History Lesson: How Did the 2008 Crisis Spread in the U.S.?

History never repeats itself but does it really rhyme? As one who lived through the 2008 global financial crisis I have been reflecting on ‘those who cannot remember the past are condemned to repeat it’.  To seek lessons, I recreate the broad building blocks of the ’08 crisis. The contagion, the transmission mechanism as well as government interventions. The financial crisis was a lot more complex than the coronacrisis. This visual built off my research, that I hope to expatiate on forthcoming, speaks a thousand words.

How did the 2008 crisis spread in the US

 

Principal Component Analysis of Contagion Spread in 2008 vs 2020

We examined multiple likely causal reasons that in combination exacerbated the 2008 crisis in the United States. Our analysis removed the “least important” variables and left us with four variables with high explanatory power – decline in home prices, a doubling in oil and higher energy prices, wealth destruction in equity markets and large reduction in credit availability. We do not see this combination of factors during 2020.

Trian Takes Stakes in Invesco, Janus Henderson With Eye on Deals

The Wall Street Journal reports “Trian Takes Stakes in Invesco, Janus Henderson With Eye on Deals – Money comes in part from a fund built with the goal of bringing consolidation to the asset-management industry”.

I have been tracking activist hedge funds for many years now. To provide color on how Trian operates , here are two historical deals I analyzed – HJ Heinz and Wendy’s. Every deal is different but analyzing the anatomy of a transaction provides a lot of insight into how hedge funds operate. I draw attention to the share price charts during the period.  ActiveAllocator allocates to activist hedge funds , inter alia.

History Lesson: How Did European Banking System Recover After 2008?

#ActiveAllocator Research- responding to WSJ article today Tue, May 26, B1 ‘European Banks Exposed to Sudden Downturn’. We examined the events affecting the European Banking sector during the 2008 crisis and identified key drivers of recovery. They raised capital, increased liquidity, reduced their U.S. structured credit exposure and relied on the economy to recover to reduce non-performing loans. We opine that they now need to build capital (and cut balance sheets) from recent levels, take account of an increasing level of loan losses, not just from problems emerging to date from the crisis, but over the course of a developing economic down-turn.

While governments have rightly stood behind European banks, these banks are still in a weaker position, relative to their American counterparts, due to past capital policy – with the shock of coronacrisis led events posing risks to damaging market confidence and trust. The effective closure of mainstream sectors of economy is a major issue for banks, and may call for further intervention. In the longer term banking models are likely to change (a reversion to tradition?) under taxpayer-shareholder and regulatory pressure – but reforms need to be introduced at a measured pace for fear of further unbalancing.

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History Lesson in Distress: Japanese Bank Restructuring

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While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Japan resolved its own crisis.

History Lesson in Distress: French Bail-out of Crédit Lyonnais (1995)

8-credit lyonnais9-credit lyonnaise timeline

While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way France resolved its own crisis. An example was the Credit Lyonnais bailout.

History Lesson in Distress: Malaysian Bank Restructuring

6-malaysian7-malaysia banks

While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Malaysia resolved its own crisis.

History Lesson in Distress: Korea Asset Management Corporation

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While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Korea resolved its own crisis. An example here of the KAMCO bailout.

History Lesson in Distress: Korean Banking Crisis (1997-99)

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While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Korea resolved its own crisis.

History Lesson in Distress: Restructuring Nordbanken and Gotha

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While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Sweden resolved its own crisis. And example here of how it restructured some large banks.

Financial Sector Distress – Restructuring and Common Solutions

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#ActiveAllocator Research – If the corporate sector is increasingly distressed, won’t the financial sector follow? Historically, governments have used a variety of tools to address financial crisis and recessions with policies of either containment or resolution. For example, in 2008, government intervention moved from the provision of short-term liquidity, through distressed asset funds to medium-term guarantees to full-scale bank capital injections, nationalization and brokered rescues. Whilst the banking system seems secure in the coronacrisis, I think it is inevitable that governments will borrow from previous playbooks.

As one who was a front row participant in the 2008 crisis here are some of my takeaways to what may be an inevitable sector restructuring – if not in the U.S., then most certainly in many countries where the contagion is already spreading from the real to the financial sector.

2020 CoronaCrisis Differs from 2008 ConfidenceCrisis

The sub-prime crisis was the catalyst for the broader crisis which followed.  It led to a breakdown of confidence in the banking system, and a subsequent lack of liquidity, with bank balance sheets placed under severe stress and deleveraging rapidly while government intervention was uncoordinated. In 2020 the banking system remains intact.

September 2020: Retail Sales Growth Slowing

“August retail sales rose by 0.6% relative to July, marking the slowest monthly increase since April. Sales in sectors such as groceries and online retailers were boosted by stay-at-home restrictions and are above pre-pandemic levels. By contrast, while sales in restaurants and bars rose a strong 4.7% last month, reflecting a gradual resumption of their activities, they remained below levels seen in February. This suggests that the services sector is still under pressure from social distancing behavior. On a year-over-year basis, retail sales are up by 2.6%, but momentum slowed in August, coinciding with the expiration of the $600 extra weekly unemployment payments. Services spending will likely remain depressed until we see the widespread distribution of a vaccine. This should contribute to a general slowing of the economic recovery.”

ActiveAllocator Business Overview 2020

ActiveAllocator.com, is seeking to enter into an equity swap, revenue sharing or a partnering arrangement with an established financial services company. We now have the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. We help investors analyze existing allocations, discover inefficiencies and create bespoke portfolios in minutes. If you see complementary synergies and understand the Fintech space well, have decision steering authority, do email me in confidence at sameer.jain@activeallocator.com or call me on +1 312 498 1903, NY.
I explain our business in this short video.

 

ActiveAllocator Shelves Growth Plans to Preserve Status Quo

  • This week we have had to take the very difficult decision to put our growth plans on hold, while preserving what we have already painstakingly created. While nothing fundamental has changed in our business thesis, we have, like many other early stage firms, not been entirely immune to the effects of the coronacrisis.  Given the very high costs of ongoing data, technology infrastructure and talent needed to operate what we have built, we no longer have the funding and investment wherewithal to scale and invest in growth. We have had to part with some colleagues, while preserving the absolute minimum core team to sustain and resurrect when opportunity accords in the future.

  • Building and evolving a digital asset allocation platform with technology-enabled customized advice capabilities over four years has been a Herculean task. Our end to end system now includes an investments accounts aggregator, a securities to asset class mapper, a capital markets comparator, a preferences personalizer, a multi-asset optimizer and a trade executor. Over the years we have enhanced our technology infrastructure through proprietary methodology and data-sets to search, recognize, classify and instantly map more than four million traded and non-traded financial instruments to 50 asset sub-classes and optimize their allocation within portfolios. We now have simultaneous optimization capabilities across skills, market exposure, downside risk and illiquidity, scalable across +200,000 portfolios concurrently. We have also added specific country/ market asset allocation models, including customized adaptation for certain emerging markets. Over the years we have surpassed business development targets with around one billion dollars in total portfolio value analyzed, reallocated and monitored across affluent and ultra-high net worth investors. We have also increased market coverage as part of our global expansion. Our efforts have been met with industry & client recognition, over a dozen endorsements, and have been supported by a thoughtful and prestigious advisory board.

  • Our efforts in the months ahead will be directed to preserving the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. When we come out of this crisis we will continue to help investors analyze existing allocations, discover inefficiencies and create bespoke portfolios in minutes. In the days ahead we will continue to leverage our Wall Street experience and academic pedigree to provide unrivaled thought leadership to financial advisors, wealth managers, institutions and individual investors.

  • We thank our departing employees who have brought invaluable complementary asset and wealth management, investment banking and software development skills to our firm. We are grateful for their incredible hard work over the years and for their positive impact. We are also grateful to our product partners, complementary vendors who have enhanced our capabilities, clients, members of our board, supporters and so many others – for we have all created ActiveAllocator together.

 

Sameer Jain and Brian Jones

Cofounders of ActiveAllocator.com

 

 

 

 

 

 

 

Changes in Investment Management Industry to Create New Client Relationship Coverage Models

As  the investment, wealth and asset management industries navigate the fallout of coronacrisis they ought to be rethinking and reshaping their client coverage and distribution models. Here are my thoughts on how the investment management industry could protect and enhance client relationships, revenues and margins as well as adjust to a changing world.

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Our Latest Regional Equity Valuation Model Captures Coronacrisis Recovery Differences

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#ActiveAllocator develops state of art algorithms to capture different rates of coronacrisis recovery within countries and international equity markets. Here is the general design idea. We naturally also include multiple other proprietary dynamic factor drivers specific to coronavirus trackers, which are not shown here.

The objective is to rank the attractiveness of regional equity markets over a 12-month time frame

  • The ranks are based on a composite score
  • The composite score is a weighted average of individual ranks for various factors:
  • Valuation factors include Forward PE, PEG, Price to Book and Yield Gap
  • For each valuation factor we
    • Generate for each region a z-score (current level – 15 year historical average / standard deviation over that 15 year period) .
    • Rank the regions based on their z-scores, in other words based on how far the current valuation is from the historical norm (for most factors a low score ranks highest, but for Yield Gap a larger number ranks highest)
    • Momentum factors include earnings revision breadth and earnings revisions depth. Larger, positive numbers rank highest
    • Use different factors and different weights for developed markets and emerging markets

Anatomy of Ecuador Sovereign Debt Exchange Transaction

Download PDF:

Ecuador – 2000 Sovereign Debt Exchange Transaction Anatomy

 

Wall Street Journal, July 18, 2020 “ Funds Clash Over Deal on Ecuador “

To swap $18 billion bonds into new that pay lower interest with delayed maturity. Restructuring debt proposals create creditor – including Ashmore Group, BlackRock, T. Rowe Price, Contrarian Capital – differences in how different bonds are to be treated. New transactions being asked to linked to ESG goals.

  • Ecuador seeking to restructure debt during coronacrisis, and lower oil prices given new liquidity and debt sustainability challenges
  • Oil dependent economy heavily reliant on external credit where external interest payments are 10% of current external receipts
  • For history of Ecuador Debt Restructuring we recommend: Feibelman, A. (2017). Ecuador’s 2008–2009 Debt Restructuring. In J. Bohoslavsky & K. Raffer (Eds.), Sovereign Debt Crises: What Have We Learned? (pp. 48-64). Cambridge: Cambridge University Press. doi:10.1017/9781108227001.004
  • We examine here the  anatomy of  Ecuador Debt Exchange Transactions — 2000 , the first instance of default in Brady Bonds

Develop Policy for Risk Allocation for Infrastructure Investing

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I very much welcome the final regulations for the NEPA rules governing environmental approvals for infrastructure projects.  Now the environmental review process will no longer take 15 years, and will be approved or denied within two years. With 500 shovel ready projects we now need to ASAP get moving. An impediment is that we don’t have a nation wide consensus on project risk sharing between federal, state and local governments and the private sector. Simple issues such as deciding between contracting out, PPP or just outright privatization result in mind numbing debates and drag on. The Trump administration should tackle this heads on.

Asia Real Estate, Especially China, has Come a Long Way Since 2008

The Wall Street Journal today Friday, July 17, 2020  has an article “The $52 Trillion Bubble : China Grapples With Epic Property Boom”

Asian Real Estate markets have come a long long way over the last decade plus. I remember tracking them way back in 2008 when they were beginning to take off just around the time of the global financial crisis.

Here is my research note of 2008 for download :

Asia Real Estate – CAI_Journal_Summer2008

Is the Blank – Check SPAC an Investor Friendly Structure ?

The Wall Street Journal today July 14, 2020, B10 has a story “Blank-Check Route to Listing Gets Boost From Virus”. Having discussed the SPAC is some length in our previous research notes we explore if the SPAC is an investor friendly structure? We think it may well be, for reasons we describe here.

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Carl Icahn Case Study – VISX

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#ActiveAllocator Research – Companies are likely to become vulnerable to activist investors during the coronacrisis period. To explain transaction mechanics, activist hedge fund motives and criteria, we analyzed 15 Icahn transactions over the years. We present these in succinct case studies each day on our research blog.

Also, you can derive your own optimal portfolio allocation to activist and other hedge fund strategies on activeallocator.com.

Illustrative Timing of a SPAC Transaction – Multiplan Merges with Churchill Capital Corp. III in $ 11 billion Deal

Wall Street Journal July 13, Monday, 2020, B1 article ” Deal Takes Health Firm MultiPlan Public “. MultiPlan a healthcare services provider owned by  private equity firm Hellman  & Friedman is merging with a SPAC Churchill Capital Corp.III in $ 11 billion deal. We provide color on the mechanics and timeline for such transactions here.

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Strategic Asset Allocation Improvement and Superior Implementation

#ActiveAllocator Research Case Study – We successfully demonstrated to the world’s perhaps most sophisticated Government Investment Fund that our proposed changes to their strategic portfolio could increase annual returns by over 60 bps, while holding risk constant. That’s a non-trivial returns enhancement when you are speaking about hundreds of billions of dollars. Never underestimate the power of Strategic Asset Allocation done correctly.  We further demonstrated concrete steps to enhance their portfolio by approximately 40 bps as described here. Here is a snapshot of one such portfolio sleeve by way of illustration (NDA prohibits us from disclosing specifics).

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Recommended Changes in Strategic Asset Allocation Demonstrate Potential to Add Substantial Value

#ActiveAllocator Research Case Study – We successfully demonstrated to the world’s perhaps most sophisticated Government Investment Fund that our proposed changes to their strategic portfolio could increase annual returns by over 60 bps, while holding risk constant. That’s a non-trivial returns enhancement when you are speaking about hundreds of billions of dollars. Never underestimate the power of Strategic Asset Allocation done correctly. Here is a snapshot of one such portfolio sleeve by way of illustration (NDA prohibits us from disclosing specifics).

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