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Agency Theory

This one hope you can understand about agency theory:
Merrill's Thain seeking 2008 bonus of $10 million: report
from Reuters

Merrill Lynch & Co Chief Executive John Thain has suggested to directors that he get a 2008 bonus of as much as $10 million, but the battered company's compensation committee is resisting his request, the Wall Street Journal said, citing people familiar with the situation.

The compensation committee has not reached a decision, but is leaning toward denying Thain and other senior executives bonuses for this year, the people told the paper.

Merrill could not be immediately reached for comment.

Shareholders on Friday approved Bank of America Corp's takeover of Merrill, a deal fraught with risk but one that would create a banking giant with a leading position in almost every major area of the financial system.

Merrill was arguably saved from extinction when it agreed to merge on September 15, an hour before Lehman Brothers Holdings Inc filed for bankruptcy. The fear was that Merrill could be next if shareholders and trading partners fled, as many did at Lehman and the former Bear Stearns Cos.

Thain has said he deserves a bonus because he helped avert what could have been a much larger crisis at the firm, people familiar with his thinking told the WSJ.

Members of Merrill's compensation committee agree with Thain that the takeover is in shareholders' best interest, but believe it would be foolish to ignore strong public sentiment against large compensation packages, the paper said, citing people familiar with their thinking.

Committee members are also weighing the fact that other Wall Street firms, including Goldman Sachs Group Inc, which did better than Merrill this year, are not giving out bonuses to top executives, the paper said.

Thain, who became Merrill's chief executive after losses in mortgage-related investments led to the October 2007 ouster of Stanley O'Neal, has also run NYSE Euronext, after a long career at Goldman.

After the Bank of America-Merrill deal is completed, he will run the merged company's global banking, securities and wealth management businesses. Thain will not be joining Bank of America's board.

So the agency theory is : A theory concerning the relationship between a principal (shareholder) and an agent of the principal (company's managers) or essentially it involves the costs of resolving conflicts between the principals and agents and aligning interests of the two groups.

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The Acquisitions and the Suspend of Century Bank

The Accuisition
Bank of Indonesia temporary cancel the acquisition of Century Bank by Sinar mas Multiartha. But Sinar Mas stil process the acquisition plan and now in due dilligence process.PT Century Mega Investindo and First Gulf Asia Holdings Ltd as share holder of PT Bank Century Tbk and Sinar Mas have signed the Letter of Intent (LoI) for accuisiting 70% of share Bank Century share.

The Suspend
Day before, Bank Century was having problems in settling its clearing payments due to a technical problem. Because of that, The Indonesia Stock Exchange (IDX) suspended the trade in Bank Century Thursday, pending clarification from the bank over the question that it could not provide Rp 5 billion to the central bank clearing house.

Century Bank history
Bank Century was formed from a merger between Bank CIC, Bank Pikko and Bank Danpac in late 2004.

Meaning of Suspend(Suspended of Trading)
A stoppage in the trading of a security for an extended period of time that normally occurs when there is a lack of material financial information on the security. Once the security is suspended, shares of that security cannot be traded on the market until the suspension is lifted or lapses. The exact amount of time for the suspension will be determined on on a case-by-case basis.

Meaning of Acquisition
A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company's stock or a combination of both.


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Repurchase Agreement

From the Jakarta Post:

Bakrie & Brothers also announced it had defaulted Rp 134.9 billion to Recapital Securities and Rp 10 billion to PT Aldira as a result of the repo financing scheme. The firm had put up shares in Bumi and PT Bakrie Sumatera Plantations for these two deals.

What is REPO?
A repurchase agreement (or repo) is an agreement between two parties whereby one party sells the other a security at a specified price with a commitment to buy the security back at a later date for another specified price. Most repos are overnight transactions, with the sale taking place one day and being reversed the next day. Long-term repos—called term repos—can extend for a month or more. Usually, repos are for a fixed period of time, but open-ended deals are also possible. Reverse repo is a term used to describe the opposite side of a repo transaction. The party who sells and later repurchases a security is said to perform a repo. The other party—who purchases and later resells the security—is said to perform a reverse repo.

While a repo is legally the sale and subsequent repurchase of a security, its economic effect is that of a secured loan. Economically, the party purchasing the security makes funds available to the seller and holds the security as collateral. If the repoed security pays a dividend, coupon or partial redemptions during the repo, this is returned to the original owner. The difference between the sale and repurchase prices paid for the security represent interest on the loan. Indeed, repos are quoted as interest rates.

Securities dealers use repos to finance their securities inventories. They repo their inventories, rolling the repos from one day to the next. Counterparties may be institutions, such as money market funds, who have short-term funds to invest, or they may be parties who wish to briefly obtain use of a particular security. For example, a party may want to sell the security short, or they may need to deliver the security to settle a trade with another party. Accordingly, there are two possible motives for entering into a reverse repo: short-term investment of funds, or to obtain temporary use of a particular security.

In the latter case, the security is called a special security. In the former case, it is called general collateral or GC.

Interest rates payable on special repos tend to be lower than those payable on GC repos. This is because a party reverse repoing a special security will accept a reduced interest rate on its funds in exchange for receiving the special security it requires. Economically, the transaction is no different from cash collateralized securities lending. Pricing of either type of deal depends upon demand for the desired security.

Because repos are essentially secured loans, their interest rates do not depend upon the respective counterparties' credit qualities. For GC repos, the same rates apply for all counterparties. Accordingly, GC repo rates—or simply repo rates—are benchmark short-term interest rates that are widely quoted in the marketplace. They differ from Libor rates in that they are for secured loans whereas Libor rates are for unsecured loans.

More about Repo:




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