What Next? Life After Lehman Takumi Shibata Deputy President & COO Nomura Holdings Inc. April 16, 2009
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What Next?Life After Lehman
Takumi Shibata
Deputy President & COO
Nomura Holdings Inc.
April 16, 2009
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1
Global Flow of Funds and Free Enterprise
Free Enterprise Spirit
Nationalization
Protectionism Globalization
End of Cold War
2005-06?
Where are weheading?
Government interventions currently seen put an end to free enterprisespirit and restrain global flow of funds
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Financial Market Events What started out as an regional mortgage problem ended out to be a
world-wide financial crisis
0
20
40
60
80
100
120
Jul-07 O ct-07 Jan-08 Apr-08 Jul-08 O ct-08 Jan-09
S&P 500 S&P Financials
Bear Sternsliquidates twofunds(31st Jul 07)
BNP Paribassuspendsthree funds(9th Aug 07)
Citigroupbuys back SIVassets(13th Nov 07)
Citigroup, UBS, MorganStanley, Merrill Lynch receivescapital injection from SWF(Nov 07 to Jan 08)
JP Morganacquires BearSterns(16th Mar 08)
BoAacquiresMerrill Lynch(15th Sep 08)
Goldmanand MorganStanley tobecome Bank-holdingcompany(21st Sep 08)
TARP introduced(19th Sep 08)
PPIF introduced(23rd Mar 09)
FSP introduced(10th Feb 09)
Citigroupannouncereorganization
(16th Jan 09)
2 GSE come underconservatorship(7th Sep 08)
Lehman filesChapter 11(15th Sep 08)
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Lehman Specific Events
Lehman CDS payout settles at 8.6 cents on a dollar.21st Oct
Bain Capital and Hellman & Friedman agrees in acquisition of asset management business
(Neuberger Berman)29th Sep
Nomura Holdings announces agreement on acquisition of Lehman's European equities and
Investment Banking businesses.23rd Sep
Nomura Holdings announces agreement on acquisition of Lehman's Asia Pacific franchise.22nd Sep
Barclays Plc announces acquisition of Lehman's North American business.17th Sep
Lehman files Chapter 11.15th Sep
Announces USD 6.9 bl. for 3Q results, further plunge in stock prices amid reform strategies.10th Sep
Report says KDB's negotiation failed, strong plunge in stock prices.9th Sep
Report says S. Korea's KDB having interest in acquiring Lehman.22nd Aug
Posts USD 2.8 bl. in losses for 2Q results.16th Jun
Announced to raise USD 6 bl. in common and preferred stock.9th Jun
Announced reduction of retail mortgage and suspend wholesale mortgage lending business in U.S.17th Jan2008
Announced closure of BNC Mortgage, Subprime-loan originator.22th Aug
Announced investments to 20% of D. E. Shaw group.13th Mar2007
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Unexpected repercussions from Lehman
After the Reserve MMF broke the buck, general fear emerged on thewhole MMF market in the US, which lead to the Fed and the Treasury
to adopt unprecedented measures
O ther984
62%
M M F616 bl.
38%U SD 3.8tr.
U SD 6.4tr.
Tim e D eposits M M F
Outstanding assets Significance in Commercial Paper Market
(Source) FRB Flow of Funds Accounts
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0
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40
60
80
100
120
140
160
180
200
220
240
260
280
300
Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09
CDS Index
Unexpected repercussions from Lehman
Failure of Bear Sterns and Lehman Brothers lead to severe mistrustamong financial institutions, and temporal CDS crisis
JP Morganacquires BearSterns(16th Mar 08)
Lehman filesChapter 11(15th Sep 08)
(Source) Nomura Institute of Capital Markets Research, based on Bloomberg
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6
Unexpected repercussions from Lehman Allowing Lehman to go bankrupt lead to contagion in prime brokerage
counterparties
Lehman transferred USD 8 billion worth of cash andsecurities from London to New York in 12th Sep, justbefore the filing of Chapter 11
Lehman transferred USD 8 billion worth of cash andsecurities from London to New York in 12th Sep, justbefore the filing of Chapter 11
GLG, Bay Harbour and other hedge funds’ assets heldin Lehman’s prime brokerage account were frozen,which lead to wide spread distrust between investors
and prime brokers
GLG, Bay Harbour and other hedge funds’ assets heldin Lehman’s prime brokerage account were frozen,which lead to wide spread distrust between investorsand prime brokers
Also, collateral in derivatives transaction estimated atUSD 1 trillion were not returned, and went understrong dispute
Also, collateral in derivatives transaction estimated atUSD 1 trillion were not returned, and went understrong dispute
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Regulatory response Regulatory focus now on emergency recovery measures
Going forward, government initiatives will be focused more on systemic
risk containment
Settlement of today’s crisis
1) Capital Injection
2) TARP, TALF, PPIP
3) Relaxing monetary policy
4) Liquidity provision to markets
Prevention of future crisis
1) Co-operation of authorities
2) Creation of systemic regulator
3) Re-engineering of IMF
4) Regulating hedge funds
5) Glass-Steagall 2.0?
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Prudential business management Financial institutions must align with regulators’ policy and manage their
capital adequacy as well as their illiquid assets
Problem of procyclicalityProblem of procyclicality Presuppose liquidity of assetPresuppose liquidity of asset
Take conservative assumptions for liquidity bufferTake conservative assumptions for liquidity buffer
Complement by stress testing illiquid assetComplement by stress testing illiquid asset
Limitations of capital adequacy testLimitations of capital adequacy test
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Litigation and political risks
(出所)Investment Dealers’ Digest (September 29, 2008)
Andrew Cuomo (NY Attorney General):
Requested executives of Citi and AIG to return their bonusesUS House of Representatives:
90% taxation to bonuses of AIG executives
Wall Street=Pennsylvania Avenue?
Risk of unexpected intervention by government higher than ever
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Opportunities in Asia –Economic growth
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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
World Major advanced economies (G7) Developing Asia
(%)
estimate
GDP Growth Comparison
Source: Nomura Institute of Capital Markets Research, based on IMF
While the developed economies stagger, developing Asian countriesemerge as a new source of growth
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Opportunities in Asia –Securitization
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
2002 2003 2004 2005 2006
Japan Korea India C hina
(Billion Dollars)
Growth of Major Securitization Markets in Asia
Source: Nomura Institute of Capital Markets Research, based on various sources
Same level asthe US in 1995
Risks in the Asian financial sector is concentrated in the banking sector,and multi channelling of capital is essential
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
US Thailand India China Korea Japan
Bank loans Other debt Bonds Shares/equity stakes
Corporate Fundraising
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Opportunities in Asia –Islamic finance Malaysia as an Islamic finance hub in Asia
Standardized and sophisticated environment developed
Others follow suit – Singapore, Indonesia, Hong Kong, Korea, Japan
Nomura opens new franchise dedicated to Islamic fund management
Sukuk Issuance
0
50
100
150
200
250
2000 2001 2002 2003 2004 2005 2006 2007 2008
Malaysia UAE Bahrain Kuwait Saudi Arabia Others
(No. of issuance)
Source: Nomura Institute of Capital Markets Research, IFIS
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Going forward - Independence Genuine “independent” investment banks will have advantage
Commercial Banks
Investment Banks
Government
Conflict of interest
Compensation
Decision making
Home country bias
Superiority of“independent”
investment banks
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Going forward - Independence Most prominent standalone investment banks have been acquired by
commercial banks
CitigroupCitigroup
WachoviaWachovia
Wells FargoWells Fargo
Washington MutualWashington Mutual
Goldman SachsGoldman Sachs
Morgan StanleyMorgan Stanley
Merrill Lynch
Merrill Lynch
Lehman BrothersLehman Brothers
Bear SternsBear Sterns
Chapter 11
Acquisition
Bank
Holding Co.
InvestBank
Holding Co.
Citi HoldingsCiti Holdings
CiticorpCiticorp
Morgan StanleySmith Barney
Morgan StanleySmith Barney
Non-core business
Core business
Wealth management joint venture
JP Morgan ChaseJP Morgan Chase
Bank of AmericaBank of America
A c q
ui si t i on
A c qui si t i on
A c qui si t i on
Partial acquisition
Partial acquisition
NomuraNomura
MUFGMUFG
BarclaysGroup
BarclaysGroup
Note: As of Mar. 31, 2009. Green represents US banking groups and blue represents US investment banks.
Source: Nomura Institute of Capital Markets Research
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Going forward - Independence Institutions opted for government support, hence losing autonomy
Fund raising by major financial institutions0 20 40 60 80 100 120
Citi Group
Bank of
J.P. Morgan
Wells Fargo
RBS
UBS
Barclays
Morgan
HSBC
Goldman
Credit Agricole
Deutsche
BNP Paribas
Nomura
Public Funds
Private Funds
(Billion US$)
Note: Includes common stock, preferred stock and hybrid securities recognized as regulatory capital. Estimated by Bloomberg based on company disclosures.From the fourth quarter of 2006 to Mar. 31, 2009. Bank of America includes Merrill Lynch, JPMorgan includes Bear Sterns and Washington Mutual, Wells Fargo
includes Wachovia.Source: Nomura Institute of Capital Markets Research, based on Bloomberg
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Going forward – Back to basics Business model of investment banks should and will shift to more client
focused one
Value up for clients
High leverage & Arbitrage
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Going forward – Back to basics Several institutions had a leverage ratio of unjustifiable level, and are
now deleveragingWritedowns/losses and leverage ratio at major financial institutions
0 20 40 60 8005001,0001,500
(Billion US$) (×)
Wells Fargo
Bank of America
JP Morgan
Citi
UBS
HSBC Holdings
Morgan Stanley
RBS
Deutsche Bank
Credit Agricole
Barclays CapitalBNP Paribas
Goldman Sachs
NOMURA
Note: Writedowns and losses since fourth quarter 2006 announced as of March 31, 2009, calculated by Bloomberg. Writedowns include those on equities notdirectly reflected in calculation of revenues. Losses include year-on-year increase in provision for bad loans. Leverage ratio calculated by Nomura Institute of
Capital Markets Research based on most recent company disclosure. Calculated by dividing total assets by shareholder equity. Bank of America includes MerrillLynch, JPMorgan includes Bear Sterns and Washington Mutual, Wells Fargo includes Wachovia.
Source: Nomura Institute of Capital Markets Research, based on Bloomberg and company financial disclosure documents
Writedowns and losses Leverage ratio
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Nomura in Asia –Lehman integration Nomura acquired people, hence new client relations
M&A financial advisors league table
–Any Asia (incl. Japan) involvement announced
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Nomura in Asia –Cross border M&A
Kirin – San MiguelJapan - Philippines
Asahi – TsingtaoJapan – China / Belgium
Chinalco – Rio TintoChina – U.K. / Australia
Nomura contributed to several value-enhancing M&A deals after Lehman
Daiichi Sankyo– Ranbaxy
Japan - India
Asahi – Cadbury
Japan - Australia
Sinopec – Tanganyika
China - Canada