Posts Tagged ‘Goldman Sachs’

Interview with H.E. Ambassador Liu Xiaoming

June 12, 2013 1 comment

First published on BBeyond Magazine February 2013. (Download PDF)

BBeyond Magazine Feb 2013_Page_1

Book Review: My Life as a Quant: Reflections on Physics and Finance

December 11, 2011 2 comments

Written by Emanuel Derman – physicist and ex-Goldman quant – the book combines my love for physics and finance and is one of the best books I’ve read in a long time. The first half of the book covers his life as a physicist at Columbia, Oxford, and Bell Labs. He talks about various luminaries and Nobel Prize winners he worked with or came across during his first reincarnation as a physicist. The book is excellent for those interested in physics and in search of the ultimate ‘truth’.

Emanuel Derman was head of Quantitative Strategies at Goldman and also spent time at the now infamous Salomon Brothers. He describes his work with Fisher Black (yup, THE Fisher Black of the Black-Scholes model) at Goldman and the famed John Meriwether’s bond arb group at Salomon.

The first half of the book is physics heavy whilst the second half focuses on one of the most interesting times in finance, where academics emigrated into Wall Street as quants in the 80s. As an armchair physicist, and currently working in finance, I thoroughly enjoyed this book.

I particularly like the part where he wrote:

“I began to believe it was possible to apply the methods of physics successfully to economics and finance, perhaps even to build a grand unified theory of securities.

After twenty years on Wall Street I’m a disbeliever. The similarity of physics and finance lies more in their syntax than their semantics. In physics you’re playing against God, and He doesn’t change His laws very often. In finance you’re playing against God’s creatures, agents who value assets based on their ephemeral opinions. The truth therefore is that there is no grand unified theory of everything in finance. There are only models of specific things.”

Perhaps he is my role model – finance is means to an end, not the end.

Derman is currently Professor at Columbia University and Director of its Financial Engineering Program



Zynga IPO to raise $1 billion dollars

December 4, 2011 Leave a comment

Games maker Zynga is hoping to raise $1 billion in tough market conditions with an IPO price of $8.50-$10 – giving it a valuation of $7 billion.  Zynga is offfering 14% of its float or 100 million shares, which is higher than most tech companies.

Lead underwriters Morgan Stanley and Goldman Sachs have an additional option to sell 15 million shares. Like Groupon and LNKD, I expect downward pressure on the price when the cost of shorting becomes feasible. If you are one of the lucky few who got in early through private placement it may be time to cash out!

It’s worth noting that a fund raising in February this year valued the company at $10 billion.

I cannot for the life of me understand why any ‘ethical’ investor would invest in a company that generates the bulk of its profits from the sale of virtual goods. (We are NOT talking e-commerce here.) Does it play a socially benefiting role?? We need more clean tech or bio tech!!! Game makers like Rockstar, which makes the highly successful Grand Theft Auto series, actually make money from selling games! Virtual goods are on another level!  How productive?

Retail investors should ask themselves: “Can I live in my virtual farm in Farmville when Fannie Mae repossess my home??!?”

For a copy of their IPO prospectus click on the link below:

Zynga IPO Roadshow Prospectus


Zynga IPO Roadshow Prospectus

If Hedge Funds are the good child of Capitalism, are Banking Institutions their Evil Twin?

July 12, 2011 42 comments

First published on BBeyond Magazine blog – an ultra niche publisher that caters exclusively for the global UNHW market and community:

Give me control of a nation’s money supply, and I care not who makes its laws.

– Mayer Amschel Rothschild

Post-credit crisis, the spotlight was already trained on large ‘unregulated’ investment vehicles. Then we had the Bernie Madoff ponzi scandal. This was followed closely by one of the largest insider trading cases worthy of a Hollywood script – the Raj Rajaratnam Galleon case, which snared senior management from some of the most prestigious Wall Street and consultancy firms.

Main Street was hit with a triple whammy – reeling from the fact that taxpayers’ money is being used to bail out banks that took on too much risk, against a backdrop of the steepest recession since the Great Depression of the 1930s, which was further exacerbated by the unpopular war on two fronts. Obama said he did not run for president to bail out a bunch of fat cat bankers. A witch-hunt was inevitable.

The opaque nature of the hedge fund industry proved an easy target. In theory, hedge funds are just capitalist. They will tear a firm down if it makes money and build it back up if it makes even more. Capitalism at its very best – hedge funds help allocate capital more efficiently by punishing inefficient firms (through short-selling) and rewarding the well-managed ones (by purchasing their stocks). As part of a group of international private investors with a sizeable war chest measuring hundreds of billions, hedge funds can significantly affect global markets and the economies of nations. As such, hedge fund failures are often well documented as their strategies are laid bare for the ensuing media scrutiny.

Long Term Capital Management’s spectacular implosion destroyed $4.6 billion. Most of it belonged to the firm’s partners. Despite its trillion dollar off-balance sheet derivative positions (due to leverage), no taxpayers’ money was used to bail them out. Subsequent academic studies noted that the Fed’s intervention, despite its good intentions, was misguided and unnecessary as it set precedence for regulating hedge fund activity. The Fed may have helped shareholders and managers of LTCM to get a better deal than they would have otherwise obtained in a rescue effort that involved a consortium of Wall Street and international banks.

When Amaranth blew up in a $6 billon bet on natural gas that went bad, another hedge fund, Citadel, stepped in and took over Amaranth’s books. This time, the markets barely flinched. As Sebastian Mallaby, author of More Money than God, puts it: “hedge funds can be a fire-starter as well as a fire-fighter”.

The global financial system and banking institutions are so intertwined that recent events have shown some banks are clearly too big to fail. Hedge funds, on the other hand, are generally small enough to fail. When hedge funds blow up, taxpayers do not foot the bill. The same cannot be said for banking institutions.

During the recent credit crisis triggered by the bursting of the US housing bubble, two of the most hallowed investment banks on Wall Street converted to bank holding companies to take advantage of a lifeline from the Fed. The rest either went bankrupt, got taken over or got bailed out. Beyond the euphemisms, firms like Citigroup, JP Morgan, Wells Fargo, Bank of America, Goldman Sachs, Merill Lynch, and Morgan Stanley were bailed out by the American taxpayers through the Troubled Assets Relief Program (TARP).  In the UK, the Royal Bank of Scotland and Northern Rock ran into the arms of the British government. Northern Rock became the first bank in 150 years to suffer a bank run. Images of the public queuing up to withdraw their money from the branches were plastered on national newspapers and will forever be seared in the minds of Northern Rock’s customers.

Whilst Hedge Funds and Banking Institutions can both be guilty of gambling with OPM (other people’s money), the hedge fund captain is more likely to go down with the ship. Hedge funds go to great lengths to justify their management and performance fees in order to align their interest with that of their investors. Fund partners often (though not always) have a significant proportion of their personal wealth invested in their own funds. In banking, on the other hand, there is a clear dislocation between management incentives and accountability. With the benefit of hindsight, incredulously, the system is essentially rigged to encourage excessive risk taking. Couple that with deregulation and the repeal of the Glass-Steagall Act and we have ourselves a recipe for disaster. History has shown that given enough rope, some of us have a tendency to hang ourselves. The problem then arises when ‘some of us’ (that may hang ourselves i.e. banks) happen to possess enormous financial power by virtue of their control of other people’s money.

The recent credit crisis may have provided ammunition to opponents of the laissez-faire approach to managing economies. One of the basic tenets of the free-market capitalist approach is that firms should be allowed to fail. Like Social Darwinism, only the strong survive and the weak die out. On the other hand, ideas of socialism, while appealing, begin a slippery slope down into communism. The problem with capitalism is the inherent disparity of wealth that creates fault lines between the ‘haves and the have nots’. The problem with socialism is that it undoubtedly leads to ‘free riding and slacking’, or as Margaret Thatcher once said: “The problem with socialism is that eventually you run out of other people’s money [to spend]”. Recent financial events have drawn parallels with a common joke that begins:

A beautiful and shallow woman said to an intelligent and ugly man: “We should get married, so our children will be as beautiful as me and as smart as you”. The man replied: “What if our children turn out to be dumb like you and ugly like me?”

This worst of both worlds approach seems to caricaturize the recent tumultuous events of our financial markets post-2007. When we have ‘too big to fail’ in a supposedly capitalistic economy, we end up with the problems of capitalism (huge disparity of wealth) AND the problems of socialism (spending other people’s money) BUT with NONE of their benefits.

Thomas Jefferson, principal author of the Declaration of Independence and Founding Father of the United States of America, the last bastion of free-market capitalism once said that “banking institutions are more dangerous to our liberties than standing armies”.

What about hedge funds that take on excessive risk through high leverage and speculation? Hedge fund luminary George Soros is infamous for being “the Man Who Broke the Bank of England” when his currency trade forced the United Kingdom out of the Exchange Rate Mechanism (a precursor to the Euro). He netted $1bn by betting on the devaluation of the pound sterling in 1992. The total cost to British taxpayers by the botched attempt to prop up the pound was put at $6.1bn (£3.3bn). Subsequent information obtained through the Freedom of Information Act noted that “if the British government had maintained $24bn foreign currency reserves and the pound had fallen by the same amount, the UK would have made a £2.4bn profit on sterling’s devaluation”.

During the 1997 Asian financial crisis, former Malaysian prime minister Dr Mahatir Mohamad publicly criticized Soros as an ‘immoral financial speculator’ while Soros described Mahatir as a ‘menace to his country’ (Mahatir later accepted that Soros was not responsible for the 1997 Asian Financial Crisis). The crisis started in Thailand when the Thai baht collapsed. Thailand had already acquired a burden of foreign debt that effectively made the country bankrupt before the collapse of its currency. Soros defended his actions by saying “speculation could benefit poor societies if it serves as a signal, not a sledgehammer”. It is worth noting that Soros held back from an all-out attack on the Thai baht. In 1992, Soros sold $10bn worth of sterling at around 2.5x the firm’s capital. The $2bn Thai trade was only one-fifth of the firm’s capital. An all-out attack would have precipitated a crisis rather than encourage the Thai government to avoid one.

In the wake of the Thai baht devaluation, Soros funds gained about $750m whilst Thailand’s economic output plunged 17% and millions fell into poverty. Hedge funds were inevitably vilified. But in a larger context, the roots of the crisis stretched back several years where ‘hot money’ pushed the Thai economy into bubble territory. The Soros team had indeed led the short selling but the actions of hedge funds were in part vindicated when the crisis spilled over to other Asian countries that engaged in ‘crony capitalism’ like Indonesia and Malaysia. What is not usually cited is the fact that Soros lost $800m buying the rupiah as he wrongly believed the turmoil in Thailand had spilled over to neighboring Indonesia without justification. This essentially wiped out all the gains he made in Thailand.  President Suharto and his cronies who controlled Indonesia’s banks drove the country to a crisis, which resulted in his own downfall. Hedge funds may have triggered the avalanche, but it was the government officials who allowed snow to build up to such dangerous levels in the first place.

Hedge funds reap the rewards when they are right and pay the price when they are wrong. Banks reap the rewards when they are right but taxpayers pay the price when they (banks) are wrong. This case of ‘heads I win, tails you lose’ has played a key role in precipitating the recent capricious events resulting from the credit crunch.


Facebook’s $ 50 billion dollar question

January 18, 2011 6 comments

I posted an offhanded remark on a Wall Street Journal article regarding the Goldman Sachs – Facebook deal and it received a lot of recommendations. As such I am reposting it on my blog.

When a firm gets to a certain critical mass, governments take interest. If the SEC is not doing something about it, rest assured the EU is waiting. We’ve seen Bill Gates take on the government and lose, the same with Google. Now it is Facebook’s turn.

Facebook is doing a much better job as repository of data and information on citizens than governments who traditionally held that role. The Head of FBI knocks on Zuckerberg’s door because Facebook’s database is better than the FBI’s. Think about it, we have this little booklet called a passport and when we travel we get little stamps on them at certain checkpoints in a country. This will prove where you’ve been. Facebook not only knows where you’ve been, it has pictures of you and your friends, what you did, what your thoughts were at that moment. Those of you who have used ‘Facebook Places’ will know that Facebook even has up to date information on your location, your status update, and possibly what you are thinking of doing next. This information is stored ‘forever’ and can be accessed at the speed of light! And the beauty of it all – it knows this information because YOU uploaded it!

I can easily see $100 billion valuation within 36 months; it is in a blue ocean in terms of growth potential. Remember, buy the rumour, sell the fact.

Being the last of Generation Y (same age group as Zuckerberg), we are one of the last generations who remember life before the Internet. And as a full Web 2.0 generation, I know of a simple litmus test that can justify the $50 billion valuation right now. How much time do I spend on Google? An awful lot; it is indispensable. How much time do I spend on Facebook? Answer: a lot more time than I spend on Google. Not because I have to, but because I want to. It may not say much about my generation, but it says a lot about ‘Facebook Effect’.

On a side note, Goldman Sachs went down one notch in my book. They are no longer the smartest guy in the room considering how they handled the Facebook deal. GS is blaming investors for the leak and investors are blaming GS for the leak. It is ironic that GS did not see it coming. After all, Facebook and Zuckerberg’s mantra is about empowering people and encouraging us to SHARE information…

With regards to their current sky-high valuation of $50 billion and stratospheric price-to-earnings ratio, consider this – before Facebook came along, Google was the number one advertising firm in the world. That’s right, it is Google, not some Madison Avenue firm. Google’s genius in terms of monetisation was its ability to sell adverts based upon our search query. It had the critical mass and it was the largest search engine. Advertisers pay a premium to ensure that their adverts reach their targeted demographics. Google’s analytics can provide pretty accurate information about its user even though most of it is guesswork. Over time, Google built a database of its users’ surfing habits and tailored the adverts accordingly. Therefore, advertisers continue to pay a premium for this.

Now consider Facebook. Facebook knows exactly who you are, your age, your background, the school you went to, your music taste, your likes and dislikes, your interest groups, even your vocabulary and etc. How? Because you TOLD it. Unlike Google there is no guesswork involved. This is an advertiser’s dream! If you wanted to advertise only to women in Timbaktu between the age of 23 to 55 who herd goats, supports Obama and listen to Metallica – technically, you can.

So in terms of Facebook’s ability to grow and monetise this, if the past is any indication of the future and Google became what it is now primarily through ad revenues, then there is no reason why Facebook cannot hit $100b within the next 36 months. Facebook has already overtaken Google as the most visited site in the US. Only three years ago, who would have thought Facebook would hit every important milestone faster than Google?

When the Web arrived in the early 1990s, it went mainstream. The number of people on the Internet exploded, from 2.6 million in 1990 to 385 million in 2000. Facebook went from nil to 600 million users in about half that time…

More than a year ago I wrote a post on Facebook. Everything I said has come to pass. Remember when Zuckerberg turned down $1 billion from Yahoo, everyone said he was crazy. When it was valued at $10 billion by Microsoft, everyone said MSFT grossly overpaid. When it was valued at $25 billion by Russians everyone said the same thing – overpriced!. Now at $50 billion everyone is saying the same thing AGAIN, yet investors are throwing money at it like there is no tomorrow. My guess is when it hits $100 billion everyone will still be saying the same thing.

Remember the cardinal rule of Wall Street: Buy the rumour, sell the fact

See also:

UPDATE: Two months after this blog post was first published, Secondmarket valuation of Facebook exceeds $70 billion (so much for 36 months.)

Update: On Facebook IPO with a $100 bn valuation my ‘call’ proved to be true. I shorted Facebook, got filled at 41!!, took profits at 38, thinking Morgan Stanley would support the IPO price. They didn’t and it crashed without me. I shorted again in low 30s, held it all the way to 18. When asked when I would stop shorting Facebook, I replied 17-18, which really meant that is when I am taking profits. This again came true. I think FB really should be 12-15; investors are unwilling to cut their losses so it will take time to get there. It will be volatile, but in the low double digits is where I peg FB (as of Aug 2012). However, due to margin of safety, I won’t short above 20 and this was my trade of the year… everything worked to plan. If only I had a way of getting in early, I would have rode it all the way up and shorted it all the way down…

%d bloggers like this: