Contents up to end Oct 2005 0 comments

Contents up to end Oct 2005 

The 1933 Glass-Steagall Act 2 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Excessive power always creates problems: the temptation to profit personally from the power one wields, and the conflicts of interest between the various overlapping fields that one has influence in. It is the role of government to rein in such power as and when it exists in the business world.

At the turn of the 20th century it was clear to many that bankers wielded such an inordinate measure of power. Since there was no central bank in the US then, they controlled both the supply of money as well as how it was allocated. In particular, the house of Morgan (JP) was where Wall Street revolved round. The bankers controlled business financing, being both lenders of capital to business owners as well as helping to underwrite bond and equity issues. It led to a consolidation of many industries, such as steel, railroad and utilities, as bigger players with good ties with the bankers obtained favourable terms to buy over smaller peers; not a few felt that such consolidation often led to monopolistic industries and stifling of innovation. Also, bankers often sat on many company boards as a result of their upstream financing, putting them in a position to further their own interests. The Pujo governmental committee in 1912 found that the officers of three major banks (including Morgan's) held 341 directorships in 112 corporations with resources of $22B. Ultimately it led to the formation of the Federal Reserve, the de facto central bank, in 1913.

But this was only one facet of the power that bankers wielded; other important areas had not been addressed. The commercial arm of a bank had easy access to what Brandeis, one of the leading socio-economic thinkers of the times, termed "other people's money". Deposit taking was a source of easy money, that banks could channel to their investment banking arm where they could make loans to brokers, and underwrite equity or bond deals for clients who inevitably had to give them a big cut of the deal. Furthermore, banks could tie commercial loan deals with clients to other deals on the investment banking side, such as future share underwritings etc; such power was very tempting. In fact, before a central bank was established, the banks had complete control over stock market prices, since they could ratchet liquidity up and down at will through margin loan availability.

Brandeis also had also other more radical views about banks, such as banks being a "public utility", since they performed a public service and operated in the public trust; the implication was that they should be heavily regulated like ordinary utilities, such as cost-plus pricing policies. He became a Supreme Court justice in 1916, and remained an enemy of bankers with his views through the booming 1920s when times were good and nobody made efforts to change the status quo. The impetus for change was triggered by the Great Depression and the ensuing witchhunts which implicated bankers as the biggest culprits for the crash. The Pecora investigations of 1933 (a witchhunt in itself) revealed the interrelationships between the various financial institutions and the existence of "preferred lists" of clients to whom bankers extended financial privileges and sought to influence; if rich clients received favourable rates while poorer clients effectively subsidised them, it was surely contrary to the principles on which the US was built on. In 1933, President took the reins of power and the Glass-Steagal Act was passed; it was the most revolutionary banking bill ever passed (and probably to this day as well). The most significant point in the bill was that commercial banking and investment banking were to be separated; a bank could not do both. This effectively destroyed the ability of banks to both take deposits and issue securities. New firms were born: Morgan Stanley from the investment banking arm of JP Morgan (which chose commercial banking); the investment bank of First Boston from First National Bank of Boston.

Despite the initial uproar and protests from bankers that without the right to receive deposits their investment banking services would be largely compromised, and running contrary to their expectations that the Act would prove short-lived, the Glass-Steagall Act actually survived several generations and defined the path of American finance until it was repealed in 1999 by President Clinton. It had the effect of limiting bankers' influence on that most critical resource to companies: financing. Furthermore, by delinking the two, it ensured that any crisis of margin loan default by money-losing speculators on the investment banking side would not spread to the the commercial banking side and cause a run on the bank by frantic depositors; no cross-subsidising of capital across inter-linked arms would be possible now.

A mature banking industry develops with governmental regulation, and that was the primary contribution of the Glass-Steagall Act in correcting the previous no-holds-barred approach. Applying the developments described above to the Singapore context, one should be able to see the rationale for opening up the Singapore banking sector to foreign competition, and also the MAS requirement for local banks to divest of their non-banking assets by 2006. Many would have heard unpleasant anecdotes of how local banks in the past have made use of their banking and financing business to exert financial pressure on companies whose assets they have then seized to augment their non-banking divisions. Such possibilities are endless and that is why they must be nipped in the bud.

References:
(1) Wall Street A History (by Charles R. Geisst)
(2) Wikipedia entry: Glass-Steagall Act

Crash stock: Amcol 4 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
In the early 1990s Amcol was one of the semi-blue chips on the buoyant Singapore stock market. A CPF trustee stock (ie. a recommended stock for Singaporeans to put their retirement money into), positioned in the booming sector of electronics (distribution of Sony, Aiwa and Funai products), boasting revenues in excess of S$700M and profits between S$30-50M, with a long history of listing (since 1969), it was not hard to see why it was one of the investors' favourites.

It became a speculators' favourite as well between 1994-95, often a danger sign because optimism tends to rise with prices for such stocks, ultimately pricing in all the potential upsides and none of the risks. It was at the centre of a number of takeover deals by Indonesians, the prevailing trend of the mid-1990s when rich Chinese Indonesian businessmen were looking to diversify their assets to safe havens like Singapore. The share price was driven, often upwards, by such incessant newsflows and perceived prospects of future Indonesia deals, quite similar to Unifiber, another punter's favourite in our current generation. Incidentally, there is a connection between these two companies: Kang Hwi Wah, revealed as a dealmaker for Unifiber recently, was the founder and main shareholder of Amcol.

Kang was arrested for corruption in 1991 and jailed in 1994, but the stock did not crash despite his conviction. Over the years 1991 to 1994, Amcol continued to make pre-tax profits of between S$30-50M on steady revenue of S$700-800M, and acquired a new key shareholder, Hong Kong property giant New World group. The latter helped Amcol to diversify into property deals in Asia, which Kang helped to drive until his conviction in 1994.

The true speculative interest in Amcol commenced when in 1995 Kang, upon his release from jail, sold 17% of his total 24% stake in Amcol to Henry Pribadi, a close associate of President Suharto and Liem Sioe Liang, Indonesia's richest businessman. Then in early 1996, he sold another 6% stake to a company run by local businessman Lee Howe Yong and Indonesian-born executive Sukamto Sia, another Suharto associate. Although New World exited in 1995, the new Indonesian shareholders were perceived to be able to bring strong connections and business deals to the Amcol group; as we all know, relationships were what mattered in the Suharto era for doing business in resource-rich Indonesia. One must also remember that in 1995, there was tremendous market interest in the migration of Indonesian assets to Singapore, a trend driven by a sudden realisation by rich Indonesian businessmen of the need for risk management as political and social turmoil in Indonesia brewed (an example was the 1994 Medan riots), and which finally culminated in the collapse of the Suharto regime as the 1997 financial crisis proved the last straw.

The speculator interest kept the company's stock on high footing, at between $3 to $5, a total market cap of close to 1 billion, and a forward PE of above 20, comparable to the average SES (now SGX) market PE of 22. That put it on a similar pedestal with blue chips which typically trade at this PE range.

Things began to unravel in 1996. The new Pribadi-controlled management hired Merrill Lynch to review operations after the Amcol stake was bought, a strange move since it defeats the purpose of due diligence before buying. The findings were not exactly encouraging, revealing critical flaws in the company's operations and balance sheet that could not be easily repaired.

To add to the troubles, there was an inevitable boardroom struggle for management control between the various Indonesian shareholders. Presumably as a result of this politicking, some Pribadi-appointed directors approached the stock exchange about alleged irregularities, triggering the beginning of the end: Price Waterhouse were appointed to make investigations, CAD was activated, Amcol was suspended from trading.

The investigations revealed the full picture that the Merrill Lynch review may only have skimmed over: and it was not pretty; an insider commented that "Whoever was on the throne raped the company". To quote examples of "gross mismanagement, incredibly bad deals and dismal accounting" that surfaced from the investigations: (1)An electronics subsidiary sold goods at a loss to Funai, which resold them to another Amcol firm at a 12% profit; (2)The group bought into a loss-making power plant in China's Guangdong province, which has surplus electricity; (3)In Indonesia, an associate firm could not adequately document a supposed investment in satellite broadcaster Indostar, for which Amcol advanced $8.5 million. Worst of all, the company was now insolvent: it needed S$70M to meet debt payments, and all of its $800M assets might be required to cover obligations. Price Waterhouse declared that Amcol's shares were "nearly worthless", and the company was placed under judicial management.

Eventually, it took another Indonesian conglomerate to clean up the mess. In 1997, Sinar Mas, Indonesia's third largest conglomerate, acquired Amcol from its key shareholders and renamed it AFP Land, a subsidiary of Asia Food and Properties which is listed on the SGX today. The deal effectively valued Amcol at ~S$1.30 a share. The previous Indonesian shareholders had made a big loss. Pribadi, for example, had bought in his stake in Amcol for about $5 a share.

One must admire Kang Hwi Wah for his excellent sense of timing in selling off nearly his entire stake in Amcol, at the end of the day. Anyone, Unifiber?


References:
(1) Asiaweek article: The "Rape" of Amcol
(2) Asiaweek article: Singapore Spree
(3) Business Times article: Amcol & Henry Pribadi