Reconstruction of 2007-08 Global Financial Crisis – European Banks


  •  What Happened?
  •  Mapping Markets Affected
  •  Everything Became Connected…
  •  Central Banks Response
  •  The Regulatory Toolbox
  •  Central Bank Policy Actions
  •  Big Bold Decisive UK Stimulus
  • Individual Country Response
  •  Eastern Europe Government Responses in 2008
  •  Effectiveness of Central Banks Response
  •  What Did it Mean for European Banks?
  •  Bank Liquidity and Funding
  •  Involuntary Asset Growth Led to Capital Constraints
  •  Impact of Write-downs on Capital
  •  Recapitalization– Reversing the Trend…
  •  Capital Ratios
  •  Led to Increase in Credit Provisioning in the US Followed by Europe
  •  Bear Stearns: Crisis of Confidence Risks a Spread to Europe
  •  What Unfolded Next?
  •  What Unfolded Next in Capital Markets?
  •  What Unfolded Next?: Stakeholders
  •  What Unfolded Next?: Business Models
  •  How Did European Banking System Recover After 2008?
  •  Longer Term Lessons

The Fed Should STOP buying MBS—

QE is the Federal Reserve buying long dated securities including MBS. The Fed pays the banks for these (and other long maturity securities such as Mortgage-Backed Securities ((MBS)) and Treasuries) and the payment is recorded as an accounting entry, by way of increasing the deposits banks hold with the Fed. The Fed pays the banks (sellers) a daily floating interest on this. This effectively means that by buying longer maturity Treasuries/MBS the Fed is reducing its long-term debt. Paying banks a daily rate of interest, which floats, is economic equivalent to issuing short term floating rate debt. So, if the Fed were a homeowner, this translates to the equivalent of a homeowner trading long term fixed rate mortgage (at very low rates) for (changing rates) short term floating rate mortgage. In the case of the Fed, it was around $ 40 billion/month.

Why is this not sensible?

First it does not make sense to replace very long-term low interest date with uncertain interest, daily priced, short term debt.

Second, it is not sensible for the Fed to buy mortgages when the housing market is booming. Few people own financial assets, especially MBS. So, purchasing financial assets helps just a few people for by buying MBS the Fed is propping up value.

Third, borrowing short to buy long term financial assets is both misguided and unsustainable in the long ter. The Fed should recognize inflation, problematic aspects of QE.

Musings on Entrepreneurship

VCs picks winners but the actual work of building companies is done by entrepreneurs. VC firms have become platforms that conceive, create, and launch companies. For companies to be formed we need many things ; an innovative breakthrough idea, managerial skills to initiate, build, execute, and grow. We need capital. And to ensure that product, pricing, and execution works. All of these come with huge uncertainty and lots of friction which makes success elusive. Some firms are creating platforms which raise their own funds and invest in their own seeded ideas, in their own innovation capacity, in attracting talent – the idea being all factors are co-deployed in pursuit of a risky idea which comes from same source. Critics say things are impossible, improbable, undesirable. But entrepreneurship is not for the faint of heart. What an entrepreneur needs is for everything to work after she has taken the plunge. To have capital, confidence, community to get to critical mass. Entrepreneurship is not about sequential incremental. One has an obligation to jump into the unknown. In typical companies, incremental advances happen given decision making is driven by always questioning and organized skepticism. For an entrepreneur who doesn’t have all the pieces together people will be skeptical. But herein lies the challenge. Since creating is about making something that does not already exist, since innovation is not connected to current reality people tasked with investing in it don’t quite know what to do with it. This creates natural resistance and a nay sayer attitude. It is always easy to say no than say yes. The riskiest of ideas begin with basic research, which when done right becomes enabling research and is followed by applied research. To encourage entrepreneurship to flower at large scale we need to be systematic in creating conditions which allow new things to happen. This needs the exercise of leadership, patience, money. The only way new breaking ideas will see the light of day is when we are willing to embrace unreasonable propositions, accept people who have potential, but we do not judge them solely by past success or failure. For it is only when we have major breaks-throughs does incrementalism stop, and extraordinary advances and leaps happen.

It is for these and many other reasons we need to encourage and protect leaps into the unknown, nurture a special culture, create systematic ways, and build on learning that comes with it. We in the U.S. are fortunate to live in a country that attracts immigrants who constantly refresh and reconstitute our culture. We have roots and a rich history. We have world class institutions, and a can do attitude that says anything’s possible. Our innovative ecosystem has emerged from a sequence of events over the past five decades. It cannot be constructed overnight and is hard to reproduce. The entrepreneurial mindset is one that is anchored in future rather than in the present. It has few boundaries and is willing to imagine anything. And in the third decade of this century with increased knowledge, multiple paths, new tools, digital transformation, abundant capital anything is possible. The future is limitless.

Factors Supporting Case for Investing in Agriculture

The increasing demand for food products from developing economies has triggered the need for rapid improvements in agricultural productivity all the way to final consumption. This creates a variety of investment opportunities in agriculture-related sectors in both the short and long run. The present food system cannot be defined as ‘sustainable’ (a sustainable system being one that ensures the present and future quality of all aspects of life). On the contrary it seems that current food consumption trends are moving very quickly in the opposite direction.

Structural and Cyclical Components Driving Oil Prices Volatility

The cyclical component of price is the delivery premium or discount determined largely by fluctuations in short-term fundamentals as captured by inventory levels. Long-dated prices have rarely moved, reflecting the relatively stable cost of bringing new supply into the market (marginal cost). Volatility in prices is driven by the cyclical component of price (demand changes).

Decline in Spare Crude Capacity and Gross Under-investment in Oil

Blaming it on OPEC is just an excuse.

Sentiment and policies that suppressed the Shale revolution exhausted spare capacity, and a multi-decade secular decline in old economy fossil fuels, and lack of storage together create conditions for oil price volatility in the U.S.

The data charted below speaks volumes!

And if we now increase imports I expect a larger global trade imbalance, which increases the supply of Dollars against other currencies, particularly the Euro, if oil prices rise further. This will affect other oil importing countries too. Although, with greater supply of the Dollar, theoretically a weakening in the Dollar should make Dollar denominated oil more affordable to consumers buying in other currencies, the empirical evidence shows no such relationship as the demand elasticities are extremely small and the volatility of oil price is usually four to five times that of the currency, completely overwhelming any currency effect.

Releasing Strategic Petroleum Reserves Will Not Reduce Oil Prices or Volatility

U.S. Department of Energy announced the release of 50 million barrels of crude oil from the Strategic Petroleum Reserve. Many other countries including India and China have followed suit.

This move, while good for political optics, is not going to solve the problem. In the chart below I show that it is a fundamental characteristic that (i) Commodities that are more difficult to store are more volatile and Oil ranks high up there; (ii) Over the years lower oil storage capacity has led to higher oil price volatility – the data speaketh !

Sovereign Wealth Funds U.A.E.’s ADIA, China’s CIC, Kuwait’s KIA, Qatar’s QIA, Saudi’s PIF Are Providers of Dumb Money- Zero Value Add to Governance, Corporate Actions, ESG, Shareholder Proposals to U.S. Companies—-

I have been examining the proxy voting and engagement policies and practices of SWFs and am particularly concerned with U.A.E ADIA, China CIC, Kuwait KIA, Qatar QIA & Saudi PIF . I tend to think of their capital as dumb money, for despite their often-significant equity stakes and associated voting power, they bring zero value add to matters related to governance, corporate actions, ESG and shareholder proposals to U.S. companies.

These SWFs no doubt hold huge amounts of U.S. equity through funds, indexed vehicles, private placements but tend to act as passive investors in U.S. equity markets. This is not necessarily a good thing. These SWFs do not publish data on their proxy votes, have no published proxy voting guidelines, do not report on their private engagement with management, don’t take board seats. Treading carefully the intersect of politics and finance, to clear of controversy, they often do not vote, do not file 13 Fs and have little economic incentive to engage in shareholder activism – and are therefore derelict in contributing to improving corporate governance. They avoid the costs of engagement and are free riders on others who exercise activist governance. They are bad stewards of corporate governance and shareholder rights, have little to say on child labor, risk management, climate change, board competence, exec compensation. These funds do not clearly explain their true objectives and relationship with citizens, little is known about their internal governance and decision-making process, their internal operations and how exactly do they implement their investment strategies or performance, AUM risk profile etc. They keep their holding below thresholds that trigger tax liability. To avoid headline risk they make use of CFIUS safe harbor provisions. More crucial given their inert holdings they take up a seat which could belong to vigilant engaged shareholders which exercise control over company boards and reign in principal agency problems. In short, their behavior is very different from responsible large investment funds, such as pension funds, endowment funds, or mutual funds.

The Santiago Principles GAPP 21 addresses participation in corporate governance to the extent it recommends return maximization, commercial, non-strategic investing but is largely silent on specifics. It is of little help. Only Norway’s Government Pension Fund Global and Singapore’s Temasek Holdings meet standards expected. Their process is designed to improve transparency and enable fund shareholders to monitor their funds’ involvement in the governance activities of portfolio companies.

We need legislation and rules that require SWFs report their proxy votes. These funds do have voting power when they have the ability to vote the security, including the ability to determine whether to vote the security at all, or to recall a loaned security before a vote. Not voting too is a form of voting after all!

Insurance Sector and Climate-Related Financial Risks: Unholy Nexus Between Private Equity & Insurance Industry Exacerbates Climate Risk Impacts

The $5 trillion insurance industry finances (insurance premiums are being used to fund climate damaging investments) and in turn is exposed to, risks from climate change. Insurance firms are exposed to climate risks in their underwriting and investments in physical properties, in fossil fuel projects, in emissions intensive industries and projects as well as in multiple other areas. Given low yields on junk bonds, to meet liability obligations it is increasingly teaming up with private equity which finance dirty high emission projects.  The insurance industry and banks are big investors in companies that contribute to climate change. They are now a significant portion of Blackstone’s assets for which it even has a dedicated Blackstone Insurance Solutions group. To earn the float, many firms have been acquiring insurance companies e.g., KKR – Global Atlantic,  Carlyle Group – Fortitude Re, Apollo Global Management – Athene Holding, Blackstone managing parts of AIG portfolios etc. Private equity investments are opaque and long term, and little is known about their private fossil fuel assets financed by insurance money.  

Also, since rating agencies have woefully categorized climate impacts on portfolios many insurance firms are grossly under capitalized against potential future climate related losses. There is very little data from insurers on property claims payouts, claim rates, premium rate increases, rates of non-renewals, claims denial, and systematic regional exits of property insurance markets in climate-impacted areas.

I recommend that insurance companies now beef up their capital structures, optimize their capital and most importantly adjust for potential liabilities. 

How Can Insurance Firms Optimize Required Capital – Asset Risk

ActiveAllocator Research Insights: How Can Insurance Firms Optimize Required Capital – Asset Risk

Using economic capital measures determined for each business and investment category firms can optimize (minimize) their required capital given the firm’s return targets

-Business units (lines of business) that have higher capital requirements with lower return expectations can be reduced or managed for higher returns, e.g., through higher premium rates

-Business units that have higher returns on capital (based upon either lower capital requirements or higher returns) can be targeted for growth using capital released by lower returning businesses

-Investments can similarly be optimized to maximize returns given required capital

Optimizing Insurance Company Capital Needs to Be Ongoing Process

Insurance companies need capital to absorb losses from expected events, unexpected but foreseeable events and unexpected unforeseen events in order to meet their obligations to policyholders and other stakeholders

Insurers protect their policyholders from financial losses associated with risk, including:

Insurance risk – property damage, bodily injury, legal liability, early death, disability, illness and longevity
Volatility risk – the volatility of financial markets and/or the incidence of insurance risk – i.e.,, the unexpected occurrence of foreseeable loss events

Capital Management Involves Four Basic Steps:

Determining Required Capital – how much capital does the company need to survive the risks it has assumed at a selected probability
Optimizing Required Capital – minimize the capital needed to absorb those risks
Funding Required Capital at Optimal Cost – obtain capital at the lowest effective cost to owners
Maintaining Financial Flexibility for Foreseen and Unforeseen Events – have a margin for error that provides the company:
Incremental capital for error in its risk models
Capacity to raise additional capital at reasonable terms when needed

Contingent Hybrid Surplus Note Structure

Insurers are exposed to event risk from a variety of causes:

—Natural Catastrophes – Tornado, hurricane, flood, earthquake, conflagration

—Investment Market Disruptions – credit losses, “flights to quality”, equity market declines, real estate values decline

—Pandemic – death claims, morbidity losses, investment losses, operations risk

 Historically, many insurance companies have responded to such events by raising equity capital after the event – at depressed prices

—None anticipated the specific triggering event, but all recognized the potential for tail events

—All were required to raise capital at highly depressed values in order to survive.

—Many insurers have had to raise equity at depressed values to maintain ratings or even solvency

  —Contingent Capital can provide guaranteed access to capital at a pre-determined price when most needed

Why is KKR and Global Infrastructure Partners buying CyrusOne (CONE) in a $15 billion deal?

CyrusOne provides mission-critical data center facilities for approximately 1000 customers. Over the last five years revenue has grown annually by 20%, earnings every year by 20%, and funds from operation too have grown by almost 12% annually . They have a strong presence in US markets where they have created a national footprint & they’ve also gone into Europe. They received an investment grade rating on their debt and the long-term outlook is pretty good – largely because one expects the usage of data to grow, the trend towards enterprise outsourcing, increased reliance on technology, as well as newer things are happening such as data hungry artificial intelligence and in the future the arrival of autonomous vehicles. Most enterprises are now outsourcing their  data centers – it is expected that almost 80% of enterprises will have shut down the traditional data centers by 2025. There is a lot of reliance now on technology and e-commerce, on remote work, in collaboration platforms, technologies such as video over Internet are mainstream, growth in mobile traffic and connected devices all of which drive a lot more consumption of data.

They have a high-quality portfolio of primarily owned assets and most of their customers are in the fortune 1000. In Europe they have a presence across most key markets. They’ve exhibited development and operational expertise and have a good track record. While it is true, they have scaled but they’re not huge – still small enough to generate meaningful growth. With investment grade risk and a customer centric focus they are going to be well-positioned for profitable growth in coming years. The portfolio of assets is good : almost 92% of their operating income comes from the assets that they own, 80% of their customers are in Fortune 1000, and the average credit rating of their large customers is almost 80%. Their leases have rent escalation clauses, the weighted remaining lease term is over four years . When it comes to Europe they have an attractive set of assets across key markets with an emphasis on Frankfort and London. Importantly they have a new data center in the portfolio and long standing relationship with the fast growing customers . With a track record of on time delivery, they also have capacity to significant increase their footprint to support  growth in short time. They have capacity and access to land across key markets to support growth. All this is expected to produce attractive equity for they have access to capital which is critical in a capital intensive business to ensure continued growth, especially where there is market volatility. What speaks volumes is that their customers have entrusted them with mission critical assets,  partnered with them they’re going to grow with them.


This said, there are certain things one needs to look out for. For example, demand is concentrated with large customers which is a disproportionate part of their portfolio. They therefore need to diversify this portfolio and execute long-term leases. Another issue of concern is prices in this segment have continue to decrease so they do need to build efficiencies to protect returns against pricing decrease. And of course they are development challenges that come from resource scarcity, local regulations and public sentiment – so they will have to be very deeply local to secure line, water, power permits and leverage their global platform for environmental, safety and regulatory, considerations. They will need to secure long-term capacity pipelines in markets that are going to grow, so this injection of capital will help them to continue to invest in global digital gateway markets to support growth. They ought to emphasize their development and operational expertise story, maintain their strong balance sheet, strive for low cost of capital and grow their funds from operations.

Equity and Equity-Linked Financing Alternatives in 2022

Hybrid capital securities are non-dilutive fixed income instruments that incorporate equity-like features such as: subordination, interest deferral , long-dated tenor. They have many advantages:

Rating Agency Equity Credit
Tax-Deductible Periodic Payments
Broad Market Access

Zero Debt REITs?

The ability to arrive at an optimum capital structure can be source of significant differentiator.

Conundrum: Since REITs do not benefit from interest tax shield the question is why have any debt at all? Spread between low cost financing and acquisition at high cap rates do increase earnings, but that also makes the REIT riskier , raises the cost of distress. The enterprise value of the REIT cannot change by taking on cheaper debt, so why take it? More debt also reduces flexibility to invest more opportunistically when property values fall etc. Having a zero debt REIT can be a very unique differentiator.

Public to Private Equity Transaction Considerations & Process

This month I reflected on the many public to private equity transactions I worked on over the last 20 years and gleaned some lessons. I collated the gestalt of my take-aways into a deck. The essential issues to wrap one’s hands around include:

Going Private Considerations; Should Companies Go Private?; Is a Company Better Off Being Private?; Going Private Considerations; Board Considerations; Director Responsibilities; Board Considerations;  Pre-Signing vs. Post-Signing Market Check; Going Private Transactions; Going Private Transaction Process Alternatives; Transaction Timing Alternatives; Role of the Special Committee in Negotiated Transaction; Special Committee Obligations in Negotiated Transactions; Leverage Considerations for Going Private Transaction; Comparable Credit Analysis; Indicative Timeline; Legal and Governance Considerations

Consortium or Club Private Equity Deals

Why Am I Ok With Consortium or Club Private Equity Deals?

Some Limited Partners are averse to club deals for it concentrates deal risk for them. However, I see many advantages to such arrangements, especially during mega multi billion $ transactions. We see around 20-25 such deals a year, and whilst not the norm, they do occur. These do bring up unique consortium dynamics, which I will separately touch upon.


‘Hostile’ M&A Escalation Decision Tree

‘Hostile’ M&A Public Escalation Analytical Framework–
I have participated in as well as examined over three dozen M&A’s over the years. What I find is an absence of a common analytical framework applicable across historical experiences of the United Kingdom, the United States, and Japan. Much has to do with differences in takeover regulation I suspect. Still, distilling my experience, I have attempted to create a general approach applicable to the public escalation phase. I present this below.