Hold on, Mr President

South China Morning Post  |  Jan 24, 2009

By Sin-ming Shaw

Byline: Barack Obama should think again before consigning Republican wrongdoings to history, writes Sin-ming Shaw

In all the gin joints in all the towns in all the world, filled with unemployed investment bankers and piano players, they dream of a new bull market to return with so much money being printed around the world. The pain of a reduced bank account has been accepted as a price for past excesses. So why not let's just move on?

US President Barack Obama, striking a message of national unity, said recently that "we need to look forward as opposed to looking backwards" when asked whether he would seek an investigation of the wrongdoings committed by the Bush administration.

The ability to forgive is one of the most admirable traits of human nature. We should not knock it.

But wait one second. What if, by ignoring the past, we are only sowing the seeds for a repeat performance in the future? Wouldn't we be setting a horrible precedent for our children that crimes can, and do, pay?

Let's take a quick tour down memory lane before we totally forget, let alone forgive. At the heart of the bubble that is still bursting was the systematic wrecking of governance by the Republican Party.

An angry US congressional committee last October asked former Federal Reserve chairman Alan Greenspan: "Do you feel that your ideology pushed you to make decisions that you wish you had not made?"

Mr Greenspan conceded: "Yes ... Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."

There is much in the view that the best government is the least government. Too often, officials are arrogant as well as incompetent, forgetting they are paid to serve the public.

However, there is a difference between good and bad governance, between excessive and no regulation. Imagine a soccer match without a referee to enforce the rules. Or one where he simply walked away, leaving the players to faithfully observe those rules because a "free market" solution is optimal.

Many of George W. Bush's appointees went about wrecking that referee part of the government with the presumption that regulations, per se, were "guilty" until proven otherwise. The list of all the wrecks is prohibitively long (but can be seen at

Next to the Federal Reserve Board, the US Securities and Exchange Commission (SEC) is the other guardian of the financial system. The SEC under Mr Bush was notorious for looking the other way especially when matters concerned major financial backers of the Republican Party.

Harvey Pitt, the former SEC chairman, was well known for his coziness with the accounting profession, which too often signed off on bogus financial statements of client firms such as Enron. It was the single largest contributor to Mr Bush's 2000 presidential campaign and helped him draft legislation "regulating" the energy industry. Enron's chairman Kenneth Lay stayed at the White House 11 times as Mr Bush's guest.

Mr Pitt left the SEC under a cloud. His successor, William Donaldson, lasted only two years because the Republican-dominated board joined up with powerful private-sector interests to sabotage his efforts to clean up corporate wrongdoings, often contradicting him at open hearings.

The final SEC appointee, Christopher Cox - whom Mr Bush praised as "a champion of the free-enterprise system" - resigned as Mr Bush left office. He was widely criticised for negligence, including ignoring warnings from SEC staff over suspicious dealings by trader Bernard Madoff.

Investors also had their doubts about the accuracy of bond credit rating agencies that are essential to the proper functioning of the debt market, whose size, including credit-based derivatives, dwarfs the global stock markets. The SEC has jurisdiction over them, too.

Moody's and Standard & Poor's, the two major credit rating agencies, "own" 80 per cent of the market, enjoying an operating margin of more than 50 per cent. That is higher than even Microsoft (under 40 per cent) and Sun Hung Kai Properties in Hong Kong (under 46 per cent).

Credit-rating agencies charge debt issuers for rating them. "It's like cattle ranchers paying the Department of Agriculture to rate the quality and safety of their beef," says one expert.

Mr Obama would be making a major policy mistake if he were to forgive and forget.

Greed will always ensure that rules will be broken, unless a fitting punishment is a certain outcome of a crime.

Sin-ming Shaw, former visiting scholar at Harvard and Oxford, is a private investor

Boom and bust, again

South China Morning Post  |  Jan 9, 2009

By Sin-ming Shaw

Byline: Smart investors would do well to ignore the exuberance over the latest surge in stock markets, writes Sin-ming Shaw

Stock markets are suddenly showing signs of breaking out from their respective lows reached late last year. As of Wednesday, the Hang Seng Index was up more than 40 per cent, the Dow Jones, 21 per cent and the Nikkei, 32 per cent. These broad indices mask even more impressive performance of individual stocks.

China Life, in an industry plagued by the implosion of American giant AIG, is up 60 per cent from its low. Bank of East Asia, hurt by rumours and by a rogue trader, is up 44 per cent.

Shipping stocks have staged a comeback that seems to ignore all the daily bad news about slower world trade. Former chief executive Tung Chee-hwa's flagship company, OOIL, at HK$19.60 on Wednesday, is up almost 100 per cent from its October low of HK$9.92.

What is going on? Do investors read the same papers as we do? Are we not watching the greatest meltdown since the Great Depression, with shrinking world trade and massive deleveraging of banks and companies? The economic realities remain depressing and grim. China, the "factory of the world", is facing its largest economic challenge since 1949. Factories are dropping like flies. Those that are surviving face a Hobson's choice: if you accept an order, the buyer might default but, if you don't take it, production must be cut and workers fired.

Property prices in Hong Kong, London and elsewhere are down between 30 per cent and 50 per cent. Interest rates are already close to zero but deflation in the US is at minus 13 per cent per annum, indicating lower rates are not having a positive effect on consumer behaviour. Banks flush with liquidity are afraid to lend as they are unsure whether the borrowers are creditworthy.

Nouriel Roubini, a professor at New York University, was one of the few academics to predict the crisis, yet his warnings were disastrously dismissed as drivel by Wall Street. He is predicting an "uglier" 2009. So are stock markets irrational again? Think of a play with three acts.

Act One consists of the financial meltdown, with stock markets plunging and Wall Street and parts of Main Street decimated. That act is drawing to a close, if it hasn't done so already.

Act Two is unfolding, with Main Street melting down at a speed substantially slower than that of Wall Street. The very nature of engaging in making "real" things in factories - moving industrial materials around the world to be made into parts and then assembled into a product to be distributed to global sales points - means that the process takes longer to start and is slower to unwind. We are far from at its end right now. Professor Roubini was spot on about it getting "uglier" in this respect.

Act Three is what the stock market investors are turning their sights to: highly inflationary policies pursued by governments around the world. They are keeping the money printing press running around the clock and are announcing massive "New Deal"-type programmes.

The popular press has crowned US president-elect Barack Obama a modern-day Franklin D. Roosevelt whose historic New Deal helped get the US out of the Great Depression.

Governments around the world have finally understood that the deadly combination of US housing folly and Wall Street machinations was not a localised US phenomenon. They are now acting to save their own countries.

Zero interest rates alone have proved to be inadequate. John Maynard Keynes long ago warned that a "liquidity trap" in a depression would require massive government action. Japan, in the 1980s, found itself in the same trap with a lethargic government politically unable to inflate the economy through massive spending.

These days, public policymakers are less restrained. Mr Obama has chosen as his close economic advisers experts on the Great Depression. Larry Summers, Mr Obama's top adviser, chastened after years of complacency regarding the stability of the US financial system, has urged Mr Obama to err on the side of "overspending". US federal deficits are now projected to be well over US$1 trillion for 2009 and probably in 2010.

So Act Three is music to the ears of the financial markets. In this script, the world economy should get back on an even keel in less than a year, saving it from a lethal hard landing. Some experts expect the global economy to hit bottom by, at latest, the fourth quarter of this year.

Should retail investors jump back into stocks with both feet, assuming the current budding exuberance is on the mark?

Is the market going to go higher in the months to come? Lee Shau-kee, who made his fortune selling apartments in Hong Kong's rigged property market and was once nicknamed "Asia's Warren Buffett" has now humbly disowned that honorific because he has fallen flat too often with his flawed forecasts.

Before regaining our exuberance, we should remember what the real Warren Buffett said long ago: every minute spent guessing what the markets will do is a minute wasted. He made his reputation and fortune by focusing on company realities. He finds great companies selling at reasonable prices, rather than guessing what market indices will do. It pays to remember his words.

Sin-ming Shaw is a former professional investor

Wall Street's private Santa

South China Morning Post  |  Dec 20, 2008

By Sin-ming Shaw

Goldman Sachs is the storied home of the "masters of the universe", with an alma mater list that includes former US Treasury secretary Robert Rubin, current Treasury chief Henry Paulson and many more stars. Yet one of its funds - Goldman Sachs Liquidity Partners, with US$1.8 billion in capital - reportedly lost over 55 per cent this year to the end of October.

This fund was supposed to be the "cavalry" that would rescue Goldman's reputation, battered by the ill fortunes of two other multibillion-dollar flagship funds: the Global Alpha Fund, down 40 per cent last year, and the Global Equity Opportunities Fund, down 32.7 per cent. Liquidity Partners was meant to take advantage of a devastated credit market on the assumption that the market was undervaluing corporate IOUs.

How could Goldman have been so wrong? If anyone should know about these things, shouldn't Goldman's highly paid geniuses be among the first in line?

Defenders of Wall Street often claim its meltdown originated in wrong-headed government policies that encouraged banks to provide housing loans to unqualified homebuyers. Let's pretend for a second that the packaging and then the selling of derivatives from such lousy loans had nothing to do with Wall Street's financial engineers. But surely the mismanaging of their own signature funds could not be blamed on someone else? As financial "masters", shouldn't they be doing a lot better than you and me? Especially given their out-of-this-world compensation? Surprise, surprise: they turned out to be just as clueless as you and I.

Investment bankers and spoiled children have one thing in common: both have wish lists for Christmas. Youngsters' non-negotiable demands for Santa go to their parents; the bankers' go to Mr Paulson.

Santa Paulson has injected US$125 billion of working people's savings into Wall Street, where his former colleagues and friends work, to save them from bankruptcy. Without that show of confidence by the US government, the market was expecting the imminent collapse of Morgan Stanley, followed by Goldman Sachs and Citicorp.

Thanks to Uncle Henry's bailout, the two firms are now doing OK. Mr Paulson did the right thing: their collapse would have been traumatic to the already panicky world markets.

That's not all. The US Federal Reserve has lent US$2 trillion to a number of financial institutions. Yes, you read me right: US$1 trillion is a thousand billion.

Bloomberg News is suing the Fed under the Freedom of Information Act to win disclosure of what, if any, collateral Wall Street banks have posted. The Fed is contesting the suit on the grounds of "trade secrets" and "fragility of confidence".

Many financial experts believe transparency is the key to stability. Keeping markets in the dark tends to increase the risk of panic due to miscalculation and unwelcome surprises.

But the truly astounding act by Mr Paulson to save his former habitat was to ignore Main Street's anxiety and anger by allowing Wall Street bankers to continue to pay themselves big bonuses - with one or two exceptions - for last year and this.

One Harvard Medical School professor told Bloomberg News: "If these guys were so talented, how did this problem happen, anyway?" A Baltimore lawyer commented: "Shouldn't they pay back a substantial portion of their 2007 bonus to the government for the financial devastation they oversaw, fostered and, in some cases, caused? Their sense of entitlement is appalling." One blogger on CNBC fumed: "Bonus! How about making them pay back the US$700 billion rescue money we loaned them!'

Only John Mack, chairman of Morgan Stanley, has done the decent thing: he gave up his 2007 and 2008 bonuses. He did get US$40 million for 2006. He is also the first on Wall Street to call for a "claw-back provision" in future that would tie compensation more closely to multi-year performance. (A disclosure: I have been a client of Morgan Stanley for many years.) Financial consultants estimate that between US$20 billion and US$23 billion in bonuses will be paid on Wall Street this year.

Main Street's revulsion is understandable. But the bankers themselves are not the only ones being blamed. They have "parents" who continue to spoil them rotten: Mr Paulson and US President George W. Bush, who signed off on the former's generosity - with other people's money, of course.

You can spank your own children, but not your private bankers. However, what you can do - when you come across yet another abrasive Wall Street smart-mouth - is to tell him to stop talking and finish his milk.

Sin-ming Shaw is a former financial professional in Los Angeles and Hong Kong

Detroit: another American icon crumbles

Bangkok Post  |  Dec 13, 2008

By Sin-ming Shaw

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"These idiots don't deserve a dime," thundered Michael Moore on Larry King's show recently in discussing the Big 3 Detroit carmakers' plea for a financial bailout.
We knew Mr Moore only as an Oscar-winning documentary filmmaker. Yet, his credentials to discuss Detroit intelligently are solid, for he is deeply connected to the auto industry.
His grandfather and father both worked at the assembly lines in General Motors and his uncle was a co-founder of United Auto Workers labour union, the largest manufacturing union in the United States.
The "idiots" are, of course, the senior executives at the Big 3 auto companies that have taken three legendary companies - General Motors, Ford and Chrysler - to the brink of bankruptcy and are now begging Congress for money to avoid collapse.
The current auto leadership is not solely responsible for the demise of Detroit. A number of their predecessors over the past 30-odd years shared 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 '70s, has increasingly accepted the necessity of energy efficiency, green technology as well as quality with near-zero maintenance.
Detroit has failed in each of the three areas despite clear signals from the global consumers as to what they want.
General Motors was once the icon of the mighty American manufacturing prowess.
Its former chairman Charles Wilson was secretary of defence under president Dwight D Eisenhower. He famously proclaimed in the early '50s "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 World War Two 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.

GM not only stood for might but quality as well. One of its signature cars was the Cadillac, which for years represented engineering excellence, money and elegance.
Fast forward to the 1990s and now the 21st century.
The Cadillac, far from being a status symbol for the rich, famous and the powerful, has become has become a laughing stock for poor quality and bad taste.
In an attempt to recapture its premium position in the early '80s, GM came out with a Cadillac Seville sedan that was an awkward combination of a me-too, old Daimler front, and an imitation Rolls Royce flat trunk at the back, that also looked like something from an old 1940s French Renault. And its record of frequent breakdowns was the stuff of car legends.
By that time Japan and Germany were already making superbly engineered cars with high gas mileage and low maintenance records, while paying microscopic attention to ergonomics that make driving these cars a pleasure that GM could not match.
Today, GM's entire market value (Dec 9) is US$3 billion, a mere 3.3% of Toyota's $93.4 billion. Remember that not quite 60 years ago, Toyota's factories were reduced to debris by Allied bombing when the war ended, while GM was at the top of the world and at the top of its game in making quality cars.
GM today stands for utter incompetence and a failed company led for years by "idiots".
The motor executives famously flew to Washington DC in three separate company jets and then, after being reprimanded for their tasteless extravagance while seeking handouts from Congress, later returned to Washington in a pathetic publicity stunt driving in hybrid cars all the way from Detroit to Washington DC.
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, thank you.
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 Japanese. Indeed, going back at least 20 years, management at Toyota and Honda 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 the US. And their maintenance record is indeed just as good.

Higher wages are a factor, but only so because Detroit 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 your products are overpriced.
China has become the "factory of the world" not on lower wages. If only that were the case, low-wage countries anywhere - in Africa, Indonesia, the Philippines or Thailand - would long have captured the bulk of the manufacturing that is now 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 talents and designers. The most talented engineers and designers do not look to Detroit for work. They go to Detroit's competitors, who now include Chinese and Koreans.
Should GM be saved, then?
Mr Moore has put it well. Save the companies and the workers by all means. But throw out the "idiots" who have always acted arrogantly and ignorantly.
Unless that is done Uncle Sam, namely the American taxpayers, will be throwing good money after bad. The idiots will be spending the money so fast they will go back to Congress for more.
Sin-ming Shaw was a former stock analyst for a Los Angeles-based fund management company.

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