Race to the White House

Who'll be the economic heavyweight?

The answer may surprise you —
the economy has historically preferred Democrats

By Zhen Ming


THE US election is five days away, but many believe it’s a done deal.

Two Thursdays ago, Paddy Power PLC, Ireland’s largest betting agency, announced that it was so confident in the outcome of this year’s US election that it would start paying out over 1 million euros (around S$2 million) on bets already made that Mr Barack Hussein Obama II will become the next president.

Bets aside, barring something sinister between now and next Tuesday, Mr Obama, the 47-year-old first-term US Senator from Illinois, will be elected America’s 44th President — and its first African-American one, too.

He will face the most financially-challenged economy for any new US President since Mr Franklin Delano Roosevelt took over amid the Great Depression in 1933.

But what if Mr Obama were to lose to his Republican rival, Mr John McCain?

Will that usher in a better, or bleaker, economic future for the US (and the world)?

Rethinking the known

According to conventional wisdom, Mr McCain’s free-trader mindset should be a definite plus point for world trade and a booster shot in the arm for the stock market.

Stock returns should therefore improve when the Republican maverick is in office since the Grand Old Party is traditionally regarded as pro-business and anti-tax.

Democrats, on the hand, have been much maligned for their anti-business, tax-and-spend platform (which seeks to redistribute wealth from the rich to the poor).

Well, guess what?

This conventional wisdom about how well or not the stock market will perform if one party or the other wins is, in the end, all urban legend.

According to a 2003 study, expect better stock market returns but only when the US Presidency is held by a Democrat!

Political cycles

Peace and prosperity for all — but only if the next US President were a Democrat?

Yes, say the University of California’s Pedro Santa-Clara and Rossen Valkanov.

They analyzed stock market returns between 1927 and 1998 in their book The Presidential Puzzle: Political Cycles and the Stock Market and uncovered these findings:

• When a Republican president held office, the value-weighted return of the US stock market delivered an excess premium of a miniscule 1.7 per cent over three-month US Treasury bills.


• But when a Democrat held office, the excess gain over T-bills was a chest-thumping 10.7 per cent.


• In the same vein, results from an equal-weighted portfolio were even more startling — with a whopping 16.5 per cent excess premium for Democrats as compared to a very dismal, NEAR-ZERO per cent, deficit discount for Republicans.

Is it possible, then, that the Democrats — the so-called anti-business party — will, ironically, generate much better results for business than the Republicans?

Frenetic 77-day transition

Whatever the case, “Dr Obama” will still have tough medicine to prescribe when it comes to deciding how best to turn the US economy around.

He will probably have to set aside some of the campaign promises (at least for now) to problem-solve five economic priorities on his to-do list. (See report, below.)

Expect, therefore, the 77-day transition period between the election and inauguration to be frenetic, frenzied and even frantic.

WHAT HE NEEDS TO DO IF ELECTED

1. Restoring public confidence through regular fireside broadcasts during first 100 days so that the US can meet and solve the financial challenges ahead.


2. Figure out how best to put his own stamp on the financial industry rescue plan to “part nationalize” more banks, insurers and assorted financially-distressed companies.


3. Revamp a regulatory structure largely built during the Great Depression so that it better reflects the speed and complexity of the current global financial system.


4. Burn the midnight oil, from 5 November onwards, to prepare a revised US Budget for fiscal 2010, due by early February.


5. Multi-task on all else, such as being prepared for terrorists to strike during the transition, while reviewing the campaign promises to expand healthcare coverage without increasing the tax burden of 95 per cent of all Americans.

Source: The New Paper, Thu 30 Oct 2008

When it's good to destroy

There's a silver lining during such gloomy times


By Zhen Ming


NOT all of The Great Crash is bad.

If history is to repeat itself, what will follow has to be not only good for the world's economy, but would probably be better than its previous model.

On Friday, on the 79th anniversary of the stock market crash that began the Great Depression, Wall Street joined stock markets around the world in a huge sell-off.

This massive sell-off sent major market indexes to their lowest levels in more than five years, on the belief that a punishing economic recession is at hand.

This fear of economic history repeating itself is part of the dog-eat-dog world of big-time business.

Except, here, we business-types prefer to call it 'creative destruction'.

Creative destruction is good

This is a term first coined by economist Joseph Schumpeter in his work entitled Capitalism, Socialism and Democracy (1942) to denote a 'process of industrial mutation that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one'.

In business, creative destruction - not unlike greed - is not only inevitable, it is good.

Creative destruction occurs when something new (usually better) 'kills' something older.

Out of this seemingly merciless destruction, a new spirit of creativity arises.

A great example of this would be the advent of personal computers.

The PC industry - led by Microsoft and Intel - destroyed many mainframe computer companies in the process.

A dozen years ago, James Grant - perhaps one of the wisest commentators on Wall Street - wrote a book called The Trouble with Prosperity.

Grant's survey of financial history basically captures his crusty theory of 'economic predestination'.

According to Grant, we all go through cycles of self-delusion, sometimes too giddy and sometimes too glum.

The consolation is that the genesis of the next business take-off usually lies in the ruins of the last economic shake-out.

Essentially, our economic triumphs and follies will always follow a predestined circular rhythm - one that can be influenced but never be circumvented.

Thus, if things seem dismal now, they will surely get better. Crisis, in fact, spawns opportunities and progress.

Heroic examples from history

And there are enough heroic examples from history that might encourage you.

Walt Disney, for instance, lost an acting job as a movie extra and started his famous cartoon company in a garage during the recession of 1923-1924.

Years later, in 1938, William Hewlett and David Packard teamed up in Silicon Valley during the Great Depression.

And then there's Bill Gates. He dropped out of Harvard College to launch Microsoft during a downturn in 1975.

The Great Depression debate

The recent bailout events - the stock market's wild swings - have thrust everyone from Seattle to Singapore into a debate about the risks of another Great Depression.

Has enough been done to protect the economy? Who or what caused this mess? Also, what does all this mean?

If you must know, it means that, in terms of the stock market, the Dow Jones industrial average will again find its way back down near 7,000 to see whether that is the new floor, or if it is somewhere even below that.

It means, buckle up, we're in for a lousy economy.

And it also means the financial sector is not out of the woods and more banks could get in trouble.

Rest assured, however, after a recessionary phase, the expansionary phase will start again.

After all, in the repetitive circle of business life, bad times can only breed good.

Something you can, most definitely, count on.


Source: The New Paper, 26 Oct 2008

NOBEL PRIZE WINNER PAUL KRUGMAN

He's speaking up for ordinary Joes


By Zhen Ming


THE problem first started with financial intermediaries.

Back then, the institutions whose liabilities were perceived as having an implicit government guarantee were essentially unregulated.

This led to severe moral hazard problems.

Consequently, the excessive risky lending of these institutions created inflation - not of goods but of asset prices.

The overpricing of assets was then sustained in part by a sort of circular process: The proliferation of risky lending first drove up the prices of risky assets which, in turn, made the financial condition of the intermediaries seem sounder than what it was.

And then the bubble burst.

Sounds familiar? Sounds like 2008? And sounds like the final bursting of the recent US housing bubble, doesn't it?

Yes, it does sound familiar. Yes, it does sound like 2008. And yes, it does sound like mortgage titans Fannie Mae and Freddie Mac getting themselves in deep trouble.

But it is not. It is instead an incisive analysis of what happened back in 1997. And the financial institutions that were in deep trouble back then were those in Asia.

This analysis was first made by none other Mr Paul Krugman, a professor at Princeton and concurrently an Op-Ed page columnist for The New York Times.

And as all economists should know by now, Mr Krugman, 55, will receive this year's Nobel Memorial Prize in Economic Science in Stockholm, Sweden on 10 December.

The prize, however, was awarded for earlier academic research that Mr Krugman had conducted, starting in 1979, on the 'analysis of trade patterns and locations of economic activity'.

Mr Krugman's solid-gold reputation, however, was only forged in the mid-'90s, when he was among the most consistent predictors of the 1997 Asian crisis.

A couple of years later, he correctly predicted that Asia would stage an impressive comeback.

But this enfant terrible of international trade theory, this self-proclaimed 'conscience of a liberal' - a larger-than-life critic of US President George W Bush - is not without controversy.

Back in September 1998, Mr Krugman irked the Western establishment, especially the International Monetary Fund, when he openly supported the controversial economic strategy of then Malaysian Prime Minister Dr Mahathir Mohamad.

Back then, Dr Mahathir had blamed machinations by Western speculators for Malaysia's woes. He had also imposed temporary controls on the outflow of capital - 'a step denounced by all but a handful of Western economists'.

At that time, in his September 1998 article for Fortune titled Saving Asia: It's Time to Get Radical, Mr Krugman had called for emergency currency controls.

Shortly after its publication, Dr Mahathir boldly implemented Mr Krugman's 'radical' recommendations.

Said Mr Krugman: 'As it turned out, (Dr Mahathir's) economic strategy was right.'

More recently, with the onset of the latest global financial crisis, Mr Krugman has shifted his focus to highlighting President Bush's many failed economic policies.

In his 9 Oct 2008 op-ed column entitled Moment of Truth, he said: 'Last month, when the US Treasury Department allowed Lehman Brothers to fail, I wrote that Henry Paulson, the Treasury secretary, was playing financial Russian roulette.

'Sure enough, there was a bullet in that chamber: Lehman's failure caused the world financial crisis, already severe, to get much, much worse.'

Tough line

But with the US elections only 12 days away, Mr Krugman has also flagged key bread-and-butter issues that concern ordinary Americans.

On supposedly 'ordinary American' Samuel J Wurzelbacher (America's by-now-famous and very-highly-paid 'Joe the Plumber'), he quipped: 'You may recall that in one of the early Democratic debates, Charles Gibson of ABC suggested that US$200,000 ($300,000) a year was a middle-class income.

'Tell that to Ohio plumbers: According to the May 2007 occupational earnings report from the Bureau of Labor Statistics, the average annual income of 'plumbers, pipefitters and steamfitters' in Ohio was US$47,930.'

For now, as far as Mr Krugman is concerned, the most important thing for him is to make ordinary Americans realise that 'the story of modern America is, in large part, the story of the fall and rise of inequality'.

Spoken like a true-blue bleeding-heart economist. And one with a liberal conscience too.


Source: The New Paper, Thu 23 Oct 2008

3 Fridays in 3 cities yield 3 remedies


By Zhen Ming


I'VE somehow crash-landed my time-machine in the middle of Harvard Square on 8Aug 2008 when I should have been at the Bird's Nest in Beijing.

But my wayward trip on this freaky Friday is not entirely wasted.

While the Chinese capital is enjoying its Olympic moment, I learn first-hand that three of the biggest banks operating in the US - UBS, Citigroup and Merrill Lynch - have pledged to buy back nearly US$39 billion ($58 billion) worth of bonds that their retail clients couldn't sell.

The Swiss bank UBS has reached a US$19.4 billion agreement to buy back bonds in the biggest settlement yet over claims that several US banks had misled investors to buy the so-called 'auction-rate securities', the Massachusetts Secretary of State's office at Beacon Hill in downtown Boston said on that momentous Friday.

Citigroup's buyback - announced just a day earlier in coordination with US regulators - called for the bank to re-purchase up to US$7.3 billion of bonds from its smallest customers in the collapsed US auction-rate securities market.

Merrill (soon to be acquired by Bank of America) also announced its plan, which called for the bank to buy back up to US$12 billion in bonds.

For an industry that normally vigorously stonewalled investor lawsuits and delayed settlements with US regulators, the astonishing speed and seeming generosity of the buyback plans indicated the severity of the three banks' public relations problem.

In reaching their settlements, the three banks did not acknowledge any wrongdoing.

Fast forward 70 days and I find myself teleported to Hong Kong. And it is here that I experience deja vu - basically, yet another freaky Friday.

After weeks of wrangling with small investors, the Hong Kong Association of Banks announces that it has agreed to a government plan - more like an ultimatum, to me - for ALL banks in Hong Kong to buy back, at market prices, the by-now-infamous 'Minibonds'.

(These are complex structured products once arranged by the now-bankrupt Lehman Brothers and sold aggressively through Hong Kong banks.)

Reportedly, more than 40,000 affected investors in Hong Kong - many of them pensioners whose life savings were tied up in the products - have been staging noisy demonstrations in protest.
They are particularly angered by what they perceive as 'misleading' marketing techniques by the banks that sold the products.

All in all, they had bought some HK$20 billion ($4 billion) of these structured notes.

Rightly or wrongly, the Hong Kong Monetary Authority and the Securities Futures Commission there have borne the brunt of the flak for failing to monitor the financial institutions selling these products.

Quick closure

But with this latest move, the banks in Hong Kong are hoping to bring to a quick close an issue that has caused widespread anger and mistrust.

Meanwhile, the fate of the Minibonds that brought the global credit crunch closer to the lives of ordinary Hongkongers has also been felt in Singapore.

Last Friday, in an announcement, partly in response to developments in Hong Kong, the Monetary Authority of Singapore (MAS) said it now wants banks and other financial institutions here to give 'top priority' when investigating complaints of mis-selling similar Minibonds to lowly-educated retiree investors.

MAS also wants the financial institutions to avoid taking an 'overly legalistic' approach in dealing with such cases. And in situations where the product was mis-sold or was clearly inappropriate, given the investor's profile and circumstances, MAS wants the institutions to take full responsibility.

'We expect them to do the right thing,' said MAS managing director Heng Swee Kiat at Friday's press conference.

Asked to elaborate, Mr Heng later told The Straits Times in an e-mail reply that 'the financial institutions should reach a fair settlement in full or in part'.

Said former NTUC Income chief Tan Kin Lian, who has championed the plight of Minibond investors in Singapore: 'I suggest (for most cases) that the amount to be paid can be the current value plus half of the difference; that is, the investor and distributor share the loss equally.'

Expect Singapore's 'tailor-made' solution - which strives for fairness - to drag on, as every claim here has to be worked out case by case.

In contrast, Hong Kong's 'one-size-fits-all' solution - which strives to buy back all Minibonds at the same price- is likely to proceed efficiently, though it may seem somewhat arbitrary, even unfair.

Many Hongkongers have, in fact, rejected this plan. They want a full refund instead - something possible only under special circumstances in Singapore.


Source: The New Paper, Sun 19 Oct 2008

Sometimes, it pays to hold on


By Zhen Ming


WICKED. That's the only way to describe last week's stock market rout.

We're only halfway through, but expect this October to go down in the annals of world financial history as the global financial system's most volatile month ever.

Earlier this week I had watched, from the safety of the sidelines, wide-mouthed and flabbergasted, as Wall Street stormed back after its worst week ever to stage the biggest single-day stock rally since the Great Depression in the 1930s.

The benchmark Dow Jones industrial average regained 11.6 per cent in one day - after tumbling some 22 per cent over the previous eight trading days.

That was on Monday.

Global stock markets staged a historic 'relief rally' on that day, as European governments pledged a total of 1.87 trillion euros (about $3.7 trillion) to save their ailing banks, and as the US confirmed it would follow suit with a similar rescue.

Watching US investors rummage through the financial wreckage on Wall Street for so-called bargains, you might think the worst is over.

But is it?

To answer this question, we need to take a closer look at last week's historic fall on Wall Street, which left the Dow at 8,451 on that frenzied Friday - 40.3 per cent off its 9 Oct 2007 all-time high of 14,164.

Friday was a roller-coaster day that saw the Dow dip briefly below the 8,000-point mark before creeping back up as investors snapped up last-minute bargains.

Indeed, last week's precipitous drop eclipsed the dark days of the Great Depression.

All in all, the Dow lost 18.2 per cent over five days, worse than the dismal week that ended 22 Jul 1933, when it plunged 17 per cent - and that was when the exchange on Wall Street was open six days a week.

But consider the worst period in history from a long-term investor's perspective.

If you were 55 just before the stock market crashed in 1929, and had been rich enough to invest US$100,000 in the market, you would have been in a very sorry shape by the time you retired 10 years later.

After an 83 per cent decline in the stock market by 1932, you would have recovered some of your money by retirement in 1939 - but not all of it.

On your retirement, you would have had only US$60,200 for your nest egg, according to market data tracked by Ibbotson Associates, a Chicago research firm.

That's because, on average, it took an investor just before the 1929 crash almost 13 long years to recover all that was lost.

But what about younger investors?

If you were only 25 just before the 1929 crash, the humongous loss in the Great Depression would have been a distant memory by the time you retired in 1969.

By then, you would have seen your US$100,000 investment grow 21-fold to US$2.1 million.

A harsher bear market

But, young or old, don't count on history repeating itself to prove you right.

This bear market - a term often defined as a prolonged drop in stock prices of 20 per cent or more - already is harsher than most of the 10 bear markets since the 1930s. (Those earlier bear markets have lasted an average of only 16 months from peak to trough.)

Expect a turnaround no earlier than 2010.

The Hong Kong Monetary Authority, for instance, has said that it would provide government backing for all of the US$773 billion in Hong Kong bank deposits through 2010 as government assistance for banks in Europe and the US put pressure on Asian regulators to follow suit (though Asian banks tended to be better capitalised).

The good news? Since the record 83 per cent plunge in 1929-32, the current market plunge is exceeded only by the drops of 49 per cent in 2000-02 during the dotcom implosion and 48 per cent in 1973-74 during a recession and energy crisis.

Unfortunately, many investors have now convinced themselves that this time it's different - that the credit crisis could push economies worldwide into the deepest recession since the Great Depression.

But in their panic, investors are ignoring 70 years of history.

Since the Great Depression, governments throughout the world have become far more aggressive about intervening when credit markets seize up or economies struggle.

And, trust me, those interventions have generally succeeded.


Source: The New Paper, Thu 16 Oct 2008

Should CEOs take ethics oath just like doctors?


By Zhen Ming


SHORTLY after the eyeball-popping terrorist attacks of 9/11, US investors on Wall Street came under a gut-wrenching attack of another kind.

It was an attack similar to the kind we all saw last week when markets around the globe lost an estimated US$6 trillion (about S$9 trillion) in a non-stop wave of panic selling. (This humongous loss, over just five days, is equivalent to snatching away US$3,600 in hard-earned savings from every family of four on this planet.)

Then, big corporations like Enron and WorldCom admitted that they had overstated their earnings by billions of dollars.

They went bankrupt, so did a few other big companies which had done the same.

All in all, these scandals wiped out some US$500billion worth of investments in US stocks.

The current crisis and the one in 2001 had one thing in common. CEOs, many of whom had MBAs from top universities, were too greedy.

In a new article in the Harvard Business Review, Rakesh Khurana and Nitin Nohria - who both teach at the Harvard Business School - say that it is time for a managerial version of the Hippocratic Oath, to which all doctors must swear (see sidebar).

Implicit in their argument entitled 'It's Time to Make Management a True Profession' is a criticism of the MBA degree itself, which many of today's failing managers hold.

According to the two professors, true professions have codes, and the meaning and consequences of these codes are taught as part of the formal education required of their members.

Two schools of thought

But the main challenge in writing an enforceable Hippocratic Oath for CEOs lies in two deeply divided schools of thought.

One school argues that management's aim should simply be to maximise shareholder wealth; the other argues that management's purpose is to balance the claims of all the firm's stakeholders.

Professor Jeffrey Pfeffer of Stanford's Graduate School of Business thinks the oath itself will do little to change things.

'This oath, in and of itself, will do little or nothing to professionalise management. That does not mean it is a bad idea, only that a pledge is insufficient to fix the problem.

'The core issue is that business education uses economic language and theory as its primary foundation, and economics proceeds from the assumption of self-interest. It is hard to 'square' that intellectual foundation with a pledge to take the interests of other parties into account.'

Indeed, of late, there has been much tongue-lashing at the failure of the MBA courses that Wall Street's 'best and brightest' took before rising up the ranks of global finance and making those big mistakes.

As I see it, the question is do we need MBAs at all to recognise the fact that someone is a good manager?

Many, after all, believe that management is as much art as science, better mastered through experience than formal education.

I asked Professor Pfeffer (who taught me 'Power and Influence' at The B-School).

He said: 'I don't think experience is the only valid teacher... Management education could add more value and may - given the many reforms in business school curricula now being implemented.'

Nobel Prize-winning economist A Michael Spence, however, believes that an MBA is merely a signalling device: Going to a business school allows individuals to credibly signal their greater commitment to a career in management.

And many MBA students have yet a different perspective: They believe that business school is simply an opportunity to develop a robust network of peers and alumni.

Indeed, the success of iconoclasts like Bill Gates - a Harvard dropout, no less - might suggest that a lack of formal management training was a positive advantage in becoming a successful entrepreneur.


The proposed CEO oath

Hippocratic Oath for managers? The Hippocratic Oath is an oath taken by doctors to ensure medicine is practiced ethically. The following is the oath Harvard professors Khurana and Nohria has proposed for managers.

As a manager I serve as society’s fiduciary for one of its most important institutions: enterprises that bring people and resources together to create valued products and services that no single individual could produce alone. My purpose is to serve the public’s interest by enhancing the value my enterprise creates for society. Sustainable value is created when the enterprise produces an economic, social, and environmental output that is measurably greater than the opportunity cost of all the inputs it consumes. In fulfilling my role:

I recognize that any enterprise is at the nexus of many different constituencies, whose interests can sometimes diverge. While balancing and reconciling these interests, I will seek a course that enhances the value my enterprise can create for society over the long term. This may not always mean growing or preserving the enterprise and may include such painful actions as its restructuring, discontinuation, or sale, if these actions preserve or increase value.

I pledge that considerations of personal benefit will never supersede the interests of the enterprise I am entrusted to manage. The pursuit of self-interest is the vital engine of a capitalist economy, but unbridled greed can be just as harmful. Therefore, I will guard against decisions and behavior that advance my own narrow ambitions but harm the enterprise I manage and the societies it serves.

I promise to understand and uphold, both in letter and in spirit, the laws and contracts governing my own conduct, that of my enterprise, and that of the societies in which it operates. My personal behavior will be an example of integrity, consistent with the values I publicly espouse. I will be equally vigilant in ensuring the integrity of others around me and bring to attention the actions of others that represent violations of this shared professional code.

I vow to represent my enterprise’s performance accurately and transparently to all relevant parties, ensuring that investors, consumers, and the public at large can make well-informed decisions. I will aim to help people understand how decisions that affect them are made, so that choices do not appear arbitrary or biased.

I will not permit considerations of race, gender, sexual orientation, religion, nationality, party politics, or social status to influence my choices. I will endeavor to protect the interests of those who may not have power, but whose well-being is contingent on my decisions.

I will manage my enterprise by diligently, mindfully, and conscientiously applying judgment based on the best knowledge available. I will consult colleagues and others who can help inform my judgment and will continually invest in staying abreast of the evolving knowledge in the field, always remaining open to innovation. I will do my utmost to develop myself and the next generation of managers so that the profession continues to grow and contribute to the well-being of society.

I recognize that my stature and privileges as a professional stem from the honor and trust that the profession as a whole enjoys, and I accept my responsibility for embodying, protecting, and developing the standards of the management profession, so as to enhance that respect and honor.


Source: The New Paper, Sun 12 Oct 2008

Global financial turmoil

SLAUGHTER IN EUROPE

Recovery harder with European dis-Union

By Zhen Ming


BEER festival Oktoberfest, usually a 16-day event held each year in Munich, Germany, ended last Sunday and attracted six million visitors. This is 200,000 fewer than last year.

Beer consumption fell by 300,000 litres to 6.6 million litres - due probably, in part, to the cold and rainy weather.

Thankfully, there wasn't much real-life blood-letting at the festival - the number of oxen slaughtered for food remained stable at 104.

Not so, on the morning after. Not so, for the tens of millions of cowering bulls slaughtered in financial markets throughout Europe and elsewhere globally.

With the party over, visions of German men in hillbilly lederhosen and German women in milkmaid dirndl vaporised the moment Europeans awoke on Monday from their drunken stupor to the stark realisation that the European Union (EU) now faces a banking and economic crisis of its own, not linked solely to bad US sub-prime debt.

Consequently, on what's now called Red Monday, many of the already-castrated financial bulls throughout the EU were gingerly slaughtered in a market bloodbath on a scale not seen in recent times.

And while the thundering herd throughout the EU and elsewhere tried to flee helter-skelter by selling frantically - on a growing realisation that the global credit crisis was likely to take a heavy toll - their mass panic only helped them to collectively lose US$2.5 trillion ($3.7 trillion) on that one day alone.

Thus far this week, European bankers are still scrambling to complete mergers and win government backing for emergency rescue packages. The EU's once-proud financial sector resembled a jungle in which only the fittest are likely to survive.

But as the disunited European leaders continue to bicker over the need for a continent-wide bailout solution, Britain and Spain couldn't wait. They have moved ahead to mount separate rescues of their own financial industries.

For instance, UK Prime Minister Gordon Brown on Tuesday night ordered a massive taxpayer-backed cash injection to rebuild the balance sheets of Britain's High Street banks, effectively part-nationalising the sector at a cost of tens of billions of pounds.

Loss of confidence

The root cause of the EU's current banking woes? Simply put, it's the loss of trust and confidence among the banks themselves.

Mr Bob McDowall, European research director at financial services consultancy Tower Group in London, said: 'Banking is like religion. It's all about trust and confidence.

'Governments and regulators are trying to demonstrate firm leadership and show confidence, but banks don't trust each other.'

Underlying this panic is the EU's over-leveraged banking system.

The more you borrow on top of the funds (or equity) you already have, the more highly leveraged you are. Take the 'overall leverage ratio' - a measure of a bank's total assets to its shareholder equity. For the average European bank, the ratio is 35 (due to large in-house investment banking operations). For the largest US banks, it is below 20.

This means that relatively small writedowns on a typical European bank's assets could have a potentially devastating impact on its razor-thin capital.

Power vacuum

The EU is also in a financial quandary because of a perpetual power vacuum. There's no real boss, so to speak. So, while the US is being governed from Washington, the EU governs itself from 27 national capitals and Brussels (its capital city).

The resulting irony could be that even though banks in the EU have, on average, engaged in less of the risky lending that pulled down so many of their American counterparts, a European banking recovery could take even longer.

The problem here is not a lack of understanding of how to stop financial crises. The problem here is a lack of political will.

Sadly speaking, unless European leaders unite to address this crisis before it spirals out of control, they may find themselves fighting over how best to salvage what's left.


Source: The New Paper, Thu 09 Oct 2008

Star who stayed a son of the soil

Actor Paul Newman a shining example of social entrepreneurship


By Zhen Ming


I USED to live only a stone's throw away from Hollywood screen legend Paul Newman and his wife Joanne Woodward 30 years ago. I am glad I did.

And, not unlike millions around the world, I was sad to learn of Newman's passing two Fridays ago, after a long battle with leukaemia. He was 83.

Back in 1978, a spritely 53-year-old Newman had returned to the campus of his alma mater Kenyon College in Gambier, Ohio - where I was an undergraduate - to direct the first production in the university's new Bolton Theatre.

Back then, I would hurriedly pass Newman's home while on my way to classes.

Sneaking a daily peek at his front porch to see if he was there, I would wonder why someone like him would bother to come back to this 'hole in the wall' place, where he had once landed in jail after a bar room brawl and where he had later graduated 'magna cum lager' (alluding to his extreme fondness for beer).

As a World War II navy veteran, Newman entered Kenyon on an athletic scholarship. He played American football and acted in a dozen plays before graduating in 1949.

But Newman the blue-eyed movie star was much more than just your regular Hollywood 'pretty face'. He was also a political activist and what you might call an 'entrepreneur-philanthropist'.

Newman's legacy to Kenyon, for instance, includes a long history of generous, usually unpublicised donations, culminating in a recent US$10 million ($14 million) gift for scholarships which made headlines worldwide.

Privately, Newman often considered himself more lucky than talented to have the career he achieved.

Luck had, in fact, made all the difference. Luck to get into a hit show on Broadway; luck to be snapped up by Warner Brothers, and luck to be picked for his breakthrough film called 'Somebody Up There Likes Me'.

Newman's Own (the food company he co-founded in 1982 with writer AE Hotchner), in fact, began as a happy-go-lucky joke - putting homemade salad dressing in an old wine bottle, tying it with a ribbon, and then giving it away to friends.

Today Newman's Own is a top-grossing multi-million-dollar business which donates ALL its profits after tax - more than US$250 million so far - to some 1,000 charities and causes around the world (including Newman's personal favourite, the 11 'Hole in the Wall Gang' camps for children with life-threatening illnesses).

You might think that Newman's Own is an unusual form of enterprise, where the entrepreneur recognises a social problem and uses traditional entrepreneurial principles to organise, create, and manage a venture to make social change.

But it actually isn't.

Nobel laureate Muhammad Yunus pioneered a not-for-profit business to provide micro-credit to help those trapped in poverty.

In 1974, the unassuming economist started a social revolution when he lent US$27 to 42 Bangladeshi basket-weavers.

After years of dispensing small loans to the desperate, he set up the Grameen (Bengali for rural) Bank in Bangladesh in 1983 to help even more needy folk, whom he made part-owners of Grameen.

Today, Grameen is owned by 7.5 million Bangladeshis. And with a default rate of only 2 per cent, Grameen would be the envy of troubled US banks, with default rates of nearly 10 per cent.

From Muhammad to Newman, social entrepreneurs and social enterprises have come a very long way indeed.

And while other actors of his celebrity lived and partied in Hollywood and vacationed at exotic resorts, Newman and his family made their home in a Connecticut farmhouse and devoted their spare time to charitable enterprises.

Newman's circle-of-life parting shot: 'The trick of living is to slip on and off the planet with the least fuss you can muster. I'm not running for sainthood. I just happen to think that in life we need to be a little like the farmer, who puts back into the soil what he takes out.'


Source: The New Paper, Sun 05 Oct 2008

New York had milk scandal too


By Zhen Ming


STEROID-FED pigs and chickens, fish pumped up with hormones, pesticide-laced dumplings and, yuck, lard made from sewage - so what else do you think is new?

In recent years, China's food and safety scandals have involved nearly everything unthinkable, from fake baby milk formulas and soy sauce made from human hair, to instances where cuttlefish were soaked in calligraphy ink to improve their colour and eels were fed contraceptive pills to make them grow long and slim.

But what about the latest tainted milk thingy? Picture this:

'The milk was marketed as pure and wholesome, and it looked fine to the naked eye. How were the mothers to know they were poisoning their babies? They had paid good money for it on the open market.

'It would take thousands of sick children before lawmakers did anything to stop it.'
Sounds familiar, doesn't it?

China in 2008?

No, New York City in 1858, points out Ms Bee Wilson, the author of Swindled: The Dark History of Food Fraud from Poisoned Candy to Counterfeit Coffee.

According to Ms Wilson, missing from the coverage of today's Chinese baby formula poisoning is how often it has happened in other countries before.

'The disaster unfolding now in China - and spreading inevitably to its trading partners - is eerily similar to the 'swill milk' scandal that rumbled on in New York for several decades of the 19thcentury,' she said.

In 1853, it was found that 90,000 or so quarts (85,000 litres) of cow's milk entered New York City each day. But that number 'mysteriously' increased to 120,000 quarts at the point of delivery.

And here's why there were 30,000 extra quarts.

Diluted, then padded

'Some of the increase was due to New York dairymen padding their milk with water, and then restoring its richness with flour - just like their latter-day Chinese counterparts, who increased the protein levels in watered-down milk by adding the noxious chemical melamine.

'But the greater part was swill milk, a filthy, bluish substance milked from cows tied up in crowded stables adjoining city distilleries and fed the hot alcoholic mash left from making whiskey.

'This too was doctored - with plaster of Paris to take away the blueness, starch and eggs to thicken it and molasses to give it the buttercup hue of honest Orange County milk.'

Back then, The New York Times reported as many as 8,000 American children each year died because of this 'swill milk'.

In the end, it took about 50 years for NewYork to clean up its food and safety act.
In China's case, news about its melamine-in-milk scandal seems to get worse with each passing day.

Tainted infant formula was also at the centre of another food scandal in China in 2004 that prompted a crackdown on rogue suppliers.

Then, more than 200 Chinese infants suffered malnutrition and at least 12 died after being fed phony formula that contained no nutrients.

So far, four infants have died and some 53,000have developed kidney stones or other illnesses after drinking the melamine-contaminated baby formula.

Not unlike New Yorkers in the past, Chinese producers trying to make more money often cheat by diluting milk with water, which lowers the nutritional content.

But the addition of melamine, which is high in nitrogen, helps the milk appear to meet nutrition standards by artificially raising its protein count.

'It's true you can make a lot more profit by putting melamine in,' said a Chinese animal feed seller.

'Melamine will cost you about US$1 (about $1.40) for each protein count per ton whereas real protein costs you about US$6, so you can see the difference.'

Not surprisingly, Chinese suppliers - squeezed by higher costs for fertiliser, feed, gas and labour - are believed to have turned to melamine.

But before you start pointing fingers, remember the uncanny similarities between China today and New York 150 years ago.

Remember, too, that the latest tainted milk scandal only shows how a fast-growing capitalist economy, coupled with a government unable or unwilling to regulate the food supply, can only mean one thing - an open invitation to wholesale swindling.


Source: The New Paper, Thu 02 Oct 2008

Bickering, anger, scandal & drama have gripped Washington and Wall Street.

If it were a movie ...

EPISODE 1: RAIDERS OF THE U.S. TAXPAYER

By Zhen Ming


DASHING, money market adventurer, Indiana Bank and Auntie Sam have been seeing each other for years.

They are on a 1-on-1 romantic date at a fine-dining restaurant on Wall Street in New York when an awkward moment arises.

When the bill for the meal is presented, Auntie Sam sits pretty, expecting the usual - that it would be paid for by Mr Bank since he's the one who had asked her out.

Except that, ahem, this time around, Mr Bank is almost flat bankrupt.

He can't make the payment on his mortgage, his credit cards are all maxed out, and now he doesn't know how to tell it to Auntie Sam, the love of his life.

Fortunately for Mr Bank, Auntie Sam is a considerate girlfriend. Sensing a problem, she offers to split the bill.

In some South American countries, the people use a Spanish phrase 'pagar a la Americana' - literally, 'to pay American style' - to describe this bill-splitting.

Closer to home, in Thailand, this propensity for bill-splitting among non-Asians, particularly Americans, is often referred to simply as 'American Share'.

And 'American Share' it will be.

You can count on it - when it's time for someone to pick up the tab for the US Treasury's proposed US$700 billion (S$995 billion) bailout of Wall Street.

But first, a quick recap of what has happened.

The US rescue plan announced 10 days ago had sent stock markets worldwide shooting up the day after. But, despite the initial euphoria, stock markets earlier last week were back to their 'business-is-not-usual' selves.

Sensing stiff political resistance, US President George W Bush went 'live' on Wednesday night to urge the American people and their lawmakers to support his rescue package, saying that a failure to do so could plunge the US into 'a long and painful recession'.

At the heart of this package is a so-called 'Troubled Asset Relief Programme' (Tarp).

In its original version, Tarp calls for US Treasury Secretary Hank Paulson Jr or his successor to oversee the purchase of rock-bottom mortgage-backed securities at any price it deems right 'without oversight or legal recourse'.

Amazingly, Tarp will also pay Wall Street to save Wall Street. At a 'standard' management fee of 2 per cent a year, never mind the 'traditional' 20 per cent upside, Tarp could provide Wall Street with a hefty windfall of US$28 billion over two years!

No wonder Main Street is outraged - it's a blatant act of financial highway robbery!

Outrage aside, is Tarp a big enough tarpaulin to shield the US economy from the current financial firestorm? Also, will this plan, even in a modified form, work?

According to columnist Jonathan Weil writing for Bloomberg, the US Treasury will pay financial institutions above-market prices for garbage assets nobody else wants.

Then, through the magic of 'mark-to-Paulson' (instead of mark-to-market) accounting, everybody else that owns similar stuff will use those same prices, or marks, to value the trash on their own balance sheets

'Shazam! Banks and insurance companies write up the asset values on their books. They post big profits. Their capital goes up. Everyone gets fooled. And nobody knows the difference,' Mr Weil explained.

Financial confusion

'Except, we do. And that's why the plan probably won't work.'

Now you know why time is literally 'running out' for Wall Street - 30 Sep, just two days away, will mark the end of the third-quarter reporting period for 2008.

If this Tarp is not set in place by early next week, then mark-to-market accounting could spell financial confusion for Wall Street!

Inclusive of Tarp, the latest guesstimate for this clean-up on Wall Street is a whopping US$1.6 trillion - roughly US$5,200 for every American citizen.

So will 'American Share', in the end, mean only US taxpayers will have to share among themselves to pick up the tab?

But be thankful at least for Tarp - even if you don't subscribe to 'American Share' and even if you don't believe it'll work the way it's intended

That's because, by making it known that he had a bailout proposal, Uncle Sam has bought the markets the most valuable commodity of all - time.

And with Wall Street's clock ticking away, there may be only one thing worse than Tarp: No Tarp.


Source: The New Paper, Sun 28 Sep 2008