Davos Notebook

Banks to be disintermediated? or is that just replaced?

January 30, 2009

Is it actually distintermediation if the thing being disintermediated has ceased to function?

Henry Kravis of Kohlberg Kravis Roberts said in Davos that, as in essence banks aren’t playing their role of intermediating debt capital for buyouts, he would be going straight to the source, doing deals directly with investors who want to fund debt for deals.

Of course many of the institutions that used to fund buyouts, CLOs and CDOs for example, no longer exist and many like hedge funds have lower appetite. He acknowledged that leverage has “come down tremendously,” which might get the prize for biggest understatement of the week.

But, like Steve Schwarzman of Blackstone earlier in the week, he maintained that lower asset prices for deals originated now would help returns.

“You might be able to buy it with less leverage and you can still get the same returns because of the purchase price you are paying.”

I hope he means the same returns as old-fashioned vintage deals rather than the returns of 2006/07 originated ones.

Schwarzman earlier in the week on same subject:

“Private equity buying assets at bottom of the cycle.. if you just put one to one leverage on you should make 3-5 times your money doing that.”

Now we just need to figure out when the bottom of the cycle is!

My other question is how badly the recent vintage deals will do, many of which look very vulnerable. Private equity people are right to say that they have $400 billion of commitments, and that in the current environment that capital will be able to demand a very high (relative) rate of return as capital is scarce. But there is going to be a lot of very messy business to be done in the meantime with existing deals, and lots of potential for conflicts with existing investors who will be concerned with today’s bread rather than tomorrow’s jam.

Jim Saft is a Reuters columnist. Any views expressed are his own.

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Global Barter Stimulus for Global Economy

The world is experiencing an unprecedented global financial and economical crisis, which is threatening to lead many countries into a deep depression. All the major economical powers are seriously affected hence each country has earnestly rushed to devise an immediate stimulus program to pump her economy to avoid a depression. No doubt, any stimulus is better than no stimulus but the effectiveness of each stimulus program seems to be unpredictable due to the global scale of this current economical crisis and the complex interdependency of all the major economical powers, namely the major international trading partners. In this paper, the author thinking outside-of-a-box is proposing a global cooperative stimulus program to bring the global economy back to vitality. The central thesis of this program is to achieve the following two main objectives immediately and cost-effectively. The first one is to eliminate the credit problem now infested in global and domestic financial institutes, which is stifling all economical activities, most critical of all, the international and domestic trade and property financing. The second objective is to restore confidence quickly and globally to revitalize the international trades among major trading countries, which is the essential means to stimulate the economy of all trading partners, hence the global economy. The author calls this proposed program, The Global Barter Stimulus Program. (GBSP for short)

The GBSP proposes that the major international trading countries immediately convene to develop a stimulus program by simply pledging to barter goods and services from each other in a magnitude (dollar value) equal or more than 110% of the 2007 trading figures. This government-backed pledge has three goals:

1. Stimulate a growth economy for each participating country by mutual support,

2. Stabilize jobs in manufacturing and services by providing credit and liquidity to finance manufacturing and trades, and

3. Restore confidence in businesses, home buyers and consumers worldwide by engaging in a cooperative global economical stimulus program.

Like many international cooperative programs, there will be differences in opinions rooted in self-interest. However, this global economical crisis is so severe; hopefuly many countries would be more willing to participate to share the benefit of a rapid global recovery than to risk a long self-destructing economic scenario. In fact, this crisis may be an opportunity to bring countries together to soften the resistance of dealing with some of the global issues such as conservation of energy, global warming, product safety, work environment, epidemic disease control, etc. etc. United States being the biggest international trading partner is in a right position to initiate and lead this Global Barter Stimulus Program, which can be a more effective High Level Governmental Solution to the world’s economy than engagement in micro-managing various domestic stimulus packages.

The GBS program can be kicked off via a summit meeting of the top fifteen trading partners in the world.

( http://www.census.gov/foreign-trade/stat istics/highlights/top/top0811yr.html )

The organizing country prepares and sends an agenda and a proposed preliminary document of understanding on how to participate and administer the GBS program (GBSP Document) to all invited participants. Each participating partner may bring a delegate including other not invited country/partner as an observer.

Prior to the meeting each invited GBS partner/country is requested to prepare a Barter List (category, dollar amount, specific requirements and possible trading partners) which are essentially the goods and services each country pledges to barter with the goods and services from another country if certain specific conditions are met. The lists will be shared among all trading partners and made publicly accessible. During this meeting, first, invited partners review, discuss, revise and approve the GBSP Document, then, begin discussions and negotiations to barter until each country has bartered most of her listed barter categories with other countries. The end result of bartering and pledges guarantees a positive economical projection.

The GBS process should be made as transparent as possible as an effective stimulus program; press and observers are invited so the process may be televised globally for the benefit of the world. The GBS trade lists with government pledges are the essence of the Global Economical Stimulus. Each participating country will fulfill her pledge, hence will stimulate each partner’s domestic economy; collectively the GBS partners will stimulate the world economy. GBS can be sustained yearly to achieve long-term benefit.

Foot Note:
A physical venue may be selected for this program. For example, the $450M Bird’s Nest in Beijing may be an appropriate structure to house such a program so that a meaningful Global Bartering Stimulus will lead to a sustainable global economical growth and world development.

IFC

 

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