The Fall of the House of Barings

Wikipedia

This month in 1995, Barings Bank, founded in 1762, in operation for more than two centuries, a bank where the Queen of England maintained an account, formally folded. It's demise could be traced to massive trading losses somewhere in the amount of £800M. By late February 1995 it had become known that Barings was on the wrong side of an enormous bet on Nikkei Futures. Without getting too technical about it, the position would make money if the Japanese stock market went up, and lose money if the reverse happened. If the market went down by a lot, then the position, or more accurately its owner Barings, stood to lose a lot. Unfortunately, this period also corresponded with the Great Kobe Earthquake of 1995, and in the weeks that followed the earthquake, the Japanese stock market, while volatile, fell much more than it rose. Nearing the end of February, the Barings position was showing a loss of around $500M, an amount which, to put in the proper perspective, was at that time more than half the Bank's capital. The possibility of insolvency had become real, and the bank could no longer afford to hold on to the position and hope that the market turned, because if it did, and the market dropped just a little more, then all its capital would be wiped out. The fact that Barings position had become publicized also created a separate but very real problem. When people know you HAVE to sell, than all the more, they will not buy from you except at distressed prices, this is especially true in the predatory world of money in which the trading pits of futures exchanges exist. True enough, with no one willing to take their losing positions off their hands except at fire-sale prices, by the time the smoke cleared, Barings had lost around $1B and had gone over the brink into the abyss of insolvency. It formally ceased to exist in March of 1995.

Barings top management claimed that all the losses were caused by unauthorized trading carried out by a single rouge trader, Nick Leeson, and that he had misled his superiors through fraud and deception. I am inclined to believe them, because unlike other instances wherein losses were attributed to "rogue trader/s", a review of Leeson's activities reveals that his actions, from the start, never benefited the bank, and so it is difficult to imagine that the bank would continuously sanction the activities if they knew about these.

By all accounts, including his very own, Leeson's trading never showed a profit overall and never benefited his employer, and so it is quite easy to believe they never sanctioned his activities. Additionally, it is even more unbelievable that Barings management would sanction any single risky activity that had the potential to endanger the firm's entire capital base, which Lesson's trading activities definitely were, and indeed eventually did. No bank does that. Truth be told, the most successful of banks do not even really trade on opinions and outlooks, but more on asymmetric trades wherein they have a large advantage - whether it be an edge in information, or speed in execution, or maybe capital, or perhaps all of the above. But that it is an entirely different subject to be saved for another day. Suffice it to say that I believe no bank would risk its entire capital on a trading position just because Nick Leeson has a gut feeling that the Japanese market is going to appreciate.

Yasuo Hamanaka theatlantic.com

Contrast this with the case of Yasuo Hamanaka, a trader for Japanese trading giant Sumitomo Corporation. For years, Hamanaka had effectively cornered the copper market and kept prices high by buying up large quantities of copper futures. His actions in the copper futures markets were no big secret, and in the trading pits where he operated, he was referred to as Mr. 5%, because at any point in time, he usually controlled around 5% of the open contracts on copper futures. While 5% may not sound like much, it is a position that takes an enormous amount of cash to support and is enough to affect the price of copper. No single party usually owns close to that percentage of open contracts, and in providing this additional demand - artificial demand is probably not too harsh a phrase - Hamanaka succeded in driving copper prices higher than they would normally be, and this benefited Sumitomo immensely in the form of increased profits on the physical copper that it sold. The only problem with the scheme was that it was one of those arrangements that worked until it didn't. When you succeed in driving the price of a physical commodity higher, you are also effectively encouraging producers to produce more, and this added production drives prices lower, and when you're the single biggest buyer in a market where the natural forces of supply and demand are driving prices lower, your losses could get very large, very quickly. Hamanaka's losses eventually reached almost $3B before he was shut down, and when his employer, Sumitomo, tried to take the "rogue trader" excuse, it strained credulity because Hamanaka's activities had greatly benefited the company for so long.

When Leeson's superiors at Barings claimed that his trading was "unauthorized" it is much easier to believe them, because it is simply too difficult to imagine that they would have gone along with it given how much risk it meant for the firm. With all this being said however, in claiming that they were unaware of Leeson's activites, Barings management, unfortunately for them, also necessarily admitted to another sort of mea culpa, far less evil but perhaps even more embarrassing - that of impressive ineptitude. In the first place, what does it say about the Bank's control functions that a single employee could hide that enormous a paper loss (a very real obligation for the bank) for months? For Leeson's superiors not to fully understand his activities is perhaps excusable, because after all, hospital management need not know exactly how a brain surgeon does what does he does, and neither does airline management need to know exactly how to fly a plane. But it is a clear failure when management does not know what is a real liability and how out-sized theirs had grown.

Furthermore, day after day, Barings provided Leeson with the margins (think of this as capital) required to support his losing positions, positions he was not supposed to have, and it was particularly damning that the capital it was providing were in amounts that were totally unjustified by the volume of legitimate business Leeson was doing for the firm. The situation is somewhat analogous to a family wherein a teenage son is caught smoking. The parents claimed to know nothing of the son's smoking, but admitted to lending the son their lighter, day after day, for close to a year. What did they think the son was doing with the lighter? According to him, they said, he was barbecuing, and they assumed he was being truthful, even if they never saw any signs of the grill ever being used, and neither ever smelled nor ever saw barbecued meat. So in the end, while they would probably be absolved of any accusations that they ordered their son to smoke, by the very statements they made to absolve themselves, they also revealed an astounding lack of parental competence and even common sense.

Strange as it may seem that upper management of a supposedly "venerable" company could so thoroughly be in the dark about what one particular employee was doing, I believe it is actually not too uncommon, especially in very old companies. I have come to believe, and I generalize loosely here, that in many organizations, save for those with sustained extraordinary leadership, sooner or later, pettiness overcomes talent - that is, when pettiness is pitted against talent for survival inside the organization, pettiness will usually win out, because the petty spend more time and work harder at politicking and intra-office warfare.

Whether it be in governments or commercial companies, as years pass, the petty come to dominate, or at least outnumber, the talented. As the world changes, new technologies come into being and new businesses activities come to be, and unfortunately, the petty will never admit that they cannot see the emperor's new clothes. Difficult as it may be to imagine, it is entirely possible that situations evolve wherein broad swaths of a firm's workforce no longer fully understand the firm's business, and when that happens they will work even harder to preserve their position within it.  While I know little about Barings Bank's exact circumstances, my point is that I do not find it difficult to imagine a company wherein a significant number of employees, even those in upper management, especially in fact, those in upper management, do not truly understand the nuances of new businesses that the company may take on. So it is not unexpected  at all that situations may develop wherein they hand that teenage boy the lighter day after day without even understanding the implications.       

The Baffling Booth

With two hours to kill I decided to try Mystery Manila's Baffling Booth. I have never been inside an Escape Room before, and the Baffling Booth was an opportunity to try something like a mini-version of one. For P150, one gets the privilege of being locked inside a phone booth for 20 minutes. The goal being, quite naturally, to figure out how to get out. I liked the fact that you are really left on your own at the start to figure out what things in your environment are actually clues and then how to apply the clues. That gave the experience a somewhat realistic feel to it. I was thinking the game would make me feel young but it actually made me feel quite old. 😁 It was tough to see inside the not-so-bright booth, and it was particularly difficult to contort my body and hands. Plus there was also the view of all these twelve-year-olds milling around outside, all probably thinking "grandpa is so stupid". 😁

I did not succeed in getting out.

This despite the fact that the staff gave me repeated hints and even an extra five minutes of time. No excuses, I think I simply did not do a good job figuring out what to do with the clues I did find.

I couldn't help but realize though, that as a business, they actually wanted me to succeed, and the reason is rooted in human behavior. People who succeed are going to post the accomplishment all over their social media accounts and talk about how "fun", "challenging", and "fulfilling" it was. People who fail, on the other hand, would probably want to forget it as soon as possible. They wouldn't mention it as much and word-of-mouth simply wouldn't go very far.

This further reminds me of those Facebook tests like "Are you a Grammar God?" or "Are you a Certified Child of the 80s?", usually tests of 15 questions that test your proficiency on a given topic. Keeping in mind that the end goal of the makers of those tests is to get you to share your results and therefore their site, I found out long ago that as long as you answer at least 12 correctly, they will tell you that you got a perfect score. I found this out after being told I had a perfect score, going back, changing a few answers, and still being told I had a perfect score. I don't consider it particularly evil that they do this, just a reminder of what their end goal is. No one sits around making these tests and challenges purely for our enjoyment, their goal is to get us to talk about it, and they know the average human being is much more likely to share something that they are proud about, especially when compared with something that he/she might be ashamed of.

These reflections on human behavior aside, I just want to say my Baffled Booth experience was great. Everyone ought to try it, or something similar, even at least once in their lives.

Left Out?

George Ty (From Metrobank Foundation Site)

By now it is no secret at all that the recent demise of Metrobank Founder George Ty has unleashed something of a battle over his estate by two recognized natural families.

I think the early flow of news reports had, for whatever reason, the unfortunate effect of creating the impression with the casual reader that the late Taipan's will had somehow left "everything" to Chinese-Filipino wife Mary V. Ty and her children. While I have not read the actual will itself, I believe this idea of "everything" is probably erroneous - a misappreciation of the legalese behind the formal document.

From the little that I know of Philippine law, the Philippine Family Code recognizes "compulsory" heirs, meaning heirs that one cannot arbitrarily leave out of a will one executes, if one expects that will to be upheld by Philippine courts, that is. And given how well-lawyered a George Ty Will is bound to be, surely it will not contradict this basic legal doctrine.

Mary V. Ty (From MB Foundation site)

In short I cannot quite believe that a Last Will and Testament executed by George Ty and his lawyers would have committed the basic error of attempting to arbitrarily bequeath "everything" to Mrs. Mary Ty. What it probably does state, was that George Ty was bequeathing the entire "free" portion of his substantial estate to Mary Ty - meaning after all legally defined compulsory heirs had received their shares in the proportions set forth by Philippine law, then what remains, again under Philippine law, is the "free" portion, which the will-maker is free to bequeath at his sole discretion and according to the desires of his heart, so to speak. And in this case, the will-maker George Ty is bequeathing that entire free portion to Mary Ty.

From what I have read in the news, the GT Will also seeks to define who is the legitimate wife, and as necessarily follows, the legitimate children. This is again further evidence to me of how legally sound the document is - it seeks to define the legitimate wife and the legitimate children precisely to aid the court in defining the compulsory heirs and the corresponding proportions of the estate they are to receive. Any and all other offspring, even those that may not been named in the news thus far, if any, are not "left out", but rather take on the status of illegitimate children, who by the way are also compulsory heirs and are not left out of an inheritance. Their only difference from the legitimate children, I believe but am not certain, is that they are to receive a smaller share.

The only offspring, whether legitimate or illegitimate, that is not a compulsory heir is one who has been disowned/disinherited, and again the GT Will defines one offspring that George Ty had, in his last days, decided to disown and gives the justification on why he is disowning her. This is once more proof to me of how legally sound the document is, because a parent cannot just arbitrarily disown a child without reasons that are ample and grave enough. This is a safeguard against a parent exercising unjustified subjectivity and disowning some offspring out of sheer favoritism.

In summary, the GT Will, it would seem to me, was well thought out and legally sound. It set out to define the legal spouse, and the legitimate offspring, because in so doing it automatically defines the status of everyone with any kind legal claim against the estate. It then states which compulsory heir the will-maker has chosen to disown and gives the justification for doing so. Finally, the Will states who is to receive the free portion of the estate.

From the Manila Tytana Colleges Site

Now, of course, being legally sound does not necessarily mean the GT Will will go uncontested. There are two obvious legal wrinkles that I, as a non-lawyer, can see even from where I sit. First, the other significant woman in George Ty's life, Lourdes de Lara, could contest the assertion that she is not the legitimate spouse. She might present evidence that she and George Ty had a perfected marriage. The legal proceedings of sorting this out would probably take years. Secondly, the disowned daughter, a natural daughter of LDL, could also question whether her sins against her father, if indeed there are any, are enough legal basis to disown and subsequently disinherit her. This would probably take years to resolve also.

If there's one thing in all of this that I find really strange, it is this (and I'm being serious if a bit facetious, as I am wont to be) - any man who has two women in his life and yet lived to the age of 86, whole of limb and sanity, must have had a decent amount of communication skills and could reason, to the extent that is humanly possible, with women who loved him (meaning not exactly emotionally-detached from the issues). So I find it a bit difficult to imagine that George Ty would have crafted his LWAT without preparing both parties for it. So I find it difficult to grasp why it seems there's now disagreement over it But I guess maybe, people's positions change depending on who they talked to last, and "understandings" can become subjugated over time by other priorities. There's a lesson in there, I think, for anyone interested in any way in human relations.

Hey, you know what would make a great movie? This rich handsome man has two wives, and on his deathbed he tells them to fake a fight over his estate so that the resulting spectacle makes the taxman forget about questioning the declared value of the estate. "Forensic accounting," the rich man would say "is tremendously boring compared to gossip.." 👦
 

A Disconcerting Signal

Picture from Uy's Wikipedia Page

Last week's announcement by the Dennis Uy-led PH Resorts Group Holdings Inc. that it was temporarily but indefinitely postponing a scheduled Follow-On Offer (FOO) of shares left me with a disconcerting feeling. While I can honestly say that I view the situation with little to no partisan political feelings, I do think that even from an objective and disinterested point of view, this particular development does not speak too well of our economic outlook. Or perhaps to be more accurate, it does not speak too well of how the international business community views our prospects for economic development.

To understand what a Follow-On Offer is, let's start with the word "Offer". An "Offer", as it relates to the stock market, is short for "Offer of Shares" A company offers new shares of stock (representing ownership in the company) to the investing public to raise more capital and expand its business. To take a very a simple and imaginary illustrative example - Let's say five friends who own a very successful neighborhood grocery want to take the next step and open up a supermarket, but they lack the capital. One thing they could do is to take in new investors who will bring in additional capital. These new investors would receive shares of stock as proof that they are now part-owners of this very-successful-grocery-turning-supermarket.

If a company offers the opportunity to invest not just to specific parties but to the public at large, be it local, foreign, or usually both, then it is a Public Offering, and the first time a company does this, it is called an Initial Public Offering - hence the more familiar term IPO.

Next let's say that the new supermarket was also a smashing success, so much so that the owners - now many more than the original five - want to take the supermarket nationwide and open up branches all over the archipelago, but to do so they would now need even more capital. One thing they could do is to take in even more investors, to bring in even more capital, by offering shares to the public again. This is no longer "Initial" since it has already been done before, hence it is called a Follow-On Offering or a Follow-On Offer.

The evolution of PH Resorts Group Holdings is a lot more complicated than a grocery-turned-supermarket-turned-supermarket-giant. First of all, when PH Resorts had an IPO, it was in a totally different industry, with a totally different name, and Dennis Uy was not yet part of the company. Uy's Udenna Holdings bought into the original listed company in 2018, renamed it, and plans to use it as the company to undertake massive integrated resort-casino projects in different parts of the Philippines. To undertake these projects it needs capital, a lot of it, and hence began to undertake an FOO.

But last week's announcement that the FOO was deferred indefinitely, would seem to indicate that investor response was lukewarm, and the wording of the announcement, which emphasizes that the company is still "very keen" on pursuing an offering and "fully intends" to do so at a later time provides further indication that the FOO was probably shelved because of a tepid response.

To my way of thinking, if the investment bankers who make investing decisions - supposedly the best at what they do - turn down an opportunity to invest in a company, the reason is usually one of these four:

1) They do not believe in the company's viability.
2) They do not believe in the company's management.
3) They do not believe in the econo-political regime that the company is in.
4) They might believe in the company but find the cost of investing too high.

In the case of PH Resorts I humbly submit a fifth possible reason:

5) They believe that the main personality behind the company is a politically exposed person and his business future is unpredictable.

In short, I consider the signals being sent by the international business community, in its collective decision to more or less decline to participate in PH Resorts, to be slightly worrisome. I believe it shows a belief, that the future of the Philippine economy is, at best, a bit too random, a bit too uncertain. They could be wrong, of course, and that would be great for us as a nation. But at the very least I think it does show that our collective economic future is not buoyed by overflowing optimism, which is, well, disconcerting...  

  

UAAP 3x3 2019

Last March 2 I made the trek to the Ayala Malls Feliz to check out the 2019 UAAP 3x3 Tournament. Early publicity articles had promised a glimpse of next season's Fighting Maroons superstar nucleus - Ricci Rivero, Kobe Paras, and holdover Juan De Llano - playing as a unit publicly for the first time; but at the 11th hour Paras pulled out, with no reason given. So the team that showed up was composed of both De Llano brothers, Rivero, and Will Gozum. It was still a team that featured 2/3 of the high profile triumvirate, and offered plenty to get excited about. Most of all I wanted to get a feel, however small, of how cohesive they are, and how good they can eventually be.

Now of course, 3x3 is totally different from the full-court game, and success in one will not necessarily mean success in the other. Still, I wanted to see how well they moved without the ball and played off of each other.

While most of my fellow UP alumni have assumed that the Fighting Maroons will automatically do even better this coming season after their Cinderella run in Season 81, I have my concerns.

First of all, it's a team that has just graduated eight seniors in all - including vital cogs Diego Dario, Paul Desiderio, and Gelo Vito. In the college game, you can never underestimate the value of seniors, because they provide much needed poise and stability. One only need look back at the tapes of the Season 81 Final Four, and the contributions of Jerson Prado, to realize the value of maturity and experience in the college game. Thankfully, Jun Manzo is still playing, and I think for UP to be successful, he has to be able to lead from the point guard spot, dictating the tempo and keeping everyone in line.

This is especially more true given that UP will be a bit thin at the point guard spot - the single most important leadership position in basketball. After Manzo, while it is true that Juan De Llano can also run the point, one should note that when he's running the point, he's not looking for his own shot (or at least not ideally). So while this is an opportunity to show how multi-faceted he can be, it's also true that any basketball player can only focus on one thing at a time, i.e. he's not scoring when he's assisting and vice versa. It will be up to him to show he can balance the different responsibilities that will surely be expected of him.

In short, while it may be tempting to assume that with the most talent it has had in perhaps 33 years, UP will automatically do even better than it did last season, what I've been trying to say is that projecting productivity is not as simple as adding up all the stats. It'll be an interesting upcoming season - and Ateneo is still very much Ateneo. Like the rest of the UP community, I am hopefully optimistic and look forward to a season that showcases the best things about athletic competition.