Global Pie: Get Assets on the Cheap, While Banks End Up With No Equity

Bloomberg just posted a very interesting story on profiting from corporate distress: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAeVSwaMsgDQ : John Paulson, CEO of hedge fund Paulson and Co, believes that it is the time to pick up the debris that the financial storm has brought: corporate distressed loans and mortgages that went sour.

While by itself the idea is not new, what is interesting is Paulson's view on 2009 prospectives for banking industry. He believes that many banks will end up losing more than their equity. He might be very right and this possibility explains why U.S. Government is so rushing to boost up banks' equity position by converting preferred shares and using TCE ratio to demonstrate banks' solvency and to prevent total collapse of the banks. Someone else mentioned recently that by the end of the year Citigroup and AIG will have no equity. 2008 was dead scary. Is 2009 going to be even more turbulent?

Policy Tools - Are the Regulators Finally Taking to Their Roles?

Ben Bernanke is talking about restoring uptick rule. Regulators are switching to TCE ratio from Tier 1 ratio as a measure of capitalization. It seems that now the government is effectively out of financial means to solve the crisis and is reaching in deeper into policy toolbox. Will it offers any relief? Many market participants considered abolition of uptick rule in 2007 as a bad idea. Then why is it being restored only now?

On a separate note, there is an ardent discussion over clearance and settlement of credit-default swaps. This market covers over $62 trillion of notional value; however, it is little regulated or organized. A potential tip of this mass is extremely dangerous. Market participants themselves have long recognized this danger and have collaborated to create a solution. A consortium of industry associations and financial institutions set a voluntary deadline of November 30, 2008 to establish central clearing of index CDS's. Ccorp located in Chicago and subsidiary of Atlanta-based IntercontinentalExchage, had been developing a trading platform and was prepared to go live on December 2, 2008 given regulatory approval. Other industry participants, such as Eurex, NYSE Euronext and a joint venture between CME Group and hedge fund Citadel were also working on competing platforms. So the industry recognized the threat, proactively worked on the solution and insistently seeked approval by regulators such as Timothy Geithner, current Treasury Secretary and then Chairman of New York Fed. However, both November 30 and December 2 deadlines were missed by the regulators even though they started reviews of risk management and platforms' design. They also took the position of not endorsing any particular platform but letting the market decide on the best solution.

One has to wonder if banks and other financial institutions should have been as much scolded as they recently have for loose practices and runaway capitalism when even their own push for regulation and standardization was neglected by regulators in the midst of financial crisis.

Excel Cheat Sheet

I have learned a great deal about Excel in the last few months and would like to share my cheat sheet. Save it Word format and when you are wondering what was that shortcut to put borders around a cell, just do a quick look up CTRL+F "border". Fast and easy!

CTRL Shortcuts

CTRL + A – Select all
CTRL + B – Bold
CTRL + C – Copy
CTRL + X – Cut
CTRL + V – Paste (Also useful: ALT E, S – Paste Special: T – format, V – Value, E – Transpose)
CTRL + D – Fill down (copies value from the cell above)
CTRL + F – Find
CTRL + G – Go to (useful for lists)
CTRL + H – Replace
CTRL + I – Italic
CTRL + K – Insert Hyperlink
CTRL + N – New Workbook
CTRL + O – Open file
CTRL + P – Print
CTRL + R – Fill right
CTRL + S – Save workbook
CTRL + U – Underline
CTRL + W – Close window
CTRL + Z – Undo
CTRL + Y – Redo
CTRL + 1 – Format window
CTRL + 5 – Strike-through
CTRL + 7 – Hide/show toolbar
CTRL + 9 – Hide row
CTRL + SHIFT + 9 – Unhide row
CTRL + 0 – Hide column
CTRL + SHIFT + 0 – Unhide column
CTRL + ~ - Show formulas/values
CTRL + ‘ – Copy above formula
CTRL + ; - Insert today’s date
CTRL + SHIFT + : - Insert current time
CTRL + [ - Precedents
CTRL + [ - Dependents
CTRL + Enter – Fill selection with entry
CTRL + Pg dn – Next worksheet/tab
CTRL + Pg up – Previous worksheet/tab
CTRL + SHIFT + Pg dn – Group with next tab(s)
CTRL + SHIFT + Pg up – Group with previous tab(s)
(ALT + E + U – Ungroup tabs)
CTRL + \ - In a selected row, highlight the cells that do not match the formula or value in the active cell
CTRL + / - Select the array containing the active cell
CTRL + SHIFT + * - Select the current region around the active cell (the data area enclosed by blank rows and blank columns)
CTRL + SHIFT +O (letter O) – Select all cells that contain comments

ALT Shortcuts

ALT + tab – switch program (hold ALT down while tapping Tab to select out of all open windows)
ALT + ‘ – Display style
ALT + T + O – Options menu (use Tab to move between tabs)
ALT + F, A – Save As
ALT + F + D + A – Send file as an attachment
ALT + L, G, ALT + R – Save with ‘Read-only’ recommendation (use this combination when the Save window is open)
ALT + D + P – Insert pivot table
ALT + D + F + F – Insert/remove Autofilter
ALT + D + L – Data validation (useful to create a drop-down menu referencing a list of values)
ALT + T + G – Goal seek function
ALT + T + I – Add-Ins menu
ALT + E + S – Paste Special box (T – Format, V – Value, E – Transpose)
ALT + W + S – (Un)split panes
ALT + W + F – (Un)freeze windows
ALT + E + M – Move worksheet
ALT + E + L – Delete worksheet
ALT + V + Z – Change view sizing
ALT + O + C + A – Autofit column width
ALT + O + R + A - Autofit row width
ALT + O + H + R – Change tab name
ALT + I + R – Insert row
ALT + I + C – Insert column
ALT + I + E – Insert copied cells
ALT + I + W – Insert worksheet
ALT + E + A + F – Clear format only (content will stay)
ALT + E + A + C – Clear content only (format will stay)
ALT + E + A + A - Clear all (content and format)
ALT + F + V – Print preview
ALT + E + U – Ungroup tabs
ALT + T + P + P – (Un)Protect worksheet
ALT + T + B + A – Share workbook
ALT + I + S – Insert a symbol
ALT + D + E – Convert text to columns box
ALT + N – stay with Delimited category (useful for breaking a string of data from 1 cell into a few cells) and go to next window.
ALT + C – to choose Comma as the separation point for data within cells
ALT + M – to choose Semicolon as the separation point
ALT + S – choose Space as the separation point
ALT + O – choose a custom character as the separation point
ALT + D + E + W – Choose Fixed Width category (useful to break the contents of the cells according to predetermined width, i.e. if there is a space in the beginning of every cell)

Formatting Shortcuts

ALT + ‘ – Display style
CTRL + 1 – Format box
CTRL + SHIFT + F – Format font/size
SHIFT + CTRL + ~ - General format
SHIFT + CTRL + ! – Number format
SHIFT + CTRL + @ - Time format
SHIFT + CTRL + # - Date format
SHIFT + CTRL +$ - Currency format
SHIFT + CTRL + % - Percentage format
SHIFT + CTRL + ^ - Exponential/scientific format
SHIFT + CTRL + & - Outline border
SHIFT + CTRL +_ - Remove border
ALT + O + D – Conditional formatting

Columns and Rows

SHIFT + Spacebar – Highlight row
CTRL + Spacebar – Highlight column
SHIFT + ALT + → - Group rows/columns
SHIFT + ALT + ← - Ungroup rows/columns
CTRL + Minus sign – Delete selected cells
SHIFT + CTRL + Plus sign – Insert blank cells

Function Key Shortcuts

F1 – Excel help menu
F2 – Edit cell
F3 – Paste name
F4 – Anchor cells (in formula)
F5 – Go To (useful for lists)
F6 – Next pane in split mode
F7 – Spell check
F8 – Anchor a cell and use arrows to highlight an area
F9 – Recalculate workbook
F10 – Activate menu bar
F11 – New chart
F12 – Save As
SHIFT + F2 – Insert a comment
SHIFT + F3 – Insert function
SHIFT + F4 – Find next
SHIFT + F5 – Find
SHIFT + F6 – Previous pane
SHIFT + F8 – Add to selection
SHIFT + F9 – Calculate active sheet
SHIFT + F10 – Display shortcut menu
SHIFT + F11 – New worksheet
CTRL + F3 – Name a cell
CTRL + F4 – Close window
CTRL + F9 – Minimize window
CTRL + F10 – Maximize window
CTRL + F12 – Open file
ALT + F1 – Insert chart
ALT + F2 – Save As
ALT + F4 – Close program
ALT + F8 – Macro box
ALT + F11 – Visual Basic Editor window

Navigation

ALT + ↓ - Drop down menu
ALT + Tab – Switch between two last active windows (hold ALT down while tapping Tab to choose from all open windows)
CTRL + Pg Up/Dn – Switch worksheets
CTRL + Tab – Switch workbooks
CTRL + Arrow keys – Go to the end of contiguous range
SHIFT + Arrow keys – Select a cell range
CTRL + SHIFT + Arrow keys – Highlight contiguous range
CTRL + SHIFT + End – Highlight range
Home – Move to beginning of row
CTRL + Home – Move to cell A1
Enter – Move to cell below
SHIFT + Enter – Move to cell above
Tab – Move to the cell to the right; also to move in progressive fashion in any menu
SHIFT + Tab – Move to the cell to the left; also to move to in the reverse direction in any menu
Backspace – Delete cell and get inside the cell
F2 – Edit/highlight dependent cells
When inside cell:
ALT + Enter – Start new line in the same cell
SHIFT + Arrow keys – Highlight within cells
F4 – Anchor cells in a formula
F7 – Spell check
CTRL + F3 – Name cell
SHIFT + F3 – Display “Insert Function” box
ALT + “=” – Sum all cells above
CTRL + ‘ – Copy formula from cell above
SHIFT + CTRL + “ – Copy value from cell above
F9 – Recalculate all workbooks
ALT + T + U + T – Trace immediate precedents (display linking arrows)
ALT + T + U + D – Trace immediate dependents (display linking arrows)
ALT + T + U + A – Remove tracing arrows
CTRL + [ - Highlight precedent cells
CTRL + ] – Highlight dependent cells
SHIFT + CTRL + { – Highlight all precendents (direct and indirect)
SHIFT + CTRL + } – Highlight all dependents (direct and indirect)
F5 + Enter – Go back to original cell

Formulas:

=abs() – Returns the absolute value of a number
=sumproduct(array 1,array 2) –Multiplies corresponding components in the given arrays, and returns the sum of those products
=sumif(range, logical test) - Sums the values in a range (range: Two or more cells on a sheet. The cells in a range can be adjacent or nonadjacent) that meet criteria that you specify.
=countif(array) - Counts the number of cells within a range that meet a single criterion that you specify
=Exact (value 1, value 2) – Compares two text strings and returns TRUE if they are exactly the same, FALSE otherwise
= trim(“text”) – Removes all spaces from text except for single spaces between words
=len(text) – Returns the number of characters in a text string
=upper() – Converts text to uppercase
=lower() – Converts text to lowercase
=proper() – Converts text to proper case
=vlookup(“What you are looking for”, “Where it might be located”, “If found, what column would you like it to reference”, “If the exact value is not found, do you want to look for the next closest thing?”) – Vlookup formula (useful for searching data in vertical orientation)
=hlookup(“What you are looking for”, “Where it might be located”, “If found, what row would you like it to reference”, “If the exact value is not found, do you want to look for the next closest thing?”) – Hlookup formula (useful for searching data in horizontal orientation)
=concatenate() or & - Concatenate (bring 2 items together)
=if(logical test,”value/text if true”, “value/text if false”)

Dear Leaders, Can We Trust You to be The Doctors?

TCE, shares conversion, bad debt bank, TARP, direct liquidity injection…. we see the new way regulators are trying to fix the financial markets but ensuring the health of major players. As of now, the whole game is a delicate balance between the need to intervene and prevent chaos while not stepping too deep into private territory. Governments around the world are trying and proposing various alternatives and observing the reaction of the markets. So far the feedback is taken in a passive way, similar to this scenario:

Government: Let me do this...
Market: No, no, no!!
Government: Ok, let's go back…

Instead, the government should have business leaders more involved in a dialogue like this:

Government: So what are the best solutions for you guys?
Market: This, this and this.
Government: Ok, let's work on this.

The problem in implementing the 2nd scenario is the eroded confidence in business leaders - CEOs and top executives of large firms as well as top academicians and regulators. Everybody at the top failed and is responsible more or less for this mess, starting with Greenspan and ending with new Treasury Secretary Timothy F. Geithner who was New York Fed Chairman. Can the same people come up with new ideas?

With leaders at all levels being exposed as lacking the diligence and wisdom at the best, and as crooks as the worst, it's hard to know who is in the position to devise a working solution. Scandals of the magnitude of the Great Depression seem to break out almost every week: Stanford, Blagojevich and Madoff (who not only lost billions of investors’ money that will reverberate throughout the global economy for years, but also caused outright suicides) are the villains of the late, of course. But even the Treasury Secretary got under fire over his questionable handling of tax obligations, and Merrill Lynch former boss John Thain caused public outrage with gross spending of government-supplied cash in the midst of financial meltdown. Even such venerable figures as Allan Greenspan, George Soros, Lloyd Blankfield and other executives of top financial institutions and hedge funds were questioned by Congress over their role in the global financial crisis.

We are in the toughest of times, but our biggest problem is not even the loss of capital but the loss of confidence and trust.

TCE and How to Eat It

On Tuesday morning news were buzzing with excitement over non-nationalization of Citigroup. The word "nationalization" permeated the markets last week when Alan Greenspan himself, ardent proponent of free markets, mentioned that not only tighter regulation but also nationalization of some larger financial institutions may be necessary. His words were echoed by Sen. Lindsey Graham (R). Markets did not like such prospective, and a massive selloff ensued, bringing Citigroup shares to a 17-year low and Dow to a 6-year low on February 19.

The gloom was partially alleviated last night as U.S. government released new plan of converting its $45B preferred stock holding into common shares, and affirmed that financial industry will remain in private hands. Markets in Europe, Asia and Americas rose on such statements and U.S. Treasurys dropped.

Such contradiction would be abnormal in earlier periods but this is abnormal times. Markets are most afraid of overdue regulation and especially outright nationalization of financial institutions. Once scare with the worst, they seem to cheer the lesser evil: U.S. buy into Citi which of course dilutes equity but does not eliminate it completely.

Why was there a need to convert preferred shares (which give U.S. taxpayer a somewhat protected position) into much riskier common stock?

This conversion is aimed at improving a previously obscure TCE ratio - Tangible Common Equity. TCE = common stock + add paid-in capital - deferred compensation + accumulated comprehensive income.

So is it an artificial way to show better capitalization or is it a way to appropriately demonstrate all equity stakes? What does this conversion mean to U.S. taxpayer? Are we taking a riskier position for the sake of accounting games?

I have seen 2 reasons cited:

1) Recent drop of Citigroup shares to dangerous lows can cause trouble if customers start withdrawing their deposits. So I am wondering - why does U.S. government think that change of labels can stop people who have already lost a lot of their assets and may want to protect what's left. If this conversion is supposed to give us confidence in Citi backing by U.S. Government, then isn't it equivalent in spirit if not in form to nationalization?

2) This week Fed starts testing bank's capitalization levels with emphasis on TCE ratio rather than traditional Tier 1. In addition to common stock Tier 1 capital measures equity other than common stock and includes stock options, accounting reserve and deferred compensation such as deferred tax credit (which we know all banks now have a LOT). So effectively, the conversion boosts the TCE ratio so that Citi can pass the test but then again, at the cost of a riskier position for U.S. taxpayers.