"Regaining Foreign Investor Confidence"

1. Regaining Foreign Investor Confidence
The Next Steps
The 13th Malaysian Capital Market Summit
Kuala Lumpur, 4 December 2008
Presentation by:
Low Tuck Seng
Frey Capital AG
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2. Introduction
We focus on the banking and financial sector as this is where it began but most
fundamentally because of the global impact, the systemic risks inherent in our
financial system and the extreme shocks to-date – are we through the worst or is
there more to come?
Confidence is fragile and trust has evaporated. Who or what will rebuild this – the
markets, Governments, regulators, you, me?
IMPORTANT NOTICE
This presentation has been prepared by Frey Capital AG (“Frey Capital”) for informational purposes only, and is neither an offer to buy or sell, nor a solicitation
of an offer to buy or sell, any security, instrument, or investment, nor solicitation of an offer of any service . The information and opinions expressed in this
presentation are based on publicly available information and the information Frey Capital have legally obtained, which Frey Capital believe to be reliable,
accurate, and complete. Frey Capital, however, does not guarantee its accuracy and completeness. Furthermore, the information and opinions contained in
this presentation may change without prior notice, and may be affected by changes in the initial premises due to, including but not limited to, shifts in the
market environment, and/or amendments in accounting and taxation rules and regulations. Copyright of this presentation solely and exclusively belongs to Frey
Capital and regardless of the purpose, any reproduction and/or use of this presentation in any shape or form without the prior written consent of Frey Capital is
strictly prohibited
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3. Market Capitalisation: Major Banks (1)
Confidence in our banks has evaporated
300,000
USD m
250,000
30/06/2007
200,000
02/12/2008
150,000
100,000
50,000
0
Source: Bloomberg
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4. Market Capitalisation: Major Banks (2)
Market values have decreased by 21% to 86% from 30/06/2007 to 02/12/2008
-21%
-41%
-44%
-56% -56%
-64% -64%
-68% -67% -67%
-71% -71%
-75% -75%
-80%
-86% -86%
Source: Bloomberg
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5. A Tale of Two Banks
Citigroup - M arket Capitalisation USD mio
The fall of the Citi ... source: Bl oomberg
300,000
… too big to fail but at what price to the US
250,000
taxpayer and to you and me
200,000
USD mio
150,000
100,000
50,000
0
Sep-2007
Sep-2008
Feb-2007
Feb-2008
Aug-2007
Aug-2008
Dec-2007
Jan-2007
Jun-2007
Jan-2008
Jun-2008
Nov-2007
Nov-2008
Jul-2007
Jul-2008
Apr-2007
Oct-2007
Apr-2008
Oct-2008
May-2007
May-2008
Mar-2007
Mar-2008
St andard Chart ered Bank - M arket Capit alisat ion GBP mio
StanChart ... sour ce: Bl oomber g
30,000
... down 50% even with relatively low
25,000
exposure to structured credit
20,000
GBP mio
15,000
10,000
5,000
0
Sep-2007
Sep-2008
Feb-2007
Feb-2008
Aug-2007
Aug-2008
Dec-2007
Jan-2007
Jun-2007
Jan-2008
Jun-2008
Nov-2007
Nov-2008
Jul-2007
Jul-2008
Apr-2007
Apr-2008
Oct-2007
Oct-2008
May-2007
May-2008
Mar-2007
Mar-2008
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6. Credit
USD 3-month Libor vs. Fed Funds Target & OIS - Spread %
Very tight credit markets will persist 3.75
source: Bl oomberg
3.5
3.25
US 3-mth Libor vs Fed Funds Target - S
D pread
3
US 3-mth Libor vs OIS - S
D pread %
• Inter-bank market: some easing 2.75
2.5
following extraordinary spikes 2.25
2
• Decimation of securitisation 1.75
1.5
1.25
• Credit rating agencies discredited 1
0.75
• Capital structure and adequacy: shoring 0.5
0.25
up of balance sheets before the 0
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jul-98
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
-0.25
recession -0.5
-0.75
• Monoline incapacitation
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7. Risk (1)
U SD 3 -m o n t h Lib o r , 3 -m o n t h T-Bills & TED Sp r e a d % (i n v er s ed f o r i l l u s t r a t i o n )
s o u r ce : B l o o m b e r g
Risk appetite has been drastically 7
6
reduced 5
4
3
• Flight to quality: what is quality from a 2
1
credit market and equity standpoint 0
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jul-98
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
today -1
-2
• Impact on emerging market securities -3
USD 3- m t h Li b o r
USD 3- m t h T- Bi l l s
(different from Asian crisis) -4 TED Sp r e ad ( i n v e r se d f o r i l l u st r at i o n )
-5
• Financial crisis preceding recession
CBOE VIX (SPX Volatility Index)
• Debt complexity 90
source: Bl oomberg
85
• Counterparty risk 80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jul-98
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
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8. Risk (2)
The pricing of risk today
5yr Credit Default Swap (Senior)
Source: Bloomberg
500
450 MALAYS CDSUS S 5Y
IA D R
CITI CDSUS S 5Y
D R
400
GERMAN CDSUS S 5Y
D R
350 CHINA CDSUS S 5Y
D R
300 UKT CDSUS S 5Y
D R
250
200
150
100
50
0
Sep-07
Sep-08
Feb-08
Aug-07
Dec-07
Aug-08
Jun-07
Jan-08
Jun-08
Nov-07
Nov-08
Jul-07
Jul-08
Apr-08
Oct-07
Oct-08
May-07
May-08
Mar-08
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9. Risk (3)
UBS in 2004
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10. Cross-border Investment
Cross-border strategic and SWF interest
Round 1: Summer/Autumn 2007 – HoldCo investment, eg GIC into UBS, Merrill Lynch
• Round 2: Meaningful well-priced transactions involving subsidiaries and operations
GIC buys
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11. Policy and Regulation
Knee-jerk reactions generally
• Total nationalisation: Northern Rock
• Partial nationalization: RBS
• Financial support: ING
• Acquisition of structured credit portfolios: Fortis, UBS
• No action: Lehman (the market shall decide)
Regulators remain behind the curve
IMF role: Hungary and Iceland to-date
BIS: Nothing new. Theoretical framework questioned
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12. Restoring Confidence (1)
Investor and public relations
• Poor initial delivery from US Treasury. Firm commitments and guarantees, forget
economic and financial management theory – the condition is too complex to unravel
immediately
• Scope for back-tracking
Swift, decisive action to stabilise – advanced scenario planning but understand
the causes
Engage neutral parties
Beware the acquisition of structured credit
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13. Restoring Confidence (2)
Addressing systemic risk
• Immediate measures to release liquidity
— Liquidity guarantee (temporary measure)
— Injecting equity
— CP facility
• Short – Medium term
— Asset purchases but beware
• Medium term
— Transparency and valuation
— Tightening regulation in certain areas and new regulation
— Risk monitoring and management
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14. Contact Details
Mr. Tuck Seng Low
Managing Director
Frey Capital AG
Othmarstrasse 8,
Address: 8008 Zurich,
Switzerland
Direct: (41) 44 253 71 88
Mobile: (41) 79 817 46 43
Fax: (41) 44 253 71 89
Email: tslow@freycapital.com
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