Danajamin – multi-billion losses in the making?

The Star on 19 August reported Danajamin Nasional Bhd, the national financial guarantee insurer, has received 2 applications for credit enhancements to raise RM8.4bn of bonds.

Danajamin was set up in May 2009, as part of the “RM60bn” stimulus package announced by the government in March, to ensure that businesses continued to have access to bond market financing.

Here’s what an interested reader says:

“This Danajamin is a disaster waiting to happen.

Bank Negara governor Tan Sri Dr Zeti says "it provides credit enhancements for viable corporations to raise financing from the bond market". But in that, there is a contradiction. If it is viable, then why need enhancements?

This sort of credit enhancement features are typically for bad companies, which cannot access the loan or the bond markets by themselves. The REASON they cannot access these 2 markets is because they are NOT credit worthy.

Banks are experts in credit analysis. In fact, that is the bread-and-butter of lending-based banking. If the banks themselves, who are experts, deem the companies not suitable for loans, then what extra expertise or knowledge does Danajamin have to decide to bear that risk?

There are 9 local banks in Malaysia, 3 Arab banks, 2 Spore banks and 4-5 foreign banks (HSBC, ABN, StanChart etc etc). Collectively, 20 banks can’t be wrong, and Danajamin correct. Secondly, since these companies are not credit worthy, they are prone to default if there is any downturn in the economy.

As such, Danajamin will be laden with non-performing loans (NPLs). Banks have the means to monitor and modify NPLs. How will Danajamin do so?

As I said above, unless Danajamin can claim that they have a better form of credit enhancement than all the 20 banks in the system and that their risk management of potential and actual NPLs is also superior, this is a disaster waiting to happen. Assuming a 20% NPL rate of MYR 18.4 billion is a massive number. Let us cross our fingers that there is no double dip recession in the US.”

To which I would add, Dr Zeti herself was quoted as saying, ““The recent narrowing of spreads between benchmark issuances and triple A rated papers indicates that risk aversion has now eased,” and demand for higher-yielding securities was also beginning to rise, ahead of the recovery in the global economy.

Danajamin might have been justified when markets were frozen. But if markets are recovering and functioning again, it has no raison d’etre.

Note that the RM8.4bn was just for two deals – so we’re talking a massive RM4.2bn size per issue. From my experience, any issue of this size would would be inundated with bankers vying for a slice of the action – for the sizeable fees and the bragging rights.

Economic reforms – One step forward, one step back .. and watch the implementation

The mainstream media has been trumpeting liberalization measures announced by Prime Minister Datuk Seri Najib Razak at the InvestMalaysia Conference on Tuesday.

Amid the plethora of measures, the one that stands out is removal of the 30% bumiputera quota for companies seeking listing in Malaysia. It is a bold political move indeed, to eliminate this “something for nothing” crutch.

Having said that, the actual impact to bumiputeras is minimal. The pipeline of new listings has hardly been inspiring in recent years. I challenge you to name even one recently-listed prominent company. Also, the policy had been a huge failure in terms of its intention to build bumiputera wealth. PM Najib said RM54bn had been allocated to bumiputeras (I think it is a lot more), but only RM2bn remains. So, bumiputeras kept less than 5% of the amounts allocated to them!

But it is good news, in that it removes a huge impediment to listing. Many owners of successful businesses shied away when told they had to offer 30% of their company to a new “partner” at a large discount. Let’s hope this results in more and better quality listings on Bursa, which would make the stock exchange more attractive and help fuel trading volume.

I am dismayed though, that replacing this 30% quota is another new fund. The RM10bn Ekuinas fund is supposed to invest in “bumiputera companies and entrepreneurs, based on merit”. Such government-run funds have awful records. And what is Ekuinas going to do that existing institutions do not?

A better approach would be to work with the private sector. For example, the government could offer to share the risks of such loans and investments with banks and venture capitalists. It could agree to bear, say, half the losses if the entrepreneurs fail. That way, the process of credit allocation is still primarily private sector driven, which should be more efficient and it saves the government having to build a duplicate infrastructure of officers to administer and monitor the investments.

As for “watch the implementation”, I am referring to the “stern” directives to:
1. Government-investment corporations (GICs) to reduce their stakes in the government-linked corporations (GLCs), in the name of raising free-floats and market liquidity; and
2. The GLCs to divest non-core businesses.

All sensible reasons, and if properly done, will be good for the economy. “Properly” is of course the crucial word. In particular, I want to see:

1. Transparency in the appointments of the brokers and the fees and commissions paid when the GICs reduce their stakes; and
2. Similarly, transparency when the GLCS sell their non-core businesses. Valuations must be fair – the businesses must not be sold at unduly cheap prices to influential parties – and all the costs, including commissions and advisory fees disclosed.

Is the next bull run here? (2)

The US equity market is still going great guns. So, is the bear market over? Last week, I pointed to a fundamental research piece offering one view.

This week, I came across another interesting piece. This one is from the technical research perspective.

For the uninitiated, here’s one technical mantra:
In a bull market, advances accompanied by increasing volume or declines on diminishing volume are taken to be bullish. Conversely, in a bear market, declines are accompanied by increasing volume and advances show diminishing volume. Volume should always be studied as a trend (relative to what has preceded) – Richard Russel, The Dow Theory Today.

Check out Hussman Funds for the full article.

Is the next bull run here?

I’m often asked if economic recovery is around the corner and the bear market is gone. I share the views of Jack McHugh at the Big Picture:

“Nothing sows the seeds of doubt in the minds of money managers quite like a bear market rally. Thoughts like, “Is the bottom in?”, and “Am I missing a once in a generation buying opportunity at the beginning of a great new bull market?” cause institutional investors to reach for the antacid tablets. For many of them, losing money in a bear market is no sin, as long as everyone else is taking on water, too. But missing out on the gains of a bull market is a career-threatening problem. As such, large investors are all competing to strain their eyes in looking for Ben Bernanke’s “green shoots”. They almost hunger for the early bits of growth that often presage an economic recovery. What they forget is that many of these green shoots will turn out to be weeds, or, what’s worse, be lost to a spring frost.

I’m not trying to be an eternal pessimist, either, since there are indeed some hopeful signs. As you can see from the articles below, the credit markets are starting to pick up. Even if prices in the dicier parts of fixed income aren’t up as much as are stocks since March 6, they are starting to tick higher. LIBOR continues to recede, high yield bond issuance is climbing off the mat, and even carry traders are beginning to feel safe enough to re-establish risky positions. With all the cash now gushing out of Washington, I suppose these nascent signs of improvement should be both expected and welcomed. But since one of the primary goals of these scribblings is to offer a perspective that is ever mindful of risk management, I would like to call everyone’s attention to the fact that these same hopeful signs were on display in the autumn of 2007 and the spring of 2008.

The spring of 2009 may yet bring more upside for investors, but they should be mindful of the fact that when individuals, corporations, and even some countries all try to delever on a global basis, false springs are more the rule than the exception. After the 1929 crash, the Hoover administration spied similarly hopeful signs in the U.S. economy. “Recovery is just around the corner”, is first attributed to economist, Irving Fisher, but Team Hoover repeated this phrase and variations of it right up until he was crushed by the landslide election of FDR in 1932. It is true the U.S. economy in 2009 has yet to see the massive reversals suffered during the Great Depression, but the root causes of each period — easy monetary policy and an over-reliance on debt — are the same.

What’s different this time is that Mr. Bernanke and the successive Treasury Secretaries he’s teamed up with have long since ditched conventional policy responses. It’s been said, and I agree, that trying to foster sustained growth in an economy weighed down by too much debt is like trying to start a sustainable fire using wet logs. The matches and gasoline (some stimulus and a low funds rate) didn’t work on our debt-soaked economy, so Mr. Bernanke is resorting to the blowtorches and rocket fuel (a lot of stimulus and quantitative easing). I don’t know enough about the chemistry of combustion to accurately predict what will happen next. But my advice would be to stand well back and wait to see what happens next. I’ll risk being underinvested during this rally. Even if he’s successful, Mr. Bernanke might set fire to more than just the logs.”

Goldman’s missing month …

Floyd Norris of the New York Times has an astute observation:

“Goldman Sachs reported a profit of $1.8 billion in the first quarter, and plans to sell $5 billion in stock and get out of the government’s clutches, if it can.

How did it do that? One way was to hide a lot of losses in not-so-plain sight.

Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.

The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.

Would the firm have had a profit if it had stuck to its old calendar, and had to include December and exclude March?”