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The Year-End Message 2009: Lessons Learnt and Ado List

In my year-end message, I will sum up the results attained in the passing year 2009, highlight practical lessons learnt and briefly review our ado list for the upcoming year 2010 to emphasize the general business development line. The practical sense behind this message is to stress global opportunities, which definitely will show up in the year 2010, and what we have to do to benefit by them.

The Year 2009: Lessons Learnt

The year 2009 has been dedicated to a one of the sacred animals of the ancient Egypt – the Ox. Ancient Egyptians treated the Ox as the symbol of fertility, because of its close relationship to the agriculture. The passing year 2009 has proved that the modern Ox has less to do with the agriculture, and the real economy as a whole, and more to do with the money making machine. The bullish mood dominated the markets, mostly thanks to the different liquidity support and bailout programmes implemented by governments. I can safely confirm that the passing year 2009 has been the year of the sacred Fiscal Ox driving the money making machine.

The outcomes of the money making machine are just perfect at the end of this year, when financial services industry brought back good fruits to those of its players, who were rational in their investments and speculations and were able to timely identify different shock events and proper valuable bargains.

The first lesson learnt is that investments in the financial services companies, thus in the money making machine, must be rationalized thoroughly. In my discussions of investments in the financial institutions I stressed the consideration must not be based on the general stock investment underpinnings, but on the simple understanding – what for do you need a bank? Are you going to use it to manage the cash flows and capital of companies in your investment portfolio? Are you going to use it to finance your foreign trading operations and provide retail services to employees of your holding company? Are you going to use it to gain access to the foreign market to benefit by opportunities on that market? Unless you are an owner of the investment or holding company, you would better not to consider investments in the bank equity, taking into account the upcoming reforms of the financial services industry and new puzzles prepared by regulators.

A lot of efforts have been undertaken during this year to support the banking system and its liquidity. These efforts fueled the money making machine and allowed investment banks to book good profits. I do not consider that bad, because this is the solely goal of the money making machine and it is unwisely to expect something else from it. The bad thing is that not all players have used the output of the money making machine to spur the creation of the capital value.

The second lesson learnt is that the more money you put in the money making machine, the more non-value-creating profits it will bring, especially during tough times, and the less support the real economy will secure, unless the certain part of the machine’s output is used to finance the creation of the capital value.

We have also become witnesses and unwilling participants of a political war on bonuses: different taxes and other make-ups have been proposed and enforced. As I stressed in my discussion on this topic, this has nothing to do with the root cause – the incentive. If you tell me that the more money I will make for a company, the more bonuses I will earn personally, and then you release my hands, I will do everything to benefit by any opportunity and shock event, whatever it could be, and use the financial wizardry to get bargains. My actions will be restricted only by my moral principles and professional code of conduct, leave alone regulatory and legal stuff. But if you tell me to get valuable bargains, restrain me from taking excessive risk and put a limit on my unruly financial wizardry to allow only the white magic, I will be enforced to follow the established rules and act according to the imposed risk-rewards profile. This is where the company’s self-discipline, its internal culture and imposed risk-rewards profile play the leading role. All other activities are just a sort of make-up. And this is the third lesson learnt. The reputation is a subject to self-discipline.

I leave alone such ideas as Tobin tax and the banking hybrid capital. In my discussion of these topics, I exemplified the bold idea of the international resolution fund to secure the stability of the fiscal system through investments in the banks’ mezzanine capital. That fund can act as a kind of insurer and receive insurance premiums from banks in exchange for capital adequacy guarantee. I will not conceal that, after thorough considerations, I found the hybrid capital as an unexplored valley of profitable opportunities.

Going back to the lessons, the main lesson learnt is that the reasonable balance must be maintained between banking system clean-up measures, the real economy support and public spending. The banking system is not the first, as one financier asserted. It cannot be the first, because its historic purpose is to serve the real economy, where the capital value is created. It is the required toolset of the fiscal system, but it is not the first – only the real economy can be the first. Only the capital value, not the money-making machine, drives the economy growth. The money-making machine is good when it is used wisely. It is good to make money and use it to finance the creation of the capital value.

At this point we are approaching the subject of rethinking the investment banking, the private equity and hedge fund operating models and creating the effective investment company, the money making machine that will facilitate the creation of the capital value and manage to secure its organic growth through the growth of the real economy. And this will be the subject of our practical work and general business development line in the coming years.

The Year 2010: Open Issues and Ado List

The money-making machine is looking good now and has grown some fat. Now time has come to do some good for the real economy and drive the creation of the capital value. The attention must be shifted to the real economy, with its open issues such as stalled credit markets, cash-starving small and medium businesses, weak sovereign earning power and accumulating debt.

In the year 2010, the focus must be put on resolving these issues and mitigating their side effects. The successful reengagement of the real economy engine is required to restore the sovereign earning power, which is important to curb and reduce the public debt. Despite good performance of the financial industry, the unemployment and public debt remain the key challenges of the coming years. More efforts must be applied to help small and medium businesses, to revive the credit and securitization markets and support the domestic consumption.

The appropriate economy layering is required to secure its organic growth and diversification. Thus the bedrocks such as basic materials, manufacturing, agribusiness and industrials must receive the first-aid kit in order to re-start the economy core. More attention must also be paid to technologies and energy sector, since they play important role in the cost reduction and economy improvement initiatives, including climate change issues.

The latter is pretty perturbing topic, around which the political bubble continues growing without any actable output. The inability of politicians to reach mutually beneficial agreement on this topic opens good opportunities for businesses to take the reins of control in their hands and prove that they are worth the price paid for their stocks by improving their self-discipline and enforcing energy-safe and environment-friendly technologies and products. The situation developing around the climate change issue is just another example that in the modern global world it is pretty hard to reach the reasonable and mutually beneficial agreement in politics, which will meet interests of all parties, because there are a lot of different political if’s and when’s weighting down on the agreement. And the more if’s and when’s you have in your solution, the more complex it is, the more harder to implement it and the more chances that interests of one party will dominate over interests of the counterparty. The carbon market is just a perfect opportunity to speculate and use the money making machine for its sole purpose. Such solution does not drive concrete changes and creation of the capital value, unless the output of the money making machine is used to drive the changes and creation of the capital value through energy-safe and environment-friendly technologies and products.

The year 2010 will show how effective each of the world players will manage to re-engage its real economy engine, to balance its sovereign earning power and resolve toxic assets, against the backcloth of decreasing support of the banking system. While the world players will gradually slow down support of the money-making machine and push on the accelerator pedal of the real economy engine, to reduce unemployment and restore the sovereign earning power, markets will definitely survive shock events. Those shock events will be intensified by that fact that each of the world players will weight down on its real economy’s accelerator pedal with a different exertion. Maybe some of them will even be forced to weight down on the breaks. There is no mutually beneficial way to secure the coordinated exits, but it is for the consequent exits.

What is important, it is to mitigate side effects of the consequent exits. The strength of shock events and their depth will depend on how effective political leaders will manage to mitigate side effects by gradually strengthening sovereign earning power, sustaining domestic consumption, structuring economy layers and managing debt. We must keep eyes open on the debt build-up. It is important to remember that the key characteristics that must be scrutinized before committing any private investments in the specific country are the sovereign debt, the sovereign earning power and economy layers. Once these characteristics are scrutinized, the decision can be made on what investments are reasonable to commit in that country.

Summing up, it is important to note, that the best way to predict the future is to create it now by learning the lessons of the past and creating the relevant business opportunities using our quick wits. In the search for valuable investments, we must keep our eyes and mind open on: (a) the aforementioned industries which are basic materials, industrials, manufacturing, agribusiness, energy and technologies; (b) how effective political leaders will manage to mitigate side effects caused by the consequent exits; (c) how effective political leaders will manage to secure economy growth, to sustain domestic consumption and structure economy layers; (d) how effective political leaders will manage their finances and debt; (e) how intensively the emerging economies will bubble and what capital value will underlie the foam. Leave alone such side effects as inflation and currency stability.

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In the New Year 2010, I wish all of us to make smart and risk-weighted decisions, to commit valuable investments in business and life and not to fall a prey to the sign of the New Year – the Tiger – by abusing its complaisance and neglecting obvious threats. I wish all of us to prosper and get bargains by wisely using our quick wits. We always have to remember that the best way to get the valuable bargain is by creating it itself and that no regulation will ever substitute self-discipline and common sense. The more valuable investment is always that we are about to commit, and the most valuable investments are that we commit to our lives, relationships and reputation.

The passing year 2009 gave us the exclusive opportunity to learn by experience and the New Year 2010 is about to give us the exclusive opportunity to benefit by gained experience. I wish all of us to properly treat the lessons learnt and always remember that the only person, who can change your life for the better, is exactly that one looking at you from the mirror. No one will make you happy and prosperous, but you. On this philosophic moment, let me wish you and your families the Happy New Year and Merry Christmas!