30 Jul

Posted at 12:20h in Credit Spectrum

ABSTRACT: Sylvain Raynes experimented with a method developed by Goya and Boyarski (1993) to standardize the synthesis of conditional Markov transition matrices for deal entry in our automated re-rating system, ABSTRAK®. In the analytical literature, the reverse-engineering of a Markov matrix from its spectral-radius eigenvector is referred to as the Inverse Perron-Frobenius...

10 Jun

Posted at 11:24h in Credit Spectrum
Over the last few weeks, much ink has been spilled in an attempt to refute, undermine and marginalize the book “Capital in the 21st Century” by Thomas Piketty, a French economist. In some, unsurprisingly British quarters it has even reached the level of “the lady doth protest too much, methinks.” You cannot convince people of your viewpoint by just silencing the opposition. It’s a safe bet that, had a British economist said the same things or reached similar conclusions, no British institution would have attacked him so publicly. But who knows, perhaps “Le Monde” would have done so with gusto and joie de vivre! It’s clear that the Financial Times is not a proper forum to argue about economic time-series with any seriousness. Although one can find fault with the Mona Lisa, doing so does not take anything away from its value as a work of art.

15 Mar

Posted at 14:30h in Credit Spectrum
Historical Preamble Around April of 1915, the Western Allies of WWI embarked on a campaign that would quickly turn into one of the costliest mistakes in modern warfare: the Battle of Gallipoli. This fiasco was largely motivated by a legitimate desire on the part of the Western Powers to resupply their ally Russia, as always cut off from the main European theater. Under the leadership of (First Lord of the Admiralty) Winston Churchill, the Allies decided to attack the Gallipoli peninsula on the edge of the Aegean Sea with some of the less capable warships in the British Navy’s then considerable arsenal. However, when combined Anglo-French naval forces proved unable to break through Ottoman defenses lining the Dardanelles, land forces were called in, ultimately with catastrophic results in terms of both material and human losses. This was carnage of hitherto unseen magnitude, whereby casualty rates routinely hovered around 90% on the Allied side. It was also the series of engagements via which Mustafa Kemal, himself a commander at Gallipoli, emerged decisively as the undisputed leader of modern Turkey, and during which he gave what is arguably the most celebrated order in military history: “I do not order you to fight. I order you to die.”

19 Feb

Posted at 15:22h in Credit Spectrum
Introduction Have you followed the strange fate of the $14.8 BN merger involving ALCATEL, the French telecommunication conglomerate, and ATT's now-defunct spin-off, Lucent Technologies Inc.? That mythical transaction, which has been shedding red ink ever since it closed, was consummated on December 1, 2006, and with much fanfare, we might add. At last, ALCATEL had a pied ä terre in the USA. What could be better than this? Actually, bankruptcy would have been better. While the deal was effectively a take-over of Lucent by the French giant, it turned out, most likely for political reasons, that the former CEO of Lucent Technologies, the American Patricia Russo, was duly nominated as the first post-merger CEO. She did not last too long, as was to be expected from someone attempting to run a quintessentially French company-cum-government bureaucracy who doesn't speak French. The last happy day for shareholders of the “new” ALCATEL was the day the deal closed. Meanwhile, former Lucent shareholders have been ecstatic ever since. The smartest guy in the room was probably the ALCATEL CEO Serge Tchuruk, who bowed out gracefully after the deal was sealed. He has been thanking God ever since that he wasn't around to see so much value destroyed so quickly, by so few people, without a single shot being fired. During the last quarter of 2012, led by the Dutchman Ben Verwaayen, the company wrote off another $1.9 BN, bringing total write-offs post-merger to a staggering $16 BN. Frankly, weapons of mass destruction couldn’t do any more damage.

21 Dec

Posted at 10:16h in NRSRO
Widespread confusion appears to exist among the investing public as to the potential distinction between ratings and valuations. Are they the same? If not, how exactly are they different, and is one more “useful” than the other as a financial measure? Even the SEC is now confused, something quite surprising in light of the fact that they are supposedly regulating rating agencies. Given the importance of this practical distinction, it’s worth spending a few minutes dispelling rumors, lies and innuendos. At a fundamental level, both ideas are identical and the issue of their supposed kinship or difference makes no sense at all. It is equivalent to asking about the difference between degrees Fahrenheit and degrees Centigrade: both are temperature-measurement systems. The only difference is that one system is used in America while the other one is used in Europe and elsewhere. (Should we call this “l’exception Américaine?”) If someone now living in Paris suddenly woke up in New York, confusion would reign only until he learned the new system, which would take less than a day, or even faster if he headed to the beach when the thermometer read “30 degrees.” The point is that a self-consistent system is always usable but only makes sense within its own context. No harm will be done by using either system as long as it is used appropriately. Since a simple transformation function exists between them, any confusion on the part of a user can be cleared up immediately with a mapping function.

11 Dec

Posted at 13:27h in Credit Spectrum
Our title is but a thinly veiled allusion to the hero of the namesake novel [Герой нашего времени] by the illustrious Russian novelist and poet Mikhail Lermontov who, on the death of the legendary Alexander Pushkin, assumed the role of Russia’s leading poet. The hero in question (Pechorin) is not the kind of heart-throbbing, virile, impeccable stud personified by a fictitious character, like James Bond. On the contrary, Pechorin is a deeply flawed, some would even say amoral, man. It may surprise you that the quintessential hero of 19th Century Russian literature is not someone we would want as Santa Claus.

11 Dec

Posted at 13:15h in Credit Spectrum
When an airplane crashes, people always die, which is not normally the case when a car crashes. Compare these outcomes to what happens when a structured deal crashes, a now unremarkable event during which no one has ever died. The point is this. The average intellectual ability that can be reasonably expected of senior executives in any industry is directly proportional to the severity of the empirical consequences of a crash in that industry. The aerospace industry is arguably the most demanding, sophisticated and rigorous of all simply because amateurishness cannot be tolerated there for the same reason it is so commonplace in finance. A case in point is the fate and fiscal health of Ford Motor Company, which of course makes cars. As a CEO, Mulally professes expertise only on the left side of Ford’s balance sheet. By contrast, most of us in attendance that evening claim expertise on the right side. Thanks to his relentless work, Ford’s asset side now seems to be in great shape, but what can be said of its liabilities? According to Wall Street, not much except the perennial and naïve buy recommendation. Much more could be done by research analysts to benefit Ford directly and significantly, at literally no expense to Ford or the investor public.

24 Sep

Posted at 05:55h in Credit Spectrum
I just spent two wonderful days in Singapore teaching a risk-management and valuation seminar to managers at CapitalLand, a leading Asian real estate and property management concern. CapitaLand has a strong knowledge culture, and Singaporeans are also consummate hosts--at least, my hosts were. Dr. Boaz Boon (head of CapitaLand’s corporate research department), John Pang (Managing Director of CapitaLand Financial) and Wen Khai Meng (CEO of CapitaLand Financial) made

20 Aug

Posted at 12:07h in Credit Spectrum

Dear Students, past, present and future:

At this very moment, many of you are probably struggling with decisions that will affect your career over the next twenty years and beyond. The capital markets are in total disarray while most investment bankers have been reduced to glorified Maytag repairmen at best. Most of them have no choice but to believe that the future will look very much like the past, and in so doing are not completely wrong. Yes, the past is still the best predictor of the future, but this only means that somehow, deals will be done next year or the following. That’s true, but how will they be done, and by whom? This is no mere speculation. The rest of your life may hang in the balance. The fate of American finance, the one we know and love, depends on finding solutions to such seemingly unsolvable riddles.

08 Sep

Posted at 07:39h in NRSRO

The following is a hypothetical conversation between Constance “Connie” de Boudinville, the dashing and attractive spokesperson for the US credit rating industry, and Axel Raskolnikov, an eastern European banker on a fact-finding mission in the United States aimed at improving the practice of banking in...