The Art Of (Self) Assessment

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.

Big Fish Tantrums

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 II: GGP's Plans

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

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.

Round 1 To GGP As CMBS Industry Overplays Its Hand

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.

Foreclosure Plan May Impact GGP

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.

Investing for a Recession (Part I)

One of the key rules of investing at any time is to be flexible in your approach, and not assume that whatever has worked well in the past will necessarily continue to do so in the future.

I am not going to lie: I failed to call the timing of the stock market downturn, but did see it coming. In fact, I called it too early, as after the effective collapse and nationalisation of Bear Stearns in mid-2007, my constant research through economic forecasts was enough to lead me to conclude that storm clouds were gathering and a major correction was coming. So I liquidated all my positions, and sat on mostly cash in my trading account - earning zero interest as I needed it available at short notice in case trading opportunities came up.

Another key investing rule is patience - one that amateur investors all too frequently fail to show as they get excited by a short term fluctuation in a stock price. I was patient for 6 months, as I sat there watching global indicies continue their inexorable rise upwards, and eventually I snapped and made a couple of investments in March 2008. I won't go into details of those as they are not important, but suffice to say that given the unrelenting speed of the market falls from May onwards, I am sitting on losses from those in excess of £50k.

You might whince, but another key to investing is to only invest what you can afford to lose, and while I am not happy about it, it makes no material difference - and I am happy with them both as long holds. More importantly, I have learned a very important lesson for future investing. Learning from your mistakes is the single biggest investing rule of all - and in this case it was that when all the logic points to something happening, it will do.

So by October, when all the fun had kicked off with Lehman Brothers, rather than joining the collective panic gripping many of my peers at the banks, I realised we had reached a wonderful opportunity to start making a large amount of money back from this crisis. Shorting is one, much maligned means of doing this, which is not what I do. On that note, let me say that shorting is needed for valid trading strategies (e.g. hedging), despite the criticism about naked short selling of the banks, which is for nothing other than the pursuit of speculative profit - that is an area more difficult to justify.

Instead I have been much more traditional in my approach - taking long positions (buying) stocks at a lows, and then selling them soon afterwards. The key is that what panic brings to the markets is enormous volatility. I assessed the reality of the fall out by giving it some context. Nothing like this had happened in our lifetimes - it was a cataclysmic shock that would obviously lead to enormous falls in the markets. Therefore key was to not be remotely optimistic and instead look at your worst case scenario expectations on prices and exceed them.

I recall listening on a tedious conference call at work, while idly watching the share prices of all the major banks in freefall. The two of particular interest were Morgan Stanley and Goldman Sachs at that time, due to their status as investment banks. The markets were voting with their wallets in their lack of confidence in this particular business model, and both had fallen a staggering amount in recent days. But no downturn is smooth with stocks, and in this case I had already watched GS hit a floor at $120/share and rally back upwards sharply for a couple of days, before rapidly plunging again.

As such, I watched as GS breached the psychologically important $100 mark and decided it was clearly about to drop off a cliff, despite it already being down 20% on the day. Sure enough, a moment of panic ensued as it moved down below $90/share, and I set a limit order to buy $150,000 of stock at $79/share. The stock suddenly plunged and touched a low of $77/share before spiking upwards above $90/share by the end of the day. I had an unrealised profit of $20,000 in 10 minutes. I also reasoned that based on previous rallies, all those shorting the stock would now be rushing to cover their positions, which creates a short squeeze that drives upward pressure.

Sure enough the next day, GS rose up above $120/share as I had expected, and I immediately sold out. And as I expected, the stock hovered there for a couple of days before plunging and I believe eventually hit a low in the $50/share range - it is somewhere around about $80/share as I type. It is worth noting that as I realised that £40k profit, I liquidated a bad investment from several years ago. Rather than panic or give up on it, I decided to hold and turn a negative into a positive - in this case it became a useful offset against my gains by reducing the amount I will have to pay in capital gains tax. In effect, I had recovered a large percentage of my losses from the market.

I repeated that trade further down with one of the other banks soon afterwards, and then stopped trading in them because I no longer had a strong view on what direction prices were moving and whether or not the downward trend was ending. My considered opinion was that they had further to go when later quarterly results were reported, and so it seems to have panned out as after rallies before Christmas they have plunged again.

However when you cannot decide where you think a stock is going to move, it important to not trade in it. I locked in my gains, and by December had turned £60,000 of spare change into £140,000. Where am I investing now? Two places. Most important was that I had deliberately chosen to trade in US banks throughout the process, because I had known from various research that historically Sterling was overvalued and long-overdue a downward correction.

My analysis concluded that an imminent recession in the UK would eventually fuel a correction in the GBP-USD exchange rate, especially given that the US was ahead in the economic cycle and already in a recession. Sure enough, with money tied up in dollars during the trades, I made considerable sums from the fall in the pound from October to December with so much money held in dollars. I then decided that since I was no longer sure about the direction of banking stocks (or most others), from researching likely directions of currencies in 2009, both sterling and the dollar were likely to continue their falls against other currencies.


As such, with a new policy of 'quantitive easing' on the horizon (aka governments printing money), that meant it was an easy decision to take a large stake in a gold ETF (exchange traded fund) in December 2008. This is effectively like buying shares that are linked to the price of gold in USD. Sure enough, with the pound falling further, I am currently sitting up 35% on my investment to date, and recommend that anybody debating what to do with their money for 2009 use the current minor sterling rally versus the dollar (as I type we are at around $1.43 to £1) and buy into a gold ETF on the London Stock Exchange for 2009.

When governments start printing money in the way they effectively are with all this debt, it will eventually stoke inflation later this year. That should lead to an increase in the price of gold, and makes it a good play until later in the year when it will be worth exiting.

You might be starting to get a taste for what investing is all about from the above outline of my investing activities since October. It is about completing your own analysis, taking into account historical statistics to give perspective, and looking ahead to do your best to assess what is logically going to happen next. If you don't know then do not do anything, but if you do think something is going to happen (such as house prices falling another 20% in the UK) then why sit around holding it?

Next time I will explain what I am doing with the majority of my money in 2009 at present.

"Oh My God, They Killed Kenny!"

As I mentioned in my first post, it amazes me how little financial common sense many people have - in particular my colleagues. After all, these are the supposed 'Masters of the Universe' (where exactly did that ridiculous phrase come from?), who are experts in the many financial products and options for investing our money. Yet it's amazing how many are really just Average Man On The Street when it comes to making those all-important decisions that determine whether you end up with some freedom in life.

On that note, let me be clear that I see money as nothing more than an enabler in life - specifically it gives you personal freedom to decide what you want to do and when. That's why the ultra rich who wander around the shops in Knightsbridge and New Bond Street look so happy and relaxed. You can spot them a mile off, with their designer everything, styled hair, moisturised skin, and most importantly no bags under their eyes from the constant strain of life in the rat race in which we all struggle. Instead they do as they please - it's when they show all the gratitude of Paris Hilton for their position in life that the resentment rightly comes in from the rest of us.

Unlike a lot of people, I have no like or dislike of money. I think those who do are usually scared by it, because it is either a constant problem to meet bills, or they don't know what to do with what they've got. But like all fears, it's facing up to it that helps, not sticking your head in the sand and pretending it isn't important. Money ultimately will decide whether I own that house in a good area in a couple of years time, and whether I can provide for the family that L and I plan to start one day. That's a quick insight into my reasoning, along with why I have no interest in pissing my money away on ego boosts like a flash car, phone or watch.

We all know the type who do that, like a friend of mine, Big H. He's enormously proud of his house, along with his flash company car and likes to be conspicuous with his wealth by showing off various electronic gadgets like his smart phone. In short, he's the kind of overstretched financial idiot of the worst kind: shallow, materialistic, he seems to actually define himself by what he buys. He also thinks he has been clever by racking up £9000 of credit card debt, which he has been flipping every 6mths between company intro deals.

A number of financial websites have advised people to do that in recent years, but as the country is about to find out - it is always a stupid idea to encourage spending beyond your means. Now those deals are drying up fast, so Big H finds himself with an uncertain future regarding his job, and no means to pay that back easily. Anyway back to my colleagues at the bank, as I heard an interesting story on Friday about an investment decision made by one who was an unfortunate lamb to the slaughter in the first big cull back in October.

Kenny's just one of those unfortunate types who was always one of the team comedy characters. We laughed AT him as much as with him, and he hasn't had the best run of luck in recent months. As you'll see though: calling most of it 'luck' is partly to excuse stupidity. Firstly he decided to take a holiday in the summer to Sardinia of all places, and despite the warnings from a colleague who knew the place well to not drive there, he hired a car - and promptly crashed it within 2hrs of arriving, and spent the remainder of his two week holiday in hospital recovering.

Kenny's a good chap, and was well liked around the bank to my knowledge. Unfortunately he was also not politically astute enough to ensure he massaged the ego of the most important person - the Boss. He made the mistake of complaining a little too vehemently about his bonus in December 2007 (that's the last time we expected bonuses). That seems to have been remembered, as he was first on the list our of the door. There's complaining by grumbling and looking like you expected more, and then complaining by making it personal or with veiled threats - and I heard he crossed that line.

Around that time was when all the fun with the banks was really kicking off of course: Lehman Brothers collapsed, and the vice tightening on Goldman Sachs and Morgan Stanley. Overshadowed but still high profile was Iceland, which quickly defaulted on all foreign debts, forcing the UK government to bail out UK savers. Guess who had over £100k stashed away in an Icesave account?

Although Kenny will eventually get that back, meantime he decided to 'invest' his generous redundancy package in a couple of other banks in December - namely RBS and Lloyds TSB. I can only assume his logic was that given they had fallen a lot up to now, it therefore meant now was the time to buy. I should probably point out that Kenny is no trader, but such simplistic reasoning also showed spectacular naivety to assume that more crap was not lurking under the surface at both of those banks. Particularly given that each has swallowed up a terribly run, overexposed competitor in ABN Amro and HBoS respectively. You only have to look at how Bank of America is now suffering from its forced purchase of Merrill Lynch for another example.

Everybody in the City knew both were as contaminated as Lehman Brothers.. or should I say anybody who spent some time doing some research into the matter, which is another key rule of investing.

Since Kenny decided to put in an unspecified amount into those banks, they have tanked an impressive 79% in value, which just goes to prove my point that you should never assume bankers are always competent with their money. Having said that, after the last 6 months I am likely preaching to the converted when it comes to assuming we're all incompetent, overpaid slime.

I must admit, a few of us at the bank couldn't help but laugh when we heard - it was just such a Kenny way to invest. In a post soon, I'll tell you what I have been doing with my own money in the last 6 months, and why I have been making a lot of money out of the downturn.