China Bank to Buy $1 Billion Stake in Bear Stearns

[Muting]

By ANDREW ROSS SORKIN
Published: October 22, 2007


Citic Securities, a top state-controlled investment bank in China, is planning to invest $1 billion in Bear Stearns and form a joint venture with the firm in Asia, the companies said this morning in a statement. The deal comes amid speculation that Bear Stearns might seek a partner following the summer's credit crunch, which took a toll on the firm's earnings.
"This groundbreaking alliance will give Bear Stearns a unique footprint in one of the world's fastest-growing economies," the chief executive of Bear Stearns, James Cayne said in a statement today. "Combining our operations in Asia with Citic Securities will greatly benefit Bear Stearns's global client base and generate substantial new revenues."
The deal, which also calls for Bear Stearns to invest $1 billion in Citic, which is owned by an arm of the Chinese government, would pool together both firms' businesses in Asia, with the exception of China. The venture, however, would include some collaboration in China, giving Bear Stearns access to some of Citic's clients.
The transaction would give Bear Stearns a strong foothold in Asia, where it has been weak, and may help it catch bigger rivals like Goldman Sachs and Morgan Stanley.
According to the statement, Citic will invest in Bear Stearns through 40-year convertible trust preferred securities that will convert to about 6 percent of Bear Stearns' outstanding shares. Citic could potentially increase the stake to 9.9 percent.
In turn, Bear Stearns will acquire a similar stake in Citic through a six-year convertible debt security. Bear Stearns will also have options to acquire additional shares.
Still, the venture does not directly address Bear Stearns' balance sheet. Some investors and analysts have suggested that the firm could require a capital infusion because of its high exposure in the moribund mortgage market. But Bear Stearns has often said such an infusion is not necessary, and its deal with Citic seems to be an expression of confidence in Bear Stearns.
Confusion over a possible deal has reigned for weeks. Jiang Dingzhi, vice chairman of the China Banking Regulatory Commission, said last week that Citic was interested in a deal with Bear Stearns. But then China Citic Bank, also a unit of Citic Group, denied that it was in talks with Bear Stearns.
Hit hard by problems in the mortgage business, Bear has announced a couple of layoffs in the last couple of months and fused its two home loan units.
The firm's exposure to the mortgage market was highlighted in its third-quarter results. Bear had net income of $171.3 million, or $1.16 a share, down from $438 million, or $3.02 a share, in the quarter a year earlier. Earninings fell 61 percent on sharp losses related to its hedge funds and exposure to subprime investments.

 

[Christian]

So the USA creates a trade deficit with China. China has loads of US dollars that are losing value relative to the other major currencies. China then puts the dollars back into the US economy via investments. Seems like a great system to let Americans consume more than we produce.

This story, along with the announcement of the $3 billion Chinese stake in Blackstone tells me that we are going to see this trend develop and our two economies become increasingly interconnected and dependent on each other.

 

[Andy Nguyen]

Looks to be lot of great opportunities for people with the Chinese language skills, working experience and education from oversea. china is booming and there will be ever increasing demand for US-trained MFE as the products there become more exotic.

 

[Yuriy]

Too bad I don't speak Chinese

 

[DominiConnor]

As a headhunter I will have to share with you that there is absolutely no shortage of Chinese language skills in Finance. None. Not even a little bit. Zero. It's value is somewhere between drinking coffee without spilling it, and advanced use of lift buttons.

I'm not even sure why anyone thinks there may be in the future ?

One reason London is a bigger financial centre than Wall Street is that it is so international that it is referred to as "Wimbledon". Like in tennis, the centre is in London, but none of the top players are British.
There are any number of teams in banks without a single native.

Yet outside sales there is almost no demand for any of the 50 languages you will find in a City bar. Work for a German or Singaporean bank, and they speak English.

We see and appreciate that many Chinese people from the 4 Chinas, as well as in these places are studying Finance. I'd guess that it's currently the 6th most common native language (English, French, Italian, Arabic, Hindi, Spanish, Mandarin, German).

The most comparable group is the Hindi speakers, which is of course a lie.
They all speak English well, about 25% cannot easily be distinguished from native speakers, so I don't count Hindi as foreign.
French and German nationals don't have problems with English either.

The reason I want to stamp very hard on the idea that Chinese language skills are valuable is that Chinese people have on average the worst English of any group we deal with by a vast margin, and some may kid themselves that it will be OK.
It won't.

Many Chinese quants have excellent English, and there is quite a notable difference between the English of those we speak to who have jobs and those who are still studying.

Think about the causality of this....

I've conducted phone interviews with Chinese people where I have had to 5 times ask them to repeat what they said because I simply could not parse it.
Compared to most HHs I'm good because a lot of my history has been working and studying with Chinese people.

The gap is largely in spoken English, written is not an issue, it may even be that Chinese are better than average non-native English speakers.

I estimate that >70% of jobs require that you be interviewed at some stage by another non-native English speaker.But not someone with your native language Think of how horrible that is going to be for you both. Think that helps your chances.

You may think you're smart enough for that not to matter.
I am here to tell you that this proves you're not smart enough.

The market is still good enough that you will get a job, but the big variable as always is whether you will get a good job.

Chinese people need to spend more time in the bar talking to non-Chinese.

Yes, there are jobs in China, and that will increase.
I fail to see why this matters.

As I say earlier, a lot of people in China are studying Finance, so in the main you will be competing with people who are prepared to work for a lot less.

A very small number of people will use the strong brand image of having a Western education and experience with a bank to score excellent jobs. Some people will get to sleep with Angelina Jolie. As a plan to get paid or laid it sucks.

If your game plan is to go to China, then the optimum path is to get experience at a big western firm first. If the interviewer at your target bank can't understand you, then it's going to be tough.

 

[Andy Nguyen]

Shoot, you just shatter the dreams of many people here. Dang, Dominic ...
I guess I don't have to learn Mandarin or Hindi to be competitive in the global market anymore

 

[Yan He]

Dominic, you are right in the sense of spoken English of Chinese. Most of them have really solid sill sets for Quant, but couldn't efficiently express themselves and fail even the first round phone screen.

CITIC which is setting to buy stake of Bear has head office in Hong Kong, where most locals speak pretty good English.

The good sign is, the market is good , we gonna work hard

Thanks, Dominic.

 

[kean]

China tries to play catch up games in the global financial markets. However, I do no think China is ready for derivatives products in the short-term unless they implement a comprehensive legal framework which covers international financial market.

However, the worlds start to show respect to Chinese and China's roles in global economy. The perception has to change. It is no longer G7 games.

Like Miss He mentioned in the above, there are smart Chinese people but they do not express themselves very well. Like it or not, typical Chinese do not like to bullshit a lots. They are hard working people. Once, they grab the ideas on system integration with their hard working attitude...the 21st Century belongs to Dragon. The game has just begun......!

Cheers

 

[Vic_Siqiao]

Looks to be lot of great opportunities for people with the Chinese language skills, working experience and education from oversea. china is booming and there will be ever increasing demand for US-trained MFE as the products there become more exotic.

hope so. but right now China's Fin industry actually need very few MFE because they can make big amount of money easily without any complex math models.

 

[kean]

who you know

In the real world, what you know is essential, who you know is important.

Making money can be in any form. You don't have to be a quant to make millions. In China, you make money when you know someone very important or you can sell something to the consumer market. I think may be I will care about penetrating the huge market then complex models in China.

hope so. but right now China's Fin industry actually need very few MFE because they can make big amount of money easily without any complex math models.

 

[Vic_Siqiao]

In the real world, what you know is essential, who you know is important.

Making money can be in any form. You don't have to be a quant to make millions. In China, you make money when you know someone very important or you can sell something to the consumer market. I think may be I will care about penetrating the huge market then complex models in China.

wow~~u know so many thing about China

 

[kean]

impossible

I'm still learning. China is huge. It is impossible to know everything....long term learning.

The market is huge. So, psychology plays a vital role in China. For example, Giant which sells health care products in China is a good example. If you can get 10 Chinese people start to believe in your products, you will sell like hot cake afterward. 10x10x10.....x10=10^n. You count.

Frankly speaking, China is trying to launch derivatives products next year. I really think whether they are ready. The China Government started 4 state assets management companies a few years ago to repackage all the bad debts or non-performing loans due to corruptions. Some of the debts are still in processing stage. Hence, they issued two stock broking licenses to CHAMC and Cinda in order to restructure those debts through IPO or via market instruments. In other words, China Government can recover as much as possible. As far as I know, CHAMC and Cinda are not quite ready for the stock broking business though they have established their operations lately.

This is all learning process. I hope they do not jump before they know how to walk...

Cheers,
Kean

Cheers,
K

wow~~u know so many thing about China

 

[DominiConnor]

I don't buy the idea that Chinese people are too primitive to cope with western ideas like derivatives, or free speech for that matter.
I guess the history of derivatives is not on the syllabus, but they are older than most countries, and were in use before the steam engine.
However, they require a social development not yet seen in China, that of the rule of law.
A working derivatives market require that if a powerful entity loses money on a deal, then one can assume that they will pay up, and that if you do a good trade your children won't be murdered.
That can actually be fixed in 6 months flat, it's been done before, but I guess we're a whole economic cycle from China doing that.

 

[kean]

....

Agreed. On the other hand, they do not want to get conned, too. The China banking system is not ready either.

For example, a western joke may not be a joke for Chinese. So, do you play a game which you do not fully understand.

I don't buy the idea that Chinese people are too primitive to cope with western ideas like derivatives, or free speech for that matter.
I guess the history of derivatives is not on the syllabus, but they are older than most countries, and were in use before the steam engine.
However, they require a social development not yet seen in China, that of the rule of law.
A working derivatives market require that if a powerful entity loses money on a deal, then one can assume that they will pay up, and that if you do a good trade your children won't be murdered.
That can actually be fixed in 6 months flat, it's been done before, but I guess we're a whole economic cycle from China doing that.

 

[Dmytro]

The China banking system is not ready either.

For example, a western joke may not be a joke for Chinese. So, do you play a game which you do not fully understand.

wow, you know so much about not just China

 

[kean]

...

I am not sure whether this is a criticism or ...

I worked in Asia for many years. I worked in China for at least 2 years. I don't think I know China but I have many friends in different industries. This is a beauty of being a SAP consultant. I could learn many industries through implementation.

Sometimes we think that we are smart but there are many people are smarter.

Old Chinese said, one mountain is higher than the other....

Information and network are power.

wow, you know so much about not just China

 

[kean]

This

When we talk about finance, we point our fingers to NY and London. A dream place to be .....but the world is changing. You will find finance and other businesses are slowly integrating with the rest of the world or already integrated. China will lead a big way into financial world.

4 of top 10 with most capitals companies in the world are Chinese conglomerates. You may find yourself working for a western firm with Chinese shareholders soon.

Think out of the box with an open mind. My apology if I am being rude.

wow, you know so much about not just China

 

[Dmytro]

As a headhunter I will have to share with you that there is absolutely no shortage of Chinese language skills in Finance. None. Not even a little bit. Zero. It's value is somewhere between drinking coffee without spilling it, and advanced use of lift buttons.

I'm not even sure why anyone thinks there may be in the future ?


Chinese people need to spend more time in the bar talking to non-Chinese.

Yes, there are jobs in China, and that will increase.
I fail to see why this matters.

As I say earlier, a lot of people in China are studying Finance, so in the main you will be competing with people who are prepared to work for a lot less.

A very small number of people will use the strong brand image of having a Western education and experience with a bank to score excellent jobs. Some people will get to sleep with Angelina Jolie. As a plan to get paid or laid it sucks.

If your game plan is to go to China, then the optimum path is to get experience at a big western firm first. If the interviewer at your target bank can't understand you, then it's going to be tough.

Dominic,
as always, great and insightful comment. is it safe to assume that one could apply the the same argument to any non-native speakers (i.e. Eastern European, SPanish, etc)?
thanks a lot

 

[Andy Nguyen]

In my opinion, one of the reasons why the US economy is so far advanced is the trust that the consumers have on their bank deposits. They know the US gov will back up their deposits.
I don't know what other countries have similar to the FDIC. Growing up in a country where the government devalued its currency several times, people lost all their deposits when private banks defaults, I know majority of my people rather buy gold, dollars or stack money under mattress than to put in a bank. I imagine it's more or less similar in China and many other Asian countries.

I know in India there is a government entity similar to the U.S.’s FDIC called Deposit Insurance and Credit Insurance Corporation (DICGC). It does not insure up to a large amount. The DICGC insures up to the equivalent of roughly $2,325 while FDIC insures up to $100K for a single account and $200K for a joint account.

Anyone knows FDIC's equivalence in China or other countries ?

 

[kean]

this

this is a good article: FDIC: FDIC Banking Review - A Survey of Current and Potential Uses of Market Data by the FDIC

China does not have a proper FDIC version that caters for global banking system. Risk insurance is done via Hong Kong banking system.

Read this: Peoples Bank of China (bank, China) -- Britannica Online Encyclopedia

People Bank of China had signed an agreement with FDIC in 2006 to develop their own FDIC version. Frankly speaking, DCFC is absolutely correct that collection of payment may be a problem in China...to some extends.

In my opinion, one of the reasons why the US economy is so far advanced is the trust that the consumers have on their bank deposits. They know the US gov will back up their deposits.
I don't know what other countries have similar to the FDIC. Growing up in a country where the government devalued its currency several times, people lost all their deposits when private banks defaults, I know majority of my people rather buy gold, dollars or stack money under mattress than to put in a bank. I imagine it's more or less similar in China and many other Asian countries.

I know in India there is a government entity similar to the U.S.'s FDIC called Deposit Insurance and Credit Insurance Corporation (DICGC). It does not insure up to a large amount. The DICGC insures up to the equivalent of roughly $2,325 while FDIC insures up to $100K for a single account and $200K for a joint account.

Anyone knows FDIC's equivalence in China or other countries ?