just in in-tray, notes on an off-the-record conversation between mr a and mr b
Canary Wharf
- Lehman is currently leasing 2 million square feet
- Landlord had a 5-year lease @$160 psf / year. Insurer of lease was AIG!
For his money, he instructed in May all companies he invested in NOT to leave money in Money Market Accounts. They were instructed to deposit monies in US Treasuries along with two corporate names – Amex and General Electric.
He noted that in 2007, some $10 Trillion in newly issued debt had been rated AAA.
He thought that no financial institution should have a AAA rating if they were 10X leveraged, as most are (or more). No rating agency would ever give an Industrial Corporation a AAA rating with only 5X leverage. No rationale as to the dichotomy.
Transaction costs are underestimated by many in regards to foreclosures. They can easily reach 25% of purchase price as many being evicted purposefully damage homes before leaving. Many are being paid “earnest money” to simply not damage the home upon leaving.
Mortgage lending is not a good business.
- Borrowers have a “free put” to close the loan. Thus, when interest rates go up, few mortgages get refinanced. When interest rates go down, a large majority get refinanced. Each case puts the lender at a disadvantage.
The US Government should not buy the $700 Billion in Toxic Bonds but rather buy $700 Billion in US homes. Value of bonds will continue to go down as long as the underlying security goes down in price – namely the homes the mortgages are tied to. If the value of homes continues to drop, $700 Billion isn’t nearly enough.
Noted that Goldman pushed out their borrowing duration to 1-year. Unprecedented for an Investment Bank. Still have a mismatch as the average duration of their Assets is 6 years.
He thinks that US Senators are much smarter and more sophisticated about the US Economy and Financial system than they were 25 years ago.
Strongly recommended reading the book, “The Banker’s Life” by George Moore – former CEO of Citibank who preceded Walt Wriston. (1959-1967).
Noted the value of debt on a company rather than simply on an asset by using an anecdote regarding Lockheed Martin in 1966. He suggested that you be a Board Member in 1966 and that you had to propose how to bankrupt the company within 5 years. What to do?
1 – Build primary factory on top of an earthquake fault (earthquake occurred in 1971).
2 – Build planes that can only use Rolls Royce engines. (RR declared bankruptcy in 1971).
3 – Lose money on multiple projects.
4 – Borrow Short Term
5 – Pay out massive dividends.
6 – Make employees hate you.
By 1971, Lockeed had done all of these things and by that time, the debt was trading at 15 cents on the dollar but didn’t go bankrupt. Why? It was in no one’s interest to see the company go under. (unions, govt., shareholders, etc.). Thus, the debt of the company was worth more than on a mere underlying asset due to vested interests. Lockheed recovered and paid down all its debt in subsequent years.
HEALTH CARE
Obesity is the #1 killer in the US.
Obesity costs are $1 Trillion.
Obesity leads to:
1. 30-50% increase in the probability of getting cancer.
2. Increases odds of having to have an amputation by 1300 times!
41% of Women in the US are not fat but obese.
6% of French women are obese and 1% of Chinese are obese.
This is one of the reasons why health care costs are so much higher in the US.
1 in 80 men in the US weighs over 300 pounds.
Health costs of an obese person are 4 times higher than that of a person that smokes.
1993 – End of the Pharmaceutical Industry as we know it.
- Clinton introduced regulation of rate of return.
- Stock prices plummeted by 40-50%
- Companies no longer incentivized to do Research and Development.
- Companies stopped focusing on R&D and started focusing on Marketing.
- Research costs in India are 20-30% of the US and can be developed in half the time.
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