What the demise of China Media Express says about the demise of Hank Greenberg and AIG

I met Hank Greenberg in late 2000.  He was chatting mostly to Ajit Jain – the Berkshire Hathaway reinsurance impresario and I was a spare wheel.  But Hank was I thought the most impressive person I had ever met.  He name-dropped shamelessly (he had had just flown back to New York on a private jet after “chatting” with Li Peng).  But he was so far ahead of me on so many issues it made me feel dumb.  He even looked – at least in the brief conversation – as if he were considerably smarter than Ajit Jain – and Ajit is no intellectual slouch.

I was just out of my league...

Anyway there is a view around AIG – a view that I shared – that AIG was built in the mold of Hank  and it required Hank – a certified genius and an unbelievable workaholic – to keep it all together.  AIG you see had a single risk control mechanism: Hank.

In this view Elliot Spitzer by causing the demise of Hank Greenberg caused the demise of AIG – and by extension the demise of the entire financial system.

I thought that might be going a bit far – but it is hard to argue against the proposition that AIG got much more risky without Hank around.

And the stories were legion too.  I know someone who was on a trading floor for AIG in Taiwan.  There was a big error and it potentially exposed AIG to hundreds of millions in losses.  Everyone was kept silent because if it leaked then people would front-run AIG closing their position and thus increasing their losses.  People slept at their desks.

But the next morning – fresh off the private jet from New York – there was Hank.  He had come to take control of the situation – and he stood behind traders as they solved the problems for minimum losses.

Hank was the man.

Now Hank is only a couple of percent the man he used to be.  His multi-billion dollar holding of AIG has been reduced to its last few hundred million.  His main asset is Starr Asia – a holding company for a variety of Asian investments (and some old AIG stock).  It was through Starr that Hank made his investment in China Media Express (CCME).

At peak Starr's investment in CCME was worth over $60 million.  This is nothing to the Hank of old – but the new diminished Hank probably thinks that $60 million is a lot of money.  It might even be a reasonable proportion of Hank's fortune.  As recently as January 2010 Starr dropped another $30 million into CCME.  And by that time CCME was a controversial company.

The demise of CCME

I wrote that China Media Express was either  (a) one of the best businesses in the history of capitalism or (b) one of the most brazen frauds in the history of capitalism.

Given the auditor has resigned and is suggesting fraud, the company is suspended and well – all sorts of other ugliness – we know which now.  It was one of the most brazen frauds in the history of capitalism.

And we know who was the biggest victim: Hank Greenberg.

And given Hank's much diminished status this was not chump change.  It was a meaningful hit.

If your one-man-risk-control unit can be fooled by something so obvious then why couldn't it also be fooled by someone offering 25 bps extra carry by double-levering life insurance statutory funds into the AAA strips of subprime securitizations?

China Media Express – apart from being a really fun story – punctures the last Hank Greenberg myth – a myth that I personally believed.


John

PS.  I think we can conclude that Ajit Jain really was the most impressive person at that table.  I sure as hell wasn't.

Banking and supercatastrophe

The second substantive post on this blog was about 77 Bank - a bank in Sendai - the capital of Miyagi Prefecture.  This is the epicenter of the Tsunami/Earthquake damage.

The original post - like this blog at the time - probably had less than 20 readers.

I have repeat the post below.

Warren Buffett once said that Fannie Mae had more supercatastrophe risk in it than Berkshire Hathaway.  He figured the really really big hurricane or earthquake could do more damage to Fannie than Berkshire even though Berkshire is the largest supercat insurer in the world.

Buffett was - I suspect - right.

We now unfortunately have a gruesome test of Buffett statement on finance and supercatastrophe.  There is probably more uninsured damage in the destruction of North East Japan than in any other event in history - and uninsured damage falls sharply on banks.

77 Bank - deeply concentrated in the disaster zone - is the test.  It is not a test I would want to repeat.  But I think we will - at the end of this - be able to confirm Buffett's observation that banks don't like supercats.

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The original post - which was titled Japanese Regional Banks - a mirror on America

77 Bank is a regional bank in Sendai (the capital of Miyagi prefecture). The Japanese guys I know think of Sendai as a backwater – a place where the “cool guys” hang out on motorcycles wearing purple clothes. Economically it is just another rapidly aging backwater where the young (other than those that hang out on motor cycles wearing purple clothes) are moving to Tokyo.

The name 77 Bank harks to tradition. During the Meiji restoration the Emperor gave out numbered bank charters. Traditional regional banks still label themselves by the number. www.77.co.jp and many other numbered sites belong to banks.

77 Bank has a very large market share (near 50%) in Sendai. The market is more concentrated that the great oligopoly banking markets of Canada, Australia, Sweden etc. It should be profitable – but isn’t.

Here is its balance sheet:

(click for a more detailed view).

Note that it has USD42.6 billion in deposits. This compares to $35.8 billion for Zions Bancorp – as close to an American equivalent as I can find.

77 only has USD26.4 billion in loans though. If you take out the low margin quasi-government loans it probably has only USD20 billion in loans.

This bank seems to be very good at taking deposits – but can’t seem to lend money.

This is typical in regional Japan. It is also a problem – because when interest rates are (effectively) zero the value of a deposit franchise is also effectively zero.

So – guess what. It sits there – just sits – with huge yen securities (yields of about 50bps) doing nothing much.

It’s a big bank. It has next to no loan losses because it has no lending.

Here is an income statement:

(click for a more detailed view)

Profits were USD87 million on shareholder equity of 3251 million. You don’t need a calculator – that is a lousy return on equity for a bank without credit losses.

You might think that given that they have no profitability and no lending potential they might be returning cash to shareholders. Obviously you are new to Japan. Profits are 27 yen per share and the dividend is 7 (which they thoughtfully increased from 6).

In a world where banks everywhere are short of capital 77 bank is swimming in it. Here is the graph of capital ratios over time:

This bank has an embarrassment of riches – and nothing to do with them.

Welcome to regional Japan.

An American Mirror

The title of this post was “An American Mirror”. And so far I have not mentioned America.

America is a land with little in deposits and considerable lending. There are similar lands – such as Spain, the UK, Australia, New Zealand and Iceland.

There are also mirror image lands – 77 is our mirror image.

Macroeconomic investing calls

We live in a world with considerable excess (mostly Asian) savings. Banks with access to borrowers made good margins because the borrowers were in short supply. Savers (or banks with access to savers) were willing to fund aggressive Western lenders on low spreads.

77 Bank has been the recipient of those low spreads. It has not been a fun place for shareholders as the sub 3% return on equity attests.

The economics of 77 Bank (and many like it) will change if the world becomes short on savings. There is NO evidence that that is happening now – and so 77 Bank will probably remain a lousy place for shareholders.

The market produces what the market wants

This is an aside really. We live in a world with an excess of savings. This is equivalent to saying that we live in a world with a shortage of (credit) worthy borrowers. So we started lending to unworthy borrowers – what Charlie Munger described as the “unworthy poor [whoever they might be] and the overstretched rich”. We know how that ended.

Unfortunately the financial system cannot make worthy borrowers. It can only lend to them when it can identify them.

This Subprime meltdown heralds the death (for now) of lending to the unworthy. The shortage of the worthy however is as acute as ever – and money for the worthy is still very cheap.

The subprime meltdown does not solve 77’s problems.

China Media Express: all will be revealed

China Media Express (Nasdaq:CCME) has been my favorite drama on Wall Street (see posts here and here and here).

The stock is now suspended without news.  We do not even know who called for the suspension.

It is time for the big reveal...

Just to amuse you though I want to run you through an email exchange I had with Snowball - the anonymous blogger at "Good Stock Bad Stock".  I read his blog irregularly.

You see Snowball is a self-confessed "beginner" value investor - but he managed to write a seemingly balanced piece on CCME.  He then suggested he was going long.  So out of the kindness I wrote him a letter to try and convince him out of it.

This is how it ended:

You wrote an ambivalent piece on CCME.  I am not sure there is much to be ambivalent about there.  Indeed your idea that you might find 10 of these - half will be frauds - and you will be up is a first cut. 

But can I put it another way.  Taleb argues that you flip a coin 50 times and it comes back heads 50 times.  You then ask a mathematician what it will be on the 51st throw.  The mathematician says it should be 50 percent heads, 50 percent tails.  After all probability is uninfluenced by prior events.  

The trader is more canny.  He says it will be heads.  The coin is rigged.
Of course the trader is right. 

Now have a look at the overlap between S-Chip scandals and CCME.  And ask yourself whether your 50-50 guess is right. 

You know what I think: the coin is rigged.

Snowball I think heeded the advice.  I think Snowball owes me - but I guess we find out today!



John

French intelligence on Libya

The Libyan National Oil Company website - like the internet in Libya generally - is down.

Below I have copied a section (from the Google Cache) on relationships with Total - the Paris based oil major.  It is clear that Total is thick with the Gadaffi regime.

So it comes as a big surprise to see Total (ahem the French Government) recognizing the Libyan rebels as a legitimate nation and exchanging ambassadors.  France does not sell arms to rebels or terrorists.  Recognition of the rebels as a nation is a basis for supplying them weapons.

France has gone further and is the major proponent of a no-fly zone.  It has also advocated bombing Libya.

Given the very substantial French oil interests in Libya it is absurd to think that Sarkozy (first and foremost a French Nationalist) did this without either the tacit acceptance of Total or without Total's interests in mind.

France is not keen to go to war (even with jets and no casualties) in support of American oil companies.  They think differently about their own oil companies.

Anyway I think we can conclude that Total (ahem the French Government) has a very different view of the outcome in Libya to that which I am getting in American and Australian media.  Moreover given the very strong presence of Total in North Africa I suspect their intelligence is better than the CIA and far better than (say) the New York Times.

Just noting.

Also noting that Britain is joining the French in calling for EU recognition.  Maybe BP also has a few tricks up their sleeve.


John

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Cache of the website of the Libyan National Oil Company

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نبذة عن الشركة وطبيعة نشاطها محليا:- توتال للاستكشاف والإنتاج ليبيا تعتبر شركة توتال متواجدة في ليبيا منذ 50 سنة. واليوم شركة توتال للاستكشاف والإنتاج ليبيا إحدى الشركات المتعاقدة مع المؤسسة الوطنية للنفط في العديد من المشاريع، أهمها تطوير حقل المبروك الواقع شرق خليج سرت، حقل الجرف في البحر الواقع بقرب من الحدود التونسية. كلا المشروعان يتم تنفيذها مع الشركة الأخت شركة توتال للنفط ليبيا ( سي. بي.تي.ال). وقعت شركة توتال للاستكشاف والإنتاج اتفاقية استكشاف وإنتاج مع المؤسسة الوطنية للنفط بمنطقة A42 في سيرنايكة (شحات)، وبمنطقتي NC191-192بحوض مرزق ومناطق سرت. شركة توتال شريك في NC115- NC186- NC187 و NC190 والمشغلة من قبل شركة ريبسول في حوض مرزق.

Company profile and its local activity Total EP Libya Total has been present in Libya for the past 50 years. Today, Total E&P Libye is in partnership with the National Oil Corporation on a number of projects, among which the development of the Mabruk field in the East Libyan Basin of Sirt, and the Al Jurf field at sea, next to the Tunisian border.  Both these projects are operated by a sister company, Compagnie des Pétrole Total Libye (CPTL). Total E&P Libye signed with NOC exploration and production agreements on the area A42 in Cyrenaica, as well as on the areas NC191-192 in the Murzuk and Sirte regions. Total is a partner on the block NC115, and blocks NC186, NC187 and NC190, operated by Repsol in the Murzuk basin.

7

8

نبذة عن نشاط الشركة دوليا:- توتال شركة مساهمة توتال شركة  طاقة متعددة الجنسيات فعالة في الاكتشاف والمبادرة لتلبية احتياجات الطاقة البشرية. تحتل شركة توتال المرتبة الرابعة بدراجة عالمية على مستوى الرأي العام التجاري في المنتجات الكيميائية، الزيت والغاز، وتعمل في أكثر من 130 دولة ولديها أكثر من 95,000 موظف من جنسيات مختلفة.  بالإضافة إلى إدارة أعملنا حسب أعلى مستويات السلوك المهني، نحافظ على الالتزام وبالشفافية والحوار.  إستراتجيتنا مكرسه لمواجهة التحديات في جميع أعمالنا عند تطور المصادر الطبيعية، حماية البيئية، اندماج عملياتنا في الثقافات البلدان المستضيفة والحوار مع المجتمع المدني.والاحترام للآخرين

Company international activity profile:- TOTAL SA Total is a multinational energy company committed to leveraging innovation and initiative to provide a sustainable response to humankind’s energy requirements. The fourth largest publicly-traded integrated oil and gas company and a world-class chemicals manufacturer, Total operates in more than 130 countries and has over 95, 000 employees.  In addition to conducting our business according to the highest standards of professional behavior, we maintain an ongoing commitment to transparency dialogue and respect for others. We are strategically dedicated to meeting the challenges faced by all our businesses when developing natural resources, protecting the environment, integrating our operations into host country cultures, and dialoguing with civil society.

8

8

نبذة عن نشاط الشركة دوليا:- توتال شركة مساهمة توتال شركة  طاقة متعددة الجنسيات فعالة في الاكتشاف والمبادرة لتلبية احتياجات الطاقة البشرية. تحتل شركة توتال المرتبة الرابعة بدراجة عالمية على مستوى الرأي العام التجاري في المنتجات الكيميائية، الزيت والغاز، وتعمل في أكثر من 130 دولة ولديها أكثر من 95,000 موظف من جنسيات مختلفة.  بالإضافة إلى إدارة أعملنا حسب أعلى مستويات السلوك المهني، نحافظ على الالتزام وبالشفافية والحوار.  إستراتجيتنا مكرسه لمواجهة التحديات في جميع أعمالنا عند تطور المصادر الطبيعية، حماية البيئية، اندماج عملياتنا في الثقافات البلدان المستضيفة والحوار مع المجتمع المدني.والاحترام للآخرين

Company international activity profile:- TOTAL SA Total is a multinational energy company committed to leveraging innovation and initiative to provide a sustainable response to humankind’s energy requirements. The fourth largest publicly-traded integrated oil and gas company and a world-class chemicals manufacturer, Total operates in more than 130 countries and has over 95, 000 employees.  In addition to conducting our business according to the highest standards of professional behavior, we maintain an ongoing commitment to transparency dialogue and respect for others. We are strategically dedicated to meeting the challenges faced by all our businesses when developing natural resources, protecting the environment, integrating our operations into host country cultures, and dialoguing with civil society.

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Keeping up appearances

The Forbes list of the world's billionaires has been published.  Bess Levin and most the rest of the press focus on the big three (Carlos Slim, Warren Buffett, Bill Gates).

I notice the slowly rising position of Liliane Bettencourt - the world's richest woman and controller of cosmetics and hair dye company Loreal.  Hair dye is the foundation and core of that business.

What can I say about Liliane?  Charming, gracious - and yes she dyes her hair.





J

PS.  Written as someone who was in a race between gray and bald.  Gray won.  If gray becomes too desperately unfashionable for men buy Loreal.

The high frequency traders are just making it up

Whilst I am on the subject of rapid trading I can't let this go by (courtesy Josh).  Its picosecond trading: quoting efinancialnews.com...

Speaking at a London conference on Tuesday, Donal Byrne, chief executive of Corvil, a high-speed trading technology company, caused a ripple of audible incredulity throughout the room when he suggested that trading speeds could be reduced to picoseconds in the not too distant future.

Josh who (a) reviews everything and (b) has a decent eye for garbage – made the obvious point.  A nanosecond is a very short time.  Light travels about 30cm in a nanosecond – so if you want nanosecond trading your computers need to in the same box – and probably your chips need to be on top of each.  And even then it is problematic as the data for matching the trade will need to travel through the chips many times to be processed.

Light takes about 20 picoseconds to travel through a silicon chip.  Presumably it has to do that a few times to complete a trade.  So picosecond trading is an Einstein speed-of-light counterexample and Donal Byrne and his company are in line for a Nobel Prize.

Josh is more gentle than me – so I am gonna say it:  Donal Byrne is a technologist speaking garbage.

When the leaders in the field start speaking easily identifiable egregious crap you know the game is nearing the end.  And so it is for high frequency trading.  If there were any decent return on capital for technology to make trading faster that return is likely to be pretty thin.  (I would not invest in any fund that talks about that as its "edge".)

Of course we can all get smarter rather than faster.  Including it seems Mr Byrne...



John

Audacious stock promoters or gungslinger day-traders

Lucas Energy is a small cap company which appears to be honest but surrounds itself with shady characters.  The company buys shut-in and otherwise exhausted oil wells and rehabilitates them – a classic Ben Graham cigar puff play.  The wells may be cheap – and maybe you only get one puff before they finally give up the ghost – but because you picked the cigar butt off the ground the return on equity is adequate.

The company adds a little spice to the returns by cutting in various penny stock companies on wells.  (See for example Savoy Energy - now sub 1c - who uses Lucas Energy as an operator.)

The penny-operators pay good money for lousy (but producing) properties and the stock promoters thus announce their production numbers.  No mention of course that these are the last puffs on a cheap cigar – but hey at least these penny-stock promotes are real producers unlike some I have blogged about from time to time.

And besides you can't knock Lucas energy for selling overpriced cigar-butts.  After all Lucas Energy is in the business of trading in exhausted oil wells and if someone wants to buy a share in one why should Lucas stand in their way?  The motives of the buyers are not Lucas Energy's business.

What is however perplexing is the sudden trading in Lucas Energy shares.  Lucas is Amex listed and used to trade 100 to 300 thousand two dollar shares a night.  This was generous turnover for 16.6 million shares outstanding and a fair whack of those locked up in the hands of management.  I never quite understand why the float of the company needs to turn over ever 50-70 days however this turnover is high – but not unusually so.

Suddenly the market view of Lucas changed.  The precursor was a press release stating that a well in the Eagle Ford trend was finished and they expected it to flow at 500 barrels of oil per day.  This is a fractured well and like most fractured wells should have a large initial flow with a rapid decline rate.  More to the point Lucas only has a 15 percent interest in this well (and a similar interest in another soon to be drilled well).  These are valuable assets but they are not huge assets.  (The value of course being dependent on the decline rate which you would expect to be high - but is at the moment unknown.)

But that is not what the stock market thinks.  Lucas has traded from a low of below $2 in late February to a high above $4.50 on Friday.  More to the point the volume has gone ballistic – 800 thousand followed by 20.7 million, 10.6 million and 25.5 million shares.  The average holding period of the float is now under a day.  These are large numbers as the trading float is probably below 10 million shares.

We could be in the world of hyper-trigger day-traders – but I would be surprised if a single one of my readers knew what Lucas Energy was.  Yet the market sees fit to make this - of all things - one of the most actively turned over stocks since the height of the dot-com-day trader bubble (turnover being measured relative to float not in absolute dollars).

What if anything rational explains turning over float quite this fast?

I see two hypotheses – and I don't know how to pick them apart.  One is that there really are a bunch of gunslinger day-traders (or their computers) here and that all-of-a-sudden they see the reason to trade the entire float of this company more than three times in as many days.

The alternative is that this is a pump-the-volume and see if you can attract suckers story.  The suckers of course could include the gunslinger day-traders.

I can't tell – but the SEC has the power to tell – and when a stock with long associations with penny-stock hucksters has volume like that I can't imagine why the SEC are not looking.  If the stocks are doing round-trips amongst a few players faking volumes then a prosecution should be easy. If however day-traders are really behind it then they are even more removed from economic reality than I thought.  (Day traders like this in energy stocks look a little like day traders in tech stocks in 1999.  Not the top - but certainly a reason for thought...)

I just look in wonder.  There is no model I know where turning over the stock of a company three times in three days is a productive way to allocate capital.  But hey – that is just the stock market – and despite doing this for years I still find stuff like this strange.


John

Diversions: Champian Fulton

I live in Sydney and have good weather and beaches.  But I miss things.

Less now: communications are wonderful.

My friend Champian Fulton now has a You Tube channel.

Health care and fiscal reform

This is one for everyone who thinks the US is insolvent.

The US budget is clearly problematic.  Social security is not a big problem (and people who argue otherwise clearly have not thought strongly about the numbers).  Medicare however is a huge problem - and extraordinarily underfunded.

But a picture on the Wall Street cheat sheet shows how large the opportunities are...






The USA health care spend is at least 3000 dollars per capital too high relative to outcomes versus any other OECD country.  It is probably closer to 4000 per capita.  Times 307 million people there is 900 billion to 1.2 trillion dollars on the table in dealing with health expenditure.

I have written about how you might squeeze the roughly trillion dollars out before - but there may be other ways of doing it.  

However that roughly trillion dollars of excess costs is a lot of peoples' income.  They are not going to want to get squeezed and they will lobby (probably very effectively).  It ain't gonna be easy no matter how you do it.

Still any government that gets this right can right America's fiscal situation with almost no other policy action at all.  What others see as waste I see as an opportunity for America - and a reason why America is ultimately more solvent than the bears imagine.

Comments.




John

Weekend reading: Guadalcanal and Australian foreign policy

Brad Delong wrote a short post recommending Neptune’s Inferno as the best book he has read all year.  I tend to read Brad’s recommendations - so - despite it being a long way from my usual reading material I got a (kindle) copy.

Neptune’s Inferno is an history of the Battle for Guadalcanal in the Solomon Islands - the first major amphibious invasion carried out by the Allies in World War II.  It was also - along with Kokoda - a "Battle for Australia"*.  The battle was fought after spies in the jungle reported that the Japanese were building an airstrip that threatened Australian shipping.  (Keeping shipping open to Australia was a core priority of the US Navy - and rather important to Australia.)

Guadalcanal was amongst the Marine’s finest hour.  It was also the hour at which they depended - more than any other time - on support from Navy destroyers - and seamen died in large numbers to provide that support.  The campaign was fought originally without battleships and sometimes without aircraft carriers.  The battleships were in port in California - not because they were not needed but because there was no way to supply fuel for them.  The tankers were in the Atlantic convoys (or on the bottom of the ocean) and Hitler - by removing the tankers removed the battleships from the Solomon Islands.  The aircraft carriers were limited by fuel and by the navy's (understandable) desire to protect them.  In the end there were battleship-to-battleship battles - something that only happened a few times in WW2.

This is not a book review.  If you like military history you will love this.  If your love of military history does not go far from the various books about military incompetence then don’t bother.

I am writing to comment on American/Australian relations.  There were in the Second World War several "Battles for Australia".  One was Kokoda - a battle fought heroically by under-trained Australian ground troops.**  The other was the battle for Guadalcanal - a battle fought by the (well trained) US Navy and the US Marines.  Australians remember Kokoda but do not remember Guadalcanal.  (Most Australians could not identify where it was despite having recent military involvement there.)  However - to be blunt - we owe you.

And also to be blunt - we keep paying.  If the American President asks for Australian support we give it.  We were in Korea, Vietnam, the Iraq-Kuwait episode, Iraq and Australians are still dying in Afghanistan.

The critics on Australian-American relations state that the object of Australian foreign policy is to internationalize the corpses in American wars.  The strongest supporters of the status quo will argue the same thing.  After all - who else can we rely on to bring serious grunt to battles like Guadalcanal?

And thus it will be - Australia will wind up fighting US wars - just or unjust.  And we will send our boys to die with your boys.  And we will do that despite the fact that we do not vote for your Presidents and exercise very little say about what wars we fight.

So whilst I do not vote in the US elections - about half my readers do.  So dear readers - read the Guadalcanal book if you like that sort of thing.  (It is a darn good book in the genre.) But more important please ensure sensible political debates are had on matters of military adventures.  Please.


John

*The term "Battle for Australia" is misleading as there is little direct evidence that the Japanese ever planned a direct invasion of Australia.  The Japanese did however bomb Darwin (and in a minimal sense Sydney).  They also extensively targeted Australian shipping routes.  The Japanese campaigns were clearly targeted at control of Australian waters.  The Japanese invasion fleet repulsed at Coral Sea was probably headed to Port Moresby.

**It is not that the Australian military is poorly trained and hence deliberately sent poorly trained troops to Kokoda.  Its just that our best troops were in Africa at the time fighting the Nazis.  We were in a better position when the African troops came back.

PS.  The (appalling) politics of the Solomon Islands is a direct result of the power structures left behind by Americans at the end of the second world war.  If someone wants to examine the effects of nation building (or the lack-thereof) after military destruction then Guadalcanal (where there is an on-again-off-again civil war) would be a good place to start.  Australia dropped a peacekeeping force on Red Beach in Guadalcanal in 2003 - a reproduction of the original American landing.

PPS.  There was another "Battle for Australia" - also largely fought by the Americans - the Battle of the Coral Sea.  That was one of the major battles of the War - with both the Americans and Japanese losing an aircraft carrier.  The US carrier Yorktown was also damaged - and as a result was lost at Midway.  Coral Sea was the precursor to the Guadalcanal campaign - if the Japanese could not get carrier superiority in the area the idea was to build airstrips on unsinkable carriers (islands).