The Way of Strategy (5): When A Good Strategy Was Not Enough

When I coached basketball many years, my responsibility was on the defensive side of the game. Many weeks before the season began, I prepared my players on the different defensive alignments and traps that I was going to call during the season. I kept the execution of each defensive alignment quite simple. The starters and the bench had to learn it. Despite the offensive prowess of certain players, everyone had to play defense. I gave them historical and statistical reasons why playing defense was important to their success. The team understood with my reasoning and agreed to play defense.

The head coach and I chose weak opponents to practice our arsenal of "pressure" trap maneuvers. When the entire team mastered the current page of tactics, I either added more variations of the traps to our playbook or increase the level of opposition to raise their quality of play.

After a progression of success, the belief of team defense created a high level of team camaraderie. We reached the Championship round with a formidable defense, but lost the final game.

Regardless of the outcome, it was a lesson of where the grand process of planning and preparation prevailed.



Thoughts on Elena Dementieva's Coach Strategy
Elena Dementieva's coach could have developed a strategy that she was not prepared to implement consistently. Sometimes, the player's inability to adjust at a short notice, is a major obstacle to the best strategy.


Afterthoughts
Strategy has no value if the implementers disbelieve its criteria. Disbelief usually creates a level of apathy that influences the implementers from executing it properly.

The smart strategist prevails due to his assessment of available talent and the various elements around his settings. He also succeeds because the foundation of his strategy is based on the given talent of the coach.

The focus of a good strategy is to give the team a general perspective of what is their goal and the direction that they will take. If the team believes in the plan, they would comply with it. If the team disbelieves in the plan, they would either fight it or flee from it

Conclusively, the expectations of the goal never exceed the expectations of the implementers.

With our Compass AE process, your project implementers knows the circumstances for strategic adjustments. If you are interested in knowing more about our Compass AE methodology, please contact us at service[aatt]collaboration360[ddott]com.





July 3, 2009, 11:06 pm

A Good Strategy Was Not Enough for Dementieva

By Geoff Macdonald

The Serena Williams-Elena Dementieva match was played at a remarkably high level for close to three hours. Dementieva’s serve may be the most improved shot on the tour, and she won a high percentage of both first and second serves against Williams, arguably the game’s best returner. Like Roger Federer and Rafael Nadal on the men’s side, Serena and Venus Williams have elevated the level of play on the women’s tour, with their big serving, aggressive returns and seemingly indomitable wills. Give Dementieva credit for responding to the challenge; she was a shot away from the final, and, for long stretches of the match, outplayed Serena.

In addition to her improved serve, Dementieva wins matches with superb footwork and solid, heavy groundstrokes, struck flat with just a whisper of topspin. Her game plan Thursday was to direct as many penetrating shots as possible to Serena’s forehand, which can go awry if pressured. If you look at the serve statistics from the match, Dementieva served to the forehand a great deal, especially in the deuce court. She mixed it up, of course, to keep Williams from dialing in on her return. But in the deuce court, Dementieva hit 21 first serves wide to the forehand, winning 13 points. On her second serve, she was even bolder in attacking Williams’s forehand, serving 18 out of 21 second serves out wide. She won 17 points, 15 when going to the forehand.

In the ad court, Dementieva served wide as well, aiming 19 first serves out wide and converting on 15 of those attempts. On the second serve, she tried to go at the body, hitting 10 out of 13 right at Williams. Interestingly, she was less successful in the ad than the deuce. Perhaps adding a serve up the T in the ad will help Dementieva in her future battles with Serena Williams. It might have made a difference in Thursday’s match.

A tactic Dementieva employs against Serena Williams is to rarely engage in backhand crosscourt rallies. One way to think about playing Serena is to view her as a lefty with a huge forehand, and try to steer more balls to the forehand side. Craig Cignarelli, an excellent coach based in Los Angelas, calls this “switching the rally” in an article on John Yandell’s Web site, tennisplayer.net. Dementieva did this brilliantly for the first two sets, but less so in the third. Give Serena credit for working harder to set up on her forehand side, and she also went back up the line more often rather than always going crosscourt. This forced Dementieva to hit more often to Williams’s feared backhand.

There was a pivotal rally late in the match that illustrated why Dementieva hatched her game plan in the first place. With Serena serving at 5-6 in the third, deuce, both players locked on to a scintillating backhand crosscourt rally. It was strength against strength as Dementieva and Williams hit heavy, high percentage crosscourt shots on a big point. I kept hoping Dementieva would change direction and go down the line to Williams’s forehand. But that would mean going over the slightly higher net into a smaller court, and changing the direction of the ball, no easy task against Serena’s pace. The point built in drama and tension, but Serena’s pace and depth increased, until finally, she ripped a deep, unreturnable backhand that skidded low on the worn grass, bringing a dejected Dementieva to her knees. She would only win two more points after this rally, which would have given her a second match point had she won it.

http://straightsets.blogs.nytimes.com/2009/07/03/a-good-strategy-was-not-enough-for-dementieva/

Transforming Chaos Into Opportunities (3)

The intelligent ones do not only look at opportunity first. They assess their global settings, pontificate their options and slowly decide.

Not only do they maintain the gathering of internal information about the strategic disposition of their targeted party, they constantly assess it. Waiting for that grand advantageous moment when the target is at its weakest state ever. They pursue it without any emotion. Conclusively, they maximize their opportunity to the fullest.

In California and other parts of the world, it is hunting season for the bargain hunters. .


#
US buying trip just hype?
By Hu Yuanyuan and Wu Chong (China Daily)
Updated: 2009-03-16 08:01

Yin Guohua heaved a sigh of relief last week as his plane touched down in Beijing after an 11-day tour of the US.

As a member of China's first-ever delegation to shop for American real estate, Yin was prepared for hectic travel, endless showings, and pushy salesmen.

He was not prepared for the reporters.

"Everywhere we went, there were cameras chasing us," Yin said ruefully.

The novelty of Chinese shopping for American property guaranteed publicity for the 21-man delegation, which visited Los Angeles, San Francisco, Las Vegas, New York, and Boston. Another 19 delegates, most of them 35-50 years old, missed the trip because of visa problems.

Soufun.com, the real estate portal, organized the trip but did not announce the results.

Yin, a lawyer who had said he intended to buy a $1 million apartment in either Los Angeles or New York, also declined to say whether he had made a deal, but said the trip met his expectations.

"In fact, we had a wider range of choices than we expected," he said.

Industry experts said the trip did not appear to be a serious attempt to buy property.

Howard Rosen, a senior manager at Grubb & Ellis, a New York-based property agency, said he does not think most Chinese individuals are qualified to purchase real property in the US "unless the money is here."

Investors with deposits in Hong Kong may qualify, he said, but assets on the Chinese mainland will not satisfy US sellers, Rosen said.

In addition, foreign investment in US property requires a lengthy process, according to Rosen. Without "certainty of disclosure," Chinese investors will not be taken seriously, he said.

Rosen also questioned Chinese investors' interest in the US real property market, as the Chinese stock markets begin to rebound.

Even if they are interested, he said, there are still many questions investors must answer before they make such an investment, such as "what kind of investment returns they'd expect" and "how long will they expect to invest."

Chen Yunfeng, secretary general of the China Real Estate Managers Association, said he also doubts that the time is right for Chinese to buy US investment property.

"Given the current US economy, there is no sign that the price of property will appreciate strongly in the short term," said Chen. The price may even continue to slide if the crisis worsens, he said.

More buying trips are likely, however, as China's new millionaires look for places to invest their wealth.

According to a report by the Boston Consulting Group, China had the world's fifth-largest population of millionaires in 2008 with 391,000, up 20 percent from the previous year.

The growing interest among Chinese in buying overseas properties is not focused solely on the US.

"There are more people coming to us, asking about the process of buying an overseas property," said Rainer Schleif, a manager of Aimeilan Consulting (Beijing) Co Ltd, a company that deals mainly with Australian and Singaporean real estate.

Desire to emigrate and the sharp depreciation of the Australian dollar have piqued investors' interest, Schleif said.

(China Daily 03/16/2009 page7)
http://www2.chinadaily.com.cn/bw/2009-03/16/content_7580709.htm


#
Chinese 'Buying' Tour May Have Been a Bust

You probably read -- or saw something on TV -- about a group of Chinese investors who toured the U.S. shopping for bargain basement real estate in San Francisco, Las Vegas, New York, Boston and Los Angeles.

One man's foreclosure is another man's profit.

While the tour made headlines -- most of which were fairly alarmist -- the trip seems to have amounted to naught, according to a China Daily report.

Turns out, unless Chinese investors have their cash in Hong Kong or U.S.-based accounts, they probably won't qualify to buy U.S. property. And there were other reasons why industry insiders were skeptical of the trip: For one thing, of the 40 people who were supposed to come, only 21 investors made it, and it's not clear how many of those who attended actually placed offers on properties. (The 19 investors that didn't come reportedly had visa problems.)

Still, that's not to say Chinese buying tours won't eventually become commonplace, but probably not until the U.S. market delivers more predictable short-term returns.


http://www.sfgate.com/cgi-bin/blogs/ontheblock/detail?entry_id=37187

Competing with Strategy

One cannot change the ground rules of a marketing arena if he or she does not know the rules of the game. One can fight on their own terms if he or she does know the limitations of each competitor.

With our Compass AE process, you will assess your grand settings. You will know more than the basics of yourself, your competition, your strengths, your weaknesses, the opportunities and the threats. You will also understand how each competitor operates in terms of the competitive terrains, the campaign logistics, and their true intent.

If you want to know more about our Compass AE process, please contact us at service@collaboration360.com


# # #

Change the ground rules

Fight competitive sales on your terms

By Jerry Stapleton

Published January 23, 2009

How often do you have sheer dominance over your competition? Unless your solution is three times as compelling as the competitor’s, the answer is just about never!

Let’s face it: few companies are lucky enough to command such superiority. That’s why most sales campaigns end up as price battles.

If we don’t dominate the competition, then we have to change the ground rules of the sale to work in our favor.

You say you want a revolution

The soldiers who fought in the American Revolution did just that. Rather than march down the middle of the street wearing their uniforms, the revolutionaries dressed in their everyday clothes and hid behind rocks, trees and piles of hay to fight the British troops. They didn’t fight the way the British wanted them to fight.

Or recall a famous scene from the film “Raiders of the Lost Ark.” Indiana Jones has just used a whip with considerable skill to fend off a few villains when he comes face to face with a man equally skilled but with a three-foot sword, which he twirls in front of Jones.

The audience watches in eager anticipation of an interesting but apparently fair battle: sword against whip. Instead, Jones suddenly pulls out his revolver and shoots his opponent. Jones changed the ground rules.

Avoid the feature trap

Mel, a salesperson for a client of mine, was selling inventory control software to a large feed mill company. Mel’s competitor’s product was clearly superior to his on a feature-by-feature comparison. They – not Mel – had sheer dominance.

But Mel’s company had one feed mill installation already under its belt; his competitor had none. So Mel changed the ground rules of the sale from technical features to feed mill expertise.

Mel never let his competitor suck him into a feature battle – which would have killed his chances. By staying “on message,” Mel won the deal.

Fight the battle on your terms

Here’s a superb illustration of a change-the-ground-rules strategy from the world of management consulting. Several years ago, the then consulting firm Coopers & Lybrand placed a series of print ads that showed a large picture of an ancient Chinese sword.

The ad’s caption read, “Does your consultant quote ‘The Art of War’ but shy away from battle?” (“The Art of War” is a popular ancient book about warfare that is commonly referenced, even today, in business settings).

Coopers & Lybrand was attempting to change the ground rules for the purchase of management consulting services from “providing theoretical strategic advice” (this is the quote “The Art of War” reference) to “facilitating the implementation of strategy” (the “shy away from battle” reference), something its competitors are not particularly strong at doing.

Take the RFP...please!

One can even change the ground rules when responding to a request for proposal (RFP). Another client salesperson did just that.

Julie had received a highly structured “sealed bid” RFP from a very large industrial company soliciting proposals for its natural gas supply. As is true with most such RFPs, the requesting company in this case planned to compare proposals from multiple gas suppliers and select the lowest price offering.

But Julie had different plans for her response to the RFP. She changed the ground rules from quoting the “lowest wellhead price” – the commodity measure typically used to compare natural gas prices that the request for proposal contained – to quoting “total energy cost,” more of a total cost of ownership kind of approach, and she won the deal. Julie’s last-minute timing was essential to prevent her competitors from attempting the same approach.

[ "If you're last, then use yin (soft) tactics, if you are first, then use yang (hard) tactics. When you have exhausted the enemy's yang measures, then expand yin to the full and seize them. ... This is then the subtle mysterious of yin and yang according to the strategists.
- Questions and Replies, 2 (from Seven Military Classics of Ancient China) ]

"Changing the ground rules that favors you" is a yin approach to playing any game,

Don’t let yourself get sucked into head-to-head engagements unless you have that elusive dominance. As you size up your own selling situation, ask yourself how you can lead with a perceived strength of your own against a perceived weakness of your competition.

Occasionally, that difference will be obvious, as in the examples above. Most other times, it’ll take some work, but it is well worth the effort.

http://www.biztimes.com/news/2009/1/23/change-the-ground-rules

Transforming Crisis Into Opportunities (2)

A continuation of an earlier thread (Assess, Position and Implement).


The key to transforming crisis (or chaos) into opportunity is to have the advantage of time and resources. Focus on detailed assessment, specific planning and solid preparation. The key is to maximize one's opportunities by establishing a Compass strategy (a Tangible Vision) that delineates your strategic overview. The strategic overview should be an organized set of priorities, approaches and circumstance that you can operate from.

When negotiating with an opposing party, assess the competitive position of each side. Then, determine who has the advantage of time and resources. Do not rush into the situation. Properly build a detailed plan based on assessed data. The greater your advantage of time and resources is, the greater your leverage becomes. Always assess the targeted party with a prepared strategic plan.

From the framework of 36 Stratagems

Loot a burning house ( 趁火打劫; Chèn huǒ dǎ jié)

When an organization is affected by an incremental streak of internal conflicts, then it will be unable to deal with an outside threat. This is the time to seize the opportunity to reap the rewards. Maintain the gathering of internal information about the strategic position of the opposing party. If he/she is currently in its weakest state ever, pursue it without any emotion. Maximize the opportunity to the fullest.

Watch the fires burning across the river ( 隔岸觀火; Gé àn guān huǒ)

Maintain the gathering of internal information on the position of the competitor. When the competitor is at its weakest, seize the opportunity without any emotions.

Delay the entering of the competition arena until all the other players are exhausted from their own internal conflict. Then go in at full strength and pick up the pieces.

Implement this "Opportunistic Stratagem" in situations where vulnerabilities can be exploited. As one capitalizes on all opportunities, the advantage continuously grow.

Collaboration360 Consultants (C360). Copyright:2009 © All rights reserved
Copying, posting and reproduction in any form (without prior consent) is an infringement of copyright.

#

Moneyed Chinese come house hunting
Andrew S. Ross Tuesday, February 24, 2009

Cash-rich Chinese coming to do some house hunting

Call it a bailout from the East. Approximately 40 Chinese real estate investors are winging their way from Beijing today looking to snap up foreclosed and otherwise "distressed" properties in the Bay Area and California. The trip, put together by Beijing real estate portal SouFun Holdings Ltd. and Fortune Group Realty Co. in Pittsburgh, is one of several such Chinese house hunting groups to visit the U.S. periodically. But the timing of this one appears to be particularly fortuitous, on both sides of the Pacific. "It's good for Chinese investors who see lots of opportunities," said Fortune Group vice-president Andrew Hang Chen. "It's also good for the American economy, at least on a small scale."

Homes, apartment buildings and other commercial property in the region are on the shopping list. First stop on the 10-day trip is Los Angeles, followed by the Bay Area, then to Las Vegas. Apparently, the group won't have to worry about mortgages and such. "They have cash, believe me," said Chen.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/02/24/BUUE1631TP.DTL&type=realestate

Transforming Chaos Into Opportunities

When negotiating with a trading partner, assess the competitive position of each side. Then, determine who has the advantage of time and resources. Do not rush into the situation. It is recommended to properly build a detailed plan that is based on assessed data. The greater your advantage of time and resources is, the greater your leverage becomes.

Revised content from the wiki page on the 36 Stratagems.

The View of China

Watch the fires burning across the river

(traditional Chinese: 隔岸觀火; simplified Chinese: 隔岸观火; pinyin: Gé àn guān huǒ)

Delay the entering of the field of battle until all the other players have become exhausted fighting amongst themselves. Then go in at full strength and pick up the pieces.

Usage

This "Opportunistic Stratagem" thrive on situations where vulnerabilities can be exploited. The objective is to capitalize on all opportunities so as to gain the advantage.

#

"Looting a house on fire" (趁火打劫 or "Chen Huo Da Jie")
When an organization is beset by internal conflicts, they are not able to deal with an outside threat. This is the time for a superior organization to make a deal that gives them leverage.

Usage
Gather internal information about the opposition. If the opposition is in its weakest state ever, conquer the opposition without mercy.

The View of Russia

Russia possesses no strategic options to gain any leverage in its dealing with China. Their initial objective is to fix their economy first.

#

[ Turning Crisis into Opportunities ]

(From Stratfor.com)

China and Russia struck a deal that will give Russian energy firms Transneft and Rosneft loans to increase East Siberian oil field development and production and to connect the Eastern Siberia-Pacific Ocean pipeline to China. In return, China will receive about 300,000 barrels per day of oil for the next 20 years. Russia might have made the deal out of economic desperation as its state-owned energy firms feel the pain of evaporating credit, economic woes and low oil prices.

China and Russia struck a deal that will give Russian energy firms Transneft and Rosneft loans to increase East Siberian oil field development and production and to connect the Eastern Siberia-Pacific Ocean pipeline to China. In return, China will receive about 300,000 barrels per day of oil for the next 20 years. Russia might have made the deal out of economic desperation as its state-owned energy firms feel the pain of evaporating credit, economic woes and low oil prices.

Analysis

China and Russia reached an agreement under which China will give key Russian energy firms Rosneft and Transneft loans for $15 billion and $10 billion, respectively, Transneft spokesman Igor Dyomin said Feb. 17. Russian state-owned oil pipeline company Transneft will use its loan to connect the long-delayed Eastern Siberia-Pacific Ocean (ESPO) pipeline to China, and Rosneft will use its loan to expand East Siberian oil field development and production. In exchange for the loans, the Chinese will receive about 300,000 barrels per day (bpd) of oil for the next 20 years.

The loans are part of the much longer negotiations circling the idea of the ESPO pipeline. It makes perfect sense for Russia to link its vast Eastern Siberian oil resources (about 10 percent of Russia’s total oil reserves, or 10 billion barrels) to energy-consuming Asian markets like South Korea, Japan and especially China. Moreover, a pipeline that could carry Russian oil to the country’s Pacific coast could supply markets even further abroad, such as the United States. The problem is that building a pipeline across thousands of miles of mountainous Siberian terrain requires enormous capital investments that are not easy to come up with, particularly during a global recession. During Soviet times, the Russians used central government investment to undertake gigantic energy infrastructure projects (such as the pipelines from the Yamal Peninsula to Europe) that served strategic interests. After the Soviet collapse, and especially during Vladimir Putin’s presidency, Russia has been demure about such capital projects, performing only what was absolutely necessary to maintain exports to existing markets and passing up major renovations or expansions. This tight-fistedness enabled Russia to build up massive foreign exchange reserves with its trade surpluses, but it meant that many potential plans remained on the drawing board.

A new opportunity emerged when the Chinese and the Russians began negotiating the deal that has just been settled. The Chinese would loan the money, and a 44-mile spur off the ESPO pipeline would be jointly built and operated, linking Skovorodino in Russia’s Amur region to Daqing in China’s Heilongjiang province. When Transneft offered to build the spur, negotiations began. Despite hard-bargaining tactics and inherent distrust between the two geopolitical rivals, the proposal always seemed promising, since it marked such a close alignment of interests. Without Chinese capital, the Russians were unlikely to realize their strategic goal of transporting resources to new markets in the East at a time when their main market — Europe — is turning away. Without Russian oil, the Chinese would not be able to diversify their oil supply and enhance their energy security.

But the proposal ignited a conflict between the two major Russian players, Transneft and Rosneft, over the fact that a pipeline leading directly to China limits Russia to one customer, whereas building the pipeline to the Pacific coast would allow supplies to be shipped to any number of buyers. Rosneft wanted to secure China as a customer first, and then go on to bigger and better things; Transneft wanted to run a line straight for the coasts (to prevent China from taking advantage of a direct line by re-exporting Russian oil or by unilaterally demanding price reductions), or to refine the oil at home and continue shipping products by rail to the Pacific.

Rosneft is one of Moscow’s energy champions, and also has the support of one of two major political factions in the Kremlin, led by Deputy Prime Minister Igor Sechin. Ever since Rosneft assimilated the broken pieces of former Russian energy company Yukos (with help from a $6 billion loan from China in 2004), it has depended on developing its Siberian potential in order to rise above its many competitors. ESPO is therefore crucial to Rosneft’s survival and success. Therefore, Rosneft wanted to secure the deal with China first so as to have a stepping stone to a broader Far East strategy.

Negotiations on the Chinese deal were delayed. The Chinese were reluctant to sign an agreement while they had doubts about whether the Russian oil producer and pipeline builder could get along — specifically, China was waiting to see whether Rosneft would have the Kremlin’s support. Beijing also knew it had control of the purse strings; and given its inherent distrust of the Russians, it wanted to be sure that the agreement was fully to its liking — for instance, by insisting, against Putin’s demands, that the loan be made in U.S. dollars and not Russian rubles. China also wanted to make sure it did not need the cash to address any immediate problems at home due to the financial crisis.

Ultimately, the Kremlin intervened in the spat between Rosneft and Transneft, approving of Rosneft’s strategy and enabling the deal to move forward — by endorsing a slew of tax reforms and incentives for oil development and export in key East Siberian sites such as Sakha, Irkutsk, Krasnoyarsk, and eventually Taymyr, Sakhalin, Lena-Tunguska and Lake Baikal. The Chinese then came forward with the $25 billion, with a 6 percent yearly interest rate (moved down from 7 percent), which means that Russia gets the cash up front while China receives about 2.2 billion barrels of oil.

The deal reveals several things about the way regional geopolitics are unfolding as the world economy contracts. Russia and its state firms are in need of a lifesaver now that the combination of low oil prices, the absence of outside credit, and domestic financial troubles has rapidly depleted their reserves. The Chinese loan will provide an infusion of cash at just the right time to stave off financial pressures, allowing the Russians to undertake otherwise unfeasible projects that will pay off when Chinese energy demand revives. Moscow will see its Far East strategy advance another rung up the ladder, while Sechin’s clan, having scored a major victory in winning Kremlin approval for the Chinese deal, will gain an economic and political advantage over rivals.

China, meanwhile, will receive a steady stream of oil for the next 20 years. Rosneft’s facilities are ready to produce about 313,000 bpd (slightly more than the agreed-upon amount to repay the loan) at Vankor, the key Siberian site for the ESPO project. This amount of oil to be paid to China is roughly the same as the amount imported from Russia in 2007 (mostly by rail), and about half as much as the 600,000 bpd rail capacity in the region. This is significant, especially for a country so dependent on manufacturing and sensitive to energy shocks. China needs a reliable energy supply and does not want to be overly dependent on energy from one source. Moreover, most of its oil is shipped via ocean from the Middle East, and this leaves China at the mercy of U.S. naval power. However remote the possibility of an interdiction, it is enough to make a landlocked oil supply route attractive to Beijing.

But for Russia the deal is not a win-win. Moscow is getting pounded by the recession, and the decision to go forward on a pipeline that goes directly to China, forgoing the possibilities offered by a more versatile sea port destination, is a major concession. Obviously, now the Russian firms have to go through with the infrastructure developments, which will be technically demanding and fraught with unforeseen expenses and delays (sending Siberian oil eastward is said to cost twice as much per barrel as sending it westward). And the Chinese got a steal: Although not all of the contract’s subtleties are likely out in the open right now, reimbursement for the loan means that the Chinese have purchased Rosneft crude for only about $11.40 a barrel once interest is figured in — about one-third of what Russia’s crude fetches on the open market right now. The Russians have essentially locked the fate of their Far East strategy to the whims of Chinese energy policy, and this is a compromise that could reveal how financially desperate Russia is.

China and Russia reached an agreement under which China will give key Russian energy firms Rosneft and Transneft loans for $15 billion and $10 billion, respectively, Transneft spokesman Igor Dyomin said Feb. 17. Russian state-owned oil pipeline company Transneft will use its loan to connect the long-delayed Eastern Siberia-Pacific Ocean (ESPO) pipeline to China, and Rosneft will use its loan to expand East Siberian oil field development and production. In exchange for the loans, the Chinese will receive about 300,000 barrels per day (bpd) of oil for the next 20 years.

The loans are part of the much longer negotiations circling the idea of the ESPO pipeline. It makes perfect sense for Russia to link its vast Eastern Siberian oil resources (about 10 percent of Russia’s total oil reserves, or 10 billion barrels) to energy-consuming Asian markets like South Korea, Japan and especially China. Moreover, a pipeline that could carry Russian oil to the country’s Pacific coast could supply markets even further abroad, such as the United States. The problem is that building a pipeline across thousands of miles of mountainous Siberian terrain requires enormous capital investments that are not easy to come up with, particularly during a global recession. During Soviet times, the Russians used central government investment to undertake gigantic energy infrastructure projects (such as the pipelines from the Yamal Peninsula to Europe) that served strategic interests. After the Soviet collapse, and especially during Vladimir Putin’s presidency, Russia has been demure about such capital projects, performing only what was absolutely necessary to maintain exports to existing markets and passing up major renovations or expansions. This tight-fistedness enabled Russia to build up massive foreign exchange reserves with its trade surpluses, but it meant that many potential plans remained on the drawing board.

(click image to enlarge)

A new opportunity emerged when the Chinese and the Russians began negotiating the deal that has just been settled. The Chinese would loan the money, and a 44-mile spur off the ESPO pipeline would be jointly built and operated, linking Skovorodino in Russia’s Amur region to Daqing in China’s Heilongjiang province. When Transneft offered to build the spur, negotiations began. Despite hard-bargaining tactics and inherent distrust between the two geopolitical rivals, the proposal always seemed promising, since it marked such a close alignment of interests. Without Chinese capital, the Russians were unlikely to realize their strategic goal of transporting resources to new markets in the East at a time when their main market — Europe — is turning away. Without Russian oil, the Chinese would not be able to diversify their oil supply and enhance their energy security.

But the proposal ignited a conflict between the two major Russian players, Transneft and Rosneft, over the fact that a pipeline leading directly to China limits Russia to one customer, whereas building the pipeline to the Pacific coast would allow supplies to be shipped to any number of buyers. Rosneft wanted to secure China as a customer first, and then go on to bigger and better things; Transneft wanted to run a line straight for the coasts (to prevent China from taking advantage of a direct line by re-exporting Russian oil or by unilaterally demanding price reductions), or to refine the oil at home and continue shipping products by rail to the Pacific.

Rosneft is one of Moscow’s energy champions, and also has the support of one of two major political factions in the Kremlin, led by Deputy Prime Minister Igor Sechin. Ever since Rosneft assimilated the broken pieces of former Russian energy company Yukos (with help from a $6 billion loan from China in 2004), it has depended on developing its Siberian potential in order to rise above its many competitors. ESPO is therefore crucial to Rosneft’s survival and success. Therefore, Rosneft wanted to secure the deal with China first so as to have a stepping stone to a broader Far East strategy.

Negotiations on the Chinese deal were delayed. The Chinese were reluctant to sign an agreement while they had doubts about whether the Russian oil producer and pipeline builder could get along — specifically, China was waiting to see whether Rosneft would have the Kremlin’s support. Beijing also knew it had control of the purse strings; and given its inherent distrust of the Russians, it wanted to be sure that the agreement was fully to its liking — for instance, by insisting, against Putin’s demands, that the loan be made in U.S. dollars and not Russian rubles. China also wanted to make sure it did not need the cash to address any immediate problems at home due to the financial crisis.

Ultimately, the Kremlin intervened in the spat between Rosneft and Transneft, approving of Rosneft’s strategy and enabling the deal to move forward — by endorsing a slew of tax reforms and incentives for oil development and export in key East Siberian sites such as Sakha, Irkutsk, Krasnoyarsk, and eventually Taymyr, Sakhalin, Lena-Tunguska and Lake Baikal. The Chinese then came forward with the $25 billion, with a 6 percent yearly interest rate (moved down from 7 percent), which means that Russia gets the cash up front while China receives about 2.2 billion barrels of oil.

The deal reveals several things about the way regional geopolitics are unfolding as the world economy contracts. Russia and its state firms are in need of a lifesaver now that the combination of low oil prices, the absence of outside credit, and domestic financial troubles has rapidly depleted their reserves. The Chinese loan will provide an infusion of cash at just the right time to stave off financial pressures, allowing the Russians to undertake otherwise unfeasible projects that will pay off when Chinese energy demand revives. Moscow will see its Far East strategy advance another rung up the ladder, while Sechin’s clan, having scored a major victory in winning Kremlin approval for the Chinese deal, will gain an economic and political advantage over rivals.

China, meanwhile, will receive a steady stream of oil for the next 20 years. Rosneft’s facilities are ready to produce about 313,000 bpd (slightly more than the agreed-upon amount to repay the loan) at Vankor, the key Siberian site for the ESPO project. This amount of oil to be paid to China is roughly the same as the amount imported from Russia in 2007 (mostly by rail), and about half as much as the 600,000 bpd rail capacity in the region. This is significant, especially for a country so dependent on manufacturing and sensitive to energy shocks. China needs a reliable energy supply and does not want to be overly dependent on energy from one source. Moreover, most of its oil is shipped via ocean from the Middle East, and this leaves China at the mercy of U.S. naval power. However remote the possibility of an interdiction, it is enough to make a landlocked oil supply route attractive to Beijing.

But for Russia the deal is not a win-win. Moscow is getting pounded by the recession, and the decision to go forward on a pipeline that goes directly to China, forgoing the possibilities offered by a more versatile sea port destination, is a major concession. Obviously, now the Russian firms have to go through with the infrastructure developments, which will be technically demanding and fraught with unforeseen expenses and delays (sending Siberian oil eastward is said to cost twice as much per barrel as sending it westward). And the Chinese got a steal: Although not all of the contract’s subtleties are likely out in the open right now, reimbursement for the loan means that the Chinese have purchased Rosneft crude for only about $11.40 a barrel once interest is figured in — about one-third of what Russia’s crude fetches on the open market right now. The Russians have essentially locked the fate of their Far East strategy to the whims of Chinese energy policy, and this is a compromise that could reveal how financially desperate Russia is.

--- eof

Assessing the Global Economy (2)

How would you assess the economic grand picture for Japan? What specific data set do you look for?


How would you would use the Sun zi strategic principles to assess the economic grand picture? ...


The clues are in this blog and some parts of it can be found in Sunzi Art of War. ...


#

Japan's economy slumps as global gloom spreads

Mon Feb 16, 2009 3:45pm EST

By Yuzo Saeki

TOKYO (Reuters) - Japan sank deeper into recession with its worst quarterly contraction since the oil crisis in the 1970s, its reliance on exports and soft domestic demand dragging down the world's second-largest economy.

Hillary Clinton, in Tokyo on her first trip abroad as U.S. secretary of state, said Asia and the United States must fight the global crisis together.

The U.S.-Japanese relationship was founded on a "commitment to our shared security and prosperity, but we also know that we have to work together to address the global financial crisis," she said.

The grim Japanese figures, coupled with disappointment over the lack of coordinated action from the G7 and worries about bank rescue plans, pushed down European shares by 1.4 percent in thin trade, with U.S. markets closed and lighter UK volumes due to holidays. [nLG79960]

U.S. oil prices dipped below $37 a barrel as the raft of gloomy economic data underscored falling oil demand worldwide. Oil prices have dropped by more than 70 percent from their peak at almost $150 per barrel last year.

The pessimism extended to Latin America. At midday, Mexico's peso weakened 0.65 percent as appetite for riskier emerging market assets waned. Brazilian stocks and currency declined in thin trade as investors awaited details on a U.S. government economic plan.

In Canada, factory shipments sank a record 8 percent in December from a month earlier, far steeper than analysts had projected, boosting predictions that the central bank would once again trim interest rates.

In Rome, G7 financial leaders, fearing a 1930s-style resurgence in protectionism, pledged at the weekend to do all they could to fight recession.

"The outlook for the global and euro area economy in 2009 appears dismal," said European Central Bank Governing Council member George Provopoulos. "The current crisis is the biggest since the 1930s and exiting from it will not be easy or quick."

At the Italian parliament, U.S. House Speaker Nancy Pelosi defended the United States against accusations of protectionism, following concerns about a "Buy American" provision in the U.S. economic stimulus plan.

"Somewhere in the mix of things, someone has decided that America has become, is becoming, more protectionist. I don't think that is the case," she said.

In the United States, President Barack Obama will sign on Tuesday the $787 billion stimulus package which is hoped will save or create 3.5 million jobs.

FURTHER ACTION

The Bank of England said it would probably have to take further action to boost Britain's waning economy but recovery could start later in the year.

"A sharp contraction in activity, both here and abroad, is already baked into the cake for the first half of this year," Deputy Governor Charles Bean said.

Falling demand forced German car maker BMW to announce it was shedding 850 jobs and cutting back production of the Mini at its factory near Oxford.

European Central Bank President Jean-Claude Trichet warned policymakers they must avoid sowing the seeds of future crises in their efforts to revive economies.

Decisions made today should "not lay the ground for similar disorder in the future," he told European parliamentarians.

In India, the government said spending may have to rise sharply this year to shield the economy from the global credit crunch. The announcement in an interim budget worried investors, and credit rating agency Standard & Poor's said it planned to review the country's domestic debt rating.

Singapore Airlines said it planned to cut capacity by 11 percent in the year from April amid waning travel and cargo demand.

The German government is considering emergency measures to rescue the stricken bank Hypo Real Estate, whose shares have fallen by 97 percent over the last 18 months.

In Europe, the Czech Republic approved an economic stimulus package, Hungary announced plans to reform its tax code to help boost the economy, and Bulgaria said its economic growth nearly halved in last year's fourth quarter.

The widening economic crisis in Russia has sparked a wave of violent crime in Moscow that started last month, said the city's chief prosecutor.

GLOBAL CRISIS

Even though Japan has been relatively insulated from the collapse of the U.S. credit and housing markets that precipitated the global downturn, Economics Minister Kaoru Yosano said his country faced its worst economic crisis since World War Two.

With demand for its cars and electronics waning, an unprecedented slump in exports saw Japan's economy shrink by 3.3 percent in the fourth quarter of 2008, or an annual rate of 12.7 percent, marking three straight quarters of contraction and its worst result since the first oil crisis in 1974.

Japanese investors had largely factored in a big fall in GDP, limiting losses after the data was released.

The Nikkei share average fell 0.4 percent. But the yen rose against other major currencies after the G7 financial chiefs made no specific mention of the strength of the Japanese currency.

Adding to the Japanese government's woes, Finance Minister Shoichi Nakagawa faced calls for his resignation after denying he was drunk at a G7 news conference. He said he had taken too much cough medicine.

In the United States, administration officials said President Obama would form a task force to oversee the restructuring of the ailing U.S. auto industry.

General Motors Corp and Chrysler LLC are due to submit new turnaround plans by Tuesday showing they can be made viable again after receiving $13.4 billion in emergency aid last year.

Negotiators for GM and the United Auto Workers union were making progress in talks aimed at trimming the automaker's costs and debt, a person familiar with the matter told Reuters. GM wants concessions from the union and debt holders as required under the terms of the government aid package.

(Additional reporting by Sumeet Desai in Rome, Elaine Lees in Tokyo, Martha Graybow in New York, Kevin Krolicki in Detroit, and Reuters bureau around the world; Writing by Giles Elgood; Editing by Jon Boyle and Matthew Lewis)

© Thomson Reuters 2008. All rights reserved.

http://www.reuters.com/article/topNews/idUSTRE5180XK20090216

Assessing the Global Economy

How would you assess the economic grand picture for the United States? What specific data set do you look at?


How would you would use the Sunzi's strategic principles to assess the economic grand picture? ...

The clues are in this blog. ...



#
Wall St. looking for clues, inspiration
Tim Paradis, Associated Press Monday, February 16, 2009
(02-16) 04:00 PST New York --

The stock market doesn't have much to hang its hat on.

With the stream of corporate earnings reports waning and President Obama preparing to sign the $787 billion stimulus package, investors this week will be looking for fresh clues about the economy.

Wall Street has been busy focusing on companies' quarterly numbers and the developments in Washington. Now, investors are faced with finding less obvious answers to the question, "What's next?"

Any jitters about what might be the next major bit of news to drive the market could extend the back-and-forth trading seen in the nearly three months since the Standard & Poor's 500 index finished at an 11-year low on Nov. 20.

Stocks fell sharply last week to end at their lowest levels since November, as investors factored in the stimulus bill and looked to other uncertainties about the economy. The benchmark S&P 500 ended down 4.8 percent for the week, while the Dow Jones industrial average lost 5.2 percent.

"This whole process has been a market-bottoming process. It takes time," said Harry Clark, president and chief executive at Clark Capital Management in Philadelphia.

Clark and other market experts say it remains unclear whether the late-November levels will hold as the bottom of the market's pullback from its October 2007 highs.

U.S. markets are closed today for Presidents Day. On Tuesday, Obama plans to sign the stimulus bill in Denver. He is then scheduled to outline his mortgage-rescue proposal on Wednesday.

Also this week, General Motors Corp. and Chrysler LLC are expected to submit plans to the government to meet a Tuesday deadline for showing how they can repay billions in loans and become viable, even as automobile sales are falling.

GM already has borrowed $9.4 billion and would receive another $4 billion if the Treasury Department signs off on its viability plan. Chrysler has borrowed $4 billion and is seeking another $3 billion.

Investors are worried one or more of the companies could have to declare bankruptcy if they don't win additional financing. Ford Motor Co. is the only one of the Detroit automakers not taking government loans.

Wall Street also will be looking at a few quarterly reports from retailers and other companies. Wal-Mart Stores Inc. is due to report results on Tuesday before the market opens. Investors have relied on the world's largest retailer as a safe bet in a weak economy because it can attract customers looking for discounts on necessities.

Earnings are also due this week from cable TV operator Comcast Corp., farm equipment-maker Deere & Co., Goodyear Tire & Rubber Co., Hewlett-Packard Co., J.C. Penney Co. and Sprint Nextel Corp.

Most earnings reports from the final quarter of 2008 have been weak, but that shouldn't come as surprise given the difficult recession, analysts say. They contend the markets eventually will look beyond the bad news to a recovery.

http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/02/16/MNG315UN5H.DTL

This article appeared on page C - 3 of the San Francisco Chronicle

--- e o f

The Dao of Strategic Assessment

Bilateral trust can only go so far.

Always perform due diligence. Assess the other party before and during the dealing process.

What is the strategic process?
Assess him or her in terms of the competitive positioning of both parties, the competitive advantage of both parties, the weaknesses and strengths of the parties, etc.



Compare and contrast each parties with the rest of the competition.

Those who do not assess properly, might face the consequences of failure.




After the assessment is completed, he/she asks the following question, "What is my competitive position now?"

#
February 8, 2009

For Bank of America and Merrill, Love Was Blind
By LOUISE STORY and JULIE CRESWELL IN mid-September, as Wall Street unwound and venerable financial institutions were brought to their knees, the mood inside the Manhattan law offices of Wachtell, Lipton, Rosen & Katz was decidedly celebratory.

After a weekend of whirlwind deal-making and emergency meetings at the Federal Reserve Bank of New York, John A. Thain and his team at Merrill Lynch had sold their troubled brokerage firm to the Bank of America Corporation, dodging the financial sinkhole that was swallowing Lehman Brothers.

But before Wachtell lawyers, who were representing Bank of America, signed off on the deal, they told Merrill’s lawyers that they wanted to be sure about just one more thing: the size of the bonuses that Mr. Thain and his colleagues would snare at the end of the year. A page was ripped from a notebook, and someone on Merrill’s team scribbled eight-digit figures for each of Merrill’s top five executives, including $40 million for Mr. Thain alone.

Although Merrill had been bleeding money all year and would continue to do so the bonuses weren’t, as Merrill executives later explained to colleagues, about that performance. Rather, they were fees for getting the merger done, akin to what investment bankers receive for blockbuster deals.

Mr. Thain in particular felt he deserved a hefty payout for his deal-making heroics, according to five individuals with detailed knowledge of the situation who requested anonymity because of their personal and business relationships with those involved.

A few weeks later, Merrill’s human resources director visited John D. Finnegan, the head of the compensation committee on Merrill’s board, and told him about the bonuses, according to four people briefed on the conversation. “That’s ludicrous,” said Mr. Finnegan, the chief executive of the Chubb Group of Insurance Companies. He thought that the lush bonus requests came across as greedy and insensitive particularly because Wall Street was in such dire straits that it was likely taxpayer support would be needed to survive.

An internal debate with Mr. Thain over his bonus ensued; a person familiar with Mr. Thain’s thinking said that a $40 million bonus was “never a subject of serious discussion.”

Even so, others at Merrill were put off by his bonus negotiations, which helped splinter the carefully tended image of Merrill’s chief executive, a man perceived during most of his career to be a robotic and circumspect number-cruncher.

More important, the episode revealed the rampant hubris and sense of entitlement embedded on Wall Street, foreshadowing the myriad problems that would eventually threaten the merger of the two beleaguered financial giants. Hailed as the path forward for a Wall Street in disarray, the merger offered Merrill a chance to rebound from billions of dollars in mortgage-related mistakes and gave Bank of America access to Merrill’s well-known brand and its vast network of brokers, known as the thundering herd.

But the merger, in which Bank of America agreed to pay about $50 billion in stock for Merrill, soured at light speed. Back then, the combined companies would have been valued by the stock market at about $176 billion.

Today, the combination has a market capitalization of only $39 billion. Interviews with almost 30 current and former Bank of America and Merrill executives and employees convey just how messy the merger has been. All of them asked not to be identified because they either did not have permission from the banks to speak or because they had signed confidentiality agreements with their former employers.

On one side is Mr. Thain, who was viewed as someone who promised far more to Merrill than he delivered. Although he has repeatedly said that he helped heal the firm’s financial wounds and its battered morale, he wound up insulating himself from most top Merrill executives and failed to protect the firm from a stunning $15.3 billion loss in the fourth quarter of last year, according to several current and former senior Merrill insiders.

On the other side of the deal is Kenneth D. Lewis, a pragmatic, no-nonsense banker who, as Bank of America’s chief executive, monitored the Merrill takeover from a remote base in his Charlotte, N.C., headquarters and who, according to people at his bank, was perhaps blinded to Merrill’s risks by his own ambitions and penchant for empire building.

While Mr. Lewis has maintained in calls with analysts that his team dug deep into Merrill’s books in mid-September, analysts have repeatedly questioned whether the reviews were thorough. Although Mr. Lewis contends that he was surprised by the magnitude of Merrill’s losses, his financial team on the ground in New York had daily access to Merrill’s trading books, which would have allowed them to detect the mounting exposures. Spokesmen for Mr. Thain and Mr. Lewis declined to comment for this article.

Now, after dismissing Mr. Thain amid public criticism about his bonus negotiations and the huge losses, Mr. Lewis faces an uphill battle as he struggles to make the marriage of two financial giants work. Taxpayers are furious that Bank of America hit up the government for a second round of bailout funds in order to close the Merrill deal earlier this year, bringing its tab at the federal trough to $45 billion and potentially exposing taxpayers to further losses.

Shareholders were shocked to see the stock of what was a solid retail banking operation recently trade below $5 a share. And Bank of America employees are angry that their own bonuses have all but evaporated because of what they see as Mr. Lewis’s mistakes. While Bank of America’s board has affirmed its support for Mr. Lewis, 61, many analysts believe that his job and his own legacy is in jeopardy if the ambitious bet he placed on Merrill plays out poorly.

Mr. Lewis is now scrambling to shore up his bank and its image by conserving cash and selling corporate jets. The bank, meanwhile, is providing reams of documents to the New York attorney general, who is investigating whether all aspects of the Merrill merger were handled legitimately.

Above all, individuals inside the bank say, Mr. Lewis is desperate to avoid greater government intervention and maintain control over his wobbling financial empire. “When you go into a deal, you hope for the best but expect the worst,” says Nancy Bush, a banking analyst. “I think Bank of America did plenty of due diligence; they just ignored what they found. They knew it was there. They just didn’t completely grapple with the fact that it could get uglier. And it did.”

ON Jan. 22, only shortly after the Merrill takeover was formally complete, breaking news drew Bank of America’s traders away from their blinking computer screens in New York to nearby televisions: John Thain was out. Spontaneous applause broke out across the trading floor and bets were placed on which one of Mr. Thain’s highly paid lieutenants would be next. That reaction was hardly a surprise.

In the eyes of Bank of America employees, Mr. Thain sold them a lemon of a company that put their own company and their jobs at risk. The animosity was fueled by reports of Mr. Thain’s lavish $1.2 million office renovation and last-minute bonuses that he paid out to Merrill employees days before the deal closed. A manager at Bank of America said that he and others were ordered to cut already-low bonuses by 20 percent the day after Merrill’s loss became public. A Bank of America spokesman said the bank did not tie its bonuses to Merrill’s results.

What is a surprise, however, is just how disliked Mr. Thain, 53, had become inside Merrill. When he arrived at Merrill in late 2007, he was given a hero’s welcome.

Mr. Thain, lanky and square-jawed at 53, was brought in to fix the wayward firm battered by losses and the ouster of its controversial leader, E. Stanley O’Neal. Merrill’s board thought Mr. Thain perfect for the job. He had traded mortgage securities at Goldman Sachs in the 1980s and rose quickly through that investment bank’s ranks to become one of the youngest chief financial officers on Wall Street. He left Goldman in 2003 to lead the New York Stock Exchange, in part because Goldman had passed him over for the top job there.

Ultimately, Mr. Thain’s tenure at Merrill would generate distinctly different internal assessments of his character within the firm. Initially, people considered him aloof but hard-working and well intentioned. After he helped engineer the sale to Bank of America at a moment when Lehman was collapsing, he was regarded as a savvy deal maker who saved the firm.

But after publicity about his lavish office redecoration and his bonus negotiations was coupled with the firm’s huge losses, people came to resent what they considered to be his feckless and self-aggrandizing behavior.

When he was first ensconced at Merrill, he brought over his closest associates from the Big Board, including Margaret D. Tutwiler to run communications. A seasoned political operator who spent most of her career working for Republican administrations in Washington, Ms. Tutwiler largely spent her time cultivating Mr. Thain’s image. Ms. Tutwiler quickly scheduled a series of interviews for Mr. Thain from Merrill’s trading floor.

As the cameras flashed, he shook hands with the troops. When the cameras left, so did Mr. Thain. “He went on a series of speeches all over the world. He was being called a hero. The press was incredible,” remarked one Merrill Lynch executive. “What was not happening was that he was not meeting with Merrill people.”

Mr. Thain, who always carefully parses his public comments and is a well-known micromanager, seemed to insulate himself from longtime Merrill executives and didn’t take time to familiarize them with his plans for reviving the firm. Instead, he surrounded himself with former colleagues. In addition to luring his N.Y.S.E. deputies, he showered cash on former Goldman executives to bring them to Merrill. He paid $25 million to Peter S. Kraus, who ran Goldman’s investment management unit, to oversee business strategy at Merrill. He shelled out $39 million to Thomas K. Montag, who was co-head of Goldman’s global securities unit, to run Merrill’s trading operations.

Mr. Kraus and Mr. Montag have already received all of that money, some in cash and some in stock and options.

Mr. Kraus, who was not offered a job at Bank of America, left Merrill weeks later to become C.E.O. of AllianceBernstein. Mr. Montag, who is still at Merrill, declined to comment on his compensation, as did Mr. Kraus. Mr. Thain took control of Merrill’s gigantic trading and risk-management operations, saying that his mortgage expertise would help him solve the firm’s problems. He also quickly raised capital $12.8 billion by early 2008. Enough, he repeatedly told Wall Street analysts, to cover the firm for the year. Along the way, Ms. Tutwiler helped get out the message:

Mr. Thain was cleaning house and getting rid of Mr. O’Neal’s problems. But on the ground at Merrill, gridlock ensued. For months, there were inquiries from hedge funds and other buyers about a range of mortgage assets and securities, but Merrill’s mortgage desk was blocked from distributing price lists because Merrill’s management refused to agree on market estimates, according to Merrill insiders.

By last summer, these people say, Mr. Thain began to realize that he, in fact, didn’t have a handle on Merrill’s mortgage mess. When he learned the firm’s second-quarter earnings were devastated by mortgage losses, he picked up a chair and threw it against a wall, according to two people who were briefed on the incident.

On a conference call shortly after that, he was testy with an analyst who asked about Merrill’s toxic portfolio of securities known as collateralized debt obligations, or C.D.O.’s: “I did not create these C.D.O.’s,” he said.

After Mr. Thain decided to sell a batch of Merrill’s C.D.O.’s at a cut-rate price, he had to raise more capital. That incurred a fee with certain Merrill investors, forcing the firm to pay them $4.6 billion. On top of that, Mr. Thain’s point man for the C.D.O. sales alienated a potential buyer, Guggenheim Partners, that had been willing to pay north of $2 billion more in cash than Merrill received, driving yet more cash out the door just when investor confidence in Wall Street was about to nose-dive all of which eventually pushed Mr. Thain into Bank of America’s arms.

IN New York on Monday, Sept. 15, after that weekend of meetings at the New York Fed, Mr. Thain and Mr. Lewis shook hands for photographers as they announced the merger. Mr. Thain emphasized his successes at Merrill, saying that “we have been consistently cleaning up the balance sheet, repairing the damage that was done over the last few years.” Mr. Lewis had built Bank of America into one of the nation’s largest and most powerful banks through numerous mergers. Some acquisitions like Merrill and, earlier, Countrywide Financial were riskier than others. He felt strongly that Merrill’s brokers, tied to his bank’s retail branches, would increase his bank’s ability to sell its products. That included his firm’s own stock.

When Bank of America raised $10 billion in new capital just a few weeks after announcing the merger with Merrill, Mr. Lewis got on a conference call with Merrill’s financial advisers and encouraged them to sell his bank’s stock to their clients. It wasn’t the most propitious time to be pushing a bank stock: a week later, the government pumped $125 billion into nine large banks, including Bank of America. Mr. Thain, meanwhile, was already in the running for other jobs. He was rumored to be Senator John McCain’s choice for Treasury secretary. When Senator McCain lost the presidential election, Mr. Thain still had a nice option: possibly taking the reins at Bank of America when Mr. Lewis retired. New trouble, however, was brewing on Merrill’s trading floor. Under Mr. Montag’s direction, Merrill’s traders were far more active than they had been since Mr. Thain’s arrival. Said by Merrill insiders to be an unpopular figure, Mr. Montag further alienated many people already stunned by the $39 million package Mr. Thain gave him when he insisted on a holiday before starting at Merrill. His late arrival, many individuals at Merrill say, left traders navigating troubled markets on their own and uncertain about when their boss would arrive to guide them. Mr. Montag has little interaction with traders on the floor, largely communicating through short, sometimes castigating, e-mail bursts, according to Merrill insiders. Others say that when a Merrill trader or colleague disagrees with him,

Mr. Montag like Mr. Thain often points out that he didn’t create the financial mess at Merrill. Last October, Mr. Montag’s traders dove into higher-quality, though risky, mortgage assets known as alt-A loans, according to people familiar with Merrill’s trading books. The fate of those maneuvers is now hotly disputed inside and outside of Merrill. Several individuals familiar with the alt-A trades, as well as others involving bets on such things as interest rates and equity derivatives, say that these gambits contributed about a third of the firm’s $15.3 billion fourth-quarter loss. But a senior Merrill trader and a former senior Merrill executive contend that there were no “significant” trading losses taken in the quarter. The former executive said that any investigation of the firm’s trading would support that fact. Whatever transpired on the trading desk, Merrill was still contending with withering assets that predated Mr. Thain’s arrival. Despite the fact that Mr. Thain inherited these assets, Merrill insiders say they could have been hedged moves well within Mr. Thain’s purview as head of risk management at the firm. Yet he never did so, according to three people who worked closely with him. An individual familiar with Mr. Thain’s thinking said that Mr. Thain didn’t believe hedges would have been effective. Losses in those so-called legacy assets would reach $10 billion in the quarter. By most accounts, few at Merrill knew how much the fourth-quarter losses would be. Many chalk that up to the fact that Mr. Montag reported directly to Mr. Thain, bypassing other Merrill executives. Still, other individuals inside Merrill note that Bank of America, shortly after the deal was announced, quickly put 200 people at the investment bank, including a large financial team. A Bank of America executive was sent to New York from Charlotte to act as an interim chief financial officer and had daily access to Merrill’s profit-and-loss statements.

Likewise, Bank of America was well aware of the $3.2 billion in bonuses that Merrill paid to its rank and file in late December. The two companies had agreed in September that Merrill might pay up to $5.8 billion, according to a private agreement reviewed by The New York Times. Several weeks after that agreement was struck, a top deputy to Mr. Lewis met with Mr. Thain and asked him to lower the bonus pool below $3.5 billion and to increase the portion paid in cash. Mr. Thain agreed to do so, according to two people familiar with the meeting.

Mr. Thain, meanwhile, lobbied for a bonus of his own until December, according to people familiar with his board discussions. The initial $40 million suggestion floated on his behalf was no longer viable and Mr. Thain himself suggested a figure of $5 million to $10 million. After that number was pilloried in public, he formally asked the board to award him nothing. On Dec. 9, Mr. Thain flew to Charlotte to attend Bank of America’s board meeting, where Merrill’s financial results through November were presented. Already 60 percent of Merrill’s losses were visible, but neither Mr. Lewis nor his board questioned Mr. Thain about the losses, according to a person close to Mr. Thain. Mr. Lewis did not immediately disclose the losses to his shareholders, who had voted to approve the merger just days before. Mr. Lewis later said that the losses greatly accelerated in mid-December, which caught him off guard.

On Friday, James Mahoney, a Bank of America spokesman said that “we have not disputed that we were kept informed about the financial condition of the company.” During the last two weeks of December, while Mr. Thain was skiing in Vail, Mr. Lewis told federal regulators that he was thinking of backing out of the deal because of the losses. Government officials, according to Mr. Lewis, told him he had to complete the deal in order to keep markets calm. But Mr. Lewis did not tell Mr. Thain about his talks with the government until Jan. 5, according to a person close to Mr. Thain.

AS the merger closed, and a new year began, Mr. Thain was prepared to take on a leadership role at Bank of America, even though several of his top deputies, longtime Merrill leaders, began leaving the bank themselves. Mr. Lewis, battered by analyst questions about the wisdom of the Merrill takeover, became disenchanted with Mr. Thain. In mid-January, he met with Mr. Thain at Merrill’s downtown headquarters. After a five-minute meeting, Mr. Thain was out. Furious, Mr. Thain paced the halls of Merrill, venting his frustration to at least two people. “I don’t know how these people can run this company without me,” he told them.

Copyright 2009 The New York Times Company

http://www.nytimes.com/2009/02/08/business/08split.html