Hopefully you have received your Ellandi Xmas card. (If not its on the Ellandi Christmas Card page.) 

We felt that light hearted banter was the way to deliver a little festive cheer after a fairly depressing 2008. But there are a number of alternatives (and obviously no right or wrongs.) I thought I would share my two favourites to date.

Christmas irony was delivered by Sheffield Hamworth, the recruitment consultant, who choose a Bull as their 2008 offering. Bulls were definitely the logo of 2006 not 2008, surely no one knows that better than a recruitment consultant? Maybe the Bears were too busy rampaging through the financial markets to pose for Xmas cards?

Well here is the card…

On a far more sober note, we got this from Postbank. Proving that no one does fun and festive better than our German friends…

We would love to see the best and worst offerings from your collection of cards. E-mail them to me (morgan@ellandi.com) and they’ll get a place on the blog.

David Ross is this week the most talked about business man in the UK and the press seem to have taken a certain degree of pleasure in destroying his previously golden image.

Mr Ross was a pin up for entrepreneurial Britain, young, talented, successful and self made. He is even public spirited taking on the daunting task of trying to assure Boris ran a tight ship in planning the 2012 Olympics.

Sadly he has become the perfect target for the British press and the peculiarly British disease, we love to find a home grown hero but then take even more delight in watching them fall.

Undoubtedly, Ross has been somewhat foolish. Firstly, he leverages his stakes in not only Carphone but also the other three listed companies of which he is  a director without fully disclosing this. This is a bit of a schoolboy error but on the face of it there has not been any market manipulation that has allowed Ross to profit or any other investor to lose money.

Rather more foolish he seems to have monetisation, by way of leverage, his equity stakes in order to grow Kandahar,  his real estate portfolio. This leaves him, and other who have done the same - notably the Russian oligarchs in a perilous position. This is a situation that does threaten the stability of markets and the solvency of both companies and individuals.

In the boom times, this model looked ingenious. You took £100m of stock and raised say 75% of its value through a loan. You then reinvested the £75m of debt as equity in other deals or sectors. Through supporting your acquisition with leverage you could grow your portfolio exponentially benefiting from further stock price growth and the seemingly endless appreciation of all asset classes.

Prior to the loan you owned £100m of equity, following this financial engineering you owned £100m of equities and £375m of property. OK, you still only have £100m of equity value but the bigger portfolio in a rising market will generate far greater returns than a £100m ungeared equity holding. Suddenly a rich man is well on the way to being a billionaire.

Unfortunately, there is always a catch. Whilst banks loved this business, it allowed them to make profitable loans, generated M&A and brokerage fees they did need some security. This came through margin calls attached to loan to value covenants.

The original £75m loan would be secured on the shares but would be limited to say 80% of the value of those shares. If the share price falls then the client has to post cash as additional security to meet the 80% ratio. Simultaneously, if the value of your real estate holdings are falling this could trigger covenants in your property loans. The rapid fall in value of both shares and real estate was never predicted or properly thought through. Suddenly an investor needs lots of liquid cash to satisfy the banks security demands. If he can not provide this the bank repossesses both the shares and the property portfolio.

Many investors have not stashed away enough money to meet this rainy day requirement. Quite rapidly you can lose both the shares and the property, as banks rush to recover as much of their loan as possible. If shares and property both fall 25% the investor loses the lot. Very wealthy men could and will be be turned to dust.

I am not suggesting that this will happen to Mr Ross but it illustrates the risks attached to leverage. I suspect it will give the tabloids the opportunity to rubbish many more big names before the end of 2009.

I know that this clip has been plagiarised to death, the Ozzie Olympic one is very good, but this did make me chuckle on this cold winter’s morning…

http://uk.youtube.com/watch?v=jbgwR1pA1k0

No, not the classic Bee Gees hit from 1977, masterfully reworked by Take That in 1996, but a question of how deep and what shape will the recession be?

Will we bounce in and out, the classic “V” shape, as most economists predict? Or will we scrape along the bottom for a while, before a vertiginous recovery?

Clearly “L” is the ugly option with no recovery n sight.

The answer, I’m sure, won’t be simple, hopefully the general economy will follow a “V” shape as a result of the governments massive fiscal and monetary easing.

Housing and commodities could well be a “U”. New supply in housing and investment in capacity of commodities has fallen off a cliff as their price has plummeted, there might be no swift recovery, but once demand does recover, in line with the general economy and the slack taken up, the lack of new building or investment in refineries, say, could lead to a sharp recovery in asset prices.

But what of commercial property investment?

People in the industry forget that this is a discretionary activity and a case for it, especially in light of its recent catastrophic performance, will need to be made again, based on no guaranteed yield compression, low gearing and poor rental growth.

Until that case is compellingly made, we could be in for a “L” of a time.

The press is now full of articles extolling the virtues of the simple life and how “The Credit Crunch Brings Career Changes”:

http://www.timesonline.co.uk/tol/news/uk/article5062778.ece

Even a bad assed hedgie, like Andrew Lahde, wants to turn his back on the lucrative career that “destroyed his health” to grow hemp (his resignation letter is well worth a read):

http://ftalphaville.ft.com/blog/2008/10/17/17194/andrew-lahde-bows-out-in-style/

Given the non-stop barrel of laughs that is the world of commercial property and finance, I quite fancy jacking it all in to be the man that oils the thighs of the virgins that roll Cohiba cigars, but I doubt it would cover the school fees.

Like many things in this crazy, mixed up world, I feel that the concept of downshifting is yet another example of woolly ideas and a lack of joined up thinking.

My local organic deli (North St SW4, very good) is already full of posters and flyers for individual yoga tuition, children’s pottery classes, aryudevic massage, toddler acting classes and Chinese stool therapy (OK I made that one up).   It would now appear likely that it will be impossible to get in the front door for further adverts extolling the virtues of “lifestyle” businesses set up by former bankers.

Call me a cynic, but these self indulgent pursuits were just as symptomatic of the credit boom as second homes, flash cars and Christmas in the Caribbean; moreover rely just as heavily on there being a large amount of highly paid idiots with too much money to spend.

Alas those times gone and in The Great Deleveraging (new expression for the post Credit Crunch world) people are going to be focused a little further down Maslows “Hierarchy of Needs” and will be more worried about the basics such as food and shelter.

It would seem that the political consensus is that only further regulation can save us form the savage beast that is laying to waste the financial markets.  I think at best it is likely that politicians will end quixotically tilting at yesterdays monsters to no real effect, the beast will have moved on; at worst, however, they will sow the seeds for the next financial crises, be it in 5 or 50 years.

Some Stateside commentators, in fact, believe that our problems are down to too much regulation.

For example, Fannie and Freddie were borne out of the depression of the 1930.  Their remit was to ensure easy credit to Main Street America to promote and foster a property owning democracy.   What they morphed into, over time, was a state backed cuckoo sat in the middle of the mortgage market sucking in trillions of dollars of funds, but more importantly all of the decent customers.  The only rational response of the banks was to chase the higher returns “offered” by poorer credit rated customers.  Stir in a bit of well meaning legislation into the pot, courtesy of Bill Clinton, to ensure that banks couldn’t turn down customers for fear of being branded racist, bake it for eight years and you have big slice of Sub Prime Pie.

You would have thought that three quarters of century of a command economy would mean that the Russians could do regulation a bit better.  However once again, the seemingly sensible regulations put in place to prevent oligarchs from taking assets out of the country, have had disastrous and unforeseen consequences.

Not able to take cash out of the country to fund acquisitions that ranged from Chelsea FC, Candy & Candy flats to Courchevel and Iceland, they instead borrowed from Western banks secured against their rouble denominated equities.  The credit crunch, assisted by a less than prudent invasion of a small neighbour, led to a dramatic fall in their value, margin calls to meet the western loans, fires sales, a run on the currency, further falls in value…….

The Russians will now blow their currency reserves, effectively re-nationalising the economy and will end up with a politico-economic structure resembling National Socialism. Nice.

I could go on, but it would appear that unexpected consequence of the Credit Crunch has been to turn a left wing leaning, champagne socialist, like me, into a raging right-wing economic Neo-Con.  Not Nice.

Gallows humour is getting better, as the world gets worse; expect to hear these trotted out over the coming months and years:

“A rolling loan, gathers no loss.” (Courtesy of those bright guys at Goldman’s)

“Their balance sheet is a mess; on the left nothing is right, on the right nothing is left.” (FT)

It’s 6.00am. May 14th 2010.

Our hero awakes, slightly hungover following his 39th birthday.  Still, he thinks, not too shabby, as he looks down at his six pack, running his fingers through his still thick, luxurious, curly hair.

The radio confirms what everyone had know for some time, Gordon has romped home with a record landslide.  He breathes a sigh of gratitude, thanks to his brave and decisive leadership President Brown is widely acknowledged as having single handedly pulled the world economy back from the brink during the short 2008 correction.

He turns right to his wife and kisses her gently on the cheek, she certainly rediscovered her mojo following the “augementation”, he turns to his left and gently kisses Kate Moss on the cheek, who was he to complain when she had asked for an “open” relationship.

Jogging downstairs into his Belgravia kitchen, he turns on the television.  PestoTV is reporting that New York has once again closed on record highs, this was now getting embarrassing, he would have to set up yet another charitable trust to distribute his massive wealth.

His blackberry watch vibrates, it’s his 8 year old daughter emailing from Oxford university…………………

OK, OK, pretty fanciful stuff, especially the six pack bit, but given the stock markets equally euphoric (possibly unhinged) performance over the last 24 hours, anything seems possible.

Unfortunately, even if the long overdue, but admittedly far reaching steps taken by central governments are successful in saving Western capitalism, most sensible commentators are still predicting a recession worse than the early 1990’s.

But, and I’ll put my neck out, as Churchill said, this may not be the beginning of the end, but may mark the end of the beginning of this crises.

If you are a local government treasurer and you got caught with a load of cash in Landesbanki, Kaupthing or any other Icelandic Bank then you deserve no sympathy. In fact you should be flogged by your local tax payers.

You were trusted with tax payers money because you are a professional fund manager. You were not the honorary treasurer collecting the Xmas kitty for the local mothers union. As a professional you should have known your job. Anyone who knows anything about economics or ooccasionallyy glances at the FT should have understood that Iceland was the ultimate hot money trade that carried a lot of risk. There have been rumours about the solvencyy of the Icelandic Banks for months and CDS spreads illustrated that this risk was increasing on a continuous basis.

Admittedly they offered a better interest rate that the British Banks but there was a good reason for that. It’s called a risk premium. Its the first principle you learn in A level economics. If you were managing money on behalf of a risk averse local authority you should not have been able to spell Iceland let alone Kaupthing. To have been investing money with them to earn a meagre 0.25% or 0.5% more each year was simply crazy.

When the government bails out the local authorities I hope they make an example out of their treasurers as they have done with the reckless bankers.

Robert Tchenguiz was widely reported to have lost a £1bn in 24 hours, earlier this week, as he was forced to crystalize his loss making stakes in M&B and Sainsbury’s. These stakes have been loss making for quite sometime but he was forced to liquidate the positions as his financiers, Kaupthing, recalled their loans to meet their own financial difficulties.

Robert is a professional investor and a big boy so I am sure he does not expect sympathy for his plight. However, I do find it odd that the press and the financial community seem to have taken great delight from his demise. He and his brother, Vincent, may not be everyone’s cup of tea but I have always found them to be hard working, energetic and entrepreneurial. Hardly characteristics to be despised or deplored.

I understand why the press have castigated short sellers who profit from the distress of others and make fortunes as Joe Publics pension value evaporates. However, Robert Tchenguiz has taken a very different approach. In both M&B and Sainsbury’s he saw an opportunity to create value from changing the companies strategic approach to their real estate assets. He campaigned aggressively, especially at M&B, to affect these changes but he certainly put his money were his mouth was. He took enormous stakes and hoped to engage the board in a strategy that he perceived would boost the share price.

His ideas, based on splitting the operations and the property assets and applying leverage, may not have been popular but he was certainly not looking to bust these companies or profit from a slump in the share price. As a major shareholder, he was doing his bit to champion shareholder value hoping to boost and his personal wealth in the process. 

Surely we should applaud entrepreneurs who invest their personal fortune in trying to improve businesses rather than celebrating their downfall. Sympathy may not be required neither is taking pleasure from his pain.