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Saturday, 10 April 2010

Guest Post: Fraud Finally Being Discussed in Polite Company … Now Where Are the Prosecutions?



As I have repeatedly pointed out, the economy cannot stabilize unless the fraud which led to the crisis (see thisthisthis and this) is openly discussed.
As Shahien Nasiripour notes today today, Alan Greenspan didn’t think regulators should even pay any attention to fraud:
He didn’t believe that fraud was something that needed to be enforced or was something that regulators should worry about, and he assumed she [Brooksley Born] probably did. And of course she did. I’ve never met a financial regulator who didn’t feel that fraud was part of their mission, but that was her introduction to Alan Greenspan.”
But, this week, Greenspan admitted in testimony to the Financial Crisis Inquiry Commissioner that regulators do need to crack down on fraud:
This week, in response to a question from Financial Crisis Inquiry Commissioner Heather Murren, who asked Greenspan whether subprime lenders should now be supervised by the Federal Reserve, Greenspan said:
“Well, first of all, remember you have to distinguish between supervision and enforcement. A lot of the problems which we had in the independent issuers of subprime and other such mortgages, the basic problem there is that, if you don’t have enforcement, and a lot of that stuff was just plain fraud, you’re not coming to grips with the issue.”
In a paper on the financial crisis he presented last month at the Brookings Institution in Washington, Greenspan did not mention the word “fraud”, in any of its forms, even once in the 66-page presentation.
His prepared remarks this week, though, mentioned it three times.
“[I]t is one thing to promulgate rules, and quite another to successfully implement them. Rules to prevent fraud and embezzlement have failed as often as not. Parenthetically, in the years ahead, we will need far greater levels of enforcement against misrepresentation and fraud than has been the practice for decades,” he told the investigatory panel.
Greenspan also called for “enhanced” enforcement against “misrepresentation and fraud” going forward as one desired part of the government’s arsenal in trying to avoid future crises in which taxpayers are forced to bail out private companies.
And the Wall Street Journal is running an important story showing that all of the big bank primary dealers – not just Lehman – have engaged in fraudulent accounting for years:
Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.
A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.
The fact that the existence of widespread fraud is finally being addressed in polite company is a good first step.
But where are the prosecutions?
Neither happy talk nor propaganda will fix the economy. The governments of the world have spent trillions trying to wallpaper over the fraud, and have become insolvent doing so.
But it’s not working. Indeed, polls show that people no longer trust our economic “leaders”. Seethis and this.
Only honest talk – and holding the people who committed fraud accountable – will stabilize the economy.

AGILITY: To Settle or To Settle



Agility has only one choice: settle the fraud case with the US government and move on. Take a one-time hit and standup and walk the line. As per Al-Qabas Kuwaiti newspaper (April 5th), the US government is asking for a $750 million settlement, while Agility is offering a $300-$500 million settlement. Latest reports conveyed through Al-Jarida Kuwaiti newspaper (April 8th)  suggest that a preliminary agreement has been reached and $600 million would be paid over three years. We still have nothing official yet.
Not reaching a settlement will result in an infected company being dragged from court to court for years fighting a neverending and costly legal battle. More inflicting, this would result in more uncertainty for shareholders and a dead-stock. However, a settelement creates a clear visibility. There is no doubt that Agility is undervalued at the current 600 fils level. The company is trading at an EV/EBITDA 2010 of 4.5x relative to peers trading at an average EV/EBITDA 2010 of 7.5x. This is partially a warranted discount for the reasons above and the following questions: How much will the settlement be? How big is the reputational damage and how fast can it recover? Announced staff cuts of 500-600 are cost improvements or reflect expectations of a plummeting Defense and General Services business? Will Agility deliver margin expansion and growth after the settlement? Most crucially, will it be restricted from bidding for new contacts or not?
There is unanimous agreement that there is no visibility as it pertains to Agility. In fact, an analyst at NBK Capital wrote a note stating the following: “We maintain our status on Agility as “Under Review” as there are several variables in play for which we have no means of predicting an outcome.” What do you think of this recommendation? Not good. The analyst should’ve stated the different scenarios and projected the expected effect of each.
I believe uncertainty creates opportunities. It may be unrelated, but the substantial write-downs taken by banks all over the world last year are history and financial stocks led the way towards recovery. Further, if Agility settles and is allowed to bid on new contracts, I beleive it would be a screaming buy. The problem is you wouldn’t be able to buy because it would be trading limit-up everyday. I guess it also depends how much they settle for. An analyst from Nomura has a price target of 740 fils if Agility settles for $750 million. If it settles for $300 million, the price target would be 860 fils. If the $600 million figure turns-out to be the right one, then I calculated the target price to be 780 fils. Maybe NBK could learn a thing or two from Nomura.
I would be a buyer of Agility at the current levels.

Fitch downgrades TAIB bank ratings



Fitch Ratings has downgraded Bahrain-based TAIB Bank's (TAIB's) long-term issuer default rating (IDR) to "B+" from "BB" with the outlook at negative.

Fitch has simultaneously downgraded the individual rating to "D" from "C/D". The short-term IDR was affirmed at "B" and the Support Rating at '5'.

"The downgrades reflect significant problems in the form of two consecutive years of losses from shrinking revenues and high impairment charges, negative net interest income and margins, a contracting balance sheet and the resulting deterioration in the bank's franchise," a statement from Fitch said.