800 inmates.

The second quarter earnings financial results for CXW are also positive with improving fundamentals and notably the purchase/redemption of $450m of senior notes due in May 2011. The third quarter earnings are due out on Friday, so now is the time to complete due diligence into this as an investment opportunity, I will let you know my thoughts later this week.

Shorting Realty Income
While looking at various Pershing Square info that has come out in the last month, I came across this presentation into the case for shorting Realty Income, which is interesting and worth reviewing. This article summarizes Ackman's reasoning why this makes a useful pair to hedge the CXW position.

So much to read and catch up upon, either way no more talk of weddings from L (aka 'Mrs EI'), which has to be a good thing...

Wedding Bells

2009-10-01T09:22:00.005+01:00

Right, well I'm off to Chicago to get hitched. I'm sure it will all go well - as will the three weeks in California afterwards away from the tedious goings on at the bank.

I'm sure you all agree I look particularly handsome in this photo I took last night, wish me luck!

Business Valuation In Chapter 11

2009-09-26T09:08:00.004+01:00

Pershing Square's much anticipated second quarter letter finally leaked onto Dealbreaker recently, and it was interesting getting some perspective from Bill Ackman on the fund's performance, successes and candid admission of mistakes and missed opportunities during that period.

I won't reiterate the various comments made in the section around General Growth Properties beyond two quotes. Firstly the final comment:

"..GGP is a highly leveraged company and there continues to be substantial uncertainty about the potential outcomes for GGP security holders." Pershing Square Q2 2009 Shareholder Letter

It was good to see an appropriately cautionary note raised around General Growth Properties share valuation, and to make sure that those currently looking at recent returns remember that this remains a risky investment. However that is also why in theory despite large rises to date, it still remains potentially excellent value.

The headline $40/share figure that everybody has latched onto comes from Ackman making a very high level statement that the REIT most comparable to GGP is Simon Properties. That is definitely true in terms of size, portfolio quality and overall market position, although obviously not in terms of risk. Ackman uses this purely to demonstrate that assuming GGP risk reduces as Chapter 11 negotiations proceed, and clarity is gained relating to shareholder dilution, then we should look at General Growth eventually trading at an equivalent cap rate.

That gives a $40/share figure based on the current portfolio and capital structure, but crucially assumes a best case scenario of zero dilution for shareholders. It merely highlights potential, and is not intended to be some sort of predication of future value. Anybody reading the report and assuming otherwise would be wise to consider further this comment:

"The balance of GGP's value should inure to the benefit of the company's shareholders. As a result, the company's valuation will likely play an important role in determining recoveries for shareholders." Pershing Square Q2 2009 Shareholder Letter

Determining Value In Chapter 11
So what are the crucial factors that will determine GGP company valuation within Chapter 11, and how is this process going to work?

This e-zine article on determining value within Chapter 11 does make a number of interesting points about factors that could impact GGP. To my mind the key factors are as follows:

1. Valuation Experts
There will be various external specialists within the commercial real estate sector able to provide an accurate market assessment of the current asset valuations of General Growth Properties. Representatives will be put forwards behalf of the creditors and debtor (GGP).

2. Valuation Methodologies
Methodologies will need to be applied, and will be scrutinised by the Court in detail to ensure impartiality and accuracy. These typically consider a wide number of factors: potential competitors available to purchase assets (i.e. market demand), industry trends (i.e. falling property values, occupancy rates and profitability) and general valuations of comparable rivals - this goes back to SPG.

3. Assumptions
Any disagreements will be submitted to the Court for resolution. One example in the article is a case where valuation cited by the creditors applied a 'bankruptcy taint' impairment if the company remained whole - presumably due to reputational damage. In GGP's case I do not think this will apply due to market conditions and the business continue to operate meantime.

4. Asset Liquidation vs Going Concern
Here valuation experts will give an assessment on which scenario maximises value, and will account for extenuating factors such as exceptional market conditions. It may be within this that some sell off of assets is agreed and included in the plan to reduce leverage.

"The premise of value utilized in the valuation process assumes either a 'going concern' or 'liquidation' of the subject. The Bankruptcy court utilizes the outcomes of these different assumptions-based approaches to make its determination."

Company specific risk will be the main consideration here, and in the case of GGP, there is a particularly strong case for its viability as a going concern: i) positive cashflow generation, ii) ability to raise DIP financing in a distressed market, and iii) voluntary servicing of creditors despite an automatic stay.

The coming months will see some interesting discussions around the above points, and it will be this determination of value and willingness to extend maturities that will ultimately decide how much or little equity value is retained by common shareholders.

Cyclical Investing - Prost!

2009-09-23T13:25:00.012+01:00

Firstly a quick word on my pre-wedding Stag weekend at Oktoberfest: excessive.. Bavarian.. fantastic! I was fortunate to go with a large group of bankers from the City (mostly Australian), who made the whole experience far better as many had been before. As such we had a great hotel just minutes from the festival, and they ensured we weren't one of the throngs without a table on the opening day.

It's a wonderful affair that despite attracting too many tourists, due to the numbers of Germans who also attend it manages to retain its cultural identify. I thought the sheer number of locals who turned up wearing traditional costume was magnificent: there is just no way we Brits would be able to take ourselves seriously wearing leather shorts.

From the singing (I challenge anybody not to have learned the lyrics to Ein Prosit by the time they leave) to the continuous shouts of 'Prost!' (cheers/bottoms up) - it was all about fun.

Oh, and for some reason I really liked the traditional Bavarian costume for the girls... I can't work out why but I'm dreaming about L wearing it now...

Champagne Tarts
On the subject of drinks, I had a few with some more senior bankers last week that was an interesting look at changing behaviour as they get older. Being mostly in their 40's and 50's they chose an old school City bar that I had never even heard of - apparently it has been around for 30 years or more, so I was informed by one fossil.

I arrived late (I still work for a living) to discover them all sprawled around several tables, reminiscing over the days when everything was charged to expenses, the Lehman Brothers collapse and generally what a complete fuck up the last year has been.

What caught my eye immediately was the lack of champagne or wine. I discounted them all vying for the first male pregnancy despite several looking due. It seems that the banker equivalent of contributing to the new Age of Austerity was everybody drinking bottled Guinness of all things. Presumably this is the 'new Champagne' in these cash strapped times - you heard it here first people, and when Diageo's shares soar on the news you know who to thank.

Still it did remind me how the days of 2005 are long gone, when amongst other bankers I had occasionally got through champers on a night out without a second thought. The bar in question was called Harry's near Cannon Street, and must hold the title of Seediest Bar In The City. On appearances, it's quite a nice little underground cellar conversion which serves good everything.

However by the time I left at 10pm the place was awash with a sea of tarted up slappers, who all clearly had arrived to play 'bed a banker'. You get the equivalent with teenage Essex girls for bankers in their 20's, so I suppose this is what they look like 20yrs on.

I watched various aforementioned tarts wander in, add another layer of foundation to cover themselves before boldy striking up conversations with the various fat bankers in their 40's and 50's dotted around the bar. What struck me were the number of single men drinking alone, and I noticed these women seemed to almost be cycling between them until they got a hit. Presumably that's my future if I stay in banking for another 20yrs - put on 40lbs and start frequenting seedy bars for illicit affairs. Yuck, what a thought.

So Many Opportunities
My thoughts are now increasingly turning to where the next big opportunity will lie after GGP as an investment. The biggest mistake many amateur investors make is to make a decision for the sake of it. Reading back I notice making that same point as I sat on significant losses on the General Growth trade back in February and March this year.

It usually takes getting burned through a couple of rash decisions before you start to realise that one of the most intelligent things you can often (but not always) do when not sure is to do nothing at all.

Buffet himself is a master at sitting on his hands when no opportunities are apparent. Berkshire Hathaway hoarded cash during the boom years, with many questioning the value of this for investors - but note how much he has been busy spending in the last 18 months by contrast. So the same of course should apply for the smaller investor, and right now the markets are like taking a walk through an orchard with trees laden with fruit. The big question however, is which will be the first to ripen, and hence which to hold as opposed to watch?

This commentary from 10 months ago is interesting, because from this you can look back and compare its accuracy:

"Even in depressed markets, it is typical for the market to stage significant bear market rallies, as witnessed in the 1930s and in Japan during the 1990s. Perhaps the best example was seen in the aftermath of the 1929 stock market crash, in which the Dow Jones Industrial Average (DJIA) rallied close to 50% from its November low to an April peak. Comparing the present day S&P/TSX with the DJIA circa 1929-1930, it is interesting to note very similar price patterns, plus seasonality which would suggest that the stock market could stage a bear market rally through the year end, as is typical at this time of year. " First Trust Quantitative Research - Dec 2008 Monthly Commentary

Not a bad observation to have made back in December 2008 I would say. So the post-1929 crash then saw a 5 month rally with a near 50% increase. Since March we have seen close to a 6 months rally now with an approximate 50% increase, but what about the future? What the commentary does not go into detail on is then pointing out that after this peak, the Dow Jones dropped back again (hence why it is referred to as a 'bear rally').

Investment Cycle
At a high level it is always useful to look at this old illustration of the investment cycle produced by Merrill Lynch Investment Management years ago:

Although it simplifies hugely, what this does also do is give a good sense of the need to make sure money flows regularly into different areas and sectors of the economy throughout the cycle to maximise returns. Before anybody objects or points out the danger of constantly investing/reinvesting, note I am referring to the economic cycle - which typically follows a 10-15yr cycle between peaks of each boom, so you can allow (very approximately) 2-4yrs per quarter depending upon severity.

This time, the cycle was skewed quite spectacularly after the dot com boom and crash by the flood of cheap credit, which effectively fast tracked back into a second boom. However that was exceptional, and in future it is reasonable to assume we will revert to the more standard cycle.

So firstly let's look at where we are right now - clearly in the red of recession. Looking back a year ago, you would have expected defensive sectors such as healthcare, consumer staples and utilities were the best places to put money. That would not be too far off, although the extraordinary nature of the credit crisis meant that financials have undergone an early return to favour - at least for now - with some amazing returns in the last 9 months. I would argue that this has gone beyond fair at this stage in the cycle.

In these times, this illustrates that investors should have been focusing their search for the best opportunities in the last 6 months on growth stocks above all else. I have a long term hold in the South American company Mercardo Libre for example, which has been posting very high growth levels right through the recession, and yet took a major hit on its share price during the October 2008 crash despite no rational justification.

Sure enough, its growth has continued, and has seen a 94% rise in stock price over the last 6 months, which illustrates the returns out there. In my case, I bought into MELI long ago but looking back I bought in at the wrong time in the cycle - hence why I moved into a loss through the downturn, and am only up a modest 30% after several years. A useful illustration of the power of timing however.

My view is that small caps should remain the focus for now, although investors should be increasingly eyeing up the early cycle sectors, which include consumer discretionary (financials already covered). The late cycle sectors include materials, energy, industrials and technology, and defensive include consumer staples, healthcare, utilities by the way. There is plenty of time for further analysis and I will be drawing up a candidate list to complete detailed analysis soon - just that small matter of a wedding looming on the horizon...

Tax Is A Four Letter Word

2009-09-17T20:45:00.006+01:00

Golden Exuberance
Gold prices have surged in recent days, with the price pushing up above $1000 per troy ounce, and close to its all time high. I have expected strength throughout 2009 and so have been looking for a rise like this, which is why I took a fairly signficant position back in January. Additionally it has served as a useful hedge against both inflation and my substantial US dollar holdings.

As of this morning I took the decision to realise my gains - a fairly modest 12% but not bad over 9 months. I am not alone in believing the recent rises are unsustainable, as this article on gold prices from the Daily Telegraph outlines.

"London's leading gold forecaster has advised clients to liquidate holdings of gold and silver until the latest speculative fever abates."

I still adamantly believe that inflation is a near certainty in 2010 and beyond, as this is the easy way for politicians to offset the enormous debt that all the government support has lead to over the last year. As such I will be watching the gold price carefully over the coming months, with an aim of buying in once there is a fall back. On that note, I have continued to be surprised by the strength of the wider market recovery since March - it seems to have gone beyond rational, and a correction is necessary.

Investors seem to have become inebriated on the 6 month returns, a classic sign a bubble is forming that will surely deflate once institutions take a cold look at the economic fundamentals in the coming dark months of autumn.

Addendum: just logged back in today (Sep 18) and noticed this video linked to the right under CNBC: Commodities also discussing gold stocks losing their lustre which is worth a watch.

Capital Gains
Inevitably a significant question for any investor is when to realise profit (or loss - the latter is equally important). Like all investment decisions, that should never be taken rashly and certainly never based on emotion.

With GGP up around 600% now since bankruptcy, and for me around 300%, I am sitting on an unrealised profit of around £250,000 (approx $400,000) at present. You might think I would also contemplate cashing in, however I consider this investment between 6 and 24 months away from reaching fair value. Additionally realising a gain of that level requires careful planning, so I am beginning to look at ways of reducing the tax level payable. Sorry Gordon, I am already 'contributing' enough to the UK's recovery.

On the subject of GGP, its spectacular rises in recent days will also likely see a correction back soon enough, although the upward trend should continue. It has been fuelled partly by the wider market reassessing the firm as a value prospect, institutional buyers returning and crucially the belief that existing shares have a significant chance of retaining value.

That has been helped by further comments on Bloomberg by David Simon of Simon Property Group yesterday, describing SPG as a "logical buyer" of General Growth Properties assets. Limited asset sales at the right price are in everybody's interests here so a deal with some of the major REIT's is looking increasingly likely to be announced over the coming months.

Deleveraging GGP is important, and is rather like selling a holiday home to reduce the mortgage on a main house: it might seem a shame, but ultimately is the route to being financially healthier in years to come through lower debt. Of greater significance to me however is this news that the US Treasury has taken on board the significant criticisms of the tax rules that penalised those seeking to manage distressed debt.

Of course, this was cited as a major factor in the inevitability of General Growth Properties needing to restructure within Chapter 11. The removal of this sends a powerful message to the credit markets that renegotiating in these times is not just possible but expected. That benefits all REIT's, but also GGP for those loans in the joint venture SPE's that are outside bankruptcy.

It also benefits General Growth by providing further evidence that equivalent extension deals will be being agreed on the wider market when included in the restructuring plan and submission to the court. I would be surprised if we did not see GGP's share price at $8/share or higher by next spring based on the current news and developments.

G20 Truffle Hunters

2009-09-07T17:19:00.012+01:00

Oktoberfest Awaits

What better way to ready myself for a long weekend of Germanic excess later this month than to start drinking as much beer as possible in my evenings going forwards? In truth this is going to be one of several legs of my stag do (aka bachelor party), although doubtless the messiest if everything I have heard about Munich is true.

Meanwhile the pace of life has accelerated significantly, hence the lengthening gaps between entries - although with the wedding just a month away now, perhaps that is not too surprising. Bloody hell, there's a thought - I suppose I ought to put some effort into listening to what L's talking about now as it's getting so close.

Bonuses: Political Truffles

The G20 meeting of finance ministers in London last weekend has proven as pointless as I expected, with politicians continuing to mine the rich seam of public resentment around banker bonuses that has always been there - good times or bad. Of course, the fundamental problem with this is that the political focus remains on the symptoms rather than underlying causes.

Bonuses are a small part of the problem that lead to where we are now. Certainly traders need to be deincentivised to ever make short-term decisions, hence the idea of performance assessment relating to any bonuses is a good idea. Additionally if I am being entirely honest (and I can be here), an awful lot of the financial products devised in the last 30 years are not as wonderful or essential to economic growth as bankers would like to pretend.

There is nothing new about packaging up of debt and selling onto multiple counterparties to enable the efficient flow of investment capital to where it is needed. The value of related products that enable speculative trading to take place on such processes is an entirely different point however. Do products that do not create wealth but only transfer it from one party to another serve any real purpose? Arguably they help markets determine value, but in many cases, as with speculative short selling, can instead skew valuations or undermine confidence in otherwise healthy companies.

One of the fundamental issues of the economy is it propensity to the 'boom and bust' cycle. As an asset bubble begins to form, the existence of these speculative trading instruments now enables traders to move in to capitalise on this very quickly. That would be fine if the markets rationally assessed value and pulled back, but instead the ability to hedge such strategies gives traders an incentive to 'bet' on how long the bubble will go on and to make as much profit from it as possible.

My view has long been that government and regulatory failure have actually been the root cause of the situation we find ourselves in. Banks need controls around their behaviour, and it is somewhat naive to expect such a large industry to all have the high level of morals and ethics to make the right decisions at all times if they have a choice not to. The quest to make money is an overriding factor that guides many if not most into finance after all, and unlike in politics at least bankers don't try to pretend otherwise.

What About GGP?
I know, I know - it's not like I could actually go an entry without mentioning it could I? Well, actually nothing visible is going to happen for some time now, so anybody sitting around watching daily charts would find the time better spent looking into other investment opportunities (and holding, I might add).

However there have been a couple of quite interesting commentaries that I recommend taking a look at. This commentary by Goodwin Procter on the GGP ruling provides an interesting expert summary on perceived weaknesses in the SPE structuring exposed by Judge Gropper's ruling last month. The most pertinent of these is that independent directors going forwards should rightly also be considering the interests of the parent entity shareholders, despite the theoretical silo within which SPE's are designed to operate, external from such concerns.

Much more interesting is this detailed critique of Judge Gropper's ruling by Alston & Bird. This is definitely worth some comment, as there are a couple of points I disagree with them on, although the conclusion in particular is excellent.

The commentary firstly notes the "unsettling" impact of the decision on the CMBS market, in particular several assumptions that lenders had previously made. It then moves onto the Court's assertion that its responsibility is to be viewing the issues at the corporate rather than individual entity level. Alston and Bird do not appear to agree with the one-sided slant to Gropper's reasoning, stating:

"The response of a secured creditor (of an SPE) might be to wonder why it suddenly must bear the burden of the parent’s financial difficulties. The court, however, sees an alignment of interests between the parent and the SPEs, asserting — wrongly perhaps — that the inability of the parent to restructure would inevitably impair the financial situation of the SPEs."

They go on to conclude:

"In reaching this conclusion, the court stops short of the full discussion one would expect in applying, and arguably expanding, the 'corporate family' doctrine to the GGP case... the corporate family doctrine should apply when the parts are worth far less than the whole, or, put another way, when the unity of interest protects not just the entities, but more importantly the underlying asset value.

It is not clear that this logic is sound as applied by GGP. The GGP SPEs, while part of a large, complicated corporate structure in one sense, were (or at least could be) operationally distinct, in that the malls could have been operated or managed independently from one another and the parent, either by GGP or another shopping center company or a sophisticated institutional investor. As such, the parts were not worth less than the whole—many healthy performing shopping centers could continue to operate successfully without the corporate parent."

Alston & Bird's analysis ignores several key factors. On the notion that assets could be sold off to rivals, it does not seem to account for a far from normal commercial real estate market. Where valuations of low volume, high value assets cannot accurately be reached, there is a significant scarcity of both credit and confidence, along with an industry wide requirement to deleverage. That being the case, any decision that had lead to a significant number of assets reaching the market in a short space of time would have been very unlikely to secure sufficient buyer interest to attain what could be deemed fair value in a functional market, and instead we would return to the 'fire sale' conditions reserved for companies forced to accept an uncompetitive price on an asset due to extenuating circumstances.

As for allowing the malls to be separately managed - that ignores the centralised management model that GGP operates under, as well as key functions around mall management that presumably the individual mall would have to pay for separately. While that might be coverable by the cashflows generated on that asset, there is no doubt that this would be inefficient and indeed would only ever be taken by creditors with interests unaligned with the underlying asset or wider collective.

"While the emphasis on preserving value for the collective enterprise is clearly the court’s focus, it seems unduly dismissive not even to discuss the contrary position, namely that separate loans to separate entities by separate lenders on separate properties should be treated separately."

I think it is for the reasons I have touched on above that Judge Gropper chose to not even entertain them in the ruling. It was quite intentionally dismissive, because to even hint at this avenue being viable would be to encourage activity that is detrimental to Chapter 11.

Keep Your Eye On The Horizon

2009-08-26T07:41:00.010+01:00

A crucial part of investing is to look in all directions towards the horizon. By that I means forwards as well as backwards, since it is both anticipation and retrospective understanding that enable us to increase our ability to make the best decisions.

The best traders and investors are those who adapt fastest from mistakes - and learn from them. It is not about selling when an unrealised loss reaches a huge number for example, but determining whether that situation will recover, or if it is indeed time to cut your losses and analyse what went wrong.

"Indeed one's faith in one's plans and methods is truly tested when the horizon before one is the blackest." Mahatma Gandhi

Hence why my focus on General Growth Properties intensified as its stock price fell throughout Q1 2009. As we know, everything so far has gone well for GGP as an investment recently, but it is well worth spending time re-assessing the stock now.

How exactly does it stack up relative to its peers on current valuations? What are the likely prospects regarding securing advantageous terms with lenders ahead of submitting a reorganisation proposal to the Court? What are the primary risk factors remaining (e.g. dilution), and what is the likely price range in 12 months? Take a look at this table of the American REIT Peer Group, which details the share price performance of GGP relative to its peers over the last 3-12 months.

The statistics speak for themselves as to which has been the best hold over the last 6 months, with GGP up a massive 403.20%. Having said that, this is in no small part due to its enormous discount due to bankruptcy risk - hence the 87.90% year-on-year fall.

For a selected group I have added in some analyst FFO estimates for 2009/10; firstly note the zero 6 month dividend yield - a shame for those of us with plenty of shares. One of the most striking observations is when we look at the forward NAV (Net Asset Value), this reflects GGP's market value based on its real estate properties, and the figure is derived from the total number of shares. At just 3.5, this is a massive 14.8x lower than Simon Property Group, and 8.4x lower than Regency. Why is GGP so much lower? The primary reason remains the uncertainty forward priced due to its status in Chapter 11, and its ability to secure asset prices or cap rates.

However looking at the sector as a whole, commercial real estate has gone through a rally that has pushed up valuation levels to near previous peak levels. If we take a benchmark (EV/EBITDA is more accurate the P/E ratios for REIT's) then the sector average is at a multiple of 14 right now. That gives an implied cap rate in the 6-7% range. However that also means that as on average, REIT's are now averaging 12.8X the 2010 Funds From Operation (per share) estimates - strikingly that is a 23% premium to long-term average multiples.

That actually suggests that for short term traders, now is not necessarily a good time to be entering commercial real estate. However if we go back to GGP, the enormous discount to the sector becomes apparent. At just a 1.5x 2010 FFO/share estimate, it sits markedly as by far the cheapest in the sector, and suggests that should restructuring complete without excessive share dilution - something I will come back to another time - then this clearly remains THE choice in the sector for value investors.

This recent commentary has suggested that the recent ruling on GGP should be considered a one off "largely because [the whole company] has filed for bankruptcy." I think one off is the wrong phrase, what they actually mean is that given most defaults are not at the parent entity level, therefore single entity defaults will not provide any opportunity for debtors to push for the kind of ruling that has just taken place with GGP.

However many other companies operate with a centralised cashflow model, and so could conceivably see similar group wide liquidity problems, so to claim this is a one off is not correct. In fact, this view is shared by the legal firm Wachtell, Lipton, Rosen & Katz, which notes:

"..the GGP ruling may herald a trend towards bankruptcy filings by highly structured commercial real estate enterprises which today find themselves vastly over-levered."

The article is well worth reviewing, as it provides some observations around how the complexity of debt tiers acts in itself as an incentive to file for Chapter 11 due to problems restructuring:

"Further fueling potential bankruptcies, many of the highly structured, multi-tranche capital stacks that were set up in the last few years present significant barriers to consensual restructuring outside of bankruptcy. For one, master servicers and special servicers are often constrained in their ability to modify loans because of restrictions under the relevant pooling and servicing agreements and adverse tax consequences under applicable REMIC tax rules."

So with GGP remaining excellent value, I think the right balance of caution about GGP's future is struck with this final passage:

"While this round went to GGP and against the SPE and CMBS lenders, it remains to be seen where the balance struck by the GGP court between creditors’ rights and the interests of equityholders leads when thorny issues such as cramming down secured lenders to extend maturities and alter pricing and other terms to the benefit of equity are presented to the court, or how negotiation and settlement discussions – both in formal bankruptcy proceedings and in consensual non-bankruptcy restructurings – will play out in the post-GGP era."

Another legal commentary by Davis Polk of the recent court ruling is also available here which gives a good summary.

Gropper Decides 'Enough Diversions'

2009-08-12T15:14:00.014+01:00

Delicious. It was like waking up to find a fine pie and chips, with a large pint of ale in a country pub waiting for me. That's really the only way I can describe my morning, as L dried her hair and woke me up, but knowing I was 'working' from home today AND then finding out that Judge Gropper has finally made his decision on whether the disputed SPE's should be included.

As I am sure anybody long on GGP is already well aware, the Court has published its memorandum of opinion on this issue, and has ruled in favour of General Growth Properties.

Despite the multitude of other arguments put forwards by the Creditors, Judge Gropper rightly centred on the issue of 'bad faith' as "the primary ground on which dismissal is sought is that the Subject Debtors’ cases were filed in bad faith. It is also contended that one of the Subject Debtors was ineligible to file." Page 4, MEMORANDUM OF OPINION

While other arguments were raised relating to some malls not having other significant creditors, and the alleged need to include entities due to the centralised nature of the GGP business model (despite other entities such as the Joint Ventures not being included), these really were in there to flesh out the argument. The central premise of this filing has always been around the issue of proving 'bad faith'.

I mentioned in previous analysis that this was highly unlikely to be upheld based on Wells Fargo's own definition of this as:

"...a balancing process between the interests of debtors and creditors which characterizes so many provisions of the bankruptcy laws and is necessary to legitimize the delay and costs imposed upon parties to a bankruptcy."

Gropper's submission gives a useful summary of the GGP group structure including its loan structures - this includes detail on how the underlying CMBS are sold onto the wider market as re-REMIC's: something those who have been reading my recent posts will be familiar with. This demonstrates that the Movant arguments for dismissal of SPE's with a single creditor are actually nonsense:

"The REMIC in turn sells certificates entitling the holders to payments from principal and interest on this large pool of mortgages." Page 10, MEMORANDUM OF OPINION

In effect, negotiations relating to such SPE's can be extraordinarily complex under situations requiring an exceptional extension or refinancing agreement, and can realistically only be achieved with consortium consent, a cramdown or through Chapter 11.

As part of the court justification for the decision, the memo of opinion goes into some detail outlining the plight of General Growth Properties, explaining how its previously industry-standard CMBS refinancing model was left at the mercy of the credit crisis. The submissions goes into detail explaining the refinancing and debt restructuring efforts made:

"...but the lenders were unwilling to consent to additional forbearance, which in turn led to defaults and cross-defaults. Furthermore, the GGP Group was generally unable to sell any of its assets to generate the cash necessary to pay down its debts, as potential purchasers were themselves unable to acquire financing." Page 15, MEMORANDUM OF OPINION

This includes confirming GGP's inability to renegotiate loans set to mature by January 2010 due to the refusal by the master servicers to allow them to communicate with the underlying creditors. This has all been covered previously in GGP's own submissions, but clearly won over the Court as a convincing reason behind its need to move into Chapter 11.

The memo breaks down its ruling by addressing each of the key objection reasons put forward by the creditors.

Bad Faith Dismissal
The first point made is that 'bad faith' filings are "a judge-made doctrine" and not an absolute that can be proven by lawyers citing previous cases in their arguments. Gropper notes that dismissal of the SPE's from Chapter 11 on these grounds should only be granted "if both objective futility of the reorganization process and subjective bad faith in filing the petition are found.” Page 19, MEMORANDUM OF OPINION

Additionally Judge Gropper concludes that no one factor on this issue can be determinative - the Court cites a previous ruling and states:

"It is the totality of circumstances, rather than any single factor, that will determine whether good faith exists... Case law recognizes that a bankruptcy petition should be dismissed for lack of good faith only sparingly and with great caution." Page 19, MEMORANDUM OF OPINION

In other words, this goes back to previous legal analysis of Court submissions that ultimately GGP and the Court needed to consider what is in the best interests of everybody here, not just the few secured creditors that would benefit from liquidation. The Court dismisses comparisons cited with bad faith rulings made on single-assets real estate debtors, and slaps down MetLife in particular by pointing to the fact that both ING Clarion and Helios even concede that GGP do intend to reorganise and emerge from bankruptcy protection.

Objective Bad Faith: Prematurity
The court answers the allegation that GGP filed for bankruptcy 'prematurely' on entities with a maturity date beyond March 2010, as the prospect of liability was too remote. The Court answer is that this is irrelevant, the question is "whether the Subject Debtors were in actual financial distress on the Petition Date", and of course that is undeniable.

Ultimately this issue cannot be upheld because "the goal of the 1978 Bankruptcy Code to incentivize a debtor to file earlier rather than later, so as to preserve the value of the estate." Page 26, MEMORANDUM OF OPINION

This ruling is summarised that it "...is not to assert that every stand-alone company with ample cash flow would necessarily act in good faith by filing a Chapter 11 petition three years before its only debt came due. However, contrary to Movants’ contentions, the Court is not required in these cases to examine the issue of good faith as if each Debtor were wholly independent." Page 27, MEMORANDUM OF OPINION

Gropper finishes off by pointing to a weakness in the creditor's arguments on this: namely not explaining "how the billions of dollars of unsecured debt at the parent levels could be restructured responsibly if the cash flow of the parent companies continued to be based on the earnings of subsidiaries that had debt coming due in a period of years without any known means of providing for repayment or refinance." Page 30, MEMORANDUM OF OPINION

In other words, General Growth Property had no choice to take the decision it did in filing for Chapter 11 protection, because it had no realistic prospect of refinancing at a group level and that was the only criteria it could make when choosing to bring the wider structure with it in the filing.

Inability To Confirm A Plan
Another of MetLife's more absurd arguments was the suggestion of bad faith because a plan could not be confirmed in advance of filing for Chapter 11, and that they would never be able to confirm a plan over its own opposition! The logic to this was clearly flawed, and Judge Gropper devotes an appropriately short space to citing previous case law that proves this is utter rubbish with no basis in the Bankruptcy Code.

Subjective Faith
The arguments here were around not negotiating prior to filing and the firing of several independent managers / directors of SPE's ahead of the Chapter 11 filing. The Court confirmed that actually Bankruptcy law does not require negotiations to begin prior to any filing - this is certainly not sufficient for proof of bad faith. Gropper adds his views on this:

"On this record, there is no evidence that pre-filing talks would have beenadequate to deal with the extent of the problem. Indeed, there is no evidence Movants would have been willing to work with the Subject Debtors." Page 36, MEMORANDUM OF OPINION

Again Judge Gropper reserves additional criticism for MetLife, who despite having some mortgage loans as well as the unwieldy CMBS structures that caused so many problems with negotiations of loans further out, revealed some fascinating views via their internal documents called for examination by the Courts:

"...there is no indication that it [MetLife] would have readily agreed to a refinancing of any of its loans." Page 37, MEMORANDUM OF OPINION

"In December 2008, the head of real estate investments at Metlife identified its debt exposure to GGP (as a group) as a 'lessons learned opportunity.' A director and member of the research group responded, 'We wouldn’t do a loan with GGP now, given their problems.'" Page 37, MEMORANDUM OF OPINION

That's what you call 'the Smoking Gun' regarding MetLife's intentions and hence need for General Growth to file for Chapter 11.

Relating to GGP's activities with its somewhat dubious late dismissal of Independent Directors of many SPE's ahead of voting in favour of joining Chapter 11, Judge Gropper surprised me by not just agreeing that this was contractually allowed and hence legal, but also largely agreeing that in many cases this was right and proper.

This was justified by GGP President Thomas Nolan, who explained that the issues requiring their dismissal arose from certain directors who were less experienced with restructuring environments and the challenges the project entities were facing, and who incorrectly agreed with lenders and "thought the independent managers were obligated to protect their interests alone." Page 39, MEMORANDUM OF OPINION

Gropper goes on the record as stating that the firing of two 'Independent Managers' was "admittedly surreptitious", but falls back on the holes in the CMBS legal contracts, which gave GGP full control over such actions. You could say GGP got away with that one, although indications are that this would never have been a dealbreaker on the wider decision of bad faith, given the need for the Court to consider the wider interests - which is clearly a Chapter 11 restructuring.

Poor Old MetLife
I had long thought that MetLife in particular was whinging more than most of the creditors, with its plethora of largely unjustified complaints submitted to the courts. Perhaps over that bottle of fine 10-year single malt Scotch that should have arrived at the Court last week, the same occurred to Judge Gropper as well.

The Court acknowledged that as a consequence of Chapter 11, "creditors are now only receiving interest on loans, and have been deprived of current amortization payments, and Metlife complains that it is not even receiving interest on its mezzanine loan, which is secured only by a stock interest in its borrower’s subsidiary." Page 41, MEMORANDUM OF OPINION

However the court concludes that no additional adequate protection has even been sought by the creditors, who have full rights to recover both the principal (original loan amount) plus interest and post-petition interest once a restructuring plan is confirmed.

"Movants complain that Chapter 11 gives the Debtors [GGP] excessive leverage, but Metlife asserts it has all the leverage it needs to makesure that its rights will be respected." Page 42, MEMORANDUM OF OPINION

Let me translate from legalese: shut up and stop whinging.

Summary
Judge Gropper sums this up with true 'third glass of the good stuff at 1am and tired of writing 40 pages to justify himself' style:

"These Motions are a diversion from the parties’ real task, which is to get each of the Subject Debtors out of bankruptcy as soon as feasible. The Movants assert talks with them should have begun earlier. It is time that negotiations commence in earnest." Page 42, MEMORANDUM OF OPINION

Impact On Other Rulings
This bodes badly for Citi's ill-timed filing yesterday of a motion to grant relief from the automatic stay under Chapter 11 of its Oakwood Shopping Center. On paper Citi have a strong argument with precedent in their favour: GGP was undersecured by $10million upon entering Chapter 11 in April 2009, and crucially now after an asset revaluation (the accuracy of which is questionable in this market), there is arguably no longer any equity remaining within the property.

"Using KTR Realty's appraised value, the Lenders [GGP] are now undersecured by more than $19 million, or approximately 20.3% of the principal amount of the Loan."

Of course, millions of homeowners around the world are in negative equity right now, and without the support of an enormous REIT. However because they continue to service their loans they are not having a forced repossession.

When put like that, Citi's claim seems equally difficult to justify, as precedent rulings previously have not been in cases where loans have continued to be serviced at pre-filing levels, hence no actual material loss suffered by the creditor.

Given the arguments already put forwards above by Judge Gropper in dismissing other such cases, this one looks likely to be swiftly dismissed as well. With General Growth Properties share price now at a new 52 week high as I finish this, I look forwards to unrealised profits climbing ever higher.

Risk Mananging Asset Backed Securitization

2009-08-10T21:31:00.008+01:00

GGP Q2 Results
General Growth Properties Q2 results were better than the markets expected. When you strip out exceptionals, many of which are related to Chapter 11 costs, the fundamentals are encouraging, and have rightly been reflected in a significant rise in the share price.

Taking a look at the breakdown, the immediate comparisons appear poor: Funds From Operation (FFO) are down by 73.8% year on year, Core FFO is also down 43.9%. However of much great importance is GGP's Net Operating Income (NOI) - down a much more modest 11% in total, and a very good figure both in comparison to GGP's major peers and market expectations. In fact, excluding the main drag from the MPC's (Master Planned Communities) - with those stripped out we reach the headline figure reported for the main Retail businesses, with NOI down a mere 2.1% on the previous year.

Relatively strong fundamentals adds further credibility to the GGP business model. The increasing market capitalization of the firm is a direct reflection of growing confidence across the market in its ability to successfully restructure without excessive equity dilution.

Bubbles & Risk Management
I fully admit to not seeing the credit crunch coming until it was too late, and if most people are honest they did not either. In fact, nor did most of the noted commentators - it was a rare few who warned of the dire effects of a credit withdrawal with the years in advance required to avoid these problems.

I thought the dot com and recent housing bubbles were both glaringly obvious, and stayed well out of both. However as I discovered with the credit crunch, bubbles are not always so clear - they have to be hard to spot to enable them to build up.

Risk management was a dirty word on the Street a few years ago. On a few occasions, I remember sneering with the best of them, as calls from risk management about positions being taken were viewed as unnecessarily cautionary. And consistently unnecessary as the high earners and income generators within my former bank confidently dismissed them as overly conservative. I was naively a believer in the pure capitalist argument that too much collateral tied up money that could and should be actively and productively used as part of the development of the 'new economy'. The financial instruments now in use were different; these managed risk as inherent in their design.

Whenever anybody starts justifying practices that generate extraordinary profits and inserts the word 'new' in the context of economics, it is time to beware. Things really weren't different this time of course, just as recessions and crises have occurred with startling regularity throughout the last century. My take on this is that it is the different generation of investors ultimately ensures that reoccurrence. Much like investment, few take the time to research before jumping in, and hence do not learn the lessons of history.

Additionally throw in the less sophisticated consumers in the emerging markets and bubbles in India and China in particular are a virtual certainty – that means the potential to exploit significant, quick profit in the coming years ahead for those willing to take the time to invest in these markets and not play safe at home (much more on this theme another time).

Risk Management of Asset Backed Securities
The one plus of this learning process for our generation is that the regulators have been taking a hard look at the woeful risk management practices in many of the large banks - particularly in the context of asset backed securitization.

The US government is proposing several key legislative changes, which are worth understanding for those inside and outside the industry:

Any bank, non-bank issuer or underwriter of an asset-backed security must retain at least a 5% interest of the credit risk in such assets for an as-yet unspecified period or form. Crucially that would be without hedging - the theory being that if firms are themselves exposed to what they are trading, they as shareholders and owners of the banks will take the issue of risk a great deal more seriously.
Requirement to continue reporting by issuers of asset-backed securities even if the number of holders falls below 300 - this has relevance to the low level issuance/ownership of Structured Purpose Entities (SPE's) that we have seen in General Growth Properties bankruptcy, whereby some creditors have effectively been the sole lender. At present these structures escape under the reporting radar, but soon no longer.

Requirement to disclose standardised asset-level or loan-level data and standardised compensation and risk retention information. This really does not have much bearing on risk management, and seems to have been inserted to placate those wishing to have some disclosure of bankers compensation.
Regulations on the use of representations and warranties in the asset-backed securities market that would require credit rating agencies to include additional analysis in their reports - this would require disclosure permitting investors to identify originators with clear underwriting deficiencies.

Elimination of the offering exemption for certain real estate mortgage notes and related participation interests.

If these proposals are adopted, the impact on the securitisation market will depend on the nature and scope of the regulations that are ultimately developed. However it is that first proposal relating to forced exposure which knowing the banks will be the most effective means of ensuring responsible behaviour.

As the cocky young traders I describe in my last entry have long proven, it is easy to play dice with other people's money – and in the right period for the economy a total muppet can make money. However put your own money on the table, and you think about the risk far more seriously. This links back to what bonuses are meant to be about - a performance linked assessment that incentivises traders to trade as effectively as possible – it is that glaring short-termist flaw in them that has been exposed and is rightly attracting criticism.

Bonus reforms remain another vital change that needs to be imposed on the sector, and if I can recognise that then you know there is no excuse for those disagreeing.

Trader Territory Marking

2009-08-04T16:58:00.007+01:00

As expected, the motion filed by Hugo Boss for a relief from the automatic stay (see previous entry for link to the motion) was roundly rejected by Judge Gropper last week. Otherwise this story is doing the rounds today, and illustrates how the 'sword' of Chapter 11 can be used as a threat:

"[GGP] said it was considering ways to treat some of its subsidiaries as a single debtor and override their status as separate companies."

This is actually going over old ground, although it would be useful to clarify there is an apparent difference in how substantive consolidation is being used. The major concerns of the credit industry lie in CMBS being substantively consolidated into wider loans such that the agreed collateral is no longer secure - this been addressed in court submissions and will be protected by the replacement lien and order for GGP to provide 'adequate protection'.

There is however a desire and incentive by GGP to consolidate lender negotiations where possible through the Chapter 11 process to assist in restructuring - the two are not necessarily incompatible, although GGP is clearly using this as a threat.

A sign of the changing tide perhaps - our first new trader since 2008 joined the Desk on Monday morning. Somehow we coped after Junior Trader's departure earlier in the year - we lost a character, but not a revenue generator. However increasing volumes and opportunities are encouraging the bank to pick up some people again.

I always enjoy watching new traders when they join a Desk.. the verbal rutting with the old hands an be highly entertaining as they attempt to establish their place in the team. In fact, for those who don't work for banks, just pop on Animal Planet when you get home tonight and you'll get the idea - replace the hogs and territorial scent marking with traders crude humour.

He might have turned into a pious, hypocritical waste of time now, but back in 2007 the columnist Cityboy gave this old example of trade floor dynamics, which plays out in various forms every week:

"Why are you such a fat bastard?" said the posh salesman to the barrow-boy trader, who admittedly did look like he'd been on the notoriously unsuccessful 'all pie diet'.

The recipient of this rather innocuous insult slowly swung around in his seat and with perfect comic timing delivered the oft-used but still classic response: "Because every time I shag your wife she gives me a biscuit".

It is how well a new arrival can handle themselves and fit in with the Desk dynamics that plays a major role in their success at a bank. Obviously though, that only goes so far. Exceptional sales contacts, or an innate talent to manage large portfolios and hence bring in huge amounts of cash make those further up happy and that is what counts most of all.

I've seen some real arses turn up over the years though, and not all have been the 19 year old Essex boy sterotypes - although on that subject, many of them are a particularly special blend of twat. With a stated aim of doing their trading exams straight out of school, these kids are often very average – not even skilled numerically - but to their credit they don't waste their time or money following a route of higher education – and with hindsight I don’t blame them.

I recall an Irish guy who arrived at a former bank I worked for, and made the mistake of continually boasting about senior roles at Morgan Stanley and Goldman Sachs previously. He also made the mistake of looking down on the rest of us and making sure everybody knew it – I think in a misguided attempt to establish himself as the alpha trader.

Unfortunately that sort of attitude doesn't endear, and within a week the team had dug the dirt on him via ex-colleagues, and confirmed his overstated role and habit for bullshit. On his first day off, the team took some time out in the morning to ceremoniously unveil a sign above his monitor reading 'Little Fella' for him to find upon his return. A reflection of his small stature in more ways than just his height.

Interestingly that was a name which stuck for the remainder of his time there..

Anyway so far our new boy seems fairly quiet - listening and learning about the non-standard systems and what portfolio's he's inheriting. Let's see whether he starts pissing off anybody over the next month or two as he comes out of his shell.

Small Bang Time as GGP Takes Control

2009-08-02T18:15:00.010+01:00

I have got far too little time at the moment with the Time Wasting Insolvency initiative nearing its crescendo - hence the lack of entries. Still it's the weekend, it's not like L had plans that might involve taking up more time with wedding preparations surely...

General Growth Properties Extension
A very big plus this week was the news on Tuesday that GGP got the hoped for time extension for the exclusion period to file a restructuring plan, along with a less important extension to the time allowed to file schedules of assets and liabilities.

So what does this actually mean? To Absolutely Confidential's question, yes the commentator you mention did get carried away with regards to General Growth Properties now spending the next six months piling up cash.
General Growth proposed in the original cash collateral motion back in mid-May to continue their prepetition cash management practices. Unless the SPE inclusion decision is overturned - still no formal news on this, but the extension suggests this has been made - then this means GGP has committed to the following as part of the ruling:

continue the practice of a centralised cash sweep from its various sub-entities into the central firm accounts
provide 'adequate protection' of creditors cash collateral by providing a replacement lien on intercompany loans - this is the notion of ensuring there is no substantive consolidation of CMBS
continue to pay interest on CMBS loans at the non-default contract rate

It looks like somebody else made the same point in the comments, including referencing back to the Cadwalader court commentary. Sullivan's response: "correct but there is approx. $5B in default that is now another 7 months from being resolved and I believe another $8b that will fall into default during that time frame.."

Just because more loans will fall into default during the next period does not mean they will be treated differently from those pre-bankruptcy. Presumptuous at best, although in most cases firms within Chapter 11 cannot service debts and so do use this period as an effective 'breather' (a significant criticism of Chapter 11, since it can provide weak companies with an unfair competitive advantage during the process).

However GGP have committed to not doing so, partly to illustrate the viability of the existing business model and add credence to extensions being a viable solution.

Regardless this is excellent news for the stock in increasing incentives of creditors to negotiate - and was rightly reflected in a 10% upturn in share price since the announcement. It is striking that every bit of news since General Growth filed for Chapter 11 has been positive.

Industry Changes to Structured Credit Products
Related to changes in the credit markets that I have mentioned previously are the industry protocol updates made by the International Swaps and Derivative Association (ISDA) for restructuring events of credit derivatives. Firstly there was the release of the Big Bang protocol in April 2009, which has been designed to add certainty for investors when defaults occur. Something as we are seeing in recent months has been a significant grey area with existing products when finally tested with a default event.

Big Bang was the final step in a process known in the industry as 'hardwiring', which has crucially incorporated auction settlement terms into standard CDS documentation for the first time. The big bang protocol includes the following:

Introduces auction settlement as a means of settling transactions - eliminates the need for defining credit event protocols for every potential scenario to cash settle Credit Default Swaps.
Makes resolutions of the Determinations Committees binding by adding into standard CDS contracts - for issues including i) dispute on whether a credit event has occurred, ii) whether obligations are deliverable, iii) whether an auction should be held.
Adds credit and succession events (aka backstop 'look back' provisions) into the CDS documentation - to provide a common standard effective date for CDS transactions.

Further refinement to resolving restructuring disputes has been added by Small Bang, which took effect on Friday, details of which are covered in this ISDA web presentation. Key additions are to provide buyers with a five day window (sellers with two days) to trigger a credit event after a restructuring has taken place. Once triggered the evidence is then presented to the Determinations Committee to argue the case - a combined arbitrator and judge in the process.

It is all about clarifying how credit derivatives will work in future, and ensuring that buyers and sellers have a clearer idea of what protection (and liability) they are entering into. For those interested in finding out more about what credit companies companies will be entering into over the coming years, and how disputes will be handled, take a look at this analysis.

Additional Reading on re-REMIC's
For recommended additional reading on how structured products are evolving and what are impacting the recovery of the credit market this Bloomberg article illustrates how re-REMIC's are being used by the banks to refinance real estate. This article by Deloitte into re-REMIC's is dry but provides a very detailed examination of how these function and their impact.

Finally this report by Andrew Cuomo into bankers bonuses has to be the least surprising set of observations since the credit crisis of October 2008 plunged the world into recession, although this is the choice quote:

"When the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well."

Welcome to my world Andy...

Credit Markets and Rating Agency 'Refinement'

2009-07-22T21:34:00.029+01:00

This is a follow on from my analysis in May into the credit markets and rating agencies, when Fitch assured that it would continue to monitor GGP assets in the context of bankruptcy proceedings (although the implication was for further downgrades).

Rating Agency Antics Fuel Uncertainty
This process continued last month when Standard & Poor's began to tighten their criteria for rating CMBS, with figures quoted as high as $235bn worth of commercial bonds under threat of losing their AAA status. Now in the WSJ today, Standard & Poor announced that it has just reversed "its evaluation of a clutch of mortgage bonds backed by commercial property." It has re-rated a number which are part of the GG-10 benchmark securitization back to the crucial AAA status required for TALF legacy eligibility - and all just a week after downgrading them.

GG-10 is a large $8bn commercial mortgage backed security bond, that has large numbers of loans resecuritized each year across the market by dealers - so ratings on this baby serve as a bellwether for the health (or problems) of the wider commercial credit market. Looking into S&P's published methodology refinement in more detail, the Fed's desire to support commercial real estate is certainly a possible factor in this turnaround.

If so then that should come as no surprise - the impartiality of rating agencies has always been questionable. Note: for more on this, I highly recommend reviewing this great commentary by Linda Lowell of Housing Wire, on the ratings agencies and their impact on CMBS markets (particularly how S&P could not provide any meaningful backing to JP Morgan analysts regarding their previous change that lead to the downgrades).

Suffice to say that the late June rally in CMBS resecuritizations was impacted by the ratings downgrade rumours and counter-rumours, as dealers were unable to price with certainty, unsure that triple-A paper classes at the time still would be so for much longer.

What Are S&P Changing?
So behind all this, quoting from the S&P methodology changes announced, the following key aspects are being amended:

Amending how losses and recoveries resulting from 'AAA' rating scenarios for super-senior classes in US conduit/fusion CMBS are assessed.
Differentiating the timing of losses from 'AAA' term and maturity default tests when cash flow modelling transactions.
Spreading out losses that are applied to a transaction's certificates over a longer period of time.

The latter is the most meaningful change, since it allows for exceptional short-term losses to be effectively averaged, and hence to smooth out rating changes and thus reduce the occurrence of short term rating changes that are subsequently reversed.

S&P Methodology Outlined
For those interested, from Standard & Poor's own paper is the refined 3-step approach that they will be using for rating conduit and fusion transactions:

Aggregate recoveries from defaults in the 'AAA' scenario and credit impaired assets up to the crossover date. [NB Crossover date is the time where allocation of principal and losses to the super seniors change to pro rata from sequential]
For cash flow modelling, assume loans will not default for 3yrs and apply a 24mth recovery period before losses up to 30% would be applied (at the end of the fifth year). Any additional losses applied the following month, expect losses due to maturity.
Use Trepp's cash flow model to apply recoveries through the capital structure of the transaction to determine which certificates had an ending balance of $0, and would therefore retain their 'AAA' ratings.

Credit Market Evolution
This report on Sribd from Deutsche entitled 'The Future Refinancing Crisis in CRE' is another one worth reviewing, to understand the refinancing challenges within CRE right now.

On a side note, the markets have been changing the structuring of resecuritisation in the last few years, in order to juice up tranches and create more AAA-rated bonds as assets became distressed. How? By moving away from the much maligned CDO to re-REMIC's (REsecuritization of Real Estate Mortgage Investment Conduits).

To see how these can be misused, take a look at this crap published by Fannie Mae back in December 2007 - see page 2 for the re-REMIC's section in which they state:

"Market participants know that almost any type of MBS can be used as collateral for Fannie Mae REMICs."

I think we're starting to see part of the problem Fannie, when you openly state almost any MBS will do. How to mortgage the future of the next generation in America through incompetence in one easy step. Let's take a look back at how the process used to work for the banks in the good old days...

"So, if I offer you this enormous stash of our sub-prime mortgage backed securities, you'll give me REMIC's in exchange?", asks the disbelieving banker.

"Sure, we luuurve you guys - you're one of our biggest clients, and we just keep on buying these.. cos.. hell, I don't know but we do. Anyway, the government wants us to buy 'em." replies the Fannie Mae redneck employee.

"I love this job.. ok fine in that case here's $50bn of our worst shit we couldn't sell to Bernie Madoff, and in exchange we'll have those nice AAA-rated Fannie re-REMIC's and sell them onto clients. As a sweetener, we'll even throw in vouchers for you and your family to have a 3 course meal at Cracker Barrel."

"HELL YES!" replies the Fannie Mae redneck. "If there's Cracker Barrel in the deal, then you've got yourself one."

However back to reality, and re-REMIC tranches are attained in a different way to the particularly special blend of bullshit that the banks came up with previously to produce AAA-grade paper from sub-prime toxicity. Rating levels now are attained with a heavy emphasis on collateralisation - hence why rating changes like today increase uncertainty and problems.

For example, triple-A paper in recent offerings has had the most extraordinary 50% subordination levels; in English that means these would still be AAA rated if half the underlying properties burned down and none of them were insured (which they are). At least in theory, these CMBS are almost unnecessarily safe, thus should not ever be downgraded.

A trader is quoted in a Commercial Mortgage journal as stating that: "The life insurance companies are driving this. For regulatory capital reasons, they benefit from holding bonds that have more ratings stability."

Credit Future
This activity had lead to tighter spreads in the resecuritization market for super-senior bonds, leading to increases in their prices on the market and a general upturn in activity at last. However the junior tranche CMBS going out onto the market still have a significantly higher 30% subordination rate, which is a lot better than the triple-A class deals of old.

To me that is a sign that the quality of the bonds is improving to instill genuine confidence in the AAA-rating once again, and rightly so. Going back to the rating agencies, these sorts of problems then derail such progress by increasing the spreads.

GGP
Despite this, looking back at GGP, this is all part of wider series of moves by the government towards improving the credit markets and is to be welcomed by shareholders as a further means of assisting the firm in restructuring.

Indications continue to be reported that the government is open to reassessing TALF terms and conditions, but these mostly are around an extension to the scheme time frame, not a meaningful change to the criteria. Talking of GGP, there has been little going on besides some arguing between GGP and Hugo Boss relating to the latter wishing to terminate a signed lease early due to delays. Boss are likely to have that dismissed and are just trying their luck with a filing like this.

Otherwise the rulings today are largely unimportant, or have already been made (e.g. around the Success Fee). Somebody needs to slip a bottle of whisky to the good judge and tell him to hurry up and make his decision on the SPE inclusion issue…

The Art Of (Self) Assessment

2009-07-08T19:39:00.011+01:00

It's that time of the year once more, when bankers are expected to select a number of colleagues who we have tenuously worked with over the past year, and ask them to provide constructive, impartial feedback on our performance.

In the name of self-assessment, we seek to better ourselves as individuals.. to make the world a better place. And more importantly determine the size of our bonuses.

The whole process is about as impartial and representative as reading the average pile of resumes that are ending up on my desk for a role we've got open - i.e. nothing more than a partisan sales pitch. Assessments are more an art than science.

The key for any graduate wondering how to climb the greasy pole, is to always select your assessor targets early in the year. I started buttering up a select few around March - inviting them out for drinks on me for example. It's amazing how much goodwill a bottle of champagne buys. A couple of tickets to a football game is a virtual guarantee of performance inflation.

Most important of all, is to combine all of this with being unjustifiably nice to them throughout the year, even when they deserve a verbal slap for incompetence.

Such self control means the end result is always fun to behold; by next month, as the glowing reviews flow in for me, others who don't prepare in advance repeat the same cycle of suddenly realising too late that they've spent most of the year pissing off people that now matter to them in a way that really matters - financially.

"Emerging Investor is a wonderful chap, a credit to the bank - and clearly one of a deserving elite that requires a fat cheque to retain his services."

Having had a browse of the Yahoo board for the first time yesterday, the above would be a lot more constructive feedback than the first comment I noticed about one of my early GGP legal analysis posts. Not anything about what I actually said - no, just some waffle about not liking the white text on a black background - clearly the author is senior management material.At this stage of the year, senior managers also frequently apply another subtle tactic, as they realise the value in being seen to 'deliver something' impressive by November. Typically from now the industry sees a flurry of small projects kicking off, combined with a hiring spree as consultants are pulled on board with no regard for cost or efficiency - all in order to further aforementioned manager's potential bonus.

Only minor rumblings on the GGP front: the judge has ordered the firm to pay Deutsche Bank the full amount of the non-default contract rate for two malls. The headlines cite the additional $2.89m GGP must pay, but at LIBOR +6% this is an entirely fair ruling.

The only other news is that GGP have applied to extend the time frame allowed within Chapter 11 to finalise and submit a restructuring plan. This will be heard on July 22nd, along with hearings to approve the success and DIP financing fees. This request to extend has been triggered due to several factors. Firstly the underlying complexity of GGP's credit structuring, and sheer number of individual creditors, means that completing this task by mid-August was always ambitious at best.

Otherwise though, the cynic in me cannot help but observe that Chapter 11 protection is an advantageous position for GGP to be in right now. While it remains here, partially shielded from the slowly passing economic downturn, its pressing need to refinance is removed, and it can happily sweep its excess cash flows from all its entities centrally, and use these to fund operations and loan repayments - all while continuing negotiations.

It is now the creditors on the back foot and more interested in seeing GGP restructure and refinance so that they can at least re-access the principle from their CMBS's, which is a good example of Chapter 11 positively incentivising.

Oh, and do take a moment to read this classic story doing the rounds right now. The Goldmangate scandal relates to a dodgy Russian programmer (referred to as a 'strat' internally at GS), who decided to further the national stereotype with some good old corporate espionage. Old Twinkle Toes Aleynikov, hatched a plan to download all of the algorithmic code for Goldman's infamous 'black box', which is actually a swarm of machines that make automated trades in response to news and events, and which brings in millions of dollars of pure profit each year.

Every major bank has a black box, but Goldmans is the most famous as they were an early and prominent pioneer of algo trading. Unfortunately Aleynikov seems to have not been especially bright, and either assumed the security around this was not high (picture a financial Fort Knox in reality), or that his idea of zipping, encrypting and sending out in smaller chunks to an external server was subtle.

Of course, that triggered the internal alarms and the rest is history with the FBI.

"..if you think about it, instead of getting their panties in a bunch over a coupla jacked megabytes of data, the Masters o' the U should be looking at this whole thing as a source of pride. Everybody wants a piece of their shit." Bess Levin, Dealbreaker

You can always trust Dealbreaker to say it like it should be said.

Exploiting Loopholes

2009-07-05T09:06:00.039+01:00

The golden rule with tennis, as with finance, is to always put your money on the Swiss. Tough luck on poor old Andy Roddick though, the guy was rightly gutted and is too good to only win a single major in his career so let's hope he comes back and wins another.

So the final legal submissions have now been made - this includes General Growth's post-hearing submissions against MetLife and against ING Clarion and Wells Fargo. The Committee of Unsecured Creditors, and the unsecured lenders ING Clarion, Helios AMC, and of course MetLife. They are really just summarising the arguments already put forwards, although additionally MetLife submitted a motion to dismiss evidence submitted by GGP because the "Movants [MetLife] were not provided with a copy to review."

The evidence itself is a summary of the MetLife Debtor groups that own the two malls in question in this appeal. Ultimately they were included to provide evidence of the consolidation benefit to GGP that would come about from their inclusion in Chapter 11. Again, whether this is accepted or rejected is arbitrary and will have little bearing on the overall decision.

Additionally I recommend reviewing two interesting analysis papers discussing the impact of the GGP bankruptcy on the CMBS industry. The first is entitled The GGP Bankruptcy So Far: Grounds for Concern, Sources for Hope, (thanks to GGP Freak for bringing that to my attention - you mentioned it is from a post on one of the boards so perhaps you could post the link). Either way, the article provides an interesting additional summary from legal experts.

It agrees that the notion of 'bad faith' is unlikely to stand up to analysis and sway the impending decision, although here the authors focus on the eleventh hour dismissal of independent directors as the other key factor instead of GGP's ability to prove its decentralised structure and hence requirement to include SPE's in Chapter 11 not directly in default. As I have said previously, many of the arguments being made in this case are being made for the cameras, and this view is clearly shared:

"in the GGP bankruptcy, it seems that the independent director issue may not be fully pursued because of the practicalities of the situation. In the view of some, even if the motions to dismiss are not granted, it is important that these arguments are made, if only to force a decision that will at least provide a benchmark against which lenders can attempt to structure and price transactions going forward."

Also interesting is this observation on the impact of the agreed DIP financing loan from Farallon Capital Management, part of which will be used to pay off the Goldman Sachs loan: "Using the $400 million DIP loan to retire the Goldman Sachs facility effectively increases the leverage on these assets by almost 100 percent."

The second article 'CMBS Bankruptcy Remote Structuring and the Recession: Revisiting the Benefits', was published last week by the Bureau of National Affairs. It provides a much more detailed analysis of CMBS structuring, and crucially an analysis on how the GGP rulings to date are impacting the industry. One telling remark is that the SPE bankruptcy remote structure has been "largely untested" to date, and only once these are resolved will the credit markets be able to move forwards with confidence and accurately rate and price risk into credit investments.

Where this article is useful is in summarising key ways in which SPE's "theoretically mitigates" risks:

Independent Directors to vote/approve the commencement of bankruptcy proceedings - the controversial one that we know about from its alleged 'misuse' during GGP's filing, which illustrated contractual holes.
Limits Debt that an entity can incur - both secured and unsecured, the court rulings have upheld this concept and ensured that GGP will not be able to load them up with additional debt as a result of their inclusion in Chapter 11.
Ensure that SPE assets/liabilities are not consolidated with those of a parent or affiliate that is involved in a bankruptcy - in reality this has not taken place in GGP's case from their inclusion in Chapter 11 either, although there would be a significant benefit from consolidation of net cash flows and of course negotiations.

As if anybody needed confirmation that the markets were being presumptuous about CMBS's, the article comments: "CMBS sponsors and lenders, supported by many of the credit rating agencies, relied heavily on the assumption that the remote bankruptcy provisions, specifically the independent director provisions, in the SPE’s governing documents would provide protection against an SPE borrower filing for voluntary bankruptcy."

Where the article becomes much more interesting is an examination of the circumstances in which GGP has been able to utilise cash flows as a collateral. Normally it would not be allowed, unless the lender consents, or the debtor convinces the court that "the lender’s interest in the cash collateral is ‘adequately protected.' "

This notion of 'adequate protection' means proving to the court that "the collateral is not being dissipated to the ultimate detriment of the lender. Typically this condition is satisfied if the property continues to generate cash flow and the lender is given a lien on post-petition income to replace the cash collateral that is expended." Despite the turbulence in commercial real estate valuations, it is fair to assume that the value of the assets exceeds debt in all cases before the court at present.

As such this is precisely what the Courts have awarded all of GGP's lenders who have appealed for their respective malls to be removed from Chapter 11. Despite a lien on cash collateral not being as appealing to lenders than instant access to the cash flows from the malls, income is safeguarded by the decisions made by Judge Gropper, by ensuring they are serviced and repaid in the event of liquidation.

The article concludes a summary of ways in which the GGP rulings to date are impacting the industry and a realistic assessment of the next steps relating to restructuring. Ultimately the ability of GGP to control the independent directors of its SPE's is seen as a key weakness in the current structure of SPE's. The legal authors point out that despite this it is very much legal, :

"Despite the fact that the removal and replacement of the independent directors may have violated the spirit of the original agreement with the lenders, GGP’s actions were permitted under state law and do not appear to have been prohibited by the organizational documents of the SPE borrowers."

In fact, the article even advises lenders able to who have the opportunity to "revisit the governance terms of borrower SPEs, would be well advised to consider modifying the 'remove and replace' provisions relating to the independent directors."

In many ways this suggests that GGP's bankruptcy is unique in another sense, due to timing and its ability to exploit weaknesses in the contracts that will be closed in the future. That being the case, any investors contemplating on taking positions in other REIT's in a similar position to GGP should exercise caution. It would be unwise to simplistically assume that other companies will necessarily be able to exploit this loophole for long, and so need to investigate the underlying SPE structures and contracts.

And finally:

"As the GGP bankruptcy progresses, given the uncertainties in the valuation of commercial real estate in the current markets, it will be interesting to see whether GGP attempts to reduce required interest payments based on the current market value of its properties and, if it does, how the bankruptcy court will determine the valuations of these properties and how reduced values will affect the commingled use of cash collateral."

Bear in mind how early into the bankruptcy process this all is - decisions made now can be amended throughout GGP's period in Chapter 11 on appeal. Meantime all of the information is before the court, suggesting a ruling is impending.

Addendum: just tidied up this post - you could tell I wrote and posted it during the Wimbledon Final, what a bloody mess it was...

Greed Guarantees It Will Happen Again

2009-07-01T12:59:00.005+01:00

It is interesting how everything in life is cyclical. You're born a disgusting, wrinkly ball akin to the stomach parasite from Alien, unable to speak or wipe your own bottom - and if lucky you end up that way again by your late-80's.

On the subject of cycles, do we truly learn from mistakes? Perhaps on a generational level, but surely not beyond that, which is why so many of the problems we are seeing now have happened before. It is the same point raised in the book 'The Millionaire Next Door', which observes how the wealth acquired by self-made millionaires through frugality is usually lost within a couple of generations, as their offspring piss it all away pursuing a materialistic utopia.

Anyway my point was actually around the whole Bernard Madoff fraud, and the absolute certainty that it will happen again in the future. I don't care what politicians and others in the press state about controls to prevent it, that is simply not the case. Wherever there are naive and/or lazy investors, there will be largely unregulated, opaque funds promising fabulous returns that seem too good to be true

In one sense everything is legal until you are caught - something that Enron illustrated impressively - although not a position I agree with, despite notions of 'right' and 'wrong' being grounded solely in perspective.

So it was with some interest that I got some perspective when I chanced upon a CMBS securitization dealer from another bank over at a Corney & Barrow champagne reception last Friday. It was completely random, at a wedding drinks bash: not mine, and sadly and not corporate - the days of charging everything back are sadly not yet there again.

I was most surprised to find out the trader worked for RBS, who having notched up losses to rival Citibank, and really are a basket case in the world of banking these days. My first question to him of course, apart from the standard piss-take "what's it like to work in the public sector these days?", was what he was still doing there with a job?

He confirmed my suspicions by admitting to being the only one left of a team of 25 a year ago. An interesting illustration of another factor reducing the CMBS transactions taking place, given the headcount reductions to support the transactions. In effect though, he is minding the shop with respect to their existing CMBS portfolio - but did add he is still an originator.

Obviously I had to bring up the subject of General Growth, more to see if he knew anything about it and the potential impact of the SPE ruling. He knew enough for me to have some fun ripping his industry apart, as I reminded him what a joke the previous contracts and sales processes had been.

He did not disagree, but gave the inside perspective - namely that it was really for the clients to complete the due diligence as they were the ones impacted. That is fair enough, but as I reminded him that is not really a valid view given the $50bn loss RBS took last year - it might just be arguable that they were impacted as well. He also confirmed the rumours I have heard that the industry is busy co-ordinating a complete re-structuring of SPE's and associated contracts that will supersede what is currently on the market.

Hardly a surprise, but what that does suggest is that when we finally receive a ruling it will not have nearly the ramifications that some would suggest. There is otherwise little news on the GGP front besides some minor legal applications ahead of future hearings.

Good news for me is that the functional spec will (at last!) be finished by the weekend. It has taken me about 2.5mths due to work, and after drafting up a high level technical spec next, I could in theory get it built in the next couple of weeks. However I will be moving onto the biggest job of all next - populating the site content. Rather more important at this stage, and given the site will provide industry grade investment research papers to registered users (for free), that is going to take time to get ready. I will be covering everything from corporate finance to investment products, market psychology and all trading products on the market, whether investors have access to them or not.

The key to successful investing, particularly for those aspiring to reach high net worth status, is building strong foundations - and that goes beyond simply building knowledge. Either way this site is going to be a more intelligent alternative to the main investment tabloids.

Decision Time Legalese

2009-06-25T16:12:00.005+01:00

What a week.. if ever I needed a reminder why I want to set-up my own business and get out of the sector, working for one of the supposed 'elite' banks (aka 'slave driving bastards'), this is it.

I am on course to notch up a 70 hours week, which is just unhealthy - never mind it also equating to having no life.

I don't have much time to comment on anything, unless anybody cares more than I do about the centre pieces design. Wedding preparation intensity is non-stop: women have an amazing capacity to focus at such moments I have discovered. Work.. wedding talk.. sleep.. wedding talk.. work.. wedding talk.. sleep..

Without enough time to get back to researching other investment opportunities, I am back onto GGP for now, and there has still not been much movement on the key decision in the Court case, although it should be very soon. Judge Gropper has clearly had a busy week ploughing through the mountain of GGP motions submitted.

Most are minor, procedural changes proposed by GGP in light of it entering Chapter 11, so are unimportant to the outcome. On Wednesday we saw MetLife's motion to dimiss several of it's SPE's from the Chapter 11 filing go before the Court. The day before, GGP filed an objection to limit the testimony of MetLife's experts relating to refinancing, which they submitted here.

GGP questioned the expertise of the witnesses that MetLife sought to call for evidence, citing their lack of being on the MetLife Real Estate Investments Committee, which is "the decision-making body with knowledge of this topic." They also cite their 'lack of preparation' in reviewing the key issues in the weeks leading up to the hearing, such that they could not be deemed suitable to provide advice.

General Growth also sought to draw on the Court's expressed desire to fast-track GGP's case as a reason to dismiss them:

"Given the expedited nature of this hearing and this Court’s expressed desire to resolve the various motions to dismiss rather than hold yet another round of hearings, MetLife’s failure to provide witnesses with knowledge about this area of inquiry cannot be excused, and should not be without the typical consequences i.e., MetLife should be barred from presenting any evidence regarding what MetLife would or might have done with regard to extending or refinancing any of the loans at issue in MetLife’s Motion to Dismiss. Put differently, MetLife should be held to what its corporate representatives testified to -- and nothing more."

Well I am not convinced, but it is worth a try. Yesterday saw this response from MetLife, and I recommend reading the introduction if nothing else, because the language is strong by legal standards and quite a laugh. MetLife's attourney's, Greenberg Traurig LLP, seem beside themselves with anger at GGP's attempt to have their evidence dismissed before it is even heard.

The motion to limit MetLife's testimony representatives is described as "nothing more than a desperate attempt by the GGP Debtors to exclude evidence that demonstrates that their entire premise for the filing of their chapter 11 cases is simply untrue." MetLife go on to forcefully suggest that GGP's case almost entirely rests around its argument "that refinancing was not available to them in the face of upcoming maturities."

In reality that is not the case - just have a browse through my previous analysis for examples of the range of other arguments that GGP have put forwards. MetLife again state that refinancing was not an issue with the malls in question here "and they [GGP] know it". They go on to state:

"The testimony that the GGP Debtors seek to exclude shows that MetLife would have been, and remains, interested in discussing refinancings or extensions of the loans to the MetLife Borrowers."

'Retrospectively interested' seems more accurate to me. MetLife point out that they have refinanced "similar loans of similar properties within the relevant time period" but I suspect that is unlikely to stand up to inspection, as they were not for REIT's in technical default. It is also highly unlikely that MetLife refinanced those with equivalent maturities so far into the future, given the tax exposure factor that is cited in the Wall Street Journal as a flaw preventing many early refinancing negotiations to open.

MetLife suggest that the only reason GGP have submitted the request to exclude these testimonies is because of their 'devastating' nature to GGP's case. Indeed "the GGP Debtors are desperately seeking any pretext to prevent the Court from considering this important evidence." Yet if the other refinancing is not truly comparable as outlined above, then that is not valid at all.

More likely GGP were busy rocking the boat and seeking to exploit a weakness in the case by having witnesses removed. Either way, it is not yet known whether this motion was upheld or not, but I feel that it is unlikely to sway the ultimate decision on this issue, despite MetLife's claims.

Even if MetLife were allowed to provide witnesses who claim refinancing was a possibility, most of their evidence is conjecture and therefore debatable. This also does not counter the case that large numbers of SPE's did refuse to even open negotiations, which combine with factors such as GGP's claim of a need to remain integrated and proactively seek a means of negotiating with all lenders.

To my mind, if the motion to dismiss the witness exclusion was overturned then the strength of GGP's original case is unchanged - but if it was upheld then it undermines MetLife's case, which is probably at the root of their vehement response.

The hearings on Friday are largely not part of this more important issue, but expect a decision soon - I am still expecting a favourable outcome for GGP.

Big Fish Tantrums

2009-06-17T21:43:00.019+01:00

I was dialed into the steering committee meeting yesterday for the post-insolvency / time wasting project , and who should dial in but the COO of the bank!

To put that into context, for those unfamiliar with working in the sector and the sheer size of the big investment banks, imagine a combination of a medieval king and Paris Hilton all rolled into one. Vast power, able to behead on a whim, combined with plenty of preening and a vast ego.

Thus he had not stopped by to listen and learn, only to be heard. Aww, bless him - isn't he cute?

We were treated to a 15min speech, although I wasn't bothered as I am not running this whole affair; it certainly didn't stop me reviewing the latest Court docs from GGP while he rambled on. In short though, he had dropped by to tell us all how pissed off he is that we have been beaten to the punch in delivering our insolvency solution by a major rival (announced in the WSJ on Tuesday).

Never mind the fact that ours will be far superior, applying not just in the US but globally, and crucially enabling Hedge Funds to margin securities rather than having to fully fund their positions - the whole point of Prime Brokerage after all. Nope, at the top this was a big corporate race, picture all the CEO's lined up in their sacks and jumping as fast as they could to the finish line. In his eyes we have lost - the trifling details are an irrelevance.

So the Court decision relating to GGP is going to take more time to reach a conclusion. Given the length of my four legal analysis posts, which in themselves are a hugely condensed summary of the arguments put forwards, I would have been surprised had the Court managed to review all of the submissions that have been flooding in right up until the last minute, much less reach a considered opinion so quickly.

The only public information out there is that the Court could take until the end of June before deciding on whether the proceedings by MetLife, Wells Fargo and ING Clarion Capital to remove their underlying collateral from the GGP bankruptcy filing are upheld. This ruling is important, as it would of course enable GGP to negotiate from a position of greater power with many more creditors, while using the combined cashflow as required, and should be able to secure more favourable extension terms. Regardless of the decision however, it will be useful for GGP to focus on its restructuring plan - expected that some time in August.

In an unrelated announced on Wednesday, Jim Graham, GGP's Director of Public Affairs also announced that the company had "very recently" made the decision not to sell the Bridgeland development as previously planned, and instead develop the site itself. This directly reflects the improvement in GGP's position since it filed for Chapter 11 and received DIP financing.

No longer is the firm desperately seeking ways to avoid Chapter 11, and is instead making considered decisions in-line with both Adam Metz and Bill Ackman's comments about there not being any rash asset sales. An encouraging sign that demonstrates mutually aligned interests with common shareholders.

Other minor points of interest this week:

Pershing Square submitted a motion on Wednesday for their Chief Legal Officer, Roy Katzovicz, to start receiving paper copies of all notices and papers going forwards. No reason is given, but it suggests that the fund will be taking an increasingly active involvement in GGP's legal maneouvering, planning and positioning over the coming months.
GGP have settled the DIPS financing claim with Brookfield Financial LLC and Goldman Sachs. The original claim was $5.78m, and the settlement is for $2.75m, and is fully supported by the committee of unsecured creditors.
Ahead of the deadline for objections by unsecured creditors, various claims have been filed. This includes the occupant at various malls J.C. Penney, filed a limited objection and reservation of their rights to the inclusion of related SPE's into the GGP bankruptcy filing. They add nothing to the actual case beyond suggesting GGP's inclusion of relevant malls "blatantly ignore the due process rights of numerous Lien holders - including J.C. Penney - who have Liens in or on property owned by the Debtors [GGP]".
A similar limited objection claim has been filed by A&K Endowment Inc, and many others - mostly around proposed amendments to establishing alternative procedures under Chapter 11.

Legal Analysis IV: GGP's Final Response

2009-06-16T12:57:00.003+01:00

Okay this is starting to get excessive, but then this run up to the court hearing tomorrow has seen some interesting arguments going on behind the scenes. Yesterday GGP submitted their final response to the creditor's case ahead of the hearing on Wednesday, which is a baby at a mere 100 pages.

One key part of that was a dissection of the motion to dismiss the Chapter 11 case of the Fox River Shopping Center LLC by FRM Funding. FRM Funding had by then already submitted a motion to withdraw its objections to inclusion in Chapter 11. Although no reason was given, the case is covered in GGP's submission, and in all probability it was an assessment by FRM's legal team on the strength of GGP's case that lead to the withdrawal.

A quick review of GGP's final response to the creditor case:

1. MetLife / FRM funding 'bad faith' arguments fundamentally flawed
GGP point out that just because certain GGP subsidiaries are operationally sound with strong cash flows does not mean they could ignore the realities of the credit markets or their duty to maximise value. In other words willfully waiting until default and potentially being forced to liquidate individual entities would be an abuse of their duty to all.

GGP's team reiterate that the wider market problems meant that anticipating future problems refinancing all loans was nothing more than a realistic assessment of the credit markets, and hence the Chapter 11 filing was made in good faith. Additionally they note that the debtors do not even attempt to show that GGP's chances of a successful "reoganization is objectively futile."

GGP also refute that Chapter 11 is being used as a "sword" to gain a tactical advantage in negotiations with secured lenders (note: it is in reality, but let's ignore that), and instead refer to it as a "shield" that will protect the firm as it restructures the debt. In that case is Bill Ackman a knight in shining armour and MetLife the evil dragon?

It does illustrates the highly subjective nature of filing under bad faith. You can argue it both ways, but you need to have definite proof to make the mud stick, and the creditors case is not strong enough. Weil Gotshal & Manges also point out inconsistencies between creditor cases, with MetLife arguing the credit market problems persisting for a year or more is "sheer speculation" by GGP, while ING and Helios agree that the CMBS market has disappeared.

2. GGP filed for Chapter 11 protection for the same reason that ING and Helios debtors filed
This being the collapse of the CRE financing markets and the advantage of "participating now in an integrated, consolidated restructuring of project entities". This makes an effective point by illustrating that other creditors were filing against GGP by this stage, and undermines suggestions by those creditors objecting just because GGP filed first that taking no action was a viable option.

3. GGP filings included loans that had already cross-defaulted
Hence did not give GGP "a reasonable prospect of refinancing before maturity, and certain other loan characteristics that further exacerbated the need for a restructuring." This point is again particularly strong, as it demonstrates the financial stress that GGP was indeed under during the months of financial limbo when it moved into technical default on loans without declaring Chapter 11.

Additionally GGP dismiss this further by arguing: "There exists no basis in law or in fact for overriding these reasonable business judgments made by the Subsidiary Debtors [GGP] on the advice of sophisticated financial, restructuring, and legal experts."

The 'loan characteristics' referred to above are covered in more detail in this WSJ article from yesterday, which shows an increasing recognition by the wider industry and US government now that there are problems with the entire CMBS market. This goes back to the point that ultimately (due to tax reasons, as it turns out), many of GGP's lenders were largely unwilling to even discuss refinancing of any loans not due within a short period of time - a fundamental structural flaw of the credit markets.

GGP has to my mind received a significant boost from these potential plans to amend the tax laws to enable lenders to talk earlier. This gives a powerful argument that GGP really was forced into Chapter 11 due to market failings and exceptional circumstances, and hence should be fast tracked back out.

4. Dismissal for lack of good faith should be granted "sparingly, with great caution."
The defence elaborate further with previous court decisions that support GGP's case, stating that a petition for bad faith should only be granted when: "it is clear that on the filing date there was no reasonable likelihood that the debtor intended to reorganize and no reasonable probability that it would eventually emerge from bankruptcy proceedings."

The defence then go into detail dismissing all of the bad faith arguments that ING, Helios, MetLife and FRM have made in their filings, claiming none have merit.

5. GGP filings for bankruptcy had full corporate authority
GGP move onto FRM's claims around technicalities in the Fox River SPE filing, and rebuff with some telling quotes back from the original derivative contracts.

For those who have read my previous comments on the CMBS industry and how contracts used to be sold, you will know I have long said that nobody did any due diligence in the good old days. It was a zip 'em and sell 'em on mentality, and frankly nobody in the banks cared as long as people bought them. Only now are people running around complaining.

Let's face it, if you did due diligence you would never have sold CMBS contracts with this explicitly in the wording:
"Nothing contained herein or omitted herefrom shall prevent the shareholder(s) of the Company [GGP] from removing an Independent Manager with immediate effect at any time for any reason."

GGP's lawyers state that the loan documents include no legal opinion regarding whether Fox River was bankruptcy remote. Even more damning, and probably the final nail that forced FRM to withdraw their motion was the legal assessment of Fox River, which refutes the notion Chapter 11 would not enable any substantive consolidation (of assets and liabilities).

6. MetLife's 'speculation' on the outcome
In MetLife's recent response, they made a convincing case about GGP acting in bad faith, but a key point was that it was indeed based largely on speculation on their part. At the heart of this was an argument that there was no point moving into Chapter 11 because when it comes time to approve any restructuring plan, "there might not be any other impaired creditors and it [MetLife] might vote against a plan."

This response from GGP is all you need to say on the matter:
"..if creditors could get a bankruptcy dismissed at the start of the case simply by claiming they may not agree to a plan of reorganization, as MetLife claims, then chapter 11 would be rendered useless as creditors can always assert they will not agree to any impairment of their claims."

The defence conclude that all of the creditors seeking dismissal of the bankruptcy petitions are seeking "to impose a requirement that debtors face imminent collapse before seeking chapter 11 protection. But no such requirement appears in the actual text of the Bankruptcy Code."

Everything continues to point towards a favourable outcome for GGP, although law is a hornet's nest, so you never quite know what will come out when you start playing with it.

Legal Analysis III: Creditors Make The Case

2009-06-13T14:13:00.009+01:00

Well, L arrives into Heathrow tomorrow morning after her indulgent week of girliness in Chicago at the Bridal Shower. As such I had better spend today tidying up this dump - it's amazing how a week without the missus demotivates me in keeping the place clean.

The final part of this legal analysis series takes a look at the arguments being submitted before the Court next week by the creditors, with respect to having various SPE's (and hence malls) removed from inclusion in GGP's Chapter 11 filing. This gives the other side of the case, and hence an opportunity to assess how convincing this and their chances of overturning the earlier decision really are.

This article focuses on the case being proposed by MetLife, and the investment fund Clarion Capital, which are two of the group of secured creditors being heard on Wednesday 17 June by Judge Gropper. Examing the various arguments proposed by the creditors:

1. Chapter 11 cases not filed 'in good faith' - the specific loans in question were all current and not in default. Upon closer examination, the creditor's claims around the filing are unconvincing in this respect. As GGP's defence team state in their response, calling it 'woefully inadequate' in establishing the burden of proof, I agree having reviewed everything they have put forward.

The creditors give evidence from previous claims to back them up throughout of course, and suggest that GGP is ineligible in this case, due to it being financially healthy and not insolvent:

"..given the enormous powers a chapter 11 debtor is given by virtue of the automatic stay, the exclusive right to file a plan, and the ability to discharge debts, these powers should be limited only to those facing financial stress."

If all GGP's problems due the credit market turmoil of the last 9 months do not equate to financial stress then I am not sure what does! The creditors then go on to cite the recent court ruling that has allowed a construction company to file a lien against General Growth to recoup owed construction costs, despite being in Chapter 11. In that case, the court stated:

"They [GGP] do not need a litigation respite, as do many chapter 11 debtors... Nor are they financially troubled debtors that seek in good faith to avoid a preclusive judgment in State court that would prejudice legitimate efforts to preserve value for the benefit of all of their creditors."

Insolvency is not a requisite for filing Chapter 11 anyway, as the creditors admit. The above Court ruling is quite different from establishing bad faith and I see nothing that suggests proof that GGP are doing anything other than attempting to sort out their problems. The only point worthy of consideration is below, although it is more than debatable that this is an abuse of Chapter 11, since it is precisely what the legal code is there to do - facilitate the move out of bankruptcy:

"The Debtors’ use of chapter 11 as a sword to obtain a tactical advantage in any negotiations to extend the Loan, when such Loan was not in default and does not mature until a year and five months after the Petition Date, is an abuse of chapter 11 that the good faith requirement is designed to prevent."

2. Loans in question were not due to mature for a significant period of time - as such there was "no present need [for] the.. debtors to file for relief under Chapter 11 of the Bankruptcy Code." Additionally MetLife claim that GGP "did not contact MetLife, one of the largest insurance company providers of real estate capital, about a loan extension prior to the Petition Date."

This point has been refuted in evidence submitted by GGP, regarding widespread creditor unwillingness to discuss extensions on all but loans due imminently. This cites that in some cases GGP were even refused the names of underlying creditors to contact. Thus, GGP may in this case have not been able to identify who to contact - either way, this point is secondary in the context of point 4 below.

3. The malls in question do not have any other significant creditors - thus GGP will not be able to cramdown a plan over the Lenders' objections.

This is a particularly weak point; citing dimissal of this SPE because it is primarily comprises a single lender, hence there is no advantage in Chapter 11 inclusions since GGP will still have to fully service them and negotiate with a single lender.

That again is refuted by the evidence submitted by GGP regarding how unwilling many lenders were to renegotiate loan terms and extensions pre-Chapter 11. It also ties back to the point that individually, lenders act within their own interests, which are not directly aligned with those of the company, other creditors (especially unsecured), shareholders or wider credit markets.

This Providence Journal article also suggests MetLife argued that GGP's attempt to 'cramdown' a wholesale reorganization plan for its mall properties will "hurt the insurer's financial interests." I do not see how that can be argued, nor have I found this point being made in the court submissions.

Being negatively financially impacted cannot be realistically argued as a motion to dismiss, beyond it 'hurting' MetLife and other creditors ability to negotiate: they do not wish to be forced to the table without holding all the cards. However all are having their loans fully serviced by GGP throughout the period at pre-bankruptcy rates, thus in theory should not lose out at all financially.

4. Chapter 11 were not filed with any reorganisational purpose - "the Debtors filed bankruptcy to improve their negotiating position by increasing the pressure on the lenders to accept refinancing terms."

Here is the reality of this entire dispute, and the primary reason for arguing for their inclusion is to obtain leverage in efforts to extend the maturity of loans. The rest is largely window dressing, and this is directly opposed by General Growth's claim of operating a centralized business model. I do not hold much credence with GGP's claim in this respect, but it can be very effectively argued and elaborated upon on the day in court, without creditors being able to disprove it.

The heart of the argument is that the creditors will continue to be fully serviced and do not lose out, whilst GGP gain the useful leverage from an automatic stay, and can utilise additional cashflow from the assets while enhancing their ability to restructure and negotiate loans.

Ultimately Judge Gropper has already indicated willingness to agree with the need for keeping GGP's "centralized business model" in tact, and for considering this case in the wider context rather than just those of some self-interested lenders. I see nothing submitted to the Court by MetLife or the creditors that will change that decision, and expect a favourable ruling for GGP next week.

Addendum to original post: late yesterday Wells Fargo issued this direct response to GGP's defence. Here they reiterate the original two points that prove 'bad faith' (inclusion of an SPE that generates sufficient capital to service its creditors, and inclusion of loans not imminently due to mature is unnecessary).

Additional points raised:

Wells Fargo cite the US government actions and potential expansion of TALF as an unknown, and that should have been relied upon by GGP as a reason to hold off declaring Chapter 11 and certainly including subsidiaries - a bizarre argument that will be rejected.
The Debtors [GGP] "brazenly replaced their Independent Managers on the eve of their bankruptcy filing in order to obtain a unanimous vote in favour of the bankruptcy filing."
SPE Operating Agreements require the Independent Managers "consider only the interests of Subsidiary Debtors and, therefore, are precluded from considering the needs or concerns of any entity other than the Subsidiary Debtors."
GGP's claim that the SPE's were essential as part of the GGP 'family' filings is "completely undercut by the fact that numerous affiliates of the Subsidiary Debtors were not placed into bankruptcy."

Key points here are that General Growth's actions in replacing directors was legal - it is expressly allowed under the terms of the CMBS contracts - and that although filing Chapter 11 is in the wider interest, it is intended for a positive reorganisational purpose that would benefit the entity too, so is therefore not 'bad faith' as interpreted in the spirit of the law.

The final argument around not all subsidiaries being included is the most interesting point, and refers to the joint ventures and other such subsidiaries not able to be placed into Chapter 11. This provides a strong argument against GGP's slightly dubious 'centralized business model' excuse, so it will be interesting seeing how this impacts the Court's decision. I see this as the main factor that could swing a decision against GGP next week.

The latter point is expanded upon by citing that GGP's explanation of the filings being "done to maximize the value for all stakeholders, including the employees, lenders, vendors and equity" is untrue, and instead were "solely for the purpose of maximizing the value of equity." That is correct, although it is arguable that employees, lenders and vendors will also benefit at a collective level from the GGP group having a greater ability to restructure.

In summary, I think the key issue around good versus bad faith is that (as quoted in Wells Fargo's submission), this is "a balancing process between the interests of debtors and creditors which characterizes so many provisions of the bankruptcy laws and is necessary to legitimize the delay and costs imposed upon parties to a bankruptcy."

In other words - was the decision to include GGP subsidiaries in Chapter 11 in the best interests of debtors and creditors, and does that legitimize the delay and costs? The previous Court ruling suggests that this decision has already been made, and in that context despite creditors whinging about it being unfair, it will not be overturned given that the 'cost' to them is actually only in terms of their leverage when negotiating with GGP during restructuring.

Legal Analysis II: GGP's Plans

2009-06-12T12:56:00.010+01:00

Well, I will start to get back to posting on topics other than GGP from now on, but it has certainly been an interesting period.

The Court submissions by GGP are lengthy enough to warrant further summary and analysis. Most interesting are the statements outlining the anticipated path through Chapter 11 by Adam Metz, CEO of General Growth Properties, and James A. Mesterharm, the restructuring advisor and MD of AlixPartners.

Thanks to Ryan for pointing out that I forgot to link to the source in my previous post - this can be found here, and as a warning is a weighty 200 page document.

ADAM METZ - Chief Executive of Corporate Propaganda
Metz's lengthy statement is here on Scribd, and it almost feels like Bill Ackman drafted passages, some of it sounds so familiar. There are assurances that GGP has a viable operating model that "is performing well with stable cash flows."

Adam Metz goes into a lot of detail on the circumstances leading up to the filing, which I will not bother to reiterate here. Additionally he repeats many of the points summarised in my previous post. However Metz does so to highlight key facts that the Court may take into account when making its decision, including:

GGP properties are performing well - certainly this is true relative to peers, with GGP having the second highest occupancy rate in the sector despite its problems. Additionally the firm expects to not be resiliant during the weaker economic environment.
GGP employs approximately 3,700 people directly - as well as having a significant impact on communities. I am not sure that will pull Judge Gropper's heartstrings, given the same could be said for most large bankruptcies, but you can't blame them for throwing it in there.
GGP operates a centralized business model - somewhat tenuous, the argument is that the services offered to national client (retail chains) and decision making are out of Chicago, and is an integrated model that would suffer if effectively broken up. This ties in with the case for including SPE's in the Chapter 11 filing.
GGP has filed to restructure its finances and de-leverage its balance sheet - placing the blame firmly on the collapse of the credit markets: "GGP did not commence these Chapter 11 cases because its operational model is flawed or because its properties are undesirable or performing poorly."
Credit refinancing problems are market wide and not specific to GGP - "even properties that have been performing well with strong credit quality are unable to attract refinancing" and "GGP's ability to divest assets is severely limited because prospective buyers also have limited or no ability to finance acquisitions."
Failure to negotiate refinancing terms with lenders was also due to the structure of the CMBS process - specifically that this "impeded those efforts." This goes back to the first post, and that when a single lender acts in its own interest, that is to go bankrupt and claim, despite it not being in the wider interest.
Chapter 11 will provide a forum for negotiations - GGP envisage this effectively forcing its diverse groups of secured and unsecured lenders to the table, with "the protections necessary for the company to preserve and enhance value by continuing its operations uninterrupted, and the tools necessary to achieve a sustainable, long-term capital structure."

GGP's Chapter 11 Goals
According to Metz, GGP is aiming to achieve the following under Chapter 11 - again none of this is surprising:

Reduce and restructure GGP's debt - effectively deleveraging the balance sheet as much as possible.
GGP will present its business plan to the Court and key constituencies "in the next few months", and begin reorganisation negotiations.
"Seek a consensual plan of reorganisation with its mortgage lenders, bondholders, and other corporate-level creditors." If this is not possible, then apply the Bankruptcy Code to push through an agreement for GGP to "reduce its corporate debt, extend the maturities, adjust rates, or otherwise restructure the company's mortgage debt."
"Explore strategic alternatives, including sales of assets, and.. available sources of capital", which means they will be open to limited asset sales, particularly offloading joint ventures.
Proceed through and quickly emerge from Chapter 11 - and there I was thinking they were going to take their time.

JAMES MESTERHARM - Restructuring Tsar
Mesterharm goes into similar details around the causes of GGP filing - namely that it is not a result of the company performance per se, but due to the credit markets. He comments that "there currently is no capacity in the real estate finance markets to refinance the GGP Group's debt on terms that are commercially acceptable."

This section confirms that GGP reported 2008 consolidated revenue of approx $3.4bn, with $29.6bn assets versus $27.3bn in total liabilities, of which $6.58bn is unsecured. I recommend browsing pages 62-66 of the document to give an idea of all the debts that are maturing between now and 2012.

As part of proving the case that GGP have done everything that can reasonably be expected to avoid filing for Chapter 11, Mesterharm highlights the wide ranging operational changes to conserve and improve liquidity, including hiring new management and cost reductions. They even made the sacrifice of "terminating two airplane contracts" - I wonder if poor old Adam has to slum it in cattle class with the chavs these days?

Mesterharm then moves onto how the $375m of DIP financing will be used. One point of note on that is that GGP state they have sufficient cash to not need an interim order to access the DIP funds "prior to entry of a final order" - a good indication of their cashflow strength. Otherwise the DIP loan is intended to provide sufficient working capital during Chapter 11, and repay the Goldman Sachs $225m loan from last year.

Unfortunately there are not yet any actual specifics on that all-important restructuring plan, but overall it has been reassuring to review GGP's submission and not find any skeletons in the closet.

Legal Analysis: GGP Make The Case

2009-06-12T01:02:00.012+01:00

I found Goldmans claim for administrative expenses against GGP for making a DIP offer (and having it rejected) highly amusing - if ever you needed an illustration of why they make so much money..

On 31st July, there will be a hearing to determine the extent and value of the lien by the creditor George Reed Inc (GRI), which are secured by the property 'Elk Grove Town Center LP'. What makes this case more unusual is that Elk Grove, and ergo GGP, owe more than $1m in unpaid progress payments (construction costs) to GRI. The deadline is being contested by GGP due to insufficient time to respond, which "failed to comply with procedures".

I have just finished reviewing GGP's court defence, and a summary is below:

1. GGP and its subsidiaries are "a fully integrated organization"
Therefore General Growth requires the revenues generated by the project-level subsidiaries for the servicing of their debts.

2. The CMBS Market GGP Relied Upon To Finance Its Properties Is "Dead"
This point is made to illustrate that it was standard CRE practice to refinance mortgages before they came due and for lenders to sell these onto the CMBS market. This is gone under current conditions, and approximately $9.9 billion of GGP's project-level subsidiary debt matures between now and 2012.

3. Unable To Renegotiate, Each Of The Debtor-Subsidiaries Determined That Chapter 11 Protection Maximized Value
A key point, is that when each of the individual entities acts within its own interest, this does not necessary act within the wider interests of the company or markets:

"When GGP approached several of the master servicers to discuss loan restructurings, it was told that the servicers would not even consider discussions unless the loans were within thirty to sixty days of default."

"Amazingly, in some cases the master servicers were even unwilling to reveal the identity of the special servicers whose consent was required for any loan restructuring."
GGP Court Submission 'OPPOSITION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO MOTIONS TO DISMISS OF ING CLARION CAPITAL LOAN SERVICES LLC AND WELLS FARGO BANK'

4. The Debtors Filed For Chapter 11 Protection
Due to the crisis, GGP and its subsidiaries (boards of the entities) met for over a month "to evaluate the data and determine whether filing for bankruptcy was in the best interest of that entity." As expected, the crux of the defence is that this is in everybody's wider interest:

"GGP entities whose mortgages were to mature in the next few years determined that filing was the best way to maximize their company’s value for all stakeholders, including employees, equity holders, and secured and unsecured lenders."

5. The Movants Remain Adequately Protected
In other words, the creditors asking for SPE removal from Chapter 11 should be paid in full anyway, and as even they cannot argue, all have been fully serviced so were not in default. Additionally GGP has "more than sufficient cash flow to service its debts to Movants."

The defence also goes into some detail around how the Movant's secured interests remain intact and protected, given the Court has upheld the need for each Debtor-Subsidiary to continue paying interest on loans at the non-default contract rate.

GGP makes a highly convincing argument in my opinion. It cites that the movants have failed to establish bad faith (a legal term, but ultimately this must be 'proven' by the Movant's to overturn the original decision). The lawyers have a field day shredding the creditor's case:

"Movants thus fall woefully short of discharging their burden of establishing the 'substantial evidence' necessary to prove bad faith. The 'bad fath' standard is meant to weed out bankruptcy petitions that seek to abuse the bankruptcy process."

As I have commented on previously, the industry overstated objections regarding the impact of this case, and stretched credibility. Here GGP's legal defence make the same point that arguing bankruptcy filings by all of the Property Owners will 'wreak havoc on the structured finance markets if permitted to proceed' is baseless:

"Movants offer no evidence that the filings have disrupted markets. Indeed, this Court has acknowledged that their concerns are 'hyperbole.'"

Overall the case seems very strong, and I cannot find anything in the objections that comes close to overturning this. It supports an industry source who confided that the credit industry objections are largely for the cameras (read: the clients). The reality is that CMBS sold to date did not come with adequate legal protection - as such they have too many legal holes for GGP not to win this argument.

NAREIT Annual Investor Forum

2009-06-07T21:48:00.007+01:00

What a week. Excessive work, excessive socials, and excessive wedding drivel courtesy of L. I just cannot summon up enthusiasm for all these preparations around cakes, colours, invitations and seating arrangements. After all, I'm just turning up to merge my assets with her liabilities and stamp on a glass.

Thankfully L has gone off to Chicago for the next week for something called a 'Bridal Shower' - it seems to be some sort of American fad that involves the Bride getting even more gifts ahead of the wedding. Don't get my wrong: she's the one, I love her to bits, but I can't wait to just get all these months of preparation over with.

Either way, it makes for a very pleasant weekend for me, and I might even have a rare chance to use my evenings productively this week and finish off the functional spec, which is taking longer than I had intended.

On a side note, it has been another spectacular week for GGP's share price, which ended the week near $3/share, and is now close to 400% up on the opening price on April 16, when it first opened after moving into Chapter 11 protection. This may well be bolstered further next week by the announcement yesterday that Bill Ackman is finally about to join the board.

That has some limited significance for common shareholders; Ackman was already a powerful champion for preserving value. Pershing will now undoubtedly be taking a more central role, helping General Growth to shape a reorganisation plan that pushes towards loan extensions, and possibly limited asset sales to reduce unsecured credit levels.

The annual NAREIT Investor Forum took place this week in Manhattan, and I thought those following the fortunes of General Growth Properties would be interested in the key themes that came up. None of it is particularly surprising, but then these events are mostly an opportunity for industry execs and analysts to get together for drinks.

1. Mergers and Acquisitions
At the conference there was plenty of discussion on the impact of asset sales, particularly at attractive cap rates. This was fueled by the REIT Macherich, which announced at the conference that it plans to raise capital through selling three joint ventures with cap rates of 7-8.5% on NOI. The key point there is the cap rate pricing, as these provide a viable route for raising significant capital for reducing unsecured debt.

This gives an indication of which assets GGP may also look to sell as part of its restructuring plan.

2. Deleveraging / Restructuring REIT Balance Sheets
It is worth bearing in mind that despite the state of the credit markets, the commercial real estate sector has managed to issue over $10 billion in equity and refinance over $10 billion of loans in the last 4 months. The price to funds from operation (FFO) ratio across the sector has markedly changed during this period to reflect these changes, having moved from lows of 6x up towards the longer term trend level of around 10x.

Various analysts have continued to emphasise the obvious: that options in the capital markets remain limited for those REIT's perceived as most at risk from leverage. Current levels are around 8.5x debt to EBITDA, and need to fall towards the long-term trend of around 5x. I think the only takeaway is that the entire sector will be continuing to deleverage balance sheets strongly throughout 2009/10 in particular.

3. Poor REIT Yields
Historically REIT's have yielded around 100 basis points above the 10yr US Treasury. Looking at the sector as a whole, there is still widespread concern that the (necessary) decision to reduce REIT dividends or payout in stock instead of cash will seriously impact the inflow of new investment capital for the foreseeable future. This may hamper the efforts of those REIT's not in Chapter 11 as they attempt to deleverage, and force others to seek protection.

4. CRE Fundamentals
Occupancy rates are expect to fall by 3-4% by the end of 2010; along with rental declines of up to 30% for the lowest quality malls gives some indication of the pressure that will continue to build. That will act as an offset as the capital markets continue to unfreeze, and as I have mentioned in my previous assessment of the TALF legacy, while criteria are set at AAA assets only, this is going to have a limited impact on relieving the sector.

5. Raising Additional Capital
Focus at NAREIT has also been on ways of generating sufficient market interest beyond dedicated REIT investors, to enable the commercial real estate sector to recover. From what I have been able to determine so far, there does not seem to be any particular strategy beyond time and the fact that as income levels stablise, generalist investors will return.

Pershing Square Make The Case

2009-05-31T22:18:00.002+01:00

I have just finished reading Pershing Square's presentation at the Ira Sohn conference, when Bill Ackman began his PR assault in favour of a 7-year loan extension as the ideal solution for resolving the company's problems.

It summarises the entire analysis and case from start to finish for going long on GGP, and the company retaining common equity value out of bankruptcy. It provides a compelling argument and may well have been behind the significant rise in share price from around $1.20 to a peak of $2.40 on Friday before it fell back to close at $2.02.

I highly recommend anybody holding or interesting in General Growth takes the time to review it here.

Different Worlds, Different Priorities

2009-05-29T13:08:00.012+01:00

I had an exhausting long weekend in Chicago for a Jewish wedding, so have spent this week jetlagged and wishing L would give me just 5mins respite from wedding planning. I swear, every evening it's something or other - yesterday selecting invitation designs for the UK reception, another time the cake design or colour of ribbons for the chairs.

It won't get any easier tonight, as L took it upon herself to invite two friends (of hers) over for dinner, leaving me to keep my eyes open into the early hours and feign interest.

As I walked over here to my lunchtime bolt hole to write an entry, on this glorious summers day here in London, I mulled over Bill Ackman's PR offensive yesterday, in which he effectively drew a line in the sand with respect to GGP's reorganisation plan, and how if this was put into place he could see a conservative cap rating lead to a 13-fold increase in his investment return upon emergence from Chapter 11.

The plan that Ackman has suggested is very simple: extending most of GGP's $27bn of debt for 7yrs, which he argues will solve all the company's problems without requiring asset sales.

It certainly sounds feasible, although would be highly unpopular with many creditors. However in principle if the court agreed to such a proposal then that is precisely what could happen. All indications to date are that Judge Gropper agrees that taking decisions that protect the wider CRE market are in the public interest. Widescale loan extensions will nonetheless be fully serviced by GGP due to its viable operating model, so this seems quite feasible.

I had envisaged widespread 2yr extensions with limited asset sales, but Ackman is clearly setting out the case with the ideal scenario for common shareholders.

Anyway, there was a certain irony that I was toying with how it would feel to bag over £1 million profit from a trade as I wandered down one of the City's many backroads, when I overheard a middle aged woman - presumably talking on the phone to her husband - arguing over whether it was him or her that was supposed to have paid the £1000 for the mortgage that month.

Different worlds, different priorities. It makes me realise how much of a bubble I live in sometimes when I overhear a conversation like that.

I think that it is fair to say that the market has started to consider GGP as a potential investment opportunity now, rather than after bankrupcty. This is part of the market reassessment after the Court's positive rulings in GGP's favour relating to the SPE inclusion in Chapter 11, amongst other things, earlier this month. I was disappointed by the lack of market response initially, but I think it took time for investors to digest the implications.. I forget most are not so close to the detail.

The end result on closing yesterday, is that the share price has now risen by exactly 200% since GGP filed for Chapter 11 and opened at 60 cents a share on April 17. Not a bad return in 6 weeks for anyone bold enough to buy that day. Although I am averaged in above $1 myself, I am already sitting on a significant unrealised profit, which feels rather better than a loss, however meaningless.

TALF Legacy Unveiled: Does It Impact GGP?

2009-05-20T13:16:00.006+01:00

The eventual expansion of TALF criteria to include broader assets and older CMBS was discussed in government committees back in Jan/Feb, so this has been looking likely for some time. The TALF Legacy was finally announced last night, and the Terms and FAQ are worth taking the time to review.

On immediate reading, it would be easy to get carried away with the news, and assume this is overwhelmingly positive for GGP - it could potentially solve all of its refinancing problems!

Hold on, hold on dear. Certainly it is not negative, since it will benefit the wider credit markets: any thawing of those it to be welcomed, since it provides additional capital for refinancing other loans - the aim of the whole programme after all. In itself GGP's status in Chapter 11 is not the issue here; eligibility for TALF Legacy funding is made at an individual CMBS level, and that is what will impact GGP's ability to utilise this for refinancing of loans.

So how does GGP's CMBS portfolio stack up?

The criteria stipulated by the Fed is that: "Eligible collateral will not include a CMBS that obtains such credit ratings based on the benefit of a third-party guarantee or a CMBS that a TALF CMBS-eligible rating agency has placed on review or watch for downgrade."

Fitch has made several precautionary downgrades of GGP CMBS's since 20 April to reflect the increased potential risk. This Seeking Alpha article summarises without going into specifics, including the Fitch announcement that it downgraded the outlook from Stable to Negative on "63 properties [which] secure 58 loans in Fitch-rated U.S. CMBS transactions."

According to Fitch "the revised Rating Outlooks are in large part due to the Chapter 11 bankruptcy filing of General Growth Properties (GGP) and certain affiliates which are borrowers in CMBS transactions."

That means many are ruled out of eligibility for TALF Legacy at present, and due to the uncertainty at the time, includes all those commercial mortgage backed securities that transferred to special servicing after their inclusion in Chapter 11 - the list is too numerous, but means those collateralised by malls including:

Boise Town Plaza and Square (Idaho)
Newgate Mall (Utah)
Northridge Fashion Center (California)
Willowbrook Mall (New Jersey)

What is worth noting is that it was the uncertainty around the bankruptcy which was a key factor in the downgrades. The rating agencies may start to respond to the recent ruling for SPE's to remain within Chapter 11 with a reassessment. The primary risk factor cited was that GGP "could seek additional leverage secured by the mortgaged properties to help repay their corporate unsecured debt. The presence of additional debt would put substantial additional stress on the properties and impair the performance of the CMBS transactions."

Judge Gropper's ruling protects the integrity of CMBS pulled into Chapter 11, since the underlying collateral cannot be laden with further debt, so arguably this will require an offset upgrade in future - although rating agencies are frequently cautious, and that by no means implies they would be upgraded to the necessary AAA status required.

Fitch has stated that it "will continue to monitor the performance of the GGP assets in addition to the progress of the bankruptcy proceedings. As the developing situation becomesclearer and as property performance warrants, Fitch will take additional ratings actions as appropriate."

Meanwhile this post here includes an article with some detail around the credit industry reaction to the GGP ruling, and their presence at the ICSC conference.

Time will tell how beneficial this proves for GGP. If I were an agency, I think I would rate this development a Cautious-Positive.

Private Insolvency Management

2009-05-19T16:44:00.012+01:00

Well I just got back from an amusing trip out to Zurich, where I gave a presentation to senior management in Private Wealth Management. I did a fine job of summoning faux enthusiasm as I ran through an unnecessarily lengthy presentation, explained how our absurd insolvency scheme could benefit them as well:

"And so, this scheme will enable you to provide your clients with full assurances that they will receive their money back, in the event of an insolvency at some point in the future," I pronounced confidently as I finished.

The PWM managers all looked keen, and agreed they would provide funding to have them added to my insolvency circus project, much to the delight of my Boss when I got back today. More funding equals more work for us - and a higher profile for him as he struggles to try and make MD.

As I packed up in the empty board room afterwards, a manager I used to work with came back in for a chat. He explained that the reason for this sudden interest from PWM is down to the exodus of clients in the last few months. As such, half of the room will be fearing for their own necks when this gets out, and have been looking desperately for anything that might give them an edge when trying to pick up more clients.

When I enquired why they had lost so many, he confessed that PWM have been so busy lying to them about portfolio performance for the last year, that when the bad news had to be finally reported at the year-end, it was the final straw for many.

"Look, the first casualty of a recession is honesty", he said seriously. "My problem with all this is that clients don't believe a word we tell them anymore, so I'm not sure this insolvency protection malarky is going to make any difference."

However bad I think my lot are, it was rather refreshing to get out to the most boring place to work in Europe and find out there is another group of bankers with even fewer morals.

Expenses Scandal Highlights Uncomfortable Parallels

2009-05-15T22:57:00.003+01:00

Earlier I drafted up a mock client statement for this ridiculous post-insolvency initiative taking place here at the bank. It looks pretty good to me, but a particularly anal MD just replied back to take issue with my naming the example client 'Dodgy Hedgefund Ltd' (located at 1 Hedgefund Alley, Kensington, London).

Christ, if you can't have a sense of humour in this job then it's time to visit a clinic for some colonic irrigation, miserable old bastard.

On the subject of this initiative, to illustrate how absurd the work is - and current estimates are that it is set to cost over $30 million of the bank's resources to implement, and all the major banks are doing the same - the FT reported over the weekend that the Chancellor is preparing to change laws in this area. "Suggestions that the US operated more effectively than the UK are misconceived," a government official said.

In that case why is the US not rushing to change its bankruptcy laws as well? The problem with the government is that they seem incapable of admitting mistakes, even when they are obvious to all. It is rather like their attitude to MP's expenses, although it would be utterly hypocritical of me to criticise them, given what I have claimed over the years.

A favourite has to be my generously volunteering to pilot a working from home scheme at a previous bank back in 2002. At the time colleagues smirked at my youthful enthusiasm, but I soon had the last laugh. Without any adequate controls, I went ahead and set-up a full 'home office'.

That meant decking out my second bedroom (designated as my 'office') with an expensive, new PC of course. I also took the opportunity to furnish the room with a new bed, table, wardrobe and - my personal favourite - a 42" flat screen TV, which I categorised as an 'office presentation device'.

In fact, there were even further parallels with politicians and their second home allowances now, remembering back. I became particularly ingenious at looking at ways of stretching the 'home office expenses' pot. My logic at the time was much like MP's I suspect, and demonstrates human nature: I treated as unacceptable anything that was refused, otherwise it was open game.

My team quickly went from ridicule, to amusement, to envy, to applying to join the pilot scheme.

I finally reached the zenith when for 6mths (until they ended the scheme), I charged 40% of my rent as 'office rent'. The logic was infallible: apparently I only lived in a 2 bedroom place because I needed an 'office'. My pad at the time consisted of 2 bedrooms, 2 bathrooms and a main room. So 2 of the 5 rooms were 'office', since the en-suite toilet was also clearly an office expense and a necessity.

I know, all the morals of a politican. I was young.. underpaid.. naive.. how is it that they say it? I made several 'errors of judgement' that lead to 'clerical errors' and 'financial oversight'.

To you, my internet audience of morality, I throw myself on the alter of judgement.. I have sinned! Fortunately I couldn't care less about public opinion, so only promise not to pay any of it back.

Round 1 To GGP As CMBS Industry Overplays Its Hand

2009-05-14T12:27:00.005+01:00

I will move off so many updates on GGP soon, not least as I am busy looking into other investment opportunities. However there was enough news late yesterday to warrant an update.

Firstly on DIP financing, after swinging between bidders (and worth noting that bidding for DIP financing is in itself a rarity), GGP turned down both Pershing Square and a consortium lead by Goldman Sachs, and instead opted for the group lead by hedge fund Farallon Capital Management.

Details seem largely unchanged from before at $400m of funding with a 12% interest rate and no warrants, apart from a lower exit fee and now a potential 8% equity repayment option - that is subject to GGP's equity value upon emerging from bankruptcy.

At present the exact details of the DIP financing are not available, although The Washington Post quotes Ackman as saying: "This is the best DIP loan that has been done since the beginning of the recession, and it could be the best DIP loan ever in terms of the structural features that are favorable to the company."

All indications had been that the Court hearing yesterday was going to rule in GGP's favour. So it proved, with both DIP Financing approved, and Judge Gropper, presiding over GGP's case, ruling for the SPE's inclusion in the Chapter 11 filing.

This brings the inital phase of proceedings to a conclusion, after much legal wrangling (and whinging) on both sides. Various lobby groups representing the CMBS industry, fearing the ramifications from investors if their products did not deliver on the promised bankruptcy protection, launched into the most hilarious claims.

The end result was that they stretched credibility and overplayed their hand.

"The GGP bankruptcy filing could - if passed - be disastrous for the CMBS [industry] in the US" warned Conor Downey, a partner at Paul Hastings. He then went on to claim that such a ruling would somehow lead to an enormous downgrade of CMBS debt and that none could attain triple-A rating again.

The highly impartial Mortgage Bankers Association also added their voice, stating grave concerns over the 'catastrophic' impact of such a precedent.

An official from the CMSA (Commercial Mortgage Securities Association) also over-exaggerated the situation by stating: "It is not an exaggeration to say that if a CMBS lender cannot get comfortable with the isolation of the real property asset to be financed and hence the cashflows derived from the operation of such asset, then no such financing will occur."

Yes, except that this does not mean CMBS lenders could not get comfortable with isolating the asset being financed. Fortunately the seasoned Judge Gropper was unimpressed with such overstatement. Even earlier in the week, such claims had been dismissed as "hyperbole".

Judge Gropper overruled the objections yesterday, rightly saying that lenders rights were protected and General Growth should have access to cash collected at its subsidiaries. The notion that commercial mortgage backed securites somehow mean lenders have a legal right to control the cashflow is clearly wrong. It would hinder a viable company, capable of fully servicing its debts to those creditors, from moving out of bankruptcy.

Where GGP had been out of line was an implicit suggestion in the bankruptcy loan that the underlying collateral for the existing CMBS loans (i.e. malls) could be used as collateral for the new DIP loan. That illustrates what CMBS do provide - a guarantee that the asset cannot be misused, and will always be there to enable repayment for the creditors, even in a bankruptcy.

Matt Reid, a senior financial analyst at DBRS made a telling observation, by stating that "the GGP bankruptcy is unique in that most of its CMBS loans are performing reasonably well with strong debt service coverage and likely equity value above the mortgage debt."

Additionally Reid concurs with my previous analysis into the motives for including SPE's: "After reviewing the bankruptcy filing documents, we think the motivation for the filing of the SPEs is to generate better negotiating leverage with the special servicer to extract the value above the CMBS mortgages, while keeping such debt current. The plan is to use this cashflow as working capital during the reorganisation process, which could be several years. Such a ruling would be positive for unsecured creditors."

Round 1 to GGP and unsecured creditors then. It will be interesting how (or if) this impacts the share price later today upon opening.

How Much Extra To Move Jobs?

2009-05-11T13:00:00.007+01:00

That's the conundrum I have been faced with this morning, following another headhunter call. Of course, the salary levels they claim are usually best-case and designed to hook you into taking it further. This one dangled the prospect of an extra £50,000 increase in my base salary if I moved.

However after about 5mins deliberation, the answer is going to be 'no'. It is certainly tempting from one perspective, but one problem is that the bank in question is terrible: without naming names, one of those suffering from merger pains, combined with being incompetently run for years - hence is on government life support and has made huge losses.

Most of all though, there is more to this than just money. Let me just reassure you that there is no loyalty for the bank, or love for the 'unique team culture' - every bank spouts waffle about it being a giant family and that they are the best. Unfortunately the brutal culling of staff in the last year merely illustrated the fallacy to those corporate clones too stupid to see it before.

Working for yourself is the only place to aim for in life. So yes, an extra £50k now would be nice, but the cost is all of the hassle and risk of a new job. When I factor in work on my business ahead of the launch later this year, I realised what is much more important to me. At present I have got time to work on this almost daily, but that could easily change with a new boss on my shoulder, and needing to forge a reputation at a new place.

Anyway it's an interesting question, and highlights to me how my priorities have changed so significantly since I mentally made the jump towards my aspirations being out of the sector.

Although not yet announced, Pershing Square are about to submit a counter-offer on the DIP financing. It is unsurprising because without the innovative equity conversion option they had included as the DIP financier, they lose a valuable hedge against their significant existing holdings. This will be good news for GGP again, as any competition around terms of financing benefits the firm - I am just hoping to see the equity conversion option dropped, but matching the other loan terms with a lower interest rate is a more likely sweetener.

Otherwise Reuters reported last week that Simon Property Group have raised more capital in another significant stock offering. They cite the reason being for "general corporate purposes", but pointedly there is no longer a denial of interest in future acquisitions, just citing timing.

Due to the market saturation (in the US) of mall owners, all of the REIT's need to expand their market shares through acquisitions. As such, and despite denials, Westfield are also lining up to compete with Simon and Vornado (who have openly admitted interest) for any asset sales that GGP decide to put out there.

As with DIP financing, it is much better to have competition in a sale like this. On an unrelated rumour, the Court will reconvene tomorrow to review the DIP financing options and progress further. For now this is a side show to the bigger issue relating to creditors and the SPE inclusions discussed in my last post.

CMBS Industry Gets A Wake Up Call

2009-05-09T18:19:00.002+01:00

I have been following recent events in the commercial mortgage backed security market with interest since General Growth Properties filed for Chapter 11 on April 16.

The headlines have recently been around an alternative DIP financier being announced. This is good news for GGP, because it has improved terms - in particular relating to potential equity dilution, which is the primary threat to common shareholders. Pershing Square had both a 4.9% warrant and a 5% equity conversion clause linked to the DIP repayment.

By contrast the new DIP terms removes the warrant, although replaces the 5% equity conversion with 6% (and demotes DIP financing to a junior lien on cash collateral - in effect making repayment less prioritised versus other secure debt to appease creditors). The equity conversion is considerably less than previously however, and as I said before ought to have minimal impact on the firm, as this could only be exercised upon successful emergence from bankruptcy. By which time the firm capitalisation should be hugely higher.

Of more interest were the recent details around the degree of investigation and preparation that GGP put into their bankruptcy filing, designed to ensure they maximise leverage when negotiating with creditors further down the line.

Firstly, it should be said that the issue here all comes down to one of expectations. Those lenders who entered into the various credit products being sold by the banks over the last 5 years, such as commercial mortgage backed securites, were reassured during the sales pitch by the way they were structured.

I know because I work with credit sales people at the banks, and their oily schmooze would be enough to convince me that they know what they are talking about, were I not familiar with the legal grey area in the detail beneath the surface. In the event, salesmen just regurgitate a well-honed sales pitch, whether they're selling CMBS's or used cars.

"Debt is tiered by risk and reward, so if you take out the higher grade debt in this product, you will be first in line for repayment in the event of a default" schmoozes the salesman.

"But what about if they go bankrupt, and take the whole thing down with them?" asks the nervous-but-greedy investor. "Surely then being first in line isn't going to be any use."

"Ah but that is all factored into the inherent design of this product", reassures the schmoozy salesman. "Commercial mortgage backed securities from DodgyBank Inc are structured with the issuer to be held through a 'special purpose vehicle'."

"What the hell is that?" asks the nervous-but-curious greedy investor.

"It's a clever legal structuring of the debt, that provides additional insurance. The holder of the security and underlying collateral is not the company that owns the malls, it's an independent legal entity which is bankruptcy remote. That means if they go under, your asset does not, so you are guaranteed to be first in line if they default as all the cash flows towards repaying you."

"Wow, that's awesome - I can't lose! Put me down for $10 million on one of the really big REIT's.. hmm, that fast growing one 'General Growth Properties' looks good."

Of course, had these idiots bothered to do some due diligence, they would have read the finer print and worked out that the companies had far more control over those special purpose vehicles (aka 'special purpose entities' or SPE's) than they realised.

In GGP's case, they had the power to hire or fire the directors of the SPE's for the underlying assets (malls) as they so chose. As such, they did just that in the weeks leading up to bankruptcy. Unsurprisingly all 166 SPE boards then subsequently backed having their malls enter Chapter 11 with GGP, so this was firstly quite legal.

In papers filed Wednesday in U.S. bankruptcy court in New York, General Growth argued the CMBS investors' objections to including the SPEs "appear grounded in the misperception that 'bankruptcy remote' means 'bankruptcy proof'."

Now the battle ground is set between GGP, which wants to strengthen its position, and outraged creditors that wish to prevent the malls which their loans are secured against being included in bankruptcy (and the cashflows going to elsewhere in the business).

Unfortunately for the creditors, as the Wall Street Journal reports yesterday, GGP have prepared a significant argument to the court by pledging "to continue paying interest on its mortgages, possibly making it more difficult for CMBS holders to argue they should be allowed to foreclose. It also pledged to provide its mortgage lenders 'adequate protection,' meaning they will have an administrative claim in any liquidation scenario to cash flow drawn from their properties by the parent company."

Whatever the court decides will have far-reaching implications for the wider credit markets, but the odds are strongly in favour of GGP persuading the courts to go ahead with this, as it is very difficult to argue this is not in the wider interest of the market and commercial real estate industry to allow this to happen.

Otherwise the only news today is that I snapped after nearly 5 hours of wedding related shopping on the Kings Road earlier. After a row with L about how all she seems to want to do with time off is go shopping, and how I have better things to do (such as finish the functional spec), she has gone off for a hair appointment, and I'm contemplating whether this is what married life is going to be like.

Perhaps I ought to Google 'marriage pre-nup'...

Shorting For Dummies

2009-05-04T10:21:00.005+01:00

With my lunchtime bolthole returning for the forseeable future, it felt rude of me to not pop out of the office and give a quick overview of how the average investor can short.

Of course, with all of the bad press around short selling in the last year - especially its supposed role in the credit crisis, one might reasonably ask why you would want to. One good reason is that a major market rise has now been underway for the past 5 weeks or so, and the apparent euphoria from some financials reporting better than expected results belies the wider economic downturn, and has the hallmarks of a house of cards built on sand.

Markets do typically reach the bottom 6-9mths before we emerge from each recession, so we ought to be there soon, but it is going to be an uneven ride that provides opportunity for profits both ways.

As every day of rises passes, so too does the potential for quick profits from shorting. Individual shorting is a process that the average investor cannot access easily - it requires access to the OTC markets, and additionally extreme caution when combined with leveraging instruments such as futures and derivatives.

In the same way as investing in gold and other commodities is now accessible to the wider market through exchange traded funds (ETF's), so the same principle has been applied for shorting through inverse ETF's. These essentially work by short selling a basket of stocks to mirror their underlying asset class or indices, and in doing so provide an inverse return. Through derivatives, versions even exist which provide a degree of leveraging - hence magnifying the ETF's rises or falls, with equivalent gain or loss for investors.

I recommend reading the Wikipedia article, as while it is simplistic, it provides a useful list of many inverse ETF's, as well as highlighting the higher fees required by an inverse ETF, which make this a strategy that should only be employed in the short-term (unlike conventional ETF's, which are more akin to tracker funds). Additionally this Trading Markets article gives further detail on how to use inverse ETF's, including for all-important hedging.

As with any investment, this is one to research before using and certainly requires caution - not least because the market direction will be upward over the coming years. Having said that, I have concluded that this particular market run is due a downward correction at some point soon, and so shorted the S&P 500 through ProShares Ultrashort yesterday.

A Change Of Perspective

2009-05-02T15:44:00.006+01:00

"Woe betide thee, who has a desk move imposed upon them and loses a spectacular City window view and privacy, to face an office cupboard with a sign reading 'Restricted Access Area' while surrounded by irritating colleagues on all sides" The Emerging Investor

Having been pulled onto this tedious Hedge Fund confidence-boosting initiative at the bank, I was duly forced to move desks to sit with the new team this week. Quite why is beyond me, as I was only sitting about 20 yards away from them before, and in this digital age we mostly communicate through email, communicator and conference calls anyway.

The bank being as tight as it is, rather than paying for the desk/equipment movers to come in, they left it to me to spend 1.5hrs crawling around on my hands and knees to unplug and switch PC's - all while avoiding the mouse traps down under the desks (we have a problem with rodents - both human and otherwise).

I'm mostly not pleased because I was happily working on my site on the quiet at work as I haven't been too busy recently, and the wireframes for the Functional Spec are rather too visible to pass as financial work. Now I might even have to do some work for my money at this rate.

Anyway it's not all bad news, as the actual site design has been progressing very well, and I am confident that within the next week or so I will have it sufficiently completed to approach vendors. They are in for a grilling given that part of my daily job is managing incompetence, and I expect nothing less from them with the build.

There is nothing of interest happening yet regarding GGP, besides Vornado being confirmed as a major potential front runner in buying any GGP assets put up for sale, and having raised sufficient capital to make reasonable offers. Also following on from my last post regarding GGP including CMBS subsidiaries in its Chapter 11 filing, which has major ramifications for the credit markets; unsurprisingly a challenge is being mounted by one of the groups who would be adversely impacted.

The creditor meeting in a fortnight from now should prove interesting, but this is going to be a slow, lengthy process in which patience is the biggest strength any investor can show.

Next time I am going to move back to investing, which will be especially useful for those interested in shorting. It is a question I have been asked by several people recently, and is actually much easier than you would think. Anybody with a standard broker account can do it today, and I will outline how and some of the options.

Raising Eyebrows

2009-04-25T10:38:00.013+01:00

"So over the next 6 months, we have been undertaking extensive measures to ensure that key clients are reassured that banking with us is both safe and advantageous to rivals", so droned a Partner to me on Wednesday.

I was initially apprehensive when I got a meeting 'invitation' from him, wondering what somebody so senior wanted a one-to-one meeting with me about. As it turned out, it seemed to be to give him a chance to rehearse a speech he is giving to even more senior partners next week, and he wanted input from somebody nearer to the actual work.

It was a hugely boring meeting so I'll skip the detail, but suffice to say that I have been pulled onto an enormous drive to boost Hedge Fund confidence that trading with us won't risk their money in the event of bankruptcy by it getting locked up by administrators as happened with Lehman Brothers. It's a huge waste of everybody's time, as in the event it won't actually provide any such guarantee - but hey, as long as we can show them 'proof' that it is in place, it reassures them.

As he droned on, my eyes glazed over and then wandered over his shoulder to the trading floor beyond, and fell on one of the news screens. I squinted and couldn't help saying "ooh, does that say 50% tax rate in 2010?"

I might as well have slapped the Partner in the face for the reaction it had - he stopped his diatribe, turned to read the mid-Budget headline, paled, and then went increasingly pink. I had to keep a straight face as he went out to get a better look, and then came back for a rant as he calculated how much more tax he would now be paying a year. (He ended up confirming it would be £90,000 next year, which for those not so good at maths means he takes home a 'mere' £1.1m - presumably excluding bonuses given that is such an unknown for 2009).

I know, even a part of me had the same reaction: my heart bleeds you lucky, overpaid fat bastard. On the other hand, if we put aside wealth envy for one moment, his subsequent reaction proves the criticism of this move made by many in the press about the potentially limited (and negative impact) of this on the country. He's a smart chap, and quickly starting mentioning having various income recategorised next year - no details, so I can only assume he means bonus-related and other asset income - and even rebasing to another office, since in theory it doesn't matter where he works from that perspective.

At a high level, people are either assets or liabilities to a country from an economic perspective. Are they net contributors like the Partner, who work hard and pay a lot in taxes, or at the other extreme are they like Karen Matthews, the benefit leech with 5+ children, who lives off the state and costs the country £100k+ each year in benefits?

It clearly makes no sense to incentivise high contributing wealth generators, both in the City and other key industries in which the UK currently has a competitive industry, to seek ways to avoid paying tax by setting it to a level perceived as unfair. It didn't work in the 1970's and it won't work now. The real problem is the relative rate, and at 50% over £150,000, this catapults us above all our main rivals, even quasi-socialist states such as France and Germany.

What is most depressing is that the budget seems to have been politically motivated above all, not what is in the best interests of the country. It was always going to be a nightmare for Alistair Darling. Old Eyebrows finally had to admit that the government have completely and utterly fucked up the economy over the last decade.

I think we all know that our beloved, unelected leader shoulders 90% of the blame for the degree of pain the country is about to experience, and I put that down to the kind of mismanagement that would have anybody in the private sector fired. MP's expenses are another fine example of the double standards. Still, I must admit that with my wedding to L being only 5 months away, and with my plan to launch the business this summer gaining momentum, I can't help feeling the same as the Partner - perhaps I will just relocate. After all, blogging's a global game.

Analysis: GGP Declares Chapter 11

2009-04-23T23:00:00.004+01:00

Well, the loss of my lunchtime bolt hole has proved a bit of a problem for me in finding time to post in the last couple of weeks. To be fair, I have been working on (and completed) a draft of the business plan, and have also selected a group of vendors to approach in the coming weeks for a build estimate.

Meantime my next major task is completing a functional spec for the site, as there's no way I trust the average coding monkey with the all-important design and usability. Overall it is going very well, and I am feeling really positive that I can create something unique, useful and commercially viable.

Of course the big news of the last fortnight was GGP finally filing for Chapter 11 bankruptcy protection.

The final straw was the combination of the bond solicitation process failing to persuade sufficient Rouse bondholders to extend, and the threat of action from disgruntled creditors ready to file a claim on certain malls - that meant GGP had little choice but to seek to protect its assets from being effectively raided.

GGP filed with $27.3 bln debt and $29.6 bln assets - figures that are of course disputed - and obtained $375 million in debtor-in-possession financing courtesy of Pershing Square.

Bill Ackman is a canny operator, and clearly used this to hedge Pershing's existing position (at 25% they are the third largest shareholder in GGP currently). By providing DIP financing, Pershing yields a healthy 12% annual return on the debt. Additionally Pershing gain warrants to buy 4.9% of the new equity when it emerges from bankruptcy, and most interestingly the potential to convert the $375m DIP into equity.

The latter option has to be admired, as it ensures Pershing Square will be guaranteed equity whichever way the firm emerges from bankruptcy. I am confident however that it remains strongly in Ackman's interests to maintain common shareholder value, although this does now raise the spectre of dilution. I have analysed this in some detail, and believe that dilution risk is a minimal factor: if the event occurs, that means GGP will have successfully restructured, emerged from bankruptcy and the huge upside potential to the shares will offset and limit any impact.

GGP President, Tom Nolan, gave several interviews subsequently, and placed the blame squarely on the frozen credit markets as the primary cause of GGP's current problems. It will clearly form the central crux when outlining the company's argument as to why a loan extension agreement is justified, and increases the likelihood of approval by the courts.

Certainly the fact that no major rivals who wanted to buy some of the best, revenue-generating properties put up for sale could secure funding is a powerful illustration of the wider market problems, and in favour of GGP.

Nolan also stated that GGP does not see an immediate need to tap DIP financing for 8 weeks, due to cash flow business running costs illustrates the relatively healthy position of the business model. Once again, GGP stands out as an unusual case. Bill Ackman also immediately went to the press to rubbish assumptions by many that GGP's weakness would be to the gain of rivals, by effectively meaning Chapter 11 meant liquidation and an eventual firesale of assets.

Today Fitch downgraded some of GGP's CMBS debt, citing that:

"If the properties remain in bankruptcy, General Growth could seek to load up the properties with additional debt to help repay their corporate unsecured debt."

So far, everything has progressed exactly as I had hoped with regards to the Chapter 11 filing, with the exception of Pershing's DIP equity conversion option. Liquidation and/or widescale share dilution remain the only scenarios in which being long in GGP would not produce significant returns.

It will be interesting finding out what the restructuring proposal submitted to the court contains. The above illustrates another mechanism by which GGP could pay off unsecured lenders and/or the bondholders without necessarily needing to sell properties. A key point mentioned here but not considered is that GGP are completing a strategic review, with a specific aim of only offering to liquidate lesser malls as part of the court proposal.

A combination of financial re-engineering, some limited asset sales, and a wider extension request for loans until the credit markets recover sufficiently to enable normal refinancing is the most likely right now.

The Price of Advice

2009-04-10T09:30:00.006+01:00

With the long Easter weekend now upon us, I am going to use this as an opportunity to plug on with the business plan. Otherwise though, a quick observation on life at the bank, which has become amazingly boring since I got back from Egypt last month. It almost feels like the quiet after a hurricane has passed over.. we rats are only poking our noses out of the hiding holes we have been in for essential activity.

The good news is that, as of last week, all of those I know who have been fired from my bank have now all landed new jobs. It's a great sign that they have been able to cash in on the ill-justified prestige associated with this place, and secure decent roles even in these tough times. By chance I had a quick coffee with another headhunter myself mid-week - as I say to all of them, while I am not actively looking, I am always "open to opportunities".

In this case, he spent half an hour ignoring me and pitching a near-identical role to me over at one of the other banks down in Canary Wharf. I have no desire to increase my commute from West London by another half an hour or more a day, I remember from living down there that Docklands is a gigantic, soulless wind tunnel without any of the charm or benefits of the City.

I explained to him several times that I have no interest in taking the risk of a move to do the same role somewhere else. As and when I move next (and this is all based on the assumption my web business has not fully taken off by then), I want to use it to make a move into a related but different area.

A good example was one of the guys on the desk who left last year to join a Venture Capitalist firm - no, not junior trader - he's ended up at that crappy little French bank Calyon, so that hedge fund claim was all bullshit. Sadly it also means my 10mth punt in the office sweepstake didn't come up.

In one sense I dislike VC's and their predatory, short-termist nature (all they are really interested in is taking a firm to the market as quickly as possible to realise quick returns). However the entrepreneurial aspects are hugely appealing to me, and his move has made me realise that I do not have to continue with a role that I can do with my eyes closed, and can look to make a move across into something new and fresh going forwards.

Of course, who knows with these times what is or is not possible. I am a great believer in persistence when told no. You need to have vision and see opportunities rather than closed doors. No direct experience in the area? So what? I had none in my current role here at the bank when I joined - instead blagging through the countless interviews through a combination of being personable, articulate, some juicy white lies and by not being clueless. If it worked here, it can work anywhere.

On an unrelated topic, I am going to get up on my soapbox about the quality and impartiality of research reports. I have access to so many as you would expect, and and am constantly amazed by how insubstantial the actual research often is. Whenever I go up to research, those fucking clowns are usually surfing the web - their technique is to cut and paste observations of others before rewording, and otherwise calling up investor relations to get the latest key financial figures to add to their reports.

The end result looks great, when shoed into a professional research report template. If ever you needed proof that presentation goes a long way, analyst reports by the banks are it. The actual content is usually woefully inadequate - weeks behind, or offers little if any meaningful insight and usually regurgitates old news or views.

They almost always go with the mainstream consensus, or safe view as well, rather than even discussing different strategies depending on investor risk tolerance. A good example is GGP, which naturally is one I know a lot about. Reports out now do not even consider many of the issues I have discussed on here in their recommendation - just a sweeping generalisation of the REIT market prospects in 2009.

To anybody who doubts it, believe me that if you take the time to do your own research on any company with information available in the public domain, you can easily put yourself well ahead of those who place their trust in crappy, overpriced analyst reports just because they have a bank's brand name stuck in the top corner.

Speculation Drives GGP

2009-04-09T12:26:00.010+01:00

I have been making some positive progress on the business plan for the financial website I am planning to create (sorry, will not be discussing specifics as you would expect on a blog!) A high level plan for its initial marketing and revenue generation has been completed, and since I have brain dumped most of the site ideas, I am going to formalise those along with specifics on the design and structure this weekend in a functional spec.

I have started to look into vendors that can build the site, but am so far fairly unimpressed with the package solutions on offer - not to mention all the bullshit extras thrown in like registering the domain name (and controlling it), that presumably appeal to the average lamer they are targeting. I will be telling them exactly what I want, and otherwise will need full control over the daily content management.

It will require some time and effort to assess what is on offer, but I am looking to approach around about 10 vendors for build estimates, options and support contract costs over the next week. I need that not least so that I can complete the financial component of the business plan, including necessary start-up capital and first year trading costs.

After my last entry on Saturday, discussing my increasing confidence in GGP's prospects - not least from Bill Ackman's recent comments - the share price on Monday underwent such an unusual increase (greater than 200% at one point), that the firm issued a statement on the trading activity to confirm there was no known basis.

I was not entirely surprised to see speculation growing from institutions and others that GGP has significant potential for common shareholders. A 98% discount alone tells you that it is clearly not a fair reflection of value. The price as of today has predictably dropped back to around 85 cents since the highs of $1.35 earlier this week - since I was waiting at around 75 cents for falls to buy more, I am happy to hold and continue waiting for a better buying opportunity (ideally somewhere under 50 cents).

In the meantime, additional support for the notion that GGP will eventually complete negotiations with lenders and file for a prepackaged bankruptcy came in the form of real estate magnate Sam Zell, who commented:

"I do not believe GGP will be liquidated," Zell said at a recent New York University real estate investment trust conference. "I expect the company to file bankruptcy. It will do a prepackaged. It will be reorganized and it will be taken public."

The net impact of this would be a controlled bankruptcy application with a pre-agreed plan of restructuring - this would enable the firm to sort that out under Chapter 11 protection in much less time, and theoretically with less court interference. It would then emerge from this and should see a huge increase in share value.

At the same time, the existing evidence points to TALF funding continuing to trickle down through the system and have an increasingly positive impact on the credit markets throughout the remainder of 2009 and into 2010.

Everything right now seems to point towards GGP being an excellent long hold for anybody not risk averse. Consider this final point: the consensus view in and outside the US government now is that the commercial real estate sector is a huge and vital component of the US credit market that must be supported. As well as CRE being more viable than the multitude of small home owners in the domestic market, many have also commented on the devastating impact that a Chapter 7 (liquidation) of GGP would have - not just on the firm and its shareholders, but more importantly on the wider market.

Too big to fail? I think people are soon about to work out that this doesn't just apply to the banks, and that the major REIT's are also in that same boat.

Increasing Confidence

2009-04-04T11:14:00.006+01:00

Another fine, relaxing weekend is in prospect - L is doing what she does best and having a lie-in as I write, and that leaves me with a spare moment to write a quick entry.

So G20 this week was every bit the anti-climax I expected. I wonder how much of that $1tr package was pre-negotiated - all of it I expect, with some hand shaking and breast beating for the cameras. GGP has been equally unexciting in its lack of progress over the last month, although major shareholder and activist Bill Ackman has spoken out again in favour of the company filing Chapter 11 soon and a pre-packaged bankruptcy.

I agree with the approach, provided common shareholder value is left in tact, which it ought to be given (and Ackman stresses), that GGP's problem is the unusual case of insolvency. Issuing shares as a means of raising capital is almost impossible for a company that has seen its share price fall by 98.5% in a year. Combined with the increasing signs that the US government will be stepping in to directly support the US commercial real estate sector, and specifically the REIT's, I am planning to increase my stake in GGP at these bargain prices.

"Bernanke said the eligible collateral for the Fed's $1 trillion Term Asset-Backed Securities Loan Facility, or TALF, will likely expand to include commercial mortgages and securities that aren't newly issued."

Some patience is required to hopefully buy at a really good price on a dip in the coming weeks, but I am looking to buy another 100,000 shares should the right opportunity arise.

Protests for the Cameras

2009-04-01T18:00:00.008+01:00

It has been an amusing week so far in the City. Apart from everybody using it as an excuse to turn up in jeans and send around some great piss-taking jokes regarding the protests, nothing much has actually happened until today.

Then of course, the much publicised four "horsemen of the apocalypse" converging on the Bank of England to lay siege to financial institutions. The whole event has been nothing more than a symbolic gesture, largely for the cameras with gimmicks like this: I suppose the scuffles, pushing around and football crowd like chanting is all about garnering a little attention. Hey, if it relieves some stress then feel free - it's not going to change a damn thing. Over at my bank around the corner, we were just out of sight of all the fun, but it didn't stop me popping out at lunchtime to go and watch. Otherwise the live stream from Sky News provided a welcome distraction from work

I found the appearance of Russell Brand particularly bizarre.

"Tell us Mr Brand, what are you angry about?", asked the eager reporter.

"Well.. I'm just.. here." replied Brand, visibly uncomfortable at the attention.

"But why specifically are you here?"

"Hey I'm just here.... participating mate." (uncomfortable look and silence from Brand)

Pathetic, the guy is a serial publicity seeker who revels in his lothario, bad boy image. He clearly decided that it would improve his image through association, and then when the predictable violence kicked in it would do him no favours and made himself look like an utter fool.

Otherwise though, the real treat was the excuse to nip off early to 'beat the protestors'. They are being contained nicely by the police (fine work by the way chaps), and were rumoured to be 'releasing' them at 5:30pm. Cue the entire office leaving at 5pm. However I'm watching TV now and see them all housed in.

Anyway what has all this really achieved? I'm afraid about as much as the G20 summit will.

Hard Dose of Reality

2009-03-25T13:02:00.005Z

I think the blog stereotype would be to spend this entry whinging on about how unpleasant it is being back at work, and how I'd like to win the lottery. On the latter point I would, but getting up today and going in was fine - helped no end by allowing yesterday for recovery and catch-up.

Having carefully managed my inbox remotely, I have had a relaxing morning back, and found time to continue work on my business plan yesterday evening at long last. Working on the plan remains my absolute top priority; nothing else in my life right now provides a glimmer of hope from escaping the daily grind of commuting into the office like this. Work is stale, and I am yearning to inject change into my life once more - however in a controlled way, without impulsively quitting and costing myself dearly.

On the plus side, the holiday really has been inspirational after my chance meeting with Peter, as I mentioned previously. Even if my site does not take off as planned, I will persist with the venture and look at what needs to change to make it work.

Once married in October, I am seriously looking into travelling to Asia and Australia for 3-4mths next year with L, although the site might make that impractical. It's really quite simple though: if we don't do it now, we won't do it in the next 15-20yrs assuming a family, as logistics will simply prevent it. The cost is of course lost income, which is a big draw that works so effectively in preventing most of us - another reason why unexpected job losses in a recession can be a blessing.

Anyway the other fun event looming next week will be the G20 economic summit here in London. Given the sheer level of anger towards the City and Wall Street these days, not least over the various bonusgate scandals, I expect to see the kind of violent protests that haven't taken place in the City for a decade or more. Last time, I recall stories of traders coming back from lunch with a dozen eggs ready to pelt protesters from the office windows - and know several who got involved in fights out on the streets. Ideological conflict of the more direct kind, I suppose.

This time I suspect we'll see none of that. Given my bank is arguably the highest profile, we'll go to usual rear-door entry only procedures while the protesters waste everybody's time with this pointless nonsense. If anybody going believes they will actually change anything then they are naive.

"Down with capitalism!" they scream.
"And replace it with what precisely?" we reply.
"ANARCHY!" yells a lone teenager bunking school.

Silence from the hopefully more mature masses, because unless there is a manifesto I am yet to see, these protests are not sure what they want - only sure what they don't want.

When driving around the United States, the world's richest and most capitalist country, it seems inherent that there will always be significant wealth imbalances throughout the population. Some is hugely unfair, but some is quite right, even if those worse off cannot see it.

Governments need to ensure opportunities are provided for everybody and restore genuinely unfair imbalances. However it is critical to have a system where those who innovate, create and/or work hard - for example on a business plan and website - deserve to be much better off than the majority who choose to sit around watching TV or playing on their XBox 360's every evening.

Inspirational Example

2009-03-20T14:43:00.012Z

Our holiday has been most pleasant, as is knowing I have another 5 days to go. I've been quickly logging into work occasionally to keep my inbox from overflowing - and to remind myself how much better life is away from the place.

The best part of the holiday was surprisingly spending some time flying elsewhere to meet up with L's cousin, who is currently managing a 2yr old baby girl with two 5mth old twins. It was a fantastic lesson in the benefits of birth control, and has convinced me there is no rush just yet to sign away my life. Just to illustrate the point, now that we are back in Sharm, I stayed in bed until 10am this morning.

What was most interesting and enjoyable for me however, was the chance to meet with the husband of L's cousin on the evening we stayed. Peter is actually an American from the south, so has a fantastic drawl in his accent, and as I was forewarned, was a 'serial entrepreneur' (a phrase he actually derided as ridiculous as in his opinion if you are an entrepreneur you will continuously set up businesses - he's right of course). In his case, he has set up all manner of businesses in the past, from a restaurant, real estate and haulier businesses, to his current bio-tech company, which is involved in stem cell research.

What was most heartening is that when talking to Peter was that I felt like a kindred spirit - we agreed on absolutely everything, and it made me realise how close my mindset is to that of an entrepreneur. I even outlined at a high level my business idea, which he thinks has a lot of potential - and I think he is the kind of person who would have picked holes and been honest rather than tip-toed around.

As an entrepreneur he was very impressive, and it really was an inspirational, lightbulb discussion for me. Seeing somebody who has gone out there and done it - in his case without a college degree and no background in biochemistry, made me realise there and then that the only way I can avoid being my Boss in 10yrs time is to make this happen. I need to devote significant amounts of what little free time I have towards completing the business plan, I need to oversee the site development, build initial partnerships, revenue streams, and push all this forwards so that when we emerge from the recession I have a site ready to capitalise fully on an inherent need from investors.

Some other good news since I have been away was discovering that two people who were fired from my bank at various points last year have now picked up new jobs. It must be a huge relief for them both, and does illustrate how there are jobs out there, even in these tough times. One has moved out of London and finance, the other is a wily old fox unable to do anything else, who has picked up a role at one of the more successful fund management groups.

Otherwise the deadline regarding GGP and bonds was extended by a week until today to give them more time to confirm or reject the proposed extension to the year-end. Meantime Bill Ackman, head of the activist hedge fund Pershing Square has given another interview reaffirming his belief that controlled bankrupty is the best solution both for GGP and the REIT sector as a whole (given that liquidation would have disastrous ramifications for US commercial property prices).

It was heartening to see that Ackman is pushing to join the board of GGP, as his interests are well aligned with shareholders in increasing value. Here's to a profitable outcome, meantime patience on this prevails.

I'm off now to join L at the pool and then down to the beach. I'm not really a beach or sun person but do this occasionally for her - and have an interesting book called 'The Millionaire Next Door' that Peter left for me when we returned the next morning to say goodbye. It seems to be a detailed analysis of the mindset of the 'average' millionaires in society, who are anything but the flash, opulent 'well to do' living people most would expect - actually it comes as no surprise to me, but then I understand the importance of saving, investing and living below your means. Should help pass a few tedious hours as I try to avoid burning...

Work-Life Balance

2009-03-11T12:49:00.004Z

Am I the only one to see the irony in a pub named 'The Golden Fleece' being just a couple of hundred yards from Bank on Queen Street?

If ever there were a phrase to sum up the activities of all banks then this has to be it - including the Old Lady of Threadneedle Street, for all her generosity with our cash these days.

Well this is more a sign-off for now: I am in one of the most delicious moments - the final day before L and I take a well-earned two week holiday. Yesterday was hectic again, and a further illustration that the bank finds itself underresourced in many areas now. More importantly, the holiday will be a wonderful respite from the daily grind - and let's face it, getting away from blighted Blighty is practically a necessity for the soul in 2009.

As a nation, we appear to be revelling in bad news, as epitomised by the continuing, grotesque voyeurism of the tabloids tracking Jade Goody's decline from terminal cancer.

My only resolution while away? Well, I'm sure the odd entry, but most importantly to find a little time to work on the business plan. It has great merit, and I am convinced that I can translate words into a pilot site quite quickly. Not least because I set up a (failed) consultancy business many years ago.

By a cruel quirk of fate, the critical deadline for GGP (Mar 16) will also be reached during my vacation, but as I invested with the understanding it could all be lost, I have no intention of letting that spoil my party should something particularly bad happen (unlikely). At present GGP are in a solicitation process with the Rouse bondholders, to suspend all payments due on Mar 16 without action on their part until the end of this year. Interest will continue to accrue meantime.

It will be highly significant if the bondholders bite, as it will in effect be a vote in the future of GGP, and significantly reduce the chances of GGP filing for Chapter 11 next week. On the other hand, if they do then I will also be very pleased as it will resolve the financial limbo - either result ought to start the move back upwards towards the $5-10 range that GGP would more realistically be priced at were it not for bankruptcy fears in these risk-averse times.

For those of you working tomorrow, I'll have a cocktail to toast absent friends when I land..

Itchy Feet

2009-03-09T13:15:00.019Z

No, I've not got fungal spores growing down there, but I must confess that despite the downturn I have been continuing a quiet look around despite a secure position. There is no real need, besides feeling that I have got everything out of this job that I can - and get called most days by one slimy headhunter or another.

I started looking around in December as a hedge given the uncertainty of my position at the bank. Now, rather than turn down any potential opportunities before they presented themselves, I went along to a final round interview with a fund management group last week, to get a sense of what else is out there on the job front. After the positive reactions from my quick look around, I really don't get a sense I would need to look too hard to find more work.

I know plenty of people who have been out of work now for as much as 18mths now, many of whom are now retraining and looking for a career outside the City. Fair enough, most of them weren't that great in terms of work ethic or skillsets, so perhaps that goes back to why recessions are arguably healthy for the economy in the long term.

When I think of the uncannily accurate stereotype of the modern Essex-boy trader in the City, I think of excessive coinfidence, excessive compensation, and excessive lifestyles - and no sense of understanding the value of money. Many appeared to have all the morals of footballers as they frittered away cash on coke fueled evenings and God knows what else - strip joints seemed to be a favourite from what I can gather of various lewd comments I have heard on the Desk over the years.

Anyway, the interview itself was fairly boring - a final round with a 40-something partner who probably makes more in a month than I do in a year. Unfortunately he spent more time talking about himself than asking any questions, in particular wanting to find out whether there was potential business I could bring in from my current bank. I discounted him and the role within 10mins, despite him starting to lavish praise on me towards the end.

"Well, you're obviously very bright and articulate" he said, beginning his ring-licking closing speech.

"I think with your background and skills you'd make an excellent addition to the group, and I'll be in touch with Helen to arrange to take this further".

I loved the assumption on his part that I must be interested.

It has however made me start to wonder whether a strategic move would be a good idea in around 6mths time. Perhaps even to a bank in the Far East for a while. I have gained about everything that I can from my time here, and change is beneficial despite us naturally shying from it. I think a well-timed hop would reap great rewards. However this one needs to be very carefully timed, so as to not enter at a low base (now crucial), and a role with enough upward potential. Before you wonder, I consider this an aside to mull over while I work on the business plan.. and anyway, I've got a wedding and honeymoon to factor in for later this year..

I'm very much now in holiday mode. It's 2pm and I can't bring myself to get back to the office.. that's right - my previous meeting 'overran'. I don't leave for another couple of days, but am purposely doing as little as possible in the meantime and delegating. I'll be out of here at 6pm tonight on the dot for a change, and need to start planning what to do with L. Two weeks off - what bliss!

Is Quantitative Easing The Answer?

2009-03-08T11:55:00.008Z

I have read a couple of interesting, contrasting views this week in the Telegraph on the subject of quantitative easing between Roger Bootle, the founder of Capital Economics, and Liam Halligan, the economics editor of the Telegraph.

Bootle's article in favour is here, whereas Halligan's exactly opposing viewpoint today is here. For the record, I am in favour of quantative easing, which for me has been highlighted starkly by the plight of General Growth Properties (GGP), and its urgent need for refinancing in order to service its debt load. As I have stated previously, GGP is a healthy company in terms of its asset base versus liabilities, and would be fine servicing its current debts before the credit crunch. Instead it is now left struggling to repay loans as they come due, because of the seizure of the CMBS market and a chronic loss of confidence in its financial viability.

Whilst Liam Halligan gives a useful perspective and balance to those calling for quantitative easing, I was left finishing his column still asking the question 'what precisely are we to do to ease the current credit crisis in that case?' He appears to suggest there is a rabid group of lobbyists suggesting any other viewpoint is held up as a heresy, which unless I am missing something is nonsense. Certainly it has become the consensus opinion amongst government and businesses, but I am quite open to alternatives if a convincing argument can be constructed.

The question is whether it is better to do nothing at all and to let banks and businesses all fail in order to avoid the spectre of inflation and short-term (significant) public debt.

Going back to the commercial real estate sector in the US, and Commercial Backed Mortgage Securities (CBMS) being near completely frozen as a going market. It would be like all banks suddenly refusing you when your fixed term mortgage deal expires, and instead demanding you sell your property at the worst possible moment in the economic cycle. It would lead to huge individual suffering for homeowners, and in the same way will see all manner of otherwise viable companies going to the wall throughout the economy - that means job losses, financial losses, and pain for many.

The US alone has a vast $200bn of such loans coming due in 2009/10 - without QE to fuel the TALF lending that will enable such businesses to refinance and ride out this period, they will simply go under. Why is that better than QE to buy those assets, and eventually sell them back onto the private sector as it thaws (and in effect 'undo' QE, reducing the money supply and trying to avoid inflation being controlled)? I fail to see why targeted action is not better than simply doing nothing.

It is one more week to go until GGP reaches its critical deadline for loan extensions on March 16 - this coincides with the repayment due to Rouse bondholders, who are a group owed money after GGP bought Rouse back in 2004. This ought to see some movement through meaningful announcements - the options being either GGP is forced to file for Chapter 11 due to Rouse bondholders, extensions being announced while TALF funding is still on the near horizon (the whole process is predictably dragging and will take months yet to take effect), asset sales ($400m has been offered for 3 properties on the market for example) to pay off key loans, or a GGP takeover/joint venture.

All are possible, to my mind all will benefit GGP's shareprice significantly. My only wish is that I had bought in now rather than in December, but I expect to see a huge improvement in my position on this trade in the next 6 weeks.

Calamity Chain(saw)

2009-03-05T13:10:00.013Z

Like investors, banks so often make the mistake of under or overreacting to situations. In this case, the growing consensus at the bank is that this has been a level of cuts too far.

Suddenly all manner of tasks, from day to day tedium to vital projects, are facing significant delays. Trading, Operations and Support teams were left scrambling to try and fill the holes left by 'resources moving on', which is the amusingly non-descript corporate phrase being used to describe the practice of mercilessly firing bright, hard working employees who mostly have done nothing to deserve it. The most bizarre part is that countless teams are finding experienced experts who survived being randomly moved onto other teams that are in worse trouble. To my surprise the firm is managing to now also utilise fewer resources less efficiently.

Perhaps it's me, but the whole thing indicates a pea-brain level of decision making at the top. Presumably there is an inverse relationship between salary size and common sense.

As such my life has suddenly timewarped and gone from manageable back to an earlier time in my career, with far too much hands-on crap. I was busy working long hours before, but suddenly the lunchtime stroll I was regularly taking in the City to somewhere where I write this blog has become a luxury. I spent 6hrs solidly in meetings from 1pm yesterday for example. So much for work life balance anymore - our masters at the top appear to naively have expected us to simply deliver as much as before (perhaps because that was mostly possible in the previous round).

It is perhaps telling that Asset Management have already been given tacit approval to start hiring, which says everything you need to know about how close we are to reaching the bottom. I think we are there, but that is dependent on when the credit markets start to thaw.

On that subject, it is good to see that the UK and US governments are pushing on with policies to pump much-needed funds into the economy. I don't subscribe to the public hysteria about letting the banks rot, but that is hardly going to surprise anybody. What some people do not appreciate is that governments are not spending our money - they spend that and more before we pay taxes each year - but that due to circumstances, they are simply increasing a number in the computers at the Bank of England and Fed.

Quantatitive easing in this case is not really about printing money. In theory it will be about buying up assets that push money out to the credit markets and (in theory) encourage lending, and then selling those to the private sector once normality starts to return (paying off the money it has created). The issue is ensuring that the money is circulated rather than holed up. It is rather like if the government sent a £1000 cheque to everybody. Two years ago I would have been online to book a holiday within a minute, but today it is just as likely I might save that for the all-too-likely rainy day, thus making no actual improvement in the economic situation. Actually not in my case, I would just get on and invest it as I do most of my savings.

On that subject, GGP remains at historic lows in the 40 cent range right now. Indications are that asset sales are on the way, which should enable several loans to be paid off. There are currently fears circulating about GGP needing to dilute shares hugely through an issue to pay off additional debt next year - that is unfounded given that at these low levels the firm is worth a mere $100m, when its balance sheet indicates $3-4bn is more accurate. It would effectively hand the entire firm to a single creditor, which nobody would want. The creditor would want cash, not to inherit the mess GGP is in, and nor would it benefit significant shareholders currently negotiating such deals.

I am still optimistic that patience will see a resolution to the GGP refinancing impasse, and Chapter 11 remains a useful bargaining tool for the firm in securing fairer terms with its creditors. Having looked into this in more detail, I am starting to conclude that the UK needs to implement similar protection laws here, although hasten to add I am no expert so that is just an aside.

Finally, it was amusing to see Gordon Brown on the front page of the Metro on the way into work this morning. The caption read he was being greeted by congressmen, although as with most things relating to him, on closer inspection it was less impressive. Those eager, outstretched hands turned out to be teenage pages, who work for the senators there on secondments. Very impressive Gordon, I'm sure your vacuous speech will save the world (again) as well.

Cull Over - But No More Complacency

2009-03-02T13:56:00.011Z

I have not been writing recently because last week turned out to be quite traumatic at the bank. To everybody's surprise, after the smokes and mirrors that are rumours around these things, they instigated a full-blooded 10%+ cull from Wednesday onwards.

It was brutal, with many colleagues I rated highly and consider friends having fallen victim. Does it make this any more personal or meaningful? Not in the slightest - I have felt fully in touch with the downturn since mid-2007, this just feels like another round. Many people I have known and worked with for years mysteriously disappeared from the global email directory (the surest first sign a 'resource' has been erased). Suddenly all number of mails were bouncing, and then the biggest shock was the immediate dismissal of one of the most productive members of my own group.

With junior trader long since departed, I had long held an assumption that this would be sufficient, or at worse the other chap with a black mark on the list would get a quiet invitation from HR upstairs for a chat. As it turned out, it was nothing of the kind, and shocked everybody to the point where we all sat in silence afterwards - with the exception of an intern who could went off to the toilet, coming back later red faced, having evidently been crying.

I never really felt particularly in danger or worried, perhaps because a part of me yearns for the shove I need to move out of this profession forever. With this round the bank has reduced headcount now by approximately 30%, so should any further cuts be required there is no doubt it will be all into the meat.

Otherwise L has been getting evermore excited by the wedding later this year. I had a weekend of talk about various, tedious aspects of planning, followed by doing my best to be enthused as I was led around the Kings Road like a puppy on a leash, to inspect her in various bikini's ahead of our vacation next week. Actually that part was enjoyable.

I have made one definite decision about the future however: the 8-7 slog that I am currently enduring cannot go on for much longer. It has been observed by many that life is too short, and I don't intend to be one of those who only realises that when it is too late. As such it is time to push on full ahead with my business plan, and I need to stop leaving work pressures as an excuse as you can make anything happen with sufficient will.

The key story that for me in the last week has to be the government's hysterical response to Fred Goodwin's fat pension.

"Not even Abu Qatada at his most unappealing could hope to match the intensity of abuse heaped on The Shred."

I was going to comment on this in some detail, until I happened upon this article by the great Jeff Randall, who sums up my own thoughts on this perfectly. A pathetic, transparent attempt by a discredited government to fuel the public thirst for vengence whilst deflecting attention from the real issues, including those most responsible - the government. They can only spin like this for so long before The Shred stops being the main story.

Fred Goodwin's pension is obscene under any circumstances in my opinion. But were I him and suddenly found myself called by Lord Myners with a zero notice threat, I would have responded in exactly the same way: on principle fight it all the way, and only make a decision like that when not strong-armed or threatened. Should he cave in now, his detractors will say that he only gave money back due to Gordon Brown and his pious preacher of hypocrisy Jacqui Smith - thus handing them an undeserved victory.

Sir Fred has ample opportunity to reflect on his compensation, public feelings and what is the right thing to do. A mark of the man will be seeing what he decides in 6-12mths without any such threats hanging over him.

Managing Micromanagers

2009-02-24T13:09:00.008Z

A fund manager here at the bank, Felix, is currently experiencing what can only be described as a slow death by micromanagement at present. The poor chap is about 10yrs older than myself, quietly spoken, and as amiable a chap as you can find amongst the ego's and bullshit of the Front Office. As such, he is eminently experienced and more than good enough to complete his job without interference or additional supervision.

All that changed about two months ago, when one of the two MD's over in emerging markets was unexpectedly let go: part of one of a number of 'mini-culls' that all of the banks have been carrying out to avoid headlines while they quietly reduce numbers. That had a profound effect on his close friend and colleague, a purple-faced Frenchman who quickly clocked that his own number could soon be up.

Therefore he has spent the time since actively calling up 'Free leeks', as he calls him, and attempting to create himself a new role from what little business is left in the area. This has taken the form of him poking his not-insubstantial nose into every area of the business for a sniff. Should anybody talk to him now, he has become a sommelier of triviality, spouting opinions on everything but with little substance.

In short, his input has been the very worst kind of management, which drives any halfway competent professional insane with frustration. Felix has confided in me several times that he is close to snapping and is toying with a move elsewhere, such is the stress he is finding all this.

For poor Felix, he has had to endure Le Sommelier infrequently attending calls and meetings, and hijacking them by asking lots of questions that waste time going over old ground. Le Sommelier has combined that with tasking him with plenty of pointless status updates, insisting on reviewing everything and then responding back requesting irrelevant changes to current procedures - all along with delegating anything he ought to be doing himself back to Felix. In short, he is treating a man in his 40's like an intern, and Felix finds himself with a new level of middle management that offers nothing.

I can't blame Le Sommelier for his desperation in avoiding losing his job. However one would hope he would be proactively looking around for additional work in the bank as well; instead he prefers to do as little as possible while cultivating the illusion to those above that he is now vitally overseeing important work. I suppose this is how large business functions everyday, but having seen it in microcosm it has brought home just what an appalling waste of time it is.

On another note, GGP announced their earnings last night, which are reasonable but below analyst expectations - how positive or negative depends on whether you read Reuters or the Wall Street Journal it seems. Looking at the market at present, we seem to be well into a second wave of panic after the temporary optimism that followed the falls from September to November. This will gradually wear off as government initiatives gain some semblence of confidence from investors, and we will likely see a month of rises and calm coming soon.. before another round of selling off, panic and negativity.

The key issue I am looking to see resolved is the unlocking of frozen credit markets. Right now, the Commercial Real Estate sector in the US for example, has approximately $200bn in loans to roll over in 2009/10. That is a staggering figure, and means this issue of refinancing is not just GGP's but an industry wide problem to be tackled. GGP are under most pressure because they are the most stretched, but the fact we are now as much as a month into technical default of loans without a single lender pushing them to file Chapter 11 says a lot about the appetite banks have for pushing them under.

A combination of fear, risk and uncertainty continue to depress GGP's share price so severely. When that ends is anybody's guess, but the March 16 deadline for various extended loans seems a reasonable focus point for now.

Coping with Investment Nerves

2009-02-21T10:46:00.015Z

It is interesting how, on a reasonably substantial trade such as my long position in GGP, even after so many years of investing I still myself effected by emotion. Having steadfastly held since early December 2008, and increasing my position as the stock fell to $1, until now I have had few concerns. However with global markets continuing to fall hard this week, GGP now sits priced at a mere 45 cents - back to near its lowest ever price. I made the mistake of calculating my paper loss: currently about £54,000.

Of course being an unhedged trade is the root cause behind that figure; I have equal upside and downside exposure here, which is never desirable. However without access to short facilities or options (outside the bank I work for), my choices here are limited. Enough to make me look at that unrealised loss and think the usual: "ouch, my net worth is lower by x amount", "God, I wish I had never got into this" and "if only I had waited until now, I could have bought TWICE as many shares for my money!"

Falling prey to such thoughts is a fallacy. Nobody can 'know' the short-term movement of stocks (despite confident assertions by junior trader). With hindsight my only wish is that I had acquired my position in GGP more gradually to give a wider spread position - that would have given me a better opportunity to take advantage of its steady falls to date. Still, to put it into context, should the price move back to where it was 5 weeks ago now, I would be sitting on an unrealised £35,000 profit.

That is a big 'if' of course. At present the reason for the increasing decline is that other investors are acting upon their own fears that GGP will probably file for Chapter 11 and that common shareholders will lose everything. I have to constantly remind myself of my previous analysis on this, and that fundamentally nothing has changed to date.

As such, I am not going to do anything - although I am toying buying another £10k's worth of stock at these low levels. An RBC Capital analyst summarised the situation GGP faced relating to the credit market seizure and refinancing the Las Vegas malls:

"Basically we had a very large, very successful company asking banks, insurance companies, anyone who is interested, 'Please lend me money on two very, very good retail properties.' And the lending community simply said, 'No.' "

I recall mulling over the psychological aspect of all this some time ago; that when GGP stock cooled off again from the period in which I first purchased, that fear would possibly reassert itself and push the price back down. I toyed with selling in the January rise - which turned out to be from the hedge fund Pershing Square making further substantial purchases - but decided the $2.25 price was too far below my target exit price.

Of course with hindsight, I should have sold then and bought now, but if we could see the future we would all be millionaires very quickly. It seemed quite possible that the price would stay in the same range as December, and at any moment could increase significantly. Quarterly earnings are on Monday, mall purchase deals are still potentially out there, and there is potential for government refinancing of the CMBS market through the starting up (at last) of the Term Asset-Backed Securities Loan Facility (TALF).

One thing's for sure - the GGP pressure pot is close to boiling now, and something is going to blow and start to move this whole situation further. I am inclined to believe now that it will be through government intervention, given the entire commercial real estate sector faces these same refinancing issues in 2009/2010.

Could This Be It?

2009-02-19T12:52:00.010Z

There seems to have been a subtle shift in the wind here at the bank. Go back a month, and there was naked fear in the air about imminent job cuts - in no small part fueled by stressed managers making unsubtle references to resource unavailability and performance limitations. And vicious rumour mongers like myself.

Yet there seems to have been a surprising turnaround in the last fortnight - at least here, I can't speak for other banks busy absorbing huge losses and laying off thousands. From what I can determine from various trusted sources, it seems the bank has postponed plans to lay off any more people. That in itself is significant - from top to bottom now, we have shed around about 22% of headcount which is certainly a lot.

The economy is cyclical (Gordon take note, a 10yr boom will not be followed by another one), and one effect of a particular sector going into downturn first is that the impact of this ripples outwards to the rest of the economy like a bomb exploding. I had many a bemused discussion in the last 18mths talking to very intelligent (home loving) bankers, who were coming out with ridiculous views that the London housing market was somehow "immune" from any downturn.

In this case, we in financial services have now weathered a 20 month storm since Bear Stearns' nationalisation first shook the financial world - the first significant job cuts coming from late 2007. It seems reasonable that we are therefore going to hit the bottom first too, and reach a period where things stop getting worse and headcount (and performance/earnings) stabilise. Timing is so difficult, but I am going to call us reaching that period across financial services in around 6-9mths, with us reaching the bottom of the markets in Q3 2009.

Otherwise on a work social last night, I took the opportunity to find out more details about the current talk amongst Prime Brokerage here, that we have inadvertently gotten ourselves caught up in this whole fiasco relating to yet another investment shark, Allen Stanford. Not directly of course, we would be no more likely to entrust our own funds to the financial equivalent of an East End used car salesman as we would have given a penny to Bernie Madoff.

No, the problem is that yet again Private Wealth Management have played the 'not my problem guv' card. Whereas before we had a commendable ban on any trading activity with Madoff's ponzi scheme, we seem to have let a number of our cricket-loving HNW's (high net worth individuals) go and place funds with him. As you can imagine, the internal impact has been the usual internal cover-up for now, so not much is being openly said but it is difficult to imagine we won't be openly mentioned in the press in connection to all this soon enough.

I wish I could say I was bothered, but previously market shocking stories are becoming a daily soap opera nowadays. Is it just me or is the collapse of the financial system absolutely hilarious?

What's the Point?

2009-02-17T13:52:00.015Z

As the howling chorus of public anger towards bankers for our crimes reaches a glorious epiphany, I have to question the underlying motives once again. I only wish that Gordon or David would learn to clasp their hands while they preach morality to the masses - just look to your great predecessor's display at Princess Diana's funeral for guidance.

"Be not too hasty to trust or admire the teachers of morality; they discourse like angels but they live like men."

Dr Johnson's quotes remain so timeless because they are pungent observations of human nature. On that note, as I restarted work on my business plan yesterday, on something which feels like it might have some genuinely positive purpose and meaning, I found myself musing over the question asked by even the most zealous androids of the corporate world: what's the point of all this?

Yes, my move away from key emerging markets last year was perfectly timed with hindsight. My role at the bank continues to develop, is interesting enough to pass the days, and compensates well enough. However work here has ceased to be about innovation and revenue generation, and is largely focused on the bank's amusingly desperate struggle to recover confidence and reignite core business again.

Some of the initatives proposed and to which banks are devoting significant resources now are just absurd. There seems to be a bizarre lack of awareness or willingness to believe that the deleveraging of the past year is continuing, and that those valuable hedge funds clients will not be returning in the shape and form of the past.

In fact, I've talked myself into it - time to get back onto the business plan this afternoon.

Recession Regeneration

2009-02-16T12:44:00.006Z

A woman collapsed on top of me while on the train into work this morning. I was sitting there, minding my own business, and the next thing I knew I was struggling to hold her weight up, with her sheet-white face inches away from mine. She appeared to have nearly fainted; I was on my feet in a moment of course. However despite insisting repeatedly that she sit down, she refused and got off at the next stop.

It reminds me of a time I came across a man lying on the pavement on Queen Victoria Street right by Bank on a weekend. The place is always deliciously empty around that time of the week, and so it was left to L and I to keep him company with his shocked friend, while we waited over 20mins for an ambulence (appalling service). I never did find out what was wrong with him, but sincerely wished him good luck as he left, given the range of possibilities. Anyway, combined with this sobering photograph of the former reality TV oddity Jade Goody, now diagnosed with terminal cancer, it was a reminder of what is really important in life - and that does not include spending the rest of life in the rat race or on a daily commute.

I am going to pick up on the business plan I started working on last summer. I am about one-third of the way through so far, but it got shelved during the excitement and fall out of the banking crisis - partly because I needed to focus on trading, and partly because the concept is suddenly less appealing in the short-term when the world is undergoing severe risk aversion. However that will change again, and I am going to set myself an aim to have an initial version of the site released by the end of July, not least because the primary cost will be my time and effort.

On an aside, my cat sitting weekend was far from the purr-fest we had been anticipating. My brother seems to own a schizophrenic moggy, which rather like him is socially dysfunctional. The moment he left, L and I were greeted with hisses and growls (yes, from a cat), and it only got worse when we opened the door to introduce him to our own kitty. Ours is a Norwegian Forest cat which are a good natured breed. It turned out to be a good illustration that we all live in our own reality, and make as much or little of a situation as we choose. So in my brother's cats case, he had a miserable, stressful weekend locked in a room away from us instead of being pampered.

A choice quote today came from the noted British historian Dr David Starkey, who commented on the City, recession and Prime Minister:

"..the City is always rebuilding - it is like a slow-motion film, rising and falling. It's absurd of our Prime Minister to say 'No more boom and bust'. The City depends as much on bust and destruction as it does on boom."

Of course, with some historical perspective Dr Starkey is absolutely right. The press continue to feast on the bad news: isn't this the worst recession in a thousand years yet? It is easy to forget that in just a few years time this will be behind us, and we will be building again from a sustainable platform for growth and prosperity. By contrast the last decade is personified by a morbidly obese football fan, who spent all his money on an expensive flat screen TV (with cable of course) - and did nothing but watch it while eating hamburgers all day. In short, it was unhealthy, unproductive and unsustainable.

Those nearest the above caricature are likely to suffer most, but it is the recession which will ensure we all learn the importance of fiscal responsibility. Not least the importance of that old proverb 'always save for a rainy day'. Boring yes but welcome to the real world, fat bastards.

Otherwise Starkey's best observation relates to the splendid restoration today of The Monument, that seventeenth century marvel which represents the City of London's rise from the ashes of the Great Fire of 1666. When asked 'is there a modern equivalent of the Monument? It serves no commercial purpose', Starkey had no hesitation in replying:

"The whole of Canary Wharf. Every modern bank is to do with the length of the banker's cock."

I had to smile at that one, and when I started cross-referencing the height of those bland, glass towers to the incumbant CEO's of the respective banks, there was no argument from me.

Foreclosure Plan May Impact GGP

2009-02-14T12:12:00.006Z

The share price of GGP continues its steady downward slide, as expected, in the wake of continued uncertainty around lending which prolongs the current financial limbo. GGP remains locked in protracted negotiations with a range of lenders including Deutsche Bank and Goldman Sachs relating to loans all now past their due date, and all now beyond the period of foreclosure.

That in effect means that if a single lender decides 'enough is enough' and pulls the plug, there would likely be a domino effect on other lenders that would lead to them all declaring default - and forcing General Growth to file for Chapter 11 bankruptcy protection.

It is interesting to note that yet again none of the wider lender consortium have done so, despite now being as much as a week beyond the foreclosure period, and only illustrates once again that lenders are desperate to avoid pushing such an enormous firm into bankruptcy.

As I have stated previously, this is in nobody's best interests - particularly Chapter 7, which would force immediate liquidation of distressed assets at firesale prices, and lead to all lenders making a loss. This seems to be shared by others in the banks that make up the lender consortium, as this article outlines:

"There seems to be a lot of concern regarding what happens when loans come due in the next couple of years. There are large numbers of loans coming due in 2009 and increasing through 2010 and 2011. J.T Coe, Managing Director, Deutsche Bank states, “Everything’s getting extended, foreclosure is the LAST resort”. Waynebern continues “[Lenders will] Extend, Forebear, Modify loans on cash flow assets.” “The Banks can’t run the business as well as the borrower.” So, the consensus opinion is that the banks will use foreclosure only as a last resort. They simply can’t maximize their returns, or minimize their losses trying to run the businesses themselves, or, liquidating assets in weak markets."

After the widespread market backlash at the lack of substance behind the Financial Stability Plan, news emerged yesterday that Barack Obama will be releasing details of the plan relating to preventing real estate foreclosures on Wednesday. I need to find out whether this also includes commercial real estate, but assume so for now. Either way, of interest is that meantime several banks have openly pledged to stop foreclosures.

At present the future of GGP remains finely balanced. One of Chicago's largest property companies on the brink, partly owned by a wealthy, Chicago-based family and major backers of a new President from Chicago. It is difficult to see GGP being thrown to the wolves when a commercially viable business could be saved through refinancing of its loans - not additional capital.

I remain comfortable with the situation relating to GGP - unlike many small investors who appear to be suffering psychological swings of doubt and worry. Interesting to note how the major institutions invested in GGP view the firm, most notably ones such as Pershing Square.

This presentation on slide 46 gives a good summary of their view of GGP. I remain optimistic that this next month is going to bring some significant news that is going to lead to a huge increase in the stock price.

Old Boy 'Career Breaks'

2009-02-13T13:18:00.009Z

Well, our junior trader is leaving today; he didn't qualify for gardening leave and instead had his market access revoked, and so has been our tea boy for the last fortnight. He certainly personifies the cocky Essex youth that is the stereotype of the modern City barrow boy trader - if his performance had lived up to even a tenth of that arrogance I suspect he would not be on his way. However he has spent the last week loudly proclaiming he knows the head of an obscure hedge fund (I had to look it up), and will soon be landing a job there.

Either that or he's desperately insecure about his failure to make it here. Naturally we're all assuming the latter for now, and the Desk is running a sweepstake on how long it will actually take him to secure a new position. The stipulation is that it has to be a City job - I've gone for a nice, round 10 months.

Either way he really does seem to have something about him with the girls in the office. Several of them seemed upset at his leaving ceremony this morning. On that note, leaving speeches really are one of the most vacuous aspects of corporate life, but today was a rare exception. The Boss used the occasion to impress us with his leadership and oratory skills, his speech ran thus:

"I would.. err.. first like to say a few words to thank [junior trader] for his outstanding contribution to the Desk and [bank]". We waited expectantly, while the Boss shuffled his feet, clearly not sure what to say next. Bless him, he's never been particularly good at thinking on his feet.

"I know that [junior trader] will be very much missed by many in the team". Whole team turns to look at the PA whom he was rumoured to be shagging - several give her a knowing wink.

"He has contributed a great deal throughout his relatively short time here such as.. err.. " Boss shuffles again uncomfortably, now aware he has not got a clue what the junior trader has actually been doing. Several in the team give the PA another wink - presumably a reference to junior traders actual 'contribution'.

"..such as helping Mark and Gary on the Emerging Markets desk." The Boss was clearly relieved to have strung the whole sentence together, meanwhile I had been toying with whether I should interrupt this nonsense with a few prompts to help him out. I did find my eyes constantly drawn to junior trader's dinner plate ears meantime. Should any of my future children end up with such a recessive gene, I pledge now to ensure they have whatever surgery it takes on their 18th birthday to enable them to hear behind them.

Fittingly I was in the 'Barrow Boy and Banker' last night with some non-City friends, and it still surprises me how so many of the old stereotypes persist about the City. In particular, one of the most outdated is the assumption that the entire place is a plummy, old boys network that relies exclusively on nepotism as the fuel for new entrants. There is the odd backwater such as the Lloyds reinsurance market and some niche private banks, where that is the case, but by and large nothing could be further from the truth. The invasion of Wall Street fortunately ended that particularly unpleasant aspect of the City, and I can honestly say it is now one of the most meritocratic places in the world.

Well with the weekend approaching, L and I need to confirm our holiday plans, and meantime have the good fortune of cat sitting for my brother all weekend. Either way it will be an improvement on the office tedium.

Tough Times On The Milk Round

2009-02-12T12:40:00.005Z

No sign of any movement today regarding job cuts, although a chap in Synthetics mentioned earlier that he has already cleared his desk and gone so far as to draft a goodbye letter to his team in readiness. Optimism seems to be but a distant memory, although with unemployment in the UK forecast to spiral upwards by 1 million in 2009, perhaps that is justified.

The spectre of unemployment is something all of us in the City are having to live with right now. I must admit, I am feeling a bit guilty about all the rumour spreading now. Oh well, I'm preparing them mentally for the big push when it happens - and I heard from another source just now that the cull has merely been postponed for a week. I suppose it partly depends on the firm, role and all manner of other factors. There is no harm in me divulging more interesting detail at some point - after all nobody is reading this anyway I expect.

To my surprise who should have wandered past me on the Desk this morning but Shriek herself. I've been lucky enough to never meet her before, and so it took somebody to point her out. In this world of globalisation, it is quite impressive how daily working relationships can be by voice alone, such that you can pass that person without even recognising them. Fortunately that worked both ways, as Shriek does not seem to know me either. She is a real oddity, with bright red (dyed) hair, and seems to have a botox habit judging by the size of her lips. In person, she seems quite different from the aggressive avatar I have known through various phone arguments, and appears to whisper rather than speak.

As such I made a sharp exit from the office before anybody noticed - the last thing I wanted to do was get dragged along to lunch with her. Obviously the 'dodgy dossier' being compiled against her can't be too serious if they've authorised travel expenses for her over to London this week.

I have been asked to take part in some graduate recruitment for the bank. As the Boss explained, this cannot impinge upon market hours, and so instead he seems to be looking for me to show enthusiasm by giving up free time on this. If the cull had already taken place, I might be tempted to show my true colours - instead I said I would be thrilled to make a positive contribution.. saracasm missed.

These are certainly tough times for graduates entering the job market for the first time in 2009. The cut back in graduate employment is in a range of sectors, and it goes without saying that banking is no exception. Many graduates interviewing with top firms now, who would have been a shoe-in for jobs in the past, are unfortunately going to get the 'small envelope' reply. That's the one which reads: 'Thank you for attending the interview, regrettably we will not be pursuing your application further at this time.'

Before feeling too sorry for graduates, they might just be the luckiest generation since the City 'talent drain' first began after Big Bang. They have a genuine chance to ask themselves that all-important question: 'what should I do in life?', without the financial opportunity cost that tempted so many of us to the devil's path.

"Why exactly do you want to go into finance?" is often my first question in interviews. I have interviewed many grads over the years, and the response is usually vague; at best recycling meangingless PR waffle from the corporate website, at worst you might get a grunt from the less communicative ones.

As somebody on the inside, I would suggest that graduates strongly consider other options. They will probably have no choice in many cases anyway - including L's little brother, who is actively looking now. Although financial services will undoubtedly recover, it is likely that compensation will take years to ever regain the levels previously seen, and a whole shake-up of the bonus culture is underway. As such, graduates today face working longer hours for less reward, which doesn't make sense to me.

As I mentioned in my first ever post, I am really looking to find a way out of this industry sooner rather than later and have always dreamed of setting up my own business. On that subject, I have a web-based business idea brewing that seems to be an excellent synergy between my skill set, experience and where there might be future demand. It's just finding the time to turn that into reality that is the biggest challenge right now.