Remember how people used to queue for Hello Kitty toys at McDonalds?
Consider this extreme: You are queueing in line for that limited edition item and suddenly realise that it'll be sold out by the time it reaches you. The thought of walking away empty-handed drives you to think of other ways, including negotiating with the folks in front of you. But everyone respects the unwritten rule of the queue - first come first served, get in line and wait for your turn.
Desperate and frantic, you decide to go bat-crap crazy and threaten to burn the whole store down if you don't get your toy, putting the entire queue and McDonalds store in jeopardy. Suddenly the store manager comes over to appease you, bringing you to the front of the queue, effectively guaranteeing a reward for your troubles.
Make enough noise, create enough damage and you'll get something.
For years, practitioners in the industry have understood, accepted and have been taught that equity holders stand behind debt holders in the queue to redeem cash flows of a business. These are the rules of the game relating to the priority of how cash in a business would be distributed, if and when assets are being liquidated.
It's a basic principle codified in financial markets theory.
But that rule seemed to have changed forever when Credit Suisse decided to write off a huge chunk of their AT1 debt last week and facilitate any residual payments to shareholders.
FT also commented on the situation of Credit Suisse's AT1 bonds:
"Protectionism, geopolitical self-interest and state intervention, in other words, seem to have over-ruled free-market principles."
By allowing the "free market principles" to take reign and go its natural course, the Swiss government runs the risk of embarrassing a certain influential Middle Eastern shareholder who recently invested in Credit Suisse, and in the process, taking the rap for the bank's current state of affairs.
Investors and onlookers would ask, "why bother even doing a capital raise in the first place only to write it all off within months?".
There would be a crisis of confidence in management, possibly wider overhanging doubts over stability in the region, including the country's position as a global wealth management hub. And then no one would put money in Switzerland anymore, a cost possibly too high for the government to bear.
When the reputation of your country is at stake, all concepts of equity and debt gets thrown out of the window.
Bottomline: Rather than adhere by the rules governing capitalist theory, it is far better to offend those who can afford to be offended than to risk a systemic meltdown.
Of course extreme situations call for extreme measures.
Under the normal course of business, every one is happy to stand in line and play by the rules. Decent wages for decent work, a fair share of the pie for a fair amount of effort invested. Most investors who walk into a share agreement try not to think too much about a material adverse outcome.
But when the house is on fire, everything is up for grabs and all stakeholders - equity and debt - will scramble for the exit.
I think the uncomfortable truth today, that no one talks about explicitly, is that: rather than fight a war using conventional arms, political decision-makers around the world have found a way to weaponise the workings of financial markets and monetary policies to drive their own agendas, in the process distorting how we perceive value.
Any country in world can 'own' another country by simply imposing trade sanctions, ridiculous tariffs, and in extreme cases, confiscate assets - assuming one country is heavily reliant on the other for the import of certain critical goods and services.
By creating dependency, you are weakening the bargaining power of the other party, and lesser bargaining power generally comes with lower value. Nassim Taleb also talks about this under the chapter of "How to legally own a person" in his book:
“Every organization wants a certain number of people associated with it to be deprived of a certain share of their freedom. How do you own these people? First, by conditioning and psychological manipulation; second, by tweaking them to have some skin in the game, forcing them to have something significant to lose if they disobey authority—something hard to do with gyrovague beggars who flout their scorn for material possessions. In the orders of the mafia, things are simple: made men (that is, ordained) can be whacked if the capo suspects a lack of allegiance, with a transitory stay in the trunk of a car—and a guaranteed presence of the boss at their funerals. For other professions, skin in the game comes in more subtle forms” - Hidden Asymmetries in Daily Life
For good or for bad, sovereign risk has become even more closely intertwined with equity risk.
When you buy a stock or a bond, it is no longer as simple as taking a view on profitability, future cash flows and room for improvements, but also the strategic importance of a company's position in the ecosystem.
DCF does not capture all of that.
In fact, no amount of number crunching and analysis allow for an accurate appraisal of any company's fair value today, primarily because the so-called free market is no longer that free. Instead of willing buyer, willing seller, the market economy is now to a good extent, influenced by statecraft, driven by the common interests of various governments.
The treatment of Credit Suisse's AT1 bonds has also further demonstrated and reinforced how loosely-held and trivial the definition of equity and debt can be when push comes to shove.
For what it is worth (as it has always been), value will forever be driven by the willingness of another party to take the asset off your hands at their own free will.
General Electric (GE) in the 20th century was known for the implementation of many successful business and management practices, including the lesser-known origination of the modern day investor relations (IR) function. It was apparently pioneered by a guy called Ralph Cordiner, who was GE's CEO and Chairman from 1958 to 1963.
The roots of IR were evolved in the early days due to the need for companies to compete for capital in a systematic and strategic way, beyond the customary one-directional promotional advertisements. Money markets back then were a lot less developed with far fewer investors, and the large part of' IR work was subsumed under public relations, which was primarily focused on getting word out into the market and letting investors decide for themselves whether they wanted to buy the stock of a company.
Over time, the tactics for investor targeting have grown increasingly sophisticated, characterised not only by demonstrating financial competency, but also the need for bi-directional communication and interaction. The fierce competition for capital also required companies to 'up' their game with the goal of optimising cost of funds to deliver higher shareholder returns while adapting to the changing tides of the capital markets.
There is obviously a lot of art and science in IR today, from analyzing changes in shareholding patterns, proactive capital markets management, to dancing the tango between the company's management team and investors brokered by securities firms and investment banks.
Because share price is often taken to be the holy grail of a company's success, IR functions are often expected to be part of corporate decision-making process, with investor engagement being an extremely core part of that consideration.
Rightfully speaking, this dialogue with investors should guide towards a true and accurate reflection of a company's fair value, but the world is more complicated than that.
As many business units within the firm including C-suite functions tend to be graded based on share price performance, there is almost always a natural incentive to curate and design the short-term narrative towards a high value, which sometimes comes at a cost.
Beyond the obvious moral hazard, this ultimately results in share price and trading volume volatility. In the textbook context, these attributes are conventionally perceived as risk, which in today's market can be capitalised and profiteered by creative investment managers seeking to take advantage of the wild swing in prices. And the swing in share price can sometimes put a lot of pressure on those in IR roles.
I recently 'counselled' a couple of colleagues on the above, hoping to help them put things in perspective, and more importantly, not to beat up themselves too much if things don't go according to plan.
There are things that you can change and there are those that you can't. The world is that complex a place.
"When something that previously didn’t work suddenly does, it doesn’t necessarily mean the people who tried it first were wrong. It usually means other parts of the system have evolved in a way that allows what was once impossible to now become practical." - Morgan Housel
Because of all these moving parts, any success or failure in an IR function becomes incredibly difficult to measure. For example, should the KPIs of IR teams be penalised by the overall decline in share price of a public listed company? Conversely, should all credit be given to that same team if there is a two or three fold increase in share price over the same period of time?
Is a company's share price performance a core competency indicator for an IR team?
These are sometimes the result of fundamental reasons ranging from revenue and profit (which are partly driven by the business and macro environment), to irrational and unpredictable events such as someone firing a missile from a certain peninsula in Asia. Both of which are not within the direct influence of the IR function.
The reality is that changes in share price are subject to multi-dimensional catalysts. And if these are mis-read, can unwittingly lead management down the wrong path of decision-making.
"You either die a hero or you live long enough to see yourself become the villain." - Harvey Dent, The Dark Knight
Nearly everyone I know who started out in banking or PE had the image of a five figure monthly salary in mind, being able to buy a home at an early age, take leisurely trips around the world, shopping at whim. It was the idea of a certain kind of financial freedom that caught us. No need for a billion dollars, just enough to live life on our terms.
If you extrapolate that income over a period of say 7 to 10 years, it is easy to see how that could be possible. When you are a twenty-something year-old looking at someone else in their late thirties or forties working in the same career as you, it can be extremely easy to be disillusioned into thinking you can do this forever.
But life is often never that straight.
Pulling the hours and all nighters for that long a time can be both mentally and physically exhausting. It comes with the sacrifice of personal time, family and friends. Most people are oblivious to how much you have to give up (and put up with) when you work almost 7-days a week, go home past midnight and never see your family and friends for extended periods of time - all for that juicy bonus at the end of every year.
Then there is also that temptation of starting a business, or a side gig, open a shop or something like that. After all what is the use of earning the big bucks when you can’t get to be your own boss one day?
Some of us would go on to invest a part of that income into either public equities or the private markets. Both pathways requires staking a significant portion of capital. The lucky ones got out alive and sometimes with a decent profit. But there are also those who unfortunately come out with losses on the other end.
Either way, statistically, it always seem to play out to the same result: We continue struggling to keep the lights on and do the jobs we do in order to justify our aspirations and lifestyles, whatever that may be.
If you are a smart guy, you’ll figure the right time to get out before the hamster wheel consumes you. After all, the whole point of why we got into the high paying jobs was because it was always more than just about amassing money, correct?
David Rubenstein, one of the co-founders of private equity firm, Carlyle, has his own talk show where it would seem that he is having a ball interviewing leaders and celebrities globally and from all walks of life. Both Steve Schwarzman (Blackstone) and Ray Dalio (Bridgewater) have turned to writing memoirs to share their collective experience and wisdom from doing business over the years. Andrew Ross Sorkin, no doubt a much younger chap and has a somewhat parallel career to Wall Street, has made his name both as a successful finance journalist and producer of TV show, Billions. Recently, one of my younger friends also highlighted to me that even the chief of Goldman Sachs, David Solomon, has apparently also started his own gig as a DJ.
While they are not the best examples (primarily because they are either in the celebrity realm or billionaires), it demonstrates that there is possibly an alternative life beyond Wall Street. And everyone who has made it in some way or another, finds self-fulfilment in doing something either unrelated or tangential to finance, publicly or in the private domain.
When you are in your twenties, you spend most years in the accumulation of cash. If you are the ambitious type, you might even set your sights on climbing the corporate or industry ladder. You work all-nighters and pump nitro just to get there.
By the time you reach the thirties and touching forty, and if you are lucky enough to have some credentials, you find yourself in a nice position whereby you can capitalise on the knowledge, experience and the resources. It is relatively easy to earn well from here on, but also just as easy to get caught up in workplace politics and corporate re-orgs. You are a high-cost resource treading on a thin line and might find yourself working twice as hard just to justify your existence.
It’s a never-ending cycle of work and more work.
Many years back, a friend sent me this article titled “Your Professional Decline is Coming Sooner Than You Think”. It talks about how high performance individuals often struggle personally for many years past their prime. And it is important that we start to think about what comes next when the music starts to slow down.
I have kept re-reading this article from time to time over the years, not because I’m not getting any younger, but more as a reminder of the fact that we are not invincible forever.
We have been taught to plan our careers upon graduation but no one ever mentions about how we should plan the second good half of our professional lives, and that, I think, is important.