Monday, July 26, 2010

California Dreaming: requesting comments from Wachovia customers

The defining character of bank results up until Wells Fargo was (a) rapidly improving credit and (b) declining revenue.

When I state that bank credit in the US is clearly and unambiguously improving my email runs hot with people arguing that the banks are faking it.  But they are not – and there are lots of tests of that.  The problem was and remains revenue – the extreme out come is the Japanese outcome – banking without revenue, credit losses, glamour or highly paid bankers.

But the Wells Fargo result was different.  Revenue was flat.  That result is so much stronger than the competition it is silly.  Moreover interest margins were up.  Again – this differs sharply from the competition.  One correspondent wrote to me and tells us that Wells Fargo shows how it is done.  However that does not do the problem justice.  The numbers do not tell you how it is done – they just tell you that it is being done (provided the numbers are not faked).

My best guess is that Wells is using its (legendary) ability to extract revenue from a customer base to either service better or screw over (depending on your perspective) the customers of Wachovia.  This quote I think is the story:

The merger integration activities are proceeding on track and the combined company continues to produce financial results including revenue synergies better than our original expectations.

Now I have seen a lot of banking mergers with dodgy estimates of “revenue synergies”.  After all revenue synergies means extracting more financial services revenue from customers than they were previously paying – and – as even the most casual observer has noticed – most Americans pay a lot of revenue to financial institutions. 

But in this case they are ex-post claiming “revenue synergies” and – the numbers show – are probably achieving them.

So this is a call to former Wachovia customers.  What is it that Wells Fargo has changed so that you pay more money to the bank? 

Comments please.



PS.  Obviously this is part of it – but it does not explain all the numbers:

Year over year, CDs declined $63 billion, primarily the result of $57 billion of higher-cost Wachovia CDs maturing, yet total core deposits were down only $3.9 billion from a year ago.  Checking and savings deposits represented 88 percent of total core deposits. Our average deposit cost was 35 basis points.”

Saturday, July 24, 2010

Already a short follow up on Tarrants and Astarra

The local paper has reported that Ross Tarrant has closed the financial planning arm of his business

Ross Tarrant’s business survived the financial crisis – according to quotes attributed to him in the local paper – by taking undisclosed commissions called “marketing allowances” to direct money into Astarra funds.

His business however it appears does not survive his clients having their retirement savings stolen.

The Tarrants website is dead today too.

Australia has a system of privatized social security.  The US flirted with such a system too.  However this case shows that getting ordinary members of the public to deal with intermediaries (brokers, financial planners etc) can often be a quite one-side affair.  The local paper also points to a local (coal) miner who lost $200 thousand in this debacle.  He says he would never have invested had he known about the secret commissions.  I guess that is why they were secret.

Astarra and the financial planners – Ross Tarrant tells us how his business survived the financial crisis without shedding a job

By now it is obvious – the money in the Alpha Strategic Fund – now named the Astarra Strategic Fund – has been stolen. Who was the actual controller of this theft and who was “just following orders” has yet to be judicially determined – but Shawn Richard – the front-man for this mess in Australia – put forward (under privilege) the Nuremburg defense: he was just following orders from Jack Flader in Hong Kong.

More interestingly he testified that he paid large undisclosed commissions to financial planners – sometimes going under the rubric of entirely undocumented loans and sometimes called “marketing allowances”. The loans were particularly peculiar – after all when was the last time a financial institution “lent” you a million dollars based on a handshake with no documentation and not recorded in any accounts?

Anyway Ross Tarrant – who I gather perceives he has done nothing wrong – was the recipient of “marketing allowances”. He runs a large financial planning firm in Wollongong NSW. The local paper has reported that he has come out fighting. This may be the only time in my life I have quoted the Illawarra Mercury with approval – but this deserves to be quoted in full…

Tarrants managing director Ross Tarrant has broken his silence on bombshell claims his company accepted secret, illegal kickbacks from failed fund manager Trio Capital.

A NSW Supreme Court hearing last week was told Tarrants allegedly accepted $840,000 worth of secret payments last year as an incentive to invest clients' money in the failed venture.

In a statement released yesterday, Mr Tarrant described the money as a "marketing allowance" and said while the firm did not normally accept commissions, the one-off payment helped the firm survive the global financial crisis.

"During ... one of the greatest financial crises of our time, the receipt of this once-off marketing allowance from Astarra enabled Tarrants to weather the GFC without shedding a job," Mr Tarrant said.

"After receiving the marketing allowance from Astarra, Tarrants returned to a 98 per cent fee-for-service position."

I do not think this needs any embellishment.

(PS. For those that do not know the Mercury is a small – usually reactionary – local paper - which - given the style - I incorrectly thought was News Corp)

Wednesday, July 21, 2010

Part VI in the Ed Hugh series – Emporiki decides not to compete on deposits

Lets recap my arguments from the early parts of this series.  In Part 2 of the series I showed that if the Greek sovereign defaults either (a) it leaves the Euro and forces all Greek companies to convert all cash assets and liabilities to Drachma or (b) the Greek institutions including – say National Bank of Greece – will wind up going bust.  In the archetypical sovereign default with a fixed currency (Argentina) not only did the sovereign default – but all private debts got redenominated in Pesos.  I argued the same must happen in Greece if Greece were to default because Greece would want to save their institutions.  Nobody has argued why this won’t happen.  Then again nobody has provided a decent mechanical explanation for how it does happen – we don’t know how to leave the Eurozone even if you want to.

In Part 3 of this series I showed you the balance sheet of Emporiki – the Greek controlled subsidiary of Credit Agricole.  The balance sheet showed 8 billion euro of interbank funding funding the Greek business.   I argued that if Greece went off the Euro those interbank funds would be repaid in Drachma with a loss determined by the post-default trading level of the Drachma.    

Every Euro of deposits raised in Greece is a Euro that does not flow across the Greek-French financial border and it is a Euro not subject to devaluation if Greece were to go off the Euro standard. 

In my view the real risk to Credit Agricole in Greece is NOT credit losses (their lending has not been outrageously bad).  The real risk is that Greece leaves the Eurozone and the assets and liabilities of the Greek banks are revalued in Drachma. 

Into this I want to throw a slide out from Credit Agricole’s recent presentation on how they are dealing with their Greek subsidiary.  They are making a conscious decision NOT to pay Greek interest rates on term deposits – and they expect their deposit book to shrink from 22.5 billion Euro to 15.8 billion Euro.  Presumably they will need to fund another 7 billion Euro from France.



What to call this?  Double or nothing!  If Greece leaves the Eurozone Credit Agricole has almost doubled their losses.  But – if Greece stays in the Eurozone – hey – they make more interest margin for the next few years because they pay cheap French financing cost to fund Greek business.  [Isn’t that how they got into this mess in the first place?]

They better hope I am not right.  If I am I can expect the resignation and disgrace of Credit Agricole’s CEO.  This is a dangerous game.


Tuesday, July 20, 2010

Turning Japanese? Comments on the latest bank results

I am thinking out loud here – and hope for comments.  For our portfolio it has not been a happy few days.  You will need to click for the tables.


With a due apology to the Vapors the new bear case for American banking was laid out in recent results (especially Bank of America).

No sex

No drugs

No wine

No women

No fun

No sin

No credit cards

No wonder it’s dark…

I’m turning Japanese

I think I’m turning Japanese…

The second post on this blog (back in the days when I had twenty readers) ran through the financials of a typical regional Japanese bank.  I picked 77 Bank (because I once owned it) but I could have picked one of about fifty others.  The bank had a great looking deposit franchise off which they made no revenue.  After all how do you make any money out of a deposit book when interest rates are zero?  It is impossible to make deposit spread.  And – in Japan – there was such anemic loan demand that loan spreads had collapsed to near zero.  The bank had fabulous credit but remained vulnerable to even the smallest credit downturn because there was no pre-tax, pre-provision earnings to offset the losses against.  Anything above the near zero losses would impair capital.  This was a nightmare of banking without revenue, without credit losses and entirely without glamour.  If you were a shareholder at least you could shrink the bank and return capital (though the Japanese seldom do that).  If you were an employee it was worse – all except the very senior employees were paid below what they might have earned had they chosen to be an industrialist rather than a banker – and pay rises were not possible because the banks could not afford them.  In America high bank revenue allowed some (very) highly paid employees – but this did not happen in Japan. 

I have maintained throughout this blog that I thought that zero interest rates in America would have a different outcome to zero interest rates in Japan because Japanese banks are predominantly deposit franchises and zero interest rates are very bad for them – but that American banks – especially larger American banks – are fundamentally lending franchises and zero interest rates would not impair their ability to make a spread on the loan book.  In other words I thought that American regional banks (and super-regionals like Wells and Bank of America) would not become large versions of 77 Bank but instead would return to strong profitability.

This is a deep and fundamental call – and about 25 percent of our portfolio at Bronte is based on this call – so – to put it mildly it matters to us.  There are two historic models for post-banking collapse banking sector recoveries.  There is the typical model applied in Scandinavia and for that matter in Australia after its last round of banking troubles (1992) but also in Thailand, Malaysia, Indonesia and many other places.  That model has the competition wiped out or seriously impaired by the crisis followed by (a) a slow repair of credit impaired balance sheets offset by (b) solid profitability as competition is sharply reduced by the crisis and banking services remain central to the economy.  In this model banks either die in the crisis or give you 10 to 20 fold returns from the bottom of the crisis as the surviving banks mop up the (very rich) spoils.

There is an atypical post-crisis banking situation which was Japan.  In Japan the banks were always deposit rich (a function of their historic savings culture described in this post) but they became even more deposit rich as customers cash preference increased to hitherto unheard of levels.  Loan demand however turned completely anemic – and though competition was somewhat reduced margins were crushed to the point that banks were – at best – marginally viable. 

Lots of readers ask me to explain my Bank of America position – especially given I have been so skeptical of their past accounts.  The explanation is easy – I have seen this movie before.  I looked at the competition a few years ago (essentially a massive shadow banking system outside the majors) and note (with glee) that this low-margin competition is simply no longer there – and as far as I can tell – it is not coming back.  I believed that bank revenue would be strong – at least for the survivors – and if you put a five-to-ten-year time horizon hat on.  More than that – I thought the revenue – spread over a few years – would be more-than-enough to cancel out the excesses of the last boom.  [I expressed that view several times on the blog…]

But there is that other movie.  That movie is in Japanese – only the subtitles are in English.  A good proportion of my readers are bankers.  Dear Readers, you better hope it is not that that movie – because if it is your bonus will be small for the next few years – after which you will negotiate a pay cut.  Beyond that your income will go into a bit of a decline.  One day some of you will wake up and find that – as a fairly senior banker – you are paid about as much as policeman.  Welcome to the middle-and-lower-middle class.  In a Japanese scenario bankers are paid less – much much less.

The important thing as a stockholder however is not what next quarter earnings will be (they will be difficult).  It is whether – five years from now the surviving American banks are milking their privileged position as survivors or whether the margins have collapsed as-per-Japan making banks horrid businesses. 

It is in this context I want to make some comment on recent bank results.  I am not interested in whether next quarter will be difficult.  I am interested in whether we are “turning Japanese”.

Firstly credit is better than even the most ardent bulls would have predicted at the base of the crisis.  If you are still bearish big American banks on credit you either think they are faking it on a grand (even criminal) scale or you believe in a massive double-dip or you are just not looking.  Credit is unambiguously improving in the numbers.  Most the bears in the financial blogosphere – and there are many – were flat wrong on how long credit would take to turn.    

Properly adjusted delinquency is falling (albeit slowly) and charge-offs are falling relatively fast.  Charge-offs on mortgage credit at JPMorgan for instance dropped by a third during the quarter.  JPM however did state in the conference call that the new lower level of credit losses were flat over the quarter and Jamie D was careful to indicate that you should not extrapolate the falling credit losses into future quarters.  That said – even sustainably higher than historic (but not threatening) sustained credit losses should not be a problem because you should be able to price the higher credit loss expectations into loan margins. 

Which of course brings us to the bad part of the bank results – revenue.  The revenue situation has suddenly got ugly – so much so that it challenges the central basis over which part of our portfolio is organized – which is that we are not replaying the Japanese movie – and that bank revenue will be fine long term just as it has been after most (but not all) banking crises.  The trillion dollar question in bank valuation is “are we turning Japanese?”  As the Vapors suggested in their classic 1980 track – turning Japanese is no fun (it is also no sex, drugs, wine, women or sin – and in the banking context it is no credit cards). 

The market did not like the JPMorgan result and they hated the Bank of America result.  The problem is revenue decline – and guidance as per revenue decline.  The guidance is simply horrid.  BofA is not known for down-beat conference calls – but this was decidedly downbeat.  I would love to summarize it – but – hey – but Stephen Rosenman has done so far better than me.  Sorry to copy in full – but you can go to the original:

Bank of America's (BAC) conference call is a must read. Warning: it is not for the faint of heart. Its implications for banking, now that Congress has passed credit card and financial reform, are not pretty.

1. The Card Act is expected to cost $1 billion after tax.

2. Regulation E/Overdraft policy changes have already cost $1 billion after tax. The fourth quarter of 2010 will see a further reduction of $2 billion pre tax.

3. The Dodd-Frank Bill impact at this point is uncertain because hundreds of rules need to be written still. It is expected to be very costly.

4. The Durbin Amendment in the Financial Reform Bill is expected to decrease debit card revenue each year by as much as $1.8 to 2.3 billion starting in Q3 2011. BAC expects to take a $7 to $10 billion charge in goodwill in Q3 2010 due to the impairment of the debit card goodwill.

5. Net interest margin is dropping. BAC's dropped 16 bp to 2.77%. Per the call, the low interest environment is flattening the returns banks can get for their borrowed money. Loan demand is weak. As a result, net interest income was down over $800 million from Q1 2010.

These 5 banking nightmares will likely visit other financial institutions. BAC is the first to quantify some of them. BAC reiterates throughout the call that it has no idea how to "mitigate" these. While the legislative action may be intended to help level the playing field for consumers and to prevent banking excesses, for now, it appears to be leveling the financial institutions.

It is surprising that Congress would inflict these new burdens on the banking industry in a fledgling recovery. The idea was to prevent new bubbles from forming. It would be sadly ironic if the reforms were to cause the recovery to fizzle. After all, how many recoveries have occurred without the banks?

Disclosure: No Positions

I read Rosenman’s piece and got bullish.  The reason is that 1, 2, 3, and 4 on this list are one-offs.  They will compress margin – but they do not lead to sustained margin pressure.  That is fine because the bank will – over time – be able to make up the margin elsewhere.  As Jamie Dimon might say – if the diner can’t charge for ketchup they might just charge more for the hamburger.  They are – if I might put it this way – not Japanese style events.  In Japan the bank can’t seem to get away charging for anything

Alas number 5 on the list is Japan writ-large.  Loan demand remained anemic for decades and eventually loan spreads went close to zero.  Loan spreads are falling normally – after all older high rate mortgages are refinancing into lower rate mortgages – and I think that will be fine.  As long as the competition is not to bad the bank will keep a good margin.  Alas some parts of the bank have very bad loan demand.

Front-and-center is credit cards.  BofA has one of the lowest spread, highest credit quality card books in America.  Here is the quarterly data from their cards business.  (Remember to click for the full table… and you will need it for the conversation below.) 



Now note this is not a junky fee-driven credit card business.  The gross interest yield is only 10.9 percent (and falling!).  There are still new accounts.  But the balances outstanding are now only 143 billion – down from 169 billion.  This fall is happening across America.  The Federal Reserve data have total revolving consumer credit outstanding falling from 905 to 824 billion in the same period – but BofA is losing share (from 18.7 percent to 17.3 percent).  These are the highest spread product on BofAs book.  There is no obvious problem with originating new accounts – just maintaining balances.  In all of BofA’s results this the “most Japanese” thing you can see. 

The rest of the book – well margin is tight – but it does not look to be driven by the things which made Japan so painful for bank shareholders.  In the credit card book – not so much.

One thing however leaves me a little chirpier.  Purchase volumes actually rose – and they rose well in the quarter.  The quarter had almost Christmas purchase volumes.  The effect is even more pronounced with debit purchase volumes (ie purchases that do not create a debt).  The American consumer did not stop spending – more they just stopped borrowing.  I do not know how much of this is people stopping paying their mortgage but still paying their credit card – but there is some evidence that is happening.  Perhaps the strongest being JPM’s statement that about half of the JPM second mortgage where the primary mortgage is delinquent are still paying their second mortgage.  The same borrowers are also presumably paying off their credit card balance but intend to default on the mortgage.

Finally – and this comes to the competition point – the average yield on this credit card book is sub 11 percent.  That is a high interest rate for Bank of America but not a high interest rate for credit cards generally.  Despite the tone of the credit conference call (unremittingly bleak as to revenue) I suspect there is a little flexibility to increase pricing in this area.  After all the idea of a new securitisation driven credit card originator poaching the business – that seems unlikely.  But we will wait and see on that.

Business lending is NOT turning Japanese

Business lending volumes suck.  But hey – in non-Japanese fashion the margin on them is actually increasing – it was 2.32 percent verus 2.03 percent a year ago.  This is not turning Japanese – it is far more like a conventional post-crisis bank recovery in which margins get fatter. 


This does not look anything like a post-crisis Japanese bank – there the margins fell asymptotically to zero.

Finally – what is the long-term downside?

This gives me a little comfort – not much – but comfort in misery nonetheless.  Japanese banks have low single digit ROEs.  5% is sort-of-typical.  This would suggest that they should trade at very low multiples to book – but they do not.  In Japan a 5% ROE is not too bad – because it needs to be compared to a zero percent bond rate – as long as a bank earns more than its cost of capital it should trade above book – and 5% is more than the cost of capital in Japan.  So banks with shockingly and sustainably low ROEs trade above book.  They might actually a good investment relative to JGBs and you can get outperformance out of misery.  BofA is no longer trading far above book.  In a Japanese scenario I am not sure you lose to much.  But alas you can get really really bored waiting to make no money and misery can last a long time.

For comments please.




Post script: since I wrote this Goldies reported – and their revenue was also crunched.  So was their allowance for compensation – albeit from very high levels. 

Monday, July 12, 2010

Bank of America comes clean – well sort of …

Bank of America has finally admitted that it understated the quarter end assets and liabilities for the years 2007 to 2009.  It does not (yet) admit that similar transactions took place in many other years and it does not spell out the effect of these transactions on BofA’s need to carry capital.  To quote BofA’s local paper:

Bank of America Corp. has told securities regulators that it made six quarter-end transactions from 2007 to 2009 that were not in "strict compliance" with accounting rules.

In correspondence with the Securities and Exchange Commission, the Charlotte bank said the so-called "dollar roll" transactions were designed to meet internal balance sheet limits. The bank said it does not believe the transactions had a material impact on its financial statements, according to a May 13 letter posted by the SEC late Friday.

I wrote a post stating that BofA had long been reducing its quarter-end balances in March this year so this should not surprise regular readers.  Nor will not surprise regular readers of the Huffington Post and many other places where my article was reprinted.  I think the WSJ also had a poke at the story after my blog post.  Alas the story died down as BofA issued denials only to retreat from those denials in a (then private) letter to the SEC. 

BofA note that the transactions did not change reported profit.  I agree.  The transactions were however designed to shrink reported quarter-end balance sheet and hence reduce the apparent need to hold capital.  One of the reasons why BofA was short capital when the crisis came was that they did things like this to reduce the stated need for capital and they ran capital close to the “apparent” minimums. 

Anyway there are things that bug me about BofA’s admission.  Firstly at senior management it appears that they did not even know they were doing this.  The company denied the bleatingly obvious in the aftermath of my original blog post.  I do not think they were directly lying – the better explanation is that they simply did not know.  Moreover they now state that the transactions “were designed to meet internal balance sheet limits”.  In other words some internal part of the bank was using more balance sheet – hence more capital – than it was permitted under internal risk controls and entered into quarter end transactions to hide it. 

Lets put this more directly.  BofA imposes internal risk controls (usually called limits).  BofA staff enter convoluted transactions to avoid having to meet those limits.  Head office does not know – and only in response to an SEC subpoena (following a blog post a nondescript fund manager in Australia) do they conduct a review and find these transactions.  This is – it seems – worse than the transactions itself.  What it demonstrates is that BofA does not police its own risk control rules until forced to by SEC subpoena.  Put that way you have to ask “who in BofA will be forced to resign?”

More pertinently – this could be spotted by a (very) careful reading of annual and quarterly reports from Australia.  Everything needed to demonstrate that there was something strange about quarter ends could be done by someone with the published annual reports and quarterly summaries.  If anyone on BofA’s board carefully read the accounts they would have spotted the same thing.  (I guess that this demonstrates that the entire BofA board did not or was not capable of undertaking such a careful reading of their own accounts.)

My original post did this for 2006.  In 2006 as I showed the quarter end assets were substantially less than the assets averaged over the quarter.  In some quarters the difference is 46 billion dollars (substantially more than the 10 billion admitted to in 2007-2009).  The same incidentally is true of 2005 and I think (though I have not rechecked) that I first spotted this in 2004.  So far BofA has not come clean about those years.  But then again we now know that head office did not know that within the bank parties were entering transactions designed to thwart internal balance sheet limits – so if BofA cares to check they will find that the problem exists over many years. 

My estimate is that – as a result of this transaction – BofA’s looked like it required about 2 billion dollars less capital than it should have been carrying had it stated its balance sheet fairly.  2 billion in capital is significant – but is remains small in the overall problems that BofA had during the crisis.  This is – in an accounting sense – a second-order issue.  But as a statement about BofA’s control culture it is not good.  [The culture of hiding risk taking however should – in a post-crisis environment – be relatively easy to address…] 

The unnamed counterparty

These transactions were done – according to press articles – with counterparties unknown.  It is passé these days to charge the prostitute but not to charge the John.  The press however would often prefer to report on the (high profile) John than the prostitute.  Either way I wish this were corrected.

The transactions designed to hide quarter-end assets and debt were described as “roll transactions”.  I guess I am new at this game but I had not previously heard that jargon.  Anyway – with a “roll transaction” there has to be a counterparty who is willing to prostitute their balance sheet and allow the “assets” (at least temporarily) to be stuffed in.  The willing whore in this case was almost certainly Japanese – at least for some quarters.  Japanese banks typically had average balances of securities LOWER than end period balances (Mizuho is an exception).  I once meticulously went through the quarterlies of MUFJ and found exactly this trend.  In their SEC filings MUFJ tends to report its capital (or at least it did in those days) as average capital to average assets.  (I guess that makes sense when their end-period assets are stuffed with assets parked from American banks.)

Still if some trader at BofA (or someone else wanting to skirt BofA’s internal controls) wants to park assets at quarter end – and to pay good money for that privilege – then who am I to suggest that otherwise lowly profitable Japanese banks should say no?  




Disclosure:  I have never thought that we should use the blog to “talk our book”.  We will occasionally explain why we own things (which I guess is talking our book) but we are happiest discussing what is wrong with our positions.  Our biggest position remains long Bank of America (and it is more-or-less the only stock I suggest when people want a stock tip).  BofA might argue that with friends like us they don’t need enemies.  Maybe that is true – but perhaps they need board members that can read accounts. (I am offering…) 

Also – for the SEC – note that BofA shareholders have suffered much already because BofA took too little capital into the crisis.  What you should be seeking from BofA is not penalties – it is a process for fixing their internal controls so that head office can ensure that divisions are not entering transactions designed to thwart internal controls.  Surely that is far more important than a rap over the knuckles? 

Hey – the SEC should not need to seek this.  BofA should just do it.  I anticipate being a shareholder in a decade – so this matters to me. 

Friday, July 9, 2010

Don't waste a good spy exchange

I grew up in the latter part of the cold war and despite our modern day challenges we are far better off with the nuclear armed and ideology fueled terror that pervaded the post war era well behind us. But the cold war had its allure for an Australian boy often bored by the banality of summer barbecues, afternoon teas and dull middle-of-the range local politics. The cold war was the great war of my youth and it had its own strange allure. I feasted on a diet of Le Carre where stoic and very clever little men from the Circus fought an endless twilight war of attrition against their bleak opponents from Moscow Central. I lapped up the gradual leakage of information on the compromising of western intelligence agencies by soviet moles, and was surprised by the subsequent revelations that MI6 and the CIA were at least their equals.

My spies weren't James Bonds. They were non-descript George Smileys. They shuffled in the shadows and plotted against the Soviets whilst mostly fearing betrayal from their closest colleagues. And the imagery was strangely compelling. Their work was done under grey skies and in dank offices. Bitterly cold middle European cities were most often their battle ground, so that dark heavy coats was their attire of choice. Their boots would clash on frosted cobbled streets as they shuffled out for a drop off. Everything was very serious. It was the raw, cutting edge of the battle of ideas.

But Reagan and Gorby put an end to all of that - and Le Carre was never as good again.

So now we are on the cusp of a likely spy exchange - with the 10 Russian sleepers to be exchanged for western agents who have been buried, along with non compliant oligarchs, somewhere in Putin's modern day gulag. The US and Russian agencies quite sensibly could simply put the spies on a plane and be done with it - but that would be an aweful waste of a good spy exchange. There is a theatre to these things that must be upheld. I know the Anna Chapman fans probably have other ideas - but I miss the Le Carre style of cold war chic. Here is one last chance to see an exchange done as it should be: people as puppets, all victims to realpolitik.

A cursory Google Earthing of North Eastern Estonia suggests that the bridge from Narva to Ivangorod could work very well. The exchange needs to be conducted at dawn and the spies brought to each side in military lorries or dark limousines. The dress code is sombre, bleak and ill fitting. Cigarettes should be provided for each spy so, as they are released, they can trudge across the bridge and share a smoke and a wry exchange with their counter part. As the last exchange is made the sun will rise and, modern day traffic can re-enter the bridge and the cold war can once again slip into the past.

Sunday, July 4, 2010

The Confidence Game: a commentary on the Ackman-MBIA book

A correction to this post re the Australian infrastructure projects is at the end...

The Confidence Game – the book about Bill Ackman’s pursuit of MBIA is a good book – but this post is not a review – rather a commentary ex-post on the whole bond-insurer thing.
For those that do not know financial insurers were a handful of AAA rated companies who guaranteed financial products (mostly municipal and quasi government debt and structured finance) and – through their guarantee – imparted their AAA rating. All of the financial insurers got into some trouble and a few have failed. MBIA somehow soldiers on – Ambac has been split by its insurance regulator. These companies were ground zero of the crisis.

But I will start at the beginning and with an example which is more than a decade old – but which I think explains both the use of and failure of financial guarantors for structured finance.
Imagine a furniture shop which sells furniture both for cash and on store-generated credit. About half the sales are store generated credit and they are known as an easy place to get a loan. Nonetheless the shop has real customers as well – and those customers buy furniture either for cash or on credit cards supplied by third parties. [For those with a keen sense of retailing history I am not thinking of Sears.]
Anyway these loans perform sort-of-ok. The spreads are wide (more than 20 percent) but losses are about 10 percent. The loans are pooled and securitized – and – for the sake of argument – assume a piece of paper is sold entitled to the first 50 percent of the cash flow from the pool of loans. It is pretty hard to see how these loans can fail so badly the senior strip fails to pay. 
If even 45 percent of the loans actually pay over the term of the loans (assume two years) then – you will receive back 45 percent plus 20 percent spreads on those loans over two years. That is more than enough to ensure a senior tranche will repay in full. In fact – with a few years of payment history (showing the loans to be good) I would have happily rated a really senior tranche (with 50 percent protection) as AAA.
Ok – but there are things that can go wrong. And – to be really AAA you would need to cover them.
For example – the servicer of the loans can simply fall apart through incompetence or bad management of financial misadventure. So you would – to ensure a AAA rating – want to be allowed to change the servicer. And the deals I saw generally did this.
And – because I am a passive investor I would want someone with some skin in the game to be allowed to change the servicer – so it is useful to have a senior party – perhaps a guarantor – who has both the skill and incentive to change the servicer.
So far this is pretty good – and it is very hard to see why this should not be rated AAA. Indeed if I look at it now – and even knowing what happened – I find it difficult to imagine this defaulting to the AAA level. Sure it would fail in a total collapse of the US economy with unemployment rates above 50 percent everywhere. And I doubt the loans would survive a nuclear war and subsequent nuclear winter. But it is really pretty hard to imagine them defaulting.

But I am cheating. This is a real deal – and whilst nobody was ever criminally prosecuted I have a fair guess what happened. (Civil cases were still running last I looked which was years ago…)
What I think happened was that the furniture retailer made up customers – simply made them up. The people did not exist. The names in the loan files did not correspond to real people at real addresses. Instead the shop “sold” the furniture on credit to imaginary customers and then sold the imaginary loans to Wall Street for real cash. The furniture was then put back on the floor – maintaining the illusion of real furniture shops with real people walking around them.
The securitization trusts had to get bigger and bigger each year – with more fake loans made to make interest and principal payments on old fake loans. When they had grown too large the entire Ponzi came crashing down.
What you saw when you looked at the books was a fast growing furniture shop. When you looked at the shop you saw – well – a shop with real furniture, real staff – a real business.
But what was really there was an elaborate fraud.
The money – hundreds of million – supplied by Wall Street – was never recovered.
Losses in the securitization trusts rapidly went above 60 percent – indeed far above 60 percent.
You see it now – this deal really was super safe provided there was not mass fraud. And mass fraud makes something that looks really quite straightforward spectacularly different from appearance.
Flash forward to March 2000 – the height of the tech bubble – and Bob Genader – later to be CEO of Ambac but then the CEO of the Ambac/MBIA joint venture in international financial guarantee was travelling through Sydney. He was underwriting some part of yet another Macquarie deal and he dropped by my old shop for an investor relations meeting. The stock – like many financial stocks – was in the sewer then (memory says it was under $30 which looks great compared to today’s price of about $1 but lousy compared to the $90 plus it traded at later.) This was the first “real company meeting” I had done for my new shop. I started in the business about a month earlier.
Genader chatted with us for about 90 minutes while we puzzled over a business that was 150 plus times levered and never seemed to lose any money. I had done some research for this chat and already knew about MBIA’s AHERF transaction (more on that later) but I was not familiar at all with other parts of the business (for instance I simply did not understand the guaranteed investment contract business which was to cause Ambac so much grief later on).

About ten minutes of the conversation revolved around the above furniture store and the defaulted AAA securities. Genader noted with a smile that no bond insurer covered this paper and observed it must be fraud. He then said something which has stayed with me ever since – he said that Ambac and MBIA really provided financial fraud insurance. As he described deal-after-deal I had the same impression – I could not see how they could fail – but deal-after-deal could fail the same way – through mass fraud. If the security (say loans or road tunnels or tax liens or whatever) did not exist then the loans would fail.


As I looked a little closer there were clusters of deals which could cause major problems without fraud. For instance there were many loans secured by future landing fees at large airports. None of these loans were individually enough to cause Ambac or MBIA problems – but collectively they could be nasty. For instance just imagine if terrorists worked out a truly non-detectable way to blow up commercial planes and did it on a regular basis. They could make all commercial flight grind to a halt and hence turn all of the airport deals bad simultaneously. This would make the whole of Ambac or MBIA precarious simply because there were too many airport deals. Risk concentration and leverage meant that even remote possibilities had to be considered to make the judgment Ambac or MBIA were sound. There were just too many out-there things that could go wrong…

I don’t think any of the airport deals have failed – and some that I thought were questionable are still adequately covered.

Still – I think it was – and remains true that the main thing underwritten by Ambac and MBIA was fraud protection. No fraud meant the deals were OK. Fraud meant that the deals could fail spectacularly. Fraud produced spectacular and highly unexpected losses.

The only underwriting standard that made sense was “zero loss” because any loss 150 times levered could kill you. And the only way to ensure zero loss was to insure only things that could never possibly default and to insure that those deals contained no fraud.

In the furniture store case that would have been easy – get a hold of the loan file and physically check a random 100 loans. Check that the people really exist – check the sources of payments – check the phone numbers. If anyone had done the fraud would have been caught. Stopping fraud is – at least in the case of Ambac and MBIA – what due diligence was (or at least should have been) all about.


Flash back a few years to the 1990s and Sydney’s Eastern Distributor. The ED is part of my life – I drive through it regularly to go to the Northern side of Sydney Harbor (colloquially known as “the Dark Side”). The toll is outrageous.

The ED however required about half a billion dollars of finance. Like all Macquarie deals of the time it required what was then (and is now) a high level of leverage. [This deal was only modestly levered by the standards of 2006.]

This finance was not going to come from Australia as the Australian banks had already had their fill of Macquarie. It had to come from the bond market. There is however only a thinly developed bond market in Sydney. So Macquarie went global.

The only problem was that nobody in the global markets had any idea as to whether the Eastern Distributor was a good deal. If you had asked the what the base traffic level in Southern Cross Drive was they would not have had a clue…

Enter Ambac/MBIA. They could take a piece in the middle of the capital structure. They insured a mid-ranking piece – of about 70 million (and these numbers are from the deep recesses of my memory) about 200 million of debt senior to them and 230 million junior to them.

If the deal with the government was real and the traffic levels on Southern Cross Drive were not faked this piece of debt was money good. It was not going to default – and the risk to Ambac/MBIA was very nearly zero so – by rights Ambac/MBIA should have not been paid much for accepting the risk.

However Ambac/MBIA got paid really well – and they got paid well for a reason. By putting their guarantee (AAA) on an intermediate piece of debt every piece of debt senior to them in the structure was considered (justifiably) by the market to be AAA and the debt that was junior to them was also probably sound. The Ambac/MBIA joint venture – by putting their name to the deal – vouched for the entire deal – and hence improved the pricing of the entire deal. And so they got paid on the entire deal but only insured about 15 percent of it.

I remember working out the ROEs at the Ambac/MBIA leverage levels and assuming high costs – and the ROEs were in the 30s. This was a lovely business – one of the best financial businesses I have ever seen – a Warren Buffett quality business (and it came as no surprise to me that Buffett at various stages had owned some Ambac and MBIA)…

The JV however did have check that there was no fraud. That did not mean they needed to duplicate six months of traffic surveys on Southern Cross Drive – but maybe just five times half an hour check – randomly chosen – to see if the traffic volumes were as presumed in the model were accurate and had not just been “made up”. And I gather Genader made sure that check was done. The JV was being well paid for ensuring that there was no fraud before it provided a minimal amount of almost zero risk insurance.

A rating agency could come and tell you the debt was AAA – but the JV was much better than a rating agency. It was a rating agency run by people who looked competent and were risking real money – their own money – on the deal. It was a rating agency that was putting its money where its mouth was. That didn’t mean that they would never get it wrong – but in this case all that was required not to “get it wrong” was to check that there was no fraud – and that was an easy check…


Now you see what the features of the “good deal” was. Firstly it was “small” – in this context meaning a $70 million exposure, not a $500 million exposure. Secondly it was a little exotic – and hence by Ambac or MBIA putting their name to it they could convince people that it was money-good. Thirdly people were not buying the deal purely on the rating – they were buying it a little because the JV had warranted part of the deal. Ambac and MBIA’s name improved the pricing of the whole deal – the whole $500 million – and because of that they got a stupendously good ROE for safe projects.

Finally the real risk to this type of deal was “fraud” rather than ordinary credit. Credit risk you “manage” – which is a euphemism for “accept”. Fraud risk however you avoid – and you avoid it by doing due diligence. Due diligence in this case is not hard – but you have to do it – and that means you need a modicum of competence – even if all that involves is sitting a staff member by the highway with a VCR so she can count cars for half an hour on five occasions and hence check the model.

Put this way you can see why Ambac and MBIA deserved to exist – and what good business for them looked like. You can also see why it makes sense to insure things that don’t ever need to be insured because they are “safe”. In reality what they were insuring was a single thing – they were insuring the deals that they insured were not fraudulent. And fraud was not a risk that was accepted and hence subject to cycles – it was a risk that could be avoided altogether through due diligence.

My biggest gripe with the MBIA book is that it does not come to grips with what a “good MBIA” might look like – and what the real reason for MBIA existing might be.

Its only when you put it in that context you see the opposite case – and why eventually MBIA and Ambac really collapsed.

You also see that there is again a case for a new Ambac or a new MBIA – but I will get to that at the end.


Crank the clock forward a couple of years. We had invested $60 million in Ambac and had it double. We had invested a smaller amount in MBIA for a much smaller profit – and we had sold both positions because a few deals were making us mildly uncomfortable. Ambac rose fast just after we sold it and so smug feelings were short lived. (Both positions collapsed much later proving – yet again – that I would prefer be lucky than smart…)

More importantly Bob Genader had been made CEO of Ambac. That was no surprise – the international business had been astoundingly profitable – and the guy who made the money got the job. I spoke many other times Bob Genader usually about individual deals which I did not like. I never traded the stock again until quite late in the collapse and I will be the first to admit I was surprised at how nasty it turned out. I was aware of individual dodgy deals led by a Conseco securitization but I was surprised just how bad the book was and I was unaware of the so-called “CDO Squared” deals that were spectacularly bad. I had a long standing $10 bet with Genader on the Conseco deal – I thought it would lose money – Genader thought not. It was a bet in good fun…


The MBIA book starts with a meeting that Ackman had with Jay Brown – the CEO of MBIA. I too had a meeting with Jay Brown and several of his staff. I was not as well prepared as Ackman – and I was less inclined to be sceptical. That said there was a strange discussion about AHERF which alerted me that all was not quite as it seems – though I only got the full import of the discussion a few years later.
AHERF was a hospital with bonds insured by MBIA that defaulted in the late 1990s. The cost (unimportant the story) was about $200 million. Rather than taking the charge however MBIA agreed to a perverse deal with their reinsurers by which the reinsurers would absorb the charge and recover the money over many years (twenty?) by charging higher premiums in the future. This spread the loss forward rather than taking the charge when the loss was made. The account fakery has a name – it was “finite reinsurance” – the same sort of deal that later caused the AIG-Berkshire problems and landed several General Re staff in prison. It was the sort of deal which induced Jim Chanos to short AIG.
It was legal accounting legerdemain – and was an indication that not all was well…

I asked Jay Brown about it – and there were two things he said. Firstly he said that AHERF was not really a credit loss – it was fraud. The second thing he said was that the finite insurance was set up before he arrived – and if he had been CEO they would not have done it. The second statement is – I think – actively misleading – but I did not recognize that until later. The first statement – that AHERF was fraud and not reflective of MBIA’s skill as an underwriter however had me in stitches.

I reported Jay Brown’s statement to Bob Genader who raised his glass to Jay Brown – laughed and reminded me again that what they really underwrote was fraud. Brown dismissing AHERF because it was fraud was in effect admitting his company’s failure. Fraud was always the risk with deals that were otherwise so safe they did not need to be insured.


It was the second statement however that should have made me question Jay Brown further. Jay Brown said that if he had been CEO they would not have buried the AHERF loss with finite insurance. This simply does not fit with Jay Brown’s career. Jay made his reputation and fortune with an insurance company called Crum & Forster which had considerable asbestos exposures. It got sold for a good price in part because the buyers did not understand that it was larded with finite reinsurance. Jay Brown told me with a straight face that he wouldn’t have done it – when – alas – doing that stuff was precisely what he built his career on. Alas that realization came only a few years later.

There were plenty of other instances in the book where Jay Brown’s pronouncements were not to be taken at face value. One stood out – when he was telling the world about the virtues of short-sellers in financial markets whilst getting Eliot Spitzer to investigate short-sellers in his own stock.

But funnily none of what Jay Brown said in the book upsets me as much as when he misled me. As an investor all you need to know whether he is actively misleading but somehow it feels different when it is personal. It takes a certain pathology to look someone in the eye and to tell them what they want to hear rather than the nuanced truth. It is style that makes great salesmen (and Jay Brown is a great salesman). It is also – and unfortunately - surprisingly common amongst the senior executives of Wall Street firms possibly because they got there in part by being great salesmen.


Crank the clock forward a few more years and the nature of Ambac and MBIA’s business has changed. Firstly the idea that a toll road in Australia was “exotic” became almost quaint. People were securitizing almost anything and borrowing against the most bizarre assets. When David Bowie securitized his music royalties that was novel. There were however clear and identifiable cash flows and you could see how the finance was going to be repaid. Later – if you looked hard enough – there were plenty of deals where repayment looked problematic.

The international finance business model of Ambac/MBIA in the 1990s – going around the world and giving deals the “good housekeeping seal of approval” had died. Once the JV could guarantee a $70 million piece a toll road in Australia and improve the pricing for the whole $500 million – and thus – through its “good housekeeping seal” it could add value to the whole deal. By 2004 people would buy the toll road debt because Moodys or Standard and Poor rated the deal AAA. Almost nobody cared about rating agency conflict of interest (they were paid to provide the rating). Nobody I knew would have cared that Ambac or MBIA did old-fashioned due-diligence on deals – and ex-post it is clear that they didn’t get their fingers too gritty that way any more either. Standing by the road with a VCR counting cars – well that was passé… as I guess was checking that the taxi driver on the mortgage application did or did not earn 250K per annum.

So rather than doing $70 million deals for relatively large fees Ambac did $500 million deals for smaller fees. MBIA did the same. And they had a few difficulties – notably the Channel Tunnel – but the deal that always caught my eye was the Conseco manufactured housing securitization done by Ambac.
This was a distinctly worse business. They were just selling guarantees they were no longer selling their “good housekeeping seal of approval” and hence improving the pricing of the rest of the capital structure.


But something more insidious happened – which was that Ambac and MBIA stopped checking too rigorously for fraud. They must have done some checking because a careful examination shows that many Ambac securitization deals perform better than their non-insured counterparts. But they must have also turned a blind eye in some instances.

Here is a chart from a presentation by Ambac in 2008 for the net cumulative loss for their worst 12 second lien mortgage securitizations. Almost all their second lien losses came from these deals.

Two deals in particular stand out like sore-thumbs – which are a Bears Stearns deal and a First Franklin deal. First Franklin was owned by Merrill Lynch. These deals had 80 percent loss rates. To get that you need to have more than 80 percent of the loans default because the loans have (small) recoveries and also make some spread. Maybe 85 percent default will do it.

Now it is pretty hard to imagine how you could “randomly” choose 1000 loans and find 850 defaults. In fact I am not sure you could “randomly” do this. Instead you needed a process by which all the bad loans came to you. It probably requires fraud by someone – be it the companies or hundreds of mortgage brokers and thousands of borrowers.

Knowing what Ambac and MBIA really underwrite – which is not credit but fraud – I think you can guess that fraud was a likely cause. But the fraud was really widespread – these loans have loss rates 20 plus times as bad as Freddie Mac. And the non-guaranteed securitizations – the ones with no fraud check at all – were – on average – far worse than the guaranteed ones.

What really did Ambac and MBIA in is a haze of fraudulent loan origination and fraudulent accounting to hide the problems and fraudulent servicing of the loans and – well – just the ways of Wall Street in a bubble. Ambac and MBIA both failed because they forgot what they really underwrote which was fraud protection. Instead earnest people in their ivory towers (Armonk and the Southern Tip of Manhattan) did mathematical models of loss probability rather than combing though loan files and checking the individuals. The end game of mathematical modeling was CDO squared deals – where the individuals were lost two or even three deep in securitization structures and so there was no way that you were understanding just how corrupt the underlying foundations were.

What was really needed to check the Eastern Distributor was not based on a fraud is easy to state. The main thing was a staff member with a VCR by the side of the road for 4 times half an hour counting cars. What was really needed to underwrite mortgage based securitizations was someone who was someone who would randomly check 100 loans in the loan file making sure taxi-drivers did not self-report their income at $200K per annum. Alas the discipline that saw someone standing by the road counting cars was long-gone. Instead you had management accusing short sellers of fraud rather than management checking whether the loans that they insured were fraudulent.

Ackman’s MBIA short thesis

Bill Ackman’s short on MBIA was a short with an ever-changing thesis. What he saw was a highly levered company – often 140 times or more levered – doing things that were not quite straight. His original observation was the AHERF transaction – something I understood from my first look at MBIA in year 2000. Then he saw one I did not know about – a securitisation of tax liens over properties in Philadelphia. More accurately this was a securitisation of uncollectable tax liens from crack houses and the demolished houses of the dead. The transaction however was rated AAA with MBIA’s guarantee. Moreover MBIA unambiguously knew fraud was going on – firstly there was a tape of a meeting of senior executives in which the truth was on open display – and then there was the name of the transaction – which translated (badly) from the Latin as “black hole”.

The ex-post explanation is (a) these companies underwrote fraud only – as the deals had to be too safe to fail without fraud, (b) they – or at least MBIA – were committing some fraud – some of which was restated, (c) they were turning a blind-eye to fraud, (d) eventually they would be overwhelmed by fraud – in this case fraudulent mortgages – and they would die.

Ackman saw only part of this on the way – but he saw enough of it to simply obsess him. He knew everything that was public to be known about these companies – and he found a lot of bodies and guessed that there would be many more. But he was obsessive from 2002. The companies (MBIA and Ambac as well as the other bond insurers) were not insolvent in 2002 – they were only exhibiting the behaviour that would make them insolvent in the end. His starting position on the companies was almost certainly overstated – they were not insolvent – and – if they retreated to the right business model which was underwriting things that could only fail if they were fraudulent and checking for fraud – then they would have been fine. However the companies themselves reacted to the messenger by accusing him of stock fraud and then – by their own behaviour – dooming themselves to oblivion and irrelevance.*

A plea for new bond insurers

Any decent observer knows the rating agency model is completely riddled with conflicts. Moreover the rating agencies don’t get their fingers dirty – and often explicitly say that they do not check for fraud. I have never heard of a rating agency analyst counting cars for an expressway project. And I have never heard of them going through a loan file and checking 100 random mortgages.
But that is what this is – it is a gritty business. Mathematical models dreamed up by people like me in ivory towers would never have seen the furniture store above for what it was – and never saw the epidemic of truly hopeless loans given out last cycle.

There really are loans that so safe that they can be written with a zero-loss standard and levered 150 times – but they are only that safe if you have removed the possibility of fraud – and you can only really do that by getting your fingers dirty. You cannot do that with a mathematical model.

I am really hoping that one day a new Ambac and MBIA arise – ones that understand their mission – which is to be a rating agency that gets their fingers dirty doing actual due diligence and who have incentives aligned with the bond market. What I want is for the bond insurers to have the vision that Genader once gave me (and promptly forgot). They want to do smaller deals (10-15 percent of outstanding) but improve the pricing on the whole deal. They want to do this with a “good house keeping seal of approval” but not one dreamt up by the public relations firm – but one earned on the ground through loan files and counting cars. I want them to insure only things that can’t fail provided they involve no fraud – and I want them to check that there is no fraud. Because human nature being what it is – we can be assured that the financial markets will one day be infested by waves of fraudulently obtained loans – and if a bond insurer forgets that they go to zero.

One of the downsides of deregulation is “desupervision”. And desupervision is an open invite to scammers, opportunists and the gullible to borrow money they can’t or won’t repay. It is an invite to financial crisis.

Bond insurers at their best are “private supervision of financial markets”. At their worst they are “ground zero for crisis”. And the difference between being a good financial insurer and a bad one? About a decade.


*The malefactor company criticising short sellers (“shooting the messenger”) and then doubling up on their ill-deeds is a staple of my trade. Ackman and MBIA provide yet another example.

And now some notes:

1. The Conseco deal was a securitization of all of Conseco’s best manufactured home loans. Ambac insured the whole deal and I suspect the losses will wind up at zero. That looks smart – Ambac got paid well for the deal and took much less risk than it appears. But it is in fact stupid. The Conseco deals done immediately after that deal were truly utterly atrocious. They had a double-dose of bad loans in them. However they sold well because Ambac had vouched for Conseco’s credit worthiness at least at the AAA level. (For the record some of those wound up at Fannie Mae.)
Anyway what Ambac did was sell a bit of their reputation off for money. When what you are really selling is “a good housekeeping seal of approval” that is beyond dumb. It was the behavior in the Conseco deal which made me sell Ambac – not because I thought they would lose money (if they lost money Genader never made good on his $10 bet). It was because they would lose reputation and that would ultimately mean they had to compete with all the other lowlife in financial markets and not make money through adding their seal of approval.
In retrospect Genader should have been fired for the Conseco deal and the cultural shift that it represented. But I did not see it that clearly at the time – and I had too much respect for the man following the super-competent deals he had done as CEO of the JV.

2. Mary Buffett’s book on Warren notes that every Christmas Warren used to give his relatives a $10 thousand share certificate. It was a gift to the limit of the gift duty – but it was also a stock tip – and that stock tip was usually rather good. She has a list of those in the back of her otherwise bad book. Many – notably Fannie Mae, Freddie Mac, Citigroup, Ambac and MBIA have fallen on hard times. Berkshire/Buffett owned all of those at some stage and none at the end. These were all once good businesses – and they all drifted. The drift happened over a decade or more – you had plenty of time to notice. I noticed the drift at Ambac and got out. But I did not notice how far the drift had gone – and was very surprised at the end. I did not expect Ambac under Genader to get into anything like this much trouble.

3. Bob Genader stopped answering my emails. I would still like another drink and a chat if you are out there…

4. I collect super-smart people as friends. Ackman clearly fits the bill… if he wants to send me an email I would appreciate it.

Correction: I have my infrastructure project with the middle bit insured wrong. MBIA/AMBAC never insured the Eastern Distributor and it took the middle piece of NO Australian infrastructure project.
The company used to take middle pieces - but stopped doing it because the mantra was "we want the control rights". The control rights are important - the right to take over the project if certain tests are not met. That would allow the company to correct (say) for a bad servicer.
As to Australian infrastructure projects - only one loss was taken - which was the Lane Cove Tunnel. Traffic projections were wrong - probably a wave of people taking real traffic data and making assumptions in their interest (the investment bankers for instance are not paid unless a deal was done.)
Sorry to my readers for the error.


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