The Healing of Taiwan

Project Syndicate  |  Sep 14, 2009

By Sin-ming Shaw

BANGKOK – Last week, a Taiwanese court sentenced Chen Shui-bien, Taiwan’s president from 2000 until 2008, to life imprisonment for corruption.
Chen had been caught stealing millions of dollars of public funds. He did not act alone. His wife (who also received a life sentence), children, and other relatives all helped to hide the stolen loot in overseas accounts. Taiwan’s former first family turned out to be a den of common thieves.
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Chen and his ruling Democratic Progressive Party camouflaged their personal and parochial financial interests behind the patriotic mask of ensuring the survival of a democratic Chinese society in an independent Taiwan. For years, Chen was perceived as a brave David fighting the communist Goliath, and attracted many admirers around the world (including me at one point).
Presenting himself and his Party as champions of democracy, Chen sought to create the impression among Taiwan’s voters that their freedom would perish in the hands of the Kuomintang (KMT) or any party other than his own. But in fact, it was the late President Chiang Ching-kuo, the son of Generalissimo Chiang Kai-shek, who instituted the unprecedented democratic reforms that paved the way for the eventual electoral triumph of Chen’s formerly banned DPP.
Chen’s personal wealth grew conspicuously shortly after he assumed office, but no one could produce hard evidence of his corruption back then. His political supporters initially brushed aside the mushrooming rumors of his self-enrichment as opposition KMT propaganda.
But, one by one, most of the DPP’s founding fathers all left the party, accusing Chen of corruption and autocratic behavior even within his own party – which Chen dismissed as sour grapes from people who wanted their share of the political spoils.
In fact, Chen was always more concerned with consolidating his own power than with defending Taiwan. His most controversial political moves were aimed at his domestic opponents, not the Chinese government on the mainland. He led a vicious campaign to portray all Taiwanese with mainland Chinese roots, even if born and bred in Taiwan, as untrustworthy carpetbaggers – wai shen ren , or “not native people” – as if they were aliens from a different culture.
This official effort to portray native “Taiwanese” as a separate ethnic group, with scant relation to Chinese culture, was extended to language, as Chen favored using the Fujian dialect in lieu of the Mandarin spoken by 1.3 billion Chinese and taught all over the world. Meanwhile, the Ministry of Education sought to expunge all references to China in school textbooks.
So insistent was Chen’s campaign that it reminded some people of Mao’s Cultural Revolution, a time when Chinese were divided into “us” and “them.” Indeed, under Chen’s policy, Taiwan nearly became a rigidly divided society, where “local” and “not native” Chinese lived as potential enemies.
Taiwan ’s sole aboriginal parliamentarian once provided the logical rebuttal to Chen and the DPP, delivering a speech to a packed Congress entirely in his native tongue, which nobody else in the chamber could understand. The message was obvious: his was the only group with a legitimate claim to being native Taiwanese.
In the end, Chen’s effort was as futile as it was foolish. The Chinese culture embodied in the daily lives of 23 million Taiwanese of whatever political beliefs was not so easily eliminated by decree. Moreover, the attempt to do so angered the overwhelming majority of Taiwanese, who finally understood the stupidity of Chen’s policy, particularly how it led to economic stagnation at a time when mainland China was booming.
Indeed, Taiwanese capital and know-how built much of China’s hi-tech industries, and well over a half-million Taiwanese live and work near Shanghai in a virtual replica of Hsin Chu, Taiwan’s Silicon Valley. But in Chen’s Taiwan, domestic squabbles took precedence over economic development. Chen invariably blamed the KMT for blocking sensible economic plans, but even some of his moneyed supporters knew better.
When it was finally proved that power had turned Chen into a common criminal, the KMT was voted back into power. But, while Chen’s legacy of lies and corruption has ended, the reborn KMT under President Ma Ying-jeou has much to do to convince a cynical public that Chen’s ways, reminiscent of KMT’s own darker past, have not become embedded in the system.
Chen’s jail sentence should also serve to remind the DPP that it must become a party for all Taiwanese, “local” or not if it is to have any chance at a revival. Taiwan’s people know that they cannot prosper as a democracy if ethnic divisiveness is allowed to hold sway.

Crony Central Banking in Hong Kong

Project Syndicate  |  Jun 8, 2009

By Sin-ming Shaw

HONG KONG – Joseph Yam, the head of the Hong Kong Monetary Authority (HKMA) and a career civil servant, is retiring. Ordinarily, that should not be a newsworthy event, yet it is, and for good reasons.
Donald Tsang, Chief Executive of Hong Kong’s government, has the opportunity to restore integrity and proper governance in one of the most important statutory bodies in the territory by choosing a person solely on the basis of unimpeachable honesty and competence.
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Yam remains a hero to many in Hong Kong, including journalists unschooled in international finance. To them, he is the guardian of the Hong Kong dollar, which has been fixed at 7.8 to the US dollar for 26 years.
During the 1998 financial crisis, devaluation would have hurt those who owned local real estate but had little earnings or assets in US dollars. Not surprisingly, Hong Kong’s oligopoly of property tycoons opposed changing the peg despite the currency’s gross overvalue at the time. The 7.8 exchange rate was maintained at the cost – borne by all citizens – of six years of economic stagnation.
The currency was in theory governed by a rules-based Currency Board, which the British invented for their smaller colonies. It tied the local currency to the British Pound, giving local authorities no discretion in monetary policy.
While imperial in origin, the rationale behind the Currency Board was sound. Colonies were short on expertise. Freedom in money creation or in interest-rate policy could mean economic disaster – as, indeed, it did in many ex-colonies following independence.
Yam was always frustrated by the lack of policy freedom under the Currency Board. Before the crisis struck in 1998 he put in place measures giving him room to manipulate liquidity and interest rates. His deviation from the system also created loopholes that he did not know about or thought irrelevant.
This was precisely what the British empire-builders had wanted to prevent. When, during the 1997-98 Asian financial crisis, global investment professionals turned their attention from Thailand and Korea to Hong Kong, they quickly spotted structural weaknesses in the way the currency was managed. Local experts had previously warned Yam about this, but he dismissed their argument in a way that one economist who was present at a meeting with him described as “demeaning and contemptuous”. Moreover, they left in shock in realizing Yam, and the financial secretary, Donald Tsang, nominally his boss but without real power, didn’t really understand the experts’ economic reasoning.
Hong Kong ’s government, led by the HKMA, launched an unprecedented intervention, buying up local shares to “defeat” the speculators, but failed to stop the stampede by global investors, including conservative pension and mutual funds.
Finally, with the government about to exhaust its entire foreign reserves, Yam realized that he had to change course. He wisely accepted his critics’ suggestions, fixing the problems that he had denied existed. He was awarded the highest public-service medal by the then Hong Kong Chief Executive Tung Chi-wah, who was later ousted by Beijing for incompetence.
At this writing, Yam is widely criticized in Hong Kong for failing to protect small investors against the dishonest sales tactics of a number of banks in their selling of toxic Lehman Brothers derivatives disguised as bonds. He denies any responsibility, even though the HKMA oversees all financial institutions.
Yam is the highest-paid civil servant in the world, earning US$1.5 million last year. His salary is seven times that of the chairman of the US Federal Reserve and nearly 3 times higher than that of his own superior, the Hong Kong Chief Executive. He claims that he should be rewarded as a fund manager supervising a multibillion-dollar fund in the private sector. But, whereas private-sector professionals are fired or have their salaries reduced for poor performance, Yam wanted private-sector pay with none of the downside risk.
The HKMA’s Compensation Committee had the sole responsibility for setting Yam’s salary. But, during his 16-year tenure, Yam put his own appointees on that committee, choosing them from the financial sector that he regulates. The Committee routinely rubber-stamped his salary demands.
Yam’s retirement presents an opportunity for Hong Kong’s government to redress a major issue of governance. It should replace the compensation structure by the same civil-service scale applied to the government of which the HKMA is an integral part.
Hong Kong ’s civil servants are already the best paid in the world. Anyone seeking to compare a public-service job with the private sector in negotiating an employment contract should simply seek work in the private sector rather than for the public good. Anything else merely opens the door for corruption.
There is much speculation that Hong Kong Chief Executive Donald Tsang is about to appoint a generalist civil servant better known for his personal loyalty than for his financial expertise. Nor is there any sign that the entire HKMA pay scale should be scrapped.
Either outcome would mean that the Chief Executive has missed an opportunity to send the right signal that Hong Kong stands for good public governance rather than cronyism.

America’s Crony Capitalism

Project Syndicate  |  May 14, 2009

By Sin-ming Shaw

Buenos Aires – For 20 years, Americans have denounced the “crony capitalism” of Third World countries, especially in Asia. But, just as those regions have been improving their public and corporate governance – Hong Kong just witnessed a breakthrough court decision against a telecom tycoon who is the son of the province’s richest and most powerful man – crony capitalism is taking root in the United States, a country that the world long considered the gold standard of a level playing field in business. The recently completed “stress tests” of US banks are but the latest indication that crony capitalists have now captured Washington, DC.
It is no surprise that stock markets liked the results of the stress tests that US Treasury Secretary Timothy Geithner administered to America’s big banks, for the general outcome had been leaked weeks before. Indeed, most professional investors trashed the tests as dishonest even as their holdings benefited from a rising market.
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Even The Wall Street Journal , usually financial markets’ loudest cheerleader, openly disparaged the tests’ integrity. The government had allowed bankers to “negotiate” the results, like a student taking a final examination and then negotiating her grade.
The tests were supposed to reveal the true conditions of banks saddled with unaudited toxic assets in housing loans and financial derivatives. The reasoning behind the tests seemed unimpeachable. But was it?
As any seasoned banker knows, a well-managed bank should undertake internal “stress tests” regularly as a matter of good housekeeping. The financial crisis should have mandated a running stress test to keep senior management up to date daily. Why, then, did the US need the government to conduct a financial exercise that bankers themselves could and should have done far better and faster?
The truth is that the tests were not designed to find answers. Both Wall Street’s chieftains and the Obama administration already knew the truth. They knew that if the true conditions at many big banks were publicly revealed, many would have been immediately declared bankrupt, necessitating government receivership to stop a tsunami of bank runs.
But the Obama administration did not want to be tagged as “socialist” for nationalizing banks, however temporarily, even though experts such as former US Federal Reserve Chairman Paul Volcker had recommended just that. Moreover, nationalizing banks would have required dismissing Wall Street captains and their boards for grossly mismanaging their firms.
Wall Street’s titans, however, had convinced Obama and his team that their continued stewardship was essential to getting the world out of its crisis. They successfully portrayed themselves as victims of a firestorm, rather than as accessories to arson.
Geithner and Larry Summers, Obama’s chief economic advisor, share Wall Street’s culture as protégés of Robert Rubin, the former treasury secretary who went on to serve as a director and senior counselor at Citigroup. Neither man found it difficult to accept the bankers’ absurd logic.
The stress tests were meant to signal to the public that there was no immediate threat of bank failures. This message, it was hoped, would stabilize the market so that prices for “toxic” assets could rise to a level at which bankers might feel comfortable selling them. After all, senior bankers had been claiming that these assets were “mispriced,” and that pricing them at market levels would penalize the banks unnecessarily.
So far, Geithner seems to have succeeded in his “tests,” as the stock market has indeed more than stabilized, with prices of bank shares such as Citigroup and Bank of America quadrupling from their lows. The feared implosion of Wall Street seems to have been avoided.
But no one ever seriously thought that the US would allow Citigroup and Bank of America, to name just two, to fail. In fact, the stock market bottomed out last winter. Markets had factored into share prices the belief that the US government would not allow any more banks to collapse.
What the world wanted was an accurate picture of what the banks were worth and “mark-to-market” valuations to guide investors as to how much new capital they needed.
The world also wanted to see the US retaking the high road in reinforcing business ethics and integrity – so lacking under the last administration. As taxpayers had already put huge sums into rescuing failing banks, with the prospect of more to come, a transparent process to reveal how the money was being used was imperative.
Substantial public rescue funds have reportedly been siphoned off to foreign banks, Goldman Sachs, and staff bonuses for purposes unrelated to protecting public interests. None of this was either revealed or debunked by Geithner’s tests. Instead, public servants now appear to be in cahoots with Wall Street to engineer an artificial aura of profitability.
Moreover, the value of toxic assets remains as murky as ever. Once sacrosanct accounting principles have been amended at Wall Street’s behest in order to allow banks to report essentially whatever they want. And now negotiated stress test results have been released to “prove” that the banks are a lot healthier. Calling this a Ponzi scheme might be too harsh. But few financial professionals have been fooled.
Meanwhile, Wall Street chieftains and their boards of directors have nothing to fear from government. On the contrary, they are now the government’s partners in a joint venture to manage this dishonest scheme.
Like swine flu, crony capitalism has migrated from corrupt Third World countries to America, once the citadel of sound public and private governance. Is it any wonder that China is perceived as an increasingly credible model for much of the developing world, while the US is now viewed as a symbol of hypocrisy and double standards?

Time to bite the bullet over bankrupt banks

South China Morning Post  |  Feb 26, 2009

By Sin-ming Shaw

There are two overriding economic issues the Obama administration must resolve quickly.

First is what to do with the major banks that are, in effect, bankrupt. The second is whether publicly funded bailouts can be fair to taxpayers.

If, for instance, the US government were to overpay for Citigroup in the anticipated buyout, President Barack Obama will be watched closely to see how the government makes amends in some other way. Overpaying for Wall Street's damaged goods, as it were, effectively robs the working class to help the kleptomaniac captains of Wall Street.

US Treasury Secretary Timothy Geithner was correctly criticised two weeks ago for failing to take a clear stand on how best to bail out the banks. After a muddled rationalisation of his vague rescue plan, he appears to be on the verge of nationalising Citigroup, a step that is as inevitable as it was unnecessarily late. The world is watching with baited breath to see how he will execute this.

The issue with the banks is straightforward. They have, on their books, a large cache of toxic assets. The banks have been playing hide and seek with the public with tacit approval from Henry Paulson, the previous Treasury secretary, as to what these assets, and by extension their banks, are really worth.

Most astute financial professionals believe some of the world's major lenders are largely worthless.

Financier George Soros, a man of great intellectual and moral integrity, insists that assets with no actual market price at which transactions of a meaningful size can be done, should be written down to zero.

This is theoretically correct because if no one can demonstrate an asset has an actual tradeable price, it is worthless. Maybe such a price will emerge at some future date. But that's not good enough to justify keeping it at a cost based on a hope and a prayer.

More important, when such non-tradeable assets are carried at their original cost, or are insufficiently marked down, the managers of such assets - whose incomes are derived from the size of the assets - are dishonestly compensated.

Bank chief executives have been reluctant to mark down assets in the Soros fashion because to do so would immediately reveal to the world that their liabilities are larger than their assets: in short, they are bankrupt.

Bank managements have been procrastinating in the hope that markets will improve enough to mask the worthlessness of their assets and the extent of their incompetence.

They are also holding governments hostage; they have created the impression that, without them, the financial system will collapse, bringing down the whole economy. That being so, then the government must fork over ever larger sums to keep them and their firms afloat.

GM, Citigroup and AIG are the three most prominent examples. Others are waiting in the wing for more bailout money. These firms have spotted a weakness in this inexperienced Obama administration, which does not want to be seen as responsible for an economic free fall.

Mr Geithner, now increasingly viewed as weak, appears fearful of upsetting the status quo. Many existing board members of bankrupt Wall Street banks have strong political and personal ties to the senior members of the administration.

If, in the nationalisation of Citigroup, the government paid too much for its assets, existing shareholders would benefit but voters would be alienated. It would also show that Mr Obama's economic advice is inadequate for the challenges ahead.

If Mr Geithner were to do the right thing, by paying a nominal price for Citigroup as a bankrupt company, shareholder fallout would trigger

"regime change" among management. The rest of Wall Street may take heart and engineer its own less-dramatic changes at the top. If and when that happens, it would be reason to hope for a speedier recovery of the US economy.
Sin-ming Shaw is a private investor

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