Raising Eyebrows

"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

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

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

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

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

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

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

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

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

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?

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)

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

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

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

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.