Byline: The US car industry can look to a string of management failures for its demise, writes Sin-ming Shaw



These idiots don't deserve a dime. That was director Michael Moore's comment, during a Larry King TV show recently, while discussing the Big Three Detroit carmakers' plea for a financial bailout. And the Oscar-winning documentary filmmaker is on solid ground when he talks about the industry. His grandfather and father both worked on the assembly lines at General Motors and his uncle was a co-founder of the United Auto Workers Labour Union, the largest manufacturing union in the US.

The "idiots" are, of course, the senior executives at General Motors, Ford and Chrysler who have taken the legendary companies to the brink of bankruptcy.

They are not solely responsible for the demise of Detroit; a number of their predecessors over the past 30-odd years share that infamous honour.

But those "idiots" have continued a failed policy to meet the challenge of a world that, since the first oil crisis in the early 1970s, has increasingly accepted the necessity of energy efficiency and green technology, as well as quality with near-zero maintenance.

Detroit has failed on each of the three counts, despite clear signals from global consumers about what they want.

General Motors was once the icon of the mighty American manufacturing prowess. Former chairman Charles Wilson was defence secretary under president Dwight Eisenhower. He famously proclaimed in the early 1950s that "what was good for GM was good for the country and vice versa".

GM was the largest supplier of military hardware to the allied armies during the second world war and emerged as the largest manufacturing concern in America, as well as the single-largest contributor to the country's gross domestic product in the 1950s. It not only stood for might, but quality, as well. One of its signature cars was the Cadillac that for years represented engineering excellence, money and elegance.

Fast forward to the 21st century. Cadillac, far from a status symbol for the rich, famous and powerful has now become a laughing stock, synonymous with poor quality and bad taste.

Even by the early 1980s, Japan and Germany were already making superbly engineered, reliable and fuel-efficient cars that GM was unable to match.

Today, GM's entire market value (as of December 9) was US$3 billion, a mere 3.3 per cent of Toyota's US$93.4 billion. And that after Toyota's factories had been reduced to rubble by allied bombing after the second world war. GM today is a failed company led for years by "idiots".

The executives from the Big Three even flew to Washington in separate company jets and then, after being reprimanded for their tasteless extravagance while seeking handouts from Congress, later returned - in a pathetic publicity stunt - driving hybrid cars all the way from Detroit.

They must have thought the rest of us were idiots, unable to see through their stupid little ploy. Flying economy class would have made a lot more sense.

Come to think of it, they would have been better off walking; their longer absences from their respective headquarters would have meant fewer stupid and destructive management decisions.

Unproductive American workers and their supposedly union-mandated higher benefits are usually cited as among the primary reasons for Detroit's failure. That is misleading. Non-US carmakers have proved that American workers can be just as good as their Japanese counterparts.

Indeed, going back at least 20 years, management at Toyota and Honda have insisted that their US-made cars were every bit as good as those made in Japan. The record speaks for itself. Nearly all Japanese cars sold in the US are made in America. And their reliability is, indeed, just as good.

Higher wages are a factor, but only because Detroit has never attempted to compete on quality and innovation. Lower wages per se do not automatically translate into competitiveness. Conversely, higher wages do not necessarily mean that your products are overpriced.

China didn't become the "factory of the world" on lower wages. If that were the case, low-wage countries anywhere in Africa, or Indonesia, the Philippines and Thailand would have long ago captured the bulk of the manufacturing done in China. Productivity is the key to any manufacturing success. Wages are high only in relation to the products.

Detroit management has, for too long, ignored its own considerable engineering talent and designers. The best engineers and designers do not look to Detroit for work; they go to the competitors, who now include Chinese and Korean companies.

Should GM be saved? Moore put it well: save the companies and the workers by all means, but get rid of the "idiots" who have always acted arrogantly and ignorantly.

Unless that happens, American taxpayers will be throwing good money after bad. The idiots will spend it so fast, they will be back asking Congress for more.

Sin-ming Shaw is a former stock analyst for a large Los Angeles-based fund management company

We are in the eye of the "perfect financial storm". More fortunes will be lost. Ludicrously lucrative Wall Street jobs are gone.

How ludicrous have they been? "In 2007 alone, the five-largest Wall Street firms paid their staff US$66 billion, including US$39 billion in bonuses", a recent Bloomberg report claimed. Among these beneficiaries were many in Hong Kong, an important global financial hub.

The two US presidential candidates have condemned the Wall Street culture as one of "greed and corruption". These are strong words for what was once the habitat of "Masters of the Universe", the high-testosterone symbol of global financial capitalism.

"Wall Street" has, for sometime, been more than a street in lower Manhattan. Its avaricious culture has long been adopted in other countries.

Joseph Yam Chi-kwong, head of the Hong Kong Monetary Authority - whose salary is several times higher than that of Chief Executive Donald Tsang Yam-kuen - has always justified his remuneration by referring to Wall Street financial sector salaries.

Writer Tom Wolfe coined the term "Masters of the Universe" to satirise the vain, arrogant Wall Street traders. But investment bankers and traders took the words literally. They never knew the joke was on them.

There is perhaps a silver lining to the destruction of Wall Street. The humiliating implosion of blue-chip investment banks should give pause to future generations of the "best and the brightest" young minds all over the world educated at the elite universities. They should reconsider whether selling complex investment ideas is such a worthwhile way to spend one's limited time on Earth.

Providing financial services is a respectable profession but the bloated financial rewards to those "masters" playing with other people's money in years past have been abnormal and unsustainable.

Ask the elite Hong Kong families and I bet eight out of 10 would tell you their children have gone to a branded university and are working, or seek to work, in an investment bank. Forty per cent of Princeton graduates in recent years have gone to Wall Street - more than the combined total choosing law and medicine, according to Daily Princetonian, the student paper. At its state-of-the-art engineering and science graduate school, more than 55 per cent of new students are foreign.

One Princeton professor told me that, excluding just the Chinese student contingent, the engineering school would have to close, unable to justify its existence financially. A little dramatic perhaps, but probably not far from the truth. Other top-ranked graduate engineering and sciences schools such as MIT and Berkeley report similar figures. Consider the latest report from the American Society of Civil Engineers. It has given a D (a non-pass grade) to the conditions of basic infrastructure in the US; D+ for aviation. D for dams, energy, hazardous waste, roads, schools and public transit; C- for rail, public parks; and C for bridges. There isn't one grade higher than C+ for a country whose basic infrastructure used to set the world's gold standards.

Easy money and greed have indeed twisted the values of many of our best and brightest, be they in the US or Hong Kong, and detracted them from pursuing careers that actually produce something "real".

The Harvard Crimson student paper recently reported that economics professor Kenneth Rogoff received "spontaneous applause at a public forum for his jabs at recent Harvard graduates who had gone into investment banking by saying that many of them would now be free to 'go into other activities'."

There is a huge demand for those who want to do something "real", rather than playing "master of the universe", a role that was never that real to begin with. This is a perfect time in the perfect storm for parents and youngsters to reconsider chasing a career whose prime has passed.

Sin-ming Shaw was a former visiting fellow at Harvard and Princeton

BUENOS AIRES – Three-quarters of Americans now disapprove of President George W. Bush’s performance. Given this, and the fact that the policies and values of John McCain and his vice-presidential nominee, Sarah Palin, are almost identical to those of Bush, you would expect Obama to be leading in the polls by a wider margin than he is.

The reason that he is not, I suspect, is racism. When polled, most older white voters overwhelming reject Obama, even if many of them are unhappy with Bush. Indeed, one-third of Democrats have at various times told pollsters that they will not vote for a black candidate. And a recent Associated Press/Yahoo News poll suggested that his race is costing Obama six percentage points in the polls.

Most of the time, this racism is covert, only hinted at through code words. The media, particularly the increasingly popular conservative media and talk radio, are particularly important here. Obama is consistently criticized for his “otherness” and his “arrogance,” terms that call to mind the image of the “uppity nigger” from the days of segregation, which are actually not so far in America’s past.

In a recent interview, Bill O’Reilly, the most popular TV talk show host at Fox News, America’s most watched news station, talked down to Obama in so condescending a manner that some viewers were reminded of the image of a slave owner in an old Hollywood movie putting a young black upstart in his place.

Sean Hannity, another star host at the Rupert Murdoch-owned Fox News, demanded repeatedly on air from one interviewee, Fareed Zakaria, a well-known columnist at Newsweek with a CNN talk show of his own, whether he thought America to be the greatest nation on earth. The dark-skinned Zakaria, a naturalized American from India with a Ph.D. from Harvard, felt compelled to affirm his loyalty for America twice. It is hard to imagine Hannity demanding such a public affirmation of loyalty from anyone with white skin.

So how much is race costing Obama? The problem is that pollsters cannot effectively measure the problem. They call it the “Bradley effect,” first noted during the 1982 governor’s race in California, when Tom Bradley, the then African-American mayor of Los Angeles, lost the race to his white opponent despite leading in pre-election polls throughout the campaign.

The idea behind the “Bradley effect” is that white voters won’t reveal their prejudices to pollsters. Instead, they lie and say that they will vote for the black candidate when, in fact, they have no intention of doing so.
Of course, many people now say that Obama has proven that the “Bradley effect” is a thing of the past. But his continuing difficulties with white working-class voters, who in the primaries went with Hillary Clinton, suggest that, perhaps, the “Bradley effect” is still alive and well.

Younger Americans accept inter-racial relationships as part of the normal social and sexual landscape. Yet, the very speed with which American society has progressed has threatened half of the country, older and mostly white, unable and unwilling to live in the present.

The moderate Republican Party of Dwight D. Eisenhower and the Rockefellers has been taken over by a radical crowd, with even Eisenhower’s granddaughter now openly backing Obama. So it boggles many non-Americans’ minds that so many in that great nation still do not wake up to the reality that four more years of Republican rule will further degrade and bankrupt the country.
In any civilized society, ignorance is not illegal and being moralistic is anybody’s inherent privilege. But what is alarming is how private religious beliefs and morals have increasingly shaped the secular agenda of America, whose Founding Fathers had specifically designed the Constitution to separate state and church.
Today’s radical Republican Party represents a large segment of the population that believes that abortions and same-sex marriage are immoral, God sent America to Iraq, and that bailing out Wall Street is “socialism.”

At the Republican Convention in August, the ear-splitting chants of “USA! USA!” and “Drill, baby, drill” sounded like cries of desperation, as well as of defiance against an enemy who threatens American’s divine right to remain supreme. Palin has since identified the enemy, proclaiming of Obama: “This is not a man who sees America like you and I see America.” Whether or not her judgment carries a racist undertone, as many observers believe, the polls indicate that many Americans agree.

Sin-ming Shaw is a former Visiting Fellow in History at Oxford and Princeton universities.
Copyright: Project Syndicate, 2008.
www.project-syndicate.org

When Warren Buffett speaks, the world listens. When he acts, the world better pay attention.

Mr Buffett has bought about 10% of Goldman Sachs. The market considered the purchase a sign of confidence in the company. Not everything Mr Buffett has ever bought worked out as planned, though most did.

In 1998 he bought General Re, an insurance company that turned out to be a can of worms giving him not only a close look at a mix bag of derivatives General Re executives had foolishly bought, but also got him into many legal tangles with the government because of what General Re had done.

Mr Buffett did not call derivatives "financial weapons of mass destruction" without good reason.

While we may feel a little reassured that the Man with the Golden Touch has put $5 billion into Goldman Sachs, we should wonder why Goldman Sachs, supposedly the strongest, the best, bluest chip of all the investment banks needed to sell and at the most favourable terms to the buyer no less.

The terms are extraordinary. According to a September 24 New York Times report: "Berkshire Hathaway [Mr Buffett's investment vehicle] will receive perpetual preferred shares in Goldman, which will pay a 10 percent annual dividend, or $500 million a year. Those dividends take precedence over other payments to common shareholders. Goldman has the right to buy back the shares at any time for a premium of 10 percent.

In addition, Berkshire Hathaway will receive warrants to buy $5 billion in common stock at a strike price of $115 a share, which can be used at any time in a five-year period. Those warrants are already in the money: Goldman shares closed Tuesday at $125.05, up $4.27, and rose to $134.75 in after-hours trading after Mr Buffett's investment was announced."

You don't need much financial expertise to realise it was a distress sale. Goldman needed capital badly to have had to agree to such terms. This also means the Wall Street meltdown is at present only on a holding pattern.

The urgency with which Hank Paulson, US Treasury Secretary and Fed Chairman Bernanke want the US Congress to hand them a blank check of $700 billion now takes on new meaning.

Underlying the urgency must be their realisation that without that check available right away, the alternative might be a catastrophe the shape of which one dare not imagine.

There is a risk that an order of an unpredictable kind will be imposed on policy makers around the world by a panicked world.

That new order we can only imagine is likely to have the following elements. The financial markets will have a lot further to fall. Dow at 8000 or lower is not out of the question, with the Hang Seng closer to 14000 than to 24000 within the next 12 months. There will be rising global unemployment, even in China where growth will be cut short by high inflation and low global demand. Gold could reach $1300 an ounce with oil approaching $200 a barrel before an inevitable collapse destroying more personal wealth and corporate capital, causing further global unemployment.

Right now the rest of the world is still sitting on their collective hands, either like the French sniggering at the collapse of US-style financial capitalism or like China keeping its views to itself.

The incident involving Bank of East Asia is only a tiny pre-appetiser taster of what could hit the major financial centres if the world does not rise up to the occasion.

Goldman and Morgan Stanley have already ceased to exist as investment banks, so it is no longer meaningful to use Wall Street as a symbol of American capitalism at its most creative or at its most destructive - like a neutron bomb that instead destroys assets without causing actual deaths.

Every major investment bank in the US has disappeared. Everyone is now a conglomerate bank such as HSBC with an investment banking department under the control of the Federal Reserve Board.

In the new order governments in Beijing, Moscow, Tokyo, a few multibillionaires such as Mr Buffett, oil-rich Arab sheiks, perhaps a couple of Hong Kong's super rich, will own Wall Street - after "blood in the Street".

That's not all. The radical Republican Party faction that has taken over the US political agenda since Richard Nixon's presidency replacing the traditional moderate, middle-of-the-road, fiscal conservatives represented by such leaders as Dwight Eisenhower and Nelson Rockefeller will finally be discredited as a bunch of crazy nuts on par with utopian but ultimately amoral, cynical Marxism that impoverished Eastern Europe and China for over half a century.

The deliberate and systematic dismantling by the Bush crowd of oversight expertise in the US government is criminal, if not by law, certainly by ethical standards.

What is clear that for a market to function properly as in soccer is this: mayhem will result on the field without a competent team of referees. And that means competent regulators and laws to ensure the proper working of the market. They are there not to suffocate the markets but to make sure they work well and stay open, fair and efficient.

For too long the new Republican Party has been replacing competent public servants with business lobbyists who in that dishonestly twisted logic would represent the best interests of the market.

Nonsense. They represented narrow financial interests without any regards to the greater good of the country.

Meanwhile the French will be laughing all the way to their chatty salons celebrating the demise of the "Anglo Saxon" model of economics. They think the Statist model is the way of the future. One day a swing away from Statism towards a free market will surely occur. As greed once again takes over, the world will begin once again a bull market.

Until then, prepare for more surprises. The only certainty right now is uncertainty.

Sin-ming Shaw is a former fund manager and visiting scholar at Princeton.

© Copyright The Post Publishing Public Co., Ltd. 2006
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Byline: It's little wonder Warren Buffett calls derivatives 'financial weapons of mass destruction', writes Sin-ming Shaw



Is the worst of the Wall Street meltdown over? If not, how bad could it get? Successful investors and speculators typically buy when the whole world panics. Conversely, they sell when everyone else thinks what goes up will go ever higher. Historians tell us the world hasn't seen a financial crisis playing out on Wall Street since the Great Depression in the 1930s. So, is this a once-in-a-lifetime opportunity?

The fallout from Wall Street is not quite settled. Many institutions around the world bought "hi-tech" papers designed by financial engineers trained at the best departments of maths and physics in the US.

What other esoteric papers are still buried deep in corporate balance sheets around the world that we don't know of? I'm not sure.

At Columbia University in New York you can earn a PhD in financial engineering at its School of Applied Sciences that still houses the first prototype atom smashing machine that helped in the building of the first atomic bomb. One of the star professors was the former head of Goldman Sachs' derivatives group. Financial engineering is serious stuff.

Warren Buffett has famously called derivatives "financial weapons of mass destruction". George Soros has expressed similar sentiments.

The varieties of derivatives are limited only by the imagination and ingenuity of the mathematicians. Try to read any advanced financial maths textbook in a bookstore and you would probably think you had mistakenly ended up in the nuclear physics section. Not all derivatives explode like neutron bombs, but most are inherently dangerous because they embody volatile mathematical properties beyond the grasp of most investors.

If two of the world's richest and most successful investors don't understand derivatives, how many in the mortgage business, insurance companies or salespeople at brokerage houses do?

Ask randomly any smartly dressed private wealth-management executives to write down the equation behind a derivatives product and you are likely to get: "Trust me. Our principals have their own money in this."

Many of these principals have brought down Wall Street. Not a few should be put behind bars.

Let's be honest. We are still not sure how big a hole the world is in. Experts tell us the credit-default swaps amount to over US$43 trillion, far bigger than the subprime exposure, while the total derivatives market size is over US$500 trillion. The imbedded leverage is large, and leverage always spells trouble. But no one really has any solid figures. The figure on the table at present is US$43 trillion.

Last year, the entire world's gross domestic product was US$54 trillion. The figure of US$43 trillion is almost four times that of America's GDP, and 13 times China's GDP. Am I getting your attention?

What happens when the toxic virus begins to spread to other kinds of papers? To other countries? Does anyone know? And that's perhaps why the gold market, always a barometer of fear, is acting like a yo-yo that the world hasn't seen in a very long time. This is after the announcement of an unprecedented US$700 billion bailout plan by US Treasury Secretary Henry Paulson, a former chairman of Goldman Sachs, the world's foremost blue-chip provider of derivatives.

What is worrying is that the world has not responded to an increasingly desperate call for help from Washington, albeit couched in less dramatic fashion. To trained ears, Mr Paulson and US Federal Reserve chairman Ben Bernanke are in a bind, flying blind.

The three largest holders of US Treasury bills are China, Russia and Japan. None has joined Mr Paulson to tackle what they consider to be mainly a US problem. Two of these three are geopolitical competitors. The largest economic bloc, the European Union, has stayed away, no doubt fretting about an explosion among its own financial institutions.

A multitrillion-dollar market caving in cannot be just a US problem. Unless the major economies stop thinking along nationalistic lines, Mr Paulson's US$700 billion plan could look like small change before the final curtain is drawn.

If you feel you are buying into a market bottom, first check your name. Is it Soros or Li Ka-shing?

By the way, Mr Li's warning remarks about the markets in May last year were prescient. Very few in the world are as clever, though many delude themselves into believing they are.

Developer Lee Shau-kee may have lost billions making disastrous market calls of late, but he still has plenty more to burn and many overpriced apartments to sell to Hong Kong's middle class. Do you?

Sin-ming Shaw, a former fund manager, has been a visiting fellow at Columbia, Harvard and Princeton

When Warren Buffett speaks, the world listens. When he acts, the world better pay attention.
Buffett has bought about 10% of Goldman Sachs. The market considered the purchase a sign of confidence in the company. Not everything Buffett has ever bought worked out as planned though most did.
In 1998 he bought General Re, an insurance company that turned out to be a can of worms giving him not only a close look at a mix bag of derivatives General Re executives had foolishly bought, but also got him into many legal entangles with the government because of what General Re had done.
Buffett did not call derivatives “financial weapons of mass destruction” without good reasons.
While we may feel a little reassured that the Man with the Golden Touch has put $5 billion into Goldman Sachs, we should wonder why Goldman Sachs, supposedly the strongest, the bestest, bluest chip of all the investment banks needed to sell and at the most favorable terms to the buyer no less.
The terms are extraordinary. According to a September 24 New York Times report: “Berkshire Hathaway (Buffett’s investment vehicle) will receive perpetual preferred shares in Goldman, which will pay a 10 annual percent dividend, or $500 million a year. Those dividends take precedence over other payments to common shareholders. Goldman has the right to buy back the shares at any time for a premium of 10 percent.
In addition, Berkshire Hathaway will receive warrants to buy $5 billion in common stock at a strike price of $115 a share, which can be used at any time in a five-year period. Those warrants are already in the money: Goldman shares closed Tuesday at $125.05, up $4.27, and rose to $134.75 in after-hours trading after Mr. Buffett’s investment was announced.”
You don’t need much financial expertise is realize it was a distress sale. Goldman needed capital badly to have had to agree to such terms. This also means the Wall Street meltdown is at present only on a holding pattern.

The urgency with which Hank Paulson, US Secretary of Treasure and Fed Chairman Bernanke want the US Congress to hand them a blank check of US$700 billion takes on new meaning.
Underlying the urgency must be their realization that without that check available right away, the alternative might be a catastrophe the shape of which one dare not imagine.
There is a risk that an order of an unpredictable kind will be imposed on policy makers around the world by a panicked world.

That new order we can only imagine is likely to have the following elements. The financial markets will have a lot further to fall. Dow at 8000 or lower is not out of the question, with the Hang Seng closer to 14000 than to 24000 within the next 12 months. There will be a rising global unemployment, even in China where growth will be cut short by high inflation and low global demand. Gold could reach 1300 $/oz with oil approaching 200 $/barrel before an inevitable collapse destroying more personal wealth, corporate capital causing further unemployment.

If US Congress and the de facto Paulson/Bernanke Administration – with President Bush an entirely irrelevant figurehead – fail to reach an agreement soon, other countries will have to step in to provide the capital to save Wall Street from sinking into the Hudson River in order to prevent the fallout to trigger a global domino effect.

The incident involving Bank of East Asia is only a tiny pre-appetizer taster of what could hit the major financial centers.

Goldman and Morgan Stanley have already ceased to exist as investment banks, so it is no longer meaningful to use Wall Street as a symbol of American capitalism at its most creative as well as destructive.

Everyone is now a conglomerate bank such as HSBC with an investment banking department under the control of staid bankers who never made it to Goldman or Morgan after graduating from business schools. No one has ever accused HSBC for being creative or efficient.

In the new order governments in Beijing, Moscow, Tokyo, a few multibillionaires such as Buffett, oil-rich Arab sheiks, perhaps a couple of Hong Kong’s super rich, will own Wall Street – after “blood in the Street”.

That’s not all. The radical Republican Party faction that has taken over the US political agenda since Richard Nixon’s Presidency replacing the traditional moderate, middle-of-the-road, fiscal conservatives represented by such leaders as Dwight Eisenhower and Nelson Rockefeller such as the Rockefellers will finally be discredited as a bunch of crazy nuts on par with utopian but ultimately amoral, cynical Marxist that had impoverished Eastern Europe and China for over half a century

What is clear as in soccer that mayhem will result on the field without a competent team of referees. And that means competent regulators and laws to ensure the proper working of the market.

For too long the new Republican Party has been replacing competent public servants with business lobbyists who in that dishonestly twisted logic would represent the best interests of the Market.

Nonsense. They represented narrow financial interests without any regards to the greater good of the country.

The “free market” fundamentalists centered at the Universities of Chicago, Rochester, UCLA will redirect their considerable intellectual prowess to discussing “externalities” or “market imperfections” as the norm, rather than exceptions.

Meanwhile the French will be laughing all the way to their chatty salons celebrating the demise of the “Anglo Saxon” model of economics. They think the Statist model is the way of the future. Until one day, and heavens know when that might be, a swing away from Statism towards a free market will surely occur as certain as the sun will never rise from the west. As greed once again takes over, the world will begin once again a bull market.

Until then, prepare for more surprises. The only certainty right now is uncertainty.

Sin-ming Shaw is a former fund manager and visiting scholar at Princeton.